UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(XX) 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, 1997
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. Yes _XX_ 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, 1998, was approximately
$50,779,359.
The number of shares outstanding of the Registrant's Common Stock, being
the only class of capital stock outstanding, as of March 10, 1998 was 3,329,794.
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 7 -
25 of the Annual Report to security holders of Prestige Financial Corp. for the
year ended December 31, 1997 are incorporated by reference into Parts I, II and
IV of the Form 10-K; (2) the definitive Proxy Statement for the 1998 Annual
Meeting of shareholders to be filed with the Commission prior to April 30, 1998,
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.
<PAGE>
PRESTIGE FINANCIAL CORP.
1997 FORM 10-K
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business........................................................... 3
Item 2. Properties......................................................... 12
Item 3. Legal Proceedings.................................................. 12
Item 4. Submission of Matters to a Vote of
Security Holders................................................... 12
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................................ 12
Item 6. Selected Financial Data............................................ 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 15
Item 7a. Quantitative and Qualitative Disclosures About Market Risk......... 27
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 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.
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. Recent census information reveals that Somerset and Hunterdon Counties
ranked number one and two, respectively, in terms of growth rates for the
1990's.
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
3
<PAGE>
companies, financial affiliates of industrial companies and government agencies
provide additional competition for loans and for many other financial services.
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.
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.
C. Regulatory Matters.
Please refer to Note 9, on page 17 and Note 11, on page 19 of the Corporation's
1997 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 1997, 1996, and
1995. Net interest income 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>
<TABLE>
<CAPTION>
PRESTIGE FINANCIAL CORP
AVERAGE BALANCE SHEET WITH INTEREST AND AVERAGE RATES
(dollars in thousands)
Years Ended December 31,
1997 1996
----------------------------------- ---------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
----------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Investment securities:
Taxable $77,132 $5,041 6.54% $56,731 $3,590 6.33%
Non-taxable 5,216 271 5.20% 3,931 152 3.87%
Federal funds sold and short-term investments 8,213 446 5.43% 8,110 428 5.28%
Loans net of unearned 148,631 14,075 9.47% 124,778 11,947 9.57%
-------- ------- ---- -------- ------ ----
Total interest-earning assets 239,192 19,833 8.29% 193,550 16,117 8.33%
-------- ------- ---- -------- ------ ----
Noninterest-earning assets
Cash and due from banks 7,430 5,832
Other assets 9,474 4,652
Allowance for possible loan losses (1,754) (1,453)
-------- --------
Total noninterest-earning assets 15,150 9,031
-------- --------
Total assets $254,342 $202,581
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts 18,476 431 2.33% 10,747 257 2.39%
Money Market accounts 28,452 1,024 3.60% 19,504 608 3.12%
Savings accounts 39,413 1,469 3.73% 30,436 1,100 3.61%
Certificates of deposit 111,414 6,193 5.56% 100,838 5,600 5.55%
Short-term borrowings 33 2 6.06% 50 3 6.00%
-------- ------- ---- -------- ------ ----
Total interest-bearing liabilities 197,788 9,119 4.61% 161,575 7,568 4.68%
-------- ------- ---- -------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 37,947 26,100
Other liabilities 1,282 1,059
-------- --------
Total noninterest-bearing liabilities 39,229 27,159
-------- --------
Stockholders' equity 17,325 13,847
-------- --------
Total liabilities and stockholders' equity $254,342 $202,581
======== ========
Net interest income $10,714 $8,549
======= ======
Net interest spread 3.68% 3.65%
==== ====
Net interest income as percent of earning assets 4.48% 4.42%
==== ====
<CAPTION>
Years Ended December 31,
1995
-------------------------------------
Interest Average
Average Income/ Yield/
Balance Expense Rate
-------------------------------------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Investment securities:
Taxable $27,287 $1,625 5.96%
Non-taxable 2,885 182 6.31%
Federal funds sold and short-term investments 7,614 443 5.82%
Loans net of unearned 104,205 10,098 9.69%
-------- ------ ----
Total interest-earning assets 141,991 12,348 8.70%
-------- ------ ----
Noninterest-earning assets
Cash and due from banks 4,199
Other assets 3,969
Allowance for possible loan losses (1,214)
--------
Total noninterest-earning assets 6,954
--------
Total assets $148,945
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW accounts 8,232 217 2.64%
Money Market accounts 16,259 550 3.38%
Savings accounts 22,179 793 3.58%
Certificates of deposit 73,687 4,148 5.63%
Short-term borrowings 7 1 5.96%
-------- ------ ----
Total interest-bearing liabilities 120,364 5,709 4.74%
-------- ------ ----
Noninterest-bearing liabilities:
Demand deposits 17,352
Other liabilities 827
--------
Total noninterest-bearing liabilities 18,179
--------
Stockholders' equity 10,402
--------
Total liabilities and stockholders' equity $148,945
========
Net interest income $6,639
======
Net interest spread 3.96%
====
Net interest income as percent of earning assets 4.68%
====
</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.
<TABLE>
<CAPTION>
ANALYSIS OF VARIANCE IN NET INTEREST INCOME
DUE TO CHANGES IN VOLUME AND RATES
(dollars in thousands)
1997/1996 1996/1995
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 $ 1,330 $ 121 $ 1,451 $ 1,857 $ 108 $ 1,965
Non-taxable 59 60 119 55 (85) (30)
Federal funds sold and short-term investments 5 13 18 28 (43) (15)
Loans net of unearned 2,260 (132) 2,128 1,971 (122) 1,849
------- ------- ------- ------- ------- -------
Total interest-earning assets 3,654 62 3,716 3,911 (142) 3,769
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
NOW accounts 180 (6) 174 62 (22) 40
Money Market accounts 311 105 416 104 (46) 58
Savings accounts 334 35 369 298 9 307
Certificates of deposit 588 5 593 1,509 (57) 1,452
Short-term borrowings (1) 0 (1) 2 -- 2
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 1,412 139 1,551 1,975 (116) 1,859
------- ------- ------- ------- ------- -------
Change in net interest income $ 2,242 ($ 77) $ 2,165 $ 1,936 ($ 26) $ 1,910
======= ======= ======= ======= ======= =======
</TABLE>
6
<PAGE>
II. Investment Portfolio
(dollars in thousands)
INVESTMENT COMPOSITION
Book Value as of
December 31,
1997 1996 1995
------- ------- -------
U.S. Treasury and $87,815 $64,658 $41,200
U.S. Government agencies
State and political subdivisions 6,618 3,931 1,460
Other Securities 385 285 610
------- ------- -------
Total investment securities $94,818 $68,874 $43,270
======= ======= =======
<TABLE>
<CAPTION>
Book Value as of December 31, 1997
Over Over
1 year 1 year to 5 5 years to 10 Over
Contractual maturities or less years years 10 years Total
- -------------------------------- ------- ----------- ------------- -------- -----
<S> <C> <C> <C> <C> <C>
U.S. Treasury and $ 1,680 $16,136 $16,859 $53,140 $87,815
U.S. Government agencies
State and political subdivisions 5,288 281 -- $ 1,049 6,618
Other Securities -- -- 110 275 385
------- ------- ------- ------- -------
Total investment securities $ 6,968 $16,417 $16,969 $54,464 $94,818
======= ======= ======= ======= =======
Weighted average yield on a
tax-equivalent basis 6.55% 6.50% 6.86% 6.76% 6.77%
======= ======= ======= ======= =======
</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, 1997 are as follows:
Book Market
Value Value
------- -------
FHLMC $ 6,405 $ 6,481
FHLB $13,820 $13,807
FNMA $20,234 $20,346
GNMA $27,810 $27,937
SBA $17,866 $18,032
Raritan Township $ 2,589 $ 2,589
7
<PAGE>
III. Loan Portfolio
(dollars in thousands)
<TABLE>
<CAPTION>
LOAN COMPOSITION
December 31,
1997 1996 1995 1994 1993
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Domestic:
Commercial $ 57,436 $ 55,676 $ 42,699 $ 27,901 $ 19,364
Real estate - construction 7,836 7,951 5,020 6,301 5,204
Real estate - mortgage 60,850 47,696 39,768 35,845 33,167
Consumer 31,809 27,145 26,101 23,564 17,109
-------- -------- -------- -------- --------
Net of deferred loan fees and discounts 157,931 138,468 113,588 93,611 74,844
Less Allowance for loan losses 1,838 1,592 1,325 1,077 1,058
-------- -------- -------- -------- --------
Net Loans $156,093 $136,876 $112,263 $ 92,534 $ 73,786
======== ======== ======== ======== ========
</TABLE>
THE MATURITIES OF COMMERCIAL AND REAL ESTATE - CONSTRUCTION LOANS
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
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 $ 1,431 $15,364 $ 7,621 $24,416 $22,985
Real estate - construction -- -- -- -- --
------- ------- ------- ------- -------
1,431 15,364 7,621 24,416 22,985
Variable Rate:
Commercial 5,746 5,117 22,157 33,020 27,274
Real estate - construction 5,206 2,630 -- 7,836 2,630
------- ------- ------- ------- -------
10,952 7,747 22,157 40,856 29,904
------- ------- ------- ------- -------
Grand Total $12,383 $23,111 $29,778 $65,272
======= ======= ======= =======
Total of Maturities over 1 Year $23,111 $29,778 $52,889
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
RISK ELEMENTS - NON PERFORMING LOANS
December 31,
1997 1996 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $920 $454 $11 $637 $497
Accruing loans past due 90 days or more 154 356 11 -- --
Troubled debt restructurings -- -- -- -- --
------------------------------------------------------------------
$1,074 $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, 1997 was approximately $73,000.
8
<PAGE>
IV. Summary of Loan Loss Experience
(dollars in thousands)
<TABLE>
<CAPTION>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Years Ended December 31,
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period $1,592 $1,325 $1,077 $1,058 $ 654
------ ------ ------ ------ ------
Charge-offs:
Commercial 393 227 52 75 26
Real estate-construction -- -- -- -- --
Real estate-mortgage -- -- 15 -- --
Consumer 123 33 37 13 23
------ ------ ------ ------ ------
516 260 104 88 49
------ ------ ------ ------ ------
Recoveries:
Commercial 12 10 -- 1 --
Real estate-construction -- -- -- -- --
Real estate-mortgage -- -- -- -- --
Consumer 5 1 2 6 2
------ ------ ------ ------ ------
17 11 2 7 2
------ ------ ------ ------ ------
Net charge-offs 499 249 102 81 47
------ ------ ------ ------ ------
Additions charged to operations 745 516 350 100 451
------ ------ ------ ------ ------
Balance at end of period $1,838 $1,592 $1,325 $1,077 $1,058
------ ------ ------ ------ ------
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.34% 0.20% 0.10% 0.10% 0.07%
------ ------ ------ ------ ------
</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.
