SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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
CARNEGIE BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW JERSEY 22-3257100
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
619 ALEXANDER ROAD, PRINCETON, N.J. 08540
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 609-243-7500
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
(TITLE OF CLASS)
WARRANTS TO PURCHASE COMMON STOCK
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE 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-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. |X|
AS OF FEBRUARY 28, 1998, THERE WERE 2,753,030 SHARES OF THE REGISTRANT'S
COMMON STOCK, NO PAR VALUE PER SHARE, OUTSTANDING, AND BASED ON THE LAST
REPORTED SALE PRICE OF $33.375 PER SHARE ON THE NASDAQ STOCK MARKET, THE
AGGREGATE MARKET VALUE OF THE REGISTRANT'S COMMON STOCK HELD BY THOSE PERSONS
DEEMED BY THE REGISTRANT TO BE NONAFFILIATES WAS APPROXIMATELY $85,335,403.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. 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.
On December 15, 1997, the Company and Sovereign Bancorp, Inc.
("Sovereign"), the parent company of Sovereign Bank, a federal savings bank,
jointly announced the execution of an Agreement and Plan of Merger, dated as of
December 12, 1997 (the "Merger Agreement"). Under the initial terms of the
Merger Agreement, if the Sovereign Market Value (as defined below) as of the
effective date of the merger is greater than or equal to $18.00 per share and
less than or equal to $22.00 per share, each outstanding share of the Company's
Common Stock would be converted into such number of shares of common stock, no
par value, of Sovereign (the "Sovereign Common Stock") as would equal $35.50
divided by the average of the last reported sales prices of a share of Sovereign
Common Stock for the 15 consecutive trading day period immediately preceding the
effective date (the "Sovereign Market Value"). However, if the Sovereign Market
Value as of the effective date is less than $18.00 per share, each share of the
Company's Common Stock would be converted into 1.972 shares (the "Maximum
Exchange Ratio") of Sovereign Common Stock and if the Sovereign Market Value as
of the effective date is greater than $22.00 per share, each share of the
Company's Common Stock would be converted into 1.614 shares (the "Minimum
Exchange Ratio") of Sovereign Common Stock.
The Merger Agreement also provides that the Company has the right to
terminate the Merger Agreement if the Sovereign Market Value as of the Effective
Date (i) is less than $14.47 per share and (ii) has declined in value since the
date of the Merger Agreement by an amount which is at least 15% more than any
decline in the weighted average per share prices of shares of common stock
("Peer Group Common Stock") of a peer group of nine publicly-traded savings bank
holding companies, unless Sovereign elects to increase the number of shares
issuable in exchange for the Company's Common Stock in order to result in a
minimum price of $28.53 of Sovereign Common Stock per share of the Company's
Common Stock.
On January 23, 1998, Sovereign announced a 20% stock dividend to its
shareholders. Under the terms of the Merger Agreement, as a result of the
dividend, the exchange ratios and relevant Sovereign Market Values discussed
above were adjusted but the value of the consideration
to be received by Carnegie shareholders in the Merger was unchanged. Following
Sovereign's stock dividend, if the Sovereign Market Value is greater than or
equal to $15.00 per share and less than or equal to $18.33 per share, each
outstanding share of the Company's Common Stock will be converted into such
number of shares of Sovereign Common Stock as shall equal $35.50 divided by the
Sovereign Market Value. If the Sovereign Market Value as of the effective date
is less than $15.00 per share, each share of the Company's Common Stock would be
converted into 2.366 shares (the "Adjusted Maximum Exchange Ratio") of Sovereign
Common Stock and if the Sovereign Market Value as of the effective date is
greater than $18.33 per share, each share of the Company's Common Stock would be
converted into 1.937 shares (the "Adjusted Minimum Exchange Ratio") of Sovereign
Common Stock.
The effective date of the adjustment in the merger consideration to be
received by the Company's shareholders is March 27, 1998 (the "ex-dividend
date"). As a result of the Sovereign Stock Dividend, after March 27, 1998,
Carnegie will have the right to terminate the Merger Agreement if the Sovereign
Market Value as of the Effective Date (i) is less than $12.06 per share and (ii)
has declined in value since the date of the Merger Agreement by an amount which
is at least 15% more than any decline in the weighted average per share prices
of the Peer Group Common Stock, unless Sovereign elects to increase the number
of shares issuable in exchange for the Company's Common Stock in order to result
in a minimum price of $28.53 of Sovereign Common Stock per share of the
Company's Common Stock.
The proposed Merger is subject to the approval of various regulatory
authorities and a majority of the votes cast by holders of Common Stock at a
duly convened meeting of the Company's shareholders.
Additionally, Carnegie Bancorp's common stock purchase warrants expired on
August 18, 1997. All but 1,293 were exercised prior to the expiration date which
added 711,948 new shares of Common Stock and $8.8 million of new Stockholders'
equity in 1997.
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 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, 1997, the Company employed 124 full-time employees and 3
part-time employees. None of these employees is covered by a collective
bargaining agreement and the Company believes that its employee relations are
good.
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 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).
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 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.
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.
The second major provision of the Interstate Act permits banks located in
different states to merge and continue to operate as a single institution in
more than one state, so long as any state involved did not opt out of the
interstate bank merger provisions 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.
In April, 1996, the New Jersey legislature passed legislation that 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 maintains eight branches, seven 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
(2 five-year renewal options)
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, 2002
(3 five-year renewal options)
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
(1 five-year renewal option)
Langhorne Branch Office:
100 North Buckstown Drive
Suite E-204
Langhorne, PA 17047 January 31, 2002
(1 four-year renewal option)
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 1997.
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, 1997,
there were 660 registered holders of Common Stock.
The following table presents the sale price range and dividends per share for
the eight quarters ended December 31, 1997. 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.
COMMON STOCK PRICE RANGE
High Low Dividend
1997 First Quarter $19.63 $17.50 $0.14
Second Quarter 18.75 16.50 0.14
Third Quarter 27.50 18.25 0.14
Fourth Quarter 35.00 23.38 0.14
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
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. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED 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.
YEAR ENDED DECEMBER 31,
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1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Interest income ............................... $ 32,414 $ 24,464 $ 18,706 $ 13,555 $ 9,877
Interest expense .............................. 16,037 10,884 8,464 5,149 3,639
--------- --------- --------- --------- ---------
Net interest income ........................... 16,377 13,580 10,242 8,406 6,238
Provision for loan losses ..................... 446 1,609 369 650 429
--------- --------- --------- --------- ---------
Net interest income after provision for
loan losses ............................... 15,931 11,971 9,873 7,756 5,809
Non-interest income ........................... 1,034 1,360 744 495 471
Non-interest expense .......................... 11,482 10,054 7,724 6,056 4,696
--------- --------- --------- --------- ---------
Income before income taxes .................... 5,483 3,277 2,893 2,195 1,584
Income tax expense ............................ 1,858 1,133 765 656 520
--------- --------- --------- --------- ---------
Net income .................................... $ 3,625 $ 2,144 $ 2,128 $ 1,539 $ 1,064
========= ========= ========= ========= =========
PER SHARE DATA:
Net income - basic ............................ $ 1.55 $ 1.10 $ 1.11 $ 1.11 $ 0.98
- diluted .......................... 1.42 1.00 1.08 1.11 0.98
Cash dividends (1) ........................... 0.56 0.49 0.48 0.40 0.32
Book value .................................... 12.80 11.65 11.27 9.56 9.90
Weighted average shares outstanding:
- basic ............. 2,336,058 1,943,760 1,925,158 1,381,622 1,090,680
- diluted ........... 2,544,075 2,141,255 1,964,590 1,381,622 1,090,680
BALANCE SHEET DATA:
Total assets .................................. $ 431,886 $ 343,357 $ 250,562 $ 195,654 $ 154,363
Federal funds sold ............................ 1,725 -- -- -- 2,350
Loans, net .................................... 284,789 263,797 162,587 138,897 116,266
Investment securities ......................... 121,471 53,374 70,577 44,920 28,728
Deposits ...................................... 332,897 302,562 210,201 176,789 143,178
Stockholders' equity .......................... 35,224 23,742 21,794 18,056 10,798
Average equity to average total assets ........ 7.39% 7.75% 8.84% 7.67% 7.10%
PERFORMANCE RATIOS:
Return on average assets ...................... 0.94% 0.75% 0.95% 0.87% 0.81%
Return on average stockholders' equity ........ 12.69% 9.68% 10.72% 11.39% 11.38%
Net interest margin (2) ....................... 4.50% 5.11% 5.02% 5.16% 5.08%
Ratio of earnings to fixed charges (3) ....... 1.34 1.29 1.33 1.42 1.42
ASSET QUALITY RATIOS:
Allowance for loan losses to total loans ...... 1.03% 1.00% 1.07% 1.00% 0.84%
Allowance for loan losses to non-accrual
loans ..................................... 68.19% 79.74% 43.56% 67.80% 30.44%
Non-performing loans to total loans ........... 1.51% 1.25% 2.45% 1.47% 2.75%
Non-performing assets to total assets ......... 1.12% 1.11% 1.61% 1.06% 2.09%
Net charge-offs (recoveries) to average
loans ..................................... 0.06% 0.34% 0.01% 0.19% 0.28%
LIQUIDITY AND CAPITAL RATIOS:
Dividend payout ............................... 36.09% 44.42% 43.42% 35.91% 32.80%
Loans to deposits ............................. 86.44% 88.07% 78.18% 79.36% 81.89%
Tier I risk-based capital ..................... 11.81% 8.81% 12.04% 14.06% 9.61%
Total risk-based capital ...................... 12.80% 9.79% 13.03% 15.06% 10.48%
Leverage capital .............................. 8.36% 7.20% 8.87% 10.47% 8.20%
- ----------
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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
On December 15, 1997, the Company and Sovereign Bancorp, Inc., the parent
company of Sovereign Bank, jointly announced the execution of a definitive
agreement for Sovereign to acquire the Company. The terms of the agreement call
for Sovereign to exchange $35.50 in Sovereign common stock for each outstanding
share of the Company's Common Stock.
The December 15, 1997 announcement indicated the price would stay fixed at
$35.50 per the Company's share if Sovereign's average stock price remained
between $18.00 and $22.00 per share during the 15-day period prior to the
closing of the transaction. If the average price of Sovereign's stock dropped to
$18.00 per share or below during the pricing period prior to closing, the
Company's shareholders would receive a fixed rate of 1.972 shares (the "Maximum
Exchange Ratio") of Sovereign common stock for each share of the Company's
Common Stock. Conversely, if Sovereign's average stock price is $22.00 per share
or higher, the Company's shareholders would receive a fixed rate of 1.614 shares
(the "Minimum Exchange Ratio") of Sovereign common stock for each share of the
Company's Common Stock. The Company has the right to terminate the agreement if
the average stock price of Sovereign during the 15-day pricing period falls
below $14.47 and Sovereign's decline in value is 15% greater than the percentage
decline of a group of similar financial institutions, subject to Sovereign's
right to increase the exchange ratio in order to result in a minimum price of
$28.53 in Sovereign common stock.
On January 23, 1998, Sovereign announced a 20% stock dividend to its
shareholders. This stock dividend will not affect the value that the Company's
shareholders will receive as a result of this acquisition; although the exchange
ratio will be adjusted accordingly. Because of Sovereign's stock dividend, the
$18.00 price adjusts to $15.00 per share (equivalent to 2.366 shares of
Sovereign for each Company share) and the $22.00 price adjusts to $18.33 per
share (equivalent to 1.937 shares of Sovereign for each Company share). If the
average price of Sovereign's stock drops to $15.00 per share or below during the
pricing period prior to closing, the Company's shareholders would receive a
fixed rate of 2.366 shares (the "Maximum Exchange Ratio") of Sovereign common
stock for each share of Company Common Stock. Conversely, if Sovereign's average
stock price is $18.33 per share or higher, the Company's shareholders would
receive a fixed rate of 1.937 shares (the "Minimum Exchange Ratio") of Sovereign
common stock for each share of Company Common Stock. The effective date for the
adjustment is March 27, 1998 (the ex-dividend date). After March 27, 1998, the
Company will have the right to terminate the agreement if the average stock
price of Sovereign during the 15-day pricing period falls below $12.06 and
Sovereign's decline in value is 15% greater than the percentage decline of a
group of similar financial institutions, subject to Sovereign's right to
increase the exchange ratio in order to result in a minimum price of $28.53 in
Sovereign common stock. The merger is subject to the approval of various
regulatory agencies and the Company's shareholders. It is anticipated that the
transaction will close in the second quarter of 1998, and will be accounted for
as a pooling of interests.
Since Carnegie Bank commenced operations in April, 1988, the Company has
increased its asset base at a rapid pace. The Company's assets have grown from
$119.5 million at December 31, 1992 to $431.9 million at December 31, 1997, a
five year compound annual growth rate of 29.3%. 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 Pennsylvania. Although the Company's emphasis has been on growth, the
Company became profitable in its second quarter of operations, and its
net income was $3.6 million for the year ended December 31, 1997, a 69% increase
over net income for 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, and has continued to pay cash dividends in every
quarter since the first quarter of 1992. The dividend per share for 1997 and
1996 was $.56 and $.49, respectively.
The 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 all came into profitability in 1997. That
profitability, together with the benefit of the full year effect on income of
the strong 1996 loan growth, made 1997 a year in which net income experienced a
dramatic year over year improvement. Also of note, 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 the Company the sum of $722 thousand
in reimbursement for expenses incurred by the Company in connection with the
merger. The termination of the merger therefore did not affect the Company's
results of operation for 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
NET INCOME
The Company earned $3.6 million, or $1.55 per share, on a basic earnings per
share basis, and $1.42 per share on a diluted earnings per share basis for the
year ended December 31, 1997 compared to $2.1 million, or $1.10 per share on a
basic earnings per share basis and $1.00 per share on a diluted earnings per
share basis for the year ended December 31, 1996. Net income for the year ended
December 31, 1995 was $2.1 million or $1.11 per share, on a basic earnings per
share basis, and $1.08 per share on a diluted earnings per share basis. Net
interest income for 1997 increased $2.8 million or 20.6% to $16.4 million
compared to $13.6 million for 1996. Net interest income for 1995 was $10.2
million. The provision for loan losses for 1997 was $446 thousand compared to
$1.6 million for 1996, a decline of $1.2 million or 75.0%. The provision for
1995 was $369 thousand. The reduced provision in 1997 compared to 1996,
reflected slower loan growth and fewer loans charged off in 1997. Loan growth in
1997, year end to year end, totaled $21.3 million, compared to loan growth for
1996 of $102.1 million, and $24.0 million in 1995. Loans charged off in 1997
totaled $216 thousand compared to $708 thousand in 1996, and $67 thousand in
1995. Net interest income after the provision was $15.9 million for 1997, an
increase of $3.9 million or 32.5%, compared to $12.0 million for 1996 and $9.9
million for 1995. Non-interest income was $1.0 million in 1997 compared to $1.4
million for 1996 and $744 thousand for 1995. The $326 thousand or 24.0% decline
in non-interest income in 1997, compared to 1996, reflects a decline in the
gains on the sale of other real-estate owned of $228 thousand, and a decline in
the net gains on securities transactions of $261 thousand offset by an increase
in service fees on deposits of $34 thousand, and an increase in other fees and
commissions of $129 thousand. Total non-interest expense was $11.5 million in
1997, compared to $10.1 million in 1996, and $7.7 million in 1995. The increase
in non-interest expenses in 1997 was due primarily to the full year effect of
the three new branch offices opened during 1996.
