First Home Bancorp Inc.
Corporate Profile
--------------------------------------------------------------------------------
First Home Bancorp Inc. (the Company) is a New Jersey corporation and a
unitary savings and loan holding company registered under the Home Owners' Loan
Act, as amended. The Company is the parent holding company of First Home Savings
Bank, F.S.B. (the Bank), a federally chartered savings bank. The Company was
organized for the purpose of acquiring all of the capital stock of the Bank in
connection with the reorganization of the Bank into the holding company form of
ownership. Each outstanding share of common stock of the Bank was converted into
one share of common stock of the Company. The reorganization was consummated on
May 31, 1996.
The Bank operates eight offices in southern New Jersey and two offices
in New Castle County, Delaware. The Bank was chartered in 1911 for the purpose
of attracting retail savings deposits to provide mortgage funds for the
community. The Bank is a full service bank offering a broad range of financial
products and services to depositors and borrowers.
The Company's common stock is traded on the Nasdaq National Market tier
of the Nasdaq Stock Market under the trading symbol "FSPG." The newspaper
abbreviation is FstHomeBcp.
CONTENTS
Report to Shareholders 1
Market and Selected Quarterly Information 2
Five Year Consolidated Financial Summary 3
Management's Discussion and Analysis 5
Consolidated Statements of Financial Condition 14
Consolidated Statements of Income 15
Consolidated Statements of Shareholders' Equity 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 19
Report of Independent Public Accountants 43
Corporate Information 44
First Home Bancorp Inc.
Report to Shareholders
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The savings and loan industry experienced a number of changes in 1996,
the long-term effect of which could be viewed as positive. In 1996 the industry
contributed almost six billion dollars to fully fund the Savings Association
Insurance Fund (SAIF). The industry also received a measure of relief with
respect to the onerous tax requirement which may cause certain thrifts to
recapture all or a portion of their bad debt reserves in the event of a charter
change. These changes generally level the competitive playing field among
thrifts and other insured financial institutions and should allow many financial
institutions increased flexibility to choose the charter through which they wish
to operate.
The short-term effect of the SAIF recapitalization payment was a direct
charge to current earnings. The Company's charge amounted to approximately $1.6
million. Despite this one-time charge, the Company recorded outstanding earnings
for 1996 of $4.29 million, or $1.57 per share, which included a recovery of a
$732,000 valuation allowance on a deferred tax asset. Overall for 1996 the
Company achieved a 13.77% return on shareholders' equity. By comparison,
publicly-traded thrifts as a whole achieved a median return on equity of 5.19%.
Excluding the effects of non-recurring items, earnings for 1996 would have been
$1.67 per share compared to $1.55 per share for the prior year.
The Company ended 1996 with assets of $498.4 million, an increase of
$45 million over the prior year. As a result of this 10% increase in assets, net
interest income increased $1.57 million or over 11.5%. Despite the $45 million
asset growth, the ratio of general and administrative expenses to average assets
increased a modest four basis points to 1.83%, still considerably lower than
most in the industry.
The Company continues to meet the challenge to improve the delivery of
products and services to its growing list of customers. In 1996 the Company
initiated "Homeline," a telephone banking service. "Homeline" allows direct
access to accounts for funds transfer, account balance information and
individual check reconciliation. This product is currently handling
approximately 8,500 phone calls and processing about 17,000 transactions a
month. In addition to "Homeline," the Company added business development
officers to supplement the mortgage, consumer, commercial loan and new product
sales activity. Marketing efforts were stepped up with emphasis on name
recognition and market share. On a scheduled basis, retail offices are being
upgraded and reconfigured to provide a more attractive and improved banking
environment. As a result of the Company's increased marketing effort, loan
originations increased 35.1% in 1996 compared to the prior year. Additionally
approximately 1,800 new consumer and commercial checking accounts were opened
during the year.
On January 7, 1997, the Company declared a four-for-three stock split
to holders on January 22, 1997. The cash dividend on the split shares was set at
$.10 per share, an increase in the payout of 11.11%. This makes the fourth stock
split and the seventh time dividends have been increased since the Bank went
public in 1987. As a result of the stock splits, investors who purchased 100
shares of stock on the initial offering date of April 15, 1987 at the offering
price of $9.00 currently own 316 shares of stock at a cost of $2.85 per share.
The Board of Directors and Management recognize the need to continually
address the strategic direction of the Company in order to provide the best
products and services to our customers and our communities while at the same
time delivering strong earnings to our shareholders. As always, we will strive
to maintain a high level of earnings and create the greatest value for you our
shareholders.
Sincerely,
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇
Chairman, President and
Chief Executive Officer
1
First Home Bancorp Inc.
Market and Selected Quarterly Information
--------------------------------------------------------------------------------
Market and Selected Quarterly Information (unaudited)
The Company's common stock trades on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol: "FSPG."
The following table sets forth, for the periods indicated, unaudited
quarterly results of operations, high and low sales prices per share of the
Company's common stock on the Nasdaq National Market tier of the Nasdaq Stock
Market and dividends per share. The sales price data was obtained from Nasdaq
monthly statistical reports. The earnings per share, dividends per share and
quarterly sales price data have been adjusted for stock splits.
The amount of cash dividends that the Company may declare and pay are
subject to certain regulatory restrictions. See Note 20 of the accompanying
consolidated financial statements.
As of March 14, 1997, the Company's outstanding common stock was held
of record by approximately 1,015 shareholders. This estimate does not include an
indeterminate number of shareholders whose shares are held by brokers in "street
name."
First Quarter Second Quarter Third Quarter Fourth Quarter
---------------------------------------------------------------------------------
(In thousands,
except per share data 1996 1995 1996 1995 1996 1995 1996 1995
and quarterly sales prices)
------------------------------------------------------------------------------------------------------------------
Interest income $8,833 $7,508 $9,029 $8,023 $9,195 $8,370 $9,393 $8,588
Net interest income 3,732 3,335 3,774 3,365 3,797 3,376 3,783 3,441
Net income 1,165 1,433 1,110 1,142 864 1,027 1,146 1,109
Per share data:
Net income .43 .53 .41 .42 .31 .38 .42 .41
Dividends declared .09 .09 .09 .09 .09 .09 .10 .09
Quarterly sales prices:
High 14.06 10.88 14.06 11.06 14.06 12.94 14.63 14.25
Low 13.13 10.13 13.31 10.31 13.31 10.50 13.50 12.75
2
First Home Bancorp Inc.
Five Year Consolidated Financial Summary
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(In thousands, except per share data) At or for the year ended December 31,
1996 1995 1994 1993 1992
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FINANCIAL CONDITION INFORMATION
-------------------------------------------------------------------------------------------------------------------
Total assets (1) $498,399 $453,039 $388,621 $351,600 $315,211
Loans receivable 258,909 255,217 240,168 216,044 180,619
Mortgage-backed securities 188,607 146,760 94,333 95,979 88,369
Investment securities 27,356 29,304 35,019 19,170 27,436
Deposits 290,298 270,176 239,108 227,327 233,446
FHLB and other borrowed funds 173,148 150,126 123,633 98,331 59,866
Total shareholders' equity (2) 32,645 30,103 23,075 23,097 18,840
Book value per share (3) 12.05 11.12 8.58 8.86 7.27
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INCOME STATEMENT INFORMATION
-------------------------------------------------------------------------------------------------------------------
Total interest income $36,450 $32,489 $26,775 $24,570 $21,695
Total interest expense 21,364 18,972 13,901 12,152 11,864
------- ------- ------- ------- -------
Net interest income 15,086 13,517 12,874 12,418 9,831
Provision for credit losses 400 600 550 700 717
------- ------- ------- ------- -------
Net interest income after provision
for credit losses 14,686 12,917 12,324 11,718 9,114
Other income 1,387 2,307 1,240 1,784 984
SAIF recapitalization assessment 1,564 --- --- --- ---
Other expenses 9,189 7,853 6,866 7,020 6,021
------- ------- ------- ------- -------
Income before income taxes 5,320 7,371 6,698 6,482 4,077
Income taxes 1,035 2,660 2,495 2,426 1,599
------- ------- ------- ------- -------
Net income before cumulative effect of
a change in accounting principle 4,285 4,711 4,203 4,056 2,478
Cumulative effect of a change in
accounting principle --- --- --- 543 ---
------- ------- ------- ------- -------
Net income $ 4,285 $ 4,711 $ 4,203 $ 4,599 $ 2,478
======= ======= ======= ======= =======
Earnings per share:
Income before cumulative effect of
a change in accounting principle $ 1.57 $ 1.74 $ 1.56 $ 1.56 $ .95
Cumulative effect of a change in
accounting principle --- --- --- .21 ---
------- ------- ------- ------- -------
Primary net income per share (3) $ 1.57 $ 1.74 $ 1.56 $ 1.77 $ .95
======= ======= ======= ======= =======
Dividends per share (3) $ .37 $ .36 $ .32 $ .24 $ .17
======= ======= ======= ======= =======
3
First Home Bancorp Inc.
