SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998 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
N / A
Former name, former address and former fiscal year, if changed since last
report
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 report(s), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the Registrant's common stock, being
the only class of capital stock outstanding, was as follows as of November
1, 1998:
Common Stock (par value $.01) 4,262,830 Shares
Table of Contents Page
Part I. Financial information
Item 1. Financial statements
Consolidated Statements of Financial Condition as
of September 30, 1998, December 31, 1997 and
September 30, 1997 3
Consolidated Statements of Income for the Three Months
Ended and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders'
Equity for the Nine Months Ended September 30,
1998 and 1997 5
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Part II. Other information
Item 6. Exhibits and reports on Form 8-K 21
Signatures 22
Item 1. Financial Statements
Prestige Financial Corp. and Subsidiary
<TABLE>
Consolidated Statements of Financial Condition (Unaudited)
(Dollars in thousands)
<CAPTION>
<S> <C> <C> <C>
09/30/98 12/31/97 09/30/97
ASSETS:
Cash and due from banks $10,938 $10,297 $11,739
Federal funds sold and
short-term investments 7,176 11,313 887
Total cash and cash equilvalents 18,114 21,610 12,626
Loans held for sale, net 8,777 16,284 14,550
Investment securities
available for sale, net:
Taxable 18,003 - -
Investment securities held
to maturity, net:
Taxable 73,785 89,249 83,669
(Market value $74,688,
$89,804, and $76,592
respectively)
Exempt from Federal income tax 7,470 5,569 5,569
(Market value $7,459, $5,556
and $5,444 respectively)
Loans, net 186,756 141,647 143,562
...Less allowance for loan losses 2,200 1,838 1,769
Net loans 184,556 139,809 141,793
Premises and equipment, net 3,864 3,428 3,456
Accrued interest receivable 1,973 2,009 1,737
Other assets 5,365 5,629 5,110
TOTAL ASSETS $321,907 $283,587 $268,510
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES
Federal funds purchased - - 300
Deposits:
Non-interest bearing 53,000 47,595 42,426
Interest bearing 245,443 215,561 206,400
Total deposits 298,443 263,156 248,826
Accrued interest payable 436 426 473
Accrued expenses and
other liabilities 1,250 1,116 714
TOTAL LIABILITIES 300,129 264,698 250,013
STOCKHOLDERS' EQUITY
Common stock, par value
$.01; 5,000,000 shares
authorized; 4,263,129,
3,308,624 and 3,279,291
shares issued and outstanding
at September 30, 1998,
December 31, 1997 and
September 30, respectively 43 33 33
Paid in capital 16,397 15,071 14,635
Retained earnings 5,331 3,785 3,529
Accumulated Other
Comprehensive Income 7 - -
TOTAL STOCKHOLDERS' EQUITY 21,778 18,889 18,197
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $321,907 $283,587 $268,510
</TABLE>
See accompanying notes to Consolidated Financial Statements
Prestige Financial Corp. and Subsidiary
<TABLE>
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)
<CAPTION>
Three Nine
Months Ended Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income:
Loans $4,154 $3,670 $11,757 $10,412
Federal funds sold and short-
term investments 79 91 271 301
Investment Securities
Available for Sale:
Taxable 251 - 322 -
Investment Securities Held to
Maturity:
Taxable 1,262 1,340 3,992 3,677
Exempt from Federal income tax 66 56 168 149
TOTAL INTEREST INCOME 5,812 5,157 16,510 14,539
Interest expense:
Deposits 2,701 2,333 7,782 6,602
Federal funds purchased 2 1 3 1
TOTAL INTEREST EXPENSE 2,703 2,334 7,785 6,603
Net interest income 3,109 2,823 8,725 7,936
Provision for loan losses 273 199 636 522
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,836 2,624 8,089 7,414
Non-interest income:
Service charges on deposit
accounts 121 103 356 284
Gain on sale of loans 443 452 1,308 1,416
Increase in cash surrender
value of corporate
owned life insurance 54 45 221 105
Other income 133 73 360 111
TOTAL NON-INTEREST INCOME 751 673 2,245 1,916
Non-interest expense:
Salaries and employee benefits 1,125 1,015 3,312 2,868
Net occupancy expense 534 483 1,453 1,314
Data processing 119 103 353 284
Advertising/business development 77 95 172 260
Directors compensation 91 94 279 240
Other expenses 418 407 1,168 1,063
TOTAL NON-INTEREST EXPENSE 2,364 2,197 6,737 6,029
Income before provision for