For 1996, net interest income increased $3.3 million or 32.4%, due primarily to
loan growth, which was partially offset by an increase in non-interest expenses
of $2.3 million. Most of the increase in non-interest expense, in 1996, was
attributable to the three new branch offices opened in 1996, and the one new
branch office opened in November 1995. 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 National Bank, and
due to loans charged off totaling $708 thousand in 1996, compared to only $67
thousand in 1995. That additional expense was partially offset by net gains on
the sale of securities and other real estate owned of $599 thousand.
The weighted average number of shares outstanding, for the basic earnings per
share calculation and the diluted earnings per share calculation, was
substantially higher in 1997 at 2.3 million and 2.5 million, respectively,
compared to 1.9 million and 2.1 million, respectively in 1996. The 1997 increase
occurred because 712 thousand warrants and options were exercised, primarily
during the third quarter of 1997, which substantially increased the average
number of shares outstanding for the year. The decline in net income per share
in 1996 was the result of the increase in the Company's average shares
outstanding due to the exercise of stock purchase warrants and stock options,
totaling 39.8 thousand shares, and 82.6 thousand new shares issued because of
the Company's 5% stock dividend in 1996. For 1995, the weighted average number
of shares outstanding, for the basic earnings per share calculation and the
diluted earnings per share calculation, was 1.9 million and 2.0 million,
respectively.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
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.
Interest on loans to and obligations of states, municipalities and other public
entities is not subject to Federal income tax. As such, the stated (pre-tax)
yield on these assets is lower than the yields on taxable assets of similar risk
and maturity. In order to make the pre-tax income and resultant yields
comparable to taxable loans and investments, a tax-equivalent basis adjustment
was added to interest income in the following tables. This adjustment has been
calculated using the U.S. Federal statutory income tax rate of 34%. The
following table summarizes the amount that has been added to interest income as
presented in the Consolidated Condensed Statements of Income.
Twelve Months Ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
Income per consolidated statements of
income ................................... $32,414 $24,464 $18,706
Tax equivalent basis adjustment:
Loans .................................... 34 17 0
Investment securities .................... 231 197 499
------- ------- -------
Interest income adjusted to fully tax-
equivalent basis ......................... 32,679 24,678 19,205
Interest expense ........................... 16,037 10,884 8,464
------- ------- -------
Net interest income adjusted to fully tax-
equivalent basis ......................... $16,642 $13,794 $10,741
======= ======= =======
The following tables titled "Consolidated Average Balance Sheet with Resultant
Interest and Average Rates" and "Analysis of Changes in Consolidated Net
Interest Income" present by category the major factors that contributed to the
changes in net interest income for the year 1997 compared to the year 1996 and
the year 1996 compared to the same period for 1995.
CONSOLIDATED AVERAGE BALANCE SHEET
WITH RESULTANT INTEREST AND AVERAGE RATES
1997 1996 1995
---------------------------- --------------------------- ---------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- -------- -------- -------- -------- -------- -------- --------
ASSETS
- --------------------------------------------
Earning Assets:
Federal Funds Sold ....................... $ 5,250 $ 284 5.41% $ 1,989 $ 106 5.33% $ 8,040 $ 475 5.91%
Investment Securities:
Securities available for sale:
U. S. Gov't & Mtge-backed
Securities ......................... 32,950 2,151 6.53% 30,488 2,048 6.72% 37,146 2,384 6.42%
State & Political Subdivisions (1) ... 7,638 680 8.91% 7,432 580 7.80% 0 0 0.00%
Other Securities ..................... 8,527 556 6.52% 6,038 378 6.26% 2,462 151 6.13%
-------- -------- -------- -------- -------- -------- -------- -------- --------
49,115 3,387 6.90% 43,958 3,006 6.84% 39,608 2,535 6.40%
Securities held to maturity:
U. S. Gov't & Mtge-backed
Securities ......................... 43,404 3,121 7.19% 18,524 1,324 7.15% 0 0 0.00%
State & Political
Subdivisions (1) ................... 0 0 0.00% 0 0 0.00% 18,531 1,468 7.92%
-------- -------- -------- -------- -------- -------- -------- -------- --------
43,404 3,121 7.19% 18,524 1,324 7.15% 18,531 1,468 7.92%
Total Investment Securities ....... 92,519 6,508 7.03% 62,482 4,330 6.93% 58,139 4,003 6.89%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loans:(2)(3)
Comm'l Loans & Comm'l Mtgs ........... 235,361 22,666 9.63% 174,154 17,482 10.04% 119,618 12,248 10.24%
Residential Mortgages ................ 24,711 2,096 8.48% 22,239 1,911 8.59% 25,243 2,189 8.67%
Installment Loans .................... 12,303 1,125 9.14% 9,114 849 9.32% 2,924 290 9.92%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Loans ....................... 272,375 25,887 9.50% 205,507 20,242 9.85% 147,785 14,727 9.97%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Earning Assets ................. 370,144 32,679 8.83% 269,978 24,678 9.14% 213,964 19,205 8.98%
Non-Interest Earning Assets:
Loan Loss Reserve ........................ (2,855) (2,079) (1,562)
Held For Sale Securities Valuation ....... (164) (140) (1,275)
All Other Assets ......................... 19,439 18,051 13,533
-------- -------- --------
Total Assets ......................... $386,564 $285,810 $224,660
======== ======== ========
LIABILITIES & EQUITY
- --------------------------------------------
Interest-Bearing Liabilities:
Savings and Money Market Accounts ........ $157,538 7,301 4.63% $ 88,998 3,519 3.95% $ 79,988 3,096 3.87%
Time Deposits ............................ 115,350 6,507 5.64% 102,450 5,576 5.44% 86,803 5,071 5.84%
Short-term borrowings .................... 19,573 1,159 5.92% 20,804 1,160 5.58% 4,906 297 6.05%
Long-term debt ........................... 17,302 1,070 6.18% 10,075 629 6.24% 0 0 0.00%
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities ........................ 309,763 16,037 5.18% 222,327 10,884 4.90% 171,697 8,464 4.93%
Demand Deposits .......................... 46,133 40,684 32,287
Other Liabilities ........................ 2,099 640 826
Shareholders' Equity ..................... 28,569 22,159 19,850
-------- -------- --------
Total Liabilities & Equity ........... $386,564 $285,810 $224,660
======== ======== ========
NET INTEREST INCOME (FULLY
TAXABLE BASIS) ........................... $ 16,642 $ 13,794 $ 10,741
======== ======== ========
NET INTEREST MARGIN (FULLY
TAXABLE BASIS) ........................... 4.50% 5.11% 5.02%
======== ======== ========
EQUITY TO ASSETS RATIO ..................... 7.39% 7.75% 8.84%
======== ======== ========
(1) The tax-equivalent basis adjustment was computed based on a Federal income
tax rate of 34%.
(2) Includes nonperforming loans.
(3) Included in interest income are loan fees.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
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, 1997
and 1996, 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 CONSOLIDATED
NET INTEREST INCOME
1997 COMPARED TO 1996 1996 COMPARED TO 1995
-------------------------------------- --------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------ -------------------
Volume Rate Net Volume Rate Net
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Interest Earned On:
Federal Funds Sold ........................... $ 174 $ 4 $ 178 ($ 357) ($ 12) ($ 369)
Investment Securities:
Securities available for sale:
U. S. Government & Agencies .............. 165 (62) 103 (427) 91 (336)
State & Political Subdivisions ........... 16 84 100 580 0 580
Other Securities ......................... 156 22 178 219 8 227
---------- ---------- ---------- ---------- ---------- ----------
337 44 381 372 99 471
Securities held to maturity:
U. S. Gov't & Mtge-backed Securities ..... 1,778 19 1,797 1,324 0 1,324
State & Political Subdivisions (1) ....... 0 0 0 (1,468) 0 (1,468)
---------- ---------- ---------- ---------- ---------- ----------
1,778 19 1,797 (144) 0 (144)
Total Investment Securities .......... 2,115 63 2,178 228 99 327
---------- ---------- ---------- ---------- ---------- ----------
Loans:
Comm'l Loans & Comm'l Mtgs ............... 6,144 (960) 5,184 5,584 (350) 5,234
Residential Mortgages .................... 212 (27) 185 (260) (18) (278)
Installment Loans ........................ 297 (21) 276 614 (55) 559
---------- ---------- ---------- ---------- ---------- ----------
Total Loans .......................... 6,653 (1,008) 5,645 5,938 (423) 5,515
---------- ---------- ---------- ---------- ---------- ----------
Total Interest Income ..................... 8,942 (941) 8,001 5,809 (336) 5,473
---------- ---------- ---------- ---------- ---------- ----------
Interest Paid On:
Savings and Money Market Accounts ............ 2,710 1,072 3,782 349 74 423
Time Deposits ................................ 702 229 931 914 (409) 505
Short-term borrowings ........................ (69) 68 (1) 962 (99) 863
Long-term debt ............................... 451 (10) 441 629 0 629
---------- ---------- ---------- ---------- ---------- ----------
Total Interest Expense ..................... 3,794 1,359 5,153 2,854 (434) 2,420
---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income ........................ $ 5,148 ($ 2,300) $ 2,848 $ 2,955 $ 98 $ 3,053
========== ========== ========== ========== ========== ==========
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 $8.0 million, or 32.4%, to $32.7 million for
1997 compared to $24.7 million for 1996, and $19.2 million for 1995. The
improvement in interest income in 1997 was primarily due to volume increases in
the average loan portfolio. The average balance of the loan portfolio grew $66.9
million or 32.5% to $272.4 million compared to $205.5 million for 1996, and
$147.8 million for 1995. That volume increase added $6.6 million to interest
income in 1997, which was partially offset by a $1.0 million decrease in
interest income due to rate declines in the loan portfolio from 9.85% in 1996 to
9.50% in 1997. The average balance of the investment portfolio increased $30.0
million or 48.0% to $92.5 million compared to the average balance of $62.5
million in 1996, and $58.1 million in 1995. That volume increase in investments
added $2.1 million to interest income in 1997. The rate increase in the
investment portfolio of 10 basis points, from 6.93% in 1996 to 7.03% in 1997,
added another $63.0 thousand to interest income.
Interest expense increased $5.1 million, or 46.8%, to $16.0 million for 1997
compared to $10.9 million for 1996, and $8.5 million for 1995. Interest bearing
liabilities increased from $222.3 million in 1996 to $309.8 million in 1997, an
increase of $87.5 million or 39.4%, which added $3.8 million to interest
expense. Rate increases from 4.90% in 1996 to 5.18% in 1997 added another $1.4
million to interest expense. Overall, interest expense increased $5.2 million in
1997 compared to a $2.4 million dollar increase in 1996.
Net interest income for 1997 increased $2.8 million or 20.3% to $16.6 million
compared to $13.8 million for 1996, and $10.7 million for 1995. Volume increases
accounted for $5.1 million of the increase in net interest income, partially
offset by a $2.3 million decrease due to rate changes. Net interest income for
1996 increased $3.1 million or 29.0% to $13.8 million. Volume increases
accounted for $3.0 million of the increase in net interest income, and rate
changes accounted for another $98 thousand increase.
Interest income on a fully tax-equivalent ("FTE") basis, 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 the Bank 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 28.2%, 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 $99 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.
The Company's net interest margin, which measures net interest income as a
percentage of average earning assets, was 4.50%, 5.11%, and 5.02% for the years
ended December 31, 1997, 1996 and 1995, respectively, due to the combination of
factors mentioned above.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
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 $1.0 million for 1997 compared to $1.4 million for
1996, and $744 thousand for 1995, a decrease of $326 thousand or 24.0% in 1997,
and an increase of $616 or 82.8% for 1996. During 1997, service fees on deposits
increased $34 thousand to $456 thousand, compared to $422 thousand in 1996, and
$433 thousand in 1995. Other fees and commissions increased $129 thousand or
38.1% to $468 thousand, from $339 thousand in 1996, and $311 thousand in 1995.
The 1997 increase in service fees on deposits and other fees and commissions
reflect the increase in deposit and loan balances, primarily as a result of the
branch expansion that occurred in late 1995 and during 1996. Gains on the sale
of other real estate owned declined $228 thousand or 77.5% to $66 thousand in
1997, compared to $294 thousand in 1996, and none in 1995. In 1997,
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. Net security
gains, on these investment transactions declined $261 thousand or 85.6% to $44
thousand, compared to $305 thousand in 1996, and none in 1995.
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. 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. Those 1996 sales resulted in net security gains of $305
thousand, compared to none in 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSE
For the year ended December 31, 1997, total non-interest expenses increased $1.4
million, or 13.9%, to $11.5 million for 1997, compared to $10.1 million for
1996, and $7.7 million for 1995. Of this $1.4 million increase in 1997, $583
thousand was attributable to salaries and benefits, and $297 thousand was due to
increases in occupancy expenses and furniture and equipment expenses. These
increases were primarily due to the full year effect on expenses of the three
new branch offices opened during 1996, the Company's continued growth, as well
as merit and cost of living salary and wage adjustments. At December 31, 1997,
the Company had 126 full-time equivalent employees compared to 118 as of
December 31, 1996, and 109 full-time equivalent employees at December 31, 1995.
"Other" non-interest expenses increased $548 thousand or 18.3%, to $3.5 million
for 1997, compared to $3.0 million for 1996, and $2.7 million for 1995. The
increase in 1997 was due to professional fees increasing by $166 thousand,
primarily due to merger related expenses, correspondent bank fees, and messenger
fees, and system fees increasing by $55 thousand due to the Company's growth.
FDIC insurance expenses increased by $92 thousand, in 1997, when the Bank's
capital ratios temporarily dropped to "adequately capitalized" from the "well
capitalized" level prior to most of the Company's warrants being exercised in
August 1997. Additionally, advertising expenses for deposits increased $159
thousand in 1997, and Other Real Estate (ORE) expenses increased $61 thousand
compared to 1996, as well as miscellaneous other expense increases totaling $15
thousand.
Salaries and wages increased $1.1 million, or 42.6%, to $3.8 million in 1996
compared to $2.7 million for 1995. Employee benefits increased $166 thousand, or
24.0%, to $858 thousand in 1996 compared to $692 thousand for 1995. These
increases were primarily the result of opening four new branch offices 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.
Occupancy expenses increased $442 thousand, or 43.2%, to $1.5 million in 1996
compared to $1.0 million in 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 the branch openings noted above. Furniture and
equipment expenses increased $332 thousand, or 56.9%, due primarily to
depreciation on purchases of additional furniture and computer equipment for the
new office locations.
During 1996, "Other" expenses increased by $247 thousand, or 9%, to $3.0
million, compared to $2.7 million for 1995. This increase was 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE
The income tax provision, which includes both Federal and state taxes, for the
years ended December 31, 1997, 1996 and 1995 was $1.9 million, $1.1 million, and
$765 thousand, respectively.
The increase in 1997 total tax expense was primarily the result of an increase
in operating income, and an increase in tax-exempt investment securities income.
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
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 1997, the Company's
ROA was 0.94%, compared to 0.75% in 1996, and 0.95% 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 increased to 12.69% in
1997, from 9.68% in 1996 and 10.72% in 1995. The increase in the Company's ROA
for 1997 was the result of its four new branch offices, one opened in late 1995
and three throughout 1996, coming into profitability during 1997. Also
contributing to ROA, was the significant loan growth that occurred during 1996,
the full year effect of which was realized during 1997. The increase in ROE was
also the result of the new branches reaching profitability in 1997, the
realization of the full year benefit of the loan growth that occurred during
1996, and the decreased ratio of average equity to average total assets for
1997, compared to 1996, as the growth in assets outpaced the growth in equity
for most of 1997, until the majority of the Company's warrants were exercised in
August 1997 bringing in $8.8 million in new equity. The Company immediately put
some of that new capital "to work" by utilizing a leverage strategy in its
investment portfolio, whereby approximately $52 million of mortgage-backed
securities were purchased using borrowed funds.