Five Year Consolidated Financial Summary
--------------------------------------------------------------------------------
At or for the year ended December 31,
1996 1995 1994 1993 1992
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SELECTED OTHER DATA (4)
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Return on average assets before cumulative
effect of a change in accounting principle .90% 1.11% 1.12% 1.23% .95%
Return on average assets after cumulative
effect of a change in accounting principle .90% 1.11% 1.12% 1.40% .95%
Return on average equity before cumulative
effect of a change in accounting principle 13.77% 17.52% 17.79% 19.05% 13.91%
Return on average equity after cumulative
effect of a change in accounting principle 13.77% 17.52% 17.79% 21.60% 13.91%
Dividend payout ratio 23.57% 20.69% 20.35% 13.63% 18.08%
Average shareholders' equity to average assets 6.52% 6.34% 6.31% 6.47% 6.85%
Capital ratios:
GAAP 6.43% 6.64% 5.94% 6.56% 5.98%
Tangible and core (2) 6.45% 6.47% 6.69% 6.49% 5.94%
Risk-based (2) 16.84% 15.68% 15.65% 14.92% 13.72%
Average interest rate spread 3.06% 3.09% 3.42% 3.80% 3.84%
Net yield on average interest-earning assets 3.26% 3.29% 3.56% 3.94% 3.99%
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.36% 104.22% 103.61% 103.58% 103.02%
General and administrative expense
to average assets 1.83% 1.79% 1.75% 1.94% 2.09%
Asset quality ratios:
Non-performing loans to total loans 1.22% 1.13% 1.64% 1.07% 1.23%
Non-performing assets to total assets .83% .75% 1.25% 1.26% 1.83%
Allowance for possible credit losses to
non-performing loans 117.04% 121.94% 84.30% 114.09% 93.94%
Allowance for possible credit losses to
non-performing assets 90.38% 104.52% 68.02% 60.01% 35.81%
Full service banking offices at end of period 10 10 8 8 6
--------------------------------------------
(1) On January 23, 1995, two retail-banking offices located in ▇▇▇▇▇ and
Newfield, New Jersey were acquired and, in connection therewith, assumed
deposits of $15.9 million. On June 25, 1993, White Eagle Federal Savings
Bank was acquired in a merger transaction accounted for as a
pooling-of-interests. On July 1, 1992, approximately $80 million in assets
and liabilities of Fidelity Mutual were acquired in a transaction
accounted for as a purchase.
(2) The Bank exceeds all required regulatory capital requirements. For
additional information see Note 16 of the Company's accompanying
consolidated financial statements.
(3) The Company's book value, earnings per share and dividends per share have
been adjusted to give effect to four-for-three stock splits effected in
January 1992, February 1993, February 1994 and February 1997.
(4) Based on monthly data when averages are indicated.
4
First Home Bancorp Inc.
Management's Discussion and Analysis
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OVERVIEW
Two significant events occurred during 1996. The first was the
formation of the holding company which could increase the Company's ability to
expand in the future. The second was the resolution of the disparity between the
federal insurance premiums paid by Bank Insurance Fund (BIF) insured and SAIF
insured financial institutions. While payment of the special assessment to fully
capitalize the SAIF fund had a negative affect on earnings, the Company should
benefit from future reduced federal insurance premiums.
The growth in net interest income continued with an increase to $15.1
million in 1996 from $13.5 million in 1995. Increases in interest earning assets
offset the decline in the Company's net interest rate spread to 3.06% in 1996
from 3.09% in 1995.
Net income before taxes, excluding non-recurring items of $1.6 million
in 1996 attributable to the SAIF recapitalization assessment and $807,000 in
1995 attributable to a $672,000 recovery from an insurance carrier and $135,000
in interest on a tax refund, increased to $6.9 million in 1996 from $6.6 million
in 1995.
GENERAL
The Company is the sole shareholder of the Bank and the Bank represents
substantially all of the Company's consolidated assets and liabilities at
December 31, 1996. Substantially all of the Company's consolidated revenues are
derived from the operations of the Bank. The Bank's business is that of a
financial intermediary and consists primarily of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to make mortgage and other loans. The Bank provides consumer banking
services in eight retail banking offices in New Jersey and two retail banking
offices in Delaware. The Bank is subject to significant competition from other
financial institutions, and is also subject to regulation and examination by the
Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation
(FDIC).
The Company's earnings are primarily dependent upon net interest
income. Net interest income is obtained from interest earned on loans and
investments less interest paid on deposits and borrowings. In addition to net
interest income, the Company derives other income from loan servicing fees, fees
related to deposit services, and other banking related fees and charges. Major
expenses, in addition to interest expense, consist primarily of salaries and
employee benefits, occupancy and equipment expenses, provision for credit
losses, deposit insurance premiums, and other operating expenses. Earnings are
also affected by gains and losses related to mortgage-banking activity and
investments held for trading. Funds for lending and investment are obtained from
deposit gathering at branch locations, investment and loan repayments, proceeds
from loan sales, borrowings, and cash flows from operations.
Net interest income is affected by interest rate movements, general
economic conditions, and the competition for funds and loans. Lending activities
are influenced by a number of factors including the overall level of interest
rates, the market demand for housing, conditions in the construction industry
and the availability of funds. Availability of funds is affected by loan
repayments, loan sales, borrowing capacity and deposit gathering ability.
The year 1996 was volatile in terms of interest rates. During the first
quarter of the year, interest rates increased sharply in the three year to
thirty year sector of the treasury yield curve. These rates continued to climb
during the second quarter of 1996. In the third quarter interest rates
stabilized and finally during the fourth quarter those rates declined slightly.
The yield on interest-earning assets decreased slightly to 7.88% for the year
ended December 31, 1996 from 7.90% for the year ended December 31, 1995. The
cost of interest-bearing liabilities increased minimally to 4.82% for the year
ended December 31, 1996 from 4.81% for the year ended December 31, 1995.
5
First Home Bancorp Inc.
Management's Discussion and Analysis
--------------------------------------------------------------------------------
The following table sets forth for the periods indicated, information
regarding: (1) the yield on interest-earning assets and cost of interest-bearing
liabilities as of December 31, 1996; (2) the average balance of interest-earning
assets and the resultant interest income and average yields; (3) the total
dollar amount of interest-bearing liabilities (which include $7.6 million, $7.0
million, and $5.2 million of non-interest bearing deposits at December 31, 1996,
1995 and 1994, respectively) and the resultant interest expense and average
costs; (4) the net interest income; (5) interest rate spread; (6) the net yield
earned on weighted average interest-earning assets; and (7) the ratio of average
interest-earning assets to average interest-bearing liabilities. Average
balances are calculated on a month-end basis for each of the years indicated.
The table is not presented on a tax equivalent basis because the Company's
investment in tax-free obligations is insignificant.
Year Ended December 31,
1996 1995 1994
--------------------------- ------------------------- ----------------------------
(dollars in thousands)
As of Average Average Average
Dec. 31, Average Yield/ Average Yield/ Average Yield/
1996 Balance Interest Rate Balance Interest Rate Balance Interest Rate
---- ------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans (1) 8.37% $257,161 $21,712 8.44% $244,900 $20,490 8.37% $227,611 $17,985 7.90%
Mortgage-backed securities 7.31 171,937 12,448 7.24 128,805 9,435 7.32 94,251 6,257 6.64
Other (2) 6.58 33,628 2,290 6.81 37,393 2,564 6.86 39,369 2,533 6.43
` ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets 7.83 462,726 36,450 7.88 411,098 32,489 7.90 361,231 26,775 7.41
` ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Non interest-earning assets 14,326 12,995 13,409
-------- -------- --------
Total assets $477,052 $424,093 $374,640
======== ======== ========
Interest-bearing liabilities:
Deposits 4.37 $278,420 12,121 4.35 $262,095 11,179 4.27 $234,626 8,355 3.56
Borrowings 5.80 164,955 9,243 5.60 132,360 7,793 5.89 114,015 5,546 4.86
` ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Total int.-bearing liabilities 4.90 443,375 21,364 4.82 394,455 18,972 4.81 348,641 13,901 3.99
` ---- -------- ------- ---- -------- ------- ---- -------- ------- ----
Non interest-bearing liabilities 2,557 2,743 2,370
-------- -------- --------
Total liabilities 445,932 397,198 351,011
-------- -------- --------
Shareholders' equity 31,120 26,895 23,629
-------- -------- --------
Total liabilities and
shareholders' equity $477,052 $424,093 $374,640
======== ======== ========
Net interest income $ 15,086 $ 13,517 $ 12,874
======== ======== ========
Interest rate spread 2.93% 3.06% 3.09% 3.42%
==== ==== ==== ====
Net yield on weighted average
interest-earning assets 3.26% 3.29% 3.56%
===== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 104.36% 104.22% 103.61%
====== ====== ======
------------------------------------
(1) Amount is net of deferred loan origination costs, loans in process, net
unearned discount on loans purchased and allowance for credit losses and
includes non-performing loans.
(2) Consists of interest-earning deposits, short-term funds, investment
securities and Federal Home Loan Bank stock.
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of
changing rates and changing volume. The following table describes the extent to
which changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities affected interest income and interest
expense during the periods
6
First Home Bancorp Inc.
Management's Discussion and Analysis
-------------------------------------------------------------------------------
indicated. Information is provided on changes in each category attributable to
(i) changes due to volume (changes in volume multiplied by prior rate), (ii)
changes due to rates (changes in rates multiplied by prior volume) and (iii) net
change. The net change attributable to the combined impact of volume and rate
has been allocated proportionately to the change due to volume and the change
due to rate.
Year Ended December 31,
-----------------------
1996 vs. 1995 1995 vs. 1994
------------- -------------
(in thousands)
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Interest income:
Loan portfolio $1,033 $ 189 $1,222 $1,405 $ 1,100 $2,505
Mortgage-backed securities 3,125 (112) 3,013 2,478 700 3,178
Other (1) (256) (18) (274) (132) 163 31
------ ----- ------ ------ ------- ------
Total interest-earning assets 3,902 59 3,961 3,751 1,963 5,714
------ ----- ------ ------ ------- ------
Interest expense:
Deposits 707 235 942 1,045 1,779 2,824
Borrowings 1,841 (391) 1,450 970 1,277 2,247
------ ----- ------ ------ ------- ------
Total interest-bearing liabilities 2,548 (156) 2,392 2,015 3,056 5,071
------ ----- ------ ------ ------- ------
Net change in net interest income $1,354 $ 215 $1,569 $1,736 $(1,093) $ 643
====== ===== ====== ====== ======= ======
--------------------------------------------
(1) Consists of interest-earning deposits, short-term funds, investment
securities and Federal Home Loan Bank stock.
