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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to______
Commission file number 0-24562
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Carnegie Bancorp
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(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
New Jersey 22-3257100
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
619 Alexander Road, Princeton, N.J. 08540
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE 609-520-0601
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
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(TITLE OF CLASS)
Warrants to purchase Common Stock
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(TITLE OF CLASS)
Indicate by check mark whether the Issuer: (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 Issuer
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB. (X )
The aggregate market value of the voting stock held by non-affiliates of
the Issuer as of February 28, 1997, was $30,990,618.
The number of shares of the Issuer's Common Stock, no par value,
outstanding as of February 28, 1997 was 1,983,565.
For the fiscal year ended December 31, 1996, the Issuer had total revenues
of $25,284,000.
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<PAGE>
<TABLE>
<CAPTION>
DOCUMENTS INCORPORATED BY REFERENCE
10-KSB ITEM DOCUMENT INCORPORATED
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<S> <C> <C>
Item 6. Management's Discussion and Registrant's Annual Report to
Analysis or Plan of Operation Shareholders, under the caption
"Management's Discussion and Analysis of
Financial Condition and Results of
Operation"
Item 7. Financial Statements Registrant's Annual Report to Shareholders
under the caption "Consolidated Financial
Statements"
Item 9. Directors and Executive Proxy Statement for 1997 Annual Meeting of
Officers of the Company; Shareholders to be filed no later than
Compliance with Section April 29, 1997
16(a) of the Exchange Act
Item 10. Executive Compensation Proxy Statement for 1997 Annual Meeting of
Shareholders to be filed no later than
April 29, 1997
Item 11. Security Ownership of Certain Proxy Statement for 1997 Annual Meeting of
Beneficial Owners and Management Shareholders to be filed no later than
April 29, 1997
Item 12. Certain Relationships and Proxy Statement for 1997 Annual Meeting of
Related Transactions Shareholders to be filed no later than
April 29, 1997
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Carnegie Bancorp (the "Company" or "Registrant") is a New Jersey
business corporation and a bank holding company registered with the Board
of Governors of the Federal Reserve System (the "FRB") under the Bank
Holding Company Act of 1956, as amended (the "BHCA"). The Company was
incorporated on October 6, 1993 for the purpose of acquiring Carnegie
Bank, N.A. (the "Bank") and thereby enabling the Bank to operate within
the bank holding company structure. On April 12, 1994, the Company
acquired one hundred percent (100%) of the outstanding shares of the Bank.
The principal activities of the Company are owning and supervising the
Bank, which engages in a commercial banking business in Mercer,
Burlington, Hunterdon, Morris and Ocean counties, New Jersey and Bucks
County, Pennsylvania. The Company directs the policies and coordinates the
financial resources of the Bank.
During 1996, the Company continued to expand its operations through
the establishment of three new branch offices. In January, 1996, the
Company opened a new office in Montgomery, New Jersey. In addition, in
March 1996, the Company opened a loan production office in Flemington, New
Jersey and in August, 1996, a branch office in Flemington, New Jersey.
Finally, in May, 1996, the Company opened its first office outside of New
Jersey, establishing a branch office in Langhorn, Bucks County,
Pennsylvania. In late 1995, the Company had also opened a branch in Toms
River, Ocean County, New Jersey. The Company believes that each of these
locations will contribute to the Company's profitability in future years
and that these areas share similar demographics to trade areas currently
served by the Company.
On August 30, 1995, the Company had entered into an amended and
restated agreement and plan of merger (the "Merger Agreement") with Regent
Bancshares Corp. ("Regent") pursuant to which Regent would merge with and
into the Company and Regent's subsidiary bank would merge with the Bank.
Consummation of the merger was delayed several times, primarily due to
financial reporting difficulties experienced by Regent in connection with
the servicing of a portion of its loan portfolio involving auto insurance
premium financing loans. In October, 1996, the Merger Agreement was
amended to reflect Regent's then current financial condition as well as
certain other changed circumstances regarding the proposed merger.
However, subsequent to the October amendments, the parties determined that
there was still a risk of substantial delay in consummating the merger due
to, among other things, Regent's continued financial reporting problems
with its insurance premium financing portfolio and the replacement of its
public accounting
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firm on December 31, 1996. In light of the substantial
risk of delay, in January, 1997, the parties mutually agreed to terminate
the proposed merger. In connection with the termination of the proposed
merger, and pursuant to the terms of the Merger Agreement, Regent paid
Carnegie the sum of $722,000 in reimbursement for expenses incurred by
Carnegie in connection with the merger.
In September and October, 1996, Carnegie had purchased $32.8 million
in loan participations from Regent, with servicing retained by Regent.
These participation interests represented, on average, a 90% participation
in the whole loan balances. On January 14, 1997, Carnegie purchased
Regent's remaining interest in these loans, a then current principal
balance of $32.9 million, with servicing released, for a purchase price of
102.2 percent. In addition, Regent repurchased from Carnegie $2.6 million
in loan participations which Carnegie had previously purchased from
Regent.
In fiscal 1997, the Company does not expect to see the dynamic
geographic growth that has been experienced in recent years. The Company
does not anticipate establishing any additional branches in 1997, although
the Company will review any opportunities which arise. The Company will
concentrate on maintaining capital to asset ratios while increasing its
loan portfolio through greater loan originations and loan purchases and on
generating core deposits at all its branch locations.
BUSINESS OF THE COMPANY
The Company's primary business is ownership of the Bank. The Bank is
a national bank, which commenced business in 1988 as a New Jersey state
chartered commercial bank. The Bank currently operates from its main
office in Princeton, New Jersey and from seven branch offices in Hamilton
Township, Denville, Flemington, Marlton, Montgomery and Toms River, New
Jersey and Langhorne, Pennsylvania. The deposits of the Bank are insured
by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a member of the Federal Reserve System.
The Company conducts a general commercial banking business. The
Company's loan products consist primarily of commercial loans (a majority
of which are secured by mortgages on owner-occupied properties),
commercial mortgages, loans to professionals (a majority of which are
secured by business or personal assets), and to a lesser extent
residential mortgage loans. The Company offers a full array of deposit
accounts including time deposits, checking and other demand deposit
accounts, savings accounts and money market accounts. The Company targets
small businesses, professionals, and high net worth individuals as its
prime customers, and as a general course of business, does not engage in
high volume, consumer banking. The Company believes it competes
successfully for its target market by offering superior service. This
service includes having loan officers intimately involved in
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the loan approval process and delivering prompt responses to customer loan
applications. Because management believes its target customers are more
concerned with service and the availability of loans than price, the
Company does not try to be the lowest cost source of funds in its market
area.
SERVICE AREAS
The Company's service areas consist of Mercer, Morris, Burlington,
Hunterdon and Ocean counties in New Jersey and Bucks County, Pennsylvania.
The Company operates its main office in Princeton, New Jersey and seven
branch offices in Marlton, Denville, Hamilton Township, Montgomery,
Flemington and Toms River, New Jersey and Langhorne, Pennsylvania. Each of
these locations was selected by management based upon the demographics of
the area and a perceived need for the services rendered by the Company. In
addition, management of the Company is familiar with the business
communities in each of these market areas. The Company also selects branch
locations based on having a perceived "edge" or advantage in these
locations, usually based on relationships that exist in that market place.
COMPETITION
The Company operates in a highly competitive environment competing
for deposits and loans with commercial banks, thrifts and other financial
institutions, many of which have greater financial resources than the
Company. Many large financial institutions in New York City and
Philadelphia compete for the business of New Jersey residents and
businesses located in the Company's primary areas of trade. Certain of
these institutions have significantly higher lending limits than the
Company and provide services to their customers which the Company does not
offer.
Management believes the Company is able to compete on a
substantially equal basis with its competitors because it provides
responsive personalized services through management's knowledge and
awareness of the Company's service areas, customers and business.
Management believes that this knowledge and awareness provide a clear
business advantage in servicing the commercial and retail banking needs of
the professional communities that comprise the Company's service areas.
EMPLOYEES
At December 31, 1996, the Company employed 117 full-time employees
and 2 part-time employees. None of these employees is covered by a
collective bargaining agreement and the Company believes that its employee
relations are good.
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SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
both federal and state law. These laws and regulations are intended to
protect depositors, not stockholders. To the extent that the following
information describes statutory and regulatory provisions, it is qualified
in its entirety by reference to the particular statutory and regulatory
provisions. Any change in the applicable law or regulation may have a
material effect on the business and prospects of the Company and the Bank.
BANK HOLDING COMPANY REGULATION
General. As a bank holding company registered under the BHCA, the
Company is subject to the regulation and supervision of the FRB. The
Company is required to file with the FRB annual reports and other
information regarding its business operations and those of its
subsidiaries. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries or
engaging in any other activity which the FRB determines to be so closely
related to banking or managing or controlling banks as to be properly
incident thereto.
The BHCA requires, among other things, the prior approval of the FRB
in any case where a bank holding company proposes to (i) acquire all or
substantially all of the assets of any other bank, (ii) acquire direct or
indirect ownership or control of more than 5% of the outstanding voting
stock of any bank (unless it owns a majority of such bank's voting shares)
or (iii) merge or consolidate with any other bank holding company. The FRB
will not approve any acquisition, merger, or consolidation that would have
a substantially anti-competitive effect, unless the anti-competitive
impact of the proposed transaction is clearly outweighed by a greater
public interest in meeting the convenience and needs of the community to
be served. The FRB also considers capital adequacy and other financial and
managerial resources and future prospects of the companies and the banks
concerned, together with the convenience and needs of the community to be
served, when reviewing acquisitions or mergers.
Additionally, the BHCA prohibits a bank holding company, with
certain limited exceptions, from (i) acquiring or retaining direct or
indirect ownership or control of more than 5% of the outstanding voting
stock of any company which is not a bank or bank holding company, or (ii)
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or performing services for its
subsidiaries; unless such non-banking business is determined by the FRB to
be so closely related to banking or managing or controlling banks as to be
properly incident thereto. In making such determinations, the FRB is
required to weigh the expected benefits to the public, such as greater
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convenience, increased competition or gains in efficiency, against the
possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the
depositors of such depository institutions and the FDIC insurance funds in
the event the depository institution becomes in danger of default. Under a
policy of the FRB with respect to bank holding company operations, a bank
holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support
such institutions in circumstances where it might not do so absent such
policy. The FRB also has the authority under the BHCA to require a bank
holding company to terminate any activity or to relinquish control of a
non-bank subsidiary upon the FRB's determination that such activity or
control constitutes a serious risk to the financial soundness and
stability of any bank subsidiary of the bank holding company.
Capital Adequacy Guidelines for Bank Holding Companies. In January
1989, the FRB adopted risk-based capital guidelines for bank holding
companies. The risk-based capital guidelines are designed to make
regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, to account for off-balance
sheet exposure, and to minimize disincentives for holding liquid assets.
Under these guidelines, assets and off-balance sheet items are assigned to
broad risk categories each with appropriate weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.
The minimum ratio of total capital to risk-weighted assets
(including certain off-balance sheet activities, such as standby letters
of credit) is 8%. At least 4% of the total capital is required to be "Tier
I Capital," consisting of common stockholders' equity, and qualifying
preferred stock, less certain goodwill items and other intangible assets.
The remainder ("Tier II Capital") may consist of (a) the allowance for
loan losses of up to 1.25% of risk-weighted assets, (b) excess of
qualifying preferred stock, (c) hybrid capital instruments, (d) perpetual
debt, (e) mandatory convertible securities, and (f) subordinated debt and
intermediate-term preferred stock up to 50% of Tier I capital. Total
capital is the sum of Tier I and Tier II capital less reciprocal holdings
of other banking organizations' capital instruments, investments in
unconsolidated subsidiaries and any other deductions as determined by the
FRB (determined on a case by case basis or as a matter of policy after
formal rule-making).
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Bank holding company assets are given risk-weights of 0%, 20%, 50%
and 100%. In addition, certain off-balance sheet items are given similar
credit conversion factors to convert them to asset equivalent amounts to
which an appropriate risk-weight will apply. These computations result in
the total risk-weighted assets. Most loans are assigned to the 100% risk
category, except for performing first mortgage loans fully secured by
residential property which carry a 50% risk-weighting. Most investment
securities (including, primarily, general obligation claims of states or
other political subdivisions of the United States) are assigned to the 20%
category, except for municipal or state revenue bonds, which have a 50%
risk-weight, and direct obligations of the U.S. treasury or obligations
backed by the full faith and credit of the U.S. Government, which have a
0% risk-weight. In converting off-balance sheet items, direct credit
substitutes including general guarantees and standby letters of credit
backing financial obligations, are given a 100% risk-weighting.
Transaction related contingencies such as bid bonds, standby letters of
credit backing nonfinancial obligations, and undrawn commitments
(including commercial credit lines with an initial maturity or more than
one year) have a 50% risk-weighting. Short term commercial letters of
credit have a 20% risk-weighting and certain short-term unconditionally
cancelable commitments have a 0% risk-weighting.
In addition to the risk-based capital guidelines, the FRB has
adopted a minimum Tier I capital (leverage) ratio, under which a bank
holding company must maintain a minimum level of Tier I capital to average
total consolidated assets of at least 3% in the case of a bank holding
company that has the highest regulatory examination rating and is not
contemplating significant growth or expansion. All other bank holding
companies are expected to maintain a leverage ratio of at least 100 to 200
basis points above the stated minimum.
BANK REGULATION
The Bank is a national bank subject to the supervision of, and
regular examination by, the Comptroller of the Currency (the "OCC"), as
well as to the supervision of the FDIC. The FDIC insures the deposits of
the Bank to the current maximum allowed by law through the BIF.
The operations of the Bank are subject to state and federal statutes
applicable to banks which are members of the Federal Reserve System and to
the regulations of the FRB, the FDIC and the OCC. Such statutes and
regulations relate to required reserves against deposits, investments,
loans, mergers and consolidations, issuance of securities, payment of
dividends, establishment of branches, and other aspects of the Bank's
operations. Various consumer laws and regulations also affect the
operations of the Bank, including state usury laws, laws relating to
fiduciaries, consumer credit and equal credit and fair credit reporting.
Under
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the provisions of the Federal Reserve Act, the Bank is subject to
certain restrictions on any extensions of credit to the Company or, with
certain exceptions, other affiliates, on investments in the stock or other
securities of national banks, and on the taking of such stock or
securities as collateral. These regulations and restrictions may limit the
Company's ability to obtain funds from the Bank for its cash needs,
including funds for acquisitions, and the payment of dividends, interest
and operating expenses. Further, the Bank is prohibited from engaging in
certain tying arrangements in connection with any extension of credit,
lease or sale of property or furnishing of services. For example, the Bank
may not generally require a customer to obtain other services from the
Bank or the Company, and may not require the customer to promise not to
obtain other services from a competitor, as a condition to an extension of
credit. The Bank also is subject to certain restrictions imposed by the
Federal Reserve Act on extensions of credit to executive officers,
directors, principal stockholders or any related interest of such persons.
Extensions of credit (i) must be made on substantially the same terms
(including interest rates and collateral) as, and following credit
underwriting procedures that are not less stringent than those prevailing
at the time for, comparable transactions with persons not covered above
and who are not employees and (ii) must not involve more than the normal
risk of repayment or present other unfavorable features. In addition
extensions of credit to such persons beyond limits set by FRB regulations
must be approved by the Board of Directors. The Bank also is subject to
certain lending limits and restrictions on overdrafts to such persons. A
violation of these restrictions may result in the assessment of
substantial civil monetary penalties on the Bank or any officer, director,
employee, agent or other person participating in the conduct of the
affairs of the Bank or the imposition of a cease and desist order.
As an institution whose deposits are insured by the FDIC, the Bank
also is subject to insurance assessments imposed by the FDIC. Under
current law, the insurance assessment to be paid by BIF insured
institutions is as specified in schedules issued by the FDIC from time to
time. The amount of the assessment is determined in part to allow for a
minimum BIF reserve ratio of 1.25% of estimated insured deposits. The
current premium assessment schedule is from 0% to 0.31% of an
institution's average assessment base. The actual assessment to be paid by
each BIF member is based on the institution's assessment risk
classification, which is determined based upon whether the institution is
considered "well capitalized," "adequately capitalized," or
"under-capitalized," as those terms have been defined in applicable
federal regulations adopted to implement the prompt corrective action
provisions of the Federal Deposit Insurance Act, and whether such
institution is considered by its supervising agency to be financially
sound or to have supervisory concerns.
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Recent Regulatory Enactments. On September 30, 1996, the Deposit
Insurance Funds Act of 1996 (the "Deposit Act") became law. The primary
purpose of the Deposit Act is to recapitalize the Savings Association
Insurance Fund of the FDIC (the "SAIF") by charging all SAIF member
institutions a one-time special assessment. The Deposit Act will lead to
equalization of the deposit insurance assessments between Bank and SAIF
insured institutions, and will also separate out from insurance assessment
payments required for debt service and principal repayment on bonds issued
by the Federal Finance Corporation ("FICO") in the mid-1980s to fund a
portion of the thrift bailout. Under the Deposit Act, BIF-insured
institutions will, for the first time, be required to pay a portion of the
obligations owed under the FICO bonds. The rate of contribution has been
set for SAIF members at 6.4 basis points on assessed deposits while BIF
institutions will only be required to pay 1.3 basis points on assessed
deposits. This disparity will stay in effect until such time as the
Federal thrift and commercial bank charters are merged and the deposit
insurance funds are thereafter merged. Under the Deposit Act, this may
occur by January 1, 1999. At that time, all federally insured institutions
should have the same total FDIC assessment.
On September 29, 1994, the Riegle-Neal Interstate Banking and
Branching Efficiency Act (the "Interstate Act") was enacted. The
Interstate Act generally enhances the ability of bank holding companies to
conduct their banking business across state boarders. The Interstate Act
has two main provisions. The first provision generally provides that
commencing on September 29, 1995, bank holding companies may acquire banks
located in any state regardless of the provisions of state law. These
acquisitions are subject to certain restrictions, including caps on the
total percentage of deposits that a bank holding company may control both
nationally and in any single state. New Jersey law currently allows
interstate acquisitions by bank holding companies whose home state has
"reciprocal" legislation which would allow acquisitions by New Jersey
based bank holding companies in such states.
The second major provision of the Interstate Act permits, beginning
on June 1, 1997, banks located in different states to merge and continue
to operate as a single institution in more than one state. States may, by
legislation passed before June 1, 1997, opt out of the interstate bank
merger provisions of the Interstate Act. In addition, states may elect to
opt in and allow interstate bank mergers prior to June 1, 1997.
A final provision of the Interstate Act permits banks located in one
state to establish new branches in another state without obtaining a
separate bank charter in that state, but only if the state in which the
branch is located has adopted legislation specifically allowing interstate
de novo branching.
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In April, 1996, the New Jersey legislature passed legislation which
would permit interstate bank mergers prior to June 1, 1997, provided that
the home state of the institution acquiring the New Jersey institution
permits interstate mergers prior to June 1, 1997. In addition, the
legislation permits an out-of-state institution to acquire an existing
branch of a New Jersey-based institution, and thereby conduct a business
in New Jersey. The legislation does not permit interstate de novo
branches. This Legislation is likely to enhance competition in the New
Jersey marketplace as bank holding companies located outside of New Jersey
become freer to acquire institutions located within the state of New
Jersey.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's main offices are located at 619 Alexander Road,
Princeton, New Jersey. The Company leases office space in the building.
The Company, in addition to its main office, maintains seven
branches, six of which are leased and subject to renewal. The Company
believes it will have no difficulty renewing each of these leases. The
table set forth below provides additional information regarding these
leases:
BRANCH & LOCATION EXPIRATION DATE OF LEASE
Main Office:
619 Alexander Road
Princeton, New Jersey 08540 March 31, 2015
(one five year renewal
option)
Hamilton Township Branch Office:
One Edinburg Road
Mercerville, New Jersey 08619 June 30, 2001
(3 five year renewal
options)
Marlton Branch Office:
6000 West Lincoln Drive
Marlton, New Jersey 08053 July 16, 2001
(2 five year renewal
options)
Denville Branch Office:
125 East Main Street
Denville, New Jersey 07834 December 31, 1997
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Montgomery Branch Office:
One Airport Plaza
Route 206 North
Princeton, New Jersey 08540 August 31, 2000
(2 five year renewal
options)
Toms River Branch Office:
910 Hooper Avenue
Toms River, New Jersey 08753 June 30, 2005
Langhorne Branch Office:
100 North Buckston Drive
Suite E-204
Langhorne, PA 17047 January 31, 2002
(1 four year renewal
option)
Flemington Temporary Branch Office:
8 Main Street
Flemington, NJ 08822 Monthly lease, terminating
on March 31, 1997
Flemington Branch Office:
171 Main Street
Flemington, NJ 08822 Owned by Company
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are periodically parties to or otherwise
involved in legal proceedings arising in the normal course of business,
such as claims to enforce liens, claims involving the making and servicing
of real property loans, and other issues incident to the Bank's business.
Management does not believe that there is any pending or threatened
proceeding against the Company or the Bank which, if determined adversely,
would have a material effect on the business or financial position of the
Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted for a vote of the Registrant's shareholders
during the Fourth Quarter of 1996.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded over-the-counter and quoted by the
National Association of Securities Dealers through the NASDAQ National
Market System. The NASDAQ symbol for the Company's Common Stock is CBNJ.
As of December 31, 1996, there were 629 registered holders of Common
Stock.
The following table presents the sale price range and dividends per share
for the eight quarters ended December 31, 1996. The high and low bid
prices reflect inter-dealer quotations, without commissions, and may not
necessarily represent actual transactions. The high and low bid prices and
the cash dividends per share have not been adjusted for stock dividends.
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COMMON STOCK PRICE RANGE
High Low Dividend
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1996 First Quarter $18.00 $15.75 $.12
Second Quarter 16.25 14.25 .12
Third Quarter 17.13 15.00 .12
Fourth Quarter 20.13 16.75 .13
1995 First Quarter $12.75 $11.00 $.12
Second Quarter 14.25 12.25 .12
Third Quarter 16.50 13.75 .12
Fourth Quarter 16.87 15.50 .12
A dividend reinvestment and stock purchase plan is available for
stockholders who wish to increase their holdings. Under the plan,
quarterly dividends may be reinvested in the Company's Common Stock at
market value. In addition, optional cash investments of not less than $25
nor more than $5,000 per quarterly investment period may be made in Common
Stock, at market value, without incurring a commission or fee.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The information required by this item is incorporated by reference from
the Registrant's Annual Report to Shareholders under the caption
"Management's Discussion and Analysis of Financial Condition and Results
of Operation."