income taxes 1,223 1,100 3,597 3,301
Provision for income taxes 373 389 1,098 1,181
NET INCOME $850 $711 $2,499 $2,120
Net income per common share:
Basic $0.20 $0.17 $0.59 $0.49
Diluted $0.19 $0.16 $0.55 $0.49
Weighted average shares
outstanding - basic 4,259,089 4,075,733 4,206,078 4,036,758
Weighted average shares
outstanding - diluted 4,555,348 4,386,821 4,520,683 4,321,281
</TABLE>
See accompanying notes to Consolidated Financial Statements
Prestige Financial Corp. and Subsidiary
<TABLE>
Consolidated Statements of Changes in Stockholders'Equity
Nine Months Ended September 30, 1998 and 1997 (Unaudited)
(Dollars in thousands)
<CAPTION>
Accumulated
Number of Other Total
Common Common Paid-In Retained Comprehensive Stockholders'
Shares Stock Capital Earnings Income Equity
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 2,661,331 $27 $13,581 $2,102 - $15,710
Exercise of warrants 2,937 - 28 - - 28
Exercise of options 7,619 - 50 - - 50
Common stock grants 9,348 - 59 - - 59
Dividend reinvestment
and common stock
purchase plan 55,074 1 846 - - 847
Common stock issued
under 401(k) plan 4,759 - 71 - - 71
Six-for-five common
stock split 538,223 5 71 (5) - -
Common stock cash
dividend - - - (688) - (688)
Net income - - - 2,120 - 2,120
Balance, September 30,
1997 3,279,291 33 14,635 3,529 - 18,197
Balance, December 31,
1997 3,308,624 33 15,071 3,785 - 18,889
Exercise of options 21,169 1 132 - - 133
Common stock grants 11,216 - 59 - - 59
Dividend reinvestment
and common stock
purchase plan 73,471 1 1,025 - - 1,026
Common stock issued
under 401(k) plan 7,749 - 110 - - 110
Five-for-four common
stock split 840,990 8 - (8) - -
Common stock cash
dividend - - - (945) - (945)
Unrealized Gain on
Investment Securities
Available for Sale - - - - 7 7
Net income - - - 2,499 - 2,499
Balance, September 30,
1998 4,263,129 $43 $16,397 $5,331 $7 $21,778
</TABLE>
See accompanying notes to Consolidated Financial Statements
Prestige Financial Corp. and Subsidiary
<TABLE>
Consolidated Statements of Cash Flow
Nine Months Ended September 30, 1998 and 1997 (Unaudited)
(Dollars in thousands)
<CAPTION>
Nine
Months Ended
September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $2,499 $2,120
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities:
Provision for loan losses 636 522
Depreciation and amortization 409 353
Amortization / accretion of investment
securities premiums and discounts, net 556 349
Amortization of organizational costs 9 11
Decrease (increase) in accrued interest
receivable 36 (199)
Decrease (increase) in other assets 255 (3,911)
Gain on sale of loans (1,308) (1,416)
Proceeds from sale of loans held for sale 33,119 29,359
Net increase in loans held for sale (24,304) (27,480)
Increase in accrued interest payable 10 165
Increase (decrease) in accrued expenses and
other liabilities 131 (189)
Increase in deferred loan fees and unearned
discounts 414 159
Common stock grants 59 59
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 12,521 (98)
Cash flows from investing activities:
Proceeds from maturities of investment
securities 40,762 25,506
Principal paydowns on mortgage-backed
securities 18,210 4,837
Purchases of investment and mortgage-backed
securities (63,958) (51,056)
Net increase in loans (45,797) (20,611)
Capital expenditures (845) (1,319)
NET CASH USED IN INVESTING ACTIVITIES (51,628) (42,643)
Cash flows from financing activities:
Increase in Federal funds purchased - 300
Net increase in demand deposits, MMA, NOW and
savings accounts 20,159 23,473
Net increase in certificates of deposit 15,128 12,757
Proceeds from issuance of common stock, net 1,269 996
Dividends paid (945) (688)
NET CASH PROVIDED BY FINANCING ACTIVITIES 35,611 36,838
Decrease in cash and cash equivalents (3,496) (5,903)
Cash and cash equivalents at begining of year 21,610 18,529
Cash and cash equivalents at end of period $18,114 $12,626
Supplemental disclosure of cash flow information-
Cash paid during the year for:
Interest $7,775 $6,438
Income taxes 921 1,488
Transfers from loans to OREO - 418
</TABLE>
See accompanying notes to Consolidated Financial Statements
Prestige Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
1. Principles of consolidation
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 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 New Jersey Banking 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.