INTEREST RATE RISK MANAGEMENT
The Company has a program to control its interest rate risk. The
strategy includes an emphasis on originating adjustable rate mortgage (ARM)
loans, the purchase of adjustable rate and short-term mortgage-backed securities
(MBS) and the origination of short-term consumer loans. The Board of Directors
has instructed management to maintain interest rate risk within prescribed
limits. An internal asset/liability modeling system monitors the effect on
income of changing market interest rates.
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 time period (gap) is also
monitored. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. When
interest rate sensitive liabilities exceed interest rate sensitive assets, the
gap is considered negative. However, because all interest rates and yields do
not adjust at the same velocity, the gap is only a general indicator of interest
rate sensitivity.
During a period of rising interest rates, a negative gap tends to
adversely affect net interest income while a positive gap tends to increase net
interest income. During a period of declining interest rates, a negative gap
tends to increase net interest income while a positive gap tends to adversely
affect net interest income.
The Company's net interest income tends to increase in periods of
declining interest rates because its interest-bearing liabilities generally
reprice faster than its interest-earning assets. The Company's net interest
income tends to decrease in periods of rising interest rates. Therefore, rising
interest rates, particularly when combined with a flattening yield curve, could
have a significant negative impact on net interest income in future periods.
7
First Home Bancorp Inc.
Management's Discussion and Analysis
--------------------------------------------------------------------------------
The following table summarizes the amount of interest-earning assets
and interest-bearing liabilities outstanding as of December 31, 1996, which are
anticipated to mature, prepay or reprice in each of the time periods shown.
Adjustable and floating rate assets are included in the period in which interest
rates are next scheduled to adjust rather than in the period in which they are
due. Loans and MBS are included in the periods in which they are anticipated to
be repaid. If available, estimated prepayment speeds were obtained from external
sources. Otherwise, they were estimated by management based on the experience of
the portfolio. Non-performing loans have been excluded from interest-earning
assets. Money market demand accounts (MMDA) and other accounts, NOW and savings
accounts which are subject to immediate withdrawal and repricing are classified
at decay rates based upon assumptions provided by the OTS.
Twelve
Months 1-3 3-5 5-10 10-20 Over 20
or less Years Years Years Years Years Total
------- ----- ----- ----- ----- ----- -----
(dollars in thousands)
Interest-earning assets:
Residential mortgage loans
Adjustable rate $ 53,499 $ 18,296 $ 393 $ --- $ --- $ --- $ 72,188
Fixed rate 24,886 37,153 25,513 32,013 11,852 255 131,672
Mortgage-backed securities
Adjustable rate 94,745 --- --- --- --- --- 94,745
Fixed rate 15,970 25,105 17,691 24,425 13,192 1,177 97,560
Consumer and commercial loans
Adjustable rate 10,866 2,676 344 --- --- --- 13,886
Fixed rate 18,223 15,664 5,598 3,026 324 --- 42,835
Loans held for sale 676 --- --- --- --- --- 676
Investment securities 4,348 4,000 17,000 605 --- 9,923 35,876
Investment securities held for trading 60 --- --- --- --- --- 60
-------- -------- -------- ------- ------- ------- --------
Total 223,273 102,894 66,539 60,069 25,368 11,355 489,498
-------- -------- -------- ------- ------- ------- --------
Interest-bearing liabilities:
Deposits
Savings accounts 4,836 7,735 5,721 8,605 5,952 1,692 34,541
NOW and non-interest
bearing demand accounts 5,792 8,799 6,061 8,134 4,466 820 34,072
MMDA and other accounts 15,936 18,583 8,848 6,783 1,227 31 51,408
Certificates of deposit 113,048 46,939 9,912 --- --- --- 169,899
Borrowings 110,588 55,703 6,857 --- --- --- 173,148
-------- -------- -------- ------- ------- ------- --------
Total 250,200 137,759 37,399 23,522 11,645 2,543 463,068
-------- -------- -------- ------- ------- ------- --------
Excess int.-earning assets (liabilities) $(26,927) $(34,865) $ 29,140 $36,547 $13,723 $ 8,812 $ 26,430
======== ======== ======== ======= ======= ======= ========
Cumulative excess interest-earning
assets (liabilities) $(26,927) $(61,792) $(32,652) $ 3,895 $17,618 $26,430
======== ======== ======== ======= ======= =======
Ratio of GAP during the period
to total assets (5.40)% (7.00)% 5.85% 7.33% 2.75% 1.77%
===== ===== ==== ==== ===== ====
Ratio of cumulative GAP
to total assets (5.40)% (12.40)% (6.55)% 0.78% 3.53% 5.30%
===== ====== ===== ==== ==== ====
8
First Home Bancorp Inc.
Management's Discussion and Analysis
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The Company's net income for the year ended December 31, 1996 was $4.3
million compared to $4.7 million for 1995 and $4.2 million for 1994. The
following discussion describes and explains the significant components and
changes in the Company's results of operations for the three years ended
December 31, 1996.
Interest Income
Interest income for the years ended December 31, 1996, 1995, and 1994
was $36.4 million, $32.5 million, and $26.8 million, respectively. The $3.9
million increase in interest income from 1995 to 1996 was due to a $51.6 million
increase in average interest-earning assets. This increase in average
interest-earning assets was offset by a decrease in the yield on
interest-earning assets from 7.90% for the year ended December 31, 1995 to 7.88%
for the year ended December 31, 1996. The $5.7 million increase in interest
income from 1994 to 1995 was due to a $49.9 million increase in average
interest-earning assets. The increase during 1995 was also attributable to an
increase in the yield on interest-earning assets from 7.41% for the year ended
December 31, 1994 to 7.90% for the year ended December 31, 1995. The increase in
interest-earning assets during both years was primarily attributable to the
purchase of MBS. MBS increased an average of $43.1 million and $34.6 million,
respectively, during 1996 and 1995.
Interest Expense
Interest expense for the years ended December 31, 1996, 1995 and 1994
was $21.4 million, $19.0 million and $13.9 million, respectively. The increase
in interest expense from 1995 to 1996 was primarily attributable to an increase
of $48.9 million in average interest-bearing liabilities. An increase in
borrowings of $32.6 million and an increase in deposits of $16.3 million account
for the increase in average interest-bearing liabilities. The rise in the cost
of funds of .01% from 4.81% to 4.82% from 1995 to 1996 did not have a
significant impact on interest expense. The increase in interest expense from
1994 to 1995 was primarily attributable to an increase of $45.8 million in
average interest-bearing liabilities. An increase in borrowings of $18.3 million
and an increase in deposits of $27.5 million, of which $15.9 million was
acquired in the purchase of two retail-banking offices, account for the increase
in average interest-bearing liabilities. These increases along with an increase
in the cost of funds of .82%, to 4.81% from 3.99%, accounted for the $5.1
million increase in interest expense.
Net Interest Income
Net interest income increased $1.6 million, or 11.6% in 1996 and
$643,000, or 5.0% in 1995 over the respective prior years. The increase in 1996
was primarily attributable to the increase in volume of interest-earning assets
and interest-bearing liabilities at a positive spread. Net interest income was
also increased due to the decline in the cost of borrowings. The Company's
borrowed money is generally short-term and the decrease in short-term interest
rates during 1996 reduced the cost of borrowed money.
During 1995 the increase in net interest income was attributable to the
increase in volume of interest earning assets and interest-bearing liabilities
at a positive spread. However, the Company's positive spread was reduced by the
impact of a flattening yield curve. While short-term interest rates increased,
long-term interest rates declined. The combined impact of these changing
interest rates increased the Company's cost of interest-bearing liabilities to a
greater extent than the increased yield on interest-earning assets.
Allowance and Provision for Credit Losses
The provision for credit losses amounted to $400,000, $600,000 and
$550,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The
provision for credit losses was provided after considering the status of
non-performing loans, adverse situations that may affect a borrower's ability to
repay, the value of
9
First Home Bancorp Inc.
Management's Discussion and Analysis
--------------------------------------------------------------------------------
collateral securing the loans, net charge-offs, industry standards and other
considerations that effect the perceived risk in the loan portfolio. Commercial
loans, which generally have a greater credit risk, comprised $19.2 million, or
7.3%, of the total loan portfolio at December 31, 1996 compared to $16.9
million, or 6.5%, of the total loan portfolio at December 31, 1995.
Non-performing loans, net of amounts charged-off, were $3.2 million, or 1.2%,
and $2.9 million, or 1.1%, of the total loan portfolio at December 31, 1996 and
1995, respectively. The allowance for credit losses totaled $3.8 million, or
1.4%, and $3.6 million, also 1.4%, of total loans at December 31, 1996 and 1995,
respectively. In management's opinion, based on its review of the current
quality of the loan portfolio, general economic conditions and historical
experience, the allowance for credit losses is adequate to cover future credit
losses. See the Company's accompanying consolidated financial statements Note 1
- Summary of significant accounting policies - Allowance for credit losses.
Other Income
Other income decreased by $920,000 during 1996 and increased by $1.1
million during 1995. The decrease in 1996 was attributable to non-recurring
income received in 1995 of: (i) $672,000 from the recovery of an insurance claim
and (ii) $135,000 in interest on a tax refund, and losses on the sale of loans
of $84,000 during 1996 (a decrease of $212,000 from the $128,000 profit on sale
of loans in 1995). These decreases were partially offset by increases in gains
from trading activity of $70,000 and gains from the sale of mortgage-backed
securities of $25,000.
The increase in 1995 was attributable to the non recurring income
discussed above, and gains on the sale of loans of $128,000 (an increase of
$772,000 from the $644,000 loss on sale of loans in 1994) and gains from trading
activity of $152,000 during 1995 (an increase of $290,000 from the $138,000 loss
in 1994).
Operating Expenses
In 1996 operating expenses, excluding the Savings Association Insurance
Fund (SAIF) recapitalization assessment of $1.6 million, increased by $1.3
million, or 17.0%, from 1995, primarily as a result of operating and marketing
costs related to the ten retail-banking offices. During 1996, the Company
focused on increasing market awareness of the Bank and the services offered to
customers by increasing the marketing budget, installing more automated teller
machines and introducing "Homeline," a 24 hour telephone banking service.