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(dollars in thousands)
--------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
--------------------------------------------------------------------------------------------
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
to total to total to total to total to total
Balance at end of period applicable to: loans loans loans loans loans
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 827 36.37% $ 762 40.55% $ 410 37.59% $ 63 29.81% $ 158 25.87%
Real estate-construction 78 4.96% 79 5.74% 50 4.42% 96 6.73% 56 6.95%
Real estate-mortgage 577 38.53% 406 34.45% 499 35.01% 306 38.29% 372 44.32%
Consumer 160 20.14% 155 19.26% 135 22.98% 104 25.17% 184 22.86%
Unallocated 196 N/A 190 N/A 231 N/A 508 N/A 288 N/A
--------------------------------------------------------------------------------------------
Total $1,838 100.00% $1,592 100.00% $1,325 100.00% $1,077 100.00% $1,058 100.00%
============================================================================================
</TABLE>
10
<PAGE>
V. Deposits
<TABLE>
<CAPTION>
DEPOSIT COMPOSITION - AVERAGE BALANCES
(dollars in thousands)
Years Ended December 31,
----------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
1997 1997 1996 1996 1995 1995
-------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Demand $ 37,947 --% $ 26,100 --% $ 17,352 --%
NOW accounts 18,476 2.33% 10,747 2.39% 8,232 2.64%
Money Market accounts 28,452 3.60% 19,504 3.12% 16,259 3.38%
Savings accounts 39,413 3.73% 30,436 3.61% 22,179 3.58%
Certificates of deposit 111,414 5.56% 100,838 5.55% 73,687 5.63%
-------- -------- --------
Total Deposits $235,702 3.87% $187,625 4.03% $137,709 4.15%
======== ======== ========
</TABLE>
At December 31, 1997 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 $ 5,614 $ 4,851 $10,465
Over 3 months to 6 months 3,976 3,444 7,420
Over 6 months to 12 months 605 7,243 7,848
Over 12 months 100 3,496 3,596
-------
$29,329
=======
In the total of $29,329,000, $10,295,000 are "negotiable" as to their rate and
maturity. The remaining $19,034,000 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 operates out of its main office location at One Royal Road,
within Raritan Township, New Jersey and six branch locations in Hunterdon and
Somerset counties. An additional branch is planned for 1998 opening in
Somerville, New Jersey. Application for the proposed branch has been reviewed
and approved by the F.D.I.C. and the New Jersey State Department of Banking and
Insurance.
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. Leases expire at
various dates through 2007 but contain certain 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 1997 Annual Report which are incorporated herein by reference.
ITEM 3 -- LEGAL PROCEEDINGS.
Please see Note 10 - "Contingencies", on page 19 of the Corporation's 1997
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 25 of the Corporation's 1997
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 its
subsidiaries as of and for the years ended December 31, 1997, 1996, 1995, 1994,
and 1993 was derived from the audited consolidated financial statements of the
Corporation and its subsidiaries. Such selected consolidated financial data for
each of the years in the three year period ended December 31, 1997 should be
read in conjunction with the Corporation's consolidated financial statements
12
<PAGE>
and related notes on pages 7 - 23 of the Corporation's 1997 Annual Report which
are incorporated herein by reference. All per share amounts have been adjusted
to reflect the six-for-five stock split effective on April 18, 1997, 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, 1997 1996 1995 1994 1993
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Summary of Income
Interest income $19,722 $16,039 $12,254 $8,189 $6,655
Interest expense 9,119 7,568 5,709 3,327 2,706
--------------------------------------------------------------------------
Net interest income 10,603 8,471 6,545 4,862 3,949
Provision for loan losses 745 516 350 100 451
--------------------------------------------------------------------------
Income from earning assets 9,858 7,955 6,195 4,762 3,498
Other income 2,500 1,536 700 563 525
Other expense 8,457 6,222 4,898 4,124 3,276
--------------------------------------------------------------------------
Income before income tax expense 3,901 3,269 1,997 1,201 747
Provision for income taxes 1,197 1,226 825 491 287
Cumulative effect of accounting change -- -- -- -- 63
--------------------------------------------------------------------------
Net income $2,704 $2,043 $1,172 $710 $523
====================================================================================================================================
Balance Sheet Data
Investments $94,818 $68,874 $43,270 $22,541 $22,733
Total loans, net 156,093 136,876 112,263 92,534 73,786
Total assets 283,587 229,517 176,382 132,572 109,636
Total deposits 263,156 212,596 163,517 122,439 100,112
Stockholders' equity $18,889 $15,710 $12,058 $9,505 $8,951
====================================================================================================================================
Cash Dividends Declared
Common stock cash dividends $1,016 $620 $229 $118 $65
Preferred stock cash dividends -- -- 73 45 40
--------------------------------------------------------------------------
Total cash dividends declared $1,016 $620 $302 $163 $105
Cash dividends to net income 38% 30% 26% 23% 20%
====================================================================================================================================
Cash Dividends Per Common Share
Cash dividends declared $0.33 $0.21 $0.08 $0.05 $0.03
====================================================================================================================================
Earnings Per Common Share
Basic $0.83 $0.66 $0.41 $0.26 $0.19
Diluted $0.78 $0.63 $0.40 $0.26 $0.19
====================================================================================================================================
Weighted Average Common Shares Outstanding
Basic 3,242,536 3,073,968 2,651,311 2,589,123 2,487,158
Diluted 3,478,449 3,241,523 2,751,793 2,589,123 2,487,158
====================================================================================================================================
Operating Ratios
Return on average assets 1.06% 1.01% 0.79% 0.61% 0.55%
Return on average equity 15.60% 14.75% 11.27% 7.72% 6.13%
====================================================================================================================================
Book Value Per Common Share
<S> <C> <C> <C> <C> <C>
Book value (at year end) $5.71 $4.92 $4.08 $3.32 $3.11
====================================================================================================================================
Non-Financial Information
Record owners of common stock 762 672 501 496 516
Full-time equivalent employees 87 65 51 45 35
====================================================================================================================================
</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
7 - 25 of the Corporation's 1997 Annual Report which are incorporated herein by
reference.
1997 compared with 1996
Financial Condition
As of December 31, 1997 total assets had grown by $54.1 Million, or 23.6%, to
$283.6 Million as compared to $229.5 Million at December 31, 1996. This growth
was funded primarily from deposits (mainly "core" demand and time accounts)
which increased by $50.6 Million or 23.8% to $263.2 Million at December 31, 1997
from $212.6 Million at December 31, 1996. Branch openings in the western portion
of Clinton Township in August 1997, in the eastern portion of Clinton Township
in May 1996, and the opening of free standing and supermarket branches located
in the "Prestige Plaza" shopping center containing an Edwards Food Store in
Raritan Township in May of 1997 contributed to this growth as did several CD
promotions.
Total stockholders' equity increased by $3.2 Million, or 20.4%, to $18.9 Million
at December 31, 1997 from $15.7 Million at December 31, 1996 primarily 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). 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. The increase in stockholders'
equity was achieved despite cash dividends paid totaling $1.0 Million, or $.31
per weighted average share outstanding in 1997, up from $.6 Million, or $.20 per
weighted average share outstanding in 1996. The Corporation has paid consecutive
quarterly cash dividends since March 31, 1995 and increased the dividend rate to
$.075 per share from $.05 per share in March 1997.
Within the asset composition, the above growth was primarily utilized to fund
increases in the loan and investment portfolios. For the year ended December 31,
1997 total outstanding loans, including loans available for sale, rose by $19.4
Million, or 14.0%, to $157.9 Million from $138.5 Million at December 31, 1996,
despite the sale of $36.9 Million in Small Business Administration (SBA) loans,
residential mortgage loans and participations of loans to other financial
institutions in 1997.
Loan growth took place primarily in the commercial loan and commercial mortgage
categories, where December 31, 1997 balances showed increases of approximately
$14.3 Million over December 31, 1996. Much of this commercial loan growth is
attributable to the Bank's increased efforts in meeting the demand for tax
exempt loans in our developing market area of Hunterdon and Somerset counties.
Growth in residential mortgages, second mortgages and home equity loans
contributed another $5.0 Million to the increase in the loan portfolio at
15
<PAGE>
December 31, 1997 as the Bank's Mortgage Division has matured and the Bank has
added new equity loan products to satisfy its customers' requirements.
Loans held for sale totaled $16.3 Million at December 31, 1997 compared with
$15.0 Million at December 31, 1996. The loans held for sale category is
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 and Pennsylvania 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 (all classified as held to maturity) increased by $25.9
Million, or 37.6%, to $94.8 Million at December 31, 1997 from $68.9 Million at
December 31, 1996. This growth was primarily due to the purchase of securities
issued by the United States government and its agencies, including
mortgage-backed securities, notes and SBA guaranteed loan pool certificates.
At December 31, 1997, other assets totaled $5.6 Million, up $4.4 Million from
the December 31, 1996 balance of $1.2 Million. This increase is primarily
attributable to investments in corporate owned life insurance made in February,
1997 and subsequent increases in cash surrender value which contributed to the
Corporation's net income.
For the year ended December 31, 1997, the allowance for loan losses increased by
$246.1 Thousand as a result of provisions totaling $744.5 Thousand, less net
charge-offs of $498.4 Thousand. The allowance amounted to 1.16% of total
outstanding loans as of December 31, 1997 as compared to 1.15% of loans as of
December 31, 1996.
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 $1.1 Million at December 31, 1997 compared with
$810 Thousand at December 31, 1996. Non-accrual loans (also classified as
impaired loans) totaled $920 Thousand (.58% of total loans) as of December 31,
1997 as compared to $454 Thousand (.33% of total loans) as of December 31, 1996.
Of the $920 Thousand in non-accrual loans at December 31, 1997, $160 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.
16
<PAGE>
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 December 31, 1997, the Corporation's and the Bank's core (Tier-1) risk-based
capital ratios were 10.78% and 9.85%, respectively, versus 11.69% and 10.89% as
of December 31, 1996. These ratios compare favorably to a minimum of 4% as
required by the FRB and the FDIC.
At December 31, 1997, the Corporation's and the Bank's total (Tier-1 plus Tier
2) risk-based capital ratios were 11.83% and 10.91%, respectively, versus 12.87%
and 12.08% as of December 31, 1996. 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, 1997, the Corporation's and the Bank's leverage ratios were
6.75% and 6.26%, respectively, versus 7.01% and 6.55% as of December 31, 1996.
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 December 31, 1997, 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 classification.
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.
17
<PAGE>
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 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 390% and 401% at December
31, 1997 and December 31, 1996, respectively. Both ratios were considered by
management to be satisfactory.
Market Risk - Interest Rate Sensitivity
Market risk is the risk of loss from adverse changes in market prices and rates.
The Corporation's market risk arises primarily from interest rate risk inherent
in its lending, investment and deposit taking activities. The Corporation's
profitability is affected by fluctuations in interest rates. A sudden and
substantial change in interest rates may adversely impact the Corporation's
earnings to the extent that the interest rates borne by assets and liabilities
do not change at the same speed, to the same extent or on the same basis.
Management and the Bank's Board of Directors actively monitor and manage the
Corporation's interest rate risk exposure by comparing each month's results with
policies that are reviewed and updated on at least an annual basis.
The Bank employs two primary approaches to interest rate risk measurement:
income simulation analysis and gap analysis. Income simulation analysis is the
more comprehensive tool as it considers the maturity and repricing
characteristics of assets and liabilities as well as the relative sensitivity of
these balance sheet components to interest rate fluctuations and attempts to
measure the projected responsiveness of net interest income to changes in
interest rate levels over several time frames.