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.
PFC Financial Services, Inc., a wholly-owned subsidiary of the Corporation,
was organized as a corporation under New Jersey law in December 1997. PFC
Financial Services, Inc. provides customers with financial planning and
access to non-deposit investment products such as mutual funds, debt and
equity securities, fixed and variable annuities, etc. through Financial
Network Investment Corporation, a licensed broker/dealer, insurance agency
and registered investment advisor. PFC Financial Services, Inc. commenced
operations in January, 1998.
The accompanying unaudited consolidated financial statements include the
accounts of Prestige Financial Corp. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
2. Basis of presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation of the financial statements
have been included. Operating results for the three months and nine months
ended September 30, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998.
3. Stockholders' Equity
On August 20, 1998 the Board of Directors approved an eight cent per share
cash dividend on common stock, paid September 30, 1998 to shareholders of
record at September 18, 1998.
On May 21, 1998 the Board of Directors approved an eight cent per share
cash dividend on common stock, paid June 30, 1998 to shareholders of record
at June 19, 1998.
On February 23, 1998 the Board of Directors approved an eight cent per
share cash dividend on common stock, paid March 31, 1998 to shareholders of
record at March 20, 1998. Also on February 23, 1998 the Board of Directors
approved a five-for-four stock split, distributed April 17, 1998 to
shareholders of record at April 8, 1998.
4. Net Income Per Common Share
Basic net income per common share is calculated by dividing net income by
weighted average shares outstanding. Diluted net income per common share
is calculated by dividing net income by weighted average shares outstanding
as adjusted for the assumed exercise of potential common stock, using the
treasury stock method. Potential common stock resulting from stock option
agreements totaled 296,259 shares and 311,088 shares for the three months
ended September 30, 1998 and 1997, respectively. Potential common stock
resulting from stock option agreements totaled 314,605 shares and 284,523
shares for the nine months ended September 30, 1998 and 1997, respectively.
All weighted average shares outstanding reflect the five-for-four stock
split distributed April 17, 1998 and the six-for-five stock split
distributed April 18, 1997.
5. Recent Accounting Pronouncements
Effective January 1, 1998, the Corporation adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general purpose financial statements. Under SFAS No. 130, comprehensive
income consists of net income and other comprehensive income. Other
comprehensive income includes items previously recorded directly in equity,
such as unrealized gains or losses on securities available for sale.
Comparative financial statements provided for earlier periods are required
to be reclassified to reflect application of the provisions of SFAS No.
130.
SFAS No. 130 requires total comprehensive income and its components to be
displayed on the face of a financial statement for annual financial
statements. For interim financial statements, SFAS No. 130 requires only
total comprehensive income to be reported and allows such disclosure to be
presented in the notes to the interim financial statements.
For the three month periods ended September 30, 1998 and 1997 total
comprehensive income amounted to $838 Thousand and $711 Thousand,
respectively.
For the nine month periods ended September 30, 1998 and 1997 total
comprehensive income amounted to $2.506 Million and $2.120 Million,
respectively.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards and disclosure
requirements for the way companies report information about operating
segments, including related product information. Operating segments are
defined based upon the way management organizes segments for making
operations decisions and evaluating performance. Information such as
segment net earnings, revenues, expense items and certain balance sheet
amounts are required to be presented. These amounts are to be reconciled
to the Corporation's combined financial information. SFAS No. 131 is
effective for financial statements issued for annual periods ending after
December 15, 1998 and interim periods beginning in 1999.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits." This Statement
standardizes the disclosure requirements for pension and other
postretirement benefits by requiring additional information that will
facilitate financial analysis, and eliminating certain disclosures that are
considered no longer useful. SFAS No. 132 supersedes the disclosure
requirements in SFAS Nos. 87, 88 and 106. This Statement is effective for
fiscal years beginning after December 15, 1997 and will be adopted December
31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting
and reporting standards for derivative instruments, and for hedging
activities. SFAS No. 133 supersedes the disclosure requirements in SFAS
Nos. 80, 105, and 119. This Statement is effective for periods after June
15, 1999. The adoption of SFAS No. 133 is not expected to have a material
impact on the financial position or results of operations of the
Corporation.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise." This Statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities", to require that
after the securitization of mortgage loans held for sale, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and intent to
sell or hold those investments. This Statement is effective for the first
fiscal quarter beginning after December 15, 1998. The adoption of SFAS No.
