UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ...................TO...................
Commission file number 0-22186
PRESTIGE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3216510
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Royal Road P.O. Box 2480 Flemington, New Jersey 08822
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (908)-806-6200
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock ($0.01 Par Value)
Title of each class
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YesXX 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. (XX)
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, computed by reference to the average high and low price of such
stock on the NASDAQ National Market on January 31, 1997, was approximately
$36,098,696.
The number of shares outstanding of the Registrant's Common Stock, being
the only class of capital stock outstanding, as of March 10, 1997 was 2,669,831.
Listed hereunder are the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated: (1) pages 8 -
24 of the Annual Report to security holders of Prestige Financial Corp. for the
year ended December 31, 1996 are incorporated by reference into Parts I, II and
IV of the Form 10-K; (2) the definitive Proxy Statement for the 1997 Annual
Meeting of shareholders to be filed with the Commission prior to April 30, 1997,
pursuant to regulation 14A of the General Rules and Regulations of the
Commission is incorporated by reference into Part III of the Form 10-K.
1
<PAGE>
PRESTIGE FINANCIAL CORP.
1996 FORM 10-K
TABLE OF CONTENTS
PART I
Page
Item 1. Business ......................................................... 3
Item 2. Properties ....................................................... 12
Item 3. Legal Proceedings ................................................ 13
Item 4. Submission of Matters to a Vote of
Security Holders ................................................. 13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ...................................... 13
Item 6. Selected Financial Data .......................................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations .................... 15
Item 8. Financial Statements and Supplementary Data ...................... 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures ............................. 27
PART III
Item 10. Directors and Executive Officers of the
Registrant ....................................................... 27
Item 11. Executive Compensation ........................................... 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management ............................................ 27
Item 13. Certain Relationships and Related Transactions ................... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K .............................................. 28
SIGNATURES ................................................................ 31
2
<PAGE>
PART I
ITEM 1 -- BUSINESS.
A. History.
Prestige Financial Corp. (the "Corporation") is a one bank holding company which
was organized as a corporation under New Jersey law in February, 1993. On July
31, 1993, Prestige State Bank (the "Bank"), a New Jersey-chartered commercial
bank, consummated its reorganization into a holding company structure pursuant
to a Plan of Acquisition (the "Plan") whereby the Bank became a wholly-owned
subsidiary of the Corporation. The reorganization was accounted for under the
pooling of interests method of accounting for financial reporting purposes.
The Bank's application and certificate of incorporation were accepted by the
Commissioner on March 13, 1989. The Bank was granted a charter by the
commissioner on September 2, 1989 and received its Certificate of Authority and
commenced operations on March 12, 1990. The Bank is not a member of the Federal
Reserve and has its deposits insured by the Federal Deposit Insurance
Corporation.
B. Narrative Description of the Current Business.
The Corporation, through the Bank, offers a broad range of lending, depository
and related financial services to individual consumers, businesses, and
governmental units. Commercial lending services provided by the Bank include
short and medium term loans, Small Business Administration loans, revolving
credit arrangements, lines of credit, asset-based lending, real estate
construction loans and mortgage loans. Consumer banking services include various
types of deposit accounts, secured and unsecured loans, consumer installment
loans, mortgage loans and other consumer oriented services. The Corporation
operates chiefly in its approximately 228 square mile primary trade area
surrounding its headquarters facility in Raritan Township, New Jersey. The
primary trade area consists of all of Hunterdon County; four southwestern
townships of Warren that border on Hunterdon County; and four western townships
of Somerset bordering on Hunterdon County. Raritan Township, the municipality in
which the Corporation is based, is the largest and fastest growing population
center in Hunterdon County. Most of the area enjoys an above-average household
income.
The Corporation and the Bank face vigorous competition from a number of sources,
including other bank holding companies and commercial banks (some far larger
than the Corporation), consumer finance companies, thrift institutions, other
financial institutions and financial intermediaries. Federal and state savings
and loan associations, savings banks, credit unions and industrial savings banks
also actively compete to provide a wide variety of banking services. Mortgage
banking firms, real estate investment trusts, finance companies, insurance
companies, leasing companies, brokerage and factoring companies, financial
affiliates of industrial companies and government agencies provide additional
competition for loans and for many other financial services.
3
<PAGE>
The Bank also competes for interest-bearing funds with a number of other
financial intermediaries, including brokerage firms and mutual funds, which
offer a diverse range of investment alternatives.
PSB Investment Management, Inc., a wholly-owned subsidiary of the Bank, was
organized as a corporation under New Jersey law in July, 1996. PSB Investment
Management, Inc. manages a portfolio of investments for its own account. The
Bank has no other subsidiaries and is the only subsidiary of the Corporation.
The Corporation has no present plans to engage in any activities other than
acting as a holding company for the Bank.
C. Regulatory Matters.
Please refer to Note 9, on page 17 and Note 11, on page 19 of the Corporation's
1996 Annual Report which are incorporated herein by reference.
D. Financial Data and Statistics.
I. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential.
The following table contains average balance sheet data with interest
income and expense as well as interest rate information for 1996,
1995, and 1994. Net interest income here is presented on a fully
tax-equivalent basis, which is a standard analytical technique
designed to adjust tax exempt income (primarily associated with tax
free municipal securities, loans and leases) by the amount of income
tax which would have been paid had the assets been taxable. As a
result, net interest income data presented here will differ from
consolidated financial statements presented elsewhere in this report.
4
<PAGE>
PRESTIGE FINANCIAL CORP
AVERAGE BALANCE SHEET WITH INTEREST AND AVERAGE RATES
(dollars in thousands)
Years Ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- -------------------------- --------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- ------- ---- -------- ------- ---- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Investment securities:
Taxable $ 56,731 $ 3,590 6.33% $ 27,287 $ 1,625 5.96% $ 21,017 $ 870 4.14%
Non-taxable 3,931 152 3.87% 2,885 182 6.31% 1,750 81 4.63%
Federal funds sold and
short-term investments 8,110 428 5.28% 7,614 443 5.82% 6,244 257 4.12%
Loans net of unearned 124,778 11,947 9.57% 104,205 10,098 9.69% 80,591 7,056 8.76%
-------- ------- ---- -------- ------- ---- -------- ------ -----
Total interest-earning assets 193,550 16,117 8.33% 141,991 12,348 8.70% 109,602 8,264 7.54%
-------- ------- ---- -------- ------- ---- -------- ------ -----
Noninterest-earning assets
Cash and due from banks 5,832 4,199 3,426
Other assets 4,652 3,969 3,489
Allowance for possible loan losses (1,453) (1,214) (1,078)
-------- -------- --------
Total noninterest-earning assets 9,031 6,954 5,837
-------- -------- --------
Total assets $202,581 $148,945 $115,439
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts 10,747 257 2.39% 8,232 217 2.64% 6,218 160 2.57%
Money Market accounts 19,504 608 3.12% 16,259 550 3.38% 16,485 510 3.09%
Savings accounts 30,436 1,100 3.61% 22,179 793 3.58% 21,227 613 2.89%
Certificates of deposit 100,838 5,600 5.55% 73,687 4,148 5.63% 47,518 2,044 4.30%
Short-term borrowings 50 3 6.00% 7 1 5.96% -- -- --
-------- ------- ---- -------- ------- ---- -------- ------ -----
Total interest-bearing liabilities 161,575 7,568 4.68% 120,364 5,709 4.74% 91,448 3,327 3.64%
-------- ------- ---- -------- ------- ---- -------- ------ -----
Noninterest-bearing liabilities:
Demand deposits 26,100 17,352 14,186
Other liabilities 1,059 827 604
-------- -------- --------
Total noninterest-bearing liabilities 27,159 18,179 14,790
-------- -------- --------
Stockholders' equity 13,847 10,402 9,201
-------- -------- --------
Total liabilities and
stockholders' equity $202,581 $148,945 $115,439
======== ======== ========
Net interest income $ 8,549 $ 6,639 $4,937
======= ======= ======
Net interest spread 3.65% 3.96% 3.90%
===== ===== =====
Net interest income as percent
of earning assets 4.42% 4.68% 4.50%
===== ===== =====
</TABLE>
5
<PAGE>
The following table sets forth the dollar amounts of interest income (on a
taxable equivalent basis) and interest expense and changes therein resulting
from changes in volume and changes in rate. The change in interest income due to
both rate and volume has been allocated to change due to volume and change due
to rate based on the percentage relationship of such variances to each other.
ANALYSIS OF VARIANCE IN NET INTEREST INCOME
DUE TO CHANGES IN VOLUME AND RATES
(dollars in thousands)
<TABLE>
<CAPTION>
1996/1995 1995/1994
Increase/(Decrease) Increase/(Decrease)
-------------------------------- --------------------------------
Average Average Net Average Average Net
Volume Rate Change Volume Rate Change
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities:
Taxable $ 1,857 $ 108 $ 1,965 $ 306 $ 449 $ 755
Non-taxable 55 (85) (30) 66 35 101
Federal funds sold and short-term investments 28 (43) (15) 64 122 186
Loans net of unearned 1,971 (122) 1,849 2,229 813 3,042
------- ------- ------- ------- ------- -------
Total interest-earning assets 3,911 (142) 3,769 2,665 1,419 4,084
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW accounts 62 (22) 40 53 4 57
Money Market accounts 104 (46) 58 (7) 47 40
Savings accounts 298 9 307 29 151 180
Certificates of deposit 1,509 (57) 1,452 1,348 756 2,104
Short-term borrowings 2 0 2 1 -- 1
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 1,975 (116) 1,859 1,424 958 2,382
------- ------- ------- ------- ------- -------
Change in net interest income $ 1,936 ($ 26) $ 1,910 $ 1,241 $ 461 $ 1,702
======= ======= ======= ======= ======= =======
</TABLE>
6
<PAGE>
II. Investment Portfolio
(dollars in thousands)
INVESTMENT COMPOSITION
Book Value as of
December 31,
1996 1995 1994
------- ------- -------
U.S. Treasury and $64,658 $41,200 $20,491
U.S. Government agencies
State and political subdivisions 3,931 1,460 1,940
Other Securities 285 610 110
------- ------- -------
Total investment securities $68,874 $43,270 $22,541
======= ======= =======
Book Value as of December 31, 1996
<TABLE>
<CAPTION>
Over Over
1 year 5 years
1 year to 5 to 10 Over
Contractual maturities or less years years 10 years Total
- ---------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and $ 5,097 $16,843 $ 8,386 $34,332 $64,658
U.S. Government agencies
State and political subdivisions 3,095 836 -- -- 3,931
Other Securities -- -- 110 175 285
------- ------- ------- ------- -------
Total investment securities $ 8,192 $17,679 $ 8,496 $34,507 $68,874
======= ======= ======= ======= =======
Weighted average yield on a
tax-equivalent basis 5.66% 6.85% 6.73% 7.05% 6.79%
======= ======= ======= ======= =======
</TABLE>
The aggregate book and market values of investment securities of a single issuer
with an aggregate book value in excess of 10% of stockholders' equity at
December 31, 1996 are as follows:
Book Market
Value Value
------- -------
U.S. Treasury $ 3,997 $ 3,996
FHLMC $ 8,236 $ 8,322
FHLB $ 7,001 $ 6,935
FNMA $ 4,011 $ 4,068
GNMA $22,320 $22,210
SBA $19,091 $18,837
Raritan Township $ 1,885 $ 1,885
7
<PAGE>
III. Loan Portfolio
(dollars in thousands)
LOAN COMPOSITION
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial $ 55,676 $ 42,699 $ 27,901 $ 19,364 $ 16,771
Real estate - construction 7,951 5,020 6,301 5,204 1,231
Real estate - mortgage 47,696 39,768 35,845 33,167 26,890
Consumer 27,145 26,101 23,564 17,109 13,335
-------- -------- -------- -------- --------
Net of deferred loan fees and discounts 138,468 113,588 93,611 74,844 58,227
Less Allowance for loan losses 1,592 1,325 1,077 1,058 654
-------- -------- -------- -------- --------
Net Loans $136,876 $112,263 $ 92,534 $ 73,786 $ 57,573
======== ======== ======== ======== ========
</TABLE>
THE MATURITIES OF COMMERCIAL AND REAL ESTATE - CONSTRUCTION LOANS
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------
Over Maturity
1 year 1 year to 5 Over Grand over
or less years 5 years total 1 year
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Fixed Rate:
Commercial $ 2,198 $ 8,142 $ 4,520 $14,860 $12,662
Real estate - construction 260 -- -- 260 --
------- ------- ------- ------- -------
2,458 8,142 4,520 15,120 12,662
Variable Rate:
Commercial 6,641 2,841 31,334 40,816 34,175
Real estate - construction 4,476 3,215 -- 7,691 3,215
------- ------- ------- ------- -------
11,117 6,056 31,334 48,507 37,390
------- ------- ------- ------- -------
Grand Total $13,575 $14,198 $35,854 $63,627
======= ======= ======= =======
Total of Maturities over 1 Year $14,198 $35,854 $50,052
======= ======= =======
</TABLE>
RISK ELEMENTS - NON PERFORMING LOANS
<TABLE>
<CAPTION>
December 31,
1996 1995 1994 1993 1992
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $454 $ 11 $637 $497 $543
Accruing loans past due 90 days or more 356 11 -- -- --
Troubled debt restructurings -- -- -- -- --
----------------------------------------------------
$810 $ 22 $637 $497 $--
====================================================
</TABLE>
The accrual of income on loans is generally discontinued when a loan becomes
more than 90 days delinquent and is not considered well secured and in the
process of collection or when certain factors indicate reasonable doubt as to
the ability of the borrower to meet contractual principal and/or interest
obligations. Loans on which the accrual of income has been discontinued are
designated as non-accrual loans. All previously accrued interest is reversed and
income is recognized subsequently only in the period collected. A non-accrual
loan is not returned to an accrual status until factors indicating doubtful
collection no longer exist.
The gross interest income which would have been recorded had loans classified as
non-accrual continued to accrue interest at their contractual rates for the year
ended December 31, 1996 was approximately $37,000.
8
<PAGE>
IV. Summary of Loan Loss Experience
(dollars in thousands)
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period $1,325 $1,077 $1,058 $ 654 $ 300
------ ------ ------ ------ ------
Charge-offs:
Commercial 227 52 75 26 --
Real estate-construction -- -- -- -- --
Real estate-mortgage -- 15 -- -- --
Consumer 33 37 13 23 11
------ ------ ------ ------ ------
260 104 88 49 --
------ ------ ------ ------ ------
Recoveries:
Commercial 10 -- 1 -- --
Real estate-construction -- -- -- -- --
Real estate-mortgage -- -- -- -- --
Consumer 1 2 6 2 --
------ ------ ------ ------ ------
11 2 7 2 --
------ ------ ------ ------ ------
Net charge-offs 249 102 81 47 11
------ ------ ------ ------ ------
Additions charged to operations 516 350 100 451 365
------ ------ ------ ------ ------
Balance at end of period $1,592 $1,325 $1,077 $1,058 $ 654
------ ------ ------ ------ ------
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.20% 0.10% 0.10% 0.07% 0.02%
------ ------ ------ ------ ------
</TABLE>
9
<PAGE>
The following table sets forth an allocation of the allowance for loan losses
among certain categories of loans as of the dates indicated. It should not be
interpreted as an indication of the specific amounts or the relative proportion
of future changes to the allowance, but may be utilized as a device for
assessing the adequacy of the allowance as a whole.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993 December 31, 1992
-------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
Amount in each Amount in each Amount in each Amount in each Amount in each
category category category category category
Balance at end of of total of total of total of total of total
period applicable to: loans loans loans loans loans
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $762 40.55% $410 37.59% $63 29.81% $158 25.87% $129 28.80%
Real estate-construction 79 5.74% 50 4.42% 96 6.73% 56 6.95% 15 2.11%
Real estate-mortgage 406 34.45% 499 35.01% 306 38.29% 372 44.32% 189 46.19%
Consumer 155 19.26% 135 22.98% 104 25.17% 184 22.86% 90 22.90%
Unallocated 190 N/A 231 N/A 508 N/A 288 N/A 231 N/A
-------------------------------------------------------------------------------------------------------
Total $1,592 100.00% $1,325 100.00% $1,077 100.00% $1,058 100.00% $654 100.00%
=======================================================================================================
</TABLE>
10
<PAGE>
V. Deposits
DEPOSIT COMPOSITION - AVERAGE BALANCES
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
1996 1996 1995 1995 1994 1994
---------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 26,100 --% $ 17,352 --% $ 14,186 --%
NOW accounts 10,747 2.39% 8,232 2.64% 6,218 2.57%
Money Market accounts 19,504 3.12% 16,259 3.38% 16,485 3.09%
Savings accounts 30,436 3.61% 22,179 3.58% 21,227 2.89%
Certificates of deposit 100,838 5.55% 73,687 5.63% 47,518 4.30%
-------- -------- --------
Total Deposits $187,625 4.03% $137,709 4.15% $105,634 3.15%
======== ======== ========
</TABLE>
At December 31, 1996 the Corporation had outstanding Certificates of Deposit in
amounts of $100,000 or greater maturing as follows:
(dollars in thousands)
Non
Periods Negotiable Negotiable Total
- --------------------------------------------------------------------------------
Within 3 months $6,688 $2,425 $9,113
Over 3 months to 6 months 1,393 2,896 4,289
Over 6 months to 12 months 630 3,748 4,378
Over 12 months 486 3,197 3,683
-------
$21,463
=======
In the total of $21,463,000, $9,197,000 are "negotiable" as to their rate and
maturity. The remaining $12,266,000 are under the same terms and conditions as
any other accounts in the category.
The Bank has no deposits in foreign banking offices and, to the best of
management's knowledge, has no material deposits in domestic offices by foreign
depositors.
11
<PAGE>
ITEM 2 -- PROPERTIES.
The Corporation currently operates out of its original location at Reading Ridge
Center, as well as the much larger banking and office facilities at One Royal
Road, within Raritan Township, New Jersey. A third branch is located in the
borough of Raritan, within neighboring Somerset County, to service the eastern
portion of the Corporation's trade area. A fourth location serving customers in
the northern section of the trade area exists in Clinton Township. Three
additional branches are planned for 1997 opening in Flemington and Clinton, New
Jersey. Applications for the proposed branches have been reviewed and approved
by the New Jersey State Department of Banking.
The Reading Ridge branch is part of a strip shopping center located at the
intersection of Reading Road and Voorhees Corner Road. It includes about 1,800
square feet and has three inside teller stations and two drive-ups, as well as
an automated teller machine located in its vestibule. The Royal Road location
consists of about 13,300 square feet within a new 16,500 square foot building at
the corner of Royal Road and Church Street and includes four inside teller
stations, three drive-ups and an automated teller machine within its vestibule.
The Raritan Borough location is at 34 East Somerset Street and includes
approximately 5,500 square feet of banking, office, meeting and storage space.
It includes four inside teller stations, two drive-ups and an automated teller
machine within its vestibule. The Clinton Township branch is located at 37
Beaver Avenue and also contains four inside teller stations, two drive-ups and
an automated teller machine within its vestibule. Parking and access are
considered satisfactory at all locations.
Consistent with the Corporation's philosophy to minimize commitments to fixed
(non-earning) assets that may also impede future flexibility as size and
business emphasis may change, all properties are leased. The Reading Ridge
branch is rented from Reading Ridge Associates under an operating lease which
expires in 1997 but which contains certain renewal options. The Royal Road
location is leased from Prestige Quarters LP under an operating lease which
commenced in 1993 for an initial term of 20 years with an additional 10-year
renewal option. The Raritan Borough branch is leased from Prestige Realty Group,
LLC under an operating lease with an initial term of 10 years which expires in
2004 and which provides for two additional 5 year renewal options. The Clinton
Township branch is leased from Prestige Clinton Realty, LLC under an operating
lease with an initial term of ten years which expires in 2006 and which provides
for two additional 5 year renewal options. In addition to rent payments, the
Corporation is obligated to pay real estate taxes, utilities, casualty insurance
and expenses of maintaining the leased premises.
Please also refer to Note 6, on page 15, and Note 10, on page 18, of the
Corporation's 1996 Annual Report which are incorporated herein by reference.
12
<PAGE>
ITEM 3 -- LEGAL PROCEEDINGS.
Please see Note 10 - "Contingencies", on page 19 of the Corporation's 1996
Annual Report which is incorporated herein by reference.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year on which this report is being made.
PART II
ITEM 5 -- MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Please refer to Note 11, on page 19, and to page 24 of the Corporation's 1996
Annual Report which are incorporated herein by reference. Further information is
also provided in the table on page 14 of this Form 10-K.
ITEM 6 -- SELECTED FINANCIAL DATA.
The following selected consolidated financial data of the Corporation and the
Bank as of and for the years ended December 31, 1996, 1995, 1994, 1993, and 1992
was derived from the audited consolidated financial statements of the
Corporation and the Bank. Such selected consolidated financial data for each of
the years in the three year period ended December 31, 1996 should be read in
conjunction with the Corporation's consolidated financial statements and related
notes on pages 8 - 24 of the Corporation's 1996 Annual Report which are
incorporated herein by reference. All per share amounts have been adjusted to
reflect the five-for-four stock split effective on April 19, 1996 and the 10%
stock dividend effective on March 31, 1995.