Gap analysis measures the difference between interest sensitive assets and
interest sensitive liabilities in a number of time frames. 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.The following table shows the Corporation's
interest rate gap position at December 31, 1997:
18
<PAGE>
Interest Rate Gaps as of December 31, 1997
(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 and short-term investments $11,313 $ -- $ -- $ -- $ -- $ -- $11,313
Securities 35,021 8,155 9,666 24,848 17,128 -- 94,818
Loans held for sale 16,284 -- -- -- -- -- 16,284
Loans 36,644 1,677 4,181 78,871 20,274 -- 141,647
Other assets, net -- -- -- -- -- 19,525 19,525
---------------------------------------------------------------------------------
Total assets $99,262 $9,832 $13,847 $103,719 $37,402 $19,525 $283,587
---------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest-bearing deposits 114,797 26,602 35,524 38,607 31 -- 215,561
Noninterest-bearing deposits -- -- -- -- -- 47,595 47,595
Other liabilities -- -- -- -- -- 1,542 1,542
Stockholders' equity -- -- -- -- -- 18,889 18,889
---------------------------------------------------------------------------------
Total liabilities and stockholders' equity $114,797 $26,602 $35,524 $38,607 $31 $68,026 $283,587
---------------------------------------------------------------------------------
Interest rate sensitivity gap (15,535) (16,770) (21,677) 65,112 37,371 (48,501)
---------------------------------------------------------------------------------
Cumulative interest rate sensitivity gap ($15,535) ($32,305) ($53,982) $11,130 $48,501
---------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
As of December 31, 1997 there was a cumulative twelve month gap of a negative
$54.0 Million as compared to a negative $30.6 Million gap as of December 31,
1996. From this static gap 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.
As alluded to earlier, it is precisely these "dynamics" that are better
addressed by income simulation, and whose complexities make income simulation
the more meaningful method of measuring interest rate risk. The following table
shows the Corporation's estimated earnings sensitivity for the year ended
December 31, 1998. All market risk sensitive instruments considered in the
following table are held to maturity or available for sale. The Corporation has
no trading securities. Computation of prospective effects of hypothetical
interest rate changes in the following table are based on numerous assumptions,
including relative levels of market interest rates, loan prepayments and
deposits decay, and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate any actions the Corporation could
undertake in response to changes in in interest rates.
Income Simulation Analysis for the Twelve Months Ended December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Change in Projected Dollar Change in Percentage Change in
Interest Rates Net Interest Income Net Interest Income Net Interest Income
- -------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
300 basis point rise $14,483 $ 1,320 10.03%
200 basis point rise 14,020 858 6.52%
100 basis point rise 13,605 442 3.36%
Base scenario 13,163 -- --
100 basis point decline 12,719 (444) (3.37%)
200 basis point decline 12,116 (1,047) (7.95%)
300 basis point decline 11,491 (1,672) (12.70%)
</TABLE>
As of December 31, 1997 income simulation analysis for the next twelve months
projects a moderate dollar increase in net interest income in the event of an
increasing interest rate environment, and a slightly larger, yet acceptable,
dollar decrease in net interest income given a declining interest rate
environment.
20
<PAGE>
Results of Operations
Net income for the year ended December 31, 1997 amounted to $2.7 Million
compared to $2.0 Million for the year ended December 31, 1996. Related diluted
earnings-per-common-share data were: $.78 per share for 1997 versus $.63 per
share for 1996. These figures reflect the six-for-five stock split distributed
in April, 1997, and the five-for-four stock split distributed in April, 1996.
The return on average assets was 1.06% for 1997 as compared to 1.01% for 1996.
The return on average stockholders' equity was 15.60% for 1997 as compared to
14.75% for 1996.
Net Interest Income
Net interest income increased by $2.1 Million, or 25%, to $10.6 Million in 1997
from $8.5 Million in 1996. This increase was primarily due to an increase in
earning asset volume. In addition, average non-interest bearing demand deposits
rose by $11.8 Million during 1997 and accounted for 16.1% of average total
deposits in 1997 compared with 13.9% of average total deposits in 1996. As a
result, the overall weighted average interest rate paid on deposits declined to
3.87% in 1997 from 4.03% in 1996. The net interest margin on a taxable
equivalent basis was 4.48% for the year ended December 31, 1997, up from 4.42%
for the year ended December 31, 1996. This increase is attributable to a
slightly reduced overall rate paid on interest bearing liabilities as higher
costing time deposits declined to 56.3% of average interest bearing liabilities
for the year ended December 31, 1997 compared with 62.4% a year ago. This
funding has been replaced by less costly NOW and Money Market accounts which
represented 23.7% of average interest bearing liabilities for the year ended
December 31, 1997, up from 18.7% in 1996.
Non-Interest Income
Non-interest income for 1997 increased by $1.0 Million or 63% over 1996, to $2.5
Million from $1.5 Million. Net gains from the sales of loans (primarily SBA
loans) amounted to $1.8 Million during 1997 compared with $1.2 Million in 1996.
The increase in gains on loan sales was mainly attributable to a higher volume
of loans sold. The Corporation's residential mortgage division accounted for
$254 Thousand in gains on loan sales in 1997 versus $117 Thousand in gains in
1996.
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 or competition may
impact future growth, and therefore continues to focus on net interest margin as
the key element in future profit plans. Accordingly, management expects the
production of direct loans, including the ongoing origination and sale of
residential mortgage loans, to reduce reliance on sales of SBA loans and help
maintain a satisfactory net interest margin.
Also contributing to the increase in non-interest income were increases in
service charges on deposit accounts, primarily attributable to increased volume
of business accounts and related service offerings. These service charges
totaled $0.4 Million for
21
<PAGE>
the year ended December 31, 1997 compared with $0.3 Million for the year ended
December 31, 1996.
Other non-interest income increased to $0.4 Million for the year ended December
31, 1997, up from $0.1 Million for the year ended December 31, 1996. This
increase is primarily attributable to increases in the cash surrender value of
corporate owned life insurance policies purchased in the first quarter of 1997.
Non-Interest Expense
Total non-interest expense rose by $2.3 Million, or 36%, to $8.5 Million from
$6.2 Million in 1996. Most of the increase is attributable to the addition of
personnel and other costs related to the Corporation's continued growth
including additional branching.
For the year ended December 31, 1997, salaries and benefits totaled $3.9 Million
as compared to $3.1 Million for the year ended December 31, 1996 and accounted
for $0.8 Million of the increase in non-interest expense. Twenty-two full-time
equivalent employees were added during the year in order to staff the three
branch locations opened in 1997 and to better service the Corporation's growing
customer base.
For the year ended December 31, 1997, occupancy related expense totaled $1.8
Million as compared to $1.3 Million for the year ended December 31, 1996,
thereby accounting for $0.5 Million of the increase in non-interest expense.
This increase is primarily due to the opening of a branch in western Clinton
Township and free-standing and in-store branches in the new "Prestige Plaza"
shopping center on Route 31 in Clinton Township.
Data processing costs contributed another $0.1 Million to the increase in
non-interest expense for the year ended December 31, 1997 compared with the year
ended December 31, 1996, primarily as a result of increased volume.
Advertising and business development costs increased by $0.1 Million in 1997
over 1996 as the Corporation continues to expand marketing efforts in Hunterdon
and Somerset counties and surrounding environs.
Director compensation grew by $0.1 Million for the year ended December 31, 1997
compared with the year ended December 31, 1996, primarily as a result of the
adoption of a non-tax qualified retirement plan for outside directors in
February, 1997.
Additional increases in total non-interest expense in 1997 were attributable to
increases in consulting, legal and other professional fees which grew by $178
Thousand, increases in postage and telecommunications costs of $81 Thousand,
increases in printing, stationery and supplies expense of $46 Thousand, and
increases in loan operations charges of $40 Thousand. The foregoing increases
are all attributable to growth in the Corporation's asset size and customer
base. In addition, contributions increased by $31 Thousand in 1997 compared to
1996, primarily as a result of the Corporation's $25 Thousand gift to Hunterdon
Medical Center toward the development of a cancer center and other improvements.
22
<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 increased
slightly to 64% for the year ended December 31, 1997 from 62% for the year ended
December 31, 1996. More strictly directed at non-interest expense control, the
"overhead ratio" (non-interest expense divided by average assets) grew to 3.33%
for the year ended December 31, 1997 from 3.07% for the year 1996. These
increases are largely attributable to fixed costs due to the branch expansion
discussed above. Though acceptable even at current levels, management believes
these ratios will improve as economies of scale are realized and increased
revenues resulting from growth offset the fixed costs associated with branch
openings.
Provisions for Loan Losses
In 1997, the provision for loan losses increased by $229 Thousand to $745
Thousand from $516 Thousand in 1996. 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,
1997 and December 31, 1996 were .58% and .33% of total loans, respectively.
Income Tax Expense
Provisions for income tax totaled $1.2 Million in 1997 and 1996. The
Corporation's effective tax rate declined to 30.7% for the year ended December
31, 1997 from 37.5% for the year ended December 31, 1996. 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
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.
Impact of Year 2000
The Corporation is conducting a comprehensive review of its computer systems and
third party vendors to identify the processes that could be affected by the
"Year 2000" issue. The Year 2000 problem is the result of computer programs
being written using two digits rather than four to define 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 failure or
miscalculations. The Corporation is devoting the necessary internal and external
resources in the development of an implementation plan to address Year 2000.
Management anticipates that all Year 2000 initiatives and testing will be
completed in a timely manner and will meet all regulatory milestones. Related
expenditures in future years are not expected to have a material impact on the
Corporation.
23
<PAGE>
1996 compared with 1995
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 diluted
earnings-per-common-share data were: $.63 per share for 1996 versus $.40 per
share for 1995. These figures reflect the six-for-five stock split distributed
in April, 1997, the five-for-four 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 was attributable to reduced yields on earning
assets as higher rate loans and investments matured or repriced at lower rates.
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.
In addition to SBA loan sales, the Corporation's residential mortgage division,
established in 1996, 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.
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.
24
<PAGE>
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 1996 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 in 1996 over
1995 as the Corporation continued 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.
The Corporation's efficiency ratio improved to 62% for the year ended December
31, 1996 from 67% for the year ended December 31, 1995. The overhead ratio
improved to 3.07% for the year ended December 31, 1996 from 3.30% for the year
1995.
25
<PAGE>
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.
26
<PAGE>
ITEM 7a -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Please refer to the information contained under "Market Risk - Interest Rate
Sensitivity" beginning on page 18 of this Form 10-K.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please refer to pages 7 through 25 of the Corporation's 1997 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 1998 Annual
Meeting of Stockholders to be filed with the Commission prior to April 30, 1998,
which is incorporated herein by reference.
ITEM 11 -- EXECUTIVE COMPENSATION.
Please refer to the Corporation's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders to be filed with the Commission prior to April 30, 1998,
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 1998 Annual
Meeting of Stockholders to be filed with the Commission prior to April 30, 1998,
which is incorporated herein by reference.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Please refer to the Corporation's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders to be filed with the Commission prior to April 30, 1998,
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 10-K :
1 -- Financial Statements included in the 1997 Annual Page Number in the
Report and incorporated by reference: 1997 Annual Report
--------------------------------------------------------------------------
Consolidated Statements of Financial Condition
as of December 31, 1997 and 1996 7
Consolidated Statements of Income for the
Years Ended December 31, 1997, 1996, and 1995 8
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996, and 1995 9
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1997, 1996, and 1995 10
Notes to Consolidated
Financial Statements 11
Independent Auditors' Report 23
With the exception of pages 7 through 25, the Corporation's 1997 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
28
<PAGE>
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 Form of Second 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 January 1, 1998.