ITEM 7. FINANCIAL STATEMENTS
The information required by this item is incorporated by reference from
the Registrant's Annual Report to Shareholders under the caption
"Consolidated Financial Statements."
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
WITH SECTION 16(a)
Information concerning directors and executive officers is included in
the definitive Proxy Statement for the Company's 1997 Annual Meeting under
the captions "PROPOSAL 1. ELECTION Of DIRECTORS" and information
concerning compliance with Section 16(a) of the Exchange Act is included
under the caption "COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES
EXCHANGE ACT OF 1934," each of which is incorporated herein by reference.
It is expected that such Proxy Statement will be filed with the Securities
and Exchange Commission no later than April 29, 1997.
The following table sets forth certain information about each executive
officer of the Registrant who is not also a director.
<TABLE>
<CAPTION>
Principal Occupation
Name, Age and Position Officer Since During Past Five
Years
---------------------- ------------ ---------------------
<S> <C> <C> <C>
Floyd Haggar, 46, Senior 1994 National Bank Examiner,
Lending Officer Office of the Comptroller
of the Currency
(1990-1994). Formerly,
Vice President, Chase
Manhattan Bank.
Richard P. Rosa, 45, Chief 1995 Chief Financial Officer of
Financial Officer Carnegie Bank, NA, since
April 1995. Formerly,
Executive Vice President
and Chief Financial
Officer of Lakeland First
Financial Group, Inc. and
its wholly-owned
subsidiary, Lakeland
Savings Bank.
</TABLE>
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is included in the
definitive Proxy Statement for the Company's 1997 Annual Meeting under the
captions "EXECUTIVE COMPENSATION" and "PROPOSAL 2.
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APPROVAL OF THE CARNEGIE BANCORP 1997 STOCK OPTION PLAN", each of which is
incorporated herein by reference. It is expected that such Proxy Statement
will be filed with the Securities and Exchange Commission no later than
April 29, 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is included in the definitive Proxy Statement for the
Company's 1997 Annual Meeting under the caption "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT," which is incorporated herein by
reference. It is expected that such Proxy Statement will be filed with the
Securities and Exchange Commission no later than April 29, 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
included in the definitive Proxy Statement for the Company's 1997 Annual
Meeting under the caption "CERTAIN TRANSACTIONS WITH MANAGEMENT," which is
incorporated herein by reference. It is expected that such Proxy Statement
will be filed with the Securities and Exchange Commission no later than
April 29, 1997.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description of Exhibits
------- -----------------------
3(i) Certificate of Incorporation of the Company(1)
3(ii) Bylaws of the Company(1)
4(i) Warrant Agreement/Form of Warrant Certificate(2)
4(ii) Form of Stock Certificate(2)
10(i) 1993 Employee Stock Option Plan(1)
10(ii) 1993 Stock Option Plan for Non-Employee Directors(1)
10(iii) 1995 Directors' Stock Option(3)
10(iv) 1995 Employee Stock Option Plan(3)
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<PAGE>
10(v) Employment Agreement between the Registrant and Thomas L.
Gray
10(vi) Employment Agreement between the Registrant and Mark A.
Wolters
10(vii) Consulting Agreement between the Registrant and Bruce A.
Mahon
13 Annual Report to Shareholders for the year ended December
31, 1996
21 Subsidiaries of Registrant
23 Consent of Coopers & Lybrand
27 Financial Data Schedule
----------------------------------
(1) Incorporated by reference from Exhibits 2(a) to 99(b) from the
Registrant's Registration Statement on Form S-4, Registration No.
33-72088.
(2) Incorporated by reference from Registrant's Registration Statement on
Form SB-2, Registration No. 33-80426 (Exhibit 4(i))
(3) Incorporated by reference from Registrant's Registration Statement on
Form S-4, Registration No. 33-65197 (Exhibits 10(a) and 10(b)).
(b) Reports on Form 8-K.
The Registrant has filed the following reports on Form 8-K during the
quarter ended December 31, 1996.
Date Item Reported
---- --------------
October 4, 1996 Current Report on Form 8-K filed reporting the
issuance of a press release regarding
amendments to the Amended and Restated
Agreement and Plan of Merger with Regent
Bancshares Corp.
October 29, 1996 Current Report on Form 8-K filed for the
issuance of a press release dated October 17,
1996 announcing the Company's results of
operations for the three and nine month periods
ended September 30, 1996 and an increase in
the Company's quarterly cash dividend.
-17-
<PAGE>
SIGNATURES
In accordance with 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.
CARNEGIE BANCORP
By: /s/ THOMAS L. GRAY, JR.
----------------------------------
Thomas L. Gray, Jr.,
President and Chief
Executive Officer
March 28, 1997
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
/s/ THEODORE H. DOLCI, JR. March 28, 1997
- -----------------------------
Theodore H. Dolci, Jr.
/s/ MICHAEL E. GOLDEN March 28, 1997
- -----------------------------
Michael E. Golden
/s/ THOMAS L. GRAY, JR. March 28, 1997
- -----------------------------
Thomas L. Gray, Jr.
(Principal Executive Officer)
/s/ BRUCE A. MAHON March 28, 1997
- -----------------------------
Bruce A. Mahon
/s/ JOSEPH J. OAKES, III March 28, 1997
- -----------------------------
Joseph J. Oakes, III
/s/ JAMES E. QUACKENBUSH March 28, 1997
- -----------------------------
James E. Quackenbush
/s/ STEVEN L. SHAPIRO March 28, 1997
- -----------------------------
Steven L. Shapiro
/s/ SHELLEY M. ZEIGER March 28, 1997
- -----------------------------
Shelley M. Zeiger
/s/ RICHARD ROSA March 28, 1997
- ------------------------------
Richard Rosa
(Principal Financial Officer
and Principal Accounting Officer)
<PAGE>
CARNEGIE BANCORP
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- ------- -----------------------
3(i) Certificate of Incorporation of the Company(1)
3(ii) Bylaws of the Company(1)
4(i) Warrant Agreement/Form of Warrant Certificate(2)
4(ii) Form of Stock Certificate(2)
10(i) 1993 Employee Stock Option Plan(1)
10(ii) 1993 Stock Option Plan for Non-Employee Directors(1)
10(iii) 1995 Directors' Stock Option(3)
10(iv) 1995 Employee Stock Option Plan(3)
10(v) Employment Agreement between the Registrant and Thomas L.
Gray, Jr.
10(vi) Employment Agreement between the Registrant and Mark A.
Wolters
10(vii) Consulting Agreement between the Registrant and Bruce A.
Mahon
13 Annual Report to Shareholders for the Year Ended December
31, 1996
21 Subsidiaries of Registrant
23 Consent of Coopers & Lybrand
27 Financial Data Schedule
- ----------------------------------
(1) Incorporated by reference from Exhibits 2(a) to 99(b) from the
Registrant's Registration Statement on Form S-4, Registration No.
33-72088.
(2) Incorporated by reference from Registrant's Registration Statement on
Form SB-2, Registration No. 33-80426 (Exhibit 4(i))
(3) Incorporated by reference from Registrant's Registration Statement on
Form S-4, Registration No. 33-65197 (Exhibits 10(a) and 10(b)).
EMPLOYMENT AGREEMENT
AGREEMENT made as of this 1st day of January, 1997 between CARNEGIE
BANCORP, a New Jersey corporation having its principal place of business at
619 Alexander Road, Princeton, New Jersey 08540 ("Carnegie") and Thomas L.
Gray, Jr., an individual residing at_____________________________________(the
"Executive").
W I T N E S S E T H:
WHEREAS, Carnegie deems it to be in its best interests to secure and
retain the services of the Executive and the Executive desires to work for
Carnegie upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and
undertakings herein contained, the parties hereto, intending to be legally
bound hereby, agree as follows:
1. Employment and Term.
(a) Carnegie hereby employs the Executive as President and
Chief Executive Officer of Carnegie and Carnegie Bank, N.A. (collectively,
the "Position") and the Executive agrees to serve in the employ of Carnegie
in the Position, for a term of three years (the "Initial Term"), which shall
commence on the date hereof (the "Effective Date"), and which, subject to
paragraphs 1(b), 1(c) and 1(d) hereof, shall terminate on the third
anniversary of the Effective Date.
(b) Unless written notice terminating the term of employment is
given by either Carnegie or the Executive not less than 90 days prior to the
end of the Initial Term or any renewal term, this Agreement shall be
automatically extended, on all of the terms and conditions hereof, for
successive periods of one year.
(c) Carnegie shall have the right to terminate the Executive's
employment hereunder prior to the third anniversary of the Effective Date,
but only for cause. For purposes of this Agreement, "cause" means (i) the
Executive's willful and continued failure substantially to perform the duties
of his Position with Carnegie, (ii) fraud, misappropriation or other
intentional material damage to the property or business of Carnegie, (iii)
the Executive's admission or conviction of, or plea of nolo contendere to,
any felony that, in the judgment of the Board of Directors of Carnegie (the
"Board"), adversely affects Carnegie's reputation or the Executive's ability
to perform his duties hereunder; or (iv) Executive's willful violation of any
law, rule or regulation (other than traffic
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<PAGE>
violations or similar offenses) or final cease-and-desist order issued by
or regulatory consent agreement with any banking regulatory agency having
jurisdiction over Carnegie or its subsidiaries.
(d) The Executive shall have the right to terminate his employment
hereunder at any time prior to the third anniversary of the Effective Date,
upon giving sixty (60) days' prior written notification to Carnegie.
2. Duties.
(a) Subject to the ultimate control and discretion of the
Board, the Executive shall serve in the Position and perform all duties and
services of an executive nature commensurate to the Position which the Board
may from time to time reasonably assign to the Executive.
(b) The Executive shall, consistent with his position as Chief
Executive Officer of Carnegie, be responsible for the management of Carnegie,
its organizational structure and its personnel, subject to the authority of
the Board.
(c) The Executive shall devote all of the Executive's time and
attention during regular business hours to the performance of the Executive's
duties hereunder and, during the term of the Executive's employment
hereunder, shall not engage in any other business enterprise which requires
more than five hours per week of the Executive's personal time or attention,
unless granted the prior permission of the Board. The foregoing shall not
prevent the Executive's purchase, ownership or sale of investment securities
or of any interest in, any business which competes with the business of
Carnegie or the Executive's involvement in charitable or community
activities, provided that the time and attention which the Executive devotes
to such business and activities does not materially interfere with the
performance of the Executive's duties hereunder.
3. Compensation.
(a) For all services to be rendered by the Executive under this
Agreement, Carnegie agrees to pay the Executive a salary of not less than
$210,000 per annum during the term of this Agreement ("Base Compensation"),
payable in accordance with Carnegie's normal payroll practices as in effect
from time to time, plus an annual bonus (the "Bonus") equal to not less than
6.0 percent of the net after-tax income of Carnegie calculated before the
Executive's and other executive officers' additional compensation is deducted
and before any dividends or other bonuses are deducted, plus such other
additional compensation as may be awarded from time to time to the Executive
by the Board.
-2-
<PAGE>
(b) The Executive, in his capacity as a Director of Carnegie,
shall receive a fee of $750 for each Directors meeting and an additional fee
of $300 for each Committee meeting attended. Said amount shall be increased
in the event the Board increases the per meeting compensation of members of
the Board.
(c) The compensation provided for in paragraph 3(a) hereby
shall be in addition to such rights as the Executive may have, during the
Executive's service hereunder or hereafter, to participate in and receive
benefits from or under any bonus, stock option, pension, profit-sharing,
insurance or other employee benefit plan or plans of Carnegie which may exist
now or hereafter (collectively, the "Plans").
(d) If Carnegie terminates the Executive's employment
hereunder, other than in accordance with paragraph 1(c) hereof, prior to the
expiration of the Initial Term, Carnegie shall continue to pay the Executive
the Base Compensation and Bonus provided in paragraph 3(a) hereof, in
accordance with Carnegie's normal payroll practices in effect from time to
time, and maintain or pay for the medical and dental insurance benefits
provided in paragraph 3(d) hereof, for the remainder of the Initial Term.
4. Vacations. The Executive shall be entitled each year to four
weeks of vacation time during which vacation the Executive shall continue to
receive the compensation provided in paragraph 3 hereof. Each vacation shall
be taken by the Executive at such time or times as the Executive reasonably
determines, taking into account Executive's duties as set forth in Section 2
hereof and Carnegie's business needs at any particular time.
5. Expenses. Carnegie shall promptly reimburse the Executive for
all reasonable expenses paid or incurred by the Executive in connection with
his employment hereunder upon presentation of expense vouchers or appropriate
documentation therefor reasonably requested by Carnegie.
6. Death. If the Executive dies during the Initial Term of this
Agreement, this Agreement shall terminate and Carnegie's sole obligation
hereunder shall be to pay to the Executive's spouse, if such spouse survives
the Executive, or if not, to the Executive's issue in equal amounts, or if
none survive, to his Estate, (a) any accrued but unpaid compensation due the
Executive pursuant to paragraph 3 hereof to the date of the Executive's death
and (b) the Base Compensation and Bonus which would otherwise be payable to
Executive through the end of the 12-month period following the date of the
Executive's death. Such Base Compensation and Bonus shall be paid in
accordance with Carnegie's normal payroll practices as in effect from time to
time.
-3-
<PAGE>
7. Indemnification. Carnegie shall indemnify the Executive, to the
fullest extent permitted by law, for any and all liabilities to which the
Executive may be subject as a result of, in connection with or arising out of
his employment by Carnegie hereunder, as well as the costs and expenses
(including attorneys' fees) of any legal action brought or threatened to be
brought against the Executive or Carnegie as a result of, in connection with
or arising out of such employment. The Executive shall be entitled to the
full protection of any insurance polices which Carnegie may elect to maintain
generally for the benefit of its directors and officers.
8. Change in Control.
(a) Upon the occurrence of a Change in Control (as herein
defined) followed at any time during the term of this Agreement by the
involuntary termination of the Executive's employment other than for "cause",
as defined in paragraph 1(c) hereof, or, as provided below, the voluntary
termination of his employment by Executive within eighteen months of such
Change in Control, the Executive shall be entitled to the benefits provided
under paragraph (c). Upon the occurrence of a Change in Control, the
Executive shall have the right to elect to voluntarily terminate his
employment within eighteen months of such Change in Control following any
demotion, loss of title, office or significant authority, reduction in his
annual compensation or benefits, or relocation of his principal place of
employment by more than thirty miles from its location immediately prior to
the Change in Control.
(b) A "Change in Control" shall mean:
(i) a reorganization, merger, consolidation or sale
of all or substantially all of the assets of Carnegie,
or a similar transaction in which Carnegie is not the
resulting entity;
(ii) individuals who constitute the Incumbent Board (as
herein defined) of Carnegie cease for any reason to
constitute a majority thereof;
(iii) the acquisition by any party or group acting in
concert of control of Carnegie, within the meaning of 12
C.F.R. ' 225.2(d)(2);
(iv) an event of a nature that would be required to
be reported in response to Item I of the current report
on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934 (the "Exchange Act");
-4-
<PAGE>
(v) Without limitation, a change in control shall be
deemed to have occurred at such time as any "person" (as
the term is used in Section 13(d) and 14(d) of the
Exchange Act), excluding the trustee of any employee
benefit plans or any employee benefit plans established
by Carnegie from time to time, is or becomes a
"beneficial owner" (as defined in Rule 139(d) under the
Exchange Act) directly or indirectly, of securities of
Carnegie representing 25 percent or more of Carnegie's
outstanding securities ordinarily having the right to
vote at the election of directors;
(vi) A proxy statement soliciting proxies from
stockholders of Carnegie is disseminated by someone other
than the current management of Carnegie, seeking
stockholder approval of a plan of reorganization, merger
or consolidation of Carnegie or similar transaction with
one or more corporations as a result of which the
outstanding shares of the class of securities then
subject to the plan or transaction are exchanged or
converted into cash or property or securities not issued
by Carnegie;
(vii) A tender offer is made for 25 percent or more
of the voting securities of Carnegie and the shareholders
owning beneficially or of record 25 percent or more of
the outstanding securities of Carnegie have tendered or
offered to sell their shares pursuant to such tender
offer and such tendered shares have been accepted by the
tender offeror.
For these purposes, "Incumbent Board" means the Board of
Directors on the Effective Date, provided that any person becoming a director
subsequent to the Effective Date whose election was approved by a vote of at
least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by members or stockholders was approved by the
same nominating committee serving under an Incumbent Board, shall be
considered as though he were a member of the Incumbent Board.
(c) In the event the conditions of paragraph (a) above are
met, Executive shall be entitled to receive the Base Compensation and Bonus
which would otherwise have been payable to Executive through the end of the
thirty (30) month period after such termination. Such payments will be made
in accordance with Carnegie's normal payroll practices in effect at the time
Executive's termination. In addition, Carnegie shall continue to provide
Executive with hospital, health, medical and life
-5-
<PAGE>
insurance, and any other benefits in effect at the time of such termination
through the end of such period. Executive shall have no duty to mitigate damages
in connection with his termination by Carnegie or its successor without cause.
However, in the event Executive obtains new employment and such new employment
provides for hospital, health, medical and life insurance, and other benefits,
in a manner substantially similar to the benefits payable by Carnegie to
Executive upon the date of such termination, Carnegie may permanently terminate
the duplicative benefits it is obligated to provide hereunder.
9. Additional Covenants.
(a) Confidential Information. Except as required in the
performance of his duties hereunder, the Executive shall not use or disclose
any Confidential Information (as hereinafter defined) or any know-how or
experience related thereto without the express prior written authorization of
Carnegie. Upon termination of his employment, the Executive shall leave with
Carnegie all documents and other items in his possession which contain
Confidential Information. For purposes of this paragraph 9(a), the term
"Confidential Information" shall mean all information about Carnegie or
relating to any of its services or any phase of its operations not generally
known to any of its competitors with which the Executive becomes acquainted
during the term of his employment.
(b) Specific Performance. Carnegie and the Executive agree
that irreparable damage would occur in the event that the provisions of
paragraph 9(a) hereof were not performed in accordance with their specific
terms or were otherwise breached. Carnegie and the Executive accordingly
agree that Carnegie shall be entitled to an injunction or injunctions to
prevent a breach of paragraph 9(a) hereof and to enforce specifically the
terms and provisions of paragraph 9(a) hereof in addition to any other remedy
to which Carnegie is entitled at law or in equity.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient, if in writing and if sent by registered or
certified mail to either party hereto at their respective addresses set forth
above. All notices shall be deemed given when mailed.
11. Assignability. The services of the Executive hereunder are
personal in nature, and neither this Agreement nor the rights or obligations
of Executive hereunder may be assigned , whether by operation of law or
otherwise. This Agreement shall be binding upon, and inure to the benefit
of, Carnegie and its permitted successors and assigns hereunder. This
Agreement shall inure to the benefit of the Executive's heirs, executors,
administrators and other legal representatives.
-6-
<PAGE>
12. Waiver. The waiver by Carnegie or the Executive of a breach of
any provision of this Agreement by the other shall not operate or be
construed as a waiver of any subsequent or other breach hereof.
13. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey without
giving effect to principles of conflict of laws.
14. Entire Agreement. This Agreement contains the entire agreement
of the parties hereto with respect to the subject matter hereof and may not
be amended, waived, changed, modified or discharged, except by an agreement
in writing signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under their respective hands and seals as of the day and year first above
written.
CARNEGIE BANCORP
Attest:________________________ By:_______________________________
Bruce A. Mahon
Chairman of the Board
Witness:_______________________ _______________________________
Thomas L. Gray
-7-
EMPLOYMENT AGREEMENT
AGREEMENT made as of this 1st day of January, 1997 between CARNEGIE
BANCORP, a New Jersey corporation having its principal place of business at
619 Alexander Road, Princeton, New Jersey 08540 ("Carnegie") and Mark A.
Wolters, an individual residing at_____________________________________(the
"Executive").
W I T N E S S E T H:
WHEREAS, Carnegie deems it to be in its best interests to secure and
retain the services of the Executive and the Executive desires to work for
Carnegie upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual promises and
undertakings herein contained, the parties hereto, intending to be legally
bound hereby, agree as follows:
1. Employment and Term.
(a) Carnegie hereby employs the Executive as Executive Vice
President of Carnegie and of Carnegie Bank, N.A. (collectively, the
"Position") and the Executive agrees to serve in the employ of Carnegie in
the Position, for a term of three years (the "Initial Term"), which shall
commence on the date hereof (the "Effective Date"), and which, subject to
paragraphs 1(b), 1(c) and 1(d) hereof, shall terminate on the third
anniversary of the Effective Date.
(b) Unless written notice terminating the term of employment is
given by either Carnegie or the Executive not less than 90 days prior to the
end of the Initial Term or any renewal term, this Agreement shall be
automatically extended, on all of the terms and conditions hereof, for
successive periods of one year.
(c) Carnegie shall have the right to terminate the Executive's
employment hereunder prior to the third anniversary of the Effective Date,
but only for cause. For purposes of this Agreement, "cause" means (i) the
Executive's willful and continued failure substantially to perform the duties
of his Position with Carnegie, (ii) fraud, misappropriation or other
intentional material damage to the property or business of Carnegie, (iii)
the Executive's admission or conviction of, or plea of nolo contendere to,
any felony that, in the judgment of the Board of Directors of Carnegie (the
"Board"), adversely affects Carnegie's reputation or the Executive's ability
to perform his duties hereunder; or (iv) Executive's willful violation of any
law, rule or regulation (other than traffic violations or similar offenses)
or final cease-and-desist order issued by or regulatory consent agreement
with any
-1-
<PAGE>
banking regulatory agency having jurisdiction over Carnegie or its
subsidiaries.
(d) The Executive shall have the right to terminate his employment
hereunder at any time prior to the third anniversary of the Effective Date, upon
giving sixty (60) days' prior written notification to Carnegie.
2. Duties.
(a) Subject to the ultimate control and discretion of the Board
and the Chief Executive Officer, the Executive shall serve in the Position
and perform all duties and services of an executive nature commensurate to
the Position which the Board and the Chief Executive Officer may from time to
time reasonably assign to the Executive.