Salaries and employee benefits, other operating expense, net real estate
operations expense and occupancy and equipment expense increased $568,000,
$414,000, $211,000 and $173,000, respectively, from those of the prior year.
On September 30, 1996, the Deposit Insurance Funds Act of 1996 (the
DIFA), which required the recapitalization of the SAIF, became law. Accordingly,
all depository institutions with SAIF insured deposits were charged a one-time
special assessment on their SAIF-assessable deposits as of March 31, 1995 at the
rate of 65.7 basis points. The Bank's portion of the special assessment was $1.6
million.
In 1995, operating expenses increased by $987,000, or 14.4%, from 1994,
primarily as a result of the acquisition of two retail-banking offices in
January 1995. The deposit premium related to the acquisition is being amortized
over the estimated life of the customer base. Included in operating expense
during 1995 is the amortization of $257,000 of the initial deposit premium of
$1.1 million. Salaries and employee benefits, other operating expense and
occupancy and equipment expense increased $522,000, $281,000, and $175,000,
respectively, from those of the prior year. Those increases were offset by a
decrease in net real estate operations expense of $314,000.
Income Taxes
In 1996, the Company expensed $1.8 million in combined federal and
state income taxes on pre-tax income of $5.3 million compared to $2.7 million of
tax expense in 1995 on pre-tax income of $7.4 million. Tax expense decreased by
$893,000, or 33.6%, as pre-tax income decreased by $2.1 million, or 27.8%. The
Company's
10
First Home Bancorp Inc.
Management's Discussion and Analysis
--------------------------------------------------------------------------------
effective income tax rate decreased to 33.2% for the year ended December 31,
1996 from 36.1% for the year ended December 31, 1995.
In 1995, the Company expensed $2.7 million in combined federal and
state income taxes on pre-tax income of $7.4 million compared to $2.5 million of
tax expense in 1994 on pre-tax income of $6.7 million. Tax expense increased
$165,000, or 6.6%, as pre-tax income increased by $673,000, or 10.0%. The
Company's effective income tax rate decreased to 36.1% for the year ended
December 31, 1995 from 37.2% for the year ended December 31, 1994.
A recovery of a valuation allowance related to deferred income taxes
was recognized in the amount of $732,000 during the year ended December 31,
1996. The recovery was recognized after considering the impact of a change in
the Internal Revenue Code and the estimated timing of temporary differences
related to deferred loan fees for tax purposes.
FINANCIAL CONDITION
Total assets increased to $498.4 million at December 31, 1996 from
$453.0 million at December 31, 1995, an increase of 10.0%. This increase
primarily reflects the increase in MBS held-to-maturity, MBS available-for-sale
and loans receivable. MBS held-to-maturity increased to $97.4 million at
December 31, 1996 from $68.0 million at December 31, 1995, an increase of $29.4
million, or 43.2%. MBS available-for-sale increased to $91.2 million at December
31, 1996 from $78.8 million at December 31, 1995, an increase of $12.4 million,
or 15.7%. Loans receivable increased to $258.2 million at December 31, 1996 from
$254.8 million at December 31, 1995, an increase of $3.4 million, or 1.3%.
Total liabilities increased to $465.8 million at December 31, 1996 from
$422.9 million at December 31, 1995, an increase of 10.1%. The increase in
liabilities of $42.9 million was primarily attributable to increases in FHLB
borrowings of $30.8 million and deposits of $20.1 million, offset by a decrease
in other borrowed funds of $7.8 million.
Shareholders' equity increased to $32.6 million at December 31, 1996
from $30.1 million at December 31, 1995. This increase was primarily the result
of net income of $4.3 million, less an increase in unrealized losses on
securities available-for-sale of $739,000 (see Notes 1, 4 and 5 of the
accompanying consolidated financial statements), and the payment of cash
dividends of $1.0 million. At December 31, 1996, the Bank exceeded its core,
tangible and risk-weighted assets capital requirements by $17.2 million, $24.7
million and $18.2 million, respectively. For additional information regarding
the Bank's regulatory capital requirements, see Note 16 of the accompanying
consolidated financial statements.
LIQUIDITY, CASH FLOWS AND COMMITTED RESOURCES
Liquidity consists of cash on hand and in banks, interest-earning
deposits and certain investment securities. The Bank is required under
applicable OTS regulations to maintain specified levels of "liquid" investments.
At December 31, 1996 and December 31, 1995 the minimum level of liquidity
required was 5.0% of net withdrawable savings deposits plus short-term
borrowings. The Bank's regulatory liquidity ratio was 7.1% and 6.3% at December
31, 1996 and December 31, 1995, respectively. Management believes that liquidity
is being maintained at adequate levels.
The Company's primary source of cash is its financing activity. Funds
obtained from financing activities include borrowings and net deposit inflows.
Net borrowings totaled $23.0 million and net deposit inflows totaled $20.1
million during 1996. During the year ended December 31, 1995, the Company
increased net borrowings by $26.5 million while net deposit inflows totaled
$15.1 million.
11
First Home Bancorp Inc.
Management's Discussion and Analysis
--------------------------------------------------------------------------------
The Company's primary investment activity is lending. Loans originated
or purchased for the portfolio totaled $56.4 million, $59.7 million and $80.9
million during the years ended December 31, 1996, 1995 and 1994, respectively.
MBS are also a significant investment activity. MBS purchases totaled $55.5
million, $54.8 million and $26.5 million for the years ended December 31, 1996,
1995 and 1994, respectively. Cash flows from investing activities were provided
by repayments on existing loans which totaled $52.5 million, $44.2 million and
$49.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
At December 31, 1996, the Company had outstanding commitments,
including undisbursed loans in process, to originate or purchase loans totaling
$18.4 million. Commitments to originate and purchase mortgage loans included
$9.5 million in fixed rate mortgage loans. Thirty-year fixed rate mortgage loans
originated by the Company are classified as loans held-for-sale. The Company
enters forward agreements to sell these loans in the secondary market at the
time of commitment. Twenty-year and fifteen-year fixed rate mortgage loans are
currently retained by the Company as investments. All commitments are
anticipated to fund within one year. It is anticipated that funding for these
commitments will be obtained from normal cash flows. The Company has $113.0
million in certificate accounts which are scheduled to mature during the year
ending December 31, 1997. It is anticipated that a substantial portion of these
maturing deposits will remain in the Company.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the presentation of financial condition and measurement of operating
results in terms of historical dollars, disregarding inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than the effects of inflation. Interest rates do not
necessarily move in the same direction, or with the same magnitude, as the
prices of goods and services, since such prices are affected by inflation.
Inflation can have a more direct impact on certain categories of
operating expenses such as salaries and wages, employee benefits, occupancy
costs and other operating expenses. These expenses fluctuate with changes in
general price levels.
Because primary assets include substantial fixed rate, fixed term loans
and ARM loans which generally reprice annually, changes in interest rates in the
economy have a gradual impact on the yield on assets. Primary liabilities
include savings deposits which are short term in nature and therefore adjust
with changes in the economy. In general, periods of high inflation are
accompanied by high interest rates. When interest rates move up rapidly, the
cost of funds increases rapidly while the yield on interest-earning assets
increases slowly, resulting in a negative impact on net income. Conversely,
during periods of low inflation, lower and more moderate interest rates are
normally present, which results in a lower cost of funds and a more favorable
impact on net income.
FINANCIAL INSTITUTION LEGISLATION
The DIFA resolved the premium disparity between BIF insured and SAIF
insured financial institutions. The legislation provided for a one-time
assessment to recapitalize the SAIF. The assessment was equal to 65.7 basis
points per $100 of all SAIF assessable deposits held by an institution as of
March 31, 1995 (with certain exceptions). The assessment was effective on
September 30, 1996 and paid on November 27, 1996. The assessment brought the
SAIF's reserve ratio to a level comparable to the BIF reserve ratio of 1.25% of
insured deposits. The special assessment paid by the Bank was $1,564,323 before
a tax benefit of approximately $563,000. Effective 1997, the annual insurance
premium payable by the Bank was reduced from $.23 per $100 of deposits to $.0648
per $100 of deposits, a level competitive premium to deposit insurance payable
by BIF insured institutions.
12
First Home Bancorp Inc.
Management's Discussion and Analysis
--------------------------------------------------------------------------------
In August 1996 the Small Business Job Protection Act (the Act) was
signed into law. The Act repealed the percentage of taxable income method of
accounting for bad debts for thrift institutions for years beginning after
December 31, 1995 and requires the recapture of bad debt reserves accumulated
since 1988. The amount recaptured must be taken into income ratably over a six
year period beginning with the 1996 tax year. If certain lending requirements
are met, a two year delay in the recognition of the recapture is possible. Since
the Bank is currently providing deferred income taxes for these reserves, the
change will increase the Bank's tax payments but will not have a material effect
on earnings. For additional information regarding the impact of this
legislation, see Note 15 of the accompanying consolidated financial statements.
13
First Home Bancorp Inc.