10.9 Executive Supplemental Retirement Income Agreement. (6)
10.10 Directors Retirement Plan. (6)
13 Pages 7 to 25 of the Corporation's 1997 Annual Report to Shareholders which
are incorporated by reference herein.
21 Subsidiaries of the Corporation: Prestige State Bank, a New Jersey
corporation, and the Bank's wholly owned subsidiary PSB Investment
Management, Inc., a New Jersey corporation, and PFC Financial Services,
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.
29
<PAGE>
(2) Previously filed with the Corporation's Form S-8, File No. 33-83066,
and incorporated herein by reference.
(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.
(6) Previously filed with the Corporation's Form 10-K for the year ended
December 31, 1996 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 1997.
30
<PAGE>
Signatures
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRESTIGE FINANCIAL CORP.
(Registrant)
By: /s/ Robert J. Jablonski
-----------------------------------
Robert J. Jablonski
Chief Executive Officer,
Treasurer/Principal
Financial Officer/Principal
Accounting Officer
Date: March 27, 1998
------------------------------
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 Date: March 27, 1998
Financial Officer/Principal -----------------------
Accounting Officer, Director
Date: March 27, 1998
-----------------------
/s/ Roland D. Boehm, Sr. /s/ James W. MacDonald
- ----------------------------- -----------------------------
Roland D. Boehm, Sr. James W. MacDonald
Vice Chairman Director
Date: March 27, 1998 Date: March 27, 1998
----------------------- -----------------------
/s/ Louis R. DeFalco /s / Gerald A. Lustig
- ----------------------------- -----------------------------
Louis R. DeFalco Gerald A. Lustig
Chairman Director
Date: March 27, 1998 Date: March 27, 1998
----------------------- -----------------------
/s/ Arthur Stryker, Jr.
- -----------------------------
Arthur Stryker, Jr.
Director
Date: March 27, 1998
-----------------------
31
Exhibit 10.8
PRESTIGE FINANCIAL CORP.
Second Addendum to
Executive Employment Agreement
WHEREAS, the Board of Directors of Prestige Financial Corp. (the "Company")
and Arnold F. Horvath (the "Executive") entered into an Executive Employment
Agreement (the "Agreement") effective January 1, 1994; and
WHEREAS, said Agreement was modified, effective August 16, 1995, by an
Addendum to Executive Employment Agreement ("First Addendum"); and
WHEREAS, the Company and the Executive desire to modify said Agreement and
First Addendum in certain respects as set forth herein; and
WHEREAS, the Agreement provides for modification or amendment solely by an
instrument in writing signed by the parties.
NOW, THEREFORE, in consideration of the mutual covenants of the parties
herein contained, the parties hereto agree to modify said Agreement as follows:
1. Section 2. A of the Agreement shall be modified by striking said paragraph
and substituting therefor the following:
"A. TERM OF EMPLOYMENT. The period of Executive's employment under this
Agreement shall commence on January 1, 1998, and shall continue for a
period of four years thereafter or until the date of the Executive's
death, if earlier. This Agreement shall automatically be extended for
additional one-year periods without action by the parties beginning
January 1, 2002, and on January 1 of each year thereafter unless
either party serves written notice upon the other at least 90 days
prior to the January 1 renewal date of each succeeding year stating
such party's intention to terminate this Agreement."
2. Section "5-B(i)" of the Agreement shall be modified by substituting
"5-A(ii) for 5-A(i)" in the second line thereof
3. Section 3 of the Agreement shall be modified by adding sub-paragraph "H" to
the end thereof, which shall state as follows:
[LOGO]
<PAGE>
"H EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT. The Company and the
Executive have entered into an Executive Supplemental Retirement Income
Agreement ("SERP") for the benefit of the Executive under which the Company
has promised to pay certain benefits to the Executive following his
termination of employment. The Company agrees to honor said SERP in
accordance with its terms, provided, however, that in the event of an
imminent Change in Control, as defined herein and/or in said SERP, pursuant
to which the Company has agreed to make a final lump sum contribution equal
to the present value of all remaining contributions to the Retirement
Income Trust Fund (as defined in the SERP), the Company agrees that such
contribution shall be made in such a manner as to minimize any potential
"excess parachute payment" as defined in Section 280G of the Internal
Revenue Code of 1986, as amended ("Code"). For example, in the event that
an imminent Change in Control shall occur in the immediately succeeding
calendar year pursuant to a definitive agreement executed or any other
action taken in a calendar year, then the Company shall make the final
contribution in the year immediately preceding the calendar year of the
Change in Control, i.e., in the year of the execution of said definitive
agreement or other action causing the imminent Change in Control".
4. The First Addendum to the Agreement shall be modified by adding new paragraph
12 to the end thereof which shall state as follows:
"12. Accelerated Vesting of SARs in the event of a Change in Control.
Notwithstanding anything herein to the contrary, in the event of an
imminent 100 percent Change in Control pursuant to paragraph 6 of the First
Addendum, or in the event of an imminent 30 percent change in control
pursuant to paragraph 7 of the First Addendum, the Company shall cause the
accelerated vesting of all or a portion (but not less than 30 percent) of
the SARs value to the Executive under the imminent Change in Control in
such a manner as to minimize any potential "excess parachute payment" as
defined in Section 280G of the Code. The remaining portion of the SAR's
value shall then be forfeited by the Executive. For example, in the event
that an imminent Change in Control shall occur in the immediately
succeeding calendar year pursuant to a definitive agreement executed or any
other action taken in a calendar year, then the Company may agree to
immediately bonus the Executive to the extent of 35% (with Executive then
forfeiting 65%) of the anticipated SAR's value attributable to the Change
in Control, in the year immediately preceding the calendar year of the
Change in Control, i.e., in the year of the execution of said definitive
agreement or other action causing the imminent Change in Control."
[LOGO]
<PAGE>
5. This Second Addendum shall be effective as of the 1st day of January, 1998.
In all respects not inconsistent herewith, the Agreement and First Addendum
shall remain in full force and effect.
IN WITNESS WHEREOF, Prestige Financial Corp, has caused this Second
Addendum to be executed and its seal affixed here into by its officers thereunto
duly authorized, and the Executive has signed this Second Addendum, all as of
the 29th day of December 1997.
ATTEST: PRESTIGE FINANCIAL CORP.
Louis R. DeFalco
/s/ [ILLEGIBLE] /s/ Louis R. DeFalco
- --------------------------- ------------------------------
Secretary Chairman of the Board
WITNESS: Arnold F. Horvath
/s/ Deborah A. Fabian /s/ Arnold F. Horvath
- --------------------------- ------------------------------
[LOGO]
<PAGE>
PRESTIGE FINANCIAL CORP.
Second Addendum to
Executive Employment Agreement
WHEREAS, the Board of Directors of Prestige Financial Corp. (the "Company")
and Robert J. Jablonski (the Executive") entered into an Executive Employment
Agreement (the "Agreement") effective January 1, 1994; and
WHEREAS, said Agreement was modified, effective August 16, 1995, by an
Addendum to Executive Employment Agreement ("First Addendum"); and
WHEREAS, the Company and the Executive desire to modify said Agreement and
First Addendum in certain respects as set forth herein; and
WHEREAS, the Agreement provides for modification or amendment solely by an
instrument in writing signed by the parties.
NOW, THEREFORE, in consideration of the mutual covenants of the parties
herein contained, the parties hereto agree to modify said Agreement as follows:
1. Section 2. A of the Agreement shall be modified by striking said paragraph
and substituting therefor the following:
"A. TERM OF EMPLOYMENT. The period of Executive's employment under this
Agreement shall commence on January 1, 1998, and shall continue for a
period of four years thereafter or until the date of the Executive's
death, if earlier. This Agreement shall automatically be extended for
additional one-year periods without action by the parties beginning
January 1, 2002, and on January 1 of each year thereafter unless
either party serves written notice upon the other at least 90 days
prior to the January 1 renewal date of each succeeding year stating
such party's intention to terminate this Agreement."
2. Section "5-B(i)" of the Agreement shall be modified by substituting
"5-A(ii) for 5-A(i)" in the second line thereof
3. Section 3 of the Agreement shall be modified by adding sub-paragraph "H" to
the end thereof, which shall state as follows:
[LOGO]
<PAGE>
"H. EXECUTIVE SUPPLEMENTAL RETIREMENT INCOME AGREEMENT. The Company and
the Executive have entered into an Executive Supplemental Retirement
Income Agreement ("SERP") for the benefit of the Executive under which
the Company has promised to pay certain benefits to the Executive
following his termination of employment. The Company agrees to honor
said SERP in accordance with its terms, provided, however, that in the
event of an imminent Change in Control, as defined herein and/or in
said SERP, pursuant to which the Company has agreed to make a final
lump sum contribution equal to the present value of all remaining
contributions to the Retirement Income Trust Fund (as defined in the
SERP), the Company agrees that such contribution shall be made in such
a manner as to minimize any potential "excess parachute payment" as
defined in Section 280G of the Internal Revenue Code of 1986, as
amended ("Code"). For example, in the event that an imminent Change in
Control shall occur in the immediately succeeding calendar year
pursuant to a definitive agreement executed or any other action taken
in a calendar year, then the Company shall make the final contribution
in the year immediately preceding the calendar year of the Change in
Control, i.e., in the year of the execution of said definitive
agreement or other action causing the imminent Change in Control".
4. The First Addendum to the Agreement shall be modified by adding new paragraph
12 to the end thereof which shall state as follows:
"12. Accelerated Vesting of SARs in the event of a Change in Control.
Notwithstanding anything herein to the contrary, in the event of an
imminent 100 percent Change in Control pursuant to paragraph 6 of the
First Addendum, or in the event of an imminent 30 percent change in
control pursuant to paragraph 7 of the First Addendum, the Company
shall cause the accelerated vesting of all or a portion (but not less
than 30 percent) of the SARs value to the Executive under the imminent
Change in Control in such a manner as to minimize any potential
"excess parachute payment" as defined in Section 280G of the Code. The
remaining portion of the SAR's value shall then be forfeited by the
Executive. For example, in the event that an imminent Change in
Control shall occur in the immediately succeeding calendar year
pursuant to a definitive agreement executed or any other action taken
in a calendar year, then the Company may agree to immediately bonus
the Executive to the extent of 35% (with Executive then forfeiting
65%) of the anticipated SAR's value attributable to the Change in
Control, in the year immediately preceding the calendar year of the
Change in Control, i.e., in the year of the execution of said
definitive agreement or other action causing the imminent Change in
Control."
[LOGO]
<PAGE>
5. This Second Addendum shall be effective as of the 1st day of January, 1998.
In all respects not inconsistent herewith, the Agreement and First Addendum
shall remain in full force and effect.