(b) The Executive shall, consistent with his position Executive
Vice President of Carnegie, be responsible for such duties and services as
are incidental to the position, subject to the authority of the Board and the
Chief Executive Officer of Carnegie.
(c) The Executive shall devote all of the Executive's time and
attention during regular business hours to the performance of the Executive's
duties hereunder and, during the term of the Executive's employment
hereunder, shall not engage in any other business enterprise which requires
more than five hours per week of the Executive's personal time or attention,
unless granted the prior permission of the Board. The foregoing shall not
prevent the Executive's purchase, ownership or sale of investment securities
or of any interest in, any business which competes with the business of
Carnegie or the Executive's involvement in charitable or community
activities, provided that the time and attention which the Executive devotes
to such business and activities does not materially interfere with the
performance of the Executive's duties hereunder.
3. Compensation.
(a) For all services to be rendered by the Executive under this
Agreement, Carnegie agrees to pay the Executive a salary of not less than
$100,000 per annum during the term of this Agreement ("Base Compensation"),
payable in accordance with Carnegie's normal payroll practices as in effect
from time to time, plus an annual bonus (the "Bonus") equal to not less than
2.0 percent of the net after-tax income of Carnegie calculated before the
Executive's and other executive officers' additional compensation is deducted
and before any dividends or other bonuses are deducted, plus such other
additional compensation as may be awarded from time to time to the Executive
by the Board.
-2-
<PAGE>
(b) The Executive, in his capacity as a Director of Carnegie,
shall receive a fee of $750 for each Directors meeting and an additional fee
of $300 for each Committee meeting attended; provided, however, that
Executive shall not be entitled to any compensation for attendance at loan
committee meetings. Said amount shall be increased in the event the Board
increases the per meeting compensation of members of the Board.
(c) The compensation provided for in paragraph 3(a) hereby
shall be in addition to such rights as the Executive may have, during the
Executive's service hereunder or hereafter, to participate in and receive
benefits from or under any bonus, stock option, pension, profit-sharing,
insurance or other employee benefit plan or plans of Carnegie which may exist
now or hereafter (collectively, the "Plans").
(d) If Carnegie terminates the Executive's employment
hereunder, other than in accordance with paragraph 1(c) hereof, prior to the
expiration of the Initial Term, Carnegie shall continue to pay the Executive
the Base Compensation and Bonus provided in paragraph 3(a) hereof, in
accordance with Carnegie's normal payroll practices in effect from time to
time, and maintain or pay for the medical and dental insurance benefits
provided in paragraph 3(d) hereof, for the remainder of the Initial Term.
4. Vacations. The Executive shall be entitled each year to four
weeks of vacation time during which vacation the Executive shall continue to
receive the compensation provided in paragraph 3 hereof. Each vacation shall
be taken by the Executive at such time or times as the Executive reasonably
determines, taking into account Executive's duties as set forth in Section 2
hereof and Carnegie's business needs at any particular time.
5. Expenses. Carnegie shall promptly reimburse the Executive for
all reasonable expenses paid or incurred by the Executive in connection with
his employment hereunder upon presentation of expense vouchers or appropriate
documentation therefor reasonably requested by Carnegie.
6. Death. If the Executive dies during the Initial Term of this
Agreement, this Agreement shall terminate and Carnegie's sole obligation
hereunder shall be to pay to the Executive's spouse, if such spouse survives
the Executive, or if not, to the Executive's issue in equal amounts, or if
none survive, to his Estate, (a) any accrued but unpaid compensation due the
Executive pursuant to paragraph 3 hereof to the date of the Executive's death
and (b) the Base Compensation and Bonus which would otherwise be payable to
Executive through the end of the 12-month period following the date of the
Executive's death. Such Base Compensation and Bonus shall be paid in
accordance with
-3-
<PAGE>
Carnegie's normal payroll practices as in effect from time to
time.
7. Indemnification. Carnegie shall indemnify the Executive, to the
fullest extent permitted by law, for any and all liabilities to which the
Executive may be subject as a result of, in connection with or arising out of
his employment by Carnegie hereunder, as well as the costs and expenses
(including attorneys' fees) of any legal action brought or threatened to be
brought against the Executive or Carnegie as a result of, in connection with
or arising out of such employment. The Executive shall be entitled to the
full protection of any insurance polices which Carnegie may elect to maintain
generally for the benefit of its directors and officers.
8. Change in Control.
(a) Upon the occurrence of a Change in Control (as herein
defined) followed at any time during the term of this Agreement by the
involuntary termination of the Executive's employment other than for "cause",
as defined in paragraph 1(c) hereof, or, as provided below, the voluntary
termination of his employment by Executive within eighteen months of such
Change in Control, the Executive shall be entitled to the benefits provided
under paragraph (c). Upon the occurrence of a Change in Control, the
Executive shall have the right to elect to voluntarily terminate his
employment within eighteen months of such Change in Control following any
demotion, loss of title, office or significant authority, reduction in his
annual compensation or benefits, or relocation of his principal place of
employment by more than thirty miles from its location immediately prior to
the Change in Control.
(b) A "Change in Control" shall mean:
(i) a reorganization, merger, consolidation or sale
of all or substantially all of the assets of Carnegie,
or a similar transaction in which Carnegie is not the
resulting entity;
(ii) individuals who constitute the Incumbent Board (as
herein defined) of Carnegie cease for any reason to
constitute a majority thereof;
(iii) the acquisition by any party or group acting in
concert of control of Carnegie, within the meaning of 12
C.F.R. ' 225.2(d)(2);
(iv) an event of a nature that would be required to
be reported in response to Item I of the current report
on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d)
-4-
<PAGE>
of the Securities Exchange Act of
1934 (the "Exchange Act").
(v) Without limitation, a change in control shall be
deemed to have occurred at such time as any "person" (as
the term is used in Section 13(d) and 14(d) of the
Exchange Act), excluding the trustee of any employee
benefit plans or any employee benefit plans established
by Carnegie from time to time, is or becomes a
"beneficial owner" (as defined in Rule 139(d) under the
Exchange Act) directly or indirectly, of securities of
Carnegie representing 25 percent or more of Carnegie's
outstanding securities ordinarily having the right to
vote at the election of directors;
(vi) A proxy statement soliciting proxies from
stockholders of Carnegie is disseminated by someone other
than the current management of Carnegie, seeking
stockholder approval of a plan of reorganization, merger
or consolidation of Carnegie or similar transaction with
one or more corporations as a result of which the
outstanding shares of the class of securities then
subject to the plan or transaction are exchanged or
converted into cash or property or securities not issued
by Carnegie;
(vii) A tender offer is made for 25 percent or more
of the voting securities of Carnegie and the shareholders
owning beneficially or of record 25 percent or more of
the outstanding securities of Carnegie have tendered or
offered to sell their shares pursuant to such tender
offer and such tendered shares have been accepted by the
tender offeror.
For these purposes, "Incumbent Board" means the Board of
Directors on the Effective Date, provided that any person becoming a director
subsequent to the Effective Date whose election was approved by a vote of at
least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by members or stockholders was approved by the
same nominating committee serving under an Incumbent Board, shall be
considered as though he were a member of the Incumbent Board.
(c) In the event the conditions of paragraph (a) above are
met, Executive shall be entitled to receive the Base Compensation and Bonus
which would otherwise have been payable to Executive through the end of the
eighteen (18) month period after such termination. Such payments will be
made in accordance with
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<PAGE>
Carnegie's normal payroll practices in effect at the
time Executive's termination. In addition, Carnegie shall continue to
provide Executive with hospital, health, medical and life insurance, and any
other benefits in effect at the time of such termination through the end of
such period. Executive shall have no duty to mitigate damages in connection
with his termination by Carnegie or its successor without cause. However, in
the event Executive obtains new employment and such new employment provides
for hospital, health, medical and life insurance, and other benefits, in a
manner substantially similar to the benefits payable by Carnegie to Executive
upon the date of such termination, Carnegie may permanently terminate the
duplicative benefits it is obligated to provide hereunder.
9. Additional Covenants.
(a) Confidential Information. Except as required in the
performance of his duties hereunder, the Executive shall not use or disclose
any Confidential Information (as hereinafter defined) or any know-how or
experience related thereto without the express prior written authorization of
Carnegie. Upon termination of his employment, the Executive shall leave with
Carnegie all documents and other items in his possession which contain
Confidential Information. For purposes of this paragraph 9(a), the term
"Confidential Information" shall mean all information about Carnegie or
relating to any of its services or any phase of its operations not generally
known to any of its competitors with which the Executive becomes acquainted
during the term of his employment.
(b) Specific Performance. Carnegie and the Executive agree
that irreparable damage would occur in the event that the provisions of
paragraph 9(a) hereof were not performed in accordance with their specific
terms or were otherwise breached. Carnegie and the Executive accordingly
agree that Carnegie shall be entitled to an injunction or injunctions to
prevent a breach of paragraph 9(a) hereof and to enforce specifically the
terms and provisions of paragraph 9(a) hereof in addition to any other remedy
to which Carnegie is entitled at law or in equity.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient, if in writing and if sent by registered or
certified mail to either party hereto at their respective addresses set forth
above. All notices shall be deemed given when mailed.
11. Assignability. The services of the Executive hereunder are
personal in nature, and neither this Agreement nor the rights or obligations
of Executive hereunder may be assigned , whether by operation of law or
otherwise. This Agreement shall be binding upon, and inure to the benefit
of, Carnegie and its permitted successors and assigns hereunder. This
Agreement shall
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<PAGE>
inure to the benefit of the Executive's heirs, executors,
administrators and other legal representatives.
12. Waiver. The waiver by Carnegie or the Executive of a breach of
any provision of this Agreement by the other shall not operate or be
construed as a waiver of any subsequent or other breach hereof.
13. Applicable Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New Jersey without
giving effect to principles of conflict of laws.
14. Entire Agreement. This Agreement contains the entire agreement
of the parties hereto with respect to the subject matter hereof and may not
be amended, waived, changed, modified or discharged, except by an agreement
in writing signed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under their respective hands and seals as of the day and year first above
written.
CARNEGIE BANCORP
Attest:__________________________________ By:________________________________
Thomas L. Gray, Jr.,
President and Chief Executive
Officer
Witness: ______________________________ ________________________________
Mark A. Wolters
-7-
CONSULTING AGREEMENT
CONSULTING AGREEMENT made as of this 1st day of January, 1997 between
CARNEGIE BANCORP, a New Jersey corporation with its principal office at 619
Alexander Road, Princeton, New Jersey 08540 ("Carnegie") and BRUCE A. MAHON, an
individual whose business address is ________________________ (the
"Consultant").
RECITAL:
WHEREAS, the parties hereto desire to enter into this Agreement to provide
for the retention by Carnegie of the Consultant as a consultant to Carnegie and
for certain other matters in connection with such retention more fully as set
forth in this Agreement;
NOW, THEREFORE, the parties hereto, in consideration of the mutual
premises and covenants herein contained and intending to be legally bound
hereby, agree as follows:
1. Duties. Carnegie agrees that the Consultant shall be retained by
Carnegie commencing as of the date hereof as a consultant to Carnegie. The
Consultant agrees to provide consulting services to Carnegie as and when
requested by the Board of Directors or President and Chief Executive Officer of
Carnegie, subject to the reasonable convenience and schedule of the Consultant.
2. Term. Subject to paragraphs 4 and 5 hereof, the Consultant's
retention hereunder shall be for a term of two years commencing on the date
hereof.
3. Compensation and Expenses.
(a) During the term of this Agreement, the Consultant shall be paid
a consulting fee at the rate of $75,000 per year in full payment of the services
to be rendered by the Consultant to Carnegie hereunder. The consulting fee shall
be paid by Carnegie to the Consultant in quarterly installments of $18,750 or as
otherwise agreed by Carnegie and the Consultant.
(b) The Consultant is authorized to incur, and Carnegie agrees to
reimburse the Consultant for, reasonable and necessary business related expenses
incurred by the Consultant in rendering the consulting services provided for
herein, upon presentation by the Consultant to Carnegie of itemized accounts of
such expenses in accordance with Carnegie's regular policies for reimbursement
of employees' business expenses.
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<PAGE>
4. Death or Total Disability of the Consultant.
(a) In the event of the death of the Consultant during the term of
this Agreement, this Agreement shall terminate effective as of the date of the
Consultant's death, and Carnegie shall not have any further obligations or
liability to the Consultant hereunder except as provided in paragraph 7 hereof
and except that Carnegie shall pay to the Consultant any unpaid fees for
consulting services rendered prior to the date of the Consultant's death and
reimburse the Consultant's estate for any business expenses incurred by the
Consultant which had not been reimbursed at the date of the Consultant's death.
(b) In the event of the Total Disability (as defined herein) of the
Consultant for a period of 90 consecutive days during the term of this
Agreement, Carnegie shall have the right to terminate the Consultant's services
hereunder by giving the Consultant 10 days' written notice thereof and, upon
expiration of such 10-day period, Carnegie shall not have any further
obligations or liability to the Consultant hereunder except as provided in
paragraph 7 hereof and except that Carnegie shall pay to the Consultant any
unpaid fees for consulting services rendered prior to the date of termination
and reimburse the Consultant for any business expenses incurred by the
Consultant which had not been reimbursed at the date of termination. As used
herein, the term "Total Disability" shall mean a mental or physical condition
which, in the reasonable opinion of Carnegie, renders the Consultant unable to
perform the consulting services.
5. Termination for Cause. Carnegie shall have the right to terminate the
Consultant's services hereunder for Cause (as defined herein) by giving the
Consultant 10 days' written notice thereof and, upon expiration of such 10-day
period, Carnegie shall not have any further obligations or liability to the
Consultant hereunder except as provided in paragraph 7 hereof and except that
Carnegie shall pay to the Consultant any unpaid fees for consulting services
rendered prior to the date of termination and reimburse the Consultant for any
business expenses incurred by the Consultant which had not been reimbursed at
the date of termination. As used herein, the term "Cause" shall mean (i) the
Consultant's willful and continued failure to perform his duties hereunder, (ii)
fraud, misappropriation or other intentional material damage to the property or
business of Carnegie or (iii) the Consultant's admission or conviction of, or
plea of nolo contendere to, any felony that, in the judgment of the Board of
Directors of Carnegie, adversely affects Carnegie's reputation or the
Consultant's ability to perform his duties hereunder.
6. Non-Disclosure.
(a) Except as required in the performance of his duties hereunder,
the Consultant shall not use or disclose any
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<PAGE>
Confidential Information (as hereinafter defined) or any know-how or
experience related thereto without the express written authorization of
Carnegie. Upon termination of this Agreement, the Consultant shall leave with
Carnegie all documents and other items in his possession which contain
Confidential Information. For purposes of this paragraph 6(a), the term
"Confidential Information" shall mean all information about Carnegie or relating
to any of its services or any phase of its operations not generally known to any
of its competitors with which the Consultant becomes acquainted during the term
of this Agreement.
(b) Carnegie and the Consultant agree that irreparable damage would
occur in the event that the provisions of paragraph 6(a) hereof were not
performed in accordance with their specific terms or were otherwise breached.
Carnegie and the Consultant accordingly agree that Carnegie shall be entitled to
an injunction or injunctions to prevent a breach of paragraph 6(a) hereof and to
enforce specifically the terms and provisions of paragraph 6(a) hereof in
addition to any other remedy to which Carnegie is entitled at law or in equity.
(c) The provisions of this paragraph 6 shall survive the termination
of this Agreement.
7. Indemnification. Carnegie shall indemnify the Consultant, to the
fullest extent permitted by law, for any and all liabilities to which the
Consultant may be subject as a result of, in connection with or arising out of
its retention by Carnegie hereunder, as well as the costs and expenses
(including attorneys' fees) of any legal action brought or threatened to be
brought against the Consultant or Carnegie as a result of, in connection with or
arising out of such retention. The Consultant shall be entitled to the full
protection of any insurance policies which Carnegie may elect to maintain
generally for the benefit of its directors and officers as the same may be
applicable to the Consultant.
8. Change in Control.
(a) Upon the occurrence of a Change in Control (as herein defined)
followed at any time during the term of this Agreement by the involuntary
termination of the Consultant's service other than for "cause", as defined in
paragraph 5 hereof, or, as provided below, the voluntary termination of his
services by Consultant within eighteen months of such Change in Control, the
Consultant shall be entitled to the benefits provided under paragraph (c). Upon
the occurrence of a Change in Control, the Consultant shall have the right to
elect to voluntarily terminate his service within eighteen months of such Change
in Control following any substantial change in the conditions of rendering the
services provided for hereunder including any material
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<PAGE>
increase in the number of hours of services rendered, the type of services
rendered and the place such services are rendered.
(b) A "Change in Control" shall mean:
(i) a reorganization, merger, consolidation or sale
of all or substantially all of the assets of Carnegie,
or a similar transaction in which Carnegie is not the
resulting entity;
(ii) individuals who constitute the Incumbent Board (as
herein defined) of Carnegie cease for any reason to
constitute a majority thereof;
(iii) the acquisition by any party or group acting in
concert of control of Carnegie, within the meaning of 12
C.F.R. s. 225.2(d)(2);
(iv) an event of a nature that would be required to be
reported in response to Item I of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act");
(v) Without limitation, a change in control shall be
deemed to have occurred at such time as any "person" (as the
term is used in Section 13(d) and 14(d) of the Exchange
Act), excluding the trustee of any employee benefit plans or
any employee benefit plans established by Carnegie from time
to time, is or becomes a "beneficial owner" (as defined in
Rule 139(d) under the Exchange Act) directly or indirectly,
of securities of Carnegie representing 25 percent or more of
Carnegie's outstanding securities ordinarily having the
right to vote at the election of directors;
(vi) A proxy statement soliciting proxies from
stockholders of Carnegie is disseminated by someone other
than the current management of Carnegie, seeking stockholder
approval of a plan of reorganization, merger or
consolidation of Carnegie or similar transaction with one or
more corporations as a result of which the outstanding
shares of the class of securities then subject to the plan
or transaction are exchanged or converted into cash or
property or securities not issued by Carnegie;
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<PAGE>
(vii) A tender offer is made for 25 percent or more of
the voting securities of Carnegie and the shareholders
owning beneficially or of record 25 percent or more of the
outstanding securities of Carnegie have tendered or offered
to sell their shares pursuant to such tender offer and such
tendered shares have been accepted by the tender offeror.
For these purposes, "Incumbent Board" means the Board of Directors
on the date hereof, provided that any person becoming a director subsequent to
the date hereof whose election was approved by a vote of at least three-quarters
of the directors comprising the Incumbent Board, or whose nomination for
election by members or stockholders was approved by the same nominating
committee serving under an Incumbent Board, shall be considered as though he
were a member of the Incumbent Board.
(c) In the event the conditions of paragraph (a) above are met,
Consultant shall be entitled to receive the compensation to which he would have
otherwise been entitled under Section 3(a) hereof through the end of the thirty
(30) month period after such termination. Such payments will be made in
accordance with the payment schedule set forth in Section 3(a).
9. Assignment.
(a) The rights and obligations of Carnegie under this Agreement
shall inure to the benefit of, and shall be binding upon, the successors and
assigns of Carnegie.
(b) This Agreement and the obligations created hereunder may
not be assigned by the Consultant.
10. Miscellaneous.
(a) Any amendment to this Agreement, including any extension of the
term of this Agreement, shall be made in writing and signed by the parties
hereof.
(b) This Agreement shall be governed by and construed in
accordance with the laws of the State of New Jersey.
(c) All notices required or permitted to be given hereunder shall be
in writing and shall be deemed to have been given when mailed by certified or
registered mail, return receipt requested, addressed to the address listed for
each party on the first page hereof.
Any party may change its address for the purpose of notices to that party by a
similar notice specifying a new address, but no
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<PAGE>
such change shall be deemed to have been given until it is actually
received by the party sought to be charged with its contents.
(d) This Agreement constitutes the entire agreement of the parties
with respect to the subject matter hereof and supersedes all prior agreements of
the parties with respect thereto.
IN WITNESS WHEREOF, this Agreement has been executed by the parties
hereto on the date first above written.
CARNEGIE BANCORP
By:______________________________
Thomas L. Gray, Jr., President
and Chief Executive Officer
----------------------------------
Bruce A. Mahon
-6-
Dear Shareholders:
Our growth continues to be spectacular! Even though our acquisition of Regent
Bancshares Corp. didn't come to fruition due to problems causing extensive
delays in consummating the deal, we garnered several benefits from the process.
Our Langhorne, Pennsylvania office, opened only to accommodate the merger, is
now at $10.5 million in deposits and $33.1 million in loans. We also purchased
$32.9 million in quality, seasoned loans from Regent National Bank.
Our loan portfolio grew 62.2% from $162.6 million at December 31, 1995 to $263.8
million at December 31, 1996. We continue to maintain high underwriting
standards and lending practices. Total assets grew 37.0% for the year, and
deposits grew 43.9% for the same period. Net income for 1996 was greater than
1995, and that was noteworthy when we examine the components of that
performance. Our four newest offices - Toms River (opened November 1995),
Montgomery (opened January 1996), Langhorne (opened May 1996), and Flemington
(opened March 1996 as a loan production office and August 1996 as a full-service
office) - all operated at losses as expected during the year. Those losses
totaled $841.3 thousand pre-tax. The Toms River Office has been operating
profitably during the first two months of 1997. Montgomery reached a break-even
performance level in February 1997. Langhorne achieved profitability in February
1997, with the addition of the loans purchased from Regent National Bank.
Flemington achieved a break-even performance level in January 1997 while
operating from their temporary office; however, with the move into a permanent
location and the additional occupancy expenses associated therewith, we expect
that a true break-even will occur during mid-1997. We do not anticipate opening
any new offices in 1997, but expect to do so in 1998.
Another component of our earnings performance for this year was the tremendous
growth in our loan portfolio. Well over $1 million of our provision for loan
losses was made for that growth. Management plans to continue our rate of growth
over the next two years to achieve an asset size of $500 million. We may even
exceed that mark if we acquire one or more banks within the next two years,
however, that is not essential to our plan. After achieving our targeted growth
in 1997 and 1998, we shall change the primary goals of the Company from
achieving spectacular asset growth with good earnings to achieving excellent
earnings and moderate asset growth. We are convinced that this plan is the best
way to maximize the value of our common stock for shareholders.