For 1996, the Company's ROA was 0.75%, compared to 0.95% in 1995. 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 which occurred in
the second half of 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 was not realized until 1997.
LOAN PORTFOLIO
The Company's target markets 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, 1997 totaled $284.8 million, an increase
of $21.0 million, or 8.0%, compared to net loans at December 31, 1996 of $263.8
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. 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 $85.7 million, an increase of $5.8
million, or 7.3%, over the December 31, 1996 balance of $79.9 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 $152.5 million at December 31, 1997 versus $133.9
million at December 31, 1996, an increase of $18.6 million, or 13.9%. 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 increase in 1997 when compared to 1996. 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 decreased in 1997 by $5.5 million, or 32.5%, to
$11.4 million at December 31, 1997 from $16.9 million at December 31, 1996.
Risks inherent in 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 in whether
LOAN PORTFOLIO (CONTINUED)
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, 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 can be 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.
Commercial and financial loans increased to $79.9 million, an increase of $35.5
million, or 80.0%, over the December 31, 1995 balance of $44.4 million.
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%.
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.
The Company makes construction loans to individuals with expertise in the
industry or to owner occupied projects. These loans increased in 1996 $4.4
million, or 35.2%, to $16.9 million at December 31, 1996 from $12.5 million at
December 31, 1995.
The following table summarizes the components of the loan portfolio as of
December 31, for each of the years 1997 through 1993.
LOAN PORTFOLIO BY TYPE OF LOAN
Year Ended December 31,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------- ---------------- ------------------ ------------------ -----------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Commercial and financial . $ 85,737 29.80% $ 79,907 29.99% $ 44,432 27.03% $ 41,917 29.88% $ 34,451 29.38%
Real estate construction . 11,412 3.97% 16,905 6.34% 12,483 7.60% 8,399 5.99% 12,277 10.47%
Residential mortgage ..... 24,527 8.52% 23,173 8.70% 25,699 15.64% 26,207(1) 18.68% 25,386(1) 21.65%
Commercial mortgage ...... 152,477 52.99% 133,908 50.25% 77,701 47.28% 61,242 43.65% 42,780 36.49%
Installment .............. 13,592 4.72% 12,569 4.72% 4,026 2.45% 2,532 1.80% 2,352 2.01%
- -------------------------- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Loans ........... $287,745 100.00% $266,462 100.00% $164,341 100.00% $140,297 100.00% $117,246 100.00%
- -------------------------- -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Allowance for loan losses. (2,956) (2,665) (1,754) (1,400) (980)
- -------------------------- -------- -------- -------- -------- --------
Net loans ........... $284,789 $263,797 $162,587 $138,897 $116,266
- -------------------------- ======== ======== ======== ======== ========
(1) Gives effect to Carnegie's adoption of SFAS No. 114, effective for 1995.
Pursuant to SFAS No. 114, Carnegie reclassified $300,000 in substance
foreclosure as loans at the year ends 1993 and 1994.
The following table sets forth total loans by maturity and interest rate
sensitivity at December 31, 1997 and does not include those loans which are
classified as non-accruing.
LOANS OUTSTANDING - MATURITY DISTRIBUTION
December 31, 1997
----------------------
(Dollars in thousands)
Fixed rate loans:
One year or less -
Commercial and financial ........................... $ 5,551
Real estate construction ........................... 2,373
Residential mortgage ............................... 869
Commercial mortgage ................................ 12,467
Installment ........................................ 1,232
--------
Total ................................ 22,492
--------
Over one to five years -
Commercial and financial ........................... 18,562
Real estate construction ........................... 0
Residential mortgage ............................... 812
Commercial mortgage ................................ 94,126
Installment ........................................ 1,154
--------
Total ................................ 114,654
--------
Over five years -
Commercial and financial ........................... 8,170
Real estate construction ........................... 0
Residential mortgage ............................... 11,979
Commercial mortgage ................................ 18,565
Installment ........................................ 886
--------
Total ................................ 39,600
--------
Total fixed rate loans ............... 176,746
--------
Floating rate loans:
One year or less -
Commercial and financial ........................... 46,635
Real estate construction ........................... 9,039
Residential mortgage ............................... 9,914
Commercial mortgage ................................ 22,259
Installment ........................................ 9,949
--------
Total ................................ 97,796
--------
Over one to five years -
Commercial and financial ........................... 3,546
Real estate construction ........................... 0
Residential mortgage ............................... 546
Commercial mortgage ................................ 4,405
Installment ........................................ 371
--------
Total ................................ 8,868
--------
Over five years -
Commercial and financial ........................... 0
Real estate construction ........................... 0
Residential mortgage ............................... 0
Commercial mortgage ................................ 0
Installment ........................................ 0
--------
Total ................................ 0
--------
Total floating rate loans ............ 106,664
--------
Total Loans .......................... $283,410
========
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, 1997 through 1993.
NON-PERFORMING ASSETS AND CONTRACTUALLY PAST DUE LOANS
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Non-Performing Assets (1):
Non-accruing loans
Real estate ..................................... $ 407 $ 248 $ 767 $ 445 $ 1,410
Installment ..................................... 0 27 69 -- 42
Commercial mortgage ............................. 655 1,029 1,180 1,620 1,767
Commercial and financial ........................ 3,273 1,981 2,011 -- --
Real estate construction ........................ 0 57 -- -- --
--------- --------- --------- --------- ---------
Total non-accruing/non-performing loans ........... 4,335 3,342 4,027 2,065 3,219
Other real estate owned ........................... 523 473 -- -- --
--------- --------- --------- --------- ---------
Total Non-Performing Assets ....................... $ 4,858 $ 3,815 $ 4,027 $ 2,065 $ 3,219
========= ========= ========= ========= =========
Contractually Past Due Loans (2): ................. $ 381 $ 839 $ 298 $ 4 $ 381
========= ========= ========= ========= =========
Non-performing loans to total loans ............... 1.51% 1.25% 2.45% 1.47% 2.74%
Non-performing assets to total assets ............. 1.12% 1.11% 1.61% 1.06% 2.09%
Allow. for loan losses to non-performing loans .... 68.19% 79.74% 43.56% 67.80% 30.44%
(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.
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, 1997, total non-accruing loans amounted to $4.3 million, an
increase of $993 thousand, or 29.7%, over the level at December 31, 1996. Of the
$4.3 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 Note 7 to
Consolidated Financial Satements regarding impaired loans.
The ratio of non-performing assets to total assets remained at 1.1% while the
ratio of non-performing loans to total loans was 1.5% compared to 1.2% at
December 31, 1997 and December 31, 1996, respectively. The increase in this
ratio was attributable to the increase in the Company's non-accruing commercial
and financial portfolio which was partially offset by a decrease in the
Company's non-accruing commercial mortgage loan portfolio. The allowance for
loan losses as a percentage of non-performing loans was 68.2% compared to 79.7%
in the prior year.
If the non-accruing loans had continued to pay interest, interest income would
have been increased by $405 thousand for 1997. As of December 31, 1996 and 1995
there were non-accruing loans in the aggregate amounts of $3.3 million and $4.0
million, respectively. If the non-accruing loans in 1996 and 1995 had continued
to pay interest, interest income during 1996 would have been increased by $370
thousand and interest income during 1995 would have been increased by $313
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.
ASSET QUALITY (CONTINUED)
The provision for loan losses was $446 thousand, $1.6 million and $369 thousand
for the years ended December 31, 1997, 1996 and 1995, 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 1997 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 $446 thousand for the year ended December 31, 1997 decreased by
$1.2 million, or 75.0%, compared to the prior year amount of $1.6 million.
Management believes that the Company has adequate reserves to address potential
losses in the loan portfolio.
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 believed that the Company had adequate reserves to address potential
losses in the loan portfolio during 1996. 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, 1997.
ALLOWANCE FOR LOAN LOSSES
Year Ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(Dollars in thousands)
Balance - beginning of period ............ $ 2,665 $ 1,754 $ 1,400 $ 980 $ 806
Provision charged to expense ............. 446 1,609 369 650 429
--------- --------- --------- --------- ---------
3,111 3,363 1,769 1,630 1,235
Recoveries:
Commercial ............................. 50 -- 8 50 25
Real estate ............................ 7 10 44 0 --
Installment ............................ 4 -- -- 0 --
--------- --------- --------- --------- ---------
Total recoveries ......................... 61 10 52 50 25
--------- --------- --------- --------- ---------
Charge-offs:
Commercial ............................. (141) (570) (3) (153) (272)
Real estate ............................ (53) (106) (60) (126) --
Installment ............................ (22) (32) (4) (1) (8)
--------- --------- --------- --------- ---------
Total charge-offs ........................ (216) (708) (67) (280) (280)
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries ............. (155) (698) (15) (230) (255)
--------- --------- --------- --------- ---------
Balance - end of period .................. $ 2,956 $ 2,665 $ 1,754 $ 1,400 $ 980
========= ========= ========= ========= =========
Net charge-offs as a percentage
of average loans ....................... 0.06% 0.34% 0.01% 0.19% 0.28%
Allowance for loan losses to
period end loans ....................... 1.03% 1.00% 1.07% 1.00% 0.84%
Allowance for loan losses to
non-accrual loans ...................... 68.19% 79.74% 43.56% 67.80% 30.44%
MANAGEMENT'S DISCUSSION (CONTINUED)
- --------------------------------------------------------------------------------
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.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (1)
December 31,
-----------------------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- -----------------------
Amount % Amount % Amount %
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Commercial and financial ................. $ 938 31.72% $ 743 27.88% $ 420 23.95%
Real estate construction ................. 80 2.71% 177 6.64% 179 10.20%
Residential mortgage ..................... 196 6.63% 209 7.84% 107 6.10%
Commercial mortgage ...................... 1,187 40.17% 1,161 43.56% 845 48.18%
Installment .............................. 210 7.10% 216 8.11% 160 9.12%
Unallocated .............................. 345 11.67% 159 5.97% 43 2.45%
-------- -------- -------- -------- -------- --------
$ 2,956 100.00% $ 2,665 100.00% $ 1,754 100.00%
======== ======== ======== ======== ======== ========
(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.
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, 1997, 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 stockholder's 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, 1997, the Company classified $52.5 million or 43.2% of its
investment portfolio as available for sale. These available-for-sale securities
had a cost basis of $52.4 million. The fair value adjustment at December 31,
1997 required the Company to increase the carrying value of investment
securities by $62 thousand, increase the net deferred tax provision by $25
thousand, and increase stockholders' equity by $37 thousand. The average tax
equivalent yield on the securities available for sale as of the year ended
December 31, 1997, was 6.90%
SECURITIES HELD TO MATURITY
At December 31, 1997, the Company classified $69.0 million, or 56.8%, 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,
1997 the net unrealized gains on these securities was $5 thousand. Securities
with a cost of $52.5 million were purchased for the held to maturity account
during 1997.
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 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, 1997,
1996 and 1995.
INVESTMENT SECURITIES PORTFOLIO
Year Ended December 31, 1997 (1)
--------------------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
-------------------------------- --------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
(Dollars in thousands)
U. S. Government ............................... $ 8,037 $ 8,236 $ 13,068 $ 13,126
Mortgage-backed agencies ....................... 60,951 60,757 20,727 20,750
States & Political Subdivisions ................ -- -- 10,369 10,389
Other securities ............................... -- -- 8,257 8,218
----------- ----------- ----------- -----------
Total investment securities .................... $ 68,988 $ 68,993 $ 52,421 $ 52,483
=========== =========== =========== ===========
(1) Net unrealized gains of $37 thousand, net of tax provision of $25 thousand,
were reported as an increase to stockholders' equity at December 31, 1997.
Year Ended December 31, 1996 (2)
--------------------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
-------------------------------- --------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
(Dollars in thousands)
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
=========== =========== =========== ===========
(2) 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.
Year Ended December 31, 1995 (3)
--------------------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
-------------------------------- --------------------------------
Amortized Market Amortized Market
Cost Value Cost Value
----------- ----------- ----------- -----------
(Dollars in thousands)
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
=========== =========== =========== ===========
(3) 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.
The following table shows the amortized costs and market values of the Company's
investment securities by contractual maturity as of December 31, 1997. Expected
maturities of mortgage- backed securities may differ from contractual maturities
because borrowers have the right to prepay obligations.
MATURITY SCHEDULE OF INVESTMENT SECURITIES
Year Ended December 31, 1997
--------------------------------------------------------------------------------------------
Securities Held to Maturity Securities Available for Sale
------------------------------------------- -------------------------------------------
Amortized Market Amortized Market
Cost Value Yield Cost Value Yield
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Due 1 year or less ............... -- -- -- $ 3,275 $ 3,275 6.95%
Due after 1 year
through 5 years ............ -- -- -- 4,955 4,957 8.13%
Due after 5 years
through 10 years ........... 8,037 8,237 7.70% 13,549 13,625 7.02%
Due after 10 years ............... 60,951 60,756 7.06% 30,642 30,626 6.70%
----------- ----------- ----------- ----------- ----------- -----------
Total investment
securities ................. $ 68,988 $ 68,993 7.13% $ 52,421 $ 52,483 6.84%
=========== =========== =========== =========== =========== ===========
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, 1997 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, 1997 were $332.9 million, an increase of $30.3 million,
or 10.0%, compared to total deposits of $302.6 million at December 31, 1996. 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 $68.7 million at December 31, 1996 to
$90.5 million at December 31, 1997. Most of that growth is due to the new "no
penalty" certificate of deposit. Deposits at December 31, 1996 were $302.6
million, an increase of $92.4 million, or 44.0%, above total deposits of $210.2
million at December 31, 1995.
Average total deposits increased by $86.9 million, or 37.4%, to $319.0 million
for the twelve months ended December 31, 1997 compared to the 1996 full year
average of $232.1 million. Changes in the average deposit mix include a $15.5
million, or 39.7% increase in certificates of deposit over $100 thousand; a $2.6
million, or 4.1%, decrease in consumer certificates of deposit; a $10.1 million,
or 19.0%, decrease in money market deposit accounts; a $76.0 million, or 389.7%,
increase in regular savings; a $2.7 million, or 16.8%, increase in NOW account
deposits; and an $5.4 million, or 13.2%, 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 1997, 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-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, 1997, 1996 and 1995.
DEPOSIT LIABILITIES
December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- --------------------------- ---------------------------
Amount % Amount % Amount %
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
Demand ............................. $ 56,430 16.95% $ 42,372 14.00% $ 40,944 19.48%
NOW accounts ....................... 24,359 7.32% 24,663 8.15% 12,364 5.88%
Money market
deposit accounts ................. 42,076 12.64% 46,304 15.30% 54,100 25.74%
Other savings
deposits ......................... 90,546 27.20% 68,704 22.71% 3,966 1.89%
Time CDs over
$100,000 ......................... 75,745 22.75% 58,511 19.34% 44,500 21.16%
Other time deposits ................ 43,741 13.14% 62,008 20.50% 54,327 25.85%
----------- ----------- ----------- ----------- ----------- -----------
Balance-end of
period ........................... $ 332,897 100.00% $ 302,562 100.00% $ 210,201 100.00%
=========== =========== =========== =========== =========== ===========
The following table is a summary of the maturity distribution of certificates of
deposit as of December 31, 1997.
MATURITY SCHEDULE OF CDS
December 31, 1997
----------------------------------------
Time CDs Over Other Time
$100,000 Deposits
------------------ ------------------
Amount % Amount %
------- ------- ------- -------
(Dollars in thousands)
Due in 90 days or less ............. $62,180 82.09% $11,624 26.57%
Due between 91 days and 180 days ... 9,745 12.86% 8,716 19.93%
Due between 181 days and one year .. 2,346 3.10% 10,873 24.86%
Due after one year ................. 1,474 1.95% 12,528 28.64%
------- ------- ------- -------
$75,745 100.00% $43,741 100.00%
======= ======= ======= =======
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.