Consolidated Statements of Financial Condition
--------------------------------------------------------------------------------
December 31,
1996 1995
---- ----
ASSETS
Cash and amounts due from depository institutions $ 5,133,348 $ 7,015,388
Interest-earning deposits and short-term funds 1,302,081 1,642,052
Investment securities held-to-maturity (market value - 1996 $2,320,716;
1995 $517,000) 2,320,716 517,000
Investment securities held for trading at market value 60,396 57,019
Investment securities available-for-sale at market value 24,975,035 28,729,522
Mortgage-backed securities held-to-maturity (market value - 1996 $98,417,517;
1995 $69,588,486) 97,390,749 67,994,547
Mortgage-backed securities available-for-sale at market value 91,216,261 78,765,677
Loans receivable - net 258,233,455 254,798,690
Loans held for sale at market value 675,700 418,305
Accrued interest receivable 3,013,169 2,903,279
Real estate owned and other repossessed assets 947,722 486,763
Federal Home Loan Bank stock-at cost 7,375,500 5,317,000
Office properties and equipment 2,998,856 2,586,321
Deposit premium (accumulated amortization - 1996 $515,139; 1995 $257,283) 630,776 888,632
Net deferred income taxes 1,347,430 542,473
Prepaid expenses and other assets 777,368 376,057
------------ ------------
TOTAL ASSETS $498,398,562 $453,038,725
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $290,297,687 $270,175,738
Borrowings from the Federal Home Loan Bank 136,622,300 105,797,300
Other borrowed funds 36,526,000 44,329,000
Advances by borrowers for taxes and insurance 445,159 393,140
Accrued interest payable 587,875 555,101
Excess of fair value over cost 66,137 315,089
Accounts payable and accrued expenses 1,208,642 1,370,629
------------ ------------
Total liabilities 465,753,800 422,935,997
------------ ------------
Commitments and contingencies (Note 19)
Shareholders' equity:
Preferred stock - no par value; 1,000,000 shares authorized;
none issued --- ---
Common stock - no par value; 10,000,000 shares authorized;
issued and outstanding, 1996, 2,708,426 shares; 1995, 2,706,679
shares --- ---
Paid-in capital in excess of par 8,922,941 8,918,639
Retained earnings - partially restricted 24,592,225 21,315,342
Unrealized loss on securities available-for-sale, net (870,404) (131,253)
------------ ------------
Total shareholders' equity 32,644,762 30,102,728
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $498,398,562 $453,038,725
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
14
First Home Bancorp Inc.
Consolidated Statements of Income
--------------------------------------------------------------------------------
Years Ended December 31,
1996 1995 1994
---- ---- ----
INTEREST INCOME:
Interest and fees on loans $21,711,657 $20,490,217 $17,985,212
Interest on mortgage-backed securities 12,447,643 9,434,965 6,256,570
Other interest income and dividends 2,290,284 2,563,980 2,533,107
----------- ----------- -----------
Total interest income 36,449,584 32,489,162 26,774,889
INTEREST EXPENSE:
Interest on deposits 12,120,820 11,179,153 8,354,550
Interest on borrowed money 9,242,806 7,793,121 5,546,177
----------- ----------- -----------
Total interest expense 21,363,626 18,972,274 13,900,727
----------- ----------- -----------
NET INTEREST INCOME 15,085,958 13,516,888 12,874,162
PROVISION FOR CREDIT LOSSES 400,000 600,000 550,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
CREDIT LOSSES 14,685,958 12,916,888 12,324,162
----------- ----------- -----------
OTHER INCOME:
Service charges and other fees 571,557 504,671 379,821
Loan servicing fees 213,953 230,776 194,266
Profit (loss) on sale or valuation of:
Loans held for sale (83,749) 128,109 (644,271)
Investment securities held for trading 222,848 152,470 (137,989)
Mortgage-backed securities available-for-sale 24,726 --- ---
Accretion of excess of fair value over cost 248,952 248,952 248,952
Other income 188,916 1,041,787 1,198,918
----------- ----------- -----------
Total other income 1,387,203 2,306,765 1,239,697
----------- ----------- -----------
OPERATING EXPENSES:
General and administrative expenses:
Salaries and employee benefits 4,228,433 3,660,208 3,138,514
Occupancy and equipment 1,296,093 1,123,387 948,534
Federal insurance premiums 543,570 574,362 508,845
Other operating expenses 2,645,173 2,230,803 1,949,439
----------- ----------- -----------
Total general and administrative expenses 8,713,269 7,588,760 6,545,332
SAIF recapitalization assessment 1,564,323 --- ---
Amortization of deposit premium 257,856 257,283 ---
Real estate operations - net 217,293 6,698 320,874
----------- ----------- -----------
Total operating expenses 10,752,741 7,852,741 6,866,206
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,320,420 7,370,912 6,697,653
----------- ----------- -----------
INCOME TAX EXPENSE:
Current 1,424,185 2,709,530 2,048,337
Deferred 343,018 (49,530) 446,213
----------- ----------- -----------
Total current and deferred income taxes 1,767,203 2,660,000 2,494,550
Recovery of deferred tax valuation allowance (732,203) --- ---
----------- ----------- -----------
Total income taxes 1,035,000 2,660,000 2,494,550
----------- ----------- -----------
NET INCOME $ 4,285,420 $ 4,710,912 $ 4,203,103
=========== =========== ===========
Earnings per share data:
Primary net income per share $ 1.57 $ 1.74 $ 1.56
Fully diluted net income per share $ 1.57 $ 1.73 $ 1.56
Average number of shares outstanding - primary 2,724,147 2,710,849 2,701,388
Average number of shares outstanding - fully diluted 2,725,512 2,723,608 2,701,388
The accompanying notes are an integral part of these consolidated statements.
15
First Home Bancorp Inc.
Consolidated Statements of Shareholders' Equity
--------------------------------------------------------------------------------
Paid-in Unrealized
Capital Gain
in (Loss) Total
Excess Retained on Shareholders'
of Par Earnings Securities Equity
------ -------- ---------- ------
Balance at January 1, 1994 $8,636,852 $14,236,871 $ 223,698 $23,097,421
Stock issued upon exercise of
stock options 235,442 --- --- 235,442
Cash in lieu of fractional shares --- (5,381) --- (5,381)
Dividends $.32 per share --- (855,520) --- (855,520)
Unrealized loss on securities, net --- --- (3,600,427) (3,600,427)
Net income --- 4,203,103 --- 4,203,103
---------- ----------- --------- -----------
Balance at December 31, 1994 8,872,294 17,579,073 (3,376,729) 23,074,638
Stock issued upon exercise of
stock options 46,345 --- --- 46,345
Dividends $.36 per share --- (974,643) --- (974,643)
Unrealized gain on securities, net --- --- 3,245,476 3,245,476
Net income --- 4,710,912 --- 4,710,912
---------- ----------- --------- -----------
Balance at December 31, 1995 8,918,639 21,315,342 (131,253) 30,102,728
Stock issued upon exercise of
stock options 4,302 --- --- 4,302
Cash in lieu of fractional shares --- (6,869) --- (6,869)
Dividends $.37 per share --- (1,001,668) --- (1,001,668)
Unrealized loss on securities, net --- --- (739,151) (739,151)
Net income --- 4,285,420 --- 4,285,420
---------- ----------- --------- -----------
Balance at December 31, 1996 $8,922,941 $24,592,225 $(870,404) $32,644,762
========== =========== ========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
16
First Home Bancorp Inc.
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
Years Ended December 31,
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES:
Net Income $4,285,420 $4,710,912 $4,203,103
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for credit losses 400,000 600,000 550,000
Depreciation 360,317 299,248 250,047
Accretion of excess fair value over cost (248,952) (248,952) (248,952)
Amortization of fair market premiums 50,517 186,488 332,801
Amortization of deposit premiums 257,856 257,283 ---
Net (gains) losses on investment securities held for trading (222,848) (152,470) 137,989
Purchase of investment securities held for trading (9,372,271) (1,817,033) (10,258,147)
Proceeds from sale of investment securities held for trading 9,591,742 2,368,734 10,339,806
Gains from sale of mortgage-backed securities available-for-sale (24,726) --- ---
Loans originated for sale (8,845,461) (6,262,211) (11,441,117)
Proceeds from loans sold 8,504,317 6,260,190 17,673,113
Net loss (gain) on sale of loans 83,749 (128,109) 644,271
Increase in accrued interest receivable (109,890) (402,567) (241,114)
Increase in accrued interest payable 32,774 106,154 156,662
(Increase) decrease in deferred income taxes (389,185) (49,530) 446,213
Net other (563,298) 167,884 3,761,712
---------- ---------- ----------
Net cash provided by operating activities 3,790,061 5,896,021 16,306,387
---------- ---------- ----------
INVESTMENT ACTIVITIES:
Proceeds from maturities of investment securities 14,560,833 20,274,738 6,571,609
Proceeds from sale of mortgage-backed securities available-for-sale 3,636,950 --- ---
Purchase of:
Investment securities (12,847,004) (14,415,676) (22,931,583)
Mortgage-backed securities (55,491,075) (54,841,094) (26,493,169)
Repayments on mortgage-backed securities 9,085,346 6,799,895 22,482,619
Net decrease in real estate projects --- --- 22,734
Purchase of FHLB stock (2,058,500) (660,300) (705,600)
Purchase of property and equipment (772,852) (285,149) (228,082)
(Increase) decrease in real estate owned (460,959) 454,233 1,062,490
Principal collected on longer term loans 52,514,984 44,201,081 49,183,319
Loans originated or acquired (56,371,528) (59,707,846) (80,854,174)
Cash obtained from acquisition of branches --- 14,511,820 ---
---------- ---------- ----------
Net cash used by investing activities (48,203,805) (43,668,298) (51,889,837)
---------- ---------- ----------
17
First Home Bancorp Inc.
Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------
Years Ended December 31,
1996 1995 1994
---- ---- ----
FINANCING ACTIVITIES:
Net increase (decrease) in:
Demand deposits, NOW accounts, and savings accounts 5,276,517 1,050,726 (2,092,729)
Certificates of deposit 14,845,432 14,093,061 13,943,306
Net (decrease) increase in other borrowings (7,803,000) 7,999,950 17,081,550
Proceeds from FHLB borrowings 41,625,000 29,413,850 30,711,750
Repayment of FHLB borrowings (10,800,000) (10,900,000) (22,450,000)
Cash dividends and cash in lieu of fractional shares (1,008,537) (974,643) (860,901)
Proceeds from exercise of common stock options 4,302 46,345 235,442
Net increase (decrease) in advances from borrowers for taxes
and insurance 52,019 (83,235) (137,825)
---------- ---------- ----------
Net cash provided by financing activities 42,191,733 40,646,054 36,430,593
---------- ---------- ----------
(DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (2,222,011) 2,873,777 847,143
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 8,657,440 5,783,663 4,936,520
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $6,435,429 $8,657,440 $5,783,663
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
During 1995, investments and mortgage backed-securities with a book value of
$32,019,901 were transferred from held to maturity to available-for-sale. See
Note 1 - Summary of significant accounting policies - investment policy.