13
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(dollars in thousands, except per share data)
Years Ended December 31, 1996 1995 1994 1993 1992
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Summary of Income
Interest income $16,039 $12,254 $8,189 $6,655 $5,467
Interest expense 7,568 5,709 3,327 2,706 2,709
-------------------------------------------------------------------
Net interest income 8,471 6,545 4,862 3,949 2,758
Provision for loan losses 516 350 100 451 365
-------------------------------------------------------------------
Income from earning assets 7,955 6,195 4,762 3,498 2,393
Other income 1,536 700 563 525 188
Other expense 6,222 4,898 4,124 3,276 2,228
-------------------------------------------------------------------
Income before income tax expense 3,269 1,997 1,201 747 353
Provision for income taxes 1,226 825 491 287 154
Extraordinary items -- -- -- -- 154
Cumulative effect of accounting change -- -- -- 63 --
-------------------------------------------------------------------
Net income $2,043 $1,172 $710 $523 $353
====================================================================================================================
Balance Sheet Data
Investments $68,874 $43,270 $22,541 $22,733 $18,365
Total loans, net 136,876 112,263 92,534 73,786 57,572
Total assets 229,517 176,382 132,572 109,636 83,247
Total deposits 212,596 163,517 122,439 100,112 74,803
Stockholders' equity $15,710 $12,058 $9,505 $8,951 $7,866
====================================================================================================================
Cash Dividends Declared
Common stock cash dividends $620 $229 $118 $65 $60
Preferred stock cash dividends 0 73 45 40 11
-------------------------------------------------------------------
Total cash dividends declared $620 $302 $163 $105 $71
Cash dividends to net income 30% 26% 23% 20% 20%
====================================================================================================================
Cash Dividends Per Common Share
Cash dividends declared $0.25 $0.10 $0.06 $0.03 $0.03
====================================================================================================================
Earnings Per Common Share
Primary $0.76 $0.48 $0.31 $0.23 $0.18
Fully diluted $0.75 $0.47 $0.31 $0.23 $0.18
====================================================================================================================
Weighted Average Common Shares Outstanding
Primary 2,701,269 2,293,161 2,157,603 2,072,631 1,948,879
Fully diluted 2,719,389 2,333,464 2,157,603 2,072,631 1,948,879
====================================================================================================================
Operating Ratios
Return on average assets 1.01% 0.79% 0.61% 0.55% 0.50%
Return on average equity 14.75% 11.27% 7.72% 6.13% 5.01%
====================================================================================================================
Book Value Per Common Share
Book value (at year end) $5.90 $4.89 $3.98 $3.73 $3.37
====================================================================================================================
Non-Financial Information
Record owners of common stock 672 501 496 516 489
Full-time equivalent employees 65 51 45 35 22
====================================================================================================================
</TABLE>
14
<PAGE>
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
For a comprehensive understanding of the Corporation's financial condition
and performance, the following discussion should be considered within the
context of the Consolidated Financial Statements and accompanying notes on pages
8 - 24 of the Corporation's 1996 Annual Report which are incorporated herein by
reference.
1996 compared with 1995
Financial Condition
As of December 31, 1996 total assets had grown by $53.1 Million, or 30%, to
$229.5 Million as compared to $176.4 Million at December 31, 1995. This growth
was funded primarily from deposits (mainly "core" demand and time accounts)
which increased by $49.1 Million or 30% to $212.6 Million at December 31, 1996
from $163.5 Million at December 31, 1995. The opening of the Corporation's
fourth location in Clinton Township in May of 1996 contributed to this growth as
did several CD promotions run early in 1996 to insure funding for above budget
loan production. In addition, management believes that continuing industry
consolidation has aided the Corporation's growth as customers seek the personal
service of a community bank.
Total stockholders' equity increased by $3.6 Million, or 30%, to $15.7 Million
at December 31, 1996 from $12.1 Million at December 31, 1995 as a result of
earnings, and dividends reinvested and optional cash purchases made by
shareholders in accordance with the Corporation's Dividend Reinvestment and
Common Stock Purchase Plan (the Plan) adopted in the third quarter of 1995,
partially offset by cash dividends paid totaling $620 Thousand in 1996. Under
the provisions of the Plan, shareholders may reinvest dividends free from
brokers' commissions and may make optional cash purchases of Corporation common
stock to a maximum of $5 Thousand per quarter at a 5% discount from market
price.
Within the asset composition, this growth was utilized primarily to fund
increases in the loan and investment portfolios. For the year ended December 31,
1996 total outstanding loans, including loans available for sale, rose by $24.9
Million, or 22%, to $138.5 Million from $113.6 Million at December 31, 1995,
despite the sale of $22.9 Million in Small Business Administration (SBA) loans,
residential mortgage loans and participations of loans to other financial
institutions in 1996.
Loan growth took place primarily in the commercial and construction categories,
where December 31, 1996 balances showed increases of approximately $22 Million
over December 31, 1995. A major contributor to this growth has been our success
in SBA loan production, as the Bank continues to benefit from its "Preferred SBA
Lender" status. For the SBA's fiscal year ended September 30, 1996, the Bank
provided a total of $47.5 Million in SBA loan accomodations and once again led
all other lending institutions in New Jersey with $40 Million in loans within
the State. This compared with $23.9 Million in approvals within New Jersey
during the same period a year ago, and earned Prestige State Bank the SBA's
Diamond Award as New Jersey's premier SBA lender for the second consecutive
year. The Bank was also New Jersey's leading SBA lender to businesses owned by
veterans and women.
15
<PAGE>
Growth in residential mortgages, second mortgages and home equity loans
contributed another $3.7 Million to the increase in the Bank's loan portfolio at
December 31, 1996.
Loans held for sale totaled $15 Million at December 31, 1996 compared with $10.2
Million at December 31, 1995. The loans held for sale category is comprised of
SBA and residential mortgage loans which provide attractive yields as well as a
ready source of liquidity and potential gains on sales.
Investment securities (all classified as held to maturity) increased by $25.7
Million, or 59%, to $68.9 Million at December 31, 1996 from $43.2 Million at
December 31, 1995. This growth was primarily due to the purchase of securities
issued by the United States government and its agencies, including
mortgage-backed securities and SBA guaranteed loan pool certificates.
For the year ended December 31, 1996, the allowance for possible loan losses
increased by $267 Thousand as a result of provisions totaling $516 Thousand,
less net charge-offs of $249 Thousand. The allowance amounted to 1.15% of total
outstanding loans as of December 31, 1996 as compared to 1.17% of loans as of
December 31, 1995.
Non-performing loans consist of loans on which the accrual of interest has been
discontinued, or loans on which interest is still being accrued but that are
contractually past due 90 days or more as to interest or principal payments.
Non-performing loans totaled $810 Thousand at December 31, 1996 compared with
$22 Thousand at December 31, 1995. Non-accrual loans (also classified as
impaired loans) totaled $454 Thousand (.33% of total loans) as of December 31,
1996 as compared to $11 Thousand (.01% of total loans) as of December 31, 1995.
Of the $454 Thousand in non-accrual loans at December 31, 1996, $181 Thousand is
fully guaranteed by the SBA.
Considering the information in the previous two paragraphs as well as other
relevant factors, management believes that the allowance for possible loan
losses is adequate. While management uses available information to determine the
adequacy of the allowance, future additions may occur based upon growth in the
loan portfolio or changes in loan quality resulting from circumstances beyond
the Corporation's control such as changes in economic conditions in the region
in which the Corporation conducts business.
Capital Adequacy
The Federal Reserve Board (FRB) in the case of bank holding companies such as
the Corporation and the Federal Deposit Insurance Corporation (FDIC) in the case
of state banks such as the Bank have adopted risk-based capital guidelines which
require a minimum ratio of 8% of total risk-based capital to assets, as defined
in the guidelines. At least one half of the total capital, or 4%, is to be
comprised of common equity and qualifying perpetual preferred stock, less
deductible intangibles (Tier 1 capital).
Risk-based capital ratios are expressed as percentages of capital to
"risk-adjusted assets" and, therefore, relate capital to the risk factors
inherent within a company's asset base, including off-balance sheet risk
exposure. Various weightings are assigned to different asset categories as well
as off-balance sheet exposure depending upon the
16
<PAGE>
risk associated with each category. In general, less capital is required for a
less risky asset composition.
At December 31, 1996, the Corporation's and the Bank's core (Tier-1) risk-based
capital ratios were 11.69% and 10.89%, respectively, versus 10.71% and 9.91% as
of December 31, 1995. These ratios compare favorably to a minimum of 4% as
required by the FRB and the FDIC.
At December 31, 1996, the Corporation's and the Bank's total (Tier-1 plus Tier
2) risk-based capital ratios were 12.87% and 12.08%, respectively, versus 11.89%
and 11.10% as of December 31, 1994. These ratios also compare favorably to a
minimum of 8% as required by the FRB and the FDIC.
The FRB and the FDIC have supplemented the risk-based capital guidelines with an
additional capital ratio referred to as the leverage ratio or core capital
ratio. The regulations require a financial institution to maintain a minimum
leverage ratio of 4% to 5%, depending upon the condition of the institution.
At December 31, 1996, the Corporation's and the Bank's leverage ratios were
7.01% and 6.55%, respectively, versus 6.81% and 6.32% as of December 31, 1995.
Again, these ratios compare favorably with existing guidelines established by
the FRB and the FDIC. The Bank's ratio in both years qualifies it as being "well
capitalized" by exceeding the FDIC's 6.00% requirement for that designation.
It should be noted that additional capital raised via the Dividend Reinvestment
and Common Stock Purchase Plan provides the ability to downstream capital from
the Corporation to the Bank should the Bank's capital ratios require it.
Liquidity
The liquidity position of the Corporation is dependent upon the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise principally to accommodate possible
deposit outflows and to meet customers' requests for loans. Such needs can be
satisfied by maturing loans and investments, short term liquid assets, and the
ability to raise short-term funds from external sources.
Thus far, virtually all funding needs have been met via the acquisition of
deposits, and not through other, higher costing sources such as borrowings or
securities sold under repurchase agreements. In addition, the total of all
liquid assets (e.g. Federal funds, short term investments, assets available for
sale) as measured against what may be considered volatile liabilities (i.e.
short term $100,000 certificates of deposit) produced liquidity ratios of 401%
and 332% at December 31, 1996 and December 31, 1995, respectively. Both ratios
were considered by management to be satisfactory.
Interest Rate Sensitivity
The management of interest rate risk is also important to the profitability of
the entity. Interest rate risk arises when an earning asset matures or has its
interest rate change in a time period different from that of a supporting
interest bearing liability; or when an interest bearing liability matures or has
its interest rate change in a time period different from that of an earning
asset that it supports. While the Corporation does not match specific assets and
liabilities, total earning assets and interest bearing
17
<PAGE>
liabilities are grouped to determine the overall interest rate risk within a
number of specific time frames.
Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. The difference between
interest sensitive assets and interest sensitive liabilities is referred to as
the interest sensitivity gap. At any given point in time, the Corporation may be
in an asset-sensitive position, meaning its interest-sensitive assets exceed its
interest-sensitive liabilities; or in a liability-sensitive position, whereby
its interest-sensitive liabilities exceed its interest-sensitive assets. These
positions may expose the Corporation to possible future gain or loss of net
interest income, depending upon which way interest rates move.
As of December 31, 1996 there was a cumulative twelve month gap of a negative
$30.6 Million as compared to a negative $18.1 Million gap as of December 31,
1995. The percentage of imbalance from a perfectly matched 100% was
approximately 22% at December 31, 1996. Management does not, however, consider
this to be of concern as this represents what is known as the "static gap"
measure of assets to liabilities.
From this simplistic static viewpoint, a negative gap may be expected to cause
reductions in net interest income in a rising rate environment and enhance net
interest income in a declining rate environment. However, the repricing of
liabilities can be, and often are, lagged behind earning asset rate increases,
or exaggerated when rates decrease, in order to offset the gap's effects. In
addition, rate sensitive assets may reprice at different frequencies than rate
sensitive liabilities within the twelve month time frame, further offsetting the
gap's effects. With such considerations factored into a more meaningful "dynamic
gap" model, the Corporation's December 31, 1996 position indicated that an
increase in average interest rates would, in fact, have a positive impact on net
interest income. Conversely a drop in rates would likely have a somewhat
negative impact on net interest income over the 12 months thereafter.
Incidentally, the introduction of a flat interest rate scenario into this
dynamic gap model also projects improvement in the net interest margin for the
12 months thereafter, though not as significant as the improvement projected in
a rising rate environment.
18
<PAGE>
Interest Rate Gaps as of December 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Rate Sensitive
------------------------------------------------------------
1 to 90 91 to 180 181 to 365 1 to 5 Beyond Not Rate
Days Days Days Years 5 Years Sensitive Total
------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold $8,950 $ -- $ -- $ -- $ -- $ -- $8,950
Securities 29,151 3,716 3,434 26,756 5,817 -- 68,874
Loans held for sale 15,013 -- -- -- -- -- 15,013
Loans 46,270 2,733 4,685 62,208 7,559 -- 123,455
Other assets, net -- -- -- -- -- 13,225 13,225
----------------------------------------------------------------------------------------
Total assets $99,384 $6,449 $8,119 $88,964 $13,376 $13,225 $229,517
----------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing deposits 89,484 25,627 29,457 32,710 -- -- 177,278
Noninterest-bearing deposits -- -- -- -- -- 35,318 35,318
Other liabilities -- -- -- -- -- 1,211 1,211
Stockholders' equity -- -- -- -- -- 15,710 15,710
----------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $89,484 $25,627 $29,457 $32,710 $ -- $52,239 $229,517
----------------------------------------------------------------------------------------
Interest rate sensitivity gap 9,900 (19,178) (21,338) 56,254 13,376 (39,014)
----------------------------------------------------------------------------------------
Cumulative interest rate
sensitivity gap $9,900 ($9,278) ($30,616) $25,638 $39,014
----------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Results of Operations
Net income for the year ended December 31, 1996 amounted to $2.0 Million
compared to $1.2 Million for the year ended December 31, 1995. Related fully
diluted earnings-per-common-share data were: $.75 per share for 1996 versus $.47
per share for 1995. These figures reflect a 25% stock split distributed in
April, 1996 and a 10% stock dividend issued in March of 1995. The return on
average assets was 1.01% for 1996 as compared to .79% for 1995. The return on
average stockholders' equity was 14.75% for 1996 as compared to 11.27% for 1995.
Net Interest Income
Net interest income increased by $2.0 Million, or 31%, to $8.5 Million in 1996
from $6.5 Million in 1995. This increase was primarily due to an increase in
earning asset volume while interest rates paid on supporting deposit liabilities
declined. In addition, average non-interest bearing demand deposits rose by $8.7
Million during 1996 and accounted for 13.9% of average total deposits in 1996
compared with 12.6% of average total deposits in 1995. As a result, the overall
weighted average interest rate paid on deposits declined to 4.03% in 1996 from
4.15% in 1995. The net interest margin on a taxable equivalent basis was 4.42%
for the year ended December 31, 1996, down from 4.68% for the year ended
December 31, 1995. This decrease is attributable to reduced yields on earning
assets as higher rate loans and investments matured or repriced at lower rates.
The Corporation's net interest margin may decline moderately in 1997 due to the
effect of an investment in corporate owned life insurance in February, 1997
which, although increasing non-interest income, will slightly reduce the
Corporation's earning asset base.
Non-Interest Income
Non-interest income for 1996 increased by $836 Thousand or 119% over 1995, to
$1.5 Million from $700 Thousand. Gains from the sales of loans (primarily SBA
loans) amounted to $1.2 Million during 1996 compared with $572 Thousand in 1995.
The increase in gains on loan sales was mainly attributable to a higher volume
of loans sold.
As discussed earlier, SBA loan production was up considerably. In addition, the
Corporation's recently established residential mortgage division accounted for
$117 Thousand in gains on loan sales in 1996 versus no gains in 1995.
Partially offsetting gains on loan sales was a loss of $50 Thousand incurred in
July, 1996 on the sale of $5.5 Million in unguaranteed portions of SBA loans as
management took advantage of an opportunity to reduce overall risk within the
Bank's portfolio.
Selling the guaranteed portions of SBA loans is a normal and recurring component
of the Corporation's operations, and the Bank's "Preferred SBA Lender" status
has allowed a buildup of SBA loans for future retention or sale. Management
believes that gains from SBA loan sales can continue as an important component
in the Corporation's future profits. However, management is also cognizant of
the fact that changes may occur in the government program, and therefore
continues to focus on net interest margin as the key element in future profit
plans. Furthermore, management expects the ongoing origination and sale of
residential mortgage loans to reduce reliance on sales of SBA
20
<PAGE>
loans, allowing the higher yielding SBA loans to continue to accumulate and help
maintain a satisfactory net interest margin.
The increase in non-interest income in 1996 compared with 1995 is also
attributable in part to losses of $76 Thousand sustained on sales of investments
in 1995. There were no sales of investments in 1996. Losses from the sales of
investment securities in 1995 occurred as the Corporation took advantage of a
one-time opportunity to reassess certain investments formerly classified as
"held-to-maturity" in order to reinvest in higher yielding assets pursuant to
Special Report No. 155-B, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities - Questions and
Answers" issued by the Financial Accounting Standards Board.
Non-Interest Expense
Total non-interest expense rose by $1.3 Million (or 27%) to $6.2 Million from
$4.9 Million in 1995. Most of the increase is attributable to the addition of
personnel and other costs related to the Corporation's continued growth.
For the year ended December 31, 1996, salaries and benefits totaled $3.1 Million
as compared to $2.3 Million for the year ended December 31, 1995 and accounted
for $.8 Million of the increase in non-interest expense. Fourteen full-time
equivalent employees were added during the year in order to staff the Clinton
Township branch which opened in May, 1996 and to better service the
Corporation's growing customer base.
For the year ended December 31, 1996, occupancy related expense totaled $1.3
Million as compared to $1.0 Million for the year ended December 31, 1995,
thereby accounting for $.3 Million of the increase in non-interest expense. This
increase is primarily due to the opening of the Clinton Township location in May
of 1996 and the leasing of additional office space in the Corporation's Royal
Road headquarters building. The additional space is being utilized to house the
Corporation's growing residential mortgage operation, increased commercial
lending staff, and increased operational staff necessary to manage above budget
growth in both the number and dollar volume of new business.
Data processing costs contributed another $.1 Million to the increase in
non-interest expense for the year ended December 31, 1996 compared with the year
ended December 31, 1995, primarily as a result of increased volume.
Advertising and business development costs increased by $.1 Million over 1995 as
the Corporation continues to expand its presence in Hunterdon and Somerset
counties and surrounding environs.
Additional increases in total non-interest expense were attributable to
increases in printing, stationery and supplies expense which rose by $53
Thousand, increases in checkbook costs of $45 Thousand, and increases in
postage/telecommunications charges of $36 Thousand. These increases in other
non-interest expense are due to increased volume.
They were offset to some extent by a reduction in Federal deposit insurance
premiums of $138 Thousand resulting from FDIC rate reductions instituted in
mid-1995.
21
<PAGE>
The "efficiency ratio" (non-interest expense divided by the sum of taxable
equivalent net interest income and non-interest income) provides an indication
of control over non-interest expense combined with a measure of the ability to
generate non-interest income. The Corporation's efficiency ratio improved to 62%
for the year ended December 31, 1996 from 67% for the year ended December 31,
1995. More strictly directed at non-interest expense control, the "overhead
ratio" (non-interest expense divided by average assets) improved to 3.07% for
the year ended December 31, 1996 from 3.30% for the year 1995.
Provisions for Loan Losses
In 1996, the provision for loan losses increased by $166 Thousand to $516
Thousand from $350 Thousand in 1995. The increase was necessary to maintain the
allowance for loan losses at targeted levels in light of continued loan growth.
As discussed previously, the Corporation's non-accrual loans at December 31,
1996 and December 31, 1995 were .33% and .01% of total loans, respectively.
Income Tax Expense
Provisions for income tax totaled $1.2 Million in 1996, up from $825 Thousand in
1995 as a result of the Corporation's increased taxable earnings. The
Corporation's effective tax rate declined to 37.5% for the year ended December
31, 1996 from 41.3% for the year ended December 31, 1995. This decrease was
primarily attributable to the formation in the third quarter of 1996 of PSB
Investment Management, Inc., a wholly-owned subsidiary of the Bank, which
manages a portfolio of investment securities for its own account. The earnings
of PSB Investment Management, Inc. are taxed by the State of New Jersey at a
rate of 2.25% as opposed to the 9.0% state income tax rate to which the Bank and
Corporation are subject.
22
<PAGE>
1995 compared with 1994
Financial Condition
As of December 31, 1995 total assets had grown by $43.8 Million, or 33%, to
$176.4 Million as compared to $132.6 Million at December 31, 1994. This growth
was funded primarily from deposits (mainly "core" demand and time accounts)
which increased by $41.1 Million or 34% to $163.5 Million at December 31, 1995
from $122.4 Million at December 31, 1994.
Capital increased by $2.6 Million, or 27%, to $12.1 Million at December 31, 1995
from $9.5 Million at December 31, 1994 as a result of earnings, dividends
reinvested and optional cash purchases made by shareholders in accordance with
the Plan, and a private placement of 176,000 common shares in the fourth quarter
of 1995.
Within the asset composition, this growth was utilized to increase the loan and
investment portfolios, as well as contributing to a $2.0 Million increase in the
overnight federal funds total pending repositioning into longer-term earning
assets, primarily loans.