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, 1997, the Company's cumulative one year interest rate
sensitivity Gap was negative 28.3%, as shown on the next table, which compares
to negative 23.3% at December 31, 1996. The change in the one year cumulative
Gap position was primarily caused by the increase in the balance of other
savings deposits, and time CD's over $100,000 of $21.8 million, and $19.6
million, respectively. All but $4.2 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 other
savings deposits, and time CD's over $100,000 were partially offset by declines
in the balances of money market accounts, NOW accounts, and other time deposits
of $4.2 million, $0.3 million, and $11.4 million, respectively. Increases in the
average balances of short term borrowings and long term debt of $31.3 million
and $15.0 million, respectively, were used to fund the purchase of investment
securities held to maturity. 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,
1997, is well within its targeted fluctuation range.
The following table reflects the interest rate sensitivity gap position of the
Company as of December 31, 1997:
INTEREST RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1997
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)
ASSETS:
Investment securities available
for sale ................................... $ 52,483 -- -- -- $ 52,483
Investment securities held to
maturity ................................... -- -- 68,988 -- 68,988
Loans ........................................ 73,111 47,068 163,363 4,335 287,877
Valuation Reserves (1) ....................... -- -- -- (3,088) (3,088)
Non-interest earning assets .................. -- -- -- 25,626 25,626
----------- ----------- ----------- ----------- -----------
Total Assets ............................. $ 125,594 $ 47,068 $ 232,351 $ 26,873 $ 431,886
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Money market accounts ...................... $ 42,076 -- -- -- $ 42,076
NOW accounts ............................... 24,359 -- -- -- 24,359
Other savings deposits ..................... 90,546 -- -- -- 90,546
Time CD's over $100,000 ................... 62,180 12,091 1,474 -- 75,745
Other time deposits ........................ 11,624 19,589 12,528 -- 43,741
Short term borrowings ...................... 22,300 10,000 -- -- 32,300
Long term debt ............................. -- -- 29,425 -- 29,425
----------- ----------- ----------- ----------- -----------
Total interest-bearing liabilities ........... 253,085 41,680 43,427 -- 338,192
Non-interest bearing deposits ................ -- -- -- 56,430 56,430
Other liabilities ............................ -- -- -- 2,040 2,040
Stockholders' equity ......................... -- -- -- 35,224 35,224
----------- ----------- ----------- ----------- -----------
Total Liabilities and
Stockholders' Equity ..................... $ 253,085 $ 41,680 $ 43,427 $ 93,694 $ 431,886
=========== =========== =========== =========== ===========
Interest Rate Sensitivity Gap .................. ($ 127,491) $ 5,388 $ 188,924 ($ 66,821)
=========== =========== =========== ===========
Cumulative Gap ................................. ($ 127,491) ($ 122,103) $ 66,821
=========== =========== ===========
Cumulative Gap to Total Assets ................. -29.52% -28.27% 15.47%
=========== =========== ===========
(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 accounts 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.
MARKET RISK
The Company's operations may be subject to a variety of market risks, the
most material of which is the risk of changing interest rates. Most generally,
interest-rate risk (IRR) is the volatility in financial performance attributable
to changes in market interest rates which may result in either fluctuation of
net interest income, or changes to the economic value of the equity of the
Company.
The principal objective of the Company's IRR management activities is to
provide maximum levels of net interest income while maintaining acceptable
levels of interest rate and liquidity risk and facilitating the funding needs of
the Company. Consistent with its definition of IRR, the Company measures
earnings at risk and value at risk.
The Company monitors and measures IRR through a variety of techniques,
including gap analysis, income-simulation analysis and value-at-risk
measurement. Gap analysis provides an indicator of potential IRR by comparing
the available repricing on the asset and liability sides of the Company's
balance sheet. Gap is defined as interest rate sensitive assets (RSA) less
interest rate sensitive liabilities (RSL) in the time period specified. Although
management reviews gap analysis, it is the least relied upon of management's IRR
evaluation tools. Gap analysis is a static analysis, and does not take into
account changes in rates and maturities caused by changes in market rates, for
example through prepayments.
The Company's primary tool is an income-simulation model which starts with
a detailed inventory of balance sheet items contained in gap analysis reports,
and factors in the probability of the maturity and repricing characteristics of
assets and liabilities, including assumed prepayment risks. Income simulation
attends to the relative sensitivities of these balance sheet items to dynamic
rates and projects their behavior over an extended period of time. Income
simulation analysis reflects both the possibility and probability of the
behavior of balance sheet items.
Income simulation analysis, and to a much lesser extent, Gap analysis, are
tools for understanding and measuring IRR from the perspective of earnings at
risk. Value-at-risk analysis is the measurement and management of IRR, from a
longer term perspective, to the economic value of the equity of the Company.
This is performed through Net Portfolio Value (NPV) analysis which is intended
to address the changes in equity value arising from movements in interest rates.
The NPV analysis first reprices all of the assets and liabilities under the
current interest rate environment, then compares this result to repricing under
a changed interest rate environment, thus evaluating the impact of immediate and
sustained interest rate shifts across the current interest rate yield curve to
the market value of the current balance sheet. As with gap analysis, NPV
analysis is static. There is no recognition of the potential for strategy
adjustments in a volatile rate environment which would protect or conserve
equity values.
Changes in the estimates and assumptions made for IRR analysis could have a
significant impact on projected results and conclusions. These analyses involve
a variety of significant estimates and assumptions, including, among others: (1)
estimates concerning assets and liabilities without definite maturities or
repricing characteristics; (2) how and when yields on interest-earning assets
and costs of interest-bearing liabilities will change in response to movement of
market interest rates; (3) prepayment speeds; (4) Future cash flows; and (5)
discount rates. Therefore, these techniques may not accurately reflect the
impact of general market interest rate movements on the Company's net interest
income or the value of its economic equity.
The table below sets forth the assumed change to the Company's estimated
net portfolio value at December 31, 1997, based upon an immediate and sustained
interest rate change from the interest rate yield curve at December 31, 1997 of
plus 200 basis points and minus 200 basis points.
NET CHANGE
PORTFOLIO -----------------
CHANGE IN RATES VALUE AMOUNT PERCENT
--------------- ------- ------- -------
+200 basis points $29,940 $(7,426) -19.9%
Estimated Net Portfolio Value
at December 31, 1997-base case $37,366 $ -0- 0.0%
-200 basis points $37,708 $ 342 1.0%
The table below sets forth the estimated change to the Company's
estimate of its net interest income based upon its December 31, 1997 balance
sheet, assuming an interest rate change from the December 31, 1997 interest rate
yield curve of plus 200 basis points and minus 200 basis points. Such rate shift
is assumed to be gradual over the first twelve months and then sustained for the
remainder of the period.
PERCENT CHANGE
CHANGE IN RATES YEAR 1 YEAR 2 TOTAL
--------------- ------- ------- -------
+ 200 basis points +0.61% -4.51% -1.92%
Base Case (Net Interest Inc., in Thou) $18,382 $18,016 $36,398
-200 basis points +0.24% +3.95% +2.08%
The Company manages its IRR through use of the tools described above, and
its actions are taken under the guidance of the Asset/Liability Committee (ALCO)
comprised of senior management, with oversight provided by the Board of
Directors. The ALCO has established a limit that projected net interest income
should not fluctuate negatively by greater than 5% during Year 1 of the
projection, when compared to the base case. As can be seen from the table above,
the Company is within this established limit, at December 31, 1997. In addition
to these tools, ALCO's review includes the book and market value of assets and
liabilities, unrealized gains and losses, market conditions and interest rates,
and cash flow needs with regard to loan and investment activity and deposit
flow.
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 15.9% and
13.6% of the Company's total assets at December 31, 1997 and December 31, 1996,
respectively. The increase in liquid assets at December 31, 1997 is a result of
the purchase of available for sale investment securities during the year.
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)
1997 1996 1995
-------- -------- --------
Cash and cash equivalents-beginning ........ $ 16,745 $ 10,207 $ 6,815
Cash flows from operating activities:
Net income ............................... 3,625 2,144 2,128
Adjustments to reconcile net income
to net cash provided by operating
activities ............................. 1,794 2,290 523
- --------------------------------------------------------------------------------
Net cash provided by operating activities .. 5,419 4,434 2,651
Net cash (used in) investing activities .... (90,305) (88,630) (49,655)
Net cash provided by financing activities .. 84,251 90,734 50,396
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents .. (635) 6,538 3,392
- --------------------------------------------------------------------------------
Cash and cash equivalents-ending ........... $ 16,110 $ 16,745 $ 10,207
- --------------------------------------------------------------------------------
Net cash used in investing activities during the year ended December 31, 1997
was primarily attributable to a net increase in the purchase of investment
securities available for sale of $67.5 million and of investment securities held
to maturity of $52.5 million. The net cash used in 1997 to purchase investment
securities was partially offset by the proceeds from the sale, maturity or
paydowns on investment securities, which totaled $52.1 million.
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 provided by financing activities during the year ended December 31,
1997 was primarily attributable to a net increase in both short-term and
long-term borrowings of $31.3 million and $15.0 million, respectively, combined
with a net increase in deposits of $30.3 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 $14.4 million and a decrease in short-term borrowings of $16.5
million.
LIQUIDITY (CONTINUED)
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.
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
$7.0 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, 1997, the Company had an overnight line of credit with the
Federal Home Loan Bank-New York ("FHLB-NY") for $32,497,300 of which $-0- 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.
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 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 its wholly-owned subsidiary, Carnegie Bank, N.A. (the "Bank"),
before the unrealized holding gains on securities available for sale, net, at
December 31, 1997, as well as the regulatory required minimum capital ratios:
December 31, 1997 Regulatory
------------------- Required
Company Bank Minimum
------- ------ -------
Risk-based Capital:
Tier I capital ratio ............ 11.81% 9.42% 4.00%
Total capital ratio ............. 12.80% 10.42% 8.00%
Leverage ratio .................... 8.36% 6.68% 3.00%-5.00%
As noted in the above table, the Company's capital ratios at December 31, 1997
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. Net proceeds from the securities offering increased the Company's
equity by $7.9 million during the third quarter of 1994. As of August 18, 1997,
the expiration date for the exercise of the warrants, substantially all of the
warrants had been exercised, increasing the Company's capital by $9.9 million.
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 on 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 did not have a material
impact on the Company's consolidated financial statements.
EARNINGS PER SHARE.
Issued in March, 1997, SFAS No. 128, "Earnings per Share", establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, "Earnings per Share", and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. This Statement requires restatement of all
prior-period EPS data presented. Adoption of this pronouncement did not have a
material impact on the Company's consolidated financial statements.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE.
FASB has also issued SFAS No. 129, "Disclosure of Information about Capital
Structure", establishing standards for disclosing information about an entity's
capital structure. This Statement continues the previous requirements to
disclose certain information about an entity's capital structure found in APB
Opinions No. 10, "Omnibus Opinion - 1966", and No. 15, "Earnings per Share", and
FASB Statement No. 47, "Disclosure of Long-Term Obligations", for entities that
were subject to the requirements of those standards. This Statement eliminates
the exemption of nonpublic entities from certain disclosure requirements on
Opinion No. 15 as provided by FASB Statement No. 21, "Suspention of the
Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises". It supersedes specific disclosure requirements of Opinions No. 10
and No. 15 and Statement No. 47 and consolidates them in this Statement for ease
of retrieval and for greater visibility to nonpublic entities. This Statement is
effective for financial statements issued for periods ending after December 15,
1997. It contains no change in disclosure requirements for entities that were
previously subject to the requirements of Opinions No. 10 and No. 15 and
Statement No. 47 and therefore its adoption had no effect on the Company's
consolidated financial statements.
REPORTING COMPREHENSIVE INCOME.
FASB has also issued SFAS No. 130, "Reporting Comprehensive Income", effective
for fiscal years beginning after December 15, 1997. This Statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. An example of comprehensive
income is the unrealized gains and losses on securities available for sale, net
of taxes. The Company will implement the disclosure requirements related to this
pronouncement beginning in 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this Item is contained in the Registrant's
Management's Discussion and Analysis of Financial Condition and Results of
Operations included herein, under the caption "Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is hereby made to the Financial Statements filed as part of this
report, beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Following is a list of the names of all directors of the Registrant, together
with: their ages, their positions and offices with the Registrant, their
principal occupations during the past five years, and the years during which
their current consecutive terms as directors of the Registrant first commenced:
Name, Age and Principal Occupations
Position with Registrant During Past Five Years Director Since(1)
------------------------ ---------------------- --------------
Theodore H. Dolci, Jr., 41 President, Ted Dolci Excavating, Inc. 1989
Michael E. Golden, 54, Chairman and Chief Executive Officer, First 1988
Vice Chairman of the Board Colonial Securities Group, Inc., a full
service stock and bond brokerage; Vice
Chairman, Admiralty Bank (Palm Beach Gardens,
Florida)
- ----------
(1) Includes prior service on Board of Directors of the Bank.
Thomas L. Gray, Jr., 53, President and Chief Executive Officer of the 1988
President and Chief Company and the Bank; Director, Admiralty Bank
Executive Officer (Palm Beach Gardens, Florida)
Bruce A. Mahon, 67, Chairman of the Board of the Company and the 1988
Chairman of the Board Bank; Chairman, Admiralty Bank (Palm Beach
Gardens, Florida)
James E. Quackenbush, 68 Retired, formerly Managing Partner, Malesard, 1988
Quackenbush, Swift & Company, Certified Public
Accountants
Steven L. Shapiro, 57 Chairman of Alloy, Silverstein, Shapiro, 1992
Adams, Mulford & Co., Certified Public
Accountants, Cherry Hill, New Jersey. Mr.
Shapiro is Commissioner of the New Jersey
Casino Reinvestment Development Authority and
Trustee of the New Jersey Hospital
Foundation. Mr. Shapiro is also a member of
the Executive Advisory Council of Rutgers
University and serves on the board of the
Student Loan Marketing Corporation in
Washington, D.C.
Shelley M. Zeiger, 62 Chairman, Zeiger Enterprises, Inc., an import an 1992
export company
Mark A. Wolters, 37, Executive Vice President of the Company and
Executive Vice President the Bank; Director, Admiralty Bank (Palm Beach 1994
Gardens, Florida)
Joseph J. Oakes, III, 55 President, Acorn Financial Services, a 1988
financial services and insurance brokerage firm
No director of the Company is also a director of any other company with a
class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the
requirements of Section 15(d) of such Act or any company registered as an
investment company under the Investment Company Act of 1940.
Following is a list of the names of all executive officers of the
Registrant who are not also directors, together with their ages, their positions
and offices with the Registrant, and their principal occupations during the past
five years:
Name, Age and Principal Occupations
Position with Registrant During Past Five Years Officer Since
------------------------ ---------------------- -------------
Richard P. Rosa, 46, Chief Financial Officer of Carnegie Bank, 1995
Chief Financial Officer N.A., since April 1995; Director, Admiralty
Bank (Palm Beach Gardens, Florida); Formerly,
Executive Vice President and Chief Financial
Officer of Lakeland First Financial Group,
Inc. and its wholly-owned subsidiary,
Lakeland Savings Bank
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth a summary for the last three (3) fiscal
years of the cash and non-cash compensation awarded to, earned by, or
paid to, the Chief Executive Officer of the Company and each of the
most highly compensated executive officers who were serving as
executive officers of the Registrant at December 31, 1997 and whose
individual remuneration exceeded $100,000 for the last fiscal year
(collectively, "Named Officers").