We express sincere gratitude to our directors, officers, employees,
shareholders, customers and friends for all they have done. We look forward to
apprising them of our progress and sharing in that progress with them.
Your management promises to prudently execute our plans while always maintaining
the interests of our stakeholders.
Sincerely,
Thomas L. Gray, Jr.
President and
Chief Executive Officer
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of its consolidated
balance sheets and statements of income. This section should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes, included herein.
Overview and Strategy
Since it commenced operations in April, 1988, the Company has increased its
asset base at a rapid pace. The Company's assets have grown from $51.3 million
at December 31, 1989 to $343.4 million at December 31, 1996, a compound annual
growth rate of 31.2%. This growth has come both through the Company's success in
penetrating its original market in the Princeton, New Jersey area, and through
expansion into other market areas in New Jersey and, recently, Pennsylvania.
New branch offices were opened in Toms River, New Jersey in November 1995,
Montgomery, New Jersey in January 1996, Langhorne, Pennsylvania in May 1996, and
Flemington, New Jersey in August, 1996. Carnegie also relocated its Hamilton
branch office to a location with more parking and better access in October 1996.
Although the Company's emphasis has been on growth, the Company became
profitable in its second quarter of operations, and its net income was $2.1
million for the year ended December 31, 1996. As a result of the Company's
success in continuing growth while maintaining profitability, and in order to
provide the stockholders with a return on their investment, the Company began
paying cash dividends in the first quarter of 1992. The Company has continued to
pay cash dividends in every quarter since the first quarter of 1992. The
dividend per share for 1995 and 1996 was $.48 and $.49, respectively. The first
quarter dividend of 1997, declared on January 15, 1997, was $0.14 per share, or,
on an annualized basis, is $.56 per share.
1996 was marked by an improved economy in the Company's market areas and the
Company posted significant increases in deposits and loans. Net income increased
from 1995 levels despite operating four new offices that were not yet profitable
as of December 31, 1996. In January, 1997, the Company and Regent Bancshares
Corp. ("Regent") mutually agreed to terminate their proposed merger due to the
significant delays which had been experienced. In connection with the
termination of the proposed merger, and pursuant to the terms of the Merger
Agreement, Regent paid Carnegie the sum of $722 thousand in reimbursement for
expenses incurred by Carnegie in connection with the merger. The termination of
the merger therefore did not affect the Company's results of operation for 1996.
Net Income
The Company earned $2.1 million, or $1.01 per share, on a primary basis, and
$1.00 per share on a fully diluted basis for the year ended December 31, 1996
compared to $2.1 million, or $1.08 per share on a primary basis and $1.07 per
share on a fully diluted basis for the year ended December 31, 1995. Net
interest income increased $3.3 million or 32.6% which was partially offset by an
increase in non-interest expenses of $2.3 million. Most of the increase in
non-interest expense was attributable to having four new branch offices open in
1996. Additionally, the provision for loan losses increased $1.2 million,
primarily due to loan growth including the purchase of $32.8 million in loan
participations from Regent. That additional expense was partially offset by net
gains on the sale of securities and other real estate owned of $599 thousand.
For the year ended December 31, 1995, the Company earned $2.1 million, or $1.08
per share on a primary basis, and $1.07 per share on a fully diluted basis, an
increase of $589 thousand, or 38.3% compared to the year ended December 31,
1994. This increase was primarily due to a $1.8 million, or 21.8% increase in
net interest income partially offset by higher non-interest expense, an increase
in non-interest income, a decrease in the provision for loan losses and
increased income tax expense. The decline in net income per share in 1996 was
the result of the increase in the Company's average shares outstanding through
the exercise of stock purchase warrants and stock options.
Average Balances and Net Interest Income
Net interest income, the primary source of the Company's earnings, is the
difference between interest and fees earned on loans and other interest-earning
assets, and interest paid on deposits and other interest-bearing liabilities.
Interest-earning assets include loans to businesses and individuals, investment
securities, interest-earning deposits with other banks, and Federal funds sold
in the inter-bank market. Interest-bearing liabilities are comprised primarily
of interest-bearing demand accounts, savings accounts, money market accounts,
time deposits and borrowed funds. Funds attracted by interest-bearing
liabilities are invested in interest-earning assets. Accordingly, net interest
income depends upon the volume and mix of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
The following table illustrates the Company's consolidated average balances of
assets, liabilities and stockholders' equity for the years ended December 31,
1996, 1995 and 1994, as well as the amount of interest income/expense on related
items, and the Company's average interest yield for such periods. The interest
yields have been computed on a fully tax-equivalent basis, assuming a Federal
income tax rate of 34%.
<PAGE>
Average Balance Sheet With Resultant Interest Income/Expense And Average Rates
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- -------------------------- --------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
[Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Earning Assets:
Federal Funds Sold $ 1,989 $ 106 5.33% $ 8,040 $ 475 5.91% $ 6,969 $ 290 4.16%
Investment Securities:
Securities available for sale:
U. S. Government & Mortgage-
backed Securities 30,488 2,048 6.72% 37,146 2,384 6.42% 27,396 1,753 6.40%
State & Political
Subdivisions (1) 7,432 580 7.80% - - - - - -
Other Securities 6,038 378 6.26% 2,462 151 6.13% 1,382 75 5.43%
43,958 3,006 6.84% 39,608 2,535 6.40% 28,778 1,828 6.35%
Securities held to maturity:
U.S. Government & Mortgage-
backed Securities 18,524 1,324 7.15% - - - - - -
State & Political Subdivisions (1) - - - 18,531 1,468 7.92% 9,596 779 8.12%
18,524 1,324 7.15% 18,531 1,468 7.92% 9,596 779 8.12%
Total Investment
Securities 62,482 4,330 6.93% 58,139 4,003 6.89% 38,374 2,607 6.79%
Loans: (2) (3)
Commercial Loans and
Commercial Mortgages 174,154 17,482 10.04% 119,618 12,248 10.24% 95,177 8,740 9.18%
Residential Mortgages 22,239 1,911 8.59% 25,243 2,189 8.67% 25,075 1,955 7.80%
Installment Loans 9,114 849 9.32% 2,924 290 9.92% 2,391 228 9.54%
Total Loans 205,507 20,242 9.85% 147,785 14,727 9.97% 122,643 10,923 8.91%
Total Earning
Assets 269,978 24,678 9.14% 213,964 19,205 8.98% 167,986 13,820 8.23%
Non-Interest Earning Assets:
Loan Loss Reserve (2,079) (1,562) (1,076)
Held For Sale
Securities Valuation (140) (1,275) (1,217)
All Other Assets 18,051 13,533 10,408
Total Assets 285,810 224,660 176,101
Liabilities & Equity
Interest-Bearing Liabilities:
Savings and Money Market
Accounts $ 88,998 3,519 3.95% $ 79,988 3,096 3.87% $100,034 $ 3,747 3.75%
Time Deposits 102,450 5,576 5.44% 86,803 5,071 5.84% 37,344 1,400 3.75%
Borrowed Funds 30,879 1,789 5.79% 4,906 297 6.05% 38 2 5.26%
Total Interest-Bearing
Liabilities 222,327 10,884 4.90% 171,697 8,464 4.93% 137,416 5,149 3.75%
Demand Deposits. 40,684 32,287 24,663
Other Liabilities 640 826 515
Shareholders' Equity 22,159 19,850 13,507
Total Liabilities & Equity $285,810 $224,660 $176,101
Net Interest Income
(fully taxable basis) $13,794 $10,741 $ 8,671
Net Interest Margin
(fully taxable basis) 5.11% 5.02% 5.16%
Equity to Assets Ratio 7.75% 8.84% 7.67%
<FN>
(1) The tax-equivalent basis adjustment was computed based on a Federal income tax rate of 34%.
(2) Includes non-performing loans.
(3) Included in interest income are loan fees.
</FN>
</TABLE>
<PAGE>
The following table presents by category the major factors that contributed to
the changes in net interest income for each of the years ended December 31, 1996
and 1995, as compared to each respective previous period. Amounts have been
computed on a fully tax-equivalent basis, assuming a Federal income tax rate of
34%.
Analysis of Changes in Net Interest Income
1996 compared to 1995 1995 compared to 1994
----------------------- -----------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
------------- -------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in thousands)
Interest Earned On:
Federal Funds Sold $ (357) $ (12) $ (369) $ 45 $ 140 $ 185
Investment Securities:
Securities available for sale:
U.S. Government &
Mortgage-backed Securities (427) 91 (336) 624 7 631
State & Political Subdivisions 589 (9) 580 - - -
Other Securities 219 8 227 59 17 76
381 90 471 683 24 707
Securities held to maturity:
U.S. Government &
Mortgage-backed Securities 1,189 135 1,324 - - -
State & Political
Subdivisions (1) (1,468) - (1,468) 725 (36) 689
(279) 135 (144) 725 (36) 689
Total Investment Securities 102 225 327 1,408 (12) 1,396
Loans:
Commercial Loans &
Commercial Mortgages 5,584 (350) 5,234 2,244 1,264 3,508
Residential Mortgages (260) (18) (278) 13 221 234
Installment Loans 614 (55) 559 51 11 62
Total Loans 5,938 (423) 5,515 2,308 1,496 3,804
Total Interest Income 5,683 (210) 5,473 3,761 1,624 5,385
Interest Paid On:
Savings and Money
Market Accounts 349 74 423 (751) 100 (651)
Time Deposits 914 (409) 505 1,854 1,817 3,671
Federal Funds Borrowed 1,572 (80) 1,492 256 39 295
Total Interest Expense 2,835 (415) 2,420 1,359 1,956 3,315
Net Interest Income 2,848 205 3,053 2,402 (332) 2,070
Interest income on a fully tax-equivalent ("FTE") basis, which adjusts for the
tax-exempt status of income earned on certain investments to express such income
as if it were taxable, increased $5.5 million, or 28.6 %, to $24.7 million for
1996 compared to $19.2 million for 1995. The improvement in interest income was
primarily due to volume increases in the loan portfolio as Carnegie benefited
from strong loan demand and the purchase of $32.8 million of loan participations
from Regent National Bank during the last two quarters of 1996, which produced a
volume related increase in interest income on loans of $5.9 million.
Interest expense for the year ended December 31, 1996 increased by $2.4 million,
or 28.6%, to $10.9 million from $8.5 million for the year ended December 31,
1995. The increase in interest expense was due primarily to volume increases in
savings and money market accounts, time deposits and borrowed funds accounting
for $349 thousand, $914 thousand, and $1.6 million, respectively of the volume
related increase in interest expense. These volume related increases were
partially offset by rate decreases in time deposits and borrowed funds which
accounted for a $409 thousand and $80 thousand decrease in interest expense.
Rate increases in savings and money market accounts increased interest expense
by $74 thousand. Volume increases are the result of pricing decisions made by
management in response to the need for a cost effective source of funds,
primarily to provide for loan growth.
<PAGE>
In the year ended December 31, 1995, interest income on a FTE basis increased
$5.4 million, or 39.1%, to $19.2 million for 1995 compared to $13.8 million for
1994. The improvement in interest income was primarily due to volume increases
in the loan portfolio and investment securities portfolio as Carnegie benefited
from an improved economy in New Jersey and continued its historical growth rate,
which produced an increase in interest income on loans of $2.3 million and an
increase in interest income on investments of $1.4 million. Interest income was
further increased by $1.5 million due to rate increases on loans during a period
of rising rates.
Interest expense for the year ended December 31, 1995 increased by $3.4 million,
or 66.7%, to $8.5 million from $5.1 million for the year ended December 31,
1994. The increase in interest expense was due primarily to rate increases in
consumer certificates of deposit and certificates of deposit over $100 thousand,
which accounted for $2.0 million of the increase, and volume increases
accounting for $1.4 million, resulting primarily from volume increases in time
deposits, offset by a decrease of $751 thousand attributable to volume decreases
in money market accounts. These volume increases reflected management's decision
to emphasize certificates of deposit over $100 thousand and six month consumer
certificates of deposit as cost effective sources of funds.
The Company's net interest margin, which measures net interest income as a
percentage of average earning assets, was 5.11%, 5.02%, and 5.16% for the years
ended December 31, 1996, 1995 and 1994, respectively, due to the combination of
factors mentioned above.
Non-Interest Income
The Company's non-interest income consists of service fees on deposits, other
fees and commissions, gains on the sale of other real estate owned, investment
securities gains and investment securities losses.
Total non-interest income was $1.4 million for 1996 compared to $744 thousand
for 1995, an increase of $616 thousand, or 82.8%. Increases included $197
thousand, or 83.5% in service fees on deposits and $52 thousand, or 20.1% in
other fees and commissions. In our continuing efforts to improve non-interest
income, toward the end of 1995, the Company entered into an arrangement with
Beacon Trust Company, headquartered in Chatham, New Jersey. Beacon has
established a branch office located inside the Company's main office lobby to
generate additional trust accounts and customers. The Company shares in the
income from that business.
Service fees on deposits decreased by $11 thousand in 1996 compared to 1995.
Although the average balance of deposits increased by $33.0 million or 16.6% in
1996, the Company experienced a decline in overdraft fee income in comparison to
1995 which accounted for the decline in deposit fee income. The decrease was
offset by a $28 thousand increase in other fees and commissions. Other fees and
commissions increased as a result of the Company's continued branch expansion.
The Company realized a $294 thousand gain on the sale of other real estate
owned, compared to "none" in 1995. The Company also realized net securities
gains on available-for-sale securities of $305 thousand in 1996, compared to
"none" in 1995. In 1996, available-for-sale securities were sold in the ordinary
course of business to take advantage of opportunities to restructure the
portfolio to shorten maturities or improve income, as well as to fund loan
growth.
Total non-interest income was $744 thousand for 1995 compared to $495 thousand
for 1994, an increase of $249 thousand, or 50.3%. Increases included $197
thousand, or 83.5% in service fees on deposits and $52 thousand, or 20.1% in
other fees and commissions.
The increase in service charges on deposit accounts in 1995 was primarily the
result of an increase in the average balance of deposits outstanding during 1995
coupled with an increase in the fees charged. The increase in other fees and
commissions was due to continued expansion of the branch system and an increase
in rates charged.
Non-Interest Expense
For the year ended December 31, 1996, total non-interest expense increased $2.3
million, or 30.2%, to $10.1 million for 1996 from $7.7 million for 1995. Of this
increase, $1.3 million was attributable to salaries and benefits due to an
increase in the number of employees required by the Company's growth, and
establishment of four newly opened branch offices, as well as merit and cost of
living adjustments. At December 31, 1996, the Company had 118 full-time
equivalent employees compared to 109 full-time equivalent employees at December
31, 1995.
<PAGE>
Occupancy expense increased $442 thousand, or 43.2% during 1996 compared to
1995, due primarily to increased lease expenses incurred as a result of the full
year effect during 1996 of the relocated and larger corporate headquarters
opened in April 1995, plus the additional lease expenses incurred because of
four new branch offices opened in Toms River, New Jersey in November 1995,
Montgomery, New Jersey in January 1996, Langhorne, Pennsylvania in May 1996, and
Flemington, New Jersey in August 1996. Furniture and equipment expenses
increased $332 thousand, or 59.0%, due primarily to depreciation on purchases of
additional furniture and computer equipment for the new office locations.
Other expenses increased by $247 thousand, or 9%, due to the continued growth of
the Company's deposit base, which resulted in increased supplies, communications
and professional expenses partially offset by a reduction in FDIC insurance
premiums.
FDIC insurance premiums decreased by $233 thousand to $2 thousand for 1996 from
$235 thousand for 1995, although the Company's deposit base increased by 43.9%
comparing year end 1996 to year end 1995. This decrease in FDIC insurance
premiums was due to the recapitalization of the FDIC's Bank Insurance Fund and
the subsequent reduction in insurance premium rates.
For the year ended December 31, 1995, total non-interest expense increased $1.6
million, or 26.2%, to $7.7 million compared to $6.1 million for 1994. Of this
increase, $803 thousand was attributable to salaries and benefits due to an
increase in the number of employees required by the Company's growth, and
establishment of additional offices, as well as merit and cost of living
adjustments.
Occupancy expense increased $323 thousand, or 46.1% during 1995 compared to
1994, due primarily to increased lease expense incurred for the relocated and
larger corporate headquarters facilities. Furniture and equipment expenses
increased $221 thousand, or 61.0%, due primarily to depreciation on purchases of
additional computer equipment and depreciation on replacements of other
furniture and equipment.
Other expenses increased by $321 thousand, or 13.3%, during 1995 due to the
continued growth of the Company's deposit base, which resulted in increased
supplies, communications and professional expenses partially offset by a
reduction in FDIC insurance premiums.
FDIC insurance premiums decreased by $103 thousand to $235 thousand for 1995
from $338 thousand for 1994, although the Company's deposit base increased by
18.9% for the comparable periods. This decrease in FDIC insurance premiums was
due to a refund of $119 thousand received in September 1995 which resulted from
the recapitalization of the FDIC's Bank Insurance Fund and the subsequent
reduction in insurance premium rates.
Income Tax Expense
The income tax provision, which includes both Federal and state taxes, for the
years ended December 31, 1996, 1995 and 1994 was $1.1 million, $765 thousand and
$656 thousand, respectively.
The increase in 1996 total tax expense was primarily the result of an increase
in operating income, and a decrease in tax-exempt investment securities income.
The increase in 1995 total tax expense was primarily the result of an increase
in operating income, partially offset by an increase in tax-exempt securities
income.The effective tax rate was 34.6% in 1996, 26.4% in 1995 and 29.9% in
1994.
Return on Average Equity and Average Assets
Two industry measures of the performance by a banking institution are its return
on average assets and return on average equity. Return on average assets ("ROA")
measures net income in relation to total average assets and indicates a
Company's ability to employ its resources profitably. For 1996, the Company's
ROA was .75%, compared to .95% in 1995. Return on average equity ("ROE") is
determined by dividing annual net income by average stockholders' equity and
indicates how effectively a company can generate net income on the capital
invested by its stockholders. ROE decreased from 10.7% in 1995 to 9.68% in 1996.
This decline in the Company's ROA and ROE was primarily the result of branch
expansion and loan growth in 1996. New branch offices were opened November 1995
in Toms River, New Jersey, January 1996 in Montgomery, New Jersey, May 1996 in
Langhorne, Pennsylvania, and August 1996 in Flemington, New Jersey. These new
startup branches operated at a loss during 1996. Additionally, in mid September
and early October 1996, the Company purchased $32.8 million in loan
participations from Regent National Bank. Internal loan growth during the
second half of 1996 was also strong, growing $36.3 million. Provisions were made
for these new loans in accordance with the Company's loan loss policy; however,
the full year effect of the interest income will not be realized until 1997.
<PAGE>
Loan Portfolio
The Company's target market for its commercial and consumer loans
are small businesses, professionals and high net worth individuals in the market
areas surrounding the Company's branches. Senior loan officers are intimately
involved in the loan approval process, and in helping meet the financing needs
of customers.
The Company's loan portfolio consists of commercial mortgage loans, commercial
and financial loans, residential mortgage loans and real estate construction
loans. In addition, the Company makes a small number of consumer installment
loans as an accommodation to its customers.
The Company's net loans at December 31,1996 totaled $263.8 million, an increase
of $101.2 million, or 62.2%, compared to net loans at December 31, 1995 of
$162.6 million. The increase in the portfolio was concentrated in commercial and
financial loans and commercial mortgage loans, and is attributed to greater
penetration of the marketplace and an improvement in the general economic
environment in New Jersey, as well as to $32.8 million in loan participations
purchased from Regent National Bank in September and October 1996. On January
14, 1997, the Company purchased Regent's remaining interest in these loans, a
then current principal balance of $32.9 million, with servicing released.
Commercial and financial loans increased to $79.9 million, an increase of $35.5
million, or 79.8%, over the December 31, 1995 balance of $44.4 million.
Commercial and financial loans are primarily made to small businesses and
professionals for working capital purposes with maturities generally between one
and seven years. The majority of these loans are collateralized by real estate
consisting of single family residential properties and further secured by
personal guarantees. The Company generally requires that there be a loan to
value ratio not exceeding 80% on these loans. The Company also reviews
borrowers' cash flows in analyzing loan applications. Risks inherent in these
loans include risks that a borrower's cash flow generated from its business may
not be sufficient to repay the loans, either because of general economic
downturns, downturns specific to the borrower's business or interest rate
changes which cause deterioration in a borrower's cash flow as well as risks
associated with the collateral securing the loans, such as possible
deterioration in value of the collateral or environmental contamination of the
collateral.
Commercial mortgages totaled $133.9 million at December 31, 1996 versus $77.7
million at December 31, 1995, an increase of $56.2 million, or 72.3%. Commercial
mortgage loans are granted to professionals such as doctors, lawyers, and
accountants who purchase office condominium units for their practices and other
small business persons who purchase commercial real estate for use in their
businesses. The Company will generally not finance in excess of 75% of the
appraised value. In reviewing a borrower's qualifications, the Company pays
particular attention to cash flow. In addition, the Company frequently requires
personal guarantees. Risk factors associated with these loans include general
economic performance which will affect vacancy rates for commercial properties
and the ability of professionals to maintain and sustain a practice as well as
the resale value which may be yielded on a particular property.
The Company originates and retains residential mortgage loans. The majority of
these loans are made as accommodations to existing customers which is reflected
in the marginal decrease in 1996 when compared to 1995. Risks inherent in these
loans include the employment stability and earnings potential of the borrower as
well as potential resale prices associated with the collateral securing these
loans. In addition, residential mortgages bear some additional risk associated
with the personal status of the borrower, such as the borrower's continued
marital status and health.
The Company makes construction loans to individuals with expertise in the
industry or to owner occupied projects. The loans are generally on projects for
which a sales contract has been executed and for which permanent mortgage
financing is in place. In most commercial construction projects, the Company
will generally lend up to 50% of the cost of the land and 85% of the
construction costs. These loans increased in 1996 by $4.4 million, or 35.0%, to
$16.9 million at December 31, 1996 from $12.5 million at December 31, 1995.
Risks inherent with these loans include performance of the general economy which
will affect whether the sale of a project actually closes despite its contracted
status and the risk inherent with whether the construction of a project will
actually be completed and completed within budgeted compliance. Environmental
factors may affect whether a project can be completed and the cost associated
with its completion.