For the year ended December 31, 1995 total outstanding loans, including loans
available for sale, rose by $20.0 Million, or 21%, to $113.6 Million from $93.6
Million at December 31, 1994, despite the sale of $8.9 Million in SBA loans and
participations of loans to other financial institutions in 1995.
Investment securities increased by $20.7 Million, or 92%, to $43.2 Million at
December 31, 1995 from $22.5 Million at December 31, 1994. This growth was
primarily due to the purchase of securities issued by the United States
government and its agencies, including mortgage-backed securities.
Other assets increased by $1.0 Million, or 111%, to $1.9 Million at December 31,
1995 from $.9 Million at December 31, 1994. This increase was primarily due to
receivables from brokers in connection with securities sales initiated at year
end.
For the year ended December 31, 1995, the allowance for possible loan losses
grew by $248 Thousand as a result of provisions totaling $350 Thousand, minus
net charge-offs of $102 Thousand. The allowance amounted to 1.17% of total
outstanding loans as of December 31, 1995 as compared to 1.15% of loans as of
December 31, 1994.
Non-accrual loans (also classified as impaired loans under Statement of
Financial Accounting Standards No. 114) totaled $11 Thousand (.01% of total
loans) as of December 31, 1995 as compared to $637 Thousand (.68% of total
loans) as of December 31, 1994. These are loans on which accrual of interest has
been discontinued, or loans on which interest is still being accrued but that
are contractually past due 90 days or more as to interest or principal payments.
23
<PAGE>
Capital Adequacy.
At December 31, 1995, the Corporation's and the Bank's core (Tier-1) risk-based
capital ratios were 10.71% and 9.91%, respectively, versus 9.09% and 10.02% as
of December 31, 1994. These ratios compare favorably to a minimum of 4% as
required by the FRB and the FDIC.
At December 31, 1995, the Corporation's and the Bank's total (Tier-1 plus Tier
2) risk-based capital ratios were 11.89% and 11.10%, respectively, versus 10.23%
and 11.16% as of December 31, 1994. These ratios also compare favorably to a
minimum of 8% as required by the FRB and the FDIC.
At December 31, 1995, the Corporation's and the Bank's leverage ratios were
6.81% and 6.32%, respectively, versus 6.45% and 7.11% as of December 31, 1994.
Again, these ratios compare favorably with existing guidelines established by
the FRB and the FDIC.
Liquidity.
The total of all liquid assets (e.g. Federal funds sold, short-term investments,
assets available for sale) as measured against what may be considered volatile
liabilities (i.e. short-term $100,000 certificates of deposit) produced
liquidity ratios of 332% and 193% for December 31, 1995 and December 31, 1994,
respectively. Both ratios were considered by management to be adequate.
Interest Rate Sensitivity.
As of December 31, 1995 there was a cumulative twelve month gap of a negative
$18.1 Million as compared to a negative $9.3 Million gap as of December 31,
1994.
24
<PAGE>
Results of Operations
Net income for the year ended December 31, 1995 amounted to $1.2 Million
compared to $710 Thousand for the year ended December 31, 1994. Related fully
diluted earnings-per-common-share data were: $.47 per share for 1995 versus $.31
per share for 1994. These numbers reflect a 25% stock split distributed in
April, 1996 and a 10% stock dividend issued in March of 1995. The return on
average assets was .79% for 1995 as compared to .61% for 1994. The return on
average stockholders' equity was 11.27% for 1995 as compared to 7.72% for 1994.
Net Interest Income.
Net interest income increased by $1.6 Million, or 33%, to $6.5 Million in 1995
from $4.9 Million in 1994 even though interest expense rose by $2.4 Million or
73% to $5.7 Million in 1995 from $3.3 Million in 1994. The increase in net
interest income reflected in 1995 over 1994 resulted primarily from an increase
in earning asset volume, and, to a lesser extent, from improved yields while
interest rates paid on deposits grew at a slower pace.
Non-Interest Income.
Non-interest income for 1995 increased by $137 Thousand or 24% over 1994, to
$700 Thousand from $563 Thousand. Gains from the sales of loans amounted to $572
Thousand during 1995 versus $406 Thousand in 1994. Most of the increase in gains
on loan sales (all SBA loans) was attributable to a higher volume of loans sold;
but a portion of the increase was due to higher premiums being paid on sold
portions. This increase was offset by losses on sales of investments of $76
Thousand in 1995. There were no sales of investments in 1994.
Losses from the sales of investment securities in 1995 occurred as the
Corporation took advantage of a one-time opportunity to reassess certain
investments formerly classified as "held-to-maturity" in order to reinvest in
higher yielding assets pursuant to Special Report No. 155-B, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities - Questions and Answers" issued by the Financial
Accounting Standards Board.
Non-Interest Expense.
Total non-interest expenses rose by $.8 Million (or 20%) to $4.9 Million from
$4.1 Million in 1994. Most of the increase is attributable to the addition of
personnel and other costs related to the Corporation's growth.
For the year ended December 31, 1995, salaries and benefits totalled $2.3
Million as compared to $1.8 Million for the year ended December 31, 1994 and
accounted for $.5 Million of the increase in non-interest expense. Six full-time
equivalent employees were added during the year in order to strengthen coverage
for the Corporation's growing customer base and to enhance the Corporation's
service offerings and operating efficiency.
25
<PAGE>
For the year ended December 31, 1995, occupancy related expense totaled $1.0
Million as compared to $.9 Million for the year ended December 31, 1994 thereby
accounting for $.1 Million of the increase in non-interest expense. Total
non-interest expenses in 1995 reflect a full year of operating expenses for the
Raritan Borough location which was opened in May of 1994.
The remaining increase in total non-interest expense was primarily attributable
to increases in data processing expenses of $37 Thousand, increases in postage
and telephone charges of $51 Thousand, and increases of $123 Thousand for
holding company costs including charges associated with listing the
Corporation's common stock on the NASDAQ National Market and the creation of the
Dividend Reinvestment and Common Stock Purchase Plan. These increases were
offset by a reduction in FDIC premiums of $88 Thousand resulting from FDIC rate
reductions instituted in mid-1995.
Provisions for Loan Losses.
In 1995, the provision for loan losses increased by $250 Thousand to $350
Thousand from $100 Thousand in 1994. The increase was necessary to maintain the
allowance for loan losses at targeted levels in light of continued loan growth.
As discussed previously, the Corporation's non-accrual loans at December 31,
1995 and December 31, 1994 were .01% and .68% of total loans, respectively.
Income Tax Expense.
Provisions for income tax totaled $825 Thousand in 1995, up from $491 Thousand
in 1994 as a result of the Corporation's increased taxable earnings.
26
<PAGE>
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please refer to pages 8 through 24 of the Corporation's 1996 Annual Report which
are incorporated herein by reference.
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Please refer to the Corporation's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders to be filed with the Commission prior to April 30, 1997,
which is incorporated herein by reference.
ITEM 11 -- EXECUTIVE COMPENSATION.
Please refer to the Corporation's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders to be filed with the Commission prior to April 30, 1997,
which is incorporated herein by reference.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Please refer to the Corporation's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders to be filed with the Commission prior to April 30, 1997,
which is incorporated herein by reference.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Please refer to the Corporation's definitive Proxy Statement for its 1997 Annual
Meeting of Stockholders to be filed with the Commission prior to April 30, 1997,
which is incorporated herein by reference.
27
<PAGE>
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following financial statements and schedules are filed as part of this
Form 10K :
1 -- Financial Statements included in the 1996 Annual Page Number in the
Report and incorporated by reference: 1996 Annual Report
- --------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
as of December 31, 1996 and 1995 8
Consolidated Statements of Income for the
Years Ended December 31, 1996, 1995, and 1994 9
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995, and 1994 10
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995, and 1994 11
Notes to Consolidated
Financial Statements 12
Independent Auditors' Report 23
With the exception of pages 8 through 24, the Corporation's 1996 Annual
Report is not deemed to be filed as part of this Form 10-K.
Page in this
2 -- Financial Statement Schedules: Form 10-K
- --------------------------------------------------------------------------------
Schedule I - Distribution of Assets, Liabilities and
Stockholders' Equity, Interest Rates and Interest
Differential 5
Schedule II - Investment Portfolio 7
Schedule III - Loan Portfolio 8
Schedule IV - Summary of Loan Loss Experience 9
Schedule V - Deposits 11
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3 -- Exhibits.
Exhibit
Number Document
2 Plan of Acquisition Between Prestige State Bank and Prestige Financial
Corp. (1)
3.1 Certificate of Incorporation of the Registrant. (1)
3.2 Bylaws of the Registrant. (1)
10.1 1990 Long-Term Incentive Compensation Plan for Key Employees. (2)
10.2 1994 Stock Option Plan for Key Employees. (5)
10.3 1994 Stock Option Plan for Senior Management. (2)
10.4 1994 Stock Option Plan for Outside Directors. (5)
10.5 1994 Recognition and Retention Plan for Founding Outside Directors.
(2)
10.6 Form of Employment Agreement between (i) Arnold F. Horvath and the
Corporation and (ii) Robert J. Jablonski and the Corporation. (3)
10.7 Form of Addendum to Executive Employment Agreement between (i) Arnold
F. Horvath and the Corporation and (ii) Robert J. Jablonski and the
Corporation entered into effective as of August 16, 1995. (4)
10.8 Executive Supplemental Retirement Income Agreement.
10.9 Directors Retirement Plan.
13 Pages 8 to 24 of the Corporation's 1996 Annual Report to Shareholders
which are incorporated by reference herein.
21 Subsidiaries of the Corporation: Prestige State Bank, a New Jersey
corporation and its wholly owned subsidiary PSB Investment Management,
Inc., a New Jersey corporation.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
(1) Previously filed with the Corporation's Form S-4, File No.
33-59752, and incorporated herein by reference.
(2) Previously filed with the Corporation's Form S-8, File No.
33-83066, and incorporated herein by reference.
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(3) Previously filed with the Corporation's Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
(4) Previously filed with the Corporation's Form 10-K for the year
ended December 31, 1995 and incorporated herein by reference.
(5) Previously filed with the Corporation's Form S-8, File No.
333-15739, and incorporated herein by reference.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth quarter of 1996.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRESTIGE FINANCIAL CORP.
(Registrant)
By: /s/ Robert J. Jablonski
---------------------------
Robert J. Jablonski
Chief Executive Officer,
Treasurer/Principal
Financial Officer/Principal
Accounting Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated above:
/s/ Robert J. Jablonski /s/ Arnold F. Horvath
- ------------------------------ -----------------------------
Robert J. Jablonski Arnold F. Horvath
Chief Executive Officer, President,Director
Treasurer/Principal
Financial Officer/Principal
Accounting Officer, Director
Date: March 28, 1997 Date: March 28, 1997
/s/ Roland D. Boehm, Sr. /s/ James W. MacDonald_
- ------------------------------ -----------------------------
Roland D. Boehm, Sr. James W. MacDonald
Vice Chairman Director
Date: March 28, 1997 Date: March 28, 1997
/s/ Louis R. DeFalco /s/ Gerald A. Lustig
- ------------------------------ -----------------------------
Louis R. DeFalco Gerald A. Lustig
Chairman Director
Date: March 28, 1997 Date: March 28, 1997
/s/ Arthur Stryker, Jr.
- ------------------------------
Arthur Stryker, Jr.
Director
Date: March 28, 1997
EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT
(PAYMENT OPTION - 15 YEAR PERIOD CERTAIN OR LIFE)
This Executive Supplemental Retirement Income Agreement (the "Agreement"),
effective as of the 20th day of February, 1997, formalizes the understanding by
and between PRESTIGE STATE BANK (the "Bank"), a commercial bank, and certain key
employees, hereinafter referred to as "Executive(s)", who shall be elected and
approved by the Bank to participate in this Agreement by execution of an
Executive Supplemental Retirement Income Joinder Agreement ("Joinder Agreement")
in a form provided by the Bank. PRESTIGE FINANCIAL CORP. (the "Holding Company")
is a party to this Agreement for the sole purpose of guaranteeing the Bank's
performance hereunder.
W I T N E S S E T H :
WHEREAS, the Executives are employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services heretofore performed for
it by such Executives and wishes to encourage continued employment; and
WHEREAS, the Executives wish to be assured that they will be entitled to a
certain amount of additional compensation for some definite period of time from
and after retirement from active service with the Bank or other termination of
employment and wish to provide their beneficiaries with benefits from and after
death; and
WHEREAS, the Bank and the Executives wish to provide the terms and
conditions upon which the Bank shall pay such additional compensation to the
Executives after retirement or other termination of employment and/or death
benefits to their beneficiaries after death; and
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WHEREAS, the Bank and the Executives intend this Agreement to be considered
an unfunded arrangement, maintained primarily to provide supplemental retirement
income for such Executives, members of a select group of management or highly
compensated employees of the Bank, for tax purposes and for purposes of the
Employee Retirement Income Security Act of 1974, as amended; and
WHEREAS, the Bank has adopted this Executive Supplemental Retirement Income
Master Agreement which controls all issues relating to Supplemental Retirement
Income Benefits as described herein.
NOW, THEREFORE, in consideration of the premises and of the mutual promises
herein contained, the Bank and the Executive agree as follows:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the meanings
below unless the context clearly indicates otherwise:
1.1 "Accrued Benefit" means that portion of the Supplemental Retirement Income
Benefit which is required to be expensed and accrued under generally
accepted accounting principles (GAAP) by any appropriate method which the
Bank's Board of Directors may require in the exercise of its sole
discretion.
1.2 "Act" means the Employee Retirement Income Security Act of 1974, as amended
from time to time.
1.3 "Bank" means PRESTIGE STATE BANK and any successor thereto.
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1.4 "Beneficiary" means the person or persons (and their heirs) designated as
Beneficiary in the Executive's Joinder Agreement to whom the deceased
Executive's benefits are payable. If no Beneficiary is so designated, then
the Executive's Spouse, if living, will be deemed the Beneficiary. If the
Executive's Spouse is not living, then the Children of the Executive will
be deemed the Beneficiaries and will take on a per stirpes basis. If there
are no living Children, then the Estate of the Executive will be deemed the
Beneficiary.
1.5 "Benefit Age" shall be the birthday on which the Executive becomes eligible
to receive the maximum Supplemental Retirement Income Benefit under the
Plan. Such birthday shall be designated in the Executive's Joinder
Agreement.
1.6 "Benefit Eligibility Date" shall be the date on which an Executive is
entitled to receive the maximum Supplemental Retirement Income Benefit
available under the Plan. It shall be the 1st day of the month following
the month in which the Executive attains the Benefit Age designated in his
Joinder Agreement.
1.7 "Cause" means personal dishonesty, willful misconduct, willful malfeasance,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule, regulation
(other than traffic violations or similar offenses), or final
cease-and-desist order, material breach of any provision of this Agreement,
or gross negligence in matters of material importance to the Bank.
1.8 "Change in Control" of the Bank or the Holding Company shall mean:
(1) a Change in Control of a nature that would be required to be reported
in response to Item 1(a) 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
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(2) a Change in Control shall occur at such time as
(i) any "person" (as the term is used in Sections 13(d) and 14(d) of
the Exchange Act) who is not now presently but becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Holding
Company representing Thirty Percent (30%) or more of the Holding
Company's outstanding securities except for any securities
purchased by any tax-qualified employee benefit plan of the
Holding Company or the Bank; or
(ii) individuals who constitute the Board of Directors on the
effective 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 election was approved by a vote of at least three-quarters
of the Directors comprising the Incumbent Board, or whose
nomination for election by the Holding Company's shareholders was
approved by the Holding Company's Incumbent Board, shall be, for
purposes of this clause (ii), considered as though he were a
member of the Incumbent Board; or
(iii)a plan of reorganization, merger, consolidation, or sale of all
or substantially all of the assets of the Bank or the Holding
Company occurs in which the Bank or the Holding Company is not
the resulting entity; or
(iv) a proxy statement is issued soliciting proxies from the
stockholders of the Holding Company by someone other than the
current management of the Holding Company, seeking stockholder
approval of a plan of reorganization, merger, or consolidation of
the Holding Company or similar transaction with one or more
corporations as a result of which the outstanding shares of the
class of the Holding Company's securities then subject to the
plan or transaction are exchanged for or converted into cash or
property or securities not issued by the Holding Company; or
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(v) a tender offer is made for Thirty Percent (30%) or more of the
voting securities of the Company.
1.9 "Children" means the Executive's children, or the issue of any deceased
Children, then living at the time payments are due the Children under this
Agreement. The term "Children" shall include both natural and adopted
Children.
1.10 "Disability Benefit" means the monthly benefit payable to the Executive
following a determination, in accordance with Subsection 3.6, that he is no
longer able, properly and satisfactorily, to perform his duties as
Executive.
1.11 "Effective Date" of this Agreement shall be February 20, 1997.
1.12 "Estate" means the estate of the Executive.
1.13 "Holding Company" means Prestige Financial Corporation.
1.14 "Interest Factor" means monthly compounding or discounting, as applicable,
at six (6%) percent per annum.
1.15 "Payout Period" means the time frame during which certain benefits payable
hereunder shall be distributed. Payments shall be made in equal monthly
installments commencing within thirty (30) days following the occurrence of
the event which triggers distribution and continuing for the greater of (i)
One Hundred Eighty (180) months, or (ii) the life of the Executive. For
purposes of the Survivor's Benefit payable hereunder, the Payout Period
shall be One Hundred Eighty (180) consecutive months.
1.16 "Plan Year" shall mean the calendar year. However, "Plan Year" shall mean
February 20, 1997 through December 31, 1997 for the first Plan Year ,
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1.17 "Spouse" means the individual to whom the Executive is legally married at
the time of the Executive's death.
1.18 "Supplemental Retirement Income Benefit" means an annual amount (before
taking into account federal and state income taxes), payable in monthly
installments throughout the Payout Period. The Supplemental Retirement
Income Benefit payable to the Executive is set forth in the Joinder
Agreement.
1.19 "Survivor's Benefit" means an annual amount payable to the Beneficiary in
monthly installments throughout the Payout Period, equal to the amount
designated in the Executive's Joinder Agreement and subject to Subsection
3.2.
1.20 "Year of Service" shall be earned upon completing twelve (12) months of
continuous service (including authorized leaves of absence) during any Plan
Year after the execution date of the Executive's Joinder Agreement.
However, one "Year of Service" shall be earned upon completing ten (10)
months of continuous service (including authorized leaves of absence)
during the first Plan Year.
SECTION II
ESTABLISHMENT OF RABBI TRUST
The Bank intends to establish a rabbi trust into which the Bank intends to
contribute assets which shall be held therein, subject to the claims of the
Bank's creditors in the event of the Bank's "Insolvency" as defined in the
agreement which establishes such rabbi trust, until the contributed assets are
paid to the Executives and their Beneficiaries in such manner and at such times
as specified in this Agreement. It is the intention of the Bank to make
contributions to the rabbi trust to provide the Bank with a source of funds to
assist it in meeting the liabilities of this Agreement. The rabbi trust and any
assets held therein shall conform to the terms of the rabbi trust agreement
6
<PAGE>
which has been established in conjunction with this Agreement. To the extent the
language in this Agreement is modified by the language in the rabbi trust
agreement, the rabbi trust agreement shall supersede this Agreement. Any
contributions to the rabbi trust shall be made during each Plan Year in
accordance with the rabbi trust agreement. The amount of such contribution(s)
shall be equal to the full present value of all benefit accruals under this
Plan, if any, less: (i) previous contributions made on behalf of the Executive
to the rabbi trust, and (ii) earnings to date on all such previous
contributions.
SECTION III
BENEFITS
3.1 Retirement Benefit. If the Executive is in service with the Bank until
reaching his Benefit Age, the Executive shall be entitled to the
Supplemental Retirement Income Benefit. Such benefit shall commence on the
Executive's Benefit Eligibility Date and shall be payable in monthly
installments throughout the Payout Period. In the event the Executive dies
at any time after attaining his Benefit Age, but prior to completion of all
such payments due and owing hereunder, the Bank shall pay to the
Executive's Beneficiary a continuation of the monthly installments for the
remainder of the Payout Period.
3.2 Death Prior to Benefit Age. If the Executive dies prior to attaining his
Benefit Age but while employed at the Bank, the Executive's Beneficiary
shall be entitled to the Survivor's Benefit. The Survivor's Benefit shall
commence within thirty (30) days of the Executive's death and shall be
payable in monthly installments throughout the Payout Period.
3.3 Involuntary Termination Other Than for Cause. If the Executive's employment
with the Bank is involuntarily terminated prior to the attainment of his
Benefit Age, for any reason other than for Cause, the Executive's death,
disability, or following a Change in Control (as defined), the Executive
(or his Beneficiary) shall be entitled to the Supplemental Retirement
Income Benefit set forth in the Executive's
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Joinder Agreement, based on the Executive's actual age at termination of
employment. Such benefit shall commence within thirty (30) days of such
termination and shall be payable in monthly installments throughout the Payout
Period. In the event the Executive dies prior to commencement or completion of
all such payments due and owing hereunder, the Bank shall pay to the Executive's
Beneficiary a continuation of the monthly installments for the remainder of the
Payout Period.