SUMMARY COMPENSATION TABLE
Cash and Cash Equivalent Forms
of Remuneration
Long Term
Compensation
Securities
Name and Current Annual Annual Other Annual Underlying
Principal Position Year Salary Bonus(1) Compensation(2) Options
- ------------------ ---- ------ -------- --------------- -------
Thomas L. Gray, Jr. 1997 $210,000 $449,508 $20,900(3) 19,425
President and Chief 1996 $130,000 $173,133 $20,872 -0-
Executive Officer 1995 $130,000 $142,585 $19,409 54,475
Mark A. Wolters 1997 $100,000 $ 57,711 $14,420(3) 14,175
Executive Vice 1996 $ 80,000 $ 57,711 $14,467 -0-
President 1995 $ 80,000 $ 47,528 $12,932 13,114
Richard P. Rosa 1997 $ 85,000 $ 20,199 $ 5,000 8,925
Senior Vice
President and Chief
Financial Officer
- ----------
(1) Bonuses earned for services rendered in the indicated years although
payment may have been made in subsequent years.
(2) Other annual compensation includes director fees, insurance premiums and
the personal use of Company automobiles, or automobile allowance.
(3) In 1997, Mr. Gray received $18,450 for attending meetings of the Board of
Directors and special committees of the Board and Mr. Wolters received
$11,550 for attending meetings of the Board of Direcors and special
committees of the Board.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table sets forth with respect to grants of stock options made
during 1997 to each of the Named Officers; (i) the name of such officer; (ii)
the number of options granted; (iii) the percent the grant represents of the
total options granted to all employees during 1997; (iv) the per share exercise
price of the options granted; (v) the expiration date of the options; and (vi)
the Black-Scholes value of the options at grant date.
Percent of Total
No. of Securities Options/SARs Exercise of
Underlying Granted to Base Price
Options/SARs Granted Employees in ($/Share) Expiration Grant Date Present
Name (#) Fiscal Year 1/15/07 Date Value (1)
Thomas L. Gray, Jr. 19,425 15.42% $17.86 1/15/07 $59,810
Mark A. Wolters 14,175 11.25% $17.86 1/15/07 $43,645
Richard P. Rosa 8,925 7.08% $17.86 1/15/07 $27,480
(1) The values shown reflect standard application of the Black-Scholes pricing
model using (i) a 20% stock price volatility, (ii) an expected term of five
years, (iii) a risk-free interest rate of 6.17%, and (iv) a dividend yield
of 3.00%. The values do not take into account risk factors such as
non-transferability and limits on exercisability. In assessing the values
indicated in the above table, it should be kept in mind that no matter what
theoretical value is placed on a stock option on the date of grant, the
ultimate value of the option is dependent on the market value of the Common
Stock at a future date, which will depend to a large degree on the efforts
of the named officers to bring future success to the Company for the
benefit of all stockholders.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL
YEAR AND FISCAL YEAR END OPTION/SAR VALUES
The following table sets forth with respect to each exercise of stock options
during 1997 by each of the Named Officers and the year-end value of unexercised
options on an aggregated basis: (i) the name of each such officer; (ii) the
number of shares received upon exercise; (iii) the aggregate dollar value
realized upon exercise; (iv) the total value of unexercised options held at
December 31, 1997 separately identifying the exercisable and unexercisable
options; and (v) the aggregate dollar value of in-the-money, unexercised options
held at December 31, 1997, separately identifying the exercisable and
unexercisable options.
Value of Unexercised
No. of Securities In-the-Money Options at FY
Underlying Unexercised End ($) (based on $34.37
Options at FY End (#) per share)
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise (#) Realized Unexercisable Unexercisable
Thomas L. Gray, Jr. 13,208 $291,745 73,822 / 29,584 $ 1,705,875 / $578,412
Mark A. Wolters -- -- 32,181 / 14,247 $ 742,051 / $256,907
Richard P. Rosa -- -- 7,235 / 8,363 $ 149,410 / $148,096
COMPENSATION OF DIRECTORS
Directors of the Company receive no remuneration for their service on the Board
of Directors of the Company. Directors of the Bank, other than full-time
employees of the Bank, receive a $5,000 annual retainer, payable quarterly. All
directors of the Bank receive fees of $750 per Board meeting attended and $300
per committee meeting attended, except that the Chairman of the Audit Committee
receives $600 per Audit Committee meeting attended. In addition, Mr. Michael
Golden, in his capacity as Vice Chairman of the Bank, receives an annual stipend
of $12,000. Mr. Gray does receive Board meeting and Loan Committee (of the Bank)
meeting fees and Mr. Wolters does receive Board meeting fees.
The Company has entered into a consulting agreement with Mr. Bruce Mahon,
Chairman of the Board of the Company. Pursuant to the consulting agreement, Mr.
Mahon receives an annual consulting fee of $100,000. The consulting agreement
has a term of two years. The consulting agreement can be terminated by the
Company at any time for cause. Cause is defined in the consulting agreement as
consultant's (i) willful and continued failure to perform his duties; (ii)
fraud, misappropriation or other intentional damage to the property or business
of the Company or (iii) the consultant's admission or conviction of, or plea of
nolo contendere to, any felony that adversely affects the Company. In the event
of Mr. Mahon's death, the Company is obligated to reimburse his estate for any
unpaid fees and expenses for services rendered prior to his death. In addition,
Mr. Mahon also receives certain insurance
benefits directly from the Company which are not included in the consulting
agreement.
The Company maintains a 1995 Directors Stock Option Plan ("1995 Directors
Plan"). Under the 1995 Directors' Plan, 151,315 shares of Common Stock have been
reserved for issuance, as adjusted to reflect stock dividends declared by the
Company from time to time. Directors of the Company, the Bank and any other
subsidiaries which the Company may acquire or incorporate are eligible to
participate in the 1995 Directors Plan. The 1995 Directors Plan is administered
by the Company's Board of Directors which has the power to designate which
directors will receive options and the terms of such options. No option may be
exercised more than ten years after the date of its grant.
The Company maintains the 1993 Stock Option Plan for Non-Employee Directors (the
"Outside Directors' Plan"). Under the Outside Directors' Plan, 42,000 shares of
Common Stock have been reserved for issuance, adjusted to reflect stock
dividends declared subsequent to the adoption of the Outside Directors' Plan.
Non-employee Directors of the Company, the Bank and any other subsidiaries which
the company may acquire or incorporate participate in the Outside Directors'
Plan. Each participant in the Outside Directors' Plan automatically receives an
option to purchase 5,000 shares of Common Stock effective as of the date such
participant commences his service on the Board of Directors. No option may be
exercised more than ten years after the date of its grant. The purchase price of
the shares of Common Stock subject to options under the Outside Directors' Plan
is 100% of the fair market value on the date such option is granted. There are
no more shares available for issuance under the Outside Directors' Plan.
On January 15, 1997, the Board of Directors adopted the Carnegie Bancorp 1997
Stock Option Plan which provides for grants of stock options to officers,
directors and employees of the Company.
The 1997 Plan is administered by the Company's Board of Directors, which has the
authority to designate the optionees and to determine the number of shares
subject to each option, the date of grant and the terms and conditions governing
the option, including any vesting schedule. The Board of Directors also
designates whether options granted under the 1997 Plan are non-statutory stock
options or incentive stock options. In addition, the Board is charged with the
responsibility of interpreting the 1997 Plan and making all administrative
determinations thereunder.
All directors, officers and employees of the Company or its subsidiaries are
eligible to receive options under the 1997 Plan.
The 1997 Plan authorized the Company to issue 274,000 shares of the Common Stock
pursuant to options. However, pursuant to the terms of the 1997 Plan, no options
may first become exercisable if on such date options to purchase in excess of
15% of the Company's outstanding Common Stock are then exercisable. New options
may only become exercisable for the first time if and to the extent their
exercisability will not cause exercisable options to purchase in excess of 15%
of the Company's outstanding Common Stock to be outstanding under all of the
Company's stock option plans in the aggregate.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Thomas L. Gray, Jr.,
its President and Chief Executive Officer, and Mr. Mark A. Wolters, its
Executive Vice President. The employment agreements are intended to ensure that
the Company will be able to maintain a stable and competent management base. The
continued success of the Company depends, to a significant degree, on the skills
and competence of Mr. Gray and Mr. Wolters.
The employment agreement with Mr. Gray (the "Gray Employment Agreement")
provides for a three-year term, and further provides that it will automatically
be renewed for a one-year term on each anniversary date unless, ninety days
prior to such anniversary date, either party provides written notice of its
intention not to renew. The Gray Employment Agreement provides that Mr. Gray
will receive an annual base salary of $210,000 for fiscal 1997, and that his
base salary will be reviewed annually by the Board of Directors. In addition,
the Gray Employment Agreement provides that Mr. Gray is to receive an annual
bonus of not less than 6% of the adjusted net after tax income of the Company
and such other compensation as determined by the Board of Directors. The Gray
Employment Agreement permits the Company to terminate Mr. Gray's employment for
cause at any time. The Gray Employment Agreement defines cause to mean (i)
willful and continued failure to perform duties; (ii) fraud, misappropriate or
material damage to the property or business of the Company; (iii) willful
violation of law or conviction or admission of, or plea of nolo contendere to,
any felony which would adversely affect the executive's ability to perform his
duties; or (iv) 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 banking regulatory agency having
jurisdiction over the Company or any of its subsidiaries. In the event Mr. Gray
is terminated for reasons other than cause prior to the expiration of the term
of the Agreement, Mr. Gray shall be entitled to receive his base salary and
bonus for the remaining term. In addition, the Company is to maintain medical
and life insurance benefits for Mr. Gray for the remaining term. Mr. Gray may
terminate his employment upon sixty (60) days' notice to the Company. Upon the
occurrence of a change in control (as defined in the Gray Employment Agreement)
which results in Mr. Gray's involuntary termination without cause or Mr. Gray's
voluntary resignation within 18 months of such change in control because (i) he
is reassigned to a position of lesser rank or status than chief Executive
Officer; (ii) his place of employment is relocated by more than thirty miles
from its location as of the date of the Employment Agreement; or (iii) his
compensation or other benefits are reduced, Mr. Gray will be entitled to receive
his base salary and bonuses for a period of thirty (30) months after such
termination. In addition, the Company will continue to maintain Mr. Gray's
medical and dental insurance and other benefits in effect through the end of
such 30-month period.
The Company has entered into an employment agreement with Mark A. Wolters, the
Executive Vice President of the Company (the "Wolters Employment Agreement").
Pursuant to the Wolters Employment Agreement, Mr. Wolters is to be employed for
a term of three years and his employment is subject to automatic renewal of an
additional one-year term on each anniversary date unless, ninety days prior to
such anniversary date, either party provides written notice of its intention not
to renew. Mr. Wolters' annual base salary is $100,000 for fiscal 1997 and this
base salary is subject to annual review by the Board of Directors. In addition,
Mr. Wolters is entitled to receive a bonus in an amount equal to 2% of the
adjusted net after-tax income of the Company and such other compensation as
determined by the Board of Directors. The Wolters Employment Agreement permits
the Company to terminate Mr. Wolters' employment for cause. Cause is defined
under the Wolters Employment Agreement in the same manner as it is defined under
the Gray Employment Agreement. In the event Mr. Wolters is terminated for
reasons other than cause prior to the expiration of the initial three-year term,
Mr. Wolters shall be entitled to receive his base salary and bonus for the
remaining term. Mr. Wolters may terminate his employment upon sixty (60) days'
written notice to the Company. In addition, the Company shall maintain his
medical and dental insurance and other benefits for the remaining term. Upon the
occurrence of a change in control (as defined in the Wolters Employment
Agreement) and the
subsequent involuntary termination of Mr. Wolters without cause or his voluntary
resignation within 18 months of such change in control because (i) he is
reassigned to a position of lesser rank or status than Executive Vice President,
(ii) his principal place of employment is moved by more than 30 miles from its
current place, or (iii) his compensation or other benefits are reduced, Mr.
Wolters will be entitled to receive his then current base salary and bonus for
18 months after such termination. In addition, the Company will continue to
maintain Mr. Wolters' medical and dental insurance and other benefits in effect
through the end of such 18-month period.
BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Company does not maintain a standing Compensation Committee. The
compensation payable to the Company's executive officers is determined by the
Board of Directors of the Company, without the participation of Messrs. Gray and
Wolters on any compensation matter directly related to them individually.
EXECUTIVE COMPENSATION POLICY
The Company's policy is to compensate its executives fairly and adequately for
the responsibility assumed by them for the success and direction of the Company,
the effort expended in discharging that responsibility and the results achieved
directly or indirectly from each executive's performance. "Fair and adequate
compensation" is established after careful review of:
1. The Company's earnings;
2. The Company's performance as compared to other companies of similar size
and market area; and
3. Comparison of what the market demands for compensation of similarly
situated and experienced executives.
Total compensation takes into consideration a mix of base salary, bonus,
perquisites and stock options. The particular mix is established in order to
competitively attract competent professionals, retain those professionals, and
reward extraordinary achievement.
The Board of Directors also considers net income for the year and earnings per
share of the Company before finalizing officer increases for the coming year.
Based upon its current levels of compensation, the Company is not affected by
the provisions of the Internal Revenue Code which limits the deductibility to a
company of compensation in excess of $1 million paid to any of its top five
executives. Thus, the Company has no policy as to that subject.
BASE SALARY
The Board of Directors bears the responsibility for establishing base salary.
Salary is minimum compensation for any particular position and is not tied to
any performance formula or standard. However, that is not to say that poor
performance will not result in termination. Acceptable performance is expected
of all executive officers as a minimum standard.
To establish salary, the following criteria are used:
1. Position description.
2. Direct responsibility assumed.
3. Comparative studies of peer group compensation. Special weight is given
to local factors as opposed to national averages.
4. Earnings performance of the Company resulting in availability of funds
for payment of salary expense.
5. Competitive level of salary to be maintained to attract and retain
qualified and experienced executives.
ANNUAL BONUSES
Each year the Board establishes the parameters for the award of a bonus and the
size of the pool of available bonus money. The current parameters are related to
the Company's net income after taxes.
STOCK OPTIONS
Stock option awards are determined by the Board's Stock Option Committee.
The Stock Option Committee meets to evaluate meritorious performance of all
officers and employees for consideration to receive stock options.
The Stock Option Committee makes awards based upon the following criteria:
1. Position of the officer or employee in the Company.
2. The benefit which the Company has derived as a result of the efforts of
the award candidate under consideration.
3. The Company's desire to encourage long-term employment of the award
candidate.
PERQUISITES
Perks, such as company automobiles and their related expenses, country club
memberships, auxiliary insurance benefits and other perks which the Board may
approve from time to time are determined and awarded pursuant to evaluation
under the same criteria used to establish base salary.
The Company has long believed that a strong, explicit link should exist
between executive compensation and the value delivered to shareholders.
The bonus program and the stock option awards both provide competitive
compensation while mirroring the Company's performance. Since the bonus
is based on a direct, explicit link to the Company's performance, it is
directly and explicitly linked to the value received by shareholders.
The Company's profitability inures to the benefit of shareholders, and
is a direct result of the direction established by management.
MEMBERS OF THE BOARD OF DIRECTORS
Bruce A. Mahon James E. Quackenbush
Theodore H. Dolci, Jr. Steven L. Shapiro
Thomas L. Gray, Jr. Mark A. Wolters
Michael E. Golden Shelly M. Zeiger
Joseph J. Oakes, III
PERFORMANCE GRAPH
Set forth below is a graph and table comparing the yearly percentage change in
the cumulative total shareholder return on the Commpany's Common Stock
against (1) the cumulative total return on the NASDAQ Total U.S. Bank Index, and
(2) the cumulative total return on the SNL $250M-$500M Bank Index for the period
commencing September 8, 1994, the date on which the Company commenced trading on
the NASDAQ National Market, and ending December 31, 1997.