The Company's net loans at December 31, 1995 totaled $162.6 million, an increase
of $23.7 million, or 17.1%, compared to net loans at December 31, 1994 of $138.9
million. The increase in the portfolio was concentrated in commercial and
financial loans and commercial mortgage loans and can be attributed to greater
penetration of the marketplace and an improvement in the general economic
environment in New Jersey.
<PAGE>
Commercial and financial loans increased to $44.4 million, an increase of $2.5
million, or 6.0%, over the December 31, 1994 balance of $41.9 million.
Commercial mortgages totaled $77.7 million at December 31, 1995 versus $61.2
million at December 31, 1994, an increase of $16.5 million, or 27.0%.
The Company originates and retains residential mortgage loans. The majority of
these loans are made as accommodations to existing customers which is reflected
in the marginal decrease in 1995 when compared to 1994.
The Company makes construction loans to individuals with expertise in the
industry or to owner occupied projects. These loans increased in 1995 $4.1
million, or 48.8%, to $12.5 million at December 31, 1995 from $8.4 million at
December 31, 1994.
The following table summarizes the components of the loan portfolio as of
December 31, for each of the years 1996 through 1992.
Loan Portfolio by Type of Loan
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ---------------- ------------------ ------------------ --------------------
Amount % Amount % Amount % Amount % Amount %
-------- ------- -------- ------- -------- ------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and financial $79,907 29.99% $44,432 27.03% $41,917 29.88% $34,451 29.38% $23,918 29.31%
Real estate construction 16,905 6.34% 12,483 7.60% 8,399 5.99% 12,277 10.47% 9,520 11.66%
Residential mortgage 23,173 8.70% 25,699 15.64% 26,207(1) 18.68% 25,386(1) 21.65% 19,844 24.31%
Commercial mortgage 133,908 50.25% 77,701 47.28% 61,242 43.65% 42,780 36.49% 26,768 32.80%
Installment 12,569 4.72% 4,026 2.45% 2,532 1.80% 2,352 2.01% 1,567 1.92%
Total Loans $266,462 100.00% $164,341 100.00% $140,297 100.00% $117,246 100.00% $81,617 100.00%
Allowance for loan losses (2,665) (1,754) (1,400) (980) (806)
Net loans $263,797 $162,587 $138,897 $116,266 $80,811
<FN>
(1) Gives effect to Carnegie's adoption of SFAS No. 114, effective for 1995. Pursuant to SFAS No. 114, Carnegie reclassified a
$300,000 in substance foreclosure as loans at the year ends 1993 and 1994.
</FN>
</TABLE>
<PAGE>
Loans Outstanding - Maturity Distribution
The following table sets forth total loans plus unearned income by maturity and
interest rate sensitivity at December 31, 1996 and does not include those loans
which are classified as non-accrual.
December 31, 1996
(Dollars in thousands)
Fixed rate loans:
One year or less-
Commercial and financial $ 7,770
Real estate construction -
Residential mortgage -
Commercial mortgage 7,772
Installment 1,222
Total 16,764
Over one to five years-
Commercial and financial 14,801
Real estate construction -
Residential mortgage 1,078
Commercial mortgage 78,664
Installment 1,112
Total 95,655
Over five years-
Commercial and financial 6,367
Real estate construction -
Residential mortgage 9,843
Commercial mortgage 14,832
Installment 2,589
Total 33,631
Total fixed rate loans 146,050
December 31, 1996
(Dollars in thousands)
Floating rate loans:
One year or less-
Commercial and financial $ 44,387
Real estate construction 16,033
Residential mortgage 11,108
Commercial mortgage 31,611
Installment 7,431
Total 110,264
Over one to five years-
Commercial and financial 3,824
Real estate construction 872
Residential mortgage 520
Commercial mortgage
Installment 188
Total 5,404
Over five years-
Commercial and financial 777
Real estate construction -
Residential mortgage 625
Commercial mortgage -
Installment -
Total 1,402
Total floating rate loans 117,070
Total Loans $263,120
Asset Quality
Various degrees of credit risk are associated with substantially all investing
activities. The lending function, however, carries the greatest risk of loss.
Risk elements include loans past due, non-accrual loans, renegotiated loans,
other real estate owned and loan concentrations. The Company closely monitors
its loan portfolio to minimize the risk of delinquency and problem credits.
Borrowers are advised in writing when a loan is seven days past due. Under the
Company's loan collection policy, an account officer makes telephone contact
with the borrower within fifteen days of the contract payment date. Loans
delinquent in excess of 90 days are placed on non-accrual status, and previously
accrued interest not collected is reversed out of the Company's interest income
account.
The following table summarizes the composition of the Company's non-performing
assets as of December 31, 1996 through 1992.
<PAGE>
Non-Performing Assets and Contractually Past Due Loans
<TABLE>
December 31,
1996 1995 1994 1993 1992
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-Performing Assets (1)
Non-accruing loans:
Real estate $ 248 $ 767 $ 445 $1,410 $1,118
Installment 27 69 - 42 -
Commercial mortgage 1,029 1,180 1,620 1,767 1,224
Commercial and financial 1,981 2,011 - - -
Real estate construction 57 - - - -
Total non-accruing/non-performing loans 3,342 4,027 2,065 3,219 2,342
Other real estate owned. 473 - - - -
Total Non-Performing Assets $3,815 $4,027 $2,065 $3,219 $2,342
Contractually Past Due Loans (2): $ 839 $ 298 $ 4 $ 381 $ 113
Non-performing loans to total loans 1.25% 2.45% 1.47% 2.74% 2.87%
Non-performing assets to total assets 1.11% 1.61% 1.06% 2.09% 1.96%
Allowance for loan losses to non-performing loans 79.74% 43.56% 67.80% 30.44% 34.42%
<FN>
(1) Non-performing assets exclude loans classified as contractually past due 90
days or more and still accruing.
(2) Accruing loans past due 90 days or more.
</FN>
</TABLE>
At the dates indicated in the foregoing table, there were no concentrations of
loans exceeding 10% of the Company's total loans and the Company had no foreign
loans.
As of December 31, 1996, total non-accruing loans amounted to $3.3 million, a
decrease of $685 thousand, or 17.0%, over the level at December 31, 1995. Of the
$3.3 million in total non-accruing loans, all are secured by commercial or
residential mortgages on properties which management believes retain sufficient
equity to satisfy the loan. Also see the additional discussion in footnote
number 6 regarding impaired loans.
The ratio of non-performing loans to total loans was 1.2% compared to 2.5% and
non-performing assets to total assets was 1.1% compared to 1.6% at December 31,
1996 and December 31, 1995, respectively. The decrease in this ratio was
attributable to the increase in the Company's total loan portfolio.The allowance
for loan losses as a percentage of non-performing loans was 79.7% compared to
43.6% in the prior year, reflecting the Company's increased provision and
decline in non-performing loans.
If the non-accruing loans had continued to pay interest, interest income would
have been increased by $370 thousand for 1996. As of December 31, 1995 and 1994
there were non-accruing loans in the aggregate amounts of $4.0 million and $2.1
million, respectively. If the non-accruing loans in 1995 and 1994 had continued
to pay interest, interest income during 1995 would have been increased by $313
thousand and interest income during 1994 would have been increased by $204
thousand.
The Company attempts to maintain an allowance for loan losses at a sufficient
level to provide for potential losses in the loan portfolio and off balance
sheet risks such as unused lines of credit, letters of credit, and commitments
to lend. Loan losses are charged directly to the allowance when they occur and
any recoveries are credited to the allowance. The allowance for loan losses is
increased periodically through charges to earnings in the form of a provision
for loan losses. The provision for loan losses is determined periodically by
senior management based upon consideration of several factors including: (1) an
ongoing review of the quality, mix and size of the overall loan portfolio; (2)
historical loan loss experience; (3) evaluation of non-performing loans; (4)
assessment of economic conditions and their related effects on the existing
portfolio; and (5) the amount and quality of collateral, including guarantees,
securing loans. In addition, management takes into account the level of risk
inherent in the types of loans included in the Company's portfolio. Although
management attempts to set the allowance at a level deemed appropriate, numerous
factors, including changes in economic conditions, regulatory policies and
borrower's performance, could result in additional provisions. For impaired
loans, management considers the sufficiency of the value of the underlying
collateral or the present value of the future cash flows.
<PAGE>
The provision for loan losses was $1.6 million, $369 thousand and $650 thousand
for the years ended December 31, 1996, 1995 and 1994, respectively. The
provision for loan losses for these years reflects management's intent to
continue to maintain the Company's allowance for loan losses at a level
consistent with the increasing size of the loan portfolio and historical loan
loss experience. The provision during 1996 was attributable both to an increase
in the size of the loan portfolio and a change in the composition of the
portfolio as commercial mortgages became a larger component and residential
mortgages declined as a percentage of the portfolio. As a general proposition,
more risk is associated with commercial mortgages than with residential
mortgages, although commercial mortgages are generally more profitable.
The provision of $1.6 million for the year ended December 31, 1996 increased by
$1.2 million, or 336.0%, compared to the prior year amount of $369 thousand.
Management believes that the Company has adequate reserves to address potential
losses in the loan portfolio.
The provision of $369 thousand for the year ended December 31, 1995 decreased by
$281 thousand, or 43.2%, compared to the prior year amount of $650 thousand.
Management believed that the Company had adequate reserves to address potential
losses in the loan portfolio during 1995. Although there was an increase in
non-performing loans, management believed that substantially all of these loans
had adequate supporting collateral. Management also believed that the local and
regional economies were improving.
The following table represents activity in the allowance for loan losses for the
five years ended December 31, 1996.
Allowance for Loan Losses (1)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance-beginning of period $1,754 $1,400 $ 980 $ 806 $ 573
Provision charged to expense 1,609 369 650 429 476
3,363 1,769 1,630 1,235 1,049
Recoveries:
Commercial - 8 50 25 3
Real estate 10 44 - - 1
Installment - - - - 3
Total recoveries 10 52 50 25 7
Charge-offs:
Commercial (570) (3) (153) (272) (21)
Real estate (106) (60) (126) - (216)
Installment (32) (4) (1) (8) (13)
Total charge-offs (708) (67) (280) (280) (250)
Net (charge-offs) recoveries (698) (15) (230) (255) (243)
Balance-end of period $2,665 $1,754 $1,400 $980 $806
Net charge-offs as a percentage of average loans 0.34% 0.01% 0.19% 0.28% 0.35%
Allowance for loan losses to period end loans 1.00% 1.07% 1.00% 0.84% 0.99%
Allowance for loan losses to non-accrual loans 79.74% 43.56% 67.80% 30.44% 34.42%
</TABLE>
- ----------
(1) The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations.
The following table details the allocation of the allowance for loan losses to
the various categories. The allocation is made for analytical purposes and it is
not necessarily indicative of the categories in which future loan losses may
occur. The total allowance is available to absorb losses from any segment of
loans.
<PAGE>
Allocation of the Allowance for Loan Losses (1)
December 31,
-------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
Amount % Amount % Amount %
------- ------- ------ ------- ------ -------
(Dollars in thousands)
Commercial and financial $ 743 27.88% $ 420 23.95% $ 447 31.93%
Real estate construction 177 6.64% 179 10.20% 130 9.29%
Residential mortgage 209 7.84% 107 6.10% 150 10.71%
Commercial mortgage 1,161 43.56% 845 48.18% 502 35.86%
Installment 216 8.11% 160 9.12% 36 2.57%
Unallocated 159 5.97% 43 2.45% 135 9.64%
$2,665 100.00% $1,754 100.00% $1,400 100.00%
- --------------
(1) The allocation of the allowance for loan losses to the respective loan
classifications is not necessarily indicative of future losses or future
allocations.
Investment Securities
The Company's securities portfolio is comprised of U.S. Government and Federal
agency securities, the tax-exempt issues of states and municipalities, and other
securities. The investment securities portfolio generates substantial interest
income and provides liquidity for the Company.
The Company adopted SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") as of January 1, 1994. Debt and equity
securities are classified in one of three categories and are accounted for as
follows:
Securities are classified at date of purchase as securities held to maturity
based on management's intent and the Company's ability to hold them to maturity.
Such securities are stated at cost, adjusted for unamortized purchase premiums
and discounts. Securities that are bought and held principally for the purpose
of selling them in the near term are classified as trading securities, which are
carried at market value. Realized gains and losses from marking the portfolio to
market value are included in trading revenue. At December 31, 1996, the Company
had no securities classified as trading securities. Securities not classified as
securities held to maturity or trading securities are classified as securities
available for sale, and are stated at fair value. Unrealized gains and losses on
securities available for sale are excluded from results of operations, and are
reported as a separate component of stockholders' equity, net of taxes.
Securities classified as available for sale include securities that may be sold
in response to changes in interest rates, changes in prepayment risks, the need
to increase regulatory capital or other similar requirements. Due to this
classification, the Company's stockholders' equity will be affected by changing
interest rates as they affect the market price of the Company's securities
available for sale.
Securities Available for Sale
At December 31, 1996, the Company classified $30.1 million or 56.4% of its
investment portfolio as available for sale. These available-for-sale securities
had a cost basis of $30.4 million. The fair value adjustment at December 31,
1996 required the Company to decrease the carrying value of investment
securities by $322 thousand, decrease the net deferred tax liability by $118
thousand, and decrease stockholders' equity by $204 thousand. The average tax
equivalent yield on the securities available for sale as of the year ended
December 31, 1996, was 6.84%.
Securities Held to Maturity
At December 31, 1996, the Company classified $23.3 million, or 43.6%, of its
investment portfolio as held to maturity based on management's intent and the
Company's ability to hold them to maturity. These securities are stated at cost,
adjusted for unamortized purchase premiums and discounts. As of December 31,
1996 the net unrealized losses on these securities was $6 thousand. Securities
with a cost of $25.0 million were purchased for the held to maturity account
during 1996.
In November 1995, the Financial Accounting Standards Board ("FASB") issued a
special report entitled "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities", herein
referred to as "Special Report." The Special Report gave the Company a one-time
opportunity to reconsider its ability and intent to hold securities to maturity,
and allowed the Company to transfer securities from held to maturity to other
categories without tainting its
<PAGE>
remaining held-to-maturity securities. Management evaluated all securities held
to maturity and concluded that it is the intent of management to hold these
securities for an indefinite period of time or to utilize these securities for
tactical asset liability purposes and sell them from time to time to effectively
manage interest rate exposure and resultant prepayment risk and liquidity needs.
Accordingly, on December 29, 1995, the Company moved all of its securities
classified as held to maturity with a carrying value, fair value and unrealized
gain of $22,876,000, $23,644,000 and $768,000, respectively, to available for
sale.
The following tables present the amortized cost and market values of the
Company's investment securities portfolio for the years ended December 31, 1996,
1995 and 1994.
Investment Securities Portfolio
<TABLE>
<CAPTION>
Year Ended December 31, 1996 (1)
---------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U. S. Government $ 9,035 $ 9,243 $ 5,986 $ 5,936
Mortgage-backed agencies 14,229 14,015 15,524 15,306
States & Political Subdivisions - - 890 890
Other securities - - 8,032 7,978
Total investment securities $23,264 $23,258 $30,432 $30,110
<FN>
(1) Net unrealized losses of $204 thousand, net of tax benefit of $118 thousand,
were reported as a reduction of stockholders' equity at December 31, 1996.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995 (2)
---------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U. S. Government $ - $ - $10,499 $10,565
Mortgage-backed agencies - - 36,843 36,811
States & Political Subdivisions - - 19,075 19,805
Other securities - - 3,451 3,396
Total investment securities $ 0 $ 0 $69,868 $70,577
<FN>
(2) Net unrealized gains of $440 thousand, net of tax provision of $269
thousand, were reported as an increase to stockholders' equity at December 31,
1995.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1994 (3)
--------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U. S. Government $ - $ - $ 7,262 $ 6,586
Mortgage-backed agencies - - 20,282 18,394
States & Political Subdivisions 18,631 18,187 - -
Other securities - - 1,412 1,309
Total investment securities $18,631 $18,187 $28,956 $26,289
<FN>
(3) Net unrealized losses of $1.7 million, net of tax benefit of $981 thousand,
were reported as a reduction of stockholders' equity at December 31, 1994.
</FN>
</TABLE>
<PAGE>
The following table shows the amortized costs and market values of the Company's
investment securities by contractual maturity as of December 31, 1996.
Maturity Schedule of Investment Securities
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
------------------------------------ --------------------------------------
Amortized Fair Amortized Fair
Cost Value Yield Cost Value Yield
--------- ------- ----- --------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Due 1 year or less $ - $ - - $ 0 $ 0 0.00%
Due after 1 year through 5 years - - - 2,445 2,441 6.18%
Due after 5 years through 10 years 9,035 9,243 7.71% 2,581 2,574 7.36%
Due after 10 years 14,229 14,015 7.34% 25,406 25,095 6.78%
Total investment securities $23,264 $23,258 7.48% $30,432 $30,110 6.78%
</TABLE>
Deposits
The Company offers a variety of deposit accounts, including checking, savings,
money-market and certificates of deposit. Since 1989, the Company has
experienced strong growth in deposits, especially in certificates of deposit and
non-interest bearing demand deposits. As of December 31, 1996 the Company did
not have any brokered deposits and neither solicited nor offered premiums for
such deposits.
Deposits are obtained primarily from the market areas which the Company serves.
The Company believes that these market areas have a higher than average
disposable income and that households in these areas are more liquid than
average. The rate structure available on the Company's loan products varies
depending upon the totality of a customer's business relationship with the
Company. The major factor in determining which rates apply to any borrowing
under this structure is the amount and type of deposits a customer has with the
Company. The customer can obtain a reduced rate on borrowings, or reduced points
on borrowings, by having deposits equal to a certain percentage of the borrowing
in either interest or non-interest bearing accounts with the Company.
Deposits at December 31, 1996 were $302.6 million, an increase of $92.4 million,
or 44.0%, compared to total deposits of $210.2 million at December 31, 1995. The
growth in deposits during this period was primarily due to the expansion of the
Company's branch system and its aggressive pricing on certificates of deposit in
comparison to our marketplace. Additionally, a new product was introduced in
September 1996, a seven month "no penalty" certificate of deposit that allows
for complete or partial withdrawals without penalty. This product is part of
"Other savings deposits" which grew from $4.0 million at December 31, 1995 to
$68.7 million at December 31, 1996. Most of that growth is due to the new "no
penalty" certificate of deposit. Deposits at December 31, 1995 were $210.2
million, an increase of $33.4 million, or 18.9%, above total deposits of $176.8
million at December 31, 1994.
Average total deposits increased by $33.1 million, or 16.6%, to $232.1 million
for the twelve months ended December 31, 1996 compared to the 1995 full year
average of $199.1 million. Changes in the average deposit mix include a $2.3
million, or 6.3% increase in certificates of deposit over $100 thousand; a $13.3
million, or 26.7%, increase in consumer certificates of deposit; a $10.5
million, or 16.5%, decrease in money market deposit accounts; a $16.1 million,
or 480.7%, increase in regular savings; a $3.5 million, or 27.1% increase in NOW
account deposits; and an $8.4 million, or 26.0% increase in non-interest bearing
demand deposits. The dramatic increase in regular savings accounts reflects the
increase in our new "no penalty" seven month certificate of deposit discussed
above, which is classified as a savings account due to its "no penalty" feature.
During 1996, the Company primarily utilized growth in certificates of deposit
including certificates of deposit over $100 thousand, and the growth in other
savings deposits as funding sources for the loan portfolio growth. The Company
has found the cost of these deposits to be lower than other available sources of
funds. Deposits are obtained primarily from the market area which the Company
serves through its branch network. Although certificates of deposit of over $100
thousand may generally be considered to entail higher costs and potentially
increased volatility, management believes that these instruments serve as a
stable and cost-
<PAGE>
efficient source of funds for the Company. This is in large measure due to the
Company's marketing strategy for targeting professionals, small businesses and
high net worth individuals and in part due to the Company's policy of taking
into account a customer's entire relationship with the Company when pricing
loans. The interest rate which the borrower may receive may be less if the
borrower has significant other business relationships with the Company. In light
of this, the Company's experience has been, and expectation continues to be,
that these certificates of deposit, although of short maturity, will be renewed
by borrowers and continue as a stable funding source for the Company.
The following table summarizes the components of deposit liabilities as of
December 31, 1996, 1995 and 1994.
Deposit Liabilities
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1996 1995 1994
----------------- ------------------ -----------------
Amount % Amount % Amount %
-------- ------- -------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand $ 42,372 14.00% $ 40,944 19.48% $ 32,809 18.56%
NOW accounts 24,663 8.15% 12,364 5.88% 10,275 5.81%
Money market deposit accounts 46,304 15.30% 54,100 25.74% 85,458 48.34%
Other savings deposits 68,704 22.71% 3,966 1.89% 3,407 1.93%
Time CDs over $100,000 58,511 19.34% 44,500 21.16% 29,216 16.52%
Other time deposits 62,008 20.50% 54,327 25.85% 15,624 8.84%
Balance - end of period $302,562 100.00% $210,201 100.00% $176,789 100.00%
</TABLE>
The following table is a summary of the maturity distribution of certificates of
deposit as of December 31, 1996.
Maturity Schedule of CD's
December 31, 1996
----------------------------------
Time CDs Over Other Time
$100,000 Deposits
---------------- ----------------
Amount % Amount %
------- ------- ------- -------
(Dollars in thousands)
Due in 90 days or less $46,716 79.84% $ 9,448 15.24%
Due between 91 days and 180 days 3,543 6.05% 13,746 22.17%
Due between 181 days and one year 4,363 7.46% 19,442 31.35%
Due after one year 3,889 6.65% 19,372 31.24%
$58,511 100.00% $62,008 100.00%
Asset and Liability Management
Management of interest rate sensitivity is an important element of both earnings
performance and maintaining sufficient liquidity. The interest rate sensitivity
Gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of
interest-bearing liabilities maturing or repricing within that same time period.
A Gap is positive when the amount of interest-earning assets maturing or
repricing exceeds the amount of interest-bearing liabilities maturing or
repricing within the same period, and is negative when the amount of
interest-bearing liabilities maturing or repricing exceeds the amount of
interest-earning assets maturing or repricing within the same period.