During 1994, $9,802,761 of loans held for sale were transferred to loans
receivable. See Note 7 - Loans held for sale.
The Company issued 677,284 shares of Common Stock no par value on February 14,
1997, to effect a four-for-three stock split declared effective December 31,
1996.
The accompanying notes are an integral part of these consolidated financial
statements.
18
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Home Bancorp Inc. (the Company) follows accounting and reporting
practices, in accordance with generally accepted accounting principles
(GAAP), normally adhered to by financial institutions. The more
significant accounting policies are summarized below.
Principles of Consolidation - The consolidated financial statements
include the accounts of First Home Bancorp Inc., its wholly-owned
subsidiary, First Home Savings Bank, F.S.B. (the Bank) and the Bank's
wholly owned subsidiaries. The Company's business is conducted
primarily through the Bank. Intercompany accounts and transactions have
been eliminated in consolidation. Certain reclassifications have been
made to prior years' financial statements to conform to the
classifications used in 1996.
Nature of Operations - The Bank conducts business through ten
full-service offices located in Camden, Gloucester, and Salem Counties,
in New Jersey, and New Castle County in Delaware. The Bank was
chartered in 1911 for the purpose of attracting retail savings deposits
to provide mortgage funds for the community. Today, while home lending
is still the cornerstone of activities, the Bank is a full service bank
offering a broad range of products and services to borrowers and
depositors.
Use of Estimates in the Preparation of Financial Statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from the estimates.
Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand and in banks and interest-earning deposits.
Investment Policy - In accordance with Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" (FAS 115),
investments are classified into three categories; those
held-to-maturity and reported at amortized cost, for which the Company
has the positive intent and ability to hold-to-maturity; those
classified as available-for-sale and reported at fair value with
unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity; and those classified as trading
securities and reported at fair value with unrealized gains and losses
included in earnings.
In December 1995, investments were reclassified with a book value of
$32,019,901 and a fair value of $32,888,612 from held-to-maturity to
available-for-sale. This reclassification was allowable under Financial
Accounting Standards Board (FASB) guidance which permitted institutions
to make a one-time reassessment of the appropriateness of investment
security classifications. As a result of this reclassification, the net
unrealized loss on securities recorded as a component of shareholders'
equity decreased approximately $555,975, net of tax.
Realized security gains and losses are computed using the specific
identification method and are recorded on a trade date basis.
The investment in Federal Home Loan Bank stock is carried at cost.
Loans Held for Sale - Loans held for sale are carried at the lower of
aggregate cost (remaining principal net of unearned premiums and
discounts) or market.
Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments - During 1996, the Company was a party to
financial instruments with off-balance-sheet risk in the normal course
of business to reduce its exposure to fluctuations in interest rates
(hedging). The off-balance-sheet financial
19
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
instruments were forward commitments. During 1995, the Company did not
engage in these activities. Those instruments involved, to varying
degrees, elements of credit, interest rate, or liquidity risk in excess
of the amounts recognized in the balance sheets. The contract amounts
of those instruments represent the extent of the Company's risk in
these financial instruments.
Credit risk is controlled by conducting transactions with major
investment firms and by setting policies for transaction volume
limitations and periodic monitoring. Each dealer was carefully
evaluated on the basis of its financial strength, reputation and
expertise. Unless noted otherwise, the Company does not require
collateral or other securities to support derivative financial
instruments with credit risk.
A forward contract is a legal agreement between two parties to purchase
or sell a specific quantity of a financial instrument, at a specified
price, with delivery and settlement at a specified future date. Because
forward contracts lack the liquidity and protection provided by
regulated exchanges, there is a heightened risk of default by the
counterparties. There were no open forward commitments for future
delivery at December 31, 1996 and 1995.
During 1996, forward contracts were purchased to hedge the loans held
for sale portfolio and outstanding fixed rate mortgage loan
commitments. During 1996, losses of $48,750 were recognized and
included in the actual loss on loans sold. No activity occurred during
1995 with regard to forward contracts.
Mortgage-Backed Securities - Mortgage-Backed Securities (MBS) including
real estate mortgage investment conduits (REMICS) classified as
held-to-maturity are carried at cost and are adjusted for amortization
of premiums and accretion of discounts over the term of the securities
using a method which approximates the interest method. Temporary
changes in the market value of the securities are not recognized since
it is management's intention to hold these MBS to maturity. In
management's opinion, it has the ability to hold these securities to
maturity. MBS classified as available-for-sale, in accordance with FAS
115, are reported at fair value, with unrealized gains and losses, net
of tax, reported as a separate component of shareholders' equity.
Allowance for Credit Losses - An allowance for credit losses is
maintained at a level that management considers adequate to provide for
losses based upon an evaluation of known and inherent risks attendant
with the loan portfolio. Management's evaluation is based on regular
review of the loan portfolio and considers such factors as payment
history, adverse situations which may affect a borrower's ability to
repay, collateral adequacy and current economic conditions. Actual
losses may vary from current estimates. These estimates are reviewed
periodically and, as adjustments become necessary, they are recorded in
the period in which they become known.
Allowance for Uncollected Interest -Interest is not recognized on loans
deemed to be uncollectible. Generally, this includes loans that are
more than three months delinquent. Such interest, if collected, is
credited to income in the period of recovery. The allowance for
uncollected interest is netted against accrued interest receivable for
financial reporting purposes.
Unearned Premiums and Discounts - Unearned premiums and discounts on
assets purchased or acquired are amortized over the estimated life
using a method which approximates the effective interest method.
Loan Fees and Origination Costs - Loan origination fees and related
direct loan origination costs are deferred and recognized over the life
of the loan as an adjustment to yield. The amount of net loan
origination fees recognized as a yield adjustment is reflected as
interest income in the consolidated statements of income. The
unamortized balance of net loan origination fees is reflected in the
consolidated statements of financial condition as part of loans
receivable-net.
20
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Mortgage Servicing Rights - The cost of mortgage servicing rights is
amortized over the period of estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair
value of those rights. Fair values are estimated using prepayment
assumptions based on current market interest rates. For purposes of
measuring impairment, the rights are stratified based on the interest
rates of the underlying loans. The amount of impairment recognized is
the amount by which the capitalized mortgage servicing rights for a
stratum exceed their fair value.
Real Estate Owned - Real estate acquired in settlement of loans is
carried at the lower of cost or estimated fair value less estimated
costs to sell. Subsequent costs directly related to the completion of
construction or improvement of the real estate are capitalized to the
extent realizable. Gains on the sale of real estate are recognized upon
disposition of the property and losses are charged to operations as
incurred. Carrying costs, such as maintenance, interest, and taxes, are
charged to operations as incurred. Rental income is recognized as a
reduction of operating costs.
Office Properties and Equipment - Office buildings and equipment are
recorded at cost less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method based on the
estimated useful life of the related asset. The cost of leasehold
improvements is amortized over the estimated life of the improvement or
the term of the lease, whichever is shorter. The asset cost and
accumulated depreciation or amortization for property retirements and
disposals are eliminated from the respective accounts, and any
resultant gain or loss is included in net income as incurred. The cost
of maintenance and repairs is charged to operating expense, as
incurred. The cost of major additions and improvements is capitalized.
Deposit Premium - The premium resulting from the valuation of core
deposits acquired in the purchase of branch offices is amortized over
the estimated remaining life of the existing customer deposit base
acquired using a method which approximates the effective interest
method. The estimated life at the time of purchase was ten years.
Amortization periods are monitored to determine if events and
circumstances require such periods to be reduced.
Income Taxes - The Company files a consolidated federal income tax
return and separate state tax returns. In accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(FAS 109), deferred income tax expense or benefit is determined by
recognizing deferred tax assets and liabilities for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The realization of deferred tax assets is
assessed and a valuation allowance provided, when necessary, for that
portion of the asset which is not likely to be realized. Management
believes, based upon current facts, that more likely than not there
will be sufficient taxable income in future years to realize any
deferred tax assets. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in earnings in the period that
includes the enactment date.
Securities Sold Under Agreements to Repurchase - The Bank enters into
sales of securities under agreements to repurchase (reverse repurchase
agreements). Reverse repurchase agreements are treated as borrowings.
Excess of Fair Value Over Cost - The excess of the fair value over cost
of net assets acquired after adjustment of non-current assets resulted
from the conversion merger of Fidelity Mutual Savings & Loan
Association in July 1992. The excess of fair value over cost is
amortized over the economic life of the related long term
interest-earning assets estimated to be approximately six years.
21
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Interest Rate Risk - The Company is principally engaged in the business
of attracting deposits from the general public and using these
deposits, together with borrowings and other funds, to make loans
secured by real estate, to purchase mortgage-backed and other
investment securities and, to a lesser extent, to make consumer loans.
The potential for interest rate risk exists as a result of the shorter
duration of the Company's interest-sensitive liabilities compared to
the generally longer duration of interest-sensitive assets. In a rising
interest rate environment, liabilities will reprice faster than assets
thereby reducing the market value of long-term assets and reducing net
interest income. For this reason, management regularly monitors the
maturity structure of the Company's assets and liabilities in order to
measure its level of interest rate risk and plan for future volatility.
Business Combination and Acquisitions - On May 31, 1996, the Bank
completed a reorganization into a holding company form of ownership,
and the Bank became a wholly-owned subsidiary of First Home Bancorp
Inc. (the newly formed holding company). The shareholders of the Bank
exchanged their shares of the Bank for the same number of shares of
First Home Bancorp Inc.