Cumulative total return on the Company's Common Stock, the NASDAQ Total U.S.
Index and the SNL $250M-$500M Bank Index equals the total increase in value
since September 8, 1994, assuming reinvestment of all dividends. The graph and
table were prepared assuming that $100.00 was invested on September 8, 1994, in
the Company's Common Stock, the NASDAQ Total U.S. Index and the SNL $250M-$500M
Bank Index.
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
PERIOD ENDING
---------------------------------------------------
INDEX 9/8/94 12/31/94 12/31/95 12/31/96 12/31/97
- -------------------------------------------------------------------------------
Carnegie Bancorp 100.00 78.04 125.76 154.45 305.61
NASDAQ - Total US 100.00 98.13 138.79 170.70 209.47
SNL $250M-$500M Bank Index 100.00 97.22 131.20 170.36 294.65
The NASDAQ Total US Index consists of all NASDAQ National Market and SmallCap
Stocks. The SNL $250M-$500M Bank Index consists of all publicly traded banks
with assets between $250M and $500M
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1998, certain information
concerning the ownership of shares of common Stock by (i) each person who is
known by the company to own beneficially more than five percent (5%) of the
issued and outstanding Common Stock, (ii) each director and nominee for director
of the Company, (iii) each named executive officer described in the section
captioned "Executive compensation", and (iv) all directors and officers as a
group. Except as otherwise indicated, each individual named has sole investment
and voting power with respect to the securities shown.
No. of Shares
Beneficially Percent
Name of Beneficial Owner Owned (1) of Class
- ------------------------ -------------- --------
John Hancock Advisers, Inc. 137,659(2) 5.00%
101 Huntington Avenue
Boston, Massachusetts 02199
Name of Directors and Executive Officers
- ----------------------------------------
Bruce A. Mahon 51,357(4) 1.84%
Thomas L. Gray, Jr. 116,201(5) 4.07%
Mark A. Wolters 49,609(6) 1.77%
Theodore H. Dolci, Jr. 34,521(3) 1.24%
Michael E. Golden 77,143(7) 2.76%
Joseph J. Oakes, III 42,824(3)(8) 1.54%
James E. Quackenbush 54,415(3)(9) 1.96%
Steven L. Shapiro 29,663(10) 1.07%
Shelley M. Zeiger 31,750(11) 1.14%
Richard P. Rosa 22,285(12) .80%
All Directors and Executive Officers 509,768 16.93%
As a Group
(1) Beneficially owned shares include shares over which the named person
exercises either sole or shared voting power or sole or shared investment
power. It also includes shares owned (i) by a spouse, minor children or by
relatives sharing the same home, (ii) by entities owned or controlled by
the named person, and (iii) by other persons if the named person has the
right to acquire such shares within 60 days by the exercise of any right or
option. Unless otherwise noted, all shares are owned of record and
beneficially by the named person, either directly or through the company's
Dividend Reinvestment Plan.
(2) Based solely upon the most recent Schedule 13G filed by John Hancock
Advisers, Inc. received by the Company.
(3) Includes 23,341 shares purchasable pursuant to options which are
exercisable within sixty (60) days.
(4) Includes 2,808 shares beneficially owned by Mr. Mahon's spouse. Also
included are 36,683 shares purchasable pursuant to options which are
exercisable within sixty (60) days
(5) Includes 734 shares held by Mr. Gray's former spouse as guardian for his
minor son, 1,350 shares held in a self-directed IRA, 2,126 shares under the
Bank's 401(k) Plan and 78,678 shares purchasable pursuant to options which
are exercisable within sixty (60) days.
(6) Includes 35,725 shares purchasable pursuant to options which are
exercisable within sixty (60) days, 1,062 shares held in an IRA account and
2,120 shares under the Bank's 401(k) Plan.
(7) Includes 8,424 shares held in a Profit Sharing Plan of which Mr. Golden is
the beneficiary, 5,643 shares in a retirement account and 9,004 shares held
in a self-directed IRA. Also includes 40,515 shares purchasable pursuant to
options which are exercisable within sixty (60) days.
(8) Includes 7,116 shares held in a Keogh Plan of which Mr. Oakes is the
beneficiary and 11,086 shares in a retirement account.
(9) Includes 15,495 shares held in Mr. Quackenbush's self-directed IRA and
9,866 shares in the name of The Fairhurst Trust, of which Mr. Quackenbush's
spouse is co-trustee and beneficiary and 100 shares in Mr. Quackenbush's
spouse's self-directed IRA.
(10) Includes 4,282 shares held in Mr. Shapiro's self-directed IRA and 1,207
shares held in a voluntary Pension Plan of which Mr. Shapiro is trustee and
beneficiary. Also includes 21,257 shares purchasable pursuant to options
which are exercisable within sixty (60) days.
(11) Includes 1,348 shares held by Mr. Zeiger's spouse and minor child, and
21,257 shares purchasable pursuant to options which are exercisable within
sixty (60) days.
(12) Includes 5,116 shares held in Mr. Rosa's self-directed IRA, 99 shares under
the Bank's 401(k)
Plan and 7,609 shares held in the name of Morris Area community foundation
of which Mr. Rosa is Finance Chairman. Also includes 9,466 shares
purchasable pursuant to options which are exercisable within sixty (60)
days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has made in the past and, assuming continued satisfaction of generally
applicable credit standards, expects to continue to make loans to directors,
executive officers and their associates (i.e., corporations or organizations for
which they serve as officers or directors or in which they have beneficial
ownership interests of ten percent or more). These loans have all been made in
the ordinary course of the Bank's business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and do not involve more than the
normal risk of collectability or present other unfavorable features.
Michael E. Golden is the Vice Chairman of the Board of the Company and is also
the Chairman and CEO of First Colonial Securities Group, Inc. ("FCSG, Inc."). On
October 6, 1997, the Company retained Janney Montgomery Scott Inc. and FCSG,
Inc. (collectively, the "co-advisors") to act as financial advisors to the
Company's Board of Directors in evaluating and responding to an unsolicited
expression of interest to acquire the Company and to advise the Board with
respect to potential strategic alternatives available to the Company. The
Company paid a non-refundable advisory fee of $25,000 to the co-advisors upon
retaining the co-advisors, and $100,000 upon execution of the Merger Agreement
with Sovereign Bancorp Inc. on December 12, 1997. Under the terms of the
Company's engagement of the co-advisors, half of the foregoing fees were paid to
FCSG, Inc. Additionally, each co-advisor would be entitled to receive a payment
equal to one-half of 1.5% of the aggregate consideration received by the Company
or its shareholders upon consummation of the Merger, less its respective portion
of the $125,000 fee already paid during 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
None
(a)(3) Exhibits
Exhibit
Number Description of Exhibits
- ------ -----------------------
(2) Agreement and Plan of Merger dated as of December 12, 1997
between the Company and Sovereign
Bancorp, Inc. (Filed herewith)
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) 1997 Stock Option Plan(4)
10(vi) Employment Agreement between the Registrant and Thomas L. Gray, Jr.(5)
10(vii) Employment Agreement between the Registrant and Mark A. Wolters(6)
10(viii) Consulting Agreement between the Registrant and Bruce A. Mahon(7)
21 Subsidiaries of the Company (Filed herewith)
23 Consent of Coopers & Lybrand L.L.P. (Filed herewith)
27 Financial Data Schedule (Filed herewith)
- ----------
(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)).
(4) Incorporated by reference to Exhibit 10(v) of Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996.
(5) Incorporated by reference to Exhibit 10(vi) of Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference to Exhibit 10(vii) of Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996.
(7) Incorporated by reference to Exhibit 10(viii) of Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996.
(b) Reports on Form 8-K.
The Registrant has filed the following reports on Form 8-K during the quarter
ended December 31, 1997.
Date Item Reported
- ---- -------------
December 31, 1997 Current Report on Form 8-K filed reporting the issuance of a
press release dated December 15, 1997 regarding the signing
of the Agreement andPlan of Merger between the Company and
Sovereign Bancorp, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CARNEGIE BANCORP
By: /s/
--------------------------------
Thomas L. Gray, Jr.,
President and Chief
Executive Officer
March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/
- --------------------------------- March 31, 1998
Theodore H. Dolci, Jr.
/s/
- --------------------------------- March 31, 1998
Michael E. Golden
/s/
- --------------------------------- March 31, 1998
Thomas L. Gray, Jr.
(Principal Executive Officer)
/s/
- --------------------------------- March 31, 1998
Bruce A. Mahon
/s/
- --------------------------------- March 31, 1998
Joseph J. Oakes, III
/s/
- --------------------------------- March 31, 1998
James E. Quackenbush
/s/
- --------------------------------- March 31, 1998
Steven L. Shapiro
/s/
- --------------------------------- March 31, 1998
Mark A. Wolters
/s/
- --------------------------------- March 31, 1998
Shelley M. Zeiger
- --------------------------------- March 31, 1998
Richard P.
Rosa
(Principal Financial Officer
and Principal Accounting Officer)
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 Subsidiaries (the "Company") as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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 Subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Princeton, New Jersey
February 2,1998
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
1997 1996
--------- ---------
(Dollars in thousands)
ASSETS
Cash and cash equivalents:
Cash and due from banks ......................................................................... $ 14,385 $ 16,745
Federal funds sold .............................................................................. 1,725 0
- --------------------------------------------------------------------------------------------------- --------- ---------
Total cash and cash equivalents .................................................. 16,110 16,745
- --------------------------------------------------------------------------------------------------- --------- ---------
Investment Securities:
Available for sale .............................................................................. 52,483 30,110
Held to maturity (market value $68,993 at December 31, 1997
and $23,258 at December 31, 1996) ............................................................. 68,988 23,264
- --------------------------------------------------------------------------------------------------- --------- ---------
Total investment securities ...................................................... 121,471 53,374
- --------------------------------------------------------------------------------------------------- --------- ---------
Loans, net of allowance for loan losses of $2,956 at December 31, 1997
and $2,665 at December 31, 1996 ................................................................. 284,789 263,797
Premises and equipment, net ....................................................................... 4,235 4,482
Other real estate owned ........................................................................... 523 473
Accrued interest receivable and other assets ...................................................... 4,758 4,486
- --------------------------------------------------------------------------------------------------- --------- ---------
Total Assets ..................................................................... $ 431,886 $ 343,357
=================================================================================================== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing demand deposits ............................................................ $ 56,430 $ 42,372
Interest bearing deposits:
Savings deposits .............................................................................. 156,981 139,671
Other time deposits ........................................................................... 43,741 62,008
Certificates of deposit $100,000 and over ..................................................... 75,745 58,511
- --------------------------------------------------------------------------------------------------- --------- ---------
Total deposits ................................................................... 332,897 302,562
- --------------------------------------------------------------------------------------------------- --------- ---------
Short-term borrowings ............................................................................. 32,300 1,000
Long-term debt .................................................................................... 29,425 14,425
Accrued interest payable and other liabilities .................................................... 2,040 1,628
- --------------------------------------------------------------------------------------------------- --------- ---------
Total liabilities ................................................................ 396,662 319,615
- --------------------------------------------------------------------------------------------------- --------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, authorized 5,000,000 shares;
issued and outstanding 2,751,816 at December 31, 1997
and 1,940,942 at December 31, 1996 ............................................................ 13,759 9,705
Capital surplus ................................................................................. 19,486 12,711
Undivided profits ............................................................................... 1,942 1,530
Net unrealized holding gains (losses) on securities available for
sale .......................................................................................... 37 (204)
- --------------------------------------------------------------------------------------------------- --------- ---------
Total stockholders' equity ....................................................... 35,224 23,742
- --------------------------------------------------------------------------------------------------- --------- ---------
Total Liabilities and
Stockholders' Equity ........................................................ $ 431,886 $ 343,357
=================================================================================================== ========= =========
See accompanying notes to consolidated financial statements.
F-1
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
------------------------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands, except per share data)
Interest income:
Loans, including fees ................................................ $ 25,853 $ 20,225 $ 14,727
Federal funds sold ................................................... 284 106 475
Investment securities:
Taxable ............................................................ 5,828 3,750 2,535
Tax-exempt ......................................................... 449 383 969
- ------------------------------------------------------------------------ -------- -------- --------
Total interest income .................................. 32,414 24,464 18,706
- ------------------------------------------------------------------------ -------- -------- --------
Interest expense:
Savings deposits ..................................................... 7,301 3,519 3,096
Other time deposits .................................................. 3,445 3,448 2,947
Certificates of deposit $100,000 and over ............................ 3,062 2,128 2,124
Short-term borrowings ................................................ 1,159 1,160 297
Long-term debt ....................................................... 1,070 629 --
- ------------------------------------------------------------------------ -------- -------- --------
Total interest expense ................................. 16,037 10,884 8,464
- ------------------------------------------------------------------------ -------- -------- --------
Net interest income .................................... 16,377 13,580 10,242
Provision for loan losses .............................................. 446 1,609 369
- ------------------------------------------------------------------------ -------- -------- --------
Net interest income after provision
for loan losses ...................................... 15,931 11,971 9,873
- ------------------------------------------------------------------------ -------- -------- --------
Non-interest income:
Service fees on deposits ............................................. 456 422 433
Other fees and commissions ........................................... 468 339 311
Gain on sale of other real-estate owned .............................. 66 294 --
Investment securities gains .......................................... 150 399 132
Investment securities losses ......................................... (106) (94) (132)
- ------------------------------------------------------------------------ -------- -------- --------
Total non-interest income .............................. 1,034 1,360 744
- ------------------------------------------------------------------------ -------- -------- --------
Non-interest expense:
Salaries and wages ................................................... 4,296 3,826 2,683
Employee benefits .................................................... 971 858 692
Occupancy expense .................................................... 1,548 1,466 1,024
Furniture and equipment .............................................. 1,130 915 583
Other ................................................................ 3,537 2,989 2,742
- ------------------------------------------------------------------------ -------- -------- --------
Total non-interest expense ............................. 11,482 10,054 7,724
- ------------------------------------------------------------------------ -------- -------- --------
Income before income taxes ............................. 5,483 3,277 2,893
Income tax expense ..................................................... 1,858 1,133 765
- ------------------------------------------------------------------------ -------- -------- --------
Net Income ............................................. $ 3,625 $ 2,144 $ 2,128
======================================================================== ======== ======== ========
Per Common Share:
Basic Earnings per Share ............................................. $ 1.55 $ 1.10 $ 1.11
Diluted Earnings per Share ........................................... $ 1.42 $ 1.00 $ 1.08
======================================================================== ======== ======== ========
Weighted Average Shares Outstanding
(in thousands)
Basic ................................................................ 2,336 1,944 1,925
Diluted .............................................................. 2,544 2,141 1,965
======================================================================== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-2
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unrealized
Holding Gain (Loss) Total
Common Capital Retained on Securities Available Stockholders'
Stock Surplus Earnings For Sale, Net Equity
------------ ------------ ------------ --------------------- ------------
(Dollars in thousands)
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
5% stock dividend issued
(98,926 shares) 495 1,360 (1,855) -- -
Net income -- -- 3,625 -- 3,625
Cash dividend ($ .56 per share) -- -- (1,358) -- (1,358)
Issuance of 711,948 common shares for
options and warrants exercised 3,559 5,274 -- -- 8,833
Tax benefit on exercised options -- 141 -- -- 141
Increase (decrease) in fair value adjustment -
securities available for sale, net -- -- -- 241 241
- ---------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 $13,759 $19,486 $1,942 $37 $35,224
=================================================================================================================================
See accompanying notes to consolidated financial statements.