134 is not expected to have a material impact on the financial position or
results of operations of the Corporation.
6. Other Significant Matters
On September 17, 1998, the Corporation entered into an agreement with
Commerce Bancorp, Inc. (Commerce) whereby the Corporation would be merged
with and into Commerce in a stock-for-stock exchange which is expected to
close during the first quarter of 1999 and be accounted for as a pooling of
interests.
Prestige Financial Corp. and Subsidiary
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Financial Condition
At September 30, 1998, total assets had reached $321.9 Million which was a
$38.3 Million, or 13.5%, increase as compared to the December 31, 1997
balance of $283.6 Million; and a $53.4 Million, or 19.9%, increase when
compared to the September 30, 1997 balance of $268.5 Million. This growth
was funded primarily from deposits (mainly "core" demand and time accounts)
which increased by $35.3 Million, or 13.4%, to $298.4 Million at September
30, 1998 as compared to $263.2 Million at December 31, 1997; and by $49.6
Million, or 19.9%, when compared to the September 30, 1997 balance of
$248.8 Million. The June 1998 opening of the Corporation's eighth office,
in a bank building on Main Street in Somerville, NJ that is listed on the
National Register of Historic Places, contributed to this growth as did the
opening of a branch in the western portion of Clinton Township in August
1997 and the opening of free standing and supermarket branches located in
the "Prestige Plaza" shopping center in Raritan Township in May 1997.
Total Stockholders' Equity stood at $21.8 Million as of September 30, 1998
and was $2.9 Million, or 15.3%, higher than the year-end 1997 balance of
$18.9 Million; and $3.6 Million, or 19.7%, higher than the September 30,
1997 balance of $18.2 Million. These increases were primarily attributable
to increased 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), partially offset by
cash dividends paid. The Plan was terminated in September 1997 as a result
of the agreement to merge with and into Commerce Bancorp, Inc. described on
page eleven. The increase in stockholders' equity was achieved despite
cash dividends paid totaling $945 Thousand in the first nine months of
1998, up $257 Thousand or 37.4% from $688 Thousand in the first nine months
of 1997. The Corporation has paid consecutive quarterly cash dividends
since March 31, 1995 and last increased the dividend rate in March 1998 to
$.08 per share from $.075 per share.
Within the asset composition, the above growth was primarily utilized to
fund increases in the loan and investment portfolios. As of September 30,
1998 outstanding loans, including loans held for sale, totaled $195.5
Million which was $37.6 Million, or 23.8%, more than the December 31, 1997
balance of $157.9 Million; and $37.4 Million, or 23.7%, greater than the
September 30, 1997 balance of $158.1 Million. Loan growth occurred
primarily in the commercial mortgage and tax exempt municipal loan
categories, and to a lesser degree in the indirect consumer and home equity
portfolios.
Loans held for sale totaled $8.8 Million at September 30, 1998 vs. $16.3
Million at December 31, 1997 and $14.6 Million at September 30, 1997.
Loans held for sale are comprised primarily of SBA loans which provide
attractive yields as well as a ready source of liquidity and potential
gains on sales. Recognized as the leading SBA lender in New Jersey in 1996
and 1995, the Bank carries the designation of "Preferred Lender" in New
York as well as New Jersey, where it remains among the State's top lenders.
Preferred Lender status enables the Bank to streamline the SBA loan
application and approval process for qualified borrowers.
Investment securities at September 30, 1998 amounted to $99.3 Million, an
increase of $4.5 Million, or 4.7% as compared to the December 31, 1997
balance of $94.8 Million; and an increase of $10.0 Million, or 11.2%, when
compared with the September 30, 1997 balance of $89.3 Million. This growth
resulted primarily from the purchase of securities issued by the United
States government and its agencies, including mortgage-backed securities.
At September 30, 1998, other assets totaled $5.4 Million versus the
December 31, 1997 balance of $5.6 Million, and the September 30, 1997
balance of $5.1 Million. Other assets consist primarily of investments in
corporate owned life insurance.