IN WITNESS WHEREOF, Prestige Financial Corp, has caused this Second
Addendum to be executed and its seal affixed here into by its officers thereunto
duly authorized, and the Executive has signed this Second Addendum, all as of
the 29th day of December 1997.
ATTEST: PRESTIGE FINANCIAL CORP.
Louis R. DeFalco
/s/ [ILLEGIBLE] /s/ Louis R. DeFalco
- --------------------------- ------------------------------
Secretary Chairman of the Board
WITNESS: Robert J. Jablonski
/s/ Deborah A. Fabian /s/ Robert J. Jablonski
- --------------------------- ------------------------------
[LOGO]
[LOGO]
PRESTIGE FINANCIAL CORP.
Doing Well by Doing Good
1997 ANNUAL REPORT
<PAGE>
The following chart details the sales price ranges for Prestige Financial Corp.
common stock on a quarterly basis for 1996 and 1997.
These prices reflect actual transactions exclusive of commissions, as adjusted
for stock distributions via dividends and splits.
================================================================================
High Low
- --------------------------------------------------------------------------------
1996:
First Quarter $12.33 $ 9.33
Second Quarter 13.13 10.73
Third Quarter 11.46 9.38
Fourth Quarter 11.98 9.28
- --------------------------------------------------------------------------------
1997:
First Quarter $14.79 $10.83
Second Quarter 15.63 13.65
Third Quarter 17.00 14.00
Fourth Quarter 18.00 14.00
================================================================================
The number of shares outstanding as of December 31, 1997 was 3,308,624.
The Corporation's common stock is listed on the NASDAQ National Market and the
ranges of sales prices were obtained from that source.
Stock Symbol: PRFN
NASDAQ National Market
Shareholder Inquiries:
For information regarding your shares of common stock of Prestige Financial
Corp., please contact:
Arnold F. Horvath
President
908-806-6200
Financial Information and Form 10K:
Persons may obtain a copy, free of charge, of Prestige Financial Corp.'s 1997
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
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
Herzog, Heine, Geduld, Inc.
525 Washington Boulevard
Jersey City, NJ 07310
Ryan, Beck & Co.
80 Main Street
West Orange, NJ 07052
FIA Capital Group
119 Littleton Road
Parsippany, NJ 07054
Corporate Headquarters:
Prestige Financial Corp.
One Royal Road
P.O. Box 2480
Flemington, NJ 08822
908-806-6200
Branch Offices
East Clinton
87 Beaver Avenue
Clinton, NJ 08822
908-730-9141
West Clinton
92 Route 173
Clinton, NJ 08822
908-735-7744
Edward's Store
Prestige Plaza
334 Highway 31
Raritan Twp., NJ 08822
908-806-6200
Raritan Borough
34 East Somerset Street
Raritan, NJ 08822
908-218-9898
Reading Ridge Center
8 Reading Road
Flemington, NJ 08822
908-806-6200
Investment Center
Mortgage Division
Prestige Plaza
334 Highway 31
Raritan Twp., NJ 08822
908-806-6200
Annual Shareholders' Meeting:
The annual shareholders' meeting of Prestige Financial Corp. will be held at
5:30 pm on Tuesday, April 21, 1998 at One Royal Road, Flemington, NJ
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
<CAPTION>
Dollars in thousands, except per share data Years Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Summary of Income 1997 1996 1995 1994 1993
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $ 10,603 $ 8,471 $ 6,545 $ 4,862 $ 3,949
Provision for loan losses 745 516 350 100 451
Non-interest income 2,500 1,536 700 563 525
Non-interest expense 8,457 6,222 4,898 4,124 3,276
Provision for income taxes 1,197 1,226 825 491 287
Extraordinary items -- -- -- -- --
Cumulative effect of accounting change -- -- -- -- 63
------------------------------------------------------------
Net income $ 2,704 $ 2,043 $ 1,172 $ 710 $ 523
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Investments $ 94,818 $ 68,874 $ 43,270 $ 22,541 $ 22,733
Total loans, net 156,093 136,876 112,263 92,534 73,786
Total assets 283,587 229,517 176,382 132,572 109,636
Total deposits 263,156 212,596 163,517 122,439 100,112
Stockholders' equity $ 18,889 $ 15,710 $ 12,058 $ 9,505 $ 8,951
============================================================
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Ratios
Return on average assets 1.06% 1.01% 0.79% 0.61% 0.55%
Return on average equity 15.60% 14.75% 11.27% 7.72% 6.13%
Diluted earnings per common share $0.78 $0.63 $0.40 $0.26 $0.19
Book value per common share $5.71 $4.92 $4.08 $3.32 $3.11
Cash dividends per common share $0.33 $0.21 $0.09 $0.05 $0.03
Tier 1 capital ratio 10.78% 11.69% 9.91% 10.02% 11.08%
Total risk-based capital ratio 11.83% 12.87% 11.10% 11.16% 12.33%
Allowance for loan losses/total loans 1.16% 1.15% 1.17% 1.15% 1.41%
Net charge-offs/average total loans 0.34% 0.20% 0.10% 0.10% 0.07%
============================================================
YEAR-END ASSETS
(In Millions)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<<< TABLE TO BE INSERTED >>>
NET INCOME
(In Thousands)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<<< TABLE TO BE INSERTED >>>
EARNINGS PER SHARE
(In Dollars)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<<< TABLE TO BE INSERTED >>>
YEAR-END MARKET CAPITALIZATION
(In Millions)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<<< TABLE TO BE INSERTED >>>
-----
1
</TABLE>
<PAGE>
TO SHAREHOLDERS OF PRESTIGE:
DOING WELL BY DOING GOOD
Prestige Financial Corp. enjoyed another record year in 1997 as Prestige
State Bank continued to "do well by doing good," for shareholders, customers and
the community. From SBA loans and municipal lease financing to support of Little
League Baseball, Prestige State Bank is an active, supportive presence in New
Jersey.
It is customary in this letter to talk about financial results and the
other traditional measurements by which shareholders and the investment
community judge a company's performance. You will find that information in our
report, of course, but we will also be telling you about another way we would
like you to measure our performance: How well we are fulfilling our obligation
to be a good corporate citizen.
Prestige is a community bank, and we owe our success to the communities and
individuals who contribute to the bank's growth through their deposits, their
borrowings and their recommendations of the bank to friends and neighbors. Those
who bank with us appreciate that Prestige, its management and its staff know and
understand the needs and expectations of the people and businesses we serve,
because our customers are also our neighbors.
Some of those neighbors are in need--of the best possible health services,
special education and training programs, child care, recreational facilities and
activities, affordable housing, a better municipal infrastructure, support for
arts projects and the environment, and other contributions to a better quality
of life. Prestige State Bank helps meet these needs in many ways throughout the
year, with donations of volunteer time, financial support, materials and banking
expertise.
The United Way of Hunterdon County and the social service agencies it
supports provide help to many of the county's neediest citizens, and the people
of Prestige State Bank are among the biggest givers to the United Way's annual
appeal. But the bank gives more than dollars. Prestige lends the time and
leadership skills of its officers, helps with advertising, and supplies
materials and postage for mailings. Our work as a team player with the United
Way has earned Prestige State Bank the United Way Chairman's Award each year for
the past several years.
[PHOTO]
The fun-filled "cityscape" at
Des Mares School in Raritan
Township as a result of a
successful Operation
Playground for which Prestige
was recognized as a Platinum
donor.
[PHOTO]
-----
2
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
[PHOTO]
On Hunterdon County United Way's Day of Caring, Prestige adds to its financial
support by joining other volunteers to help with painting, repairs, filing,
organizing, transportation, etc. at member-agency locations.
[PHOTO]
Three future "big leaguers" dream of hitting it over the fence at one of the
ball fields maintained via the Flemington-Raritan Little League golf outing
sponsored in large part by Prestige State Bank.
Prestige is a longtime supporter of the Hunterdon Medical Center, a vital
healthcare facility for everyone in our service area. When we were asked during
1997 to consider making a multi-year pledge of $15,000 to the Center's capital
campaign, we responded with an immediate $25,000 donation and will be recognized
with a plaque in the new Medical Imaging/Diagnostic Center Unit of the hospital.
We were also a major donor in a campaign to raise $80,000 for expansion and
renovation of the landmark Hunterdon County War Memorial. The association of our
name with the effort helped attract other donors, assuring that the campaign
would be a success.
Prestige helps the children of the community in many ways. When a project
called "Operation Playground" was organized to build a safe, imaginative place
to play near a new elementary school in Raritan Township, Prestige was the only
"Platinum" level donor not directly involved with the construction of the
playground or with the school. Our name was used by the fund-raising team to
attract other area businesses, and was inscribed on a plaque at the site.
As the major sponsor throughout our corporate life of the annual
Flemington-Raritan Little League golf tournament, we have -- each year --
provided balls for all players, paid for at least 16 golfers and solicited what
the organizers call "super-sponsors," mostly bank director or advisory board
member companies, who donate $1,000 each. Over the eight-year period, proceeds
have totaled nearly $50,000 for the betterment of our youth.
We sponsor a composer and performer of children's music named Macheis Wind
who displays our name as he entertains. Children in our area have also been
supported by our donations to Big Brothers Big Sisters, the Boy Scouts, 4-H,
several scholarship funds, a fire safety program for kids, Pop Warner football
and activities for disabled youngsters.
-----
3
<PAGE>
TO SHAREHOLDERS OF PRESTIGE: (Continued)
DOING WELL BY DOING GOOD
[PHOTO]
Some of Prestige State Bank's "team"
prepare to take part in the Town of
Clinton's Christmas Parade in which the
bank places a float carrying familiar
characters to please young and old
alike.
Prestige joins in the celebrations of the communities where it is located,
including the popular Clinton and Flemington Christmas parades, Raritan
Borough's annual street fair, the annual Raritan Township Community Day, a fall
festival in Ringoes and the multicultural, alcohol-free New Years Eve First
Night festivities.
The bank's officers help the communities where we operate to remain strong,
by serving on boards or committees of chambers of commerce, Rotary Clubs, Elks,
Lions and other civic or fraternal organizations. We contribute to the programs
and fundraisers of the YMCA, churches, synagogues, Hadassah, Catholic Charities,
the American Legion, numerous drug awareness and treatment programs and the
Heart, Diabetes, and Cancer associations. Prestige received the prestigious
Israel Unity Award for our exemplary support of the Jewish community, and the
bank was honored at a dinner with a special commendation and a wall hanging for
its contribution to the Israel Bonds drive.
We also recognize the importance of culture, arts and the environment to a
community, and we have contributed to the Hunterdon regional art center, concert
performances, a Teen Arts Festival, and a crafts outlet for seniors. Prestige
was recognized for its "distinguished efforts and major contributions on behalf
of the environment" by an area association.
Prestige has aided groups concerned with affordable housing, including
Habitat for Humanity and the Somerset County Coalition on Affordable Housing,
and is active in the downtown revitalization efforts of Main Street Flemington
and the Flemington Partnership for Progress.
As a bank with strong community ties and a record of service, we are better
positioned than our larger competitors to be the bankers to municipalities that
are looking for lease financing and to individuals seeking capital to start or
expand a business. Within the past year, Prestige has helped the Township of
Lebanon purchase a new fire engine with a tax-free loan, assisted a school that
is adding a new wing, and loaned $45,000 to Meals on Wheels to buy a building
they had been renting.