The consolidated financial statements of the holding company remain the
same as those prior to the reorganization, since the merger was
essentially accounted for in a manner similar to that in
pooling-of-interests. As of the effective date of the reorganization,
the assets, liabilities and shareholders' equity of the Bank were
reflected on the Company's consolidated balance sheet at their
historical values. Also, the consolidated statement of operations of
the Company subsequent to the reorganization reflect the consolidated
operations of the Bank as if the reorganization had taken place prior
to the periods covered by such financial statements. At December 31,
1996, substantially all of the holding company's assets are invested in
capital stock of the Bank (see Note 23).
On January 23, 1995, certain assets were purchased and deposit
liabilities were assumed pursuant to an agreement entered into on
September 21, 1994 to purchase two retail banking offices. The deposit
liabilities assumed amounted to $15,924,000 and the net assets
received, consisting primarily of cash, amounted to $14,766,000. The
fair value of liabilities assumed exceeded the fair value of tangible
assets acquired by $1,146,000, and was allocated to deposit premium.
Earnings and Dividends Per Share - On January 7, 1997 the Board of
Directors declared a four-for-three stock split effective December 31,
1996, which was effected in the form of a stock dividend and
distributed on February 14, 1997, to holders of record on January 22,
1997. Accordingly, earnings per share (EPS) and dividends per share
have been restated to reflect the increased number of shares
outstanding in each prior period.
Recently Issued or Proposed Accounting Standards - The FASB issued
Statement No. 114, "Accounting by Creditors for Impairment of a Loan"
(FAS 114) in May 1993, and FAS 118 "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosures" (FAS 118),
in October 1994. These statements require creditors to measure certain
impaired loans based on the present value of expected future cash flows
discounted at the loan's effective interest rate or at the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent. The in-substance foreclosure rules also
changed in that "in-substance foreclosures" are classified as loans and
stated at the lower of cost or fair value, as defined. These statements
are effective for fiscal years beginning after December 15, 1994, and
accordingly, the Company adopted the statements as of January 1, 1995.
The effect of adopting the statements was not significant.
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (FAS 121). This statement requires that long-lived assets
and certain identifiable intangibles held and used by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
In performing the review for recoverability, the entity should estimate
the future cash flows expected to
22
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
result from the use of the asset and its eventual disposition. If the
sum of the expected future cash flows (undiscounted and without
interest charges) is less than the carrying amount of the asset, an
impairment loss is recognized. Measurement of an impairment loss for
long-lived assets and identifiable intangibles that an entity expects
to hold and use should be based on the fair value of the asset. This
statement is effective for financial statements for fiscal years
beginning after December 15, 1995, and accordingly, the Company adopted
the statement January 1, 1996. The effect of adopting the statement was
not significant.
In May 1995, the FASB issued Statement No. 122 "Accounting for Mortgage
Servicing Rights," (FAS 122), this statement requires that the Company
recognize rights to service mortgage loans for others as separate
assets regardless of how those servicing rights are acquired. An
institution that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells those loans with
servicing rights retained should allocate a portion of the cost of the
loans to mortgage servicing rights. FAS 122 requires that
securitizations of mortgage loans be accounted for as sales of mortgage
loans and acquisitions of MBS. Additionally, FAS 122 requires that
capitalized mortgage servicing rights be assessed for impairment, based
on the fair value of those rights. FAS 122 is required to be applied
prospectively for fiscal years beginning after December 15, 1995 to
transactions in which an entity acquires mortgage servicing rights and
to impairment evaluations of all capitalized mortgage servicing rights.
Retroactive application is prohibited. The Company adopted the
statement January 1, 1996. The effect of the adoption did not have a
material effect on consolidated financial position or results of
operations.
In October 1995, FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). This statement requires certain
disclosures about stock-based employee compensation arrangements,
defines a fair value based method of accounting for an employee stock
option or similar equity instruments, and encourages all entities to
adopt that method of accounting for all of their employee stock
compensation plans. However, it also allows an entity to continue to
measure compensation cost for stock-based compensation plans using the
intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Entities electing to remain with the accounting in
APB 25 must make pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting defined in FAS
123 had been applied. Under the fair value based method, compensation
cost is measured at the grant date based on the value of the award and
is recognized over the service period, which is usually the vesting
period. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the
grant date, or other measurement date, over the amount an employee must
pay to acquire the stock. FAS 123 is effective for fiscal years
beginning after December 15, 1995. Under FAS 123, the Company has
elected to disclose on a pro forma basis the fair value method of
accounting for stock-based compensation. Pro forma disclosures required
for entities that elect to continue to measure compensation cost using
APB 25 must include the effects of all awards granted in fiscal years
that began after December 15, 1994. The Company adopted the statement
on January 1, 1996 and will continue accounting for stock-based
compensation under APB 25. See footnote 18 for pro forma disclosures
required by FAS 123.
In June 1996, the FASB issued Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (FAS 125). The Statement provides consistent standards for
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. Those standards are based upon
consistent application of a financial components approach that focuses
on control. The Statement also defines accounting treatment for
servicing assets and other retained interests in the assets that are
transferred. FAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
December 31, 1996 and is to be applied prospectively. FAS No. 127 was
also issued in 1996 and amended FAS No. 125 by deferring for one year
the effective date for certain provisions of FAS No. 125. The Company
intends to adopt FAS No. 125, as amended, on January 1, 1997, and FAS
No. 127 on January 1, 1998. The adoption of these Statements is not
expected to have a material effect on the Company's financial condition
or results of operations.
23
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Disclosures about Fair Value of Financial Instruments - The following
disclosure of the estimated fair value of financial instruments is made
in accordance with the requirements of FAS 107, "Disclosures about Fair
Value of Financial Instruments." The estimated fair value amounts have
been determined by the Bank using available market information and
appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on estimated fair value
amounts.
December 31,
1996 1995
---- ----
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in thousands)
Assets:
Cash and cash equivalents $ 6,435 $ 6,435 $ 8,657 $ 8,657
Investment securities held-to-maturity 2,321 2,321 517 517
Investment securities held for trading 60 60 57 57
Investment securities available-for-sale 24,975 24,975 28,730 28,730
Mortgage-backed securities held-to-maturity 97,391 98,418 67,995 69,588
Mortgage-backed securities available-for-sale 91,216 91,216 78,766 78,766
Loans receivable, net 258,781 262,724 255,440 260,605
Loans held for sale 676 676 418 418
Liabilities:
Demand deposits 120,020 120,077 114,743 114,870
Time deposits 169,899 170,269 155,224 156,583
Borrowings from the Federal Home Loan Bank 136,622 136,159 105,797 106,644
Other borrowed funds 36,526 36,655 44,329 44,329
Cash and cash equivalents - For cash and cash equivalents, the carrying
amount is a reasonable estimate of fair value.
Investment securities held-to-maturity, held for trading and
available-for-sale - For investment securities held-to-maturity, held
for trading and available-for-sale, estimated fair values are based on
quoted market prices or dealer quotes. If a quoted market price or
dealer quote is not available, fair value is estimated using quoted
market prices for substantially similar investments.
Mortgage-backed securities held-to-maturity and available-for-sale -
Estimated fair value for MBS issued by governmental sponsored agencies
is based on quoted market prices. The fair value of MBS issued by
non-governmental sponsored agencies is estimated based on similar
securities with quoted market prices and adjusted for any differences
in credit ratings or maturities.
Loans receivable - For certain homogeneous categories of loans, such as
residential mortgage loans and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by
similar loans, adjusted for differences in loan characteristics and
guarantees. The fair values of other types of loans are estimated using
the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of
other types of loans are 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 remaining maturities.
Non-performing loans of $3,213,053 and $2,921,459 at December 31, 1996
and 1995, and allowance for credit losses of $3,760,485 and $3,562,330
are not included in the carrying amount or estimated fair value at
December 31, 1996 and 1995, respectively.
24
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
-------------------------------------------------------------------------------
Demand deposits and time deposits - The fair value of demand deposits,
savings accounts, and certain money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed
maturity certificates of deposit is estimated using interest rates
currently offered for deposits of similar remaining maturities.
Borrowings from the Federal Home Loan Bank and other borrowed funds -
Interest rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate the fair value of
existing debt.
2. INVESTMENT SECURITIES HELD-TO-MATURITY
Investment securities held-to-maturity at December 31, 1996 and 1995
consisted of tax exempt obligations due in less than one year.
3. INVESTMENT SECURITIES HELD FOR TRADING
Investment securities held for trading at December 31, 1996 and 1995
consisted of an investment in a mutual fund.
The Company buys and sells debt and equity securities that are
classified as trading securities. At each reporting period, the Company
adjusts the value of these securities to market value. Net gains of
$222,848 and $152,470 were recorded in 1996 and 1995, respectively. Net
losses in the amount of $137,989 were recorded in 1994.
4. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
Investment securities available-for-sale at December 31, 1996 and 1995
consisted of the following:
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government Agencies
Due after one year through five years $17,975,954 $ 72,448 $(16,515) $18,031,887
Due after five years through ten years --- --- --- ---
Corporate Notes
Due in one year or less 724,718 1,754 --- 726,472
Due after one year through five years 2,972,203 36,946 --- 3,009,149
Due after five years through ten years 639,207 11,345 --- 650,552
Preferred stock 2,547,723 9,252 --- 2,556,975
----------- -------- -------- -----------
Total $24,859,805 $131,745 $(16,515) $24,975,035
=========== ======== ======== ===========
25
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government Agencies
Due after one year through five years $10,991,273 $132,055 $(15,000) $11,108,328
Due after five years through ten years 8,978,750 39,129 (11,400) 9,006,479
Corporate Notes
Due in one year or less 1,996,543 19,719 --- 2,016,262
Due after one year through five years 3,668,388 103,305 --- 3,771,693
Due after five years through ten years 645,621 33,639 --- 679,260
Preferred stock 2,096,775 50,725 --- 2,147,500
----------- -------- -------- -----------
Total $28,377,350 $378,572 $(26,400) $28,729,522
=========== ======== ======== ===========
U.S. Government Agencies consist of $2,000,000 and $11,000,000 of
step-up securities with periodic interest rate adjustments and call
dates as well as $15,975,954 and $8,970,023 of callable agency notes at
December 31, 1996 and 1995, respectively.