F-3
CARNEGIE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
Cash flows from operating activities:
Net income ................................................................. $ 3,625 $ 2,144 $ 2,128
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .......................................... 1,146 1,002 539
Provision for loan losses .............................................. 446 1,609 369
Accretion of investment discount ....................................... (200) (9) (18)
Amortization of investment premium ..................................... 475 356 356
Gain on sale of available-for-sale securities .......................... (150) (399) (132)
Loss on sale of available-for-sale securities .......................... 106 94 132
Gain on sale of other real estate owned ................................ (66) (294) --
Loss on disposal of equipment .......................................... 40 -- 321
Decrease (increase) in deferred taxes .................................. 67 (838) 1,219
(Increase) decrease in accrued interest receivable
and other assets ..................................................... (482) 208 (2,521)
Increase in accrued interest payable and
other liabilities .................................................... 412 561 258
- ------------------------------------------------------------------------------ --------- --------- ---------
Net cash provided by operating activities ............................ 5,419 4,434 2,651
- ------------------------------------------------------------------------------ --------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale ........................ 42,134 36,283 18,619
Proceeds from maturities and principal paydowns of
securities available-for-sale ............................................ 3,355 10,946 3,802
Proceeds from maturities and principal paydowns of
securities held-to-maturity .............................................. 6,574 1,636 --
Purchase of securities available-for-sale .................................. (67,458) (7,763) (45,040)
Purchase of securities held-to-maturity .................................... (52,549) (24,972) --
Net increase in loans made to customers .................................... (22,194) (103,630) (24,111)
Cash collected on previously charged-off loans ............................. 61 10 52
Additions to premises and equipment ........................................ (939) (1,762) (2,977)
Proceeds from sale of other real estate owned .............................. 711 622 --
- ------------------------------------------------------------------------------ --------- --------- ---------
Net cash used in investing activities ................................ (90,305) (88,630) (49,655)
- ------------------------------------------------------------------------------ --------- --------- ---------
Cash flows from financing activities:
Net increase in deposits ................................................... 30,335 92,361 33,412
Increase (decrease) in short-term borrowings ............................... 31,300 (16,500) 17,500
Increase in long-term borrowings ........................................... 15,000 14,425 --
Proceeds from common stock issued on exercise of
options and warrants ..................................................... 8,974 1,353 323
Cash paid for dividends .................................................... (1,358) (905) (839)
- ------------------------------------------------------------------------------ --------- --------- ---------
Net cash provided by financing activities ............................ 84,251 90,734 50,396
- ------------------------------------------------------------------------------ --------- --------- ---------
Net change in cash and cash equivalents ...................................... (635) 6,538 3,392
Cash and cash equivalents as of beginning of year ............................ 16,745 10,207 6,815
- ------------------------------------------------------------------------------ --------- --------- ---------
Cash and cash equivalents as of end of year .................................. $ 16,110 $ 16,745 $ 10,207
============================================================================== ========= ========= =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest ................................................................... $ 15,666 $ 10,653 $ 8,219
Income taxes ............................................................... $ 1,701 $ 1,377 $ 1,014
Transfer of investment securities held to maturity to investment
securities available for sale .............................................. -- -- $ 22,876
============================================================================== ========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
CARNEGIE BANCORP AND SUBSIDIARIES
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 judgment 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, Carnegie Bank, N.A., and TMRF, LLC, a limited liability
company formed to acquire, hold, operate and dispose of real property. 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 1997 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.
F-5
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.
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 judgment, 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
judgments 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.
F-6
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.
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, it 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.
Earnings Per Common Share ("EPS") - Earnings 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. Basic EPS excludes dilution and
is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
Company. The common share equivalents of options and warrants in the computation
of diluted 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.
F-7
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) EARNINGS PER SHARE ("EPS")
Following is the reconciliation of the numerators and denominators of the basic
and diluted EPS computations:
Year Ended December 31, 1997
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ --------
NET INCOME $3,625
---------
BASIC EPS
Income available to common shareholders 3,625 2,336 $1.55
========
EFFECT OF DILUTIVE SECURITIES
Options and Warrants 208
--------- ----------
DILUTED EPS
Income available to common shareholders
+ assumed conversions $3,625 2,544 $1.42
========= ========== ========
Year Ended December 31, 1996
-----------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ --------
NET INCOME $2,144
---------
BASIC EPS
Income available to common shareholders 2,144 1,944 $1.10
========
EFFECT OF DILUTIVE SECURITIES
Options and Warrants 197
--------- ----------
DILUTED EPS
Income available to common shareholders
+ assumed conversions $2,144 2,141 $1.00
========== =========== ========
Year Ended December 31, 1995
---------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ --------
NET INCOME $2,128
---------
BASIC EPS
Income available to common shareholders 2,128 1,925 $1.11
========
EFFECT OF DILUTIVE SECURITIES
Options and Warrants 40
--------- ----------
DILUTED EPS
Income available to common shareholders
+ assumed conversions $2,128 1,965 $1.08
========= ========== ========
Options and warrants to purchase 825 thousand shares of common stock at an
average exercise price of $14.02 per share were outstanding during the first
eight months of 1995 but were not included in the computation of diluted EPS
because the exercise price was greater than the average market price of the
common shares.
F-8
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) CASH AND DUE FROM BANKS
The Company maintains various deposits in other banks. At December 31, 1997 and
1996 average cash balances reserved to meet Federal Regulatory requirements of
$2,373,000 and $1,202,000 respectively, were maintained at the Federal Reserve
Bank of Philadelphia.
F-9
(4) INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The following is a comparative summary of investment securities at December 31:
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- --------- --------- ----------
(Dollars in thousands)
1997
Securities available for sale:
U.S. Government ............ $13,068 $58 $ -- $13,126
Mortgage-backed securities . 20,727 115 (92) 20,750
Obligations of State and
Political Subdivisions 10,369 20 -- 10,389
Other securities ........... 8,257 -- (39) 8,218
---------- --------- --------- ----------
$52,421 $193 ($131) $52,483
========== ========= ========= ==========
Securities held to maturity:
U.S. Government ............ $8,037 $199 -- $8,236
Mortgage-backed securities . 60,951 53 (247) 60,757
---------- --------- --------- ----------
$68,988 $252 ($247) $68,993
========== ========= ========= ==========
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
========== ========= ========= ==========
The following table shows the amortized costs and market values of the Company's
investment securities by contractual maturity as of December 31, 1997. Expected
maturities of mortgage-backed securities may differ from contractual maturities
because borrowers have the right to prepay obligations.
Year Ended December 31, 1997
-----------------------------------------
Securities Held Securities Available
to Maturity for Sale
------------------- -------------------
Amortized Market Amortized Market
Cost Value Cost Value
-------- ------- -------- -------
(Dollars in thousands)
Due 1 year or less ................ $ -- $ -- $ 3,275 $ 3,275
Due after 1 year through 5 years .. -- -- 4,956 4,957
Due after 5 years through 10 years 8,037 8,236 13,549 13,625
Due after 10 years ................ 60,951 60,757 23,661 23,646
Federal Home Loan Bank stock ...... -- -- 6,441 6,441
Federal Reserve Bank stock ........ -- -- 539 539
------------------------------------------
$68,988 $68,993 $52,421 $52,483
==========================================
Securities held to maturity and available for sale of $89,054,000 as of December
31, 1997 and $19,220,000 as of December 31, 1996 were pledged to secure public
deposits and for other purposes as required or permitted by law.
F-10
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LOANS
- --------------------------------------------------------------------------------
Loans at December 31, 1997 and 1996 consist of the following:
1997 1996
----------- ------------
(Dollars in thousands)
Commercial and financial ....... $85,737 $79,907
Real estate construction ....... 11,412 16,905
Residential mortgage ........... 24,527 23,173
Commercial mortgage ............ 152,477 133,908
Installment .................... 13,592 12,569
------------------------------------------------------------
Total loans .............. 287,745 266,462
Less allowance for loan losses . 2,956 2,665
------------------------------------------------------------
Loans, net ............... $284,789 $263,797
============================================================
Included in loans receivable at December 31, 1997 and 1996 are loans amounting
to $4,335,000 and $3,342,000 respectively, on which the accrual of interest has
been suspended. Interest income that would have been accrued had these loans
been current aggregated $405,000 and $370,000 at December 31, 1997 and 1996,
respectively.
As of December 31, 1997 and 1996 the Bank had no loans to any single customer
that exceeded 10% of the Bank's loan portfolio.
F-11
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
An analysis of the allowance for loan losses for 1997, 1996 and 1995 is as
follows:
1997 1996 1995
--------- ---------- ----------
(Dollars in thousands)
Balance, beginning of year ...... $2,665 $1,754 $1,400
Provision charged to operations . 446 1,609 369
Recoveries ...................... 61 10 52
Loans charged off. .............. (216) (708) (67)
--------------------------------- ---------- ---------- ----------
Balance, end of year ............ $2,956 $2,665 $1,754
================================= ========== ========== ==========
F-12
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) 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, 1997, the recorded
investment in loans for which impairment has been recognized totaled $4,863,000.
These loans have corresponding valuation allowance of $473,000. The total amount
of impaired loans measured using the present value of expected future cash flows
amounted to $1,785,000 and the total amount of impaired loans measured using the
fair value of the loan's collateral amounted to $3,078,000. For the year ended
December 31, 1997, the average recorded investment in impaired loans was
approximately $4,927,000. The Company recognized $123,000 of interest on
impaired loans on a cash basis, during the portion of the year that they were
impaired.
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.
F-13
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) 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 1997 is as follows:
1997
---------
(Dollars in thousands)
Balance, beginning of year $4,302
Additions 563
Payments and other adjustments (1,412)
-------------------------------------------------------------
Balance, end of year $3,453
=============================================================
F-14
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The components of premises, furniture and equipment at December 31 were as
follows:
1997 1996
---------- ----------
(Dollars in thousands)
Land and buildings .................. $ 738 $ 407
Leasehold improvements .............. 2,382 2,361
Furniture and equipment ............. 4,570 4,049
------------------------------------- ---------- ----------
7,690 6,817
Less accumulated depreciation and
amortization .................. 3,455 2,335
------------------------------------- ---------- ----------
Premises and equipment, net ... $4,235 $4,482
=================================================================
F-15
(9) INCOME TAXES
The components of the provision for income tax expense reflected in the
financial statements are as follows:
Year Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
Consolidated Statements of Income
---------------------------------------
Current: Federal ..................... $1,716 $1,382 $693
State and local ............. 218 201 109
--------------------------------------- --------- --------- ---------
Total current income taxes .. 1,934 1,583 802
--------------------------------------- --------- --------- ---------
Deferred: Federal ..................... (60) (366) (16)
State and local ............. (16) (84) (21)
--------------------------------------- --------- --------- ---------
Total deferred income taxes . (76) (450) (37)
--------------------------------------- --------- --------- ---------
Total ....................... $1,858 $1,133 $765
======================================= ========= ========= =========
Consolidated Statements of Changes in
Stockholders' Equity
=======================================
Deferred tax attributable to unrealized
(gains) or losses on available for
sale securities ($143) $388 ($1,250)
==========================================================================
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:
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
Expected statutory income tax expense . $1,865 $1,114 $984
Increase (decrease) in taxes resulting
from:
State taxes on income, net of
federal tax benefit ............... 144 77 58
Tax-exempt income, net .............. (146) (120) (279)
Other, net .......................... (5) 62 2
--------------------------------------- --------- --------- ---------
Total income tax provision ............ $1,858 $1,133 $765
======================================= ========= ========= =========
Deferred tax assets and liabilities as of December 31, 1997 and 1996 consisted
of the following:
1997 1996
--------- ----------
(Dollars in thousands)
Deferred tax assets:
Unrealized loss on available for sale
securities ........................ $ -- $118
Allowance for possible loan losses .. 992 834
Loan fees ........................... 53 314
Loan interest income ................ 250 150
Other ............................... 151 72
--------------------------------------- --------- ---------
Total deferred tax assets ... 1,446 1,488
Deferred tax liabilities .............. (15) (15)
Unrealized gain on available for
sale securities ..................... (25) --
--------------------------------------- --------- ---------
Net deferred tax assets ............... $1,406 $1,473
======================================= ========= =========
Net deferred tax assets are included in other assets as of December 31, 1997 and
1996. Management believes that it is more likely than not that the deferred tax
assets will be realized, therefore, no valuation allowance was recorded for
deferred tax assets at December 31, 1997 or 1996.
F-16
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) OTHER NON-INTEREST EXPENSE
- --------------------------------------------------------------------------------
Other non-interest expense for the years ended December 31, consisted of the
following:
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
Communications and supplies ........... $648 $690 $552
Professional and other fees ........... 1,202 799 747
Business development .................. 307 294 267
FDIC assessment insurance ............. 94 2 235
Advertising and shareholder relations . 271 224 198
Directors' and Advisory Board fees .... 265 271 241
Other ................................. 750 709 502
--------------------------------------- --------- --------- ---------
$3,537 $2,989 $2,742
========= ========= =========
F-17
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES
Future minimum lease payments under non-cancelable operating leases at December
31, 1997 are as follows:
Year ending December 31,
(Dollars in thousands)
1998............................................... $ 897
1999............................................... 900
2000............................................... 896
2001............................................... 858
2002............................................... 741
Thereafter......................................... 8,116
------------------------------------------------------------
Total minimum lease payments....................... $12,408
------------------------------------------------------------
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 $963,000 for 1997, $924,000 for 1996 and $667,000 for
1995.
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.
F-18
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) 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, 1997, that the Company and the Bank meet
all capital adequacy requirements to which they are subject. Under capital
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, 1997 and December 31, 1996, as well as
the regulatory required minimum capital ratios:
Regulatory Requirements
----------------------------
Company Bank Minimum "Well Capitalized"
------- ---- ------- ------------------
As of December 31, 1997
- --------------------------------------------------------------------------------
Risk-based capital:
Tier I capital ratio ... 11.81% 9.42% 4.00% 6.00%
Total capital ratio .... 12.80% 10.42% 8.00% 10.00%
Leveraged ratio ............ 8.36% 6.68% 3.00%-5.00% 5.00% or greater
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, 1997, 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, and Tier I leverage ratios as set forth in the table above. As of
December 31, 1997 management of the Company considers the Company to be "well
capitalized".
F-19
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) 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 $30,000 for 1997, $20,000 for
1996 and $13,000 for 1995.
Stock Option Plans - The Company maintains stock option plans, pursuant to which
an aggregate of 386,135 shares of Common Stock have been reserved for issuance
to certain key employees and the directors of the Company and its subsidiaries.
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. Options granted to directors under the 1997 Stock Option Plan are
subject to a vesting restriction prohibiting their exercise if such options,
when combined with all other exercisable options outstanding under all of the
Company's stock options plans, would cause the total number of shares
purchasable under exercisable options to exceed 15% of the Company's outstanding
Common Stock. These vesting restrictions will lapse for each option holder on a
proportionate basis as either the number of outstanding shares increases or the
number of outstanding exercisable options decreases.
Options Outstanding
-----------------------------
Shares Price per share
------ ---------------
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 canceled ..................... (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 canceled ..................... (5,802) 10.15
- --------------------------------------------------------------------------------
Balance, December 31, 1996
(177,023 shares exercisable) ......... 258,737 $8.24-13.10**
Granted ............................... 120,000 18.75
Additional options issued -
5% stock dividend ................... 27,443 --
Options exercised ..................... (20,045) $8.25-11.88
- --------------------------------------------------------------------------------
Balance, December 31, 1997
(309,191 shares exercisable) ......... 386,135 $9.67-17.86
- --------------------------------------------------------------------------------
* The weighted average price per share was $10.51 as of December 31, 1995.
** The weighted average exercise price of options outstanding was $12.00 at
December 31, 1996.
F-20
The following table summarizes information about stock options outstanding at
December 31, 1997:
Options Outstanding Options Exercisable
---------------------------------- -------------------------
Wgtd. Avg. Wgtd. Avg. Wgtd. Avg.