3.4 Termination of Service Related to a Chance in Control.
If a Change in Control occurs at the Bank, and thereafter the Executive's
employment is terminated (either voluntarily or involuntarily), the Executive
shall be entitled to the Supplemental Retirement Income Benefit set forth in the
Executive's Joinder Agreement, based on the Executive's actual age at
termination of employment. Such benefit shall commence within thirty (30) days
of such termination and shall be payable in monthly installments throughout the
Payout Period. In the event that the Executive dies at any time after
termination of employment, but prior to commencement or completion of all such
payments due and owing hereunder, the Bank, or its successor, shall pay to the
Executive's Beneficiary a continuation of the monthly installments for the
remainder of the Payout Period.
3.5 Termination for Cause. If the Executive is terminated for Cause, all
benefits under this Agreement shall be forfeited and this Agreement shall
become null and void.
3.6 Disability Benefit. Notwithstanding any other provision hereof, if
requested by the Executive and approved by the Board of Directors (which
approval shall not be unreasonably withheld), the Executive shall be
entitled to receive the Disability Benefit hereunder, in any case in which
it is determined by a duly licensed physician selected by the Bank, that
the Executive is no longer able, properly and satisfactorily, to perform
his regular duties as an Executive, because of ill health, accident,
disability or general inability due to age. If the Executive's
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<PAGE>
service is terminated pursuant to this paragraph and Board of Director
approval is obtained, the Executive may elect to begin receiving the
Disability Benefit in lieu of his Supplemental Retirement Income Benefit,
which is not available prior to the Executive's Benefit Eligibility Date.
The Disability Benefit shall not begin more than thirty (30) days following
the above-mentioned disability determination. The Disability Benefit shall
equal the Supplemental Retirement Income Benefit set forth in the
Executive's Joinder Agreement, based on the Executive's actual age at the
time of approval of the Disability Benefit by the Board of Directors. The
Disability Benefit shall be payable in monthly installments over the Payout
Period commencing within thirty (30) days of the approval of the Disability
Benefit by the Board of Directors. In the event the Executive dies at any
time after termination of employment due to disability but prior to
commencement or completion of all payments due and owing hereunder, the
Bank shall pay to the Executive's Beneficiary a continuation of the monthly
installments for the remainder of the Payout Period.
3.7 Voluntary Termination of Employment. If the Executive voluntarily
terminates employment with the Bank before reaching his Benefit Age, other
than a voluntary termination following a Change in Control in accordance
with Section 3.4 hereof, all benefits under this Agreement shall be
forfeited and this Agreement shall become null and void with respect to the
Executive.
3.8 Non-Competition During and After Employment.
(a) In consideration of the agreements of the Bank contained herein and of
the payments to be made by the Bank pursuant hereto, the Executive
hereby agrees that, so long as he remains employed by the Bank, he
will devote substantially all of his time, skill, diligence and
attention to the business of the Bank, and will not actively engage,
either directly or indirectly, in any business or other activity which
is or may be deemed to be in any way competitive with or adverse to
the best interests of the business of the Bank.
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(b) The Executive expressly agrees that, as consideration for the
covenants of the Bank contained herein and as a condition to the
performance by the Bank of its obligations hereunder, from and after
any voluntary or involuntary termination of service, other than a
termination of service pursuant to Subsection 3.4, and continuing
throughout the entire Payout Period, as provided herein, he will not,
without the prior written consent of the Bank, engage in, become
interested, directly or indirectly, as a sole proprietor, as a partner
in a partnership, or as a substantial shareholder in a corporation,
nor become associated with, in the capacity of an employee, director,
officer, principal, agent, trustee or in any other capacity
whatsoever, any enterprise conducted in the trading area of the
business of the Bank which enterprise is, or may be deemed to be,
competitive with any business carried on by the Bank as of the date of
the termination of the Executive's employment or his retirement.
(c) In the event of a termination of the Executive's service related to a
Change in Control pursuant to Subsection 3.4, paragraph (b) of this
Subsection 3.8 shall cease to be a condition to the performance by the
Bank of its obligations under this Agreement.
3.9 Breach. In the event of any breach by the Executive of the agreements and
covenants contained herein, the Board of Directors of the Bank shall direct
that any unpaid balance of any payments to the Executive under this
Agreement be suspended, and shall thereupon notify the Executive of such
suspensions, in writing. Thereupon, if the Board of Directors of the Bank
shall determine that said breach by the Executive has continued for a
period of one (1) month following notification of such suspension, all
rights of the Executive and his Beneficiaries under this Agreement,
including rights to further payments hereunder, shall thereupon terminate.
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3.10 Additional Death Benefit - Burial Expense. In addition to the
above-described death benefits, upon the Executive's death, the Executive's
Beneficiary shall be entitled to receive a one-time lump sum death benefit
in the amount of Ten Thousand ($10,000.00) Dollars. This benefit shall be
provided specifically for the purpose of providing payment for burial
and/or funeral expenses of the Executive. Such death benefit shall be
payable within thirty (30) days of the Executive's death. The Executive's
Beneficiary shall not be entitled to such benefit if the Executive is
terminated for Cause prior to death.
SECTION IV
BENEFICIARY DESIGNATION
The Executive shall make an initial designation of primary and secondary
Beneficiaries upon execution of his Joinder Agreement and shall have the right
to change such designation, at any subsequent time, by submitting to the
Administrator in substantially the form attached as Exhibit A to the Joinder
Agreement, a written designation of primary and secondary Beneficiaries. Any
Beneficiary designation made subsequent to execution of the Joinder Agreement
shall become effective only when receipt thereof is acknowledged in writing by
the Administrator.
SECTION V
EXECUTIVE'S RIGHT TO ASSETS
The rights of the Executive, any Beneficiary, or any other person claiming
through the Executive under this Agreement, shall be solely those of an
unsecured general creditor of the Bank. The Executive, the Beneficiary, or any
other person claiming through the Executive, shall only have the right to
receive from the Bank those payments so specified under this Agreement. The
Executive agrees that he, his Beneficiary, or any other person claiming through
him shall have no rights or interests whatsoever in any asset of the Bank,
including any insurance policies or contracts which the Bank may possess or
obtain to informally fund this Agreement. Any asset used or acquired by the Bank
in connection with the liabilities it has assumed under this
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Agreement, unless expressly provided herein, shall not be deemed to be held
under any trust for the benefit of the Executive or his Beneficiaries, nor shall
any asset be considered security for the performance of the obligations of the
Bank. Any such asset shall be and remain, a general, unpledged, and unrestricted
asset of the Bank.
SECTION VI
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any fund
or money with which to pay its obligations under this Agreement. The Executive,
his Beneficiaries or any successor in interest to him shall be and remain simply
a general unsecured creditor of the Bank in the same manner as any other
creditor having a general claim for matured and unpaid compensation. The Bank
reserves the absolute right in its sole discretion to either purchase assets to
meet its obligations undertaken by this Agreement or to refrain from the same
and to determine the extent, nature, and method of such asset purchases. Should
the Bank decide to purchase assets such as life insurance, mutual funds,
disability policies or annuities, the Bank reserves the absolute right, in its
sole discretion, to terminate such assets at any time, in whole or in part. At
no time shall the Executive be deemed to have any lien, right, title or interest
in or to any specific investment or to any assets of the Bank. If the Bank
elects to invest in a life insurance, disability or annuity policy upon the life
of the Executive, then the Executive shall assist the Bank by freely submitting
to a physical examination and by supplying such additional information necessary
to obtain such insurance or annuities.
SECTION VII
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Executive nor any Beneficiary under this Agreement shall have
any power or right to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the benefits payable
hereunder, nor shall any of said benefits be
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subject to seizure for the payment of any debts, judgments, alimony or separate
maintenance owed by the Executive or his Beneficiary, nor be transferable by
operation of law in the event of bankruptcy, insolvency or otherwise. In the
event the Executive or any Beneficiary attempts assignment, communication,
hypothecation, transfer or disposal of the benefits hereunder, the Bank's
liabilities shall forthwith cease and terminate.
SECTION VIII
ACT PROVISIONS
8.1 Named Fiduciary and Administrator. The Bank shall be the Named Fiduciary
and Administrator (the "Administrator") of this Agreement. As
Administrator, the Bank shall be responsible for the management, control
and administration of the Agreement as established herein. The
Administrator may delegate to others certain aspects of the management and
operational responsibilities of the Agreement, including the employment of
advisors and the delegation of ministerial duties to qualified individuals.
8.2 Claims Procedure and Arbitration. In the event that benefits under this
Agreement are not paid to the Executive (or to his Beneficiary in the case
of the Executive's death) and such claimants feel they are entitled to
receive such benefits, then a written claim must be made to the
Administrator within sixty (60) days from the date payments are refused.
The Bank and its Board of Directors shall review the written claim and, if
the claim is denied, in whole or in part, they shall provide in writing,
within ninety (90) days of receipt of such claim, their specific reasons
for such denial, reference to the provisions of this Agreement or the
Joinder Agreement upon which the denial is based, and any additional
material or information necessary to perfect the claim. Such writing by the
Bank and its Board of Directors shall further indicate the additional steps
which must be undertaken by claimants if an additional review of the claim
denial is desired.
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If claimants desire a second review, they shall notify the Administrator in
writing within sixty (60) days of the first claim denial. Claimants may
review this Agreement, the Joinder Agreement or any documents relating
thereto and submit any issues and comments, in writing, they may feel
appropriate. In its sole discretion, the Administrator shall then review
the second claim and provide a written decision within sixty (60) days of
receipt of such claim. This decision shall state the specific reasons for
the decision and shall include reference to specific provisions of this
Agreement or the Joinder Agreement upon which the decision is based.
If claimants continue to dispute the benefit denial based upon completed
performance of this Agreement and the Joinder Agreement or the meaning and
effect of the terms and conditions thereof, then claimants may submit the
dispute to mediation, administered by the American Arbitration Association
("AAA") (or a mediator selected by the parties) in accordance with the
AAA's Commercial Mediation Rules. If mediation is not successful in
resolving the dispute, it shall be settled by arbitration administered by
the AAA under its Commercial Arbitration Rules, and judgment on the award
rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof.
SECTION IX
MISCELLANEOUS
9.1 No Effect on Employment Rights. Nothing contained herein will confer upon
the Executive the right to be retained in the service of the Bank nor limit
the right of the Bank to discharge or otherwise deal with the Executive
without regard to the existence of the Agreement.
9.2 State Law. The Agreement is established under, and will be construed
according to, the laws of the State of New Jersey, to the extent such laws
are not preempted by the Act and valid regulations published thereunder.
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9.3 Severability. In the event that any of the provisions of this Agreement or
portion thereof, are held to be inoperative or invalid by any court of
competent jurisdiction, then: (1) insofar as is reasonable, effect will be
given to the intent manifested in the provisions held invalid or
inoperative, and (2) the validity and enforceability of the remaining
provisions will not be affected thereby.
9.4 Incapacity of Recipient. In the event the Executive is declared incompetent
and a conservator or other person legally charged with the care of his
person or Estate is appointed, any benefits under the Agreement to which
such Executive is entitled shall be paid to such conservator or other
person legally charged with the care of his person or Estate.
9.5 Unclaimed Benefit. The Executive shall keep the Bank informed of his
current address and the current address of his Beneficiaries. The Bank
shall not be obligated to search for the whereabouts of any person. If the
location of the Executive is not made known to the Bank as of the date upon
which any payment of any benefits may first be made, the Bank shall delay
payment of the Executive's benefit payment(s) until the location of the
Executive is made known to the Bank; however, the Bank shall only be
obligated to hold such benefit payment(s) for the Executive until the
expiration of thirty-six (36) months. Upon expiration of the thirty-six
(36) month period, the Bank may discharge its obligation by payment to the
Executive's Beneficiary. If the location of the Executive's Beneficiary is
not made known to the Bank by the end of an additional two (2) month period
following expiration of the thirty-six (36) month period, the Bank may
discharge its obligation by payment to the Executive's Estate. If there is
no Estate in existence at such time or if such fact cannot be determined by
the Bank, the Executive and his Beneficiary(ies) shall thereupon forfeit
any rights to the balance, if any, of any benefits provided for such
Executive and/or Beneficiary under this Agreement.
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9.6 Limitations on Liability. Notwithstanding any of the preceding provisions
of the Agreement, no individual acting as an employee or agent of the Bank,
or as a member of the Board of Directors shall be personally liable to the
Executive or any other person for any claim, loss, liability or expense
incurred in connection with the Agreement.
9.7 Gender. Whenever in this Agreement words are used in the masculine or
neuter gender, they shall be read and construed as in the masculine,
feminine or neuter gender, whenever they should so apply.
9.8 Effect on Other Corporate Benefit Agreements. Nothing contained in this
Agreement shall affect the right of the Executive to participate in or be
covered by any qualified or non-qualified pension, profit sharing, group,
bonus or other supplemental compensation or fringe benefit agreement
constituting a part of the Bark's existing or future compensation
structure.
9.9 Suicide. Notwithstanding anything to the contrary in this Agreement, the
benefits otherwise provided herein shall not be payable and this Agreement
shall become null and void if the Executive's death results from suicide,
whether sane or insane, within twenty-four (24) months after the execution
of his Joinder Agreement.
9.10 Inurement. This Agreement shall be binding upon and shall inure to the
benefit of the Bank, its successors and assigns, and the Executive, his
successors, heirs, executors, administrators, and Beneficiaries.
9.11 Tax Withholding. The Bank may withhold from any benefits payable under this
Agreement all federal, state, city, or other taxes as shall be required
pursuant to any law or governmental regulation then in effect.
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9.12 Headings. Headings and sub-headings in this Agreement are inserted for
reference and convenience only and shall not be deemed a part of this
Agreement.
SECTION X
AMNDMENT/REVOCATION
This Agreement shall not be amended, modified or revoked at any time, in
whole or part, without the mutual written consent of the Executive and the Bank,
and such mutual consent shall be required even if the Executive is no longer
employed by the Bank.
SECTION XI
EXECUTION
11.1 This Agreement sets forth the entire understanding of the parties hereto
with respect to the transactions contemplated hereby, and any previous
agreements or understandings between the parties hereto regarding the
subject matter hereof are merged into and superseded by this Agreement.
11.2 This Agreement shall be executed in triplicate, each copy of which, when so
executed and delivered, shall be an original, but all three copies shall
together constitute one and the same instrument.
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EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME JOINDER AGREEMENT TYPE
(PAYMENT OPTION - 15 YEAR PERIOD CERTAIN OR LEE)
I,_____________ , and PRESTIGE STATE BANK hereby agree for good and
valuable consideration, the value of which is hereby acknowledged, that I shall
participate in the Executive Supplemental Retirement Income Agreement
("Agreement") established as of Feb 27, 1997, by PRESTIGE STATE BANK, as such
Agreement may now exist or hereafter be modified; and do further agree to the
terms and conditions thereof.
I understand that I must execute this Executive Supplemental Retirement
Income Joinder Agreement Type ("Joinder Agreements) as well as notify the
Administrator of such execution, on or before Feb 27, 1997, in order to
participate in the Plan from its Effective Date. Otherwise, I may execute this
Joinder Agreement and give notice of such execution to the Administrator at
least thirty (30) days prior to any January 1.
My "Benefit Age" shall be sixty-two (62).
My annual "Supplemental Retirement Income Benefit" shall be as set forth below:
Current Supplemental Retirement
Age Income Benefit
--- --------------
47 $ 75,000
48 75,000
49 75,000
50 75,000
51 75,000
52 77,307
53 83,492
54 90,171
55 97,385
56 105,176
57 113,590
58 122,677
59 132,491
60 143,091
61 154,538
62 166,901
My annual "Survivor's Benefit" shall be $166,901, subject to Subsection 3.2.
In general, I understand that my receipt (or my Beneficiary's receipt) of
the Supplemental Retirement Income Benefit (or Survivor's Benefit) shall be
subject to all provisions of the Agreement.
<PAGE>
I hereby designate the following individuals as my "Beneficiary" and I am
aware that I can subsequently change such designation by submitting to the
Administrator, at any subsequent time, and in substantially the form attached
hereto as Exhibit A, a written designation of the primary and secondary
Beneficiaries to whom payment under the Agreement shall be made in the event of
my death prior to complete distribution of the benefits due and payable under
the Agreement. I understand that any Beneficiary designation made subsequent to
execution of the Joinder Agreement shall become effective only when receipt
thereof is acknowledged in writing by the Administrator.
PRIMARY BENEFICIARY: _________________________________________________
SECONDARY BENEFICIARY:________________________________________________
I further understand that I am entitled to review or obtain a copy of the
Agreement, at any time, and may do so by contacting the Bank.
This Joinder Agreement shall become effective upon execution (below) by
both the Executive and a duly authorized officer of the Bank.
Dated this 27 day of Feb, 1997
_______________________________
(Executive)
_______________________________
(Bank's duly Authorized Officer)
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EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME JOINDER AGREEMENT
BENEFICIARY DESIGNATION
The Executive, under the terms of the Executive Supplemental Retirement
Income Agreement executed by the Bank and dated _________________ 19_, hereby
designates the following Beneficiary to receive any guaranteed payments or death
benefits under such Agreement, following his death:
PRIMARY BENEFICIARY: _________________________________________________
SECONDARY BENEFICIARY:________________________________________________
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
Such Beneficiary Designation is revocable.
DATE:_______________, 19__
__________________________ __________________________
(WITNESS) EXECUTIVE
__________________________
(WITNESS)
Exhibit A
DIRECTORS RETIREMENT PLAN
This Directors Retirement Plan (the "Plan"), effective as of the 20th day
of February, 1997, formalizes the understanding by and between PRESTIGE STATE
BANK (the "Bank"), a commercial bank, and its non-employee directors,
hereinafter referred to as " Director(s)", who shall be eligible to participate
in this Plan by execution of a Directors Retirement Plan Joinder Agreement
("Joinder Agreement") in a form provided by the Bank. PRESTIGE FINANCIAL CORP.
(the "Holding Company") is a party to this Plan for the sole purpose of
guaranteeing the Bank's performance hereunder.
WITNESSETH:
WHEREAS, the Directors serve the Bank as members of the Board of Directors;
and
WHEREAS, the Bank desires to honor, reward and recognize the Directors who
have provided long and faithful service to the Bank and to ensure the continued
service on the Board by such Directors until retirement age; and
WHEREAS, the Directors wish to be assured that they will be entitled to a
certain amount of additional compensation for some definite period of time from
and after retirement from active service with the Bank or other termination of
service and wish to provide their beneficiaries with benefits from and after
death; and
WHEREAS, the Bank and the Directors wish to provide the terms and
conditions upon which the Bank shall pay such additional compensation to the
Directors after retirement or other termination of service and/or death benefits
to their beneficiaries after death; and
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WHEREAS, the Bank and the Directors intend this Plan to be considered an
unfunded arrangement, maintained primarily to provide supplemental retirement
income for such Directors; and
WHEREAS, the Bank has adopted this Directors Retirement Plan which controls
all issues relating to Retirement Benefits as described herein;
NOW, THEREFORE, in consideration of the premises and of the mutual promises
herein contained, the Bank and the Directors agree as follows:
SECTION I
DEFINITIONS
When used herein, the following words and phrases shall have the meanings
below unless the context clearly indicates otherwise:
1.1 "Accrued Benefit" means that portion of the Retirement Benefit which is
required to be expensed and accrued under generally accepted accounting
principles (GAAP) by any appropriate method which the Bank's Board of
Directors may require in the exercise of its sole discretion.
1.2 "Act" means the Employee Retirement Income Security Act of 1974, as amended
from time to time.
1.3 "Bank" means PRESTIGE STATE BANK and any successor thereto.
1.4 "Beneficiary" means the person or persons (and their heirs) designated as
Beneficiary in the Director's Joinder Agreement to whom the deceased
Director's benefits are payable. If no Beneficiary is so designated, then
the Director's Spouse, if living, will be deemed the
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Beneficiary. If the Director's Spouse is not living, then the Children of the
Director will be deemed the Beneficiaries and will take on a per stirpes basis.
If there are no living Children, then the Estate of the Director will be deemed
the Beneficiary.
1.5 "Benefit Age" shall be the birthday on which the Director becomes eligible
to receive the Level 2 Retirement Benefit under the Plan. Such birthday
shall be designated in the Director's Joinder Agreement.
1.6 "Benefit Eligibility Date" shall be the date on which a Director is
entitled to receive either his Level 1 Retirement Benefit or Level 2
Retirement Benefit. A Director's "Initial Benefit Eligibility Date" shall
occur on the 1st day of the month following the month in which the Director
has completed ten (10) Years of Service with the Bank. A Director who
reaches his Initial Benefit Eligibility Date shall be eligible to receive
his level 1 Retirement Benefit. A Director's "Level 2 Benefit Eligibility
Date" shall be the 1st day of the month following the month in which the
Director attains the Benefit Age designated in his Joinder Agreement. A
Director who attains his Benefit Age shall be entitled to the Level 2
Retirement Benefit.
1.7 "Cause" means personal dishonesty, willful misconduct, willful malfeasance,
breach of fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule, regulation
(other than traffic violations or similar offenses), or final
cease-and-desist order, material breach of any provision of this Plan, or
gross negligence in matters of material importance to the Bank.