-----
4
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
[PHOTO]
The Hunterdon County War Memorial received a major facelift and addition with
the help of major givers such as Prestige, whose money and good name were used
to forward the campaign.
[PHOTO]
Municipal Lease Financing is often provided by Prestige to government bodies as
well as school boards as an alternative funding source for purchases such as
this new fire truck for Lebanon Township.
Officers of Prestige State Bank are sought-after speakers at seminars and
expos for entrepreneurs and small business owners throughout our marketing area.
Prestige State Bank more than meets the requirements of the Federal
Community Reinvestment Act. And because we have demonstrated that Prestige State
Bank is a force for good in the community, the community turns to us when we can
offer a banking solution to their needs. That's what it means to do well by
doing good.
And Prestige Financial Corp. did very well in 1997.
Net income for the year ended December 31, 1997 rose 32 percent, to a
record $2,703,000, or 78 cents per share diluted, from net income of $2,043,000
or 63 cents per share diluted for 1996. Total assets at Dec. 31, 1997 were
$283,587,000, a 24 percent gain from assets of $229,517,000 at the same date
last year.
Return on average assets for 1997 was 1.06 percent, up 4.95 percent from
1.01 percent for 1996, and return on average equity for 1997 reached 15.60
percent, a 5.76 percent gain from 14.75 percent recorded for 1996.
Total deposits increased 24 percent to $263,156,000 at Dec. 31, 1997, from
$212,596,000 at Dec. 31, 1996, and total loans, including those "available for
sale," were up 14 percent to $157,931,000 at Dec. 31, 1997 from $138,468,000 at
Dec. 31, 1996.
Our record performance for 1997 continues an unbroken trend of higher
earnings for each year in the company's history. We are especially pleased that
Prestige maintained its strong year-to-year growth despite costs associated with
opening three new locations during 1997. Although these expenses impacted
results for the fourth quarter, net income through the first nine months of 1997
exceeded that of the full year of 1996.
In late 1997, the bank opened a full-service branch banking office in the
Hunterdon County community of Clinton, our second location in the growing
Clinton area. Earlier in 1997, we opened a free-standing branch and an in-store
branch on a major highway between Flemington and Clinton.
-----
5
<PAGE>
TO SHAREHOLDERS OF PRESTIGE: (Continued)
[PHOTO]
Instead of a "promise to pay"-Prestige
hands over a "pay to the order of"-the
Hunterdon Medical Center Foundation for
$25,000 to help fund major renovations
to the county's hospital.
Prestige State Bank continues to be a premier SBA lender as it has been
since the bank was founded in 1990. But as important as SBA lending has been in
our history and growth, such services as mortgage lending, home equity loans and
municipal financing are increasingly important contributors to our bottom line.
We also have a history of rewarding our shareholders, and we are proud that
Prestige Financial Corp. has declared consecutive quarterly dividends in every
quarter since March 31, 1995 and has paid special year-end dividends in each of
the past two years.
As we enter 1998, we are confident in the strong prospects for both the
company and the growing New Jersey banking market we serve.
We intend to direct increasing attention to the Somerset County portion of
our service area, perhaps opening an additional branch either right within that
market or, at least, as a "bridge" location between our Hunterdon and Somerset
facilities. Now that our Mortgage and Municipal Lease Financing Divisions have
fully developed, we expect to rely on them to continue the balance we've
established among all our earning assets. Non-interest income enhancements will
also be counted upon to better diversify the sources of the company's revenues.
We anticipate that the company's subsidiary, PFC Financial Services Inc. will
play a large role in such diversification by offering professional investment
services for those who desire optional routes for their own, personal finances.
Add to this that banking-at-home will become a reality in 1998 at Prestige and
one can see that we strive to increase income first by increasing levels of
service--not by finding ways to charge more for services already in place. Just
more assurance that Prestige will continue to be an example of how a financial
institution--or any business--can do well by doing good. We thank you, as
always, for your attention and continued support.
Sincerely,
/s/ Arnold F. Horvath /s/ Robert J. Jablonski
Arnold F. Horvath Robert J. Jablonski
President Chief Executive Officer
-----
6
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS PRESTIGE FINANCIAL CORP.
OF FINANCIAL CONDITION AND SUBSIDIARY
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
Assets 1997 1996
-----------------------------------
<S> <C> <C>
Cash and due from banks $ 10,297,330 $ 9,579,368
Federal funds sold and short-term investments 11,312,578 8,950,028
-----------------------------------
Total cash and cash equivalents 21,609,908 18,529,396
-----------------------------------
Loans held for sale, net 16,284,462 15,013,245
Investment securities, net (estimated market value of $95,360,123
and $68,680,887 in 1997 and 1996, respectively) 94,818,190 68,874,149
Loans, net 141,646,514 123,454,671
Less: Allowance for loan losses 1,838,207 1,592,078
-----------------------------------
Net loans 139,808,307 121,862,593
-----------------------------------
Accrued interest receivable 2,009,120 1,537,994
Premises and equipment, net 3,427,564 2,490,059
Other assets 5,629,122 1,210,011
-----------------------------------
Total assets $ 283,586,673 $ 229,517,447
===================================
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and
Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 47,595,244 $ 35,318,480
Interest bearing 215,560,598 177,277,801
-----------------------------------
Total deposits 263,155,842 212,596,281
Accrued interest payable 426,111 308,082
Accrued expenses and other liabilities 1,115,879 903,162
-----------------------------------
Total liabilities 264,697,832 213,807,525
-----------------------------------
Stockholders' equity:
Common stock, par value $.01; 5,000,000 shares authorized;
3,308,624 shares and 2,661,331 shares issued and
outstanding at December 31, 1997 and 1996, respectively 33,086 26,613
Paid-in capital 15,071,131 13,581,186
Retained earnings 3,784,624 2,102,123
-----------------------------------
Total stockholders' equity 18,888,841 15,709,922
Commitments and contingencies (note 10)
-----------------------------------
Total liabilities and stockholders' equity $ 283,586,673 $ 229,517,447
===================================
See accompanying notes to consolidated financial statements.
-----
7
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS PRESTIGE FINANCIAL CORP.
OF INCOME AND SUBSIDIARY
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 14,032,350 $ 11,920,839 $ 10,048,068
Investment securities
Taxable 5,041,347 3,590,295 1,624,625
Exempt from Federal income tax 201,937 100,244 138,744
Federal funds sold and short-term investments 446,435 427,861 443,000
-----------------------------------------------
Total interest income 19,722,069 16,039,239 12,254,437
-----------------------------------------------
Interest expense:
Deposits 9,117,481 7,565,484 5,708,330
Short-term borrowings 1,872 2,901 408
-----------------------------------------------
Total interest expense 9,119,353 7,568,385 5,708,738
-----------------------------------------------
Net interest income 10,602,716 8,470,854 6,545,699
Provision for loan losses 744,500 515,600 350,000
-----------------------------------------------
Net interest income after provision for loan losses 9,858,216 7,955,254 6,195,699
-----------------------------------------------
Non-interest income:
Service charges on deposit accounts 384,687 266,719 153,419
Gain on sale of loans held for sale 1,764,750 1,180,301 571,837
Loss on sale of securities -- -- (76,125)
Other income 350,166 89,116 51,060
-----------------------------------------------
Total non-interest income 2,499,603 1,536,136 700,191
-----------------------------------------------
Non-interest expense:
Salaries and employee benefits 3,918,682 3,149,948 2,257,405
Net occupancy expense 1,848,310 1,268,291 1,033,182
Data processing 408,917 308,680 203,002
Advertising and business development 374,436 244,382 187,008
Directors' compensation 326,971 162,980 124,219
Federal deposit insurance 26,480 2,000 139,781
Other operating expenses 1,553,676 1,086,050 953,706
-----------------------------------------------
Total non-interest expense 8,457,472 6,222,331 4,898,303
-----------------------------------------------
Income before provision for income taxes 3,900,347 3,269,059 1,997,587
Provision for income taxes 1,196,863 1,226,341 825,322
-----------------------------------------------
Net income $ 2,703,484 $ 2,042,718 $ 1,172,265
===============================================
Net income per common share:
Basic $ .83 $ .66 $ .41
Diluted $ .78 $ .63 $ .40
===============================================
Weighted average shares outstanding:
Basic 3,242,536 3,073,968 2,651,311
Diluted 3,478,449 3,241,523 2,751,793
===============================================
See accompanying notes to consolidated financial statements.
-----
8
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS PRESTIGE FINANCIAL CORP.
OF CHANGES IN AND SUBSIDIARY
STOCKHOLDERS' EQUITY
<CAPTION>
------------------------------------------------------------------------------------------------------
Total
Preferred Common Paid-in Retained stockholders'
stock stock capital earnings equity
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
Exercise of warrants (3,737 shares) -- 37 38,029 -- 38,066
Exercise of options (7,619 shares) -- 77 49,572 -- 49,649
Common stock grants (9,348 shares) -- 93 59,407 -- 59,500
Dividend reinvestment and stock
purchase plan (81,714 shares) -- 817 1,247,298 -- 1,248,115
401(k) plan (6,452 shares) -- 65 95,639 -- 95,704
Six-for-five common stock split
(538,423 shares) -- 5,384 -- (5,384) --
Common stock cash dividend
($.325 per share) -- -- -- (1,015,599) (1,015,599)
Net income -- -- -- 2,703,484 2,703,484
--------------------------------------------------------------
Balance, December 31, 1997 -- 33,086 $ 15,071,131 $ 3,784,624 $ 18,888,841
==============================================================
See accompanying notes to consolidated financial statements.
-----
9
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS PRESTIGE FINANCIAL CORP.