Accordingly, during a period of rising interest rates, an institution with a
negative Gap position would not be in as favorable a position, compared to an
institution with a positive Gap, to invest in higher yielding assets. In a
rising rate environment, a negative Gap may result in the yield on an
institution's interest-earning assets increasing at a slower rate than the
increase in an institution's cost of interest-bearing liabilities. During a
period of falling interest rates, an institution with a negative Gap would
experience a repricing of its interest-earning assets at a slower rate than its
interest-bearing liabilities which, consequently, may result in its net interest
income growing at a faster rate than an institution with a positive Gap
position.
<PAGE>
The Company's Asset/Liability Management Committee is composed of certain
directors and officers of the Company (the "ALCO Committee") and controls
asset/liability management procedures. The purpose of the ALCO Committee is to
review and monitor the volume and mix of the interest sensitive assets and
liabilities consistent with the Company's overall liquidity, capital, growth and
profitability goals.
As of December 31, 1996, the Company's cumulative one year interest rate
sensitivity Gap was negative 23.3%, as shown on the next table, which compares
to negative 4.21% at December 31, 1995. The change in the one year cumulative
Gap position was primarily caused by the increase in the average balance of NOW
accounts, other savings deposits, and time CD's over $100,000 of $12.3 million,
$64.7 million and $12.3 million, respectively. All but $0.5 million of this
increase is classified in the 90 days or less category by definition, because
most of these deposits are subject to immediate repricing. Most of this increase
was used to fund loan growth which is subject to repricing after one year. The
increases in NOW accounts, other savings deposits, and time CD's over $100,000
were partially offset by declines in the average balances of money market
accounts, other time deposits, and short term borrowings of $7.8 million, $1.9
million and $16.5 million, respectively. Using the precepts of traditional Gap
analysis, this type change indicates that the Company has become more liability
sensitive in the one year time frame, and the Company would expect to earn more
interest income in a falling rate environment than in a rising rate environment.
However, Gap analysis does not measure repricing due to the principal cash flow
from loans, nor does it evaluate the probability that core deposits, such as NOW
accounts and other savings deposits, will be repriced. Although Gap analysis
defines what is possible, it does not necessarily define what is probable.
Management of the Company relies more heavily on its quarterly interest rate
simulation modeling when evaluating the probable effects of rising and falling
rates on the Company's net interest income.
Therefore, in addition to the GAP analysis, the ALCO Committee relies on
computer simulations to evaluate the impact of changes in interest rates on
liquidity, net interest income and operating results. The simulations forecast
the Company's performance in various interest rate environments. Management
believes that the simulation model is a more effective tool than a GAP analysis
since the simulation analysis can more accurately reflect the impact of rising
and declining rates on each type of interest earning asset and interest bearing
liability. The Company's tolerance for fluctuation under the simulation model
calls for a decline in net interest income of no more than 5%, given a 200 basis
point increase or decrease in interest rates. The Company as of December 31,
1996, is well within its targeted fluctuation range.
The following table reflects the interest sensitivity Gap position of the
Company as of December 31, 1996.
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis at December 31, 1996
Maturing or Repricing in (2)
-------------------------------------------------------------
Due in Between After Non-
90 Days 91 Days- One Interest
or Less One Year Year Bearing Total
-------- -------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Investment securities available for sale $ 30,110 $ - $ - $ - $ 30,110
Investment securities held to maturity - - 23,264 - 23,264
Loans 86,511 41,306 136,088 3,342 267,247
Valuation Reserves (1) - - - (3,450) (3,450)
Non-interest earning assets - - - 26,186 26,186
Total Assets $116,621 $41,306 $159,352 $26,078 $343,357
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Money market accounts $46,304 - - - $46,304
NOW accounts 24,663 - - - 24,663
Other savings deposits 68,704 - - - 68,704
Time CD's over $100,000 46,716 7,906 3,889 - 58,511
Other time deposits 9,448 33,188 19,372 - 62,008
Short term borrowings 1,000 - - - 1,000
Long term debt - - 14,425 - 14,425
Total interest-bearing liabilities 196,835 41,094 37,686 - 275,615
Non-interest bearing deposits - - - 42,372 42,372
Other liabilities - - - 1,628 1,628
Stockholders' equity - - - 23,742 23,742
Total Liabilities and Stockholders' Equity $196,835 $41,094 $ 37,686 $67,742 $343,357
Interest Rate Sensitivity Gap ($80,214) $ 212 $121,666 ($41,664)
Cumulative Gap ($80,214) ($80,002) $ 41,664
Cumulative Gap to Total Assets -23.36% -23.30% -12.13%
<FN>
(1) Valuation reserves include allowance for loan losses and deferred loan fees.
(2) The following are the assumptions that were used to prepare the Gap analysis:
(A) Securities "available for sale" are placed in the first maturity bucket
since they can be sold at any time, and are therefore subject to the possibility
of immediate repricing.
(B) Loans are spread through the maturity buckets based on the earlier of their
actual maturity date or the date of their first potential rate adjustment.
(C) Money market accounts, NOW accounts and Other savings deposits are subject
to immediate withdrawal and are therefore presented as repricing in the first
repricing period.
(D) Time deposits are spread through the maturity buckets based on their actual maturity date.
</FN>
</TABLE>
Liquidity
Among the ALCO Committee functions is its responsibility to monitor and
coordinate all activities relating to the maintenance of liquidity and
protection of net interest income from fluctuations in market interest rates.
Liquidity is a measurement of the Company's ability to meet present and future
funding obligations and commitments. The Company adjusts the liquidity levels in
order to meet funding needs for deposit outflows, repayment of borrowings, when
applicable, and the funding of loan commitments. The Company also adjusts its
liquidity level as appropriate to meet its asset/liability objectives. Principal
sources of liquidity are deposit generation, access to purchased funds,
maturities and repayments of loans and investment securities, net interest
income and fee income. Liquid assets (consisting of cash, Federal funds sold and
investment securities classified as available for sale) comprised 13.6% and
32.2% of the Company's total assets at December 31, 1996 and December 31, 1995,
respectively. The decline in liquid assets at December 31, 1996 is a result of
the strong loan growth during the year.
<PAGE>
The Company's liquidity, represented by cash and cash equivalents, is a product
of the operating, investing and financing activities.
These activities are summarized below:
Years Ended December 31,
----------------------------
(Dollars in thousands)
1996 1995 1994
------- ------- -------
Cash and cash equivalents-beginning $10,207 $ 6,815 $ 5,972
Cash flows from operating activities:
Net income 2,144 2,128 1,539
Adjustments to reconcile net income to net cash
provided by operating activities 2,290 523 1,777
Net cash provided by operating activities 4,434 2,651 3,316
Net cash (used in) investing activities (88,630) (49,655) (43,489)
Net cash provided by financing activities 90,734 50,396 41,016
Net increase in cash and cash equivalents 6,538 3,392 843
Cash and cash equivalents-ending $16,745 $10,207 $ 6,815
Net cash used in investing activities during the year ended December 31, 1996
was primarily attributable to a net increase in loans made to customers of
$103.6 million. The net cash used in 1996 to fund loan growth was partially
offset by the proceeds from the sale, maturity or paydowns on investment
securities, net of security purchases, which totaled $16.1 million.
Net cash used in investing activities during the year ended December 31, 1995
was primarily attributable to the purchase of securities available for sale of
$45.0 million, offset by the sale of investment securities of $18.6 million and
the proceeds from maturities and paydowns of investment securities of $3.8
million. Additionally, in 1995, there was a net increase in loans made to
customers of $24.1 million. Net cash used in investing activities during the
year ended December 31, 1994 was primarily attributable to an increase in loans
made to customers of $24.2 million and the purchase of securities available for
sale of $5.5 million, and the purchase of securities held to maturity of $15.3
million.
Net cash provided by financing activities during the year ended December 31,
1996 was primarily attributable to a net increase in deposits of $92.4 million,
and an increase in long term borrowings of $10.0 million and a decrease in short
term borrowings of $16.5 million. Net cash provided by financing activities
during the year ended December 31, 1995 was primarily attributable to a net
increase in deposits of $33.4 million, and an increase in short term borrowings
of $17.5 million.
Net cash provided by financing activities during the year ended December 31,
1994 was primarily attributable to a net increase in deposits of $33.6 million,
and the gross proceeds from common stock issued of $9.1 million.
In addition to the Company's deposit base and its portfolio of
available-for-sale securities, the Company also has several secondary sources of
liquidity. Many of the Company's loans are originated pursuant to underwriting
standards which make them readily marketable to other financial institutions or
investors in the secondary market. In addition, in order to meet liquidity needs
on a temporary basis, the Company has unsecured lines of credit in the amount of
$5.5 million for the purchase of Federal funds with other financial institutions
and may borrow funds at the Federal Reserve discount window, subject to the
Company's ability to supply collateral.
At December 31, 1996, the Company had an overnight line of credit with the
Federal Home Loan Bank-New York ("FHLB-NY") for $12,524,000 of which $1,000,000
was advanced. In addition, subject to certain requirements, the Company may also
obtain longer term advances of up to 30% of the Company's assets.
The Company believes that its liquidity position is sufficient to provide funds
to meet future loan demand or the possible outflow of deposits, in addition to
being able to adapt to changing interest rate conditions.
<PAGE>
Capital Resources
The Company's primary regulator, the Federal Reserve Bank (which regulates bank
holding companies), has issued guidelines classifying and defining bank holding
company capital into the following components: (1) Tier I Capital, which
includes tangible stockholders' equity for common stock and certain qualifying
perpetual preferred stock, and excludes net unrealized gains or losses on
available-for-sale securities and deferred tax assets that are dependent on
projected taxable income greater than one year in the future, and (2) Tier II
Capital (Total Capital), which includes a portion of the allowance for loan
losses, certain qualifying long-term debt and preferred stock that does not
qualify for Tier I Capital. The risk-based capital guidelines require financial
institutions to maintain specific defined credit risk factors (risk-based
assets). The minimum Tier I and the combined Tier I and Tier II capital to
risk-weighted assets ratios are 4.0% and 8.0%, respectively. The Federal Reserve
Bank also has adopted regulations which supplement the risk-based capital
guidelines to include a minimum leverage ratio of Tier I Capital to total assets
of 3.0% to 5.0%. Regulations have also been issued by the Bank's primary
regulator, the Office of the Comptroller of the Currency, establishing similar
capital ratios.
The following table summarizes the risk-based and leverage capital ratios for
the Company and Carnegie Bank, N.A. (the "Bank") before the unrealized holding
gains on securites available for sale, net, at December 31, 1996, as well as the
regulatory required minimum capital ratios:
December 31, 1996 Regulatory
----------------- Required
Company Bank Minimum
------- ----- ----------
Risk-based Capital:
Tier I capital ratio 8.81% 8.55% 4.00%
Total capital ratio 9.79% 9.53% 8.00%
Leverage ratio 7.20% 6.98% 3.00%-5.00%
As noted in the above table, the Company's capital ratios at December 31, 1996
substantially exceed the minimum regulatory requirements.
During the third quarter of 1994, the Company strengthened its capital resources
and positioned itself for future growth with a successful public offering,
pursuant to which the Company sold 690,000 Units, each Unit consisting of one
share of common stock and one warrant to purchase one share of common stock at
an exercise price of $15.09 for a period of three years from the date of
issuance. As adjusted for the Company's 1997, 1996 and 1995 5% stock dividends
and exercised warrants, there are 600,756 warrants outstanding which are
convertible into 695,450 shares of common stock at an exercise price of $13.04
per share of common stock, at December 31, 1996. Net proceeds from the
securities offering increased the Company's equity by $7.9 million during the
third quarter of 1994.
Impact of Inflation and Changing Prices
The financial statements of the Company and notes thereto, presented elsewhere
herein, have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering the change in the
relative purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
Recently Issued Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. FASB has issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", as amended by
SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of SFAS
125," effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. Earlier or
retroactive application is not permitted. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Adoption of this
pronouncement is not expected to have a material impact on the Company's
consolidated financial statements.
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of
Carnegie Bancorp:
We have audited the accompanying consolidated balance sheets of Carnegie Bancorp
and Subsidiary (the "Company") as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company'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 consolidated 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 consolidated financial position of
Carnegie Bancorp and Subsidiary as of December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 of notes to the consolidated financial statements, the
changed its method of accounting for certain investment securities in 1994.
/s/ COOPERS & LYBRAND LLP
Princeton, New Jersey
February 3, 1997
<PAGE>
Carnegie Bancorp and Subsidiary
Consolidated Balance Sheets
December 31,
------------------------
1996 1995
-------- --------
(Dollars in thousands)
Assets
Cash and due from banks $ 16,745 $ 10,207
Investment Securities:
Available for sale 30,110 70,577
Held to maturity (fair value $23,258 in 1996) 23,264 -
Total investment securities 53,374 70,577
Loans, net of allowance for loan losses of
$2,665 at December 31, 1996
and $1,754 at December 31, 1995 263,797 162,587
Premises and equipment, net 4,482 3,722
Other real estate owned 473 -
Accrued interest receivable and other assets 4,486 3,469
Total Assets $343,357 $250,562
Liabilities and Stockholders' Equity
Deposits:
Non-interest bearing demand deposits $ 42,372 $ 40,944
Interest bearing deposits:
Savings deposits 139,671 70,430
Other time deposits 62,008 54,327
Certificates of deposit $100,000 and over 58,511 44,500
Total deposits 302,562 210,201
Short-term borrowings 1,000 17,500
Long-term debt 14,425 -
Accrued interest payable and other liabilities 1,628 1,067
Total liabilities 319,615 228,768
Commitments and contingencies
Stockholders' equity:
Common stock, no par value,
authorized 5,000,000 shares;
issued and outstanding 1,940,942 at
December 31, 1996 and 1,754,441 at
December 31, 1995 9,705 8,772
Capital surplus 12,711 10,869
Undivided profits 1,530 1,713
Net unrealized holding gains (losses)
on securities available for sale, net of tax (204) 440
Total stockholders' equity 23,742 21,794
Total Liabilities and Stockholders' Equity $343,357 $250,562
See accompanying notes to consolidated financial statements.
<PAGE>
Carnegie Bancorp and Subsidiary
Consolidated Statements of Income
Years Ended December 31,
-----------------------------------
1996 1995 1994
------- ------- -------
(Dollars in thousands, except per share data)
Interest income:
Loans, including fees $20,225 $14,727 $10,923
Federal funds sold 106 475 290
Investment securities:
Taxable 3,750 2,535 1,828
Tax-exempt 383 969 514
Total interest income 24,464 18,706 13,555
Interest expense:
Savings deposits 3,519 3,096 3,747
Other time deposits 3,448 2,947 623
Certificates of deposit $100,000 and over 2,128 2,124 777
Short-term borrowings 1,160 297 2
Long-term debt 629 - -
Total interest expense 10,884 8,464 5,149
Net interest income 13,580 10,242 8,406
Provision for loan losses 1,609 369 650
Net interest income after provision
for loan losses 11,971 9,873 7,756
Non-interest income:
Service fees on deposits 422 433 236
Other fees and commissions 339 311 259
Gain on sale of other real estate owned 294 - -
Investment securities gains 399 132 -
Investment securities losses (94) (132) -
Total non-interest income 1,360 744 495
Non-interest expense:
Salaries and wages 3,826 2,683 1,999
Employee benefits 858 692 573
Occupancy expense 1,466 1,024 701
Furniture and equipment 915 583 362
Other 2,989 2,742 2,421
Total non-interest expense 10,054 7,724 6,056
Income before income taxes 3,277 2,893 2,195
Income tax expense 1,133 765 656
Net income $ 2,144 $ 2,128 $ 1,539
Per Common Share:
Net income - primary $ 1.01 $ 1.08 $ 1.11
Net income - fully diluted $ 1.00 $ 1.07 $ 1.11
Weighted Average Shares Outstanding
(in thousands)
Primary 2,125 1,973 1,382
Fully Diluted 2,142 1,990 1,382
See accompanying notes to consolidated financial statements.
<PAGE>
Carnegie Bancorp and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Holding Gain (Loss) Total
Common Capital Retained on Securities Available Stockholders'
Stock Surplus Earnings For Sale, Net of tax Equity
------ -------- -------- ----------------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $4,487 $ 5,412 $ 899 $ - $10,798
5% stock dividend issued (44,685 shares) 223 380 (603) - -
Net income - - 1,539 - 1,539
Cash dividend ($.40 per share) - - (502) - (502)
Issuance of 690,000 common shares 3,450 4,457 - - 7,907
Fair value adjustment -
Securities available for sale, net - - - (1,686) (1,686)
Balance, December 31, 1994 8,160 10,249 1,333 (1,686) 18,056
5% stock dividend issued (82,637 shares) 413 496 (909) - -
Net income - - 2,128 - 2,128
Cash dividend ($.48 per share) - - (839) - (839)
Issuance of 39,814 common shares
for options and warrants exercised 199 124 - - 323
Increase in fair value adjustment -
securities available for sale, net - - - 2,126 2,126
Balance, December 31, 1995 8,772 10,869 1,713 440 21,794
5% stock dividend issued (87,518 shares) 438 984 (1,422) - -
Net income - - 2,144 - 2,144
Cash dividend ($.49 per share) - - (905) - (905)
Issuance of 98,983 common shares
for options and warrants exercised 495 858 - - 1,353
Increase (decrease) in fair value adjustment -
securities available for sale, net - - - (644) (644)
Balance, December 31, 1996 $9,705 $12,711 $1,530 ($ 204) $23,742
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Carnegie Bancorp and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
-------- ------- -------
(Dollars in thousands)
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 2,144 $ 2,128 $ 1,539
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,002 539 324
Provision for loan losses 1,609 369 650
Accretion of investment discount (9) (18) (40)
Amortization of investment premium 356 356 178
Gain on sale of available-for-sale
securities, net (305) - -
Gain on sale of other real estate owned (294) - -
Loss on disposal of equipment - 321 18
Decrease (increase) in deferred taxes (838) 1,219 (302)
Proceeds from sales of mortgages held for sale - - 2,814
Originations of mortgages held for sale - - (1,945)
Decrease (increase) in accrued interest
receivable and other assets 208 (2,521) (342)
Increase in accrued interest payable and
other liabilities 561 258 422
Net cash provided by operating activities 4,434 2,651 3,316
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 36,283 18,619 -
Proceeds from maturities and paydown of
investment securities 12,582 3,802 1,806
Purchase of securities available for sale (7,763) (45,040) (5,460)
Purchase of securities held to maturity (24,972) - (15,349)
Net increase in loans made to customers (103,630) (24,111) (24,201)
Cash collected on previously charged-off loans 10 52 51
Additions to premises and equipment (1,762) (2,977) (336)
Sale of other real estate owned 622 - 471
Cash paid for other real estate owned - - (471)
Net cash used in investing activities (88,630) (49,655) (43,489)
Cash flows from financing activities:
Net increase in deposits 92,361 33,412 33,611
Increase (decrease) in short-term borrowings (16,500) 17,500 -
Increase in long-term borrowings 14,425 - -
Gross proceeds from common stock issued - - 9,056
Financing costs of common stock issued - - (1,149)
Proceeds from common stock issued on exercise
of options and warrants 1,353 323 -
Cash paid for dividends (905) (839) (502)
Net cash provided by financing activities 90,734 50,396 41,016
Net change in cash and cash equivalents 6,538 3,392 843
Cash and cash equivalents as of beginning of year 10,207 6,815 5,972
Cash and cash equivalents as of end of year $ 16,745 $10,207 $ 6,815
Supplemental disclosures:
Cash paid during the period for:
Interest $ 10,653 $ 8,219 $ 5,122
Income taxes $ 1,377 $ 1,014 $ 929
Transfer of investment securities held to maturity to investment
securities available for sale - $22,876 -
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Carnegie Bancorp ("the Company"), a bank holding company, was incorporated on
October 6, 1993 with authorized capital of 5,000,000 shares of no par value
common stock. On April 12, 1994, the Company acquired 100 percent of the shares
of Carnegie Bank, N.A. ("the Bank"). The transaction was accounted for in a
manner similar to that of a pooling of interests.
The Company's primary business is ownership of the Bank. Carnegie Bank, N.A. is
a national bank, which commenced business in 1988 as a state chartered
commercial bank. The Bank currently operates from its main office in Princeton,
New Jersey and from seven branch offices in Hamilton, Denville, Marlton, Toms
River, Montgomery and Flemington, New Jersey and Langhorne, Pennsylvania. The
deposits of the Bank are insured by the Bank Insurance Fund of the Federal
Deposit Insurance Corporation. Carnegie Bank, N.A. is a member of the Federal
Reserve System and Federal Home Loan Bank-New York.
Carnegie conducts a general commercial banking business. Carnegie's loan
products consist primarily of commercial loans, commercial mortgages, loans to
professionals secured by business or personal assets, and to a lesser extent,
residential mortgage loans. Carnegie offers a full array of deposit accounts
including time deposits, checking and other demand deposit accounts, savings
accounts and money market accounts. Carnegie targets small businesses,
professionals, and high net worth individuals as its prime customers, and does
not engage in high volume, consumer banking.
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and general practice within the banking industry.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the financial statement
date and the reported amounts of revenues and expenses during the reporting
period. Since management's judgement involves making estimates concerning the
likelihood of future events, the actual results could differ from those
estimates which will have a positive or negative effect on future period
results. The policies which materially affect the determination of financial
position, results of operations and cash flows are summarized below.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and Carnegie Bank, N.A., its wholly owned subsidiary.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications - Certain amounts in the financial statements presented for
prior periods have been reclassified to conform with 1996 presentation.
Statement of Cash Flows - The statement of cash flows is presented using the
indirect method of presentation. Cash equivalents, for the purposes of this
statement are defined as cash and due from banks and other short term
investments with an original maturity of 90 days or less.
Investment Securities - Effective January 1, 1994 the Company adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," ("SFAS 115"). SFAS 115 requires that an
enterprise classify its investments in debt and readily marketable equity
securities as either securities held to maturity (carrying amount equals
amortized cost), securities available for sale (carrying amounts equal estimated
fair value; unrealized gains and losses recorded in a separate component of
stockholders' equity, net of taxes) or trading securities (carrying amount
equals estimated fair value; unrealized gains and losses included in the
determination of net income).