1.8 "Change in Control" of the Bank or the Holding Company shall mean:
(1) a Change in Control of a nature that would be required to be reported
in response to Item l(a) of the current report on Form 8-K, as in
effect on the date hereof,
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pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(the "Exchange Act"); or
(2) a Change in Control shall occur at such time as
(i) any "person" (as the term is used in Sections 13(d) and 14(d) of
the Exchange Act) who is not now presently but becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Holding
Company representing Thirty Percent (30%) or more of the Holding
Company's outstanding securities except for any securities
purchased by any tax-qualified employee benefit plan of the
Holding Company or the Bank; or
(ii) individuals who constitute the Board of Directors on the
effective 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 election was approved by a vote of at least three-quarters
of the Directors comprising the Incumbent Board, or whose
nomination for election by the Holding Company's shareholders was
approved by the Holding Company's Incumbent Board, shall be, for
purposes of this clause (ii), considered as though he were a
member of the Incumbent Board; or
(iii)a plan of reorganization, merger, consolidation, or sale of all
or substantially all of the assets of the Bank or the Holding
Company occurs in which the Bank or the Holding Company is not
the resulting entity; or
(iv) a proxy statement is issued soliciting proxies from the
stockholders of the Holding Company by someone other than the
current management of the Holding Company, seeking stockholder
approval of a plan of reorganization, merger, or consolidation of
the Holding Company or similar transaction with one or more
corporations as a result of which the outstanding shares of the
class of the Holding Company's securities then
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subject to the plan or transaction are exchanged for or converted
into cash or property or securities not issued by the Holding
Company; or
(v) a tender offer is made for Thirty Percent (30%) or more of the
voting securities of the Company.
1.9 "Children" means the Director's children, or the issue of any deceased
Children, then living at the time payments are due the Children under this
Plan. The term "Children" shall include both natural and adopted Children.
1.10 "Disability Benefit" means the monthly benefit payable to the Director
following a determination, in accordance with Subsection 3.6, that he is no
longer able, properly and satisfactorily, to perform his duties as
Director.
1.11 "Effective Date" of this Plan shall be February 20, 1997.
1.12 "Estate" means the estate of the Director.
1.13 "Holding Company" means Prestige Financial Corporation.
1.14 "Interest Factor" means monthly compounding or discounting, as applicable,
at six (6%) percent per annum.
1.15 "Payout Period" means the time frame during which certain benefits payable
hereunder shall be distributed. The Payout Period may differ depending on
whether the Director is entitled to Level 1 Retirement Benefits or Level 2
Retirement Benefits. The Payout Period for Level 1 Retirement Benefits
("Level 1 Payout Period") shall be, at the election of the Directors,
either (i) One Hundred Twenty (120) consecutive months or (ii) One Hundred
Eighty (180) consecutive months, with payments under the Level 1 Payout
Period being made in equal monthly installments commencing within thirty
(30) days following the
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<PAGE>
occurrence of the event which triggers distribution. Payments under the "Level 2
Payout Period" shall be made in equal monthly installments commencing within
thirty (30) days following the occurrence of the event which triggers
distribution and continuing for the longer of (i) One Hundred Eighty (180)
consecutive months; or (ii) the Director's lifetime; provided, however, in the
event of termination following a Change in Control, the Level 2 Payout Period
shall be One Hundred Eighty (180) consecutive months. For purposes of the
Survivor's Benefit payable hereunder, the Payout Period shall be One Hundred
Eighty (180) consecutive months.
1.16 "Plan Year" shall mean the calendar year. However, "Plan Year" shall mean
February 20, 1997 through December 3l, 1997 for the first Plan Year.
1.17 "Spouse" means the individual to whom the Director is legally married at
the time of the Director's death,
1.18 "Retirement Benefit" means an annual amount payable to the Director
pursuant to the Plan. Depending on a Director's age and length of service,
a Director may be eligible for either a "Level 1 Retirement Benefit" or a
"Level 2 Retirement Benefit." The Level 1 Retirement Benefit and Level 2
Retirement Benefit to which a Director will become entitled upon the
satisfaction of the applicable conditions shall be set forth on the
Director's Joinder Agreement.
1.19 "Survivor's Benefit" means an annual amount payable to the Beneficiary in
monthly installments throughout the Payout Period, equal to the Level 2
Retirement Benefit and subject to Subsection 3.2.
1.20 "Year of Service" shall be earned upon completing twelve (12) months of
continuous service (including authorized leaves of absence) with the Bank.
However, one "Year of Service" shall be earned upon completing ten (10)
months of continuous service during the first Plan Year. Years of Service
shall be computed from the first day of service of a Director with the
Bank.
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SECTION II
ESTABLISHMENT OF RABBI TRUST
The Bank intends to establish a rabbi trust into which the Bank intends to
contribute assets which shall be held therein, subject to the claims of the
Bank's creditors in the event of the Bank's "Insolvency" as defined in the plan
which establishes such rabbi trust, until the contributed assets are paid to the
Directors and their Beneficiaries in such manner and at such times as specified
in this Plan. It is the intention of the Bank to make contributions to the rabbi
trust to provide the Bank with a source of funds to assist it in meeting the
liabilities of this Plan. The rabbi trust and any assets held therein shall
conform to the terms of the rabbi trust agreement which has been established in
conjunction with this Plan. To the extent the language in this Plan is modified
by the language in the rabbi trust agreement, the rabbi trust agreement shall
supersede this Plan. Any contributions to the rabbi trust shall be made during
each Plan Year in accordance with the rabbi trust agreement. The amount of such
contribution(s) shall be equal to the full present value of all accruals under
the Plan, if any, less: (i) previous contributions made on behalf of the
Director to the rabbi trust, and (ii) earnings to date on all such previous
contributions.
SECTION III
BENEFITS
3.1 Retirement Benefit.
(a) If the Director remains in the service of the Bank until reaching his
Initial Benefit Eligibility Date, the Director shall be entitled to
the Level 1 Retirement Benefit. If the Director retires after
attainment of his Initial Benefit Eligibility Date but before
attainment of his Benefit Age, the Director shall be entitled to the
annuitized value (using the Interest Factor) of his Accrued Benefit
(which shall be at least as great as his Level 1 Retirement Benefit,
and for these purposes, shall be his Retirement Benefit), calculated
as of the date of his termination of service. Such Retirement Benefit
shall commence on the 1st day of the month following the Director's
actual retirement or other termination of service on the Board, other
than
8
<PAGE>
a termination of service due to the Director's death, and shall be
payable in monthly installments throughout the Level 1 Payout Period.
In the event a Director dies after commencement of the Level 1
Retirement Benefit payments but before completion of all such payments
due and owing hereunder, the Bank shall pay to the Director's
Beneficiary a continuation of the monthly installments for the
remainder of the Level 1 Payout Period.
(b) If the Director is in service with the Bank until reaching his Benefit
Age, the Director shall be entitled to the Level 2 Retirement Benefit.
Such benefit shall commence on the 1st day of the month following the
Director's actual retirement or other termination of service on the
Board and shall be payable in monthly installments throughout the
Level 2 Payout Period. In the event the Director dies at any time
after attaining his Benefit Age, but prior to completion of all Level
2 Retirement Benefit payments due and owing hereunder, the Bank shall
pay to the Director's Beneficiary a continuation of the monthly
installments for the remainder of the Level 2 Payout Period.
3.2 Death Prior to Benefit Age. If the Director dies prior to attaining his
Benefit Age but while employed at the Bank, the Director's Beneficiary
shall be entitled to the Survivor's Benefit. The Survivor's Benefit shall
commence within thirty (30) days of the Director's death and shall be
payable in monthly installments throughout the Payout Period.
3.3 Voluntary or Involuntary Termination Other Than for Cause.
(a) If the Director's service with the Bank is voluntarily or
involuntarily terminated prior to the attainment of his Initial
Benefit Eligibility Date, for any reason other than for Cause, the
Director's death, disability, or following a Change in Control (as
defined), the Director (or his Beneficiary) shall be entitled to the
annuitized value (using the Interest Factor) of his Accrued Benefit
calculated as of the date of his termination of service. Such benefit
shall commence on the Director's Initial
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<PAGE>
Benefit Eligibility Date (determined as if the Director had remained
in the continuous service of the Bank from the date of his initial
service hereunder until the completion of ten Years of Service) and
shall be payable in monthly installments throughout the Level 1 Payout
Period. In the event the Director dies at any time after attaining his
Initial Benefit Eligibility Date, but prior to completion of all such
payments due an owing hereunder, the Bank shall pay to the Director's
Beneficiary a continuation of the monthly installments for the
remainder of the Level 1 Payout Period.
(b) If the Director's service with the Bank is voluntarily or
involuntarily terminated after attainment of the Director's Initial
Benefit Eligibility Date but prior to his Benefit Age, for any reason
other than for Cause, the Director's death, disability, or following a
Change in Control, the Director (or his Beneficiary) shall be entitled
to the annuitized value (using the Interest Factor) of his Accrued
Benefit (which shall be at least as great as his Level 1 Retirement
Benefit), calculated as of the date of his termination of service.
Such benefit shall commence on the 1st day of the month following the
month in which occurs the Director's termination of service and shall
be payable in monthly installments throughout the Level 1 Payout
Period. In the event the Director dies at any time after commencement
of such payments but prior to completion of all such payments due and
owing hereunder, the Bank shall pay to the Director's Beneficiary a
continuation of the monthly installments for the remainder of the
Level 1 Payout Period.
(c) If the Director dies after his voluntary or involuntary termination of
service occurring prior to his Initial Benefit Eligibility Date, and
prior to the commencement of benefits hereunder, the Director's
Beneficiary shall be entitled to the annuitized value (using the
Interest Factor) of his Accrued Benefit. The payment of such benefit
shall commence within thirty (30) days of the Director's
10
<PAGE>
death. The benefit shall be payable in monthly installments over the
Level 1 Payout Period.
(d) If the Director dies after his voluntary or involuntary termination of
service occurring after his Initial Benefit Eligibility Date but prior
to his Benefit Age, and prior to commencement of benefits hereunder,
the Director's beneficiary shall be entitled to the annuitized value
(using the Interest Factor) of his Accrued Benefit (which shall be at
least as great as his Level 1 Retirement Benefit). The payment of such
benefit shall commence within thirty (30) days of the Director's
death. The benefits shall be payable in monthly installments over the
Level 1 Payout Period.
3.4 Termination of Service Related to a Change in Control.
(a) If a Change in Control occurs at the Bank, and thereafter the
Director's service is terminated (either voluntarily or
involuntarily), the Director shall be entitled to his Level 2
Retirement Benefit (as if he had remained in the service of the Bank
until his Benefit Age). Such benefit shall commence on the 1st day of
the month following his termination of service and shall be payable in
monthly installments throughout the Level 2 Payout Period. In the
event that the Director dies at any time after commencement of the
payments, but prior to completion of all such payments due and owing
hereunder, the Bank, or its successor, shall pay to the Director's
Beneficiary a continuation of the monthly installments for the
remainder of the Level 2 Payout Period.
(b) If, after such termination, the Director dies prior to commencement of
the benefits hereunder, the Director's Beneficiary shall be entitled
to the Survivor's Benefit which shall commence within thirty (30) days
of the Director's death. The Survivor's Benefit shall be payable in
monthly installments over the Level 2 Payout Period.
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3.5 Termination for Cause. If the Director is terminated for Cause, all
benefits under this Plan shall be forfeited and this Plan shall become null
and void as to the Director.
3.6 Disability Benefit.
(a) Notwithstanding any other provision hereof, if requested by the
Director and approved by the Board of Directors, the Director who has
not attained his Initial Benefit Eligibility Date shall be entitled to
receive the Disability Benefit hereunder, in any case in which it is
determined by a duly licensed physician selected by the Bank, that the
Director is no longer able, properly and satisfactorily, to perform
his regular duties as a Director, because of ill health, accident,
disability or general inability due to age. If the Director's service
is terminated pursuant to this paragraph and Board of Director
approval is obtained, the Director may elect to begin receiving the
Disability Benefit in lieu of any benefit available under Section 3.3,
which is not available prior to the Director's Initial Benefit
Eligibility Date. The Disability Benefit shall equal the Director's
Accrued Benefit, annuitized (using the Interest Factor) over the Level
1 Payout Period. The Disability Benefit shall be payable in monthly
installments over the Level 1 Payout Period commencing within thirty
(30) days following the later of (i) the above mentioned disability
determination and (ii) the approval of the Disability Benefit by the
Board of Directors. In the event the Director dies while receiving
payments pursuant to this Subsection, but prior to the completion of
all payments due and owing hereunder, the Bank shall pay to the
Director's Beneficiary a continuation of the monthly installments for
the remainder of the Payout Period.
(b) If the Director dies after approval of the Disability Benefit by the
Board of Directors but before the commencement of such payments, the
Director's Beneficiary shall be entitled to the Director's Accrued
Benefit annuitized (using the Interest Factor) over the Level 1 Payout
Period. Such benefit shall be payable to
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the Beneficiary in monthly installments over the Level 1 Payout Period
commencing within thirty (30) days of the Director's death.
3.7 Non-Competition During and After Service on the Board.
(a) In consideration of the agreements of the Bank contained herein and of
the payments to be made by the Bank pursuant hereto, the Director
hereby agrees that, so long as he remains in the service of the Bank,
he will not actively engage, either directly or indirectly, in any
business or other activity which is or may be deemed to be in any way
competitive with or adverse to the best interests of the business of
the Bank unless the Directors participation therein has been consented
to, in writing, by the Board of Directors.
(b) The Director expressly agrees that, as consideration for the covenants
of the Bank contained herein and as a condition to the performance by
the Bank of its obligations hereunder, from and after any voluntary or
involuntary termination of service, other than a termination of
service pursuant to Subsection 3.4, and continuing throughout the
entire Payout Period, as provided herein, he will not, without the
prior written consent of the Bank, become associated with, in the
capacity of an employee, director, officer, principal, agent, trustee
or in any other capacity whatsoever, any enterprise conducted in the
trading area of the business of the Bank which enterprise is, or may
be deemed to be, competitive with any business carried on by the Bank
as of the date of the termination of the Director's service or his
retirement.
(c) In the event of a termination of the Director's service related to a
Change in Control pursuant to Subsection 3.4, paragraph (b) of this
Subsection 3.7 shall cease to be a condition to the performance by the
Bank of its obligations under this Plan.
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3.8 Breach. In the event of any breach by the Director of the agreements and
covenants contained herein, the Board of Directors of the Bank shall direct
that any unpaid balance of any payments to the Director under this Plan be
suspended, and shall thereupon notify the Director of such suspensions, in
writing. Thereupon, if the Board of Directors of the Bank shall determine
that said breach by the Director has continued for a period of one (1)
month following notification of such suspension, all rights of the Director
and his Beneficiaries under this Plan, including rights to further payments
hereunder, shall thereupon terminate.
3.9 Additional Death Benefit - Burial Expense. In addition to the
above-described death benefits, upon the Director's death, the
Director's Beneficiary shall be entitled to receive a one-time lump sum
death benefit in the amount of Ten Thousand ($10,000.00) Dollars. This
benefit shall be provided specifically for the purpose of providing
payment for burial and/or funeral expenses of the Director. Such death
benefit shall be payable within thirty (30) days of the Director's
death. The Director's Beneficiary shall not be entitled to such benefit
if the Director is terminated for Cause prior to death.
SECTION IV
BENEFICIARY DESIGNATION
The Director shall make an initial designation of primary and secondary
Beneficiaries upon execution of his Joinder Agreement and shall have the right
to change such designation, at any subsequent time, by submitting to the
Administrator in substantially the form attached as Exhibit A to the Joinder
Agreement, a written designation of primary and secondary Beneficiaries. Any
Beneficiary designation made subsequent to execution of the Joinder Agreement
shall become effective only when receipt thereof is acknowledged in writing by
the Administrator.
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SECTION V
DIRECTOR'S RIGHT TO ASSETS
The rights of the Director, any Beneficiary, or any other person claiming
through the Director under this Plan, shall be solely those of an unsecured
general creditor of the Bank. The Director, the Beneficiary, or any other person
claiming through the Director, shall only have the right to receive from the
Bank those payments so specified under this Plan. The Director agrees that he,
his Beneficiary, or any other person claiming through him shall have no rights
or interests whatsoever in any asset of the Bank, including any insurance
policies or contracts which the Bank may possess or obtain to informally fund
this Plan. Any asset used or acquired by the Bank in connection with the
liabilities it has assumed under this Plan, unless expressly provided herein,
shall not be deemed to be held under any trust for the benefit of the Director
or his Beneficiaries, nor shall any asset be considered security for the
performance of the obligations of the Bank. Any such asset shall be and remain,
a general, unpledged, and unrestricted asset of the Bank.
SECTION VI
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any fund
or money with which to pay its obligations under this Plan. The Director, his
Beneficiaries or any successor in interest to him shall be and remain simply a
general unsecured creditor of the Bank in the same manner as any other creditor
having a general claim for matured and unpaid compensation. The Bank reserves
the absolute right in its sole discretion to either purchase assets to meet its
obligations undertaken by this Plan or to refrain from the same and to determine
the extent, nature, and method of such asset purchases. Should the Bank decide
to purchase assets such as life insurance, mutual funds, disability policies or
annuities, the Bank reserves the absolute right, in its sole discretion, to
terminate such assets at any time, in whole or in part. At no time shall the
Director be deemed to have any lien, right, title or interest in or to any
specific investment or to any assets of the Bank. If the Bank elects to invest
in a life insurance, disability or annuity policy
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upon the life of the Director, then the Director shall assist the Bank by freely
submitting to a physical examination and by supplying such additional
information necessary to obtain such insurance or annuities.
SECTION VII
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Director nor any Beneficiary under this Plan shall have any
power or right to transfer, assign, anticipate, hypothecate, mortgage, commute,
modify or otherwise encumber in advance any of the benefits payable hereunder,
nor shall any of said benefits be subject to seizure for the payment of any
debts, judgments, alimony or separate maintenance owed by the Director or his
Beneficiary, nor be transferable by operation of law in the event of bankruptcy,
insolvency or otherwise. In the event the Director or any Beneficiary attempts
assignment, communication, hypothecation, transfer or disposal of the benefits
hereunder, the Bank's liabilities shall forthwith cease and terminate.
SECTION VIII
ACT PROVISIONS
8.1 Named Fiduciary and Administrator. The Bank shall be the Named Fiduciary
and Administrator (the "Administrator") of this Plan. As Administrator, the
Bank shall be responsible for the management, control and administration of
the Plan as established herein. The Administrator may delegate to others
certain aspects of the management and operational responsibilities of the
Plan, including the employment of advisors and the delegation of
ministerial duties to qualified individuals.
8.2 Claims Procedure and Arbitration. In the event that benefits under this
Plan are not paid to the Director (or to his Beneficiary in the case of the
Director's death) and such claimants feel they are entitled to receive such
benefits, then a written claim must be made to the
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Administrator within sixty (60) days from the date payments are refused. The
Bank and its Board of Directors shall review the written claim and, if the claim
is denied, in whole or in part, they shall provide in writing, within ninety
(90) days of receipt of such claim, their specific reasons for such denial,
reference to the provisions of this Plan or the Joinder Agreement upon which the
denial is based, and any additional material or information necessary to perfect
the claim. Such writing by the Bank and its Board of Directors shall further
indicate the additional steps which must be undertaken by claimants if an
additional review of the claim denial is desired.
If claimants desire a second review, they shall notify the Administrator in
writing within sixty (60) days of the first claim denial. Claimants may review
this Plan, the Joinder Agreement or any documents relating thereto and submit
any issues and comments, in writing, they may feel appropriate. In its sole
discretion, the Administrator shall then review the second claim and provide a
written decision within sixty (60) days of receipt of such claim. This decision
shall state the specific reasons for the decision and shall include reference to
specific provisions of this Plan or the Joinder Agreement upon which the
decision is based.
If claimants continue to dispute the benefit denial based upon completed
performance of this Plan and the Joinder Agreement or the meaning and effect of
the terms and conditions thereof, then claimants may submit the dispute to
mediation, administered by the American Arbitration Association ("AAA") (or a
mediator selected by the parties) in accordance with the AAA's Commercial
Mediation Rules. If mediation is not successful in resolving the dispute, it
shall be settled by arbitration administered by the AAA under its Commercial
Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may
be entered in any court having jurisdiction thereof.
17
<PAGE>
SECTION IX
MISCELLANEOUS
9.1 No Effect on Director's Rights. Nothing contained herein will confer upon
the Director the right to be retained in the service of the Bank nor limit
the right of the Bank to deal with the Director without regard to the
existence of the Plan.
9.2 State Law. The Plan is established under, and will be construed according
to, the laws of the State of New Jersey, to the extent such laws are not
preempted by the Act and valid regulations published thereunder.
9.3 Severability. In the event that any of the provisions of this Plan or
portion thereof, are held to be inoperative or invalid by any court of
competent jurisdiction, then: (1) insofar as is reasonable, effect will be
given to the intent manifested in the provisions held invalid or
inoperative, and (2) the validity and enforceability of the remaining
provisions will not be affected thereby.
9.4 Incapacity of Recipient. In the event the Director is declared incompetent
and a conservator or other person legally charged with the care of his
person or Estate is appointed, any benefits under the Plan to which such
Director is entitled shall be paid to such conservator or other person
legally charged with the care of his person or Estate.
9.5 Unclaimed Benefit. The Director shall keep the Bank informed of his current
address and the current address of his Beneficiaries. The Bank shall not be
obligated to search for the whereabouts of any person. If the location of
the Director is not made known to the Bank as of the date upon which any
payment of any benefits may first be made, the Bank shall delay payment of
the Director's benefit payment(s) until the location of the Director is
made known to the Bank; however, the Bank shall only be obligated to hold
such benefit payment(s) for the Director until the expiration of thirty-six
(36) months. Upon expiration
18
<PAGE>
of the thirty-six (36) month period, the Bank may discharge its obligation
by payment to the Director's Beneficiary. If the location of the Director's
Beneficiary is not made known to the Bank by the end of an additional two
(2) month period following expiration of the thirty-six (36) month period,
the Bank may discharge its obligation by payment to the Director's Estate.