OF CASH FLOWS AND SUBSIDIARY
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,703,484 $ 2,042,718 $ 1,172,265
Adjustments to reconcile net income to net cash
used in operating activities:
Provision for loan losses 744,500 515,600 350,000
Depreciation 489,815 367,961 297,842
Amortization (accretion) of investment securities
premiums and discounts, net 600,575 479,182 (329,627)
Amortization of organizational costs 14,137 14,137 18,131
Increase in accrued interest receivable (471,126) (579,629) (492,072)
(Increase) decrease in other assets (627,248) 680,010 (971,344)
Loss on sale of securities -- -- 76,125
Gain on sale of loans held for sale (1,764,750) (1,180,301) (571,837)
Proceeds from sale of loans held for sale 38,710,090 24,076,664 9,423,281
Loss on sale of other real estate owned -- -- 25,000
Net increase in loans held for sale (38,216,557) (27,668,627) (18,060,531)
Increase in accrued interest payable 118,029 59,069 111,960
Increase in accrued expenses and other liabilities 212,717 345,804 67,250
Increase (decrease) in deferred loan fees
and unearned discounts 51,116 (273,507) 265,924
Common stock grants 59,500 59,500 59,500
----------------------------------------------
Net cash provided by (used in)
operating activities 2,624,282 (1,061,419) (8,558,133)
----------------------------------------------
Cash flows from investing activities:
Proceeds from sale of securities available for sale -- -- 3,630,250
Proceeds from maturities of investment securities 31,074,402 32,379,423 15,933,625
Principal paydowns on mortgage-backed securities 7,336,561 4,915,156 1,079,558
Purchases of investment and
mortgage-backed securities (64,955,579) (63,377,775) (41,119,376)
Net increase in loans (18,741,330) (19,472,380) (11,510,847)
Loan participations purchased -- (610,750) --
Purchase of corporate owned life insurance (3,806,000) -- --
Capital expenditures (1,427,320) (927,263) (215,615)
Proceeds from sale of other real estate owned -- -- 350,000
----------------------------------------------
Net cash used in investing activities (50,519,266) (47,093,589) (31,852,405)
----------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits, money market,
NOW accounts and savings accounts 33,271,174 34,014,121 11,636,393
Net increase in certificates of deposit 17,288,387 15,065,274 29,441,226
Proceeds from issuance of common stock, net 1,431,534 2,169,412 2,523,124
Dividends paid (1,015,599) (620,181) (301,763)
Redemption of preferred stock -- -- (900,000)
----------------------------------------------
Net cash provided by financing activities 50,975,496 50,628,626 42,398,980
----------------------------------------------
Increase in cash and cash equivalents 3,080,512 2,473,618 1,988,442
Cash and cash equivalents at beginning of year 18,529,396 16,055,778 14,067,336
----------------------------------------------
Cash and cash equivalents at end of year $ 21,609,908 $ 18,529,396 $ 16,055,778
==============================================
Supplemental disclosures:
Cash paid for interest $ 9,001,324 $ 7,509,316 $ 5,596,778
Cash paid for income taxes 1,906,000 1,251,008 800,078
Loans transferred to other real estate owned 417,893 -- 375,000
Investment securities transferred to
securities available for sale -- -- 3,706,375
==============================================
See accompanying notes to consolidated financial statements.
</TABLE>
-----
10
<PAGE>
NOTES TO CONSOLIDATED PRESTIGE FINANCIAL CORP.
FINANCIAL STATEMENTS AND SUBSIDIARY
December 31, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
(1) Summary of Business
Significant
Accounting Prestige Financial Corp. provides a full range of
Policies 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.
-----
11
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(continued)
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 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. Leasehold improvements are depreciated over
periods not exceeding twenty years, while furniture and
equipment is depreciated over periods not exceeding seven
years.
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.
-----
12
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
Net Income Per Common Share
Effective December 31, 1997, the Corp. adopted the
provisions of Statement of Financial Accounting Standards
No. 128, "Earnings Per Share." All prior period share
amounts have been restated to conform with the provisions of
this Statement.
Basic net income per common share is calculated by
dividing net income less preferred stock dividends, if any,
by weighted average shares outstanding.
Diluted net income per common share is calculated by
dividing net income less preferred stock dividends, if any,
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 235,913 shares, 167,555
shares and 100,482 shares in 1997, 1996 and 1995,
respectively.
Preferred stock dividends totaled $73,024 in 1995. All
outstanding preferred stock was redeemed in 1995 All
weighted average shares outstanding reflect the six-for-five
stock split effective on April 18, 1997; 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 1996 and 1995 have been
reclassified to conform with the 1997 presentation.
- --------------------------------------------------------------------------------
(2) Cash and Due The Corp.'s banking subsidiary is required to maintain
from Banks reserve balances with the Federal Reserve Bank. Such
balances amounted to $2,770,000 and $1,190,000 at December
31, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
(3) Investment The amortized cost, gross unrealized gains and losses
Securities, and estimated market values of Investment Securities at
Net December 31, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1997 Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Federal agencies $ 41,379,452 $ 252,165 $ 73,412 $ 41,558,205
Other securities 7,002,628 99,725 14,336 7,088,017
Mortgage-backed securities 46,436,110 349,371 71,580 46,713,901
----------------------------------------------------------
Total investment securities $ 94,818,190 $ 701,261 $ 159,328 $ 95,360,123
==========================================================
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
1996 Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------
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>
There were no sales of investment securities during
1997 or 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.
At December 31, 1997, securities having a book value of
approximately $19,000,000 were pledged to secure certain
public fund deposits and for other purposes required by law.
-----
13
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(continued)
The amortized cost and estimated market values of
investment debt securities at December 31, 1997 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 $ 6,967,243 $ 6,952,955
Due after one year through
five years 16,394,432 16,426,866
Due after five years through
ten years 5,270,115 5,283,910
Due after ten years 1,884,478 1,960,995
Mortgage-backed securities 46,436,110 46,713,901
SBA guaranteed loan pool
certificates 17,865,812 18,021,496
----------------------------
Total $ 94,818,190 $ 95,360,123
============================
- --------------------------------------------------------------------------------
(4) Loans A summary of loans at December 31, 1997 and 1996 is as
follows:
1997 1996
----------------------------
Real estate mortgages:
Residential $ 10,112,982 $ 9,964,053
Construction and land
development 7,835,831 7,950,569
Commercial 50,400,048 37,909,538
Commercial loans 57,586,106 55,758,733
Home equity and second
mortgages 11,900,094 7,069,592
Consumer 22,855,600 22,524,000
----------------------------
160,690,661 141,176,485
Less:
Allowance for
loan losses 1,838,207 1,592,078
Deferred loan fees
and discounts 2,759,685 2,708,569
Loans held for sale 16,284,462 15,013,245
----------------------------
Net loans $139,808,307 $121,862,593
============================
Loans in the amount of $920,433 and $454,135 were on a
nonaccrual status and considered impaired at December 31,
1997 and 1996, respectively. If these loans had continued to
realize interest in accordance with their contractual terms,
approximately $73,000 and $37,000 of interest income would
have been realized in 1997 and 1996, respectively. Actual
interest income recognized on these loans was nominal. No
specific reserves were required for impaired loans at
December 31, 1997 or 1996. The average recorded investments
in impaired loans during 1997 and 1996 were approximately
$424,000 and $330,000, respectively. Loans which were past
due 90 days or more and still accruing totaled $153,744 and
$355,865 at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, loans to directors,
executive officers and their affiliated interests amounted
to $3,966,911 and $2,568,098, respectively, which were
current as to principal and interest. During 1997, new
extensions of credit to directors, executive officers and
their affiliated interests totaled $1,975,000 and repayments
by such persons were $576,187.
-----
14
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
An analysis of the allowance for loan losses for the
years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,592,078 $ 1,324,626 $ 1,077,026
Provision charged to operations 744,500 515,600 350,000
Loans charged off, net (498,371) (248,148) (102,400)
------------------------------------------
Balance at end of year $ 1,838,207 $ 1,592,078 $ 1,324,626
==========================================
</TABLE>
- --------------------------------------------------------------------------------
(5) Accrued A summary of accrued interest receivable at December 31,
Interest 1997 and 1996 is as follows:
Receivable
<TABLE>
1997 1996
-----------------------------
<S> <C> <C>
Loans $ 852,362 $ 689,347
Investment securities and other
interest-earning assets 1,156,758 848,647
-----------------------------
$ 2,009,120 $ 1,537,994
=============================
</TABLE>
- --------------------------------------------------------------------------------
(6) Premises and Premises and equipment consists of the following at
Equipment December 31, 1997 and 1996:
<TABLE>
1997 1996
-----------------------------
<S> <C> <C>
Premises and improvements $ 3,055,137 $ 2,067,628
Furniture and equipment 2,281,121 1,841,310
-----------------------------
Total 5,336,258 3,908,938
Accumulated depreciation (1,908,694) (1,418,879)
-----------------------------
$ 3,427,564 $ 2,490,059
=============================
</TABLE>
- --------------------------------------------------------------------------------
(7) Deposits A summary of deposit balances at December 31, 1997 and 1996
is as follows:
<TABLE>
1997 1996
-----------------------------
<S> <C> <C>
Regular checking $ 47,595,244 $ 35,318,480
NOW accounts 19,746,360 14,121,069
Money market accounts 30,804,508 20,362,771
Regular savings accounts 43,317,475 38,390,093
Certificates of deposit:
$100,000 and over 29,328,715 21,462,600
Less than $100,000 92,363,540 82,941,268
-----------------------------
$ 263,155,842 $212,596,281
=============================
</TABLE>
Certificates of deposit with remaining terms exceeding
one year are scheduled to mature as follows:
<TABLE>
<S> <C>
1999 $ 14,542,539
2000 6,643,264
2001 1,727,508
2002 310,979
Thereafter 30,911
</TABLE>
Interest expense includes interest on certificates of
deposit greater than $100,000 of $1,408,966, $1,059,333 and
$1,047,725 for the years ended December 31, 1997, 1996 and
1995, respectively.
-----
15
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(continued)
- --------------------------------------------------------------------------------
(8) Income Taxes Total income tax expense in the consolidated statements of
income is summarized as follows:
<TABLE>
Current Deferred Total
------------------------------------------
<S> <C> <C> <C>
Year ended December 31, 1997:
U.S. Federal $ 1,264,861 $ (150,000) $ 1,114,861
State and local 127,002 (45,000) 82,002
------------------------------------------
$ 1,391,863 $ (195,000) $ 1,196,863
==========================================
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
==========================================
</TABLE>
A reconciliation of "expected" income tax expense at
December 31, 1997, 1996 and 1995, computed at the Federal
statutory rate, to reported income tax expense is as
follows:
<TABLE>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Provision computed at statutory tax rate $ 1,326,118 $ 1,111,480 $ 679,180
State and local taxes, net of Federal
benefit 54,121 162,913 129,956
Tax exempt income (192,998) (42,837) (57,568)
Change in valuation allowance -- (7,554) --
Other, net 9,622 2,339 73,754
------------------------------------------
$ 1,196,863 $ 1,226,341 $ 825,322
==========================================
</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, 1997 and 1996 are
as follows:
<TABLE>
1997 1996
---------------------------
<S> <C> <C>
Deferred tax assets:
Deferred fee income $ 2,095 $ 17,917
Non-qualified stock options 104,424 54,352
Allowance for loan losses 637,975 585,034
Net operating loss carryforward 46,053 --
Other 51,035 23,621
---------------------------
Total gross deferred tax assets 841,582 680,924
Deferred tax liabilities:
Differences in depreciation methods 27,954 62,296
Total gross deferred tax liabilities 27,954 62,296
---------------------------
Net deferred tax asset $ 813,628 $ 618,628
===========================
</TABLE>
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.
-----
16
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
- --------------------------------------------------------------------------------
(9) Regulatory Capital Requirements
Matters
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 and 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 judgments by the
regulatory authorities about capital components, risk
weightings and other factors.