At September 30, 1998, the allowance for possible loan losses stood at $2.2
Million --$362 Thousand more than the year-end 1997 figure of $1.8 Million
and $431 Thousand more than the September 30, 1997 balance of $1.769
Million. The change in the first nine months of 1998 from year-end 1997
resulted from provisions of $636 Thousand and net charge-offs of $274
Thousand. The allowance as a percentage of total outstanding loans as of
September 30, 1998 was 1.13% as compared to 1.16% as of December 31, 1997,
and 1.12% as of September 30, 1997.
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 $1.5 Million at September 30, 1998
compared with $1.1 Million at December 31, 1997 and $1.2 Million at
September 30, 1997. Non-accrual loans (also classified as impaired loans)
totaled $902 Thousand (.46% of total loans) as of September 30, 1998 as
compared to $874 Thousand (.55% of total loans) as of December 31, 1997,
and $688 Thousand (.44% of total loans) as of September 30, 1997. Of the
$902 Thousand in non-accrual loans at September 30, 1998, $104 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 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. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
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 risk associated with each
category. In general, less capital is required for a less risky asset
composition.
At September 30, 1998, the Corporation's and the Bank's core (Tier 1) risk-
based capital ratios were 9.92% and 9.00%, respectively, versus 10.78% and
9.85% at December 31, 1997; and 10.81% and 9.92% at September 30, 1997.
These ratios compare favorably to a minimum of 4% as required by the FRB
and the FDIC.
At September 30, 1998, the Corporation's and the Bank's total (Tier 1 plus
Tier 2) risk-based capital ratios were 10.92% and 10.02%, respectively,
versus 11.83% and 10.91% at December 31, 1997; and 11.86% and 10.97% at
September 30, 1997. 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 financial institutions to maintain
a minimum leverage ratio of 4% to 5%, depending upon the condition of the
institution.
At September 30, 1998, the Corporation's and the Bank's leverage ratios
were 6.89% and 6.24%, respectively, versus 6.75% and 6.26% at December 31,
1997; and 6.97% and 6.43% at September 30, 1997. Again, these ratios
compare favorably with existing guidelines established by the FRB and the
FDIC.
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 judgments by the regulatory
authorities about capital components, risk weightings and other factors.
Management believes that, as of September 30, 1998, the Corporation 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.
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.
So far, virtually all funding needs have been met via the acquisition of
deposits, and not through other sources such as borrowings or securities
sold under repurchase agreements. In addition, 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 294% for September 30, 1998, versus 390% for December 31, 1997,
and versus 332% for September 30, 1997. All of these are considered by
management to be satisfactory.
Results of Operations
Net income for the first nine months of 1998 amounted to $2.5 Million
compared to $2.1 Million for the same period in 1997. Related diluted
earnings-per-share data were: $0.55 per share for the first nine months of
1998 versus $0.49 per share for the same period in 1997. The annualized
return on average assets was 1.12% and 1.15% for the first nine months of
1998 and 1997, respectively. The annualized return on average shareholders'
equity was 16.24% and 16.70% for the first nine months of 1998 and 1997,
respectively.
Net income for the quarter ended September 30, 1998 was $850 Thousand
compared to $711 Thousand for the same period in 1997. Related diluted
earnings per share were: $0.19 per share for the third quarter of 1998
versus $0.16 per share for the same period in 1997. The annualized return
on average assets was 1.08% and 1.09% for the third quarter of 1998 and
1997, respectively. The annualized return on average shareholders' equity
was 15.69% and 16.07% for the third quarter of 1998 and 1997, respectively.
Net Interest Income.
The $789 Thousand, or 9.9%, increase in net interest income reflected in
the first nine months of 1998 (at $8.7 Million) over the same period in
1997 (at $7.9 Million) was attributable to an increase in earning asset
volume. The net interest margin for the nine months ended September 30,
1998 declined to 4.27% from 4.55%, primarily as a result of declines in
earning asset yields.
The $286 Thousand, or 10.1%, increase in net interest income reflected in
the third quarter of 1998 (at $3.1 Million) over the same period in 1997
(at $2.8 Million) was attributable to the same factors as discussed in the
above comparisons of the first nine months of 1998 and 1997.
Noninterest Income.
For the first nine months of 1998 noninterest income increased $329
Thousand or 17.2% to $2.2 Million, up from $1.9 Million for the same period
in 1997.