If there is no Estate in existence at such time or if such fact cannot be
determined by the Bank, the Director and his Beneficiary(ies) shall
thereupon forfeit any rights to the balance, if any, of any benefits
provided for such Director and/or Beneficiary under this Plan.
9.6 Limitations on Liability. Notwithstanding any of the preceding provisions
of the Plan, no individual acting as an employee or agent of the Bank, or
as a member of the Board of Directors shall be personally liable to the
Director or any other person for any claim, loss, liability or expense
incurred in connection with the Plan.
9.7 Gender. Whenever in this Plan words are used in the masculine or neuter
gender, they shall be read and construed as in the masculine, feminine or
neuter gender, whenever they should so apply.
9.8 Effect on Other Corporate Benefit Plans. Nothing contained in this Plan
shall affect the right of the Director to participate in or be covered by
any other corporate benefit available to Directors of the Bank constituting
a part of the Bank's existing or future compensation structure.
9.9 Suicide. Notwithstanding anything to the contrary in this Plan, the
benefits otherwise provided herein shall not be payable and this Plan shall
become null and void with respect to the Director if the Director's death
results from suicide, whether sane or insane, within twenty-four (24)
months after the execution of his Joinder Agreement.
19
<PAGE>
9.10 Inurement. This Plan shall be binding upon and shall inure to the benefit
of the Bank, its successors and assigns, and the Director, his successors,
heirs, executors, a administrators, and Beneficiaries.
9.11 Headings. Headings and sub-headings in this Plan are inserted for reference
and convenience only and shall not be deemed a part of this Plan.
SECTION X
AMENDMENT/REVOCATION
This Plan shall not be amended, modified or revoked at any time, in whole
or part, as to any Director, without the mutual written consent of the Director
and the Bank, and such mutual consent shall be required even if the Director is
no longer employed by the Bank.
SECTION XI
EXECUTION
11.1 This Plan sets forth the entire understanding of the parties hereto with
respect to the transactions contemplated hereby, and any previous
agreements or understandings between the parties hereto regarding the
subject matter hereof are merged into and superseded by this Plan.
11.2 This Plan shall be executed in triplicate, each copy of which, when so
executed and delivered, shall be an original, but all three copies shall
together constitute one and the same instrument.
20
PRESTIGE FINANCIAL CORP.
[LOGO]
1996 ANNUAL REPORT
up with people
<PAGE>
SELECTED FINANCIAL DATA PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
<TABLE>
<CAPTION>
Dollars in thousands, except per share data Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Income 1996 1995 1994 1993 1992
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 8,471 $ 6,545 $ 4,862 $ 3,949 $ 2,758
Provision for loan losses 516 350 100 451 365
Non-interest income 1,536 700 563 525 188
Non-interest expense 6,222 4,898 4,124 3,276 2,228
Provision for income taxes 1,226 825 491 287 154
Extraordinary items -- -- -- -- 154
Cumulative effect of accounting change -- -- -- 63 --
------------------------------------------------------------
Net income $ 2,043 $ 1,172 $ 710 $ 523 $ 353
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Investments $ 68,874 $ 43,270 $ 22,541 $ 22,733 $18,365
Total loans, net 136,876 112,263 92,534 73,786 57,572
Total assets 229,517 176,382 132,572 109,636 83,247
Total deposits 212,596 163,517 122,439 100,112 74,803
Stockholders' equity $ 15,710 $ 12,058 $ 9,505 $ 8,951 $ 7,866
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
Return on average assets 1.01% 0.79% 0.61% 0.55% 0.50%
Return on average equity 14.75% 11.27% 7.72% 6.13% 5.01%
Fully diluted earnings per common share $0.75 $0.47 $0.31 $0.23 $0.18
Book value per common share $5.90 $4.89 $3.98 $3.73 $3.37
Cash dividends per common share $0.25 $0.10 $0.06 $0.03 $0.03
Tier 1 capital ratio 11.69% 9.91% 10.02% 11.08% 13.70%
Total risk-based capital ratio 12.87% 11.10% 11.16% 12.33% 14.85%
Allowance for loan losses/total loans 1.15% 1.17% 1.15% 1.41% 1.12%
Net charge-offs/average total loans 0.20% 0.10% 0.10% 0.07% 0.02%
============================================================
</TABLE>
- --------------------------------------------------------------------------------
Company Characteristics:
Prestige Financial Corp. is a one bank holding company incorporated under the
laws of the State of New Jersey and whose principal business is the operation of
Prestige State Bank--a state-chartered, F.D.I.C. insured financial institution.
Our vision continues to focus on providing top quality service to our clientele
while taking great care that this endeavor contributes to the enhancement of
shareholder value. The Company's overriding strategy for the attainment of this
vision has been to employ the best people, armed with the latest proven
technology, in the most appropriate locations, to service markets and/or lines
of business with which we have a unique familiarity. Prestige Financial Corp.
stock is traded on the NASDAQ National Market under the symbol "PRFN".
- --------
page one
<PAGE>
setting
trends
TO SHAREHOLDERS OF PRESTIGE:
As the year we review in this report was an Olympic year, it would have
been appropriate to once again highlight our "record results," talk about how we
are "leading the field" and so on. However, the theme we chose for the 1996
Annual Report goes beyond the usual replays of Prestige "going for the gold" or
the statistical outcome, no matter how tempting that is when considering the
company's performance. Something more needed to be said about the dynamics of a
winning team--the essence of which is people who constantly strive to get
better, to do more.
The phrase "Up With People" puts into a few words the direction of our
company and the primary reason for its success. Depending on which words are
emphasized, UP WITH PEOPLE can describe how well Prestige has done and is doing,
as well as the importance the company places not only on its staff, but its
customers as well.
As the highlights on the previous page, and graphs on these facing pages
indicate, "Team Prestige" has had another banner year. More striking, however,
is the repetitive nature of the company's successes. It is obvious that a trend
has been set. Total assets at year-end 1996 were 276% of what they were at
year-end 1992--just four years previous! Net income for the year of 1996 was
well over five times what it was for the year of 1992. It is that "ability to
repeat" feature, rather than just the "one time explosion," that earns the true
"winning team" reputation.
Another mark of a champion is the ability to excel in more than just a few
key elements of the contest. In Olympic basketball competition, a squad that can
handle the ball, shoot from the floor and rebound well--but can't make
free-throws or play defense--will not enjoy the success of one that is better in
more of those skills. We are very proud to be able to play many positions so
well and score so highly in the most widely recognized financial performance
indicators.
A closely related characteristic of a winning organization is the speed
with which it attains ever higher performance levels. Clearly, any upward trend
is better than a flat or downward tendency, but a quicker rate of improvement
will certainly provide even further distinction to one who achieves it. Anyone
can set a fast pace early on, but it takes a strong extra effort to maintain
speed, dodge as many obstacles as possible and--perhaps most important--"absorb
a blow" when it cannot be avoided.
[The following table was represented as a bar chart in the printed matter.]
YEAR-END ASSETS
Year (In Millions)
---- -------------
1992 $ 83
1993 $110
1994 $133
1995 $176
1996 $230
[The following table was represented as a bar chart in the printed matter.]
NET INCOME
Year (In Thousands)
---- -------------
1992 $ 353
1993 $ 523
1994 $ 710
1995 $1,172
1996 $2,043
--------
page two
<PAGE>
PRESTIGE FINANCIAL CORP.
maintaining
the pace
Except for the graph on this page depicting year-end market
capitalization--which shows the only three full years during which Prestige has
been traded on NASDAQ--the presentations in this report depict impressive
incremental improvements over several periods.
The fast-rising net income over the time frame shown owes much to the
"infrastructure" of high quality people and carefully placed/appointed offices
we have created--the costs of which might have "bowed" a less-prepared entity.
Confident in our ability to grow market share, however, the company made those
commitments to staff and facilities so that customers looking for a bank to call
their own would find all they might want--and more--in Prestige.
You can see easily how we maintained the pace of bottom line growth by
checking the highlights page once again, where the chart illustrates that this
was accomplished principally through increases in net interest income--the basic
business of banking. Non-interest income augmentation was substantial from 1995
to 1996--thanks to gains from SBA and residential mortgage loan sales--but this
only partly offset the 1995 to 1996 increases in non-interest expenses
attributable to the branch and personnel investments.
How about our shareholders? There is ample evidence that this constituency
has always been of special concern to the board and management of Prestige. In
addition to the graphs at the right, take time to focus on the dividends, book
value and return on equity information contained on the highlights page at the
front of this report. And remember that Prestige State Bank--the company's only
subsidiary--first opened its doors in 1990; so that 1991 was the first full year
of this institution's history!
Interesting things happen when a team turns in several impressive
performances. For one, a natural concern observers may hold--that the quick
start and fast early pace may prove its undoing--is effectively laid to rest.
Directly on its heels, though, comes the inescapable scrutiny of the team's
makeup, of the breadth of its abilities, in order to determine how long it can
stay on or near the top of its game.
Just as in team sports there is equality in the importance of offense and
defense, banking can be thought of as having two evenly crucial phases: the
gathering of deposits (which contribute most to the entity's growth); and the
employment of those funds (most of
[The following table was represented as a bar chart in the printed matter.]
EARNINGS PER SHARE
(FULLY DILUTED)
Year (In Dollars)
---- -------------
1992 $0.18
1993 $0.23
1994 $0.31
1995 $0.47
1996 $0.75
[The following table was represented as a bar chart in the printed matter.]
YEAR-END
MARKET
CAPITALIZATION
Year (In Millions)
---- -------------
1994 $11,782,080
1995 $27,615,549
1996 $37,923,682
----------
page three
<PAGE>
TO SHAREHOLDERS OF PRESTIGE:
(continued)
stamina
which go into "earning assets" such as loans and investments). To get a good
feel for how well conditioned an institution may be to stay the course, one
should look into the makeup of its deposits and its earning assets, where the
most telling signs of a commercial bank's staying power can be found.
Prestige has moved into third position in a field of 12 banks in terms of
deposit market share within Hunterdon County, boasting nearly 12% of the $1.3
billion available. Prestige lags only the two giants, Summit and First Union,
which are much older and have many more locations. How? Is it sustainable?
The pie chart on the upper left indicates a balance among deposit
categories. Positive factors include the relatively low reliance on "jumbo"
(over $100,000) accounts and an appreciable contribution made by non-interest
bearing checking accounts. We believe that this is a picture of health for a
financial institution, marking it as one that is capturing a loyal clientele who
provide a reliable stream of core funds upon which to base loan and investment
strategies.
As much endurance as the above seems to promise, it is only half the story.
The rest is in the chart on the lower left that tells of a Prestige--highly
touted for its SBA lending prowess--which has taken care not to be overly
committed to one avenue of earning asset allocation. This bank--which, for the
second consecutive year topped all lenders in New Jersey in Small Business
Administration loans--can attribute its stamina to the fact that its assets are
as advantageously diverse as are its sources of funds.
But what about those dynamics cited earlier that seem to be associated with
a winning team--the elements of a competitive edge that are difficult to explain
though plain to see? They seem to come out of an attitude--that the records
SHOULD be broken, that this team HAS TO be victorious. Why else would so many
previously unbeatable records fall during each Olympiad or, for that matter,
during any season of professional sport? It all starts with the belief that IT
CAN BE DONE. This is the winning attitude we have nurtured and sustained at
Prestige.
There will always be an argument over whether success or failure hinges
more on great coaching or the inborn talent of the players--so let's just call
it a draw and say that
[The following table was represented as a pie chart in the printed matter.]
DEPOSIT COMPOSITION
Non-Int. Demand 16%
Now/Money Mkt. 17%
Savings 18%
Money Mkt. CDs 12%
$100M+ CDs 9%
Other Time 28%
[The following table was represented as a pie chart in the printed matter.]
EARNING ASSET DISTRIBUTION
RE Loans 26%
US Gov't. Inv. 30%
SBA Loans 17%
Consumer Loans 13%
FF Sold Other EA 5%
Other Comm. Loans 9%
- ---------
page four
<PAGE>
PRESTIGE FINANCIAL CORP.
direction
without either there would be little chance of remarkable success. At Prestige
Financial Corp., our directors began with high expectations and have not, thus
far, been given any reason to expect less than outstanding results. As a
consequence, the extra-ordinary becomes a given for the sprint as well as the
marathon.
Wanting, demanding the best is not a self-fulfilling wish. It takes work on
everyone's part to reach lofty goals. Our directors and our advisory board
members play a vital role in business development but, most importantly, these
coaches know when to direct and when to simply let their team of professionals
do the jobs for which they have been so well prepared. As the organization
becomes ever more accustomed to achieving its goals, the sense of direction
becomes instinctive, but it is during these times that firm oversight is most
important. Through questioning and comparing, Prestige directors make certain
company resources continue to be put to their highest and best use for
protection of the depositor and the long term benefit of the shareholder.
Curious, though, is the manner in which people's roles need to, and do,
adjust within the best performing teams, just as coaches may be less demanding
as the situation dictates. The poster advice "Lead, Follow, or Get Out of the
Way!" may sound comical, until one realizes that at some point it is absolutely
necessary that the boss get out of the way, that a leader sometimes has to
follow, and so on. It is this mind-set--the willingness to do, or allow to be
done, whatever it takes--that can be the most powerful direction we have taken
here at Prestige.
So all leaders have had to be followers at some point and perhaps it is
that experience that does the most to hone the skills of people in charge. With
all that has been accomplished to date at Prestige, it should not be too
surprising to find an unusual partnership at the executive level. Here, two men
share the highest official authority, bringing nearly fifty years of combined
experience to bear upon whatever challenges may arise. With them, team players
exemplified by the officers shown on page seven have performed, and will
continue to perform, at the highest level.
The people of Prestige have also played an important role in helping the
people of their community, their state, and nearby states to become economically
self-sufficient by
Directors
[PHOTO 1]
[PHOTO 2]
[PHOTO 3]
[PHOTO 4]
[PHOTO 5]
1. Louis R. DeFalco,
Chairman (and Vice Chairman--
Prestige State Bank)
2. Roland D. Boehm, Sr.,
Vice Chairman (and Chairman--
Prestige State Bank)
3. Gerald A. Lustig
4. James W. MacDonald
5. Arthur Stryker, Jr.
---------
page five
<PAGE>
TO SHAREHOLDERS OF PRESTIGE:
(continued)
leadership
starting and expanding businesses through SBA loans. In addition to earning the
Diamond Award as the top SBA producer in the state, Prestige ranked first in
loans to women-owned businesses and minority-owned businesses. For these
accomplishments, Prestige was presented with the Gold Award as the
Administration's highest honor for overall achievement. Meanwhile, loan
quality--another Achilles heel to be watched closely in banks--remained
exceptional as overall past dues at year-end totaled just $1,329,000 (less than
1% of a $138,468,000 loan portfolio). This number INCLUDED $810,000 of
non-performing loans which when divided by total assets rendered an extremely
low ratio of .35 percent.
Prestige entered 1997 with a renewed dedication to be the best we can be.
We will not relent in our quest to be THE bank within our home county of
Hunterdon. While assimilating the financial impact of the Beaver Avenue, Clinton
branch, we intend to open three more locations within the heart of our trade
area: a free standing branch on the main north-south artery between the hubs of
Flemington and Clinton; our first in-store bank within the same shopping center;
and a second Clinton branch on the western side of that North Hunterdon market.
We intend to continue as a force within the SBA arena but expect to make a
greater impression than in the past with our residential mortgage lending and
municipal financing. All the while, though, we will not lose sight of the
individuals and small companies with whom we have become identified. We plan to
attain continually impressive returns on equity as well as assets as we move
boldly UP...with PEOPLE toward the $300 million mark in asset size.
Sincerely,
/s/ Arnold F. Horvath /s/ Robert J. Jablonski
- --------------------- -----------------------
Arnold F. Horvath Robert J. Jablonski
President Chief Executive Officer
[PHOTO]
Arnold F. Horvath
[PHOTO]
Robert J. Jablonski
- --------
page six
<PAGE>
CORPORATE INFORMATION PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
up with people
<TABLE>
<S> <C> <C>
Board of Directors Officers Rosemary Dente
Assistant Vice President
Louis R. DeFalco Arnold F. Horvath Sr. SBA Bus. Development
Chairman (& Vice Chairman-- President
Prestige State Bank) Joyce A. Winecker
Robert J. Jablonski Corporate Secretary
Roland D. Boehm, Sr. Chief Executive Officer
Vice Chairman (& Chairman-- Carolyn Scalia
Prestige State Bank) Greg Schneider Assistant Vice President
Executive Vice President Auditor
Arnold F. Horvath Senior Lending Officer
Linda E. Burns
Robert J. Jablonski Annette M. Dalley Assistant Vice President
Sr. Vice President
Gerald A. Lustig Human Resources JoAnn M. Cronce
Branch Administration Assistant Treasurer
James W. MacDonald Security Officer
Lorraine A. Cook
Arthur Stryker, Jr. Sr. Vice President Judith Wallace
Controller Assistant Secretary
Hunterdon
Advisory Board Jeffrey D. Mattison Deborah Fabian
Sr. Vice President Assistant Secretary
Brian Barbiche Loan Officer
J. Susan Berger
David Bond Joseph D. Ercolino Assistant Treasurer
Vice President
Alan Castroll Business Development Maria Fusca
Assistant Treasurer
Sam Leon Thomas M. Lyons
Vice President Christine Ploski
John Little, Jr. Financial Corp. Accounting Assistant Treasurer
James T. McPherson Thomas Thompson Deborah A. Gutschmidt
Vice President Assistant Treasurer
Somerset SBA Loan Officer
Advisory Board Louise A. Maziarz
Thomas W. Ort Assistant Treasurer
Edward J. Dougherty, Ed.D. Vice President
Loan Administration Amy E. Rabosky
Gerard C. Pascale Assistant Treasurer
Mark C. Dooley
Vice President Sandra Stephens
Mortgage Officer Assistant Secretary
Christopher J. Pribula Joyce Bietka
Vice President Assistant Secretary
Operations
Jennifer Mock
Karen M. McKeon Assistant Treasurer
Assistant Vice President
Stan Hall
Assistant Vice President
</TABLE>
- ----------
page seven
<PAGE>
CONSOLIDATED STATEMENTS PRESTIGE FINANCIAL CORP.
OF FINANCIAL CONDITION AND SUBSIDIARY
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Assets 1996 1995
-------------------------------
<S> <C> <C>
Cash and due from banks $ 9,579,368 $ 5,530,778
Federal funds sold and short-term investments 8,950,028 10,525,000
-------------------------------
Total cash and cash equivalents 18,529,396 16,055,778
-------------------------------
Loans held for sale, net 15,013,245 10,240,981
Investment securities, net (estimated market value of $68,680,887
and $43,466,781 in 1996 and 1995, respectively) 68,874,149 43,270,135
Loans, net 123,454,671 103,346,182
Less: Allowance for loan losses 1,592,078 1,324,626
-------------------------------
Net loans 121,862,593 102,021,556
-------------------------------
Accrued interest receivable 1,537,994 958,365
Premises and equipment, net 2,490,059 1,930,757
Other assets 1,210,011 1,904,158
-------------------------------
Total assets $229,517,447 $176,381,730
===============================
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and
Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 35,318,480 $ 23,793,196
Interest bearing 177,277,801 139,723,690
-------------------------------
Total deposits 212,596,281 163,516,886
Accrued interest payable 308,082 249,013
Accrued expenses and other liabilities 903,162 557,358
-------------------------------
Total liabilities 213,807,525 164,323,257
-------------------------------
Stockholders' equity:
Common stock, par value $.01; 5,000,000 shares authorized;
2,661,331 shares and 1,972,539 shares issued and outstanding
at December 31, 1996 and 1995, respectively 26,613 19,725
Paid-in capital 13,581,186 11,354,121
Retained earnings 2,102,123 684,627
-------------------------------
Total stockholders' equity 15,709,922 12,058,473
Commitments and contingencies (note 10)
-------------------------------
Total liabilities and stockholders' equity $229,517,447 $176,381,730
===============================
</TABLE>
See accompanying notes to consolidated financial statements.
- ----------
page eight
<PAGE>
CONSOLIDATED STATEMENTS PRESTIGE FINANCIAL CORP.