Exercise Number Remaining Exercise Number Exercise
Prices Outstanding Contr. Life Price Exercisable Price
-------- ----------- ----------- -------- ----------- ----------
$ 9.67 95,128 5.8 $ 9.67 95,128 $ 9.67
$11.88 165,007 7.5 $11.88 119,958 $11.88
$17.86 126,000 9.0 $17.86 94,105 $17.86
- ------------------------------------------------------------------------------
$9.67 to $17.86 386,135 7.6 $13.29 309,191 $13.02
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.
1997 1996
------------------------ -----------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
(Dollars in thousands, except per share data)
Net income ............. $3,625 $3,291 $2,144 $1,822
Per Common Share:
Net income - basic ..... $ 1.55 $ 1.41 $ 1.10 $ 0.94
Net income - diluted ... $ 1.42 $ 1.29 $ 1.00 $ 0.85
The weighted average fair value of options granted was $3.35 for 1997 and $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 1997 and 1996 are as follows:
1997 Grants 1996 Grants
----------- -----------
Dividend yield ............................. 3.00% 3.00%
Expected volatility ....................... 20.00% 20.00%
Risk-free interest rate .................... 6.26% 6.49%
Expected option life ....................... 3-5 Years 5 Years
F-21
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) 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, 1997 the Bank could declare dividends aggregating approximately
$8,019,000 without regulatory approval.
F-22
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) 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 predominant focus has been in commercial lending within the states
of New Jersey and Pennsylvania. As a result, the Bank's credit risk is
concentrated in these states and is dependent on general economics of these
states 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, 1997 and
1996 consist of the following:
1997 1996
------- -------
(Dollars in thousands)
Commercial and other unused commitments .... $36,945 $30,062
Home equity unused lines ................... 8,983 7,489
Standby letters of credit .................. 3,633 8,329
---------------------------------------------------------------------
$49,561 $45,880
---------------------------------------------------------------------
Rate structure:
Variable rate ............................ $42,546 $38,195
Fixed rate ............................... 7,015 7,685
Range of fixed rate instruments:
High ..................................... 16.00% 16.00%
Low ...................................... 6.60% 6.00%
F-23
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(17) SHORT-TERM BORROWINGS
At December 31, 1997, 1996, and 1995 short-term borrowings consist of the
following:
1997 1996 1995
---------- ---------- ----------
(Dollars in thouands)
Overnight Federal funds purchased
- balance ........................ $ -- $ 1,000 $ 11,500
- weighted average rate .......... -- 7.38% 5.26%
- maturity date .................. -- 01/02/97 01/02/96
- maximum amount outstanding at
any month's end................ $ 10,400 $12,400 $ 11,500
Term advances from FHLB-NY
- balance ........................ $ 10,000 -- $ 6,000
- weighted average rate .......... 6.27% -- 5.80%
- maturity date .................. 04/22/98 -- 01/22/96
- maximum amount outstanding at
any month's end................ $ 10,000 $22,500 $ 10,000
Securities sold under repurchase
agreement with Morgan Stanley
- balance ........................ $ 22,300 -- --
- weighted average rate .......... 6.05% -- --
- maturity date .................. 01/20/98 -- --
- maximum amount outstanding at
any month's end................ $ 23,360 -- --
At December 31, 1997, the Bank had overnight lines of credit with the Federal
Home Loan Bank-New York ("FHLB-NY") for $32,497,300 of which $-0- was advanced.
The Bank also had other overnight lines of credit with other institutions
amounting to $7,000,000 of which $-0- was advanced at December 31, 1997. The
average amount of short-term borrowings for 1997, 1996, and 1995 was
$19,573,000, $20,804,000, and $4,906,000, respectively.
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
F-24
(18) LONG-TERM DEBT
- --------------------------------------------------------------------------------
At December 31, long-term debt consists of the following:
1997 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
with Salomon Bros., due 4/19/99 .... 4,425 4,425
5.91% fixed rate repurchase agreement
with Salomon Bros., due 7/22/02 .... 12,500 --
5.84% fixed rate repurchase agreement
with Salomon Bros., due 8/13/02 .... 12,500 --
------- -------
$29,425 $14,425
======= =======
The Company had no long-term debt at December 31, 1995.
F-25
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(19) 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 of August 18, 1997, the expiration date for the
exercise of the warrants, substantially all of the warrants had been exercised.
F-26
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) 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.
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 of the short term nature of these instruments which mature in
less than four months.
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, 1997 and December 31, 1996 the fair value of
these commitments was immaterial.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1997 and December 31, 1996 are as follows:
F-27
December 31, 1997 December 31, 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Dollars in thousands)
Financial Assets:
Cash and cash equivalents ......... $ 16,110 $ 16,110 $ 16,745 $ 16,745
Securities available for sale ..... 52,483 52,483 30,110 30,110
Securities held to maturity ....... 68,988 68,993 23,264 23,258
Loans, net ........................ 284,789 284,732 263,797 259,658
Accrued interest receivable ....... 2,770 2,770 1,994 1,994
Financial Liabilities:
Deposits:
Non-interest bearing demand
deposits ........................ $ 56,430 $ 56,430 $ 42,372 $ 42,372
Savings deposits ................ 156,981 156,981 139,671 139,671
Certificates of deposit and other
time deposits ................... 119,486 119,452 120,519 121,198
Short-term borrowings ............. 32,300 32,300 1,000 1,000
Long-term debt .................... 29,425 29,610 14,425 14,473
Accrued interest payable .......... 688 688 715 715
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.
F-28
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(21) MERGER AGREEMENT
On December 15, 1997, the Company and Sovereign Bancorp, Inc., the parent
company of Sovereign Bank, jointly announced the execution of a definitive
agreement for Sovereign to acquire the Company. The terms of the agreement call
for Sovereign to exchange $35.50 in Sovereign common stock for each outstanding
share of the Company's common stock..
The December 15, 1997 announcement indicated the price would stay fixed at
$35.50 per the Company's share if Sovereign's average stock price remained
between $18.00 and $22.00 per share during the 15-day period prior to the
closing of the transaction. If the average price of Sovereign's stock dropped to
$18.00 per share or below during the pricing period prior to closing, the
Company's shareholders would receive a fixed rate of 1.972 shares (the "Maximum
Exchange Ratio") of Sovereign common stock for each share of the Company's
common stock. Conversely, if Sovereign's average stock price is $22.00 per share
or higher, the Company's shareholders would receive a fixed rate of 1.614 shares
(the "Minimum Exchange Ratio") of Sovereign common stock for each share of the
Company's common stock. The Company has the right to terminate the agreement if
the average stock price of Sovereign during the 15-day pricing period falls
below $14.47 and Sovereign's decline in value is 15% greater than the percentage
decline of a group of similar financial institutions, subject to Sovereign's
right to increase the exchange ratio in order to result in a minimum price of
$28.53 in Sovereign common stock.
On January 23, 1998, Sovereign announced a 20% stock dividend to its
shareholders. This stock dividend will not affect the value that the Company's
shareholders will receive as a result of this acquisition; although the exchange
ratio will be adjusted accordingly. Because of Sovereign's stock dividend, the
$18.00 price adjusts to $15.00 per share (equivalent to 2.366 shares of
Sovereign for each share of the Company) and the $22.00 price adjusts to $18.33
per share (equivalent to 1.937 shares of Sovereign for each share of the
Company). If the average price of Sovereign's stock drops to $15.00 per share or
below during the pricing period prior to closing, the Company's shareholders
would receive a fixed rate of 2.366 shares (the "Maximum Exchange Ratio") of
Sovereign common stock for each share of the Company's common stock. Conversely,
if Sovereign's average stock price is $18.33 per share or higher, the Company's
shareholders would receive a fixed rate of 1.937 shares (the "Minimum Exchange
Ratio") of Sovereign common stock for each share of the Company's common stock.
The effective date for the adjustment is March 27, 1998 (the ex-dividend date).
After March 27, 1998, the Company will have the right to terminate the agreement
if the average stock price of Sovereign during the 15-day pricing period falls
below $12.06 and Sovereign's decline in value is 15% greater than the percentage
decline of a group of similar financial institutions, subject to Sovereign's
right to increase the exchange ratio in order to result in a minimum price of
$28.53 in Sovereign common stock. The merger is subject to the approval of
various regulatory agencies and the Company's shareholders. It is anticipated
that the transaction will close in the second quarter of 1998, and will be
accounted for as a pooling of interests.
F-29
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(22) CASH DIVIDEND
In January 1998 the Board of Directors declared a cash dividend. Stockholders of
record on February 18, 1998 received a $.14 per share cash dividend on March 18,
1998.
F-30
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(23) SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes the results of operations during 1997, on a quarterly
basis, for Carnegie Bancorp and Subsidiaries.
1997
---------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(Dollars in thousands, except per share data)
Interest income ........................................... $ 8,724 $ 8,483 $ 7,762 $ 7,445
Interest expense .......................................... 4,319 4,191 3,882 3,645
--------- --------- --------- ---------
Net interest income ....................................... 4,405 4,292 3,880 3,800
Provision for loan losses ................................. 100 50 150 146
--------- --------- --------- ---------
Net interest income after provision for
loan losses ......................................... 4,305 4,242 3,730 3,654
Net security transactions ................................. 135 0 0 (91)
Other non-interest income ................................. 263 247 202 278
Other non-interest expense ................................ 3,134 2,917 2,738 2,693
--------- --------- --------- ---------
Income before income taxes ................................ 1,569 1,572 1,194 1,148
Income taxes .............................................. 563 526 388 381
--------- --------- --------- ---------
Net income ................................................ $ 1,006 $ 1,046 $ 806 $ 767
========= ========= ========= =========
Net income per share:
Basic ............................................... $ 0.37 $ 0.43 $ 0.38 $ 0.37
Diluted ............................................. $ 0.35 $ 0.40 $ 0.34 $ 0.33
F-31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(24) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Carnegie Bancorp, parent company only, is as
follows:
BALANCE SHEETS
AT DECEMBER 31,
----------------------
1997 1996
------- -------
(Dollars in thousands)
ASSETS
Cash and cash equivalents ........................ $ 6,989 $ 161
Investments in subsidiaries ...................... 28,113 22,973
Other assets ..................................... 145 676
------- -------
TOTAL ASSETS ..................................... $35,247 $23,810
======= =======
LIABILITIES AND EQUITY CAPITAL
Other liabilities ................................ $ 23 $ 68
Equity capital ................................... 35,224 23,742
------- -------
TOTAL LIABILITIES AND EQUITY CAPITAL ............. $35,247 $23,810
======= =======
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
Interest income from subsidiaries .......................... $ 114 $ 107 $ 173
Securities gains/(losses) ................................. 22 0 0
Other operating income ..................................... 38 0 4
--------- --------- ---------
Total Operating Income ..................................... 174 107 177
Operating expenses ......................................... 198 143 179
--------- --------- ---------
Income Before Taxes and Undistributed Income ............... (24) (36) (2)
Applicable income taxes .................................... 0 60 0
--------- --------- ---------
Income Before Undistributed Income From Subsidiaries ....... (24) (96) (2)
Equity in undistributed income of subsidiaries ............. 3,649 2,240 2,130
--------- --------- ---------
NET INCOME ................................................. $ 3,625 $ 2,144 $ 2,128
========= ========= =========
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Cash Flows from Operating Activities:
Net Income ................................................. $ 3,625 $ 2,144 $ 2,128
Adjustments to reconcile net income to net cash provided by
operating activities:
(Gain) or loss on sales of assets ........................ (22) 0 0
Equity in undistributed (earnings) losses of subsidiaries (3,649) (2,240) (2,130)
Net change in other liabilities .......................... (45) (45) 63
Net change in other assets ............................... 531 (593) 5
--------- --------- ---------
Net cash provided (used) by operating activities ........... 440 (734) 66
Cash Flows from Investing Activities:
Purchases of held-to-maturity and available-for-sale
securities ............................................... 4,250 0 0
Sales and maturities of held-to-maturity and
available-for-sale securities ............................ 4,272 0 0
Payments for investments in and advances to subsidiaries ... 1,250 3,300 0
--------- --------- ---------
Net cash provided (used) by investing activities ........... (1,228) (3,300) 0
Cash Flows from Financing Activities:
Proceeds from issuance of common stock ..................... 8,833 1,353 323
Dividends paid ............................................. 1,358 905 840
Other, net ................................................. 141 0 0
--------- --------- ---------
Net cash provided (used) by financing activities ........... 7,616 448 (517)
Net increase (decrease) in cash and cash equivalents ....... 6,828 (3,586) (451)
Cash and cash equivalents at beginning of period ........... 161 3,747 4,198
--------- --------- ---------
Cash and cash equivalents at end of period ................. $ 6,989 $ 161 $ 3,747
========= ========= =========
F-32
CARNEGIE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(25) 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 did not have a material
impact on the Company's consolidated financial statements.
EARNINGS PER SHARE.
Issued in March, 1997, SFAS No. 128, "Earnings per Share", establishes standards
for computing and presenting earnings per share (EPS) and applies to entities
with publicly held common stock or potential common stock. This Statement
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, "Earnings per Share", and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. This Statement is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. This Statement requires restatement of all
prior-period EPS data presented. Adoption of this pronouncement did not have a
material impact on the Company's consolidated financial statements.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE.
FASB has also issued SFAS No. 129, "Disclosure of Information about Capital
Structure", establishing standards for disclosing information about an entity's
capital structure. This Statement continues the previous requirements to
disclose certain information about an entity's capital structure found in APB
Opinions No. 10, "Omnibus Opinion - 1966", and No. 15, "Earnings per Share", and
FASB Statement No. 47, "Disclosure of Long-Term Obligations", for entities that
were subject to the requirements of those standards. This Statement eliminates
the exemption of nonpublic entities from certain disclosure requirements on
Opinion No. 15 as provided by FASB Statement No. 21, "Suspention of the
Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises". It supersedes specific disclosure requirements of Opinions No. 10
and No. 15 and Statement No. 47 and consolidates them in this Statement for ease
of retrieval and for greater visibility to nonpublic entities. This Statement is
effective for financial statements issued for periods ending after December
F-33
(25) RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)
15, 1997. It contains no change in disclosure requirements for entities that
were previously subject to the requirements of Opinions No. 10 and No. 15 and
Statement No. 47 and therfore its adoption had no effect on the Company's
consolidated financial statements.
REPORTING COMPREHENSIVE INCOME.
FASB has also issued SFAS No. 130, "Reporting Comprehensive Income", effective
for fiscal years beginning after December 15, 1997. This Statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive income is
defined as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from nonowner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. An example of comprehensive
income is the unrealized gains and losses on securities available for sale, net
of taxes. The Company will implement the disclosure requirements related to this
pronouncement beginning in 1998.
F-34
CARNEGIE BANCORP
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- ------ -----------------------
(2) Agreement and Plan of Merger dated as of December 12, 1997
between the Company and Sovereign
Bancorp, Inc. (Filed herewith)
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) 1997 Stock Option Plan(4)
10(vi) Employment Agreement between the Registrant and Thomas L. Gray(5)
10(vii) Employment Agreement between the Registrant and Mark A. Wolters(6)
10(viii) Consulting Agreement between the Registrant and Bruce A. Mahon(7)
21 Subsidiaries of the Company (Filed herewith)
23 Consent of Coopers & Lybrand L.L.P. (Filed herewith)
27 Financial Data Schedule (Filed herewith)
- ----------
(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)).
(4) Incorporated by reference to Exhibit 10(v) of Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996.
(5) Incorporated by reference to Exhibit 10(vi) of Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996.
(6) Incorporated by reference to Exhibit 10(vii) of Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996.
(7) Incorporated by reference to Exhibit 10(viii) of Registrant's Annual Report
on Form 10-K for the year ended December 31, 1996.