The Company has evaluated all of its investments in debt securities and has
classified them as either held to maturity or available for sale. Any security
which is a U.S. Government security, U.S. Government agency security, an agency
mortgage-backed security, or an obligation of a state or political subdivision
may be placed in the held-to-maturity category if acquired with the intent and
ability to maintain the security in the portfolio until maturity. Premiums and
discounts on these securities are amortized or accreted on a basis that
approximates the effective yield method. Realized gains and losses from sale of
securities available for sale are determined on a specific identification cost
basis.
Loans - Loans are stated at principal amounts outstanding, net of unearned
discount and net deferred loan origination fees and costs. Interest income on
loans is accrued and credited to interest income monthly as earned. Loan
origination fees and certain direct loan origination costs are deferred and the
net amount is amortized as an adjustment of the related loan's yield. Net loan
fees are generally amortized over the contractual lives of the related loans.
<PAGE>
Loans are reported as non-accrual if they are past due as to principal or
interest payments for a period of more than ninety days. Exceptions may be made
if a loan is adequately collateralized and in the process of collection. At the
time a loan is placed on a non-accrual status, previously accrued and
uncollected interest is reversed against interest income in the current period.
Only after collection of loan principal is assured is interest on such loans
recognized as income. A loan is returned to an accrual status when factors
indicating doubtful collectibility no longer exist and the borrower has
performed satisfactorily under the contractual terms of the loan for a period
not less than six months.
In May 1993, SFAS No. 114 "Accounting by Creditors for Impairment of a Loan" was
issued and subsequently amended by SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures." These statements
specify how allowances for credit losses related to certain loans should be
determined. They require impaired loans, including troubled debt restructured,
to be measured based on the present value of expected future cash flows
discounted at the loan's effective rate, the loan's observable market price, or
the fair value of the collateral if the loan is collateral dependent. The
implementation of these statements did not have a significant impact on the
Company's financial statements.
Allowance for Loan Losses - An allowance for loan losses is generally
established through charges to earnings in the form of a provision for loan
losses. Loans which are determined to be uncollectible are charged against the
allowance account and subsequent recoveries, if any, are credited to the
account. In establishing an appropriate allowance, an assessment of the loan
portfolio including past loan experience, economic conditions and other factors
that, in management's judgement, warrant current recognition, are considered. 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
judgements of information available to them at the time of their examination. It
is reasonably possible that the above factors may change significantly and
therefore affect management's determination of the allowance for loan losses in
the near term.
Impaired Loans - In May 1993, the FASB issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure," was effective for fiscal years beginning after December 15,1994 and
generally requires all creditors to account for impaired loans at the present
value of the expected future cash flows discounted at the loan's effective
interest rate or at the loan's fair value based upon the underlying collateral
if the loan is collateral dependent.
Factors influencing management's recognition of impairment include decline in
collateral value; lack of performance under contract loan agreement terms,
including evaluation of late payments or non-payment; lack of performance under
other creditor's agreements or obligations (i.e. non-payment of taxes and
non-payment of loans to other creditors); financial decline significantly
different from status at loan inception; litigation or bankruptcy of borrower;
significant change in ownership or loss of guarantors to the detriment of credit
quality.
All impaired loans as recognized under the above evaluation are considered to
have some probability that contract principal, interest, or both may not be
repaid in full. Non-accrual loans are those impaired loans where management
recognizes some probability that contract principal may not be repaid in full.
Management does not carry loans in excess of 90 days delinquent on accrual, and
all such loans are classified as non-accrual. Exceptions may be made if a loan
is adequately collateralized and in the process of collection. As such, SFAS No.
114 has not impacted credit risk analysis.
Charge-off policy - An asset which no longer retains any value to the Bank will
be charged off immediately. Assets whose value has depreciated will be charged
off in part. Potential recovery against these assets is considered marginal, and
recovery is expected to be long-term. All charge-offs must be approved by
management and reported to the Board of Directors. Generally, Bank policy is to
aggressively pursue any likely recovery against charged-off assets.
Accounting policy for interest income recognition - Impaired loans may be on
accrual if management does not foresee loss of principal in part or whole.
Interest on impaired loans is not capitalized and funded by the Bank. Impaired
loans on non-accrual are recognized as those which may sustain some loss of
principal due to impairment of credit or collateral quality. On such loans,
payments by the borrower are recorded by the Bank as a reduction of principal,
and interest is not accrued as income. Interest income will only be recognized
after principal is repaid in full.
Homogeneous loans - Management evaluates all loans on an individual basis for
impairment and application of SFAS No. 114.
<PAGE>
Other Real Estate Owned - Other real estate owned includes property acquired
through foreclosure and is carried at the lower of cost or fair value less costs
to dispose. When the property is acquired, any excess of the loan balance over
the fair value less costs to dispose is charged to the allowance for loan
losses. Subsequent write-downs, if any, are included in non-interest expense.
Carrying costs associated with the operation and maintenance of the property are
expensed as incurred through current income and included in the other expense
category, net of any associated income.
Premises and Equipment, Net - Premises and equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation is computed on a
straight-line basis over the estimated useful lives of the assets. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
terms of the leases or the estimated useful lives of the improvements.
Expenditures for maintenance and repairs are charged to expenses as incurred.
Gains and losses on dispositions are reflected in current operations.
Income Taxes - The Company follows the asset and liability method of accounting
for income taxes. 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 basis. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which temporary differences, which are inherent in the
tax filing process, are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in the tax rate is recognized in
income in the current period that includes the enacted date.
Income Per Common Share - Income per common share is computed by dividing net
income by the weighted average number of common shares and common share
equivalents (when dilutive) outstanding during each year after giving
retroactive effect to stock dividends declared. The common share equivalents of
options and warrants in the computation of primary earnings per share is
computed utilizing the Treasury Stock method. For purposes of this computation,
the average market price of common stock during each three-month quarter
included in the period being reported upon, is used, when dilutive. The ending
market price of common stock is used, however, for fully diluted income per
share if the ending price is higher than the average price.
(2) Cash and Due From Banks
The Company maintains various deposits in other banks. At December 31, 1996 and
1995 average cash balances reserved to meet Federal Regulatory requirements of
$1,202,000 and $723,000 respectively, were maintained at the Federal Reserve
Bank of Philadelphia.
(3) Investment Securities
In November 1995, the FASB issued a special report entitled "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities," herein referred to as "Special Report." The Special
Report gave the Company a one-time opportunity to reconsider its ability and
intent to hold securities to maturity, and allowed the Company to transfer
securities from held to maturity to other categories without tainting its
remaining held to maturity securities. Management evaluated all securities held
to maturity and concluded that it is the intent of management to hold these
securities for an indefinite period of time or to utilize these securities for
tactical asset/liability purposes and sell them from time to time to effectively
manage interest rate exposure and resultant prepayment risk and liquidity needs.
Accordingly, on December 29, 1995, the Company moved all of its securities
classified as held to maturity with a carrying value, fair value and unrealized
gain of $22,876,000, $23,644,000 and $768,000, respectively, to available for
sale.
<PAGE>
The following is a comparative summary of investment securities at December 31:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1996
Securities available for sale:
U.S. Government $ 5,986 $ - ($ 50) $ 5,936
Mortgage-backed securities 15,524 49 (267) 15,306
Obligations of State and Political
Subdivisions 890 - - 890
Other securities 8,032 - (54) 7,978
$30,432 $ 49 ($371) $30,110
Securities held to maturity:
U.S. Government $ 9,035 $ 208 - $ 9,243
Mortgage-backed securities 14,229 - (214) 14,015
$23,264 $ 208 ($214) $23,258
1995
Securities available for sale:
U.S. Government $10,499 $ 66 $ 0 $10,565
Mortgage-backed securities 36,843 242 (274) 36,811
Obligations of State and Political
Subdivisions 19,075 730 0 19,805
Other securities 3,451 0 (55) 3,396
$69,868 $1,038 ($329) $70,577
</TABLE>
At December 31, 1996 a maturity distribution of the amortized cost and fair
values of the investment securities is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Due 1 year or less $ - $ - $ - $ -
Due after 1 year through 5 years - - 2,445 2,441
Due after 5 years through 10 years 9,035 9,243 2,581 2,574
Due after 10 years 14,229 14,015 18,563 18,252
Federal Home Loan Bank stock - - 6,441 6,441
Federal Reserve Bank stock - - 402 402
$23,264 $23,258 $30,432 $30,110
</TABLE>
Securities held to maturity and available for sale of $19,220,000 as of December
31, 1996 and securities available for sale of $20,605,000 as of December 31,
1995 were pledged to secure public deposits and for other purposes as required
or permitted by law.
<PAGE>
(4) Loans
Loans at December 31, 1996 and 1995 consist of the following:
1996 1995
-------- --------
(Dollars in thousands)
Commercial and financial $ 79,907 $ 44,432
Real estate construction 16,905 12,483
Residential mortgage 23,173 25,699
Commercial mortgage 133,908 77,701
Installment 12,569 4,026
Total loans 266,462 164,341
Less allowance for loan losses 2,665 1,754
Loans, net $263,797 $162,587
Included in loans receivable at December 31, 1996 and 1995 are loans amounting
to $3,342,000 and $4,027,000 respectively, on which the accrual of interest has
been suspended. Interest income that would have been accrued had these loans
been current aggregated $370,000 and $313,000 at December 31, 1996 and 1995,
respectively.
As of December 31, 1996 and 1995 the Bank had no loans to any single customer
that exceeded 10% of the Bank's loan portfolio.
(5) Allowance for Loan Losses
An analysis of the allowance for loan losses for 1996, 1995 and 1994 is as
follows:
1996 1995 1994
------ ------ ------
(Dollars in thousands)
Balance, beginning of year $1,754 $1,400 $ 980
Provision charged to operations 1,609 369 650
Recoveries 10 52 51
Loans charged off (708) (67) (281)
Balance, end of year $2,665 $1,754 $1,400
(6) Accounting for Loan Impairment
Loans aggregated for evaluation under SFAS No. 114 are those loans risk rated by
the Bank as substandard and doubtful. At December 31, 1996, the recorded
investment in loans for which impairment has been recognized totaled $4,175,000
of which $1,070,000 related to loans with no valuation allowance because the
Bank expects repayment in full, and $3,105,000 is related to loans with a
corresponding valuation allowance of $315,000. The total amount of impaired
loans measured using the present value of expected future cash flows amounted to
$714,000 and the total amount of impaired loans measured using the fair value of
the loan's collateral amounted to $3,461,000. For the year ended December 31,
1996, the average recorded investment in impaired loans was approximately
$3,523,000. The Company recognized $15,000 of interest on impaired loans on a
cash basis, during the portion of the year that they were impaired.
At December 31, 1995, the recorded investment in loans for which impairment has
been recognized totaled $4,027,000 of which $1,370,000 related to loans with no
valuation allowance because the loans had been partially written down through
charge-offs and $2,657,000 related to loans with a corresponding valuation
allowance of $418,000. The total amount of impaired loans measured using the
present value of expected future cash flows amounted to $209,000 and the total
amount of impaired loans measured using the fair value of the loan's collateral
amounted to $3,818,000. For the year ended December 31, 1995, the average
recorded investment in impaired loans was approximately $3,319,000. The Company
recognized $41,000 of interest on impaired loans on a cash basis, during the
portion of the year that they were impaired.
<PAGE>
(7) Loans to Related Parties
Loans to related parties include loans made to certain officers, directors and
their affiliated interests. An analysis of the activity of such related party
loans for 1996 is as follows:
1996
---------------------
(Dollars in thousands)
Balance, beginning of year $4,704
Additions 1,238
Payments and other adjustments (1,640)
------
Balance, end of year $4,302
======
(8) Premises and Equipment
The components of premises, furniture and equipment at December 31
were as follows:
1996 1995
------ ------
(Dollars in thousands)
Land and buildings $ 407 $ -
Leasehold improvements 2,361 1,986
Furniture and equipment 4,049 3,118
6,817 5,104
Less accumulated depreciation and amortization 2,335 1,382
Premises and equipment, net $4,482 $3,722
(9) Income Taxes
The components of the provision for income tax expense reflected in the
financial statements are as follows:
Consolidated Statements of Income: Years Ended December 31,
------------------------
1996 1995 1994
------ ---- ----
(Dollars in thousands)
Current: Federal $1,382 $693 $814
State and local 201 109 143
Total current income taxes 1,583 802 957
Deferred: Federal (366) (16) (226)
State and local (84) (21) (75)
Total deferred income taxes (450) (37) (301)
Total $1,133 $765 $656
Consolidated Statements of Changes
in Stockholders' Equity:
Deferred tax attributable to unrealized
(gains) or losses on available for sale
securities $ 388 ($1,250) $981
A reconciliation between the reported income tax expense and the amount computed
by multiplying income before income tax by the Federal statutory income tax rate
is as follows:
1996 1995 1994
------ ---- ----
(Dollars in thousands)
Expected statutory income tax expense $1,114 $984 $745
Increase (decrease) in taxes resulting from:
State taxes on income, net of federal tax benefit 77 58 45
Tax-exempt income, net (120) (279) (175)
Other, net 62 2 41
Total income tax provision $1,133 $765 $656
<PAGE>
Deferred tax assets and liabilities as of December 31, 1996 and 1995 consisted
of the following:
1996 1995
------ ----
(Dollars in thousands)
Deferred tax assets:
Unrealized loss on available for sale securities $ 119 $ -
Allowance for possible loan losses 834 585
Loan fees 314 271
Loan interest income 150 101
Other 71 4
Total deferred tax assets 1,488 961
Deferred tax liabilities (15) (57)
Unrealized gain on available for sale securities - (269)
Net deferred tax assets $1,473 $635
Net deferred tax assets are included in other assets as of December 31, 1996 and
1995. Management believes that it is more likely than not that the deferred tax
assets will be realized, therefore, no valuation allowance was recorded for the
deferred tax assets at December 31, 1996 or 1995.
(10) Other Non-Interest Expense
Other non-interest expense for the years ended December 31, consisted of the
following:
1996 1995 1994
------ ------ ------
(Dollars in thousands)
Communications and supplies $ 690 $ 552 $ 418
Professional and other fees 799 747 523
Business development 294 267 226
FDIC assessment insurance 2 235 338
Advertising and shareholder relations 224 198 172
Directors' and Advisory Board fees 271 241 213
Other 709 502 531
$2,989 $2,742 $2,421
(11) Commitments and Contingencies
Future minimum lease payments under non-cancellable operating leases at
December 31, 1996 are as follows:
Year ending December 31,
(Dollars in thousands)
1997 $ 905
1998 858
1999 863
2000 859
2001 820
Thereafter 8,818
Total minimum lease payments $13,123
The lease agreements on the Company's branch locations provide for the payment
of real estate taxes and other expenses in addition to the base rent which is
subject to annual escalation based upon a consumer price index.
Rental expense amounted to $924,000 for 1996, $667,000 for 1995 and $336,000 for
1994.
The Company is subject to claims and lawsuits which arise primarily in the
ordinary course of business. Based upon information currently available and
advice received from legal counsel representing the Company in connection with
such claims and lawsuits, it is the opinion of Management that the disposition
or ultimate determination of such claims and lawsuits will not have a material
adverse effect on the results of operation and cash flows as well as the
consolidated financial position of the Company.
<PAGE>
(12) Capital Compliance
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Quantitative measures
established by regulation to ensure capital adequacy require the Company and the
Bank to maintain minimum amounts and ratios, as set forth in the table below, of
Total and Tier I capital (as defined in the regulations) to risk-weighted assets
(as defined) and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1996, that the Company and the Bank meet
all capital adequacy requirements to which they are subject. Under capital
amounts and adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The following table summarizes the risk-based and leverage capital ratios for
the Company and the Bank at December 31, 1996 and December 31, 1995, as well as
the regulatory required minimum capital ratios:
Regulatory Requirements
-------------------------------
Company Bank Minimum "Well Capitalized"
------- ----- --------- ------------------
As of December 31, 1996
Risk-based capital:
Tier I capital ratio 8.81% 8.55% 4.00% 6.00%
Total capital ratio 9.79% 9.53% 8.00% 10.00%
Leveraged ratio 7.20% 6.98% 3.00%-5.00% 5.00% or greater
As of December 31, 1995
Risk-based capital:
Tier I capital ratio 12.04% 9.95% 4.00% 6.00%
Total capital ratio 13.03% 10.94% 8.00% 10.00%
Leveraged ratio 8.87% 7.32% 3.00%-5.00% 5.00% or greater
As of December 31, 1996, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as "well capitalized" under the
regulatory framework for prompt corrective action. To be categorized as "well
capitalized," the Bank must maintain minimum total risk-based, Tier I
risk-based, Tier I leverage ratios as set forth in the table above. As of
December 31, 1996 management of the Company considers the Company to be
"adequately" capitalized.
(13) Benefit Plans Savings Plan-In 1994 the Company approved a savings plan
under Section 401(k) of the Internal Revenue Code. All full-time employees over
the age of twenty-one who have completed one year of continuous employment with
the Company are eligible to participate in the plan. Under the plan, employee
contributions of up to 6% of gross salary are matched in part or total at the
discretion of the Company. Such matching becomes vested when the employee
reaches five years of credited service.Total savings plan expense was $20,000
for 1996, $13,000 for 1995 and $9,000 for 1994.
Stock Option Plans-The Company maintains stock option plans, pursuant to which
an aggregate of 258,737 shares of Common Stock have been reserved for issuance
to certain key employees and the directors of the Company and its subsidiary.
Under these plans, the options are granted at not less than the fair market
value of the Company's common stock on the date of grant, and expire not more
than ten years after the date of grant. All options granted to employees become
exercisable at the rate of 25% per year commencing on the date of grant, as do
options granted to directors under the 1995 Stock Option Plan for non-employee
directors.
<PAGE>
Options Outstanding
--------------------------
Shares Price per share
------- ---------------
Balance, December 31, 1993
(34,897 shares exercisable) 35,187 $8.23- 9.53
Granted 99,408 11.50
Additional options issued -
5% stock dividend 6,723 -
Balance, December 31, 1994
(112,112 shares exercisable) 141,318 $7.84-10.95
Additional options issued -
5% stock dividend 5,781 -
Options exercised (39,604) 7.47-10.66
Options cancelled (10,097) 11.50
Balance, December 31, 1995
(83,752 shares exercisable) 97,398 $8.65-10.66*
Granted 163,421 13.10
Additional options issued -
5% stock dividend 4,587 -
Options exercised (867) 10.15
Options cancelled (5,802) 10.15
Balance, December 31, 1996
(177,023 shares exercisable) 258,737 $8.24-13.10
*The weighted average price per share was $10.51 as of December 31, 1995.
The following table summarizes information about stock options outstanding
at December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Wgtd. Avg. Wgtd. Avg. Wgtd. Avg. Wgtd. Avg.
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contr. Life Price Exercisable Price
- -------- ----------- ----------- -------- ----------- --------
$ 8.24 1,337 6.8 $ 8.24 1,337 $ 8.24
$10.15 93,979` 6.8 $10.15 93,979 $10.15
$13.10 163,421 8.5 $13.10 81,707 $13.10
- ------- ------- --- ------ ------ ------
$8.24 to $13.10 258,737 7.9 $12.00 177,023 $11.50
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has chosen to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations in accounting for its Stock Option Plan.
Accordingly, no compensation cost has been recognized for options granted under
the Stock Option Plan. Had compensation cost for the Company's Stock Option Plan
been determined based on the fair value at the grant dates, consistent with the
method prescribed by SFAS No. 123, the Company's net income and earnings per
share would have been as follows. However, the initial impact of the new rules,
as per SFAS No. 123, may not be representative of the effect on income in future
years because the options vest over several years and additional option grants
may be made each year.
1996
--------------------------
As Reported Pro Forma
----------- -----------
(Dollars in thousands, except per share data)
Net income $2,144 $1,822
Per Common Share:
Net income - primary $ 1.01 $ 0.86
Net income - fully diluted $ 1.00 $ 0.85
<PAGE>
The weighted average fair value of options granted was $3.94 for 1996. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. The weighted average assumptions used for
grants made in 1996 are as follows:
1996 Grants
-----------
Dividend yield 3.00%
Expected volatility 20.00%
Risk-free interest rate 6.49%
Expected option life 5 Years
(14) Dividend Limitations
Funds for the payment of cash dividends by the Company are derived from
dividends paid by the Bank to the Company. Accordingly, restrictions on the
Bank's ability to pay cash dividends directly affect the payment of cash
dividends by the Company. The Bank is subject to certain limitations on the
amount of cash dividends that it may pay under the National Bank Act. The
approval of bank regulatory authorities is required if dividends declared in any
year by a national bank exceed the Bank's net profits for that year, combined
with the retained profits of the Bank for the two immediately preceeding years.
At December 31, 1996 the Bank could declare dividends aggregating approximately
$5,579,000 without regulatory approval.
(15) Financial Instruments with Off-Balance Sheet Risk or Concentrations
of Credit Risk
The Company is a party to financial instruments with off-balance sheet risk
transacted in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit, which are conditional commitments issued by the
Company to guarantee the performance of an obligation or service of a customer
to a third party. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
financial statements.
Credit policies and procedures including collateral requirements, where
applicable, for commitments to extend credit and standby letters of credit are
the same as those applicable to loans and the credit risk associated with these
instruments is considered in management's assessment of the adequacy of the
allowance for loan losses.
The Company's predominent focus has been in commercial lending within the state
of New Jersey. As a result, the Bank's credit risk is concentrated in the state
of New Jersey and is dependent on general economics of the state as well as
housing and commercial development starts, building
occupancy rates and real estate values.
Financial instruments whose contract amounts represent credit risk which are not
reflected in the accompanying financial statements as of December 31, 1996 and
1995 consist of the following:
1996 1995
------- -------
(Dollars in thousands)
Commercial and other unused
commitments $30,062 $25,363
Home equity unused lines 7,489 6,259
Standby letters of credit 8,329 4,018
$45,880 $35,640
Rate structure:
Variable rate $38,195 $34,746
Fixed rate 7,685 894
Range of fixed rate instruments:
High 16.00% 13.50%
Low 6.00% 6.60%
<PAGE>
(16) Short-Term Borrowings
At December 31, 1996 and 1995, short-term borrowings consist of the following:
1996 1995
-------- --------
Overnight Federal funds purchased
- balance $1,000 $11,500
- weighted average rate 7.38% 5.26%
- maturity date 1/02/97 1/02/96
Term advances from FHLB-NY
- balance - - $6,000
- weighted average rate - 5.80%
- maturity date - 1/22/96
At December 31, 1996, the Bank has an overnight line of credit with the Federal
Home Loan Bank-New York ("FHLB-NY") for $12,524,000 of which $1,000,000 was
advanced. The Bank also has other overnight lines of credit with other
institutions amounting to $5,500,000 of which $-0- was advanced at December 31,
1996. The Company had no overnight or short-term borrowings at December 31,
1994.