OF INCOME AND SUBSIDIARY
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $11,920,839 $10,048,068 $7,016,118
Investment securities
Taxable 3,590,295 1,624,625 870,403
Exempt from Federal income tax 100,244 138,744 45,155
Federal funds sold and short-term investments 427,861 443,000 257,094
----------------------------------------------
Total interest income 16,039,239 12,254,437 8,188,770
----------------------------------------------
Interest expense:
Deposits 7,565,484 5,708,330 3,326,690
Short-term borrowings 2,901 408 633
----------------------------------------------
Total interest expense 7,568,385 5,708,738 3,327,323
----------------------------------------------
Net interest income 8,470,854 6,545,699 4,861,447
Provision for loan losses 515,600 350,000 100,000
----------------------------------------------
Net interest income after provision for loan losses 7,955,254 6,195,699 4,761,447
----------------------------------------------
Non-interest income:
Service charges on deposit accounts 266,719 153,419 125,224
Gain on sale of loans held for sale 1,180,301 571,837 405,596
Loss on sale of securities -- (76,125) --
Other income 89,116 51,060 32,414
----------------------------------------------
Total non-interest income 1,536,136 700,191 563,234
----------------------------------------------
Non-interest expense:
Salaries and employee benefits 3,149,948 2,257,405 1,797,566
Net occupancy expense 1,268,291 1,033,182 941,862
Data processing 308,680 203,002 166,007
Federal deposit insurance 2,000 139,781 227,534
Advertising and business development 244,382 187,008 178,914
Other operating expenses 1,249,030 1,077,925 812,109
----------------------------------------------
Total non-interest expense 6,222,331 4,898,303 4,123,992
----------------------------------------------
Income before provision for income taxes 3,269,059 1,997,587 1,200,689
Provision for income taxes 1,226,341 825,322 490,803
----------------------------------------------
Net income $ 2,042,718 $ 1,172,265 $ 709,886
==============================================
Net income per common share:
Primary $ .76 $ .48 $ .31
Fully diluted $ .75 $ .47 $ .31
==============================================
Weighted average shares outstanding:
Primary 2,701,269 2,293,161 2,157,603
Fully diluted 2,719,389 2,333,464 2,157,603
==============================================
</TABLE>
See accompanying notes to consolidated financial statements.
- ---------
page nine
<PAGE>
CONSOLIDATED STATEMENTS PRESTIGE FINANCIAL CORP.
OF CHANGES IN AND SUBSIDIARY
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------------------------
Total
Preferred Common Paid-in Retained stockholders'
stock stock capital earnings equity
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 900,000 $15,692 $ 7,797,102 $ 238,147 $ 8,950,941
Exercise of options (1,724 shares) -- 17 6,985 -- 7,002
Common stock cash dividend
($.08 per share) -- -- -- (117,736) (117,736)
Preferred stock cash dividend -- -- -- (44,746) (44,746)
Net income -- -- -- 709,886 709,886
---------------------------------------------------------------
Balance, December 31, 1994 900,000 15,709 7,804,087 785,551 9,505,347
Exercise of options (26,118 shares) -- 261 116,446 -- 116,707
Common stock grants (6,800 shares) -- 68 59,432 -- 59,500
Private placement (176,000 shares) -- 1,760 1,978,240 -- 1,980,000
Dividend reinvestment and stock
purchase plan (34,326 shares) -- 343 426,074 -- 426,417
Common stock cash dividend
($.125 per share) -- -- -- (228,739) (228,739)
10% Common stock dividend
(158,351 shares) -- 1,584 969,842 (971,426) --
Preferred stock cash dividend -- -- -- (73,024) (73,024)
Redemption of preferred stock (900,000) -- -- -- (900,000)
Net income -- -- -- 1,172,265 1,172,265
---------------------------------------------------------------
Balance, December 31, 1995 -- 19,725 11,354,121 684,627 12,058,473
Exercise of warrants (6,600 shares) -- 66 50,952 -- 51,018
Exercise of options (5,673 shares) -- 57 35,065 -- 35,122
Common stock grants (7,480 shares) -- 75 59,425 -- 59,500
Dividend reinvestment and stock
purchase plan (161,895 shares) -- 1,619 2,042,741 -- 2,044,360
401(k) plan (3,029 shares) -- 30 38,882 -- 38,912
Five-for-four common stock split
(504,115 shares) -- 5,041 -- (5,041) --
Common stock cash dividend
($.25 per share) -- -- -- (620,181) (620,181)
Net income -- -- -- 2,042,718 2,042,718
---------------------------------------------------------------
Balance, December 31, 1996 $ -- $26,613 $13,581,186 $2,102,123 $15,709,922
===============================================================
</TABLE>
See accompanying notes to consolidated financial statements.
- --------
page ten
<PAGE>
CONSOLIDATED STATEMENTS PRESTIGE FINANCIAL CORP.
OF CASH FLOWS AND SUBSIDIARY
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,042,718 $ 1,172,265 $ 709,886
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for loan losses 515,600 350,000 100,000
Depreciation and amortization 367,961 297,842 277,743
Amortization (accretion) of investment
securities premiums and discounts, net 479,182 (329,627) (427,766)
Amortization of organizational costs 14,137 18,131 38,094
Increase in accrued interest receivable (579,629) (492,072) (110,520)
Decrease (increase) in other assets 680,010 (971,344) (8,022)
Loss on sale of securities -- 76,125 --
Gain on sale of loans held for sale (1,180,301) (571,837) (405,596)
Proceeds from sale of loans held for sale 24,076,664 9,423,281 10,297,844
Loss on sale of other real estate owned -- 25,000 --
Net increase in loans held for sale (27,668,627) (18,060,531) (9,922,455)
Increase in accrued interest payable 59,069 111,960 49,098
Increase in accrued expenses and other liabilities 345,804 67,250 5,085
(Decrease) increase in deferred loan fees and
unearned discounts (273,507) 265,924 788,880
Common stock grants 59,500 59,500 --
------------------------------------------
Net cash (used in) provided by
operating activities (1,061,419) (8,558,133) 1,392,271
------------------------------------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale -- 3,630,250 --
Proceeds from maturities of investment securities 32,379,423 15,933,625 13,660,000
Principal paydowns on mortgage-backed securities 4,915,156 1,079,558 1,372,633
Purchases of investment and mortgage-backed securities (63,377,775) (41,119,376) (14,412,664)
Net increase in loans (19,472,380) (11,510,847) (19,605,766)
Loan participations purchased (610,750) -- --
Capital expenditures (927,263) (215,615) (534,966)
Proceeds from sale of other real estate owned -- 350,000 --
------------------------------------------
Net cash used in investing activities (47,093,589) (31,852,405) (19,520,763)
------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits, money market,
NOW accounts and savings accounts 34,014,121 11,636,393 5,297,335
Net increase in certificates of deposit 15,065,274 29,441,226 17,029,867
Proceeds from issuance of common stock, net 2,169,412 2,523,124 7,002
Dividends paid (620,181) (301,763) (162,482)
Redemption of preferred stock -- (900,000) --
------------------------------------------
Net cash provided by financing activities 50,628,626 42,398,980 22,171,722
------------------------------------------
Increase in cash and cash equivalents 2,473,618 1,988,442 4,043,230
Cash and cash equivalents at beginning of year 16,055,778 14,067,336 10,024,106
------------------------------------------
Cash and cash equivalents at end of year $ 18,529,396 $ 16,055,778 $ 14,067,336
==========================================
Supplemental disclosures:
Cash paid for interest $ 7,509,316 $ 5,596,778 $ 3,278,225
Cash paid for income taxes 1,251,008 800,078 607,982
Loans transferred to other real estate owned -- 375,000 --
Investment securities transferred to securities
available for sale -- 3,706,375 --
==========================================
</TABLE>
See accompanying notes to consolidated financial statements.
- -----------
page eleven
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
(1) Summary of Significant
Accounting Policies
Business
Policies Prestige Financial Corp. provides a full range of banking services
to individual and corporate customers through its subsidiary, Prestige State
Bank (the Bank), with branches located in Hunterdon and Somerset counties, New
Jersey. The Bank is subject to competition from other financial institutions.
The Bank is subject to the regulations of certain Federal and state agencies,
and undergoes periodic examinations by those regulatory authorities.
Basis of Consolidated Financial Statement Presentation
The consolidated financial statements of Prestige Financial Corp. and
Subsidiary (the Corp.) have been prepared in conformity with generally accepted
accounting principles and reporting practices applied in the banking industry.
The consolidated financial statements include the accounts of Prestige Financial
Corp. and its wholly-owned subsidiary, Prestige State Bank. All significant
intercompany accounts and transactions have been eliminated in consolidation. In
preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, as well as contingent assets and liabilities, as of the dates of
the consolidated statements of financial condition and revenues and expenses for
the years then ended. Actual results could differ significantly from those
estimates and assumptions.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses.
In connection with the determination of the allowance for loan losses,
management generally obtains independent appraisals for significant properties.
Cash and Cash Equivalents
Cash and cash equivalents, for purposes of the consolidated statements of
cash flows, consist of cash on hand and in banks, Federal funds sold, and
short-term investments with a maturity of three months or less.
Investment Securities
Investment Securities are carried at cost, adjusted for amortization of
premiums and accretion of discounts over the estimated lives of the securities
using a method which approximates the level-yield method. Investment Securities
are carried at amortized cost because it is management's intention, and the
Corp. has the ability, to hold them to maturity. Management determines the
appropriate classification of securities at the time of purchase. If management
has the intent and the Corp. has the ability at the time of purchase to hold
securities until maturity, they are classified as Investment Securities and
carried at amortized historical cost.
Securities to be held for indefinite periods of time and not intended to be
held to maturity are classified as Available for Sale and carried at estimated
fair value. Unrealized holding gains and losses are excluded from earnings and
reported net of taxes as a separate component of stockholders' equity.
Securities Available for Sale include securities that management intends to use
as part of its asset/liability management strategy and that may be sold in
response to changes in interest rates, resultant changes in prepayment risk, and
other factors related to interest rate risk and resultant prepayment risk.
Gains or losses on the sale of securities are based on identifiable
certificate cost and are accounted for on a trade date basis.
Loans
Loans are stated at the principal amount outstanding, net of deferred loan
origination fees, costs and unearned discounts, and the allowance for loan
losses. Loans held for sale are carried at the lower of aggregate cost or market
value. Interest on loans is accrued and credited to income as earned. Loan
origination fees and certain direct loan origination costs are deferred and
amortized, using the level yield method, into interest income over the estimated
life of the loan as an adjustment to the loan's yield.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows, or, as a
practical expedient, at the loan's observable market price, or the fair value of
the underlying collateral if the loan is collateral dependent. Conforming
residential mortgage loans, home equity and second mortgage loans, and consumer
loans are excluded from the definition of impaired loans as they are
characterized as smaller balance, homogeneous loans and therefore are
collectively evaluated for impairment.
The accrual of income on loans, including impaired loans, is generally
discontinued when a loan becomes more than 90 days delinquent and is not
considered well secured and in the process of collection or when certain factors
indicate reasonable doubt as to the ability of the borrower to meet contractual
principal and/or interest obligations. Loans on which the accrual of income has
been discontinued are designated
- -----------
page twelve
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
as nonaccrual loans. All previously accrued interest is reversed and income is
recognized subsequently only in the period received, provided the remaining
principal balance is deemed collectible. A nonaccrual loan is not returned to an
accrual status until principal and interest payments are brought current and
factors indicating doubtful collection no longer exist.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be adequate
to absorb possible losses on existing loans that may become uncollectible, based
on evaluations of the collectibility of loans. The evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, industry
experience, collateral value and current economic conditions that may affect the
borrower's ability to pay. Management believes that the allowance for loan
losses is adequate. While management uses available information to recognize
losses on loans, future additions to the allowance may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Corp.'s
allowance for loan losses. Such agencies may require the Corp. to recognize
additions to the allowance based on their judgments of information available to
them at the time of their examination.
Loan Sales
The Bank originates Small Business Administration (SBA) guaranteed loans
which have maturities of up to 25 years. The loans are guaranteed up to 90% by
the Federal government. From time to time, the Corp. may sell the guaranteed
portion of such loans and retain the unguaranteed portion as well as the rights
to service the loans. Gains recorded on sales are calculated on the basis of a
pro rata allocation of the carrying value of the loan, which approximates a fair
value pro rata allocation considering premiums, servicing fees and costs to
service.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets or leases. Leasehold improvements are depreciated
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the improvements. Repair and maintenance items are
expensed and improvements are capitalized.
Stock-based Employee Compensation
Compensation expense under the Corp.'s fixed stock option plans and
restricted stock plans is measured by the excess, if any, of the market price of
the underlying stock over the exercise price. Compensation expense is measured
at grant date and recognized ratably over the vesting period.
Income Taxes
Income taxes are accounted for under the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the 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. 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.
Net Income Per Share
Net income per share is calculated as net income less preferred stock
dividends, if any, divided by weighted average shares outstanding (as adjusted
for the assumed exercise of dilutive common stock equivalents, using the
treasury stock method). Preferred stock dividends totaled $73,024 in 1995 and
$44,746 in 1994. All outstanding preferred stock was redeemed in 1995. All
weighted average shares outstanding reflect the five-for-four stock split
effective on April 19, 1996 and the 10% common stock dividend effective on March
31, 1995.
Reclassifications
Certain amounts relating to 1995 and 1994 have been reclassified to conform
with the 1996 presentation.
- --------------------------------------------------------------------------------
(2) Cash and Due
from Banks
The Corp.'s banking subsidiary is required to maintain reserve balances with the
Federal Reserve Bank.Such balances amounted to $1,190,000 and $672,000 at
December 31, 1996 and 1995, respectively.
- -------------
page thirteen
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(continued)
- --------------------------------------------------------------------------------
(3) Investment
Securities, Net
The amortized cost, gross unrealized gains and losses and estimated market
values of Investment Securities at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Federal agencies $36,226,852 $ 58,934 $255,060 $36,030,726
Other securities 4,216,489 5,263 -- 4,221,752
Mortgage-backed securities 28,430,808 146,901 149,300 28,428,409
----------------------------------------------------
Total investment securities $68,874,149 $211,098 $404,360 $68,680,887
====================================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1995 Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Federal agencies $21,459,029 $ 27,262 $ 21,940 $21,464,351
Other securities 2,070,149 11,820 -- 2,081,969
Mortgage-backed securities 19,740,957 180,965 1,461 19,920,461
----------------------------------------------------
Total Investment Securities $43,270,135 $220,047 $ 23,401 $43,466,781
====================================================
</TABLE>
There were no sales of investment securities during 1996. In December 1995,
pursuant to the provisions of Special Report No. 155-B, "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities--Questions and Answers" issued by the Financial Accounting
Standards Board, the Corp. made a one time transfer of Investment Securities
with an amortized cost of $3,706,375 and an unrealized loss of $76,125 to
Securities Available for Sale. These securities were sold in 1995 resulting in
gross realized losses of $76,125 with no realized gains. There were no sales of
investment securities during 1994.
At December 31, 1996, securities having a book value of approximately
$9,501,000 were pledged to secure certain public fund deposits and for other
purposes required by law.
The amortized cost and estimated market values of investment debt
securities at December 31, 1996 are shown by contractual maturity in the table
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call obligations. The contractual maturities of
mortgage-backed securities and SBA guaranteed loan pool certificates generally
exceed 10 years; however, the effective lives are expected to be less due to
anticipated prepayments.
Estimated
Amortized Market
Cost Value
---------------------------
Due in one year or less $ 8,192,909 $ 8,191,542
Due after one year through five years 12,873,848 12,848,553
Due after five years through ten years 110,000 110,000
Due after ten years 175,000 175,000
Mortgage-backed securities 28,430,808 28,428,409
SBA guaranteed loan pool certificates 19,091,584 18,927,383
---------------------------
Total $68,874,149 $68,680,887
===========================
- --------------------------------------------------------------------------------
(4) Loans
A summary of loans at December 31, 1996 and 1995 is as follows:
1996 1995
------------------------------
Real estate mortgages:
Residential $ 9,964,053 $ 8,000,710
Construction and land development 7,950,569 5,019,345
Commercial 37,909,538 31,234,186
Commercial loans 55,758,733 43,366,734
Home equity and second mortgages 7,069,592 5,308,610
Consumer 22,524,000 23,639,654
------------------------------
141,176,485 116,569,239
Less:
Allowance for loan losses 1,592,078 1,324,626
Deferred loan fees and discounts 2,708,569 2,982,076
Loans held for sale 15,013,245 10,240,981
------------------------------
Net loans $121,862,593 $102,021,556
==============================
- -------------
page fourteen
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
Loans in the amount of $454,135 and $10,823 were on a nonaccrual status and
considered impaired at December 31, 1996 and 1995, respectively. If these loans
had continued to realize interest in accordance with their contractual terms,
approximately $37,000 and $1,000 of interest income would have been realized in
1996 and 1995, respectively. No specific reserves were required for impaired
loans at December 31, 1996 or 1995. The average recorded investments in impaired
loans during 1996 and 1995 were approximately $330,000 and $280,000,
respectively. Loans which were past due 90 days or more and still accruing
totalled $355,865 and $11,177 at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, loans to directors, executive officers and
their affiliated interests amounted to $2,568,098 and $1,993,028, respectively,
which were current as to principal and interest. During 1996, new extensions of
credit to directors, executive officers and their affiliated interests totalled
$1,235,488 and repayments by such persons were $660,418.
An analysis of the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
------------------------------------------
Balance at beginning of year $ 1,324,626 $ 1,077,026 $ 1,057,612
Provision charged to operations 515,600 350,000 100,000
Loans charged off, net (248,148) (102,400) (80,586)
-----------------------------------------
Balance at end of year $ 1,592,078 $ 1,324,626 $ 1,077,026
==========================================
- --------------------------------------------------------------------------------
(5) Accrued Interest
Receivable
A summary of accrued interest receivable at December 31, 1996 and 1995 is as
follows:
1996 1995
---------------------------
Loans $ 689,347 $ 599,044
Investment securities and other
interest-earning assets 848,647 359,321
---------------------------
$1,537,994 $ 958,365
===========================
- --------------------------------------------------------------------------------
(6) Premises and
Equipment
Premises and equipment consists of the following at December 31, 1996 and 1995:
1996 1995
--------------------------------
Premises and improvements $ 2,067,628 $ 1,506,514
Furniture and equipment 1,841,310 1,425,844
--------------------------------
Total 3,908,938 2,986,358
Accumulated depreciation (1,418,879) (1,055,601)
--------------------------------
$ 2,490,059 $ 1,930,757
================================
- --------------------------------------------------------------------------------
(7) Deposits
A summary of deposit balances at December 31, 1996 and 1995 is as follows:
1996 1995
--------------------------------
Regular checking $ 35,318,480 $ 23,793,196
NOW accounts 14,121,069 9,203,591
Money market accounts 20,362,771 16,362,792
Regular savings accounts 38,390,093 24,818,713
Certificates of deposit:
$100,000 and over 21,462,600 17,205,277
Less than $100,000 82,941,268 72,133,317
--------------------------------
$212,596,281 $163,516,886
================================
Certificates of deposit with remaining terms exceeding one year are
scheduled to mature as follows:
1998 $11,602,000
1999 5,018,000
2000 5,647,000
2001 446,000
Thereafter $ --
- ------------
page fifteen
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(continued)
Interest expense includes interest on certificates of deposit greater than
$100,000 of $1,059,333, $1,047,725 and $610,487 for the years ended December 31,
1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
(8) Income Taxe
Total income tax expense in the consolidated statements of income is summarized
as follows:
Current Deferred Total
-----------------------------------------
Year ended December 31, 1996:
U.S. Federal $ 1,127,066 $ (147,563) $ 979,503
State and local 286,894 (40,056) 246,838
-----------------------------------------
$ 1,413,960 $ (187,619) $ 1,226,341
=========================================
Year ended December 31, 1995:
U.S. Federal $ 628,806 $ (387) $ 628,419
State and local 196,974 (71) 196,903
-----------------------------------------
$ 825,780 $ (458) $ 825,322
=========================================
Year ended December 31, 1994:
U.S. Federal $ 344,644 $ 24,110 $ 368,754
State and local 117,416 4,633 122,049
-----------------------------------------
$ 462,060 $ 28,743 $ 490,803
=========================================
A reconciliation of "expected" income tax expense at December 31, 1996,
1995 and 1994, computed at the Federal statutory rate, to reported income tax
expense is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
Provision computed at statutory tax rate $ 1,111,480 $ 679,180 $ 408,234
State and local taxes, net of Federal benefit 162,913 129,956 80,552
Tax exempt interest income (42,837) (57,568) (28,225)
Change in valuation allowance (7,554) -- 1,497
Other, net 2,339 73,754 28,745
-----------------------------------------
$ 1,226,341 $ 825,322 $ 490,803
=========================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are as follows:
1996 1995
------------------------
Deferred tax assets:
Deferred fee income $ 17,917 $ 24,527
Non-qualified stock options 54,352 --
Allowance for loan losses 585,034 494,110
Other 23,621 21,244
------------------------
Total gross deferred tax assets 680,924 539,881
Valuation allowance -- (7,554)
------------------------
Deferred tax assets, net 680,924 523,327
------------------------
Deferred tax liabilities:
Differences in depreciation methods 62,296 84,022
Other -- 17,296
------------------------
Total gross deferred tax liabilities 62,296 101,318
------------------------
Net deferred tax asset $ 618,628 $ 431,009
========================
Except for the effects of the reversal of net deductible temporary
differences, the Corp. is not currently aware of any factors which would cause
any significant differences between taxable income and pretax book income in
future years. However, there can be no assurances that there will be no
significant differences in the future between taxable income and pretax book
income if circumstances change (such as, for example, changes in tax laws or the
Corp.'s financial condition or performance). Management has determined that
based upon its assessment of recoverable taxes, realization of the net deferred
tax asset is more likely than not.
- ------------
page sixteen
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
- --------------------------------------------------------------------------------
(9) Regulatory Matters
Capital Requirements
The Federal Reserve Board in the case of bank holding companies such as the
Corp. and the Federal Deposit Insurance Corporation (FDIC) in the case of state
banks such as the Bank have adopted risk-based capital guidelines which require
a minimum ratio of 8% of total risk-based capital to assets, as defined in the
guidelines. At least one half of the total capital, or 4%, is to be comprised of
common equity and qualifying perpetual preferred stock, less deductible
intangibles (Tier 1 capital).