The Corporation received data processing credits totaling $180 Thousand in
the first nine months of 1998 included in other income as a result of
participation in software development and testing with a third party
vendor. Credits received during the nine months ended September 30, 1997
totaled $51 Thousand. As a result of the agreement to merge with and into
Commerce Bancorp, Inc. described on page eleven, the Corporation is
concluding its participation in this program and beginning in November
1998, will no longer be receiving these data processing credits.
Income resulting from increases in the cash surrender value of corporate
owned life insurance was $116 Thousand greater for the nine months ended
September 30, 1998 than for the same period a year ago. The underlying
policies were purchased in February 1997.
Also within other income, fees generated by a new retail investment
subsidiary, PFC Financial Services, Inc., totaled $91 Thousand for the nine
months ended September 30, 1998. PFC Financial Services commenced
operations in January 1998.
Service charges on deposit accounts contributed another $72 Thousand to the
increase in noninterest income for the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997 primarily as a result
of increased volume of business accounts and related service offerings.
The above increases in noninterest income were offset by a decline in gains
from sales of loans which amounted to $1.3 Million during the first nine
months of 1998 versus $1.4 Million in the first nine months of 1997. This
decrease is attributable to reductions in average premiums on sold loans.
For the third quarter of 1998, noninterest income increased $78 Thousand or
11.6% to $751 Thousand, up from $673 Thousand for the same period in 1997.
This increase was attributable to the same factors as discussed in the
above comparisons of the first nine months of 1998 and 1997.
Noninterest Expense.
For the first nine months of 1998 as compared to the same period in 1997,
total noninterest expense increased by $708 Thousand, or 11.7%, to $6.7
Million from $6.0 Million.
Salaries and benefits accounted for $444 Thousand of the above increase due
to the January 1 effective date for all pay increases, the addition of
personnel to staff the Corporation's larger branch network and service a
growing customer base, and the adoption of a supplemental executive
retirement plan in February 1997.
Occupancy related expenses increased $139 Thousand for the first nine
months of 1998 versus the same period in 1997 due to the opening of the
Corporation's eighth office, on Main Street in Somerville in June 1998, the
opening of a branch in the western portion of Clinton Township in August
1997 and the opening of free standing and supermarket branches located in
the "Prestige Plaza" shopping center in Raritan Township in May of 1997.
Data Processing costs contributed another $69 Thousand to the increase in
noninterest expense, primarily as a result of increased volume.
Directors compensation grew by $39 Thousand for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997 as
a result of the adoption of a non-tax qualified retirement plan for outside
directors in February 1997.
Other expenses grew by $105 Thousand for the nine months ended September
30, 1998 compared to the nine months ended September 30, 1997 primarily as
a result of volume related increases in lending expenses, telephone and
postage costs, and ATM fees.
Offsetting these increases in noninterest expense, advertising and business
development costs decreased by $88 Thousand for the nine months ended
September 30, 1998 versus the same period in 1997 as branch locations
opened in prior years mature and require somewhat less intensive marketing
efforts.
For the third quarter of 1998 as opposed to the same period in 1997, total
noninterest expenses rose by $167 Thousand, or 7.6%, to $2.4 Million from
2.2 Million. The increases in noninterest expense reflected in the third
quarter of 1998 over the same period in 1997 are attributable to the same
factors as discussed in the above comparisons of the first nine months of
1998 and 1997.
As some indication of the Corporation's control over noninterest expense
(though combining it with a measure of the Corporation's ability to produce
noninterest income), the "efficiency ratio" (noninterest expense divided by
the sum of taxable equivalent net interest income and noninterest income)
was 60% for the first nine months of 1998 vs. 60% for the first nine months
of 1997; and was 59% for the third quarter 1998 vs. 62% for the third
quarter 1997. More strictly directed at noninterest expense control, the
"overhead ratio" (annualized noninterest expense over average assets for
the period) improved to 3.02% from 3.26% for the first nine months of 1998
vs. the first nine months of 1997; and to 2.99% from 3.37% for the third
quarter 1998 vs. the third quarter 1997.
Provisions for Loan Losses.
For the first nine months of 1998 as compared to the first nine months of
1997, the provision for loan losses increased by $114 Thousand. For the
third quarter of 1998 as compared to the third quarter of 1997, the
provision for loan losses increased by $74 Thousand. Provisions are made
as necessary to maintain the allowance for loan losses at targeted levels
as measured against total loans and/or past due accounts. As discussed
previously, the Corporation's non-accrual loans at September 30, 1998
amounted to just .44% of total loans.