The Bank may obtain advances from the FHLB-NY which are collateralized by a
blanket assignment of the Bank's unpledged qualifying mortgage loan portfolio,
mortgage-backed security portfolio and investments in the stock of the FHLB-NY.
The maximum amount that the FHLB-NY will advance, for purposes other than
meeting withdrawals, fluctuates from time to time in accordance with the
policies of the FHLB-NY.
(17) Long-Term Debt
At December 31, 1996, long-term debt consists of the following:
1996
-------
(Dollars in thousands)
6.27% fixed rate term borrowing with
FHLB-NY, due 4/22/98 $10,000
6.50% fixed rate repurchase agreement,
due 4/19/99 4,425
$14,425
The company had no long-term debt at December 31, 1995 or December 31, 1994.
(18) Stock Warrants
On August 16, 1994 the Company issued, through a public offering, 690,000 units.
Each unit consisted of one share of common stock and one warrant to purchase one
share of common stock at an exercise price of $15.09 for a period of three years
from the date of issuance. As adjusted for the Company's 1997, 1996 and 1995 5%
stock dividends and exercised warrants, there are 600,756 warrants outstanding
which are convertible into 695,450 shares of common stock at an exercise price
of $13.04 per share of common stock, at December 31, 1996.
(19) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, ("SFAS 107") "Disclosure
About Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial instruments. The fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than a forced liquidation
sale. Fair value estimates, methods and assumptions are set forth below.
Cash and cash equivalents accrued interest receivable and accrued interest
payable. The carrying amounts for cash and cash equivalents, accrued interest
receivable and accrued interest payable approximate fair value because they
mature or are due in three months or less.
Securities available for sale. The fair value for securities available for sale
are based on quoted market prices or dealer prices, if available. If quoted
market prices are not available, fair value is estimated using quoted market
prices for similar securities.
<PAGE>
Loans receivable. The fair value of loans receivable is estimated by discounting
the future cash flows, using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities of such loans.
Deposits. The fair value of demand and savings accounts is equal to the amount
payable on demand at the reporting date. The fair value of certificates of
deposit is estimated using rates currently offered for deposits of similar
remaining maturities. The fair value estimates do not include the benefit that
results from the low-cost funding provided by deposit liabilities compared to
the cost of borrowing funds in the market.
Borrowed money. The fair value of borrowed money is estimated using the rates
currently available to the Bank for debt with similar terms and remaining
maturities. The carrying amounts for short term borrowed money approximate the
fair value because the maturities are 30 days or less.
Commitments to originate loans. The fair value of commitments to originate loans
is estimated using fees currently charged to enter into similar agreements
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, fair
value also considers the difference between current levels of interest and the
committed rates. As of December 31, 1996 and December 31, 1995 the fair value of
these commitments was immaterial.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------------------- --------------------------------------
Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
--------------- -------------------- --------------- --------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 16,745 $ 16,745 $ 10,207 $ 10,207
Securities available for sale 30,110 30,110 70,577 70,577
Securities held to maturity 23,264 23,258 - -
Loans, net 263,797 259,658 162,587 161,499
Accrued interest receivable 1,994 1,994 1,842 1,842
Financial Liabilities:
Deposits:
Non-interest bearing demand deposits 42,372 42,372 $ 40,944 $ 40,944
Savings deposits 139,671 139,671 70,430 70,430
Certificates of deposit and other time deposits 120,519 121,198 98,827 99,131
Short-term borrowings 1,000 1,000 17,500 17,500
Long-term debt 14,425 14,473 - -
Accrued interest payable 715 715 484 484
</TABLE>
Limitations-The fair value estimates are made at a discrete point in time based
on the relevant market information and information about the financial
instruments. Fair value estimates are based on judgements regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgement and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. Further, the foregoing estimates may not
reflect the actual amount that could be realized if all or substantially all of
the financial instruments were offered for sale. This is due to the fact that no
market exists for a sizable portion of the loan, deposit and off balance sheet
instruments.
In addition, the fair value estimates are based on existing on-and-off balance
sheet financial instruments without attempting to estimate the value of the
anticipated future business, and the value of assets and liabilities that are
not considered financial instruments. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of the
estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates, which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
<PAGE>
(20) Merger Agreement Terminated
On January 15, 1997 Carnegie Bancorp announced the termination of the Amended
and Restated Agreement and Plan of Merger that had provided for the merger of
Regent Bancshares Corp. into Carnegie Bancorp and the concurrent merger of each
company's respective subsidiary banks.
(21) Subsequent Event
In January 1997, the Board of Directors declared both a cash dividend and stock
dividend. Stockholders of record on February 12, 1997 will receive a 5% stock
dividend on March 19, 1997. Stockholders of record on February 19, 1997 will
receive a $.14 per share cash dividend on March 19, 1997. Weighted average
shares outstanding and earnings per share have been retroactively adjusted to
reflect the stock dividend.
(22) Summary of Quarterly Results (Unaudited)
The following summarizes the results of operations during 1996, on a quarterly
basis, for Carnegie Bancorp and Subsidiary.
1996
-------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(Dollars in thousands, except per share data)
Interest income ........................ $7,261 $6,247 $5,612 $5,344
Interest expense ....................... 3,420 2,682 2,455 2,327
Net interest income .................... 3,841 3,565 3,157 3,017
Provision for loan losses .............. 448 668 321 172
Net interest income
after provision for loan losses ..... 3,393 2,897 2,836 2,845
Net security transactions .............. -- 82 95 128
Other non-interest income .............. 197 194 493 171
Other non-interest expense ............. 2,706 2,500 2,568 2,280
Income before income taxes ............. 884 673 856 864
Income taxes ........................... 328 255 292 258
Net income ............................. $ 556 $ 418 $ 564 $ 606
Net income per share:
Primary .............................. $ 0.25 $ 0.20 $ 0.27 $ 0.29
Fully diluted ........................ $ 0.25 $ 0.19 $ 0.27 $ 0.29
(23) Recently Issued Accounting Standards
FASB has issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", as amended by SFAS No.
127, "Deferral of the Effective Date of Certain Provisions of SFAS 125",
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. Earlier or retroactive
application is not permitted. This Statement provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components approach
that focuses on control. Adoption of this pronouncement is not expected to have
a material impact on the Company's consolidated financial statements.
<PAGE>
Selected Consoldated Financial Data
The selected consolidated financial data set forth at and for each of the five
years presented below, except for the "Performance Ratios", "Net charge-offs
(recoveries) to average loans" and "Leverage capital", are derived from the
audited consolidated financial statements of the Company. The selected
consolidated financial information should be read in conjunction with the
consolidated financial statements of the Company and the accompanying notes
thereto, which are presented elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $ 24,464 $ 18,706 $ 13,555 $ 9,877 $ 8,217
Interest expense 10,884 8,464 5,149 3,639 3,451
---------- ---------- ---------- ---------- ----------
Net interest income 13,580 10,242 8,406 6,238 4,766
Provision for loan losses 1,609 369 650 429 476
Net interest income after provision for loan
losses 11,971 9,873 7,756 5,809 4,290
Non-interest income 1,360 744 495 471 607
Non-interest expense 10,054 7,724 6,056 4,696 3,399
Income before income taxes 3,277 2,893 2,195 1,584 1,498
Income tax expense 1,133 765 656 520 485
Net income $ 2,144 $ 2,128 $ 1,539 $ 1,064 $ 1,013
Per Share Dat
Net income - primary $ 1.01 $ 1.08 $ 1.11 $ 0.98 $ 0.93
- fully diluted 1.00 1.07 1.11 0.98 0.93
Cash dividends (1) 0.49 0.48 0.40 0.32 0.24
Book value 11.65 11.27 9.56 9.90 9.19
Weighted average shares outstanding:
- primary 2,124,807 1,972,776 1,381,622 1,090,471 1,090,471
- fully diluted 2,141,706 1,990,386 1,381,622 1,090,471 1,090,471
Balance Sheet Data:
Total assets $ 343,357 $ 250,562 $ 195,654 $ 154,363 $ 119,478
Federal funds sold - - - 2,350 11,345
Loans, net 263,797 162,587 138,897 116,266 80,811
Investment securities 53,374 70,577 44,920 28,728 21,496
Deposits 302,562 210,201 176,789 143,178 108,214
Stockholders' equity 23,742 21,794 18,056 10,798 10,021
Average equity to average total assets 7.75% 8.84% 7.67% 7.10% 9.25%
Performance Ratios:
Return on average assets 0.75% 0.95% 0.87% 0.81% 0.98%
Return on average stockholders' equity 9.68% 10.72% 11.39% 11.38% 10.60%
Net interest margin (2) 5.11% 5.02% 5.16% 5.08% 4.93%
Ratio of earnings to fixed charges (3) 1.29 1.33 1.42 1.42 1.42
Asset Quality Ratios:
Allowance for loan losses to total loans 1.00% 1.07% 1.00% 0.84% 0.99%
Allowance for loan losses to non-accrual loans 79.74% 43.56% 67.80% 30.44% 34.42%
Non-performing loans to total loans 1.25% 2.45% 1.47% 2.75% 2.87%
Non-performing assets to total assets 1.11% 1.61% 1.06% 2.09% 1.96%
Net charge-offs (recoveries) to average loans 0.34% 0.01% 0.19% 0.28% 0.35%
Liquidity and Capital Ratios:
Dividend payout 48.56% 44.50% 35.91% 32.80% 25.84%
Loans to deposits 88.07% 78.18% 79.36% 81.89% 75.42%
Tier I risk-based capital 8.81% 12.04% 14.06% 9.61% 13.10%
Total risk-based capital 9.79% 13.03% 15.06% 10.48% 14.16%
Leverage capital 7.20% 8.87% 10.47% 8.20% 8.40%
<FN>
(1) Cash dividends per share have not been restated for stock dividends.
(2) Yields on tax-exempt obligations have been computed on a fully tax-equivalent basis, assuming a Federal income tax rate of 34%.
(3) The ratio of earnings to fixed charges is calculated by dividing income from continuing operations before fixed
charges and income taxes ("earnings") by fixed charges. Fixed charges consist of interest expense and that portion of rental
expense that the Company believes to be representative of interest.
</FN>
</TABLE>
<PAGE>
BOARD OF DIRECTORS AND OFFICERS
Theodore H. Dolci, Jr.
Ted Dolci Excavating, Inc.
Michael E. Golden
First Colonial Securities Group, Inc.
Vice Chairman of the Board
Carnegie Bank, N.A.
Thomas L. Gray, Jr.
President and Chief Executive Officer
Carnegie Bank, N.A.
Bruce A. Mahon
Retired Chairman
McCay Real Estate Group
Chairman of the Board
Carnegie Bank, N.A.
Joseph J. Oakes, III
Acorn Financial Services
James E. Quackenbush
Certified Public Accountant, Retired
Steven L. Shapiro, CPA, PFS
Alloy, Silverstein, Shapiro, Adams,
Mulford & Co.
Mark A. Wolters
Executive Vice President
Carnegie Bank, N.A.
Shelley M. Zeiger
Zeiger Enterprises, Inc.
HONORARY DIRECTOR
Emil H. Block, Esquire
Attorney at Law
OFFICERS
Thomas L. Gray, Jr.
President and Chief Executive Officer
Mark A. Wolters
Executive Vice President
Richard P. Rosa
Senior Vice Presient and
Chief Financial Officer
Floyd P. Haggar
Senior Vice President and
Senior Loan Officer
Lauretta Lucchesi
Senior Vice President
Edward E. Benson
Vice President
Michael Bis
Vice President and
Controller
Brian Christie
Vice President
Paul R. Cohen
Vice President
Richard Embley
Vice President
Gerard Franz
Vice President
Suzanne Macdonald
Vice President
William MacDonald
Vice President
Christine Orben
Vice President
Elizabeth A. Roberts
Vice President
Robert Thompson
Vice President
Christopher M. Tonkovich
Vice President
Mark P. Whittaker
Vice President
Eileen Wolfe
Vice President
Jennifer Bizub
Assistant Vice President
Marjorie A. Callahan
Assistant Vice President
Patricia A. Lipke
Assistant Vice President
Leigh Martin
Assistant Vice President
Leonard P. Prevo
Assistant Vice President
Theresa D. Rose
Assistant Vice President
John H. Selenko
Assistant Vice President
Catherine Shrope-Mok
Assistant Vice President
Kimberley Skripak
Assistant Vice President
Maureen E. Witt
Assistant Vice President
Cynthia Aust
Assistant Cashier
Walter Darr
Assistant Cashier
Riquel Dawson
Assistant Cashier
Joanne Epps
Assistant Cashier
Maryellen Kasper
Assistant Cashier
Ellen Loria
Assistant Cashier
Theresa M. Macor
Assistant Cashier
Debra A. Morreale
Assistant Cashier
Bernadette Pietras
Assistant Cashier
Bonnie S. Rendina
Assistant Cashier
Jeffrey Siebold
Assistant Cashier
Elizabeth Tamasi
Assistant Cashier
<PAGE>
BUSINESS DEVELOPMENT COMMITTEES
PRINCETON
Imtiaz Ahmad, M.D., F.A.C.S.
Cardiothoracic & Vascular Associates, P.A.
Robert P. Avolio, Esquire
Avolio & Hanlon, P.C.
Stephen C. Brame, Esquire
Attorney at Law
Dennis r. Casale, Esquire
Jamieson, Moore, Peskin & Spicer
James Clingham
Galaxis Holding GmbH
Esmond S. Druker
Druker, Rahl & Fein
Kenneth Larini
Larini's Service Center
Arthur W. Perry, M.D., F.A.C.S.
Plastic and Reconstructive Surgery
Robert Petras
McCay Corporation
William Robertshaw
Williamson Construction Company
Steven E. Some
Capital Public Affairs, Inc.
HAMILTON
LeRoi Banks, GRI
ROI Realty
James E. Bartolomei, CPA
Bartolomei & Associates
Vincent Civale, CPA
Civale, Silvestri & Alfieri
Nadine S. Fischer
Nadia Communications
Paul M. Fischer, D.C.
Fischer Chiropractic Center
Lois Christiansen Havard
TLC Design
Sidney L. Hofing, Esquire
The Eagle Group, Inc.
Anthony M. Massi, Esquire
Paglione & Massi
Louis Tsarouhas, M.D.
Mercerville Medical Associates
MARLTON
Brian D. Baratz, CPA
Baratz & Associates, P.A.
Harvey S. Benn, D.O.
Internal Medicine & Rheumatology
Myron Buchman
Gentle Bear Enterprises, Inc.
John A. DeFalco, Esquire
Attorney at Law
James L. Greene
Infinity Title Agency, Inc.
Marc R. Isdaner
Lanard & Axilbund Colliers International
Clyde N. Lattimer
C.N. Lattimer & Son Construction
Company, Inc.
Morris Starkman, Esquire
Starkman & Nadel
Eric Swift
Total Product Supply, Inc.
Karen Williams, Esquire
Jasinski & Paranac
DENVILLE
Kenneth M. Courey
S.S.M. Health Care Corp.
Harry J. Hayes
Allstate Insurance Company
Steven N. Kaplan, CPA
Steven N. Kaplan & Company
Bruce A. McCarter
McCarter's Getty
Wayne Norman
Re/Max-Leading Edge Realtors
Ronald F. Pitman, Esquire
Pitman, Senesky, Nicola & Selitto
William D. Richards
Richards & Summers, Inc.
John Strydesky, CPA
Strydesky & Company
Larry I. Wiener, Esquire
Wiener & Binder
TOMS RIVER
Timothy Gillen
Gillen Realty Inc.
Harry Jay Levin, Esquire
Levin, Rosen & Pollock
Gary V. Lotano
Lotano Development, Inc.
Matthew Smith
O'Donnell, Stanton & Associates, Inc.
Deborah M. Williams
D.W. Realty Group, Inc.
Massimo F. Yezzi, Jr.
Yezzi Associates
Henry Yu, M.D.
Internal Medicine
MONTGOMERY
Marie Gallagher
IT Travel of Princeton
Cosmo Iacavazzi
Reep, Inc.
Arthur C. Liese
Collins Group
Hal W. Mandel
Greenbaum, Rowe, Smith, Ravin & Davis
Joseph L. Mazotas
Mazotas & Benner
Bruce Meier
Ewing Leasing Co., Inc.
Douglas K. Merritt
Alfred H. Merritt Agency
Douglas M. Rhoda
Somerset Data Forms
Leonard Smith
Withum, Smith & Brown
FLEMINGTON
George Muller
Flemington Cut Glass Company
Jerry Jaremenko
Kries Jeweler
George E. Michael, Jr.
Georgetown Builders
James H. Knox, Esquire
Gebhardt & Kiefer, PA
Rosalin Petrucci
J.G. Petrucci Co., Inc.
Robert Wise
Hunterdon Medical Center
Robert Hornby, Esquire
Attorney at Law
<PAGE>
STOCKHOLDER INFORMATION
COMMON STOCK
Carnegie Bancorp stock is traded over-the-counter and quoted by the National
Association of Securities Dealers through the NASDAQ National Market System. The
NASDAQ symbol for Carnegie Bancorp common stock is CBNJ. During 1996, monthly
trading volume averaged approximately 90,263 shares. As of December 31, 1996,
there were 622 registered holders of common stock.
The following table presents the sale price range and dividends per share for
the eight quarters ended December 31, 1996. These prices reflect actual
transactions, exclusive of commissions. The high and low bid prices and the cash
dividends per share have not been adjusted for stock dividends.
Common Stock Price Range
High Low Dividend
------ ------ --------
1996 First Quarter $18.00 $15.75 $0.12
Second Quarter 16.25 14.25 0.12
Third Quarter 17.13 15.00 0.12
Fourth Quarter 20.13 16.75 0.13
1995 First Quarter $12.75 $11.00 $0.12
Second Quarter 14.25 12.25 0.12
Third Quarter 16.50 13.75 0.12
Fourth Quarter 16.87 15.50 0.12
A dividend reinvestment and stock purchase plan is available for stockholders
who wish to increase their holdings. Under the plan, quarterly dividends may be
reinvested in CBNJ common stock at market value. In addition, optional cash
investments of not less than $25 nor more than $5,000 per quarterly investment
period may be made in common stock, at market value, without incurring a
commission or fee. Interested stockholders should contact Thomas L. Gray, Jr.,
President at 609-243-7500 for additional information regarding the dividend
reinvestment plan.
STOCKHOLDER AND
GENERAL INQUIRIES
Thomas L. Gray, Jr.
President
Carnegie Bancorp
619 Alexander Road
Princeton, New Jersey 08540
(609) 243-7500
STOCK TRANSFER AGENT
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
1-800-368-5948
STOCK LISTING
The common stock is traded on the NASDAQ
National Market System, Symbol: CBNJ for common
stock and CBNJW for warrants.
ANNUAL AND OTHER REPORTS
The Company is required to file an Annual Report on Form
10-KSB for its fiscal year ended December 31, 1996 with the
Securities and Exchange Commission (SEC). Copies of
the Annual Report and the Company's Quarterly Reports
(excluding certain exhibits) may be obtained without charge
by contacting Thomas L. Gray, Jr., President, Carnegie
Bancorp, 619 Alexander Road, Princeton, NJ 08540.
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The Registrant has one subsidiary, Carnegie Bank, N.A.
Carnegie Bank, N.A. has a single subsidiary, Carnegie
Investment Company.
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Carnegie Bancorp (the "Company") on Form S-8 (File Nos. 33-81918 and 333-20515),
and in the post effective amendment on Form S-3 to the registration statement of
the Company on Form SB-2 (File No. 33-80426) of our report dated February 3,
1997, which includes an explanatory paragraph regarding the change in method of
accounting for certain investment securities in 1994, on our audits of the
consolidated financial statements of Carnegie Bancorp and Subsidiary as of
December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and
1994 which is included in this Annual Report on Form 10-KSB. We also consent to
the reference to our Firm under the caption "Experts".
/s/ COOPERS & LYBRAND LLP
Princeton, New Jersey
March 31, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED CONDENSED BALANCE SHEET AT DECEMBER 31, 1996 (AUDITED),
CONSOLIDATED CONDENSED STATEMENT OF INCOME FOR THE TWELVE MONTHS
ENDED DECEMBER 31, 1996 (AUDITED) AND THE NOTES TO THE CONSOLIDATED
CONDENSED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000915277
<NAME> CARNEGIE-BANCORP
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,745,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 30,110,000
<INVESTMENTS-CARRYING> 23,264,000
<INVESTMENTS-MARKET> 23,258,000
<LOANS> 266,462,000
<ALLOWANCE> 2,665,000
<TOTAL-ASSETS> 343,357,000
<DEPOSITS> 302,562,000
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 1,628,000
<LONG-TERM> 14,425,000
0
0
<COMMON> 9,705,000
<OTHER-SE> 14,037,000
<TOTAL-LIABILITIES-AND-EQUITY> 343,350,007
<INTEREST-LOAN> 20,225,000
<INTEREST-INVEST> 4,133,000
<INTEREST-OTHER> 106,000
<INTEREST-TOTAL> 24,464,000
<INTEREST-DEPOSIT> 9,095,000
<INTEREST-EXPENSE> 10,884,000
<INTEREST-INCOME-NET> 13,580,000
<LOAN-LOSSES> 1,609,000
<SECURITIES-GAINS> 305,000
<EXPENSE-OTHER> 10,054,000
<INCOME-PRETAX> 3,277,000
<INCOME-PRE-EXTRAORDINARY> 2,144,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,144,000
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.00
<YIELD-ACTUAL> 0.09
<LOANS-NON> 3,342,000
<LOANS-PAST> 839,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,754,000
<CHARGE-OFFS> 708,000
<RECOVERIES> 10,000
<ALLOWANCE-CLOSE> 2,665,000
<ALLOWANCE-DOMESTIC> 2,506,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 159,000
</TABLE>