In addition, the Federal Reserve Board of the FDIC supplemented the
risk-based capital guidelines with an additional capital ratio referred to as
the leverage ratio or core capital ratio. The regulations require a financial
institution to maintain a minimum leverage ratio of 4% to 5%, depending upon the
condition of the institution.
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 depository
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 ratio of at least 5.0%; a Tier 1 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 subject to qualitative judgements by the regulatory
authorities about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1996, the Corp. and the Bank
meet all capital adequacy requirements to which they are subject. Further, the
most recent FDIC notification characterized the Bank as a well capitalized
institution under the prompt corrective action regulations. There have been no
conditions or events since that notification that management believes have
changed the Bank's capital classification.
The following is a summary of the Corp.'s and the Bank's actual capital
amounts and ratios as of December 31, 1996 and 1995, compared to the regulatory
authorities minimum capital adequacy requirements and requirements for
classification as a well capitalized institution (dollars in thousands):
<TABLE>
<CAPTION>
Regulatory Requirements
---------------------------------------------
Minimum Capital For Classification
Actual Adequacy as Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Corp.: December 31, 1996
Leverage (Tier 1) capital $15,686 7.01% $ 8,954 4.00% $11,193 5.00%
Risk-based capital:
Tier 1 15,686 11.69% 5,369 4.00% 8,054 6.00%
Total 17,278 12.87% 10,738 8.00% 13,423 10.00%
December 31, 1995
Leverage (Tier 1) capital 12,020 6.81% 7,055 4.00% 8,819 5.00%
Risk-based capital:
Tier 1 12,020 10.71% 4,489 4.00% 6,734 6.00%
Total $13,345 11.89% $ 8,979 8.00% $11,224 10.00%
---------------------------------------------------------------------
Bank: December 31, 1996
Leverage (Tier 1) capital $14,584 6.55% $ 8,902 4.00% $11,177 5.00%
Risk-based capital:
Tier 1 14,584 10.89% 5,358 4.00% 8,037 6.00%
Total 16,176 12.08% 10,715 8.00% 13,394 10.00%
December 31, 1995
Leverage (Tier 1) capital 11,073 6.32% 7,013 4.00% 8,766 5.00%
Risk-based capital:
Tier 1 11,073 9.91% 4,468 4.00% 6,702 6.00%
Total $12,398 11.10% $ 8,935 8.00% $11,169 10.00%
---------------------------------------------------------------------
</TABLE>
- --------------
page seventeen
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(continued)
- --------------------------------------------------------------------------------
(10) Commitments,
Contingencies and
Concentrations of
Credit Risk
Commitments
The Corp. is party to financial instruments and commitments with
off-balance-sheet credit risk in the normal course of business. These financial
instruments and commitments include unused home equity lines of credit,
commitments to extend credit, and commitments to purchase securities. These
commitments and instruments involve, to varying degrees, elements of risk in
excess of the amounts recognized in the consolidated financial statements.
The Corp.'s maximum exposure to credit losses in the event of
nonperformance by the other party to these financial instruments and commitments
is represented by the contractual amount. The Corp. uses the same credit
policies in granting commitments and conditional obligations as it does for
financial instruments recorded in the consolidated statements of financial
condition.
At December 31, 1996 and 1995, financial instruments and commitments whose
contractual amounts represent off-balance-sheet credit risk are as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Unused portions of commercial lines of credit,
letters of credit and undisbursed portion of
construction loans:
Fixed-rate $ 270,000 $ 349,150
Variable-rate 17,650,314 12,949,431
Unused home equity lines of credit (primarily floating rate) 5,583,328 4,831,539
Unused portion of consumer lines of credit 841,999 643,237
Commitments to extend credit:
Fixed-rate 1,819,000 505,000
Variable-rate 11,872,000 11,558,630
-------------------------
$38,036,641 $30,836,987
=========================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Corp. evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Corp. upon
extension of credit, is based on management's credit evaluation of the customer.
Fixed-rate commitments had interest rates ranging from 8.75% to 9.0% at December
31, 1996.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of an act of a customer to a third party.
The Corp. leases land and buildings for its banking facilities under
operating leases which expire at various dates through 2013 but which contain
certain renewal options. Included in these leases is an obligation of the Corp.
to Prestige Quarters LP, a partnership whose controlling general partner is a
director of the Corp., for a 20-year lease which commenced in 1993. Also
included in these leases are obligations of the Corp. to Prestige Realty Group
LLC and Prestige Clinton Realty LLC, limited liability companies owned by
certain directors of the Corp., for ten-year leases which commenced in 1994 and
1996. As of December 31, 1996, future minimum rental payments, excluding the
renewal options under these leases, are as follows:
----------
1997 $ 403,546
1998 380,664
1999 380,664
2000 380,664
2001 380,664
Thereafter $3,274,161
==========
The above amounts represent minimum rentals not adjusted for possible
future increases due to escalation provisions. Rental expense, primarily related
to the above described lease obligations, aggregated $427,650, $318,537 and
$275,717 for the years ended December 31, 1996, 1995 and 1994, respectively,
which is included in net occupancy expense in the consolidated statements of
income.
- -------------
page eighteen
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
Contingencies
The Corp. may, in the ordinary course of business, be a party to litigation
involving collection matters, contract claims and other legal proceedings
relating to the conduct of its business. In management's judgment, the financial
position or results of operation of the Corp. will not be affected materially by
the final outcome of any current legal proceedings or other contingent
liabilities and commitments.
Concentrations of Credit Risk
The Corp. extends credit in the normal course of business to its customers,
the majority of whom operate or reside within the New Jersey, eastern
Pennsylvania, and southern New York business areas. The ability of its customers
to meet contractual obligations is, to some extent, dependent upon the economic
conditions existing in this region.
- --------------------------------------------------------------------------------
(11) Stockholders' Equity
The payment of dividends by the Bank is restricted. Under the New Jersey Banking
Act of 1948, as amended, the Bank may pay dividends only out of retained
earnings and out of paid-in capital to the extent that paid-in capital exceeds
50% of stated capital.
Stock Compensation and Other Benefit Plans
In October 1995 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation." This Statement encourages recording in current period
earnings compensation expense related to the fair value of certain stock-based
compensation. Companies may choose to continue to follow the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," where compensation expense is not recorded for certain
stock-based compensation plans. However, companies are required to disclose pro
forma net income and earnings per share as if they adopted the fair value based
method of accounting. The disclosure requirements for SFAS No. 123 are effective
for fiscal years beginning after December 15, 1995.
At December 31, 1996 the Corp. has four stock-based compensation plans,
which are described below. All amounts presented reflect the five-for-four stock
split effective on April 19, 1996 and the 10% stock dividend effective on March
31, 1995. The Corp. has elected to continue to account for stock-based
compensation under APB Opinion No. 25 and to provide pro forma disclosures as
required by SFAS No. 123. Accordingly, no compensation cost has been charged
against income for option plans where the exercise price is equal to the market
value of the underlying stock at the date of grant. The compensation cost that
has been charged against income for option plans where the exercise price is
less than the market value of the underlying stock at the date of grant was
$117,944 and $18,799 in 1996 and 1995, respectively. Had compensation cost for
the Corp.'s stock option plans been determined consistent with SFAS No. 123, the
Corp.'s net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
1996 1995
------------------------
Net income As Reported 2,042,718 1,172,265
Pro forma 1,918,311 1,157,534
Primary earnings per share As Reported $ .76 $ .48
Pro forma $ .72 $ .48
Fully diluted earnings per share As Reported $ .75 $ .47
Pro forma $ .71 $ .47
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of 2%; expected
volatility of 20%; risk-free interest rates equal to the five year CMT on the
date of each option grant; and expected lives of five years.
Pursuant to the 1990 Long-term Incentive Compensation Plan for Key
Employees (the 1990 Plan), 3,300 shares of Corp. stock remain reserved for
issuance to eligible employees of the Corp. upon the exercise of options granted
under the 1990 Plan. Under the 1994 Stock Option Plan for Key Employees (the
KEP), the Corp. may grant options to its key employees for up to 207,250 shares
of common stock. Under the 1990 Plan and the KEP, the exercise price of each
option granted equals 85% of the market price of the Corp.'s stock on the date
of grant. Under the 1994 Stock Option Plan for Senior Management (the SMP), the
Corp. may grant options to its senior management personnel for up to 68,750
shares of common stock. Under the 1994 Stock Option Plan for Outside Directors
(the ODP), the Corp. may grant options to its outside directors for up to 60,500
shares of common stock. Under the SMP and the ODP, the exercise price of each
option equals the market price of the Corp.'s stock on the date of grant.
Options
- -------------
page nineteen
<PAGE>
Notes to Consolidated
Financial Statements
December 31, 1996, 1995 and 1994
(continued)
granted in accordance with the above plans vest over a period not to exceed five
years and have a maximum term of ten years.
A summary of the status of the Corp.'s stock option plans as of December
31, 1996 and 1995 and changes during the years ended on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 160,485 $ 6.03 143,656 $5.33
Granted 167,784 10.36 51,313 6.02
Exercised (5,700) 5.24 (33,521) 3.08
Forfeited (1,988) 8.51 (963) 5.13
Outstanding at end of year 320,581 8.33 160,485 6.03
Options exercisable at year-end 129,458 6.08 58,251 5.97
Weighted average fair value of options
granted during the year $3.35 $2.11
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.13- 6.37 154,018 91 months $ 6.07 128,989 $6.07
$9.53-14.25 166,563 110 months $10.42 469 $9.53
</TABLE>
The Corp. established a stock grant plan for founding outside directors in
1994. The plan provides for the issuance of 46,750 shares of Corp. common stock.
At December 31, 1996, 18,700 shares have been issued under this plan.
In addition, the Corp. provides a 401(k) deferred compensation plan to all
eligible employees. Under this plan, the employer matches employee contributions
up to 7% of base salary. Employer matching contributions totalled $97,000,
$75,000 and $53,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Stock Warrants
In 1996 the Corp. issued warrants for 6,250 shares of common stock as
compensation to an outside vendor. The warrants are fully exercisable in
February, 1997 at an exercise price of $11.60 per share. The warrants expire in
1998.
- --------------------------------------------------------------------------------
(12) Fair Value of
Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of fair value information about financial instruments, whether or not
recognized on the face of the balance sheet, for which it is practicable to
estimate that value. The assumptions used in the estimation of fair value of the
Corp.'s financial instruments are detailed below. Where quoted prices are not
available, fair values are based on estimates using discounted cash flows and
other valuation techniques. The following fair value estimates were made as of
December 31, 1996 and 1995 based on pertinent market data and relevant
information on each financial instrument. These estimates do not include any
premium or discount that could result from an offer to sell the Corp.'s entire
holdings of a particular financial instrument or category thereof at one time.
Since no market exists for a substantial portion of the Corp.'s financial
instruments, fair value estimates were necessarily based on judgments with
respect to future 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 estimations cannot be calculated with precision.
Modifications in such assumptions could meaningfully alter these estimates.
Since these fair value approximations were made solely for financial instruments
at
- ------------
page twenty
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
December 31, 1996 and 1995, no attempt was made to estimate the value of
anticipated future business or the value of nonfinancial assets and liabilities.
Other important elements which are not deemed to be financial assets or
liabilities include the value of the Corp.'s existing core deposit base,
premises and equipment, and goodwill. 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.
The following methods and assumptions were used by the Corp. in estimating
the fair value of its financial instruments:
Cash and due from banks: Fair value equals the carrying value of such
assets. Federal funds sold and short-term investments: Due to the short-term
nature of these assets, the carrying values of these assets approximate their
fair values.
Loans held for sale: Fair values are based upon quoted market prices for
comparable loans as to interest rate, credit risk and term.
Investment Securities: Fair values are based on quoted market prices.
Loans: All fixed rate loans were valued using discounted cash flows. The
discount rate used to determine the present value of these loans was based on
interest rates currently being charged by the Bank on comparable loans as to
credit risk and term. Fair values for variable rate loans are considered to
approximate carrying values.
Commitments to extend credit and letters of credit: The majority of the
Corp.'s commitments to extend credit and letters of credit carry current market
interest rates if converted to loans. Because commitments to extend credit and
letters of credit are generally unassignable by either the Corp. or the
borrower, they only have value to the Corp. and the borrower. The estimated fair
value approximates the recorded deferred fee amounts.
Deposits: The fair values of deposits without stated maturities are equal
to the carrying value of such deposits. Deposits without stated maturities
include noninterest bearing demand deposits, savings accounts, NOW accounts and
money market demand accounts. Discounted cash flows have been used to value
certificates of deposit. The discount rate used is based on interest rates
currently being offered by the Bank on comparable deposits as to amount and
term.
The carrying amounts and estimated fair values of the Corp.'s financial
instruments are as follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
---------------------------------
<S> <C> <C>
December 31, 1996
Financial Assets:
Cash and due from banks $ 9,579,368 $ 9,579,368
Federal funds sold and short-term investments 8,950,028 8,950,028
Loans held for sale, net 15,013,245 15,763,907
Investment Securities, net 68,874,149 68,680,887
Loans, net 123,454,671 124,137,000
Less: Allowance for loan losses 1,592,078 1,592,078
Net loans 121,862,593 122,544,922
Financial liabilities:
Deposits with no stated maturities 108,192,413 108,192,413
Certificates of deposit $104,403,868 $104,587,000
December 31, 1995
Financial Assets:
Cash and due from banks $ 5,530,778 $ 5,530,778
Federal funds sold and short-term investments 10,525,000 10,525,000
Loans held for sale, net 10,240,981 10,855,440
Investment Securities, net 43,270,135 43,466,781
Loans, net 103,346,182 103,025,809
Less: Allowance for loan losses 1,324,626 1,324,626
Net loans 102,021,556 101,701,183
Financial liabilities:
Deposits with no stated maturities 74,178,292 74,178,292
Certificates of deposit $ 89,338,594 $ 89,883,559
</TABLE>
- ---------------
page twenty-one
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(continued)
- --------------------------------------------------------------------------------
(13) Condensed Financial
Information of
Parent Company
The condensed financial statements of Prestige Financial Corp. are as
follows:
Parent Only Statements of Financial Condition
<TABLE>
<CAPTION>
1996 1995
------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 185,303 $ 514,036
Investment securities, net (estimated market value $1,099,957 and
$500,000 at December 31, 1996 and 1995, respectively) 1,099,957 500,000
Investment in subsidiary 14,584,185 11,073,242
Other assets 28,868 44,614
------------------------------
Total assets $ 15,898,313 $ 12,131,892
==============================
Liabilities and stockholders' equity:
Other liabilities 188,391 73,419
Stockholders' equity 15,709,922 12,058,473
------------------------------
Total liabilities and stockholders' equity: $ 15,898,313 $ 12,131,892
==============================
Parent Only Statements of Income
Interest income $ 50,912 $ 2,473
Operating expenses (14,137) (14,137)
Income tax (provision) benefit (5,000) 2,631
Dividends from subsidiary -- 115,200
Equity in undistributed income of subsidiary 2,010,943 993,074
------------------------------
Net income available to common stockholders $ 2,042,718 $ 1,099,241
==============================
Parent Only Statements of Cash Flows
Cash flows from operating activities:
Net income available to common stockholders $ 2,042,718 $ 1,099,241
Less equity in undistributed income of subsidiary (2,010,943) (993,074)
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of organizational costs 14,137 14,137
Decrease in other assets 1,609 11,881
Increase in other liabilities 114,972 73,419
Common stock grants 59,500 59,500
------------------------------
Net cash provided by operating activities 221,993 265,104
------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities 9,185,575 --
Purchases of investment securities (9,785,532) (500,000)
Increase in investment in subsidiary (1,500,000) (1,555,453)
Net cash used in investing activities (2,099,957) (2,055,453)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 2,169,412 2,523,124
Cash dividends paid (620,181) (228,739)
------------------------------
Net cash provided by financing activities 1,549,231 2,294,385
------------------------------
(Decrease) increase in cash and cash equivalents (328,733) 504,036
Cash and cash equivalents at beginning of year 514,036 10,000
------------------------------
Cash and cash equivalents at end of year $ 185,303 $ 514,036
==============================
</TABLE>
- ---------------
page twenty-two
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
(14) Recent Accounting
Pronouncements
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 125
amends portions of SFAS No. 115, amends and extends to all servicing assets and
liabilities the accounting standards for mortgage servicing rights now in SFAS
No. 65, and supersedes SFAS No. 122. The Statement provides consistent standards
for distinguishing transfers of financial assets which are sales from transfers
that are secured borrowings. Those standards are based upon consistent
application of a financial components approach that focuses on control. The
Statement also defines accounting treatment for servicing assets and other
retained interest in the assets that are transferred. SFAS No. 125 is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, except for certain provisions
which were deferred until January 1, 1998 by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125" issued in
December, 1996. The adoption of the Statement is to be applied prospectively and
is not expected to have a material effect on the Corp.'s financial condition or
results of operations.
- --------------------------------------------------------------------------------
INDEPENDENT
AUDITORS' REPORT
The Stockholders and
Board of Directors
Prestige Financial Corp.:
We have audited the accompanying consolidated statements of financial
condition of Prestige Financial Corp. and subsidiary as of December 31, 1996 and
1995, and the related 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
Corp.'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 Prestige
Financial 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.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
January 17, 1997
- -----------------
page twenty-three
<PAGE>
STOCK PRICE INFORMATION PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
The following chart details the sales price ranges for Prestige Financial Corp.
common stock on a quarterly basis for 1995 and 1996.
These prices reflect actual transactions exclusive of commissions, as adjusted
for stock distributions via dividends and splits.
===============================================
High Low
- -----------------------------------------------
1995:
First Quarter $ 7.00 $ 6.00
Second Quarter 9.00 6.40
Third Quarter 9.40 6.60
Fourth Quarter 12.60 9.80
- -----------------------------------------------
1996:
First Quarter $14.80 $11.20
Second Quarter 15.75 12.88
Third Quarter 13.75 11.25
Fourth Quarter 14.38 11.13
===============================================
The number of shares outstanding as of December 31, 1996 was 2,661,331.
The Corporation's common stock is listed on the NASDAQ National Market and the
ranges of sales prices were obtained from that source.
Corporate Headquarters:
Prestige Financial Corp.
One Royal Road
P.O. Box 2480
Flemington, NJ 08822
Shareholder Inquiries:
For information regarding your shares of common stock of Prestige Financial
Corp., please contact:
Arnold F. Horvath
President
908-806-6200
Stock Symbol: PRFN
NASDAQ National Market
Market Makers:
The common stock of Prestige Financial Corp. is generally inactively traded. The
most active market makers known to the Corp. are:
Sandler O'Neil & Partners
2 World Trade Center
104th Floor
New York, NY 10048
Ryan, Beck & Co.
80 Main Street
West Orange, NJ 07052
Troster Singer
10 Exchange Place
Jersey City, NJ 07302
FIA Capital Group
119 Littleton Road
Parsippany, NJ 07054
Financial Information and Form 10K:
Persons may obtain a copy, free of charge, of Prestige Financial Corp.'s 1996
Annual Report on Form 10K (excluding exhibits) as filed with the Securities and
Exchange Commission. Investors, securities analysts and others desiring
financial information or a copy of such report should contact:
Robert J. Jablonski
Chief Executive Officer
908-806-6200
Registrar and Transfer Agent:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
Annual Shareholders' Meeting:
The annual shareholders' meeting of Prestige Financial Corp. will be held at
5:30 pm on Tuesday, April 22, 1997 at One Royal Road, Flemington, NJ
Designed by Curran & Connors, Inc.
- ----------------
page twenty-four
<PAGE>
PRESTIGE FINANCIAL CORP.
One Royal Road, P.O. Box 2480, Flemington, NJ 08822 o 908-806-6200
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Prestige Financial Corp.:
We consent to incorporate by reference in the Registration Statements (No.
33-83066) on Form S-8 and (No. 333-15739) on Form S-8 of our report dated
January 17, 1997, relating to the consolidated statements of financial condition
of Prestige Financial 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 is incorporated by reference, in the December 31, 1996 Annual
Report on Form 10-K of Prestige Financial Corp.
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 9579
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8950
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 68874
<INVESTMENTS-MARKET> 68681
<LOANS> 138468
<ALLOWANCE> 1592
<TOTAL-ASSETS> 229517
<DEPOSITS> 212596
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1211
<LONG-TERM> 0
0
0
<COMMON> 27
<OTHER-SE> 15683
<TOTAL-LIABILITIES-AND-EQUITY> 229517
<INTEREST-LOAN> 11921
<INTEREST-INVEST> 3690
<INTEREST-OTHER> 428
<INTEREST-TOTAL> 16039
<INTEREST-DEPOSIT> 7565
<INTEREST-EXPENSE> 7568
<INTEREST-INCOME-NET> 8471
<LOAN-LOSSES> 516
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6222
<INCOME-PRETAX> 3269
<INCOME-PRE-EXTRAORDINARY> 2043
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2043
<EPS-PRIMARY> .76
<EPS-DILUTED> .75
<YIELD-ACTUAL> 4.42
<LOANS-NON> 454
<LOANS-PAST> 356
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1325
<CHARGE-OFFS> 260
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1592
<ALLOWANCE-DOMESTIC> 1402
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 190
</TABLE>