Income Tax Expense.
Provisions for income tax totaled $1.1 Million and $373 Thousand for the
nine and three months ended September 30, 1998, respectively, down from
$1.2 Million and $389 Thousand for the nine and three months ended
September 30, 1997, respectively. The Corporation's effective tax rate
declined to 30.5% for the nine months ended September 30, 1998 compared
with 35.8% for the nine months ended September 30, 1997. This decrease was
primarily attributable to an increase in tax exempt income associated with
municipal lending and an investment in corporate owned life insurance; and
the operations of PSB Investment Management, Inc. 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% state income tax rate to which the Bank and
the Corporation are subject.
Year 2000 Compliance Issues.
The Year 2000 problem is the result of computer programs being written
using two digits rather than four to determine the applicable year.
Programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations. The Year 2000 issue extends beyond individual
companies to include the effect on other companies with which they do
business or by which they may be affected. The Corporation has conducted a
comprehensive review of its computer systems and third-party vendors to
identify the processes that could be affected by the Year 2000 issue and is
devoting the necessary internal and external resources to implement a plan
to address Year 2000 issues. Because the Corporation's primary operating
software is obtained and maintained by external software providers under
maintenance agreements or is already Year 2000 compliant, the Corporation
has not invested any material amounts to convert critical mainframe and PC-
based operating systems and software to Year 2000 compliant hardware and
software. Management anticipates that all operations affected by Year 2000
issues will be tested and compliant in advance of Year 2000 and will meet
all regulatory milestones. Related expenditures in future years to
complete systems projects and ensure Year 2000 compliance are not
expected by management to have a material impact on the Corporation's
financial position, results of operations or cash flow.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to information required regarding
quantitative and qualitative disclosures about market risk from the end of
the preceding fiscal year to the date of the most recent interim balance
sheet (September 30, 1998.)
Part II Other Information
Item 6. Exhibits and reports on Form 8-K
(a)(2.1) Plan of Acquisition Between Prestige State Bank and Prestige
Financial Corp. (1)
(a)(2.2) Agreement and Plan of Reorganization between Prestige Financial
Corp. and Commerce Bancorp, Inc. dated September 17, 1998,
as amended. (2)
(a)(3.1) Certificate of Incorporation of the Registrant. (1)
(a)(3.2) Bylaws of the Registrant. (1)
(a)(10) There were no material contracts entered into during the quarter
ended September 30, 1998.
(a)(11) Statement on Computation of per-share earnings
Please refer to footnote four on page eight of this Form 10-Q.
(a)(27) Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
(1) Previously filed with the Corporation's Form S-4, File No. 33-59752,
and incorporated in the Corporation's 1997 Report on Form 10-K by
reference.
(2) Incorporated by reference from the Form S-4 Registration Statement of
Commerce Bancorp, Inc., File No. 333-66915.
Prestige Financial Corp.
Signatures
Pursuant to the requirements 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 and
Treasurer/Principal
Financial Officer
Date: November 12, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 10938
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7176
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18003
<INVESTMENTS-CARRYING> 81255
<INVESTMENTS-MARKET> 82147
<LOANS> 195533
<ALLOWANCE> 2200
<TOTAL-ASSETS> 321907
<DEPOSITS> 298443
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1686
<LONG-TERM> 0
0
0
<COMMON> 43
<OTHER-SE> 21735
<TOTAL-LIABILITIES-AND-EQUITY> 321907
<INTEREST-LOAN> 11757
<INTEREST-INVEST> 4482
<INTEREST-OTHER> 271
<INTEREST-TOTAL> 16510
<INTEREST-DEPOSIT> 7782
<INTEREST-EXPENSE> 7785
<INTEREST-INCOME-NET> 8725
<LOAN-LOSSES> 636
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6737
<INCOME-PRETAX> 3597
<INCOME-PRE-EXTRAORDINARY> 3597
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2499
<EPS-PRIMARY> .59
<EPS-DILUTED> .55
<YIELD-ACTUAL> 4.27
<LOANS-NON> 902
<LOANS-PAST> 624
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1838
<CHARGE-OFFS> 316
<RECOVERIES> 42
<ALLOWANCE-CLOSE> 2200
<ALLOWANCE-DOMESTIC> 2200
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 260
</TABLE>