Management believes that, as of December 31, 1997, 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,
1997 and 1996, compared to the regulatory authorities
minimum capital adequacy requirements and requirements for
classification as a well capitalized institution (dollars in
thousands):
<TABLE>
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, 1997
------------------------------
Leverage (Tier1) capital $ 18,880 6.75% $ 11,191 4.00% $ 13,989 5.00%
Risk-based capital:
Tier 1 18,880 10.78% 7,007 4.00% 10,510 6.00%
Total 20,718 11.83% 14,013 8.00% 17,517 10.00%
December 31, 1996
------------------------------
Leverage (Tier1) 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%
--------------------------------------------------------------
Bank: December 31, 1997
------------------------------
Leverage (Tier1) capital $ 17,224 6.26% $ 10,998 4.00% $ 13,748 5.00%
Risk-based capital:
Tier 1 17,224 9.85% 6,991 4.00% 10,487 6.00%
Total 19,062 10.91% 13,982 8.00% 17,478 10.00%
December 31, 1996
------------------------------
Leverage (Tier1) 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%
--------------------------------------------------------------
</TABLE>
-----
17
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(continued)
- --------------------------------------------------------------------------------
(10) Commitments, Commitments
Contingencies
and The Corp. is party to financial instruments and
Concentrations commitments with off-balance-sheet credit risk in the normal
of Credit course of business. These financial instruments and
Risk 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, 1997 and 1996, financial instruments
and commitments whose contractual amounts represent
off-balance-sheet credit risk are as follows:
<TABLE>
1997 1996
----------------------------------
<S> <C> <C>
Unused portions of commercial lines of credit,
letters of credit and undisbursed portion of
construction loans:
Fixed-rate $ 1,656,301 $ 270,000
Variable-rate 18,353,874 17,650,314
Unused home equity lines of credit (primarily floating rate) 8,777,758 5,583,328
Unused portion of consumer lines of credit 1,261,206 841,999
Commitments to extend credit:
Fixed-rate 10,961,850 1,819,000
Variable-rate 18,293,455 11,872,000
----------------------------------
$ 59,304,444 $ 38,036,641
==================================
</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 7.50% to 9.75% at December 31,
1997.
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 2007 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, 1997, future minimum rental payments, excluding
the renewal options under these leases, are as follows:
1998 $ 570,109
1999 571,150
2000 553,025
2001 533,234
2002 514,459
Thereafter $ 3,580,396
==============
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 $625,283, $427,650
and $318,537 for the years ended December 31, 1997, 1996 and
1995, respectively, which is included in net occupancy
expense in the consolidated statements of income.
-----
18
<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' The payment of dividends by the Bank is restricted. Under
Equity 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
At December 31, 1997 the Corp. has four stock-based
compensation plans, which are described below. All amounts
presented reflect the six-for-five stock split effective on
April 18, 1997, 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,
"Accounting for Stock Issued to Employees" and to provide
pro forma disclosures of net income and earnings per share
as if the Corp. had adopted the fair value based method of
accounting in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation." 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 $132,646, $117,944
and $18,799 in 1997, 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:
<TABLE>
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C> <C>
Net income As Reported $ 2,703,484 $ 2,042,718 $ 1,172,265
Pro forma 2,488,673 1,918,311 1,157,534
Basic earnings per share As Reported $ .83 $ .66 $ .41
Pro forma $ .77 $ .62 $ .41
Diluted earnings per share As Reported $ .78 $ .63 $ .40
Pro forma $ .72 $ .59 $ .39
</TABLE>
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for
grants in 1997, 1996 and 1995: 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), 3,960 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 248,700 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 104,100 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 105,600 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.
-----
19
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(continued)
Options 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, 1997 and 1996 and changes during
the years ended on those dates is presented below:
<TABLE>
1997 1996
----------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 384,697 $ 6.94 192,582 $5.03
Granted 74,300 11.45 201,340 8.63
Exercised (7,619) 5.54 (6,840) 4.37
Forfeited (1,420) 9.95 (2,385) 7.09
Outstanding at end of year 449,958 7.70 384,697 6.94
Options exercisable at year-end 276,988 6.34 155,349 5.07
Weighted average fair value of options granted
during the year $3.18 $2.79
</TABLE>
The following table summarizes information about stock
options outstanding at December 31, 1997.
<TABLE>
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>
$ 4.28- 5.31 178,918 79 months $ 5.07 178,918 $5.07
$ 7.94-11.25 251,340 101 months $ 9.23 98,070 $8.67
$12.00-12.04 19,700 118 months $12.00 -- $ --
</TABLE>
The Corp. established a stock grant plan for founding
outside directors in 1994. The plan provides for the
issuance of 56,100 shares of Corp. common stock. At December
31, 1997, 33,660 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 totaled
$124,000, $97,000 and $75,000 for the years ended December
31, 1997, 1996 and 1995, respectively.
The Corp. established a supplemental retirement plan
for certain officers and directors in 1997. The compensation
cost recognized in 1997 totaled $203,000.
- --------------------------------------------------------------------------------
(12) Fair Value SFAS No. 107, "Disclosures about Fair Value of Financial
of Financial Instruments" requires disclosure of fair value information
Instruments 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,
1997 and 1996 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
-----
20
<PAGE>
PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
with precision. Modifications in such assumptions could
meaningfully alter these estimates. Since these fair value
approximations were made solely for financial instruments at
December 31, 1997 and 1996, 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,
1997 and 1996:
<TABLE>
Carrying Estimated
Amount Fair Value
-------------------------------
<S> <C> <C>
December 31, 1997 Financial Assets:
Cash and due from banks $ 10,297,330 $ 10,297,330
Federal funds sold and short-term investments 11,312,578 11,312,578
Loans held for sale, net 16,284,462 17,098,685
Investment Securities, net 94,818,190 95,360,123
Loans, net 141,646,514 141,968,078
Less: Allowance for loan losses 1,838,207 1,838,207
Net loans 139,808,307 140,129,871
Financial liabilities:
Deposits with no stated maturities 141,463,587 141,463,587
Certificates of deposit $ 121,692,255 $ 121,766,173
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
</TABLE>
-----
21
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(continued)
- --------------------------------------------------------------------------------
(13) Condensed The condensed financial statements of Prestige Financial
Financial Corp. are as follows:
Information
of Parent
Company
<TABLE>
Parent Only Statements of Financial Condition 1997 1996
---------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 277,263 $ 185,303
Investment securities, net (estimated market value $1,679,711 and
$1,099,957 at December 31, 1997 and 1996, respectively) 1,679,711 1,099,957
Investment in subsidiary 17,224,411 14,584,185
Other assets 15,599 28,868
---------------------------------
Total assets $ 19,196,984 $ 15,898,313
=================================
Liabilities and stockholders' equity:
Other liabilities 308,143 188,391
---------------------------------
Stockholders' equity 18,888,841 15,709,922
---------------------------------
Total liabilities and stockholders' equity: $ 19,196,984 $ 15,898,313
=================================
Parent Only Statements of Income
Interest income $ 78,967 $ 50,912
Operating expenses (14,137) (14,137)
Income tax provision (1,572) (5,000)
Equity in undistributed income of subsidiary 2,640,226 2,010,943
---------------------------------
Net income available to common stockholders $ 2,703,484 $ 2,042,718
=================================
Parent Only Statements of Cash Flows Cash flows
from operating activities:
Net income available to common stockholders $ 2,703,484 $ 2,042,718
Less equity in undistributed income of subsidiary (2,640,226) (2,010,943)
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of organizational costs 14,137 14,137
(Increase) decrease in other assets (868) 1,609
Increase in other liabilities 119,752 114,972
Common stock grants 59,500 59,500
---------------------------------
Net cash provided by operating activities 255,779 221,993
---------------------------------
Cash flows from investing activities:
Proceeds from maturities of investment securities 9,601,902 9,185,575
Purchases of investment securities (10,181,656) (9,785,532)
Increase in investment in subsidiary -- (1,500,000)
Net cash used in investing activities (579,754) (2,099,957)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,431,534 2,169,412
Cash dividends paid (1,015,599) (620,181)
---------------------------------
Net cash provided by financing activities 415,935 1,549,231
---------------------------------
Increase (decrease) in cash and cash equivalents 91,960 (328,733)
Cash and cash equivalents at beginning of year 185,303 514,036
---------------------------------
Cash and cash equivalents at end of year $ 277,263 $ 185,303
=================================
</TABLE>
-----
22
<PAGE>
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
January 20, 1998
-----
23
<PAGE>
CORPORATE INFORMATION PRESTIGE FINANCIAL CORP.
AND SUBSIDIARY
Board of Directors
[PHOTO] Louis R. DeFalco
Chairman (& Vice Chairman-
Prestige State Bank)
[PHOTO] Roland D. Boehm, Sr.
Vice Chairman (& Chairman-
Prestige State Bank)
[PHOTO] Arnold F. Horvath
[PHOTO] Robert J. Jablonski
[PHOTO] Gerald A. Lustig
[PHOTO] James W. MacDonald
[PHOTO] Arthur Stryker, Jr.
Hunterdon
Advisory Board
Brian Barbiche
David Bond
Alan Castroll
Sam Leon
John Little, Jr.
James T. McPherson
Somerset
Advisory Board
Edward J. Dougherty, Ed.D.
Gerard C. Pascale
Officers
Arnold F. Horvath
President
Robert J. Jablonski
Chief Executive Officer
Greg Schneider
Executive Vice President
Senior Lending Officer
Annette M. Dalley
Sr. Vice President
Human Resources
Branch Administration
Lorraine A. Cook
Sr. Vice President
Bank Controller
Jeffrey D. Mattison
Sr. Vice President
Loan Officer
Thomas M. Lyons
Vice President
Financial Corp. Controller
Joseph D. Ercolino
Vice President
Business Development
Thomas Thompson
Vice President
SBA Loan Officer
Thomas W. Ort
Vice President
Loan Administration
Mark C. Dooley
Vice President
Mortgage Officer
Christopher J. Pribula
Vice President
Operations
Stan Hall
Vice President
Karen M. McKeon
Assistant Vice President
Andrew Piech
Assistant Vice President
Rosemary Dente
Assistant Vice President
Sr. SBA Bus. Development
Arnold Robbins
Assistant Vice President
Auditor
Linda E. Burns
Assistant Vice President
Maria Fusca
Assistant Vice President
Judith Wallace
Assistant Secretary
Deborah Fabian
Assistant Secretary
J. Susan Berger
Corporate Secretary
Assistant Treasurer
JoAnn Cronce
Assistant Treasurer
Security Officer
Christine Ploski
Assistant Treasurer
Juanita Ombalski
Assistant Secretary
Louise A. Maziarz
Assistant Treasurer
Patrick McDermott
Assistant Treasurer
Deborah A. Gutschmidt
Assistant Treasurer
Amy E. Rabosky
Assistant Treasurer
Sandra Stephens
Assistant Secretary
Joyce Bietka
Assistant Secretary
Julia Locandro
Assistant Treasurer
Jennifer Mock
Assistant Treasurer
Glenn C. Guerin
Financial Consultant
-----
24
<PAGE>
COMPANY PROFILE
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".
[WEB BROWSER PHOTO]
Visit our web site at: www.prestigefinancialcorp.com
www.prestigestatebank.com
<PAGE>
PRESTIGE FINANCIAL CORP.
One Royal Road, P.O. Box 2480, Flemington, NJ 08822 o 908-806-6200
www.prestigefinancialcorp.com
www.prestigestatebank.com
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
Prestige Financial Corp.:
We consent to incorporation 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 20, 1998, relating to the consolidated statements of financial condition
of Prestige Financial Corp. and subsidiary as of December 31, 1997 and 1996 and
the related consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1997, which report is incorporated by reference, in the December 31, 1997 Annual
Report on Form 10-K of Prestige Financial Corp.
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 24, 1998
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<FISCAL-YEAR-END> DEC-31-1997
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0
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