No investment securities available-for-sale were sold under agreement
to repurchase at December 31, 1996. U.S. Government Agencies with
amortized costs of $8,978,750 and market values of $9,006,479 were sold
under agreement to repurchase at December 31, 1995.
There were no sales of investment securities available-for-sale during
1996, 1995 and 1994.
5. MORTGAGE-BACKED SECURITIES
A summary of mortgage-backed securities at December 31, 1996 and 1995
consisted of the following:
December 31, 1996
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Mortgage-Backed Securities
Available-for-Sale
FNMA pass-through certificates $ 1,862,589 $ 34,577 $ (2,302) $ 1,894,864
FHLMC pass-through certificates 4,342,140 236,560 (167) 4,578,533
GNMA pass-through certificates 6,070,394 389,659 --- 6,460,053
Real estate mortgage investment
conduit obligations 80,416,374 277,492 (2,411,055) 78,282,811
----------- ---------- ----------- -----------
Total mortgage-backed securities
available-for-sale $92,691,497 $938,288 $(2,413,524) $91,216,261
=========== ========== =========== ===========
Mortgage-Backed Securities
Held to Maturity
Non-agency pass through certificates $ 6,143,017 $ 47,852 $ (6,699) $ 6,184,170
Real estate mortgage investment
conduit obligations 91,247,732 1,202,415 (216,800) 92,233,347
----------- ---------- ----------- -----------
Total mortgage-backed securities
held to maturity $97,390,749 $1,250,267 $ (223,499) $98,417,517
=========== ========== =========== ===========
26
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
December 31, 1995
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Mortgage-Backed Securities
Available-for-Sale
FNMA pass-through certificates $ 2,340,880 $ 38,472 $ --- $ 2,379,352
FHLMC pass-through certificates 5,573,652 332,827 (373) 5,906,106
GNMA pass-through certificates 7,775,011 378,043 --- 8,153,054
Real estate mortgage investment
conduit obligations 63,633,391 236,559 (1,542,785) 62,327,165
----------- -------- ----------- -----------
Total mortgage-backed securities
available-for-sale $79,322,934 $ 985,901 $(1,543,158) $78,765,677
=========== ========== =========== ===========
Mortgage-Backed Securities
Held to Maturity
Non-agency pass through certificates $ 7,319,434 $ 79,947 $ (47,265) $ 7,352,116
Real estate mortgage investment
conduit obligations 60,675,113 1,651,045 (89,788) 62,236,370
----------- --------- ----------- ----------
Total mortgage-backed securities
held to maturity $67,994,547 $1,730,992 $ (137,053) $69,588,486
=========== ========== =========== ===========
Mortgage-backed securities with amortized costs of $66,690,201 and
$36,860,813 and market values of approximately $66,990,150 and
$36,863,793 were pledged as collateral for securities sold under
agreements to repurchase at December 31, 1996 and 1995, respectively.
The Company had FHLMC pass-through certificates with amortized costs of
$800,247 and $873,162 and market values of $846,129 and $933,214
pledged for the Treasury, Tax, and Loan Account and the Discount Window
at the Federal Reserve Bank of Philadelphia at December 31, 1996 and
1995, respectively.
Gains of $24,726 were recognized in 1996 from the sales of MBS
available-for-sale. There were no sales of MBS during 1995 and 1994.
Expected maturities of MBS will differ from contractual maturities
because borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
27
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
6. LOANS RECEIVABLE
Loans receivable at December 31, 1996 and 1995 consisted of the
following:
December 31,
1996 1995
---- ----
Residential mortgage loans on existing property $203,573,974 $206,264,708
Residential construction mortgage loans 3,823,763 3,258,284
Commercial real estate loans 17,213,802 15,670,880
Commercial business loans 1,948,398 1,232,999
Consumer loans:
Home equity loans 19,479,002 16,631,949
Mobile home loans 6,605,623 7,804,508
Equity lines of credit 3,992,872 3,674,874
Automobile loans 4,630,703 4,087,717
Other loans 3,747,576 3,538,614
------------ ------------
Total 265,015,713 262,164,533
Undisbursed portion of loans in process (1,222,037) (1,680,884)
Deferred loan fees, discounts and premiums (net) (1,799,736) (2,122,629)
Allowance for credit losses (3,760,485) (3,562,330)
------------ ------------
Total $258,233,455 $254,798,690
============ ============
The Company originates or purchases both adjustable and fixed interest
rate loans. At December 31, 1996 the composition of loans (excluding
non-performing loans, deferred loan fees, discounts, premiums, and
allowance for credit losses), by maturity or repricing was as follows:
Fixed Adjustable
Rate Rate
-------- ----------
(in thousands)
1 month - 1 year $ 3,980 $60,387
1 - 3 years 5,886 24,420
3 - 5 years 12,956 1,266
5 - 10 years 33,935 ---
10 - 20 years 103,708 ---
over 20 years 14,043 ---
-------- -------
Total $174,508 $86,073
======== =======
Adjustable rate loans have interest rate adjustment limitations and are
generally indexed to the 1-year or 3-year U.S.Treasury interest rate.
Market factors affect the correlation of the interest rate adjustment
to the interest rates the Company pays on short-term deposits which
have primarily been used to fund these loans.
At December 31, 1996 and 1995, the Company was servicing loans for
others amounting to $64,900,000, and $63,400,000, respectively.
Servicing loans for others generally consists of collecting mortgage
payments, disbursing payments to investors and processing foreclosures.
Loan servicing income is recorded upon receipt and includes servicing
fees from investors and certain charges collected from borrowers, such
as late payment fees. Mortgage servicing rights of $73,117 were
capitalized in 1996. Amortization of mortgage servicing rights was
$3,656 in 1996.
Loans to executive officers and directors at December 31, 1996 and 1995
were $832,093 and $669,504, respectively. Additional loans and
repayments for the year ended December 31, 1996 were $235,471 and
$72,882, respectively.
28
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
At December 31, 1996 approximately 61% and 13% of mortgage loans
receivable were collateralized by property located in New Jersey and
Delaware, respectively.
The following schedule summarizes the changes in the allowance for
credit losses:
Year Ended December 31,
1996 1995 1994
---- ---- ----
Beginning balance $3,562,330 $3,315,340 $2,662,977
Provision for credit losses 400,000 600,000 550,000
Charge-offs (357,530) (580,427) (43,921)
Recoveries 155,685 227,417 146,284
---------- ---------- ----------
Total $3,760,485 $3,562,330 $3,315,340
========== ========== ==========
Non-accrual loans at December 31, 1996 and 1995, net of charge-offs,
were $3,213,053 and $2,921,459, respectively. The reserve for
delinquent interest on loans totaled $261,123 and $269,869 at December
31, 1996 and 1995, respectively, and is netted against accrued interest
receivable.
At December 31, 1996 and 1995, the recorded investment in loans that
are considered to be impaired as defined by FAS 114 totaled $333,613,
and $286,446 (of which $159,610 and $219,954 were included in
non-accrual loans), respectively. All impaired loans have no allowances
for credit losses as a result of $114,831 and $164,000 in charge-offs
during 1996 and 1995, respectively. The average recorded investment in
impaired loans were $273,919 and $148,719 during the years ended
December 31, 1996 and 1995, respectively. Payments received on impaired
loans that are not classified non-accrual are recognized as income on
the cash basis. For the years ended December 31, 1996 and 1995, the
Company recognized interest income of $23,682 and $13,109 on impaired
loans.
7. LOANS HELD FOR SALE
Loans held for sale at December 31, 1996 and 1995 amounted to $675,700
and $418,305, respectively. Loans held for sale consist of 30 year
fixed-rate residential mortgage loans which qualify for sale in the
secondary market. These loans are recorded at the lower of cost or
market value determined on an aggregate basis.
At December 31, 1996 the Company had $1,043,200 in forward loan sale
contracts to an agency. No forward loan sales were outstanding at
December 31, 1995. Loans held-for-sale and settled and loan
applications in various stages of the underwriting process as of
December 31, 1996 will be used to satisfy these forward loan sales.
During 1994, $7,047,141 in 20 year fixed rate residential loans and
$2,755,620 in 30 year fixed rate residential loans were transferred
from loans held for sale to loans receivable at the then current market
values. Losses in the amount of $193,768 are included in the statement
of income as though the loans were actually sold in 1994.
Net losses of $83,749 and $644,271 on the sale of loans held for sale
were recorded in 1996 and 1994, respectively. Net gains of $128,109
were recorded in 1995.
29
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1996 and 1995 consisted of
the following:
December 31,
1996 1995
---- ----
Loans $1,565,647 $1,607,790
Mortgage-backed securities 986,454 790,402
Investment securities 461,068 505,087
---------- ----------
Total $3,013,169 $2,903,279
========== ==========
9. REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS
Real estate owned and other repossessed assets at December 31, 1996 and
1995 consisted of the following:
December 31,
1996 1995
---- ----
Real estate owned $941,222 $480,763
Other repossessed assets 6,500 6,000
-------- --------
Total $947,722 $486,763
======== ========
10. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized by major classifications
as follows:
December 31,
1996 1995
---- ----
Land, buildings and improvements $3,689,265 $3,435,768
Furniture and equipment 1,437,197 969,719
---------- ----------
Total 5,126,462 4,405,487
Less accumulated depreciation (2,127,606) (1,819,166)
---------- ----------
Total $2,998,856 $2,586,321
========== ==========
The Company leases three branch offices and other office space. The
leases of these facilities are accounted for as operating leases. Total
rental expense was $106,433, $104,049 and $64,944 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Minimum rental commitments under the operating leases are as follows:
1997 $ 83,808
1998 52,708
1999 29,241
2000 27,108
2001 27,108
2002 and beyond 6,777
--------
Total $226,750
========
30
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
11. DEPOSITS
Deposits at December 31, 1996 and 1995 consisted of the following:
December 31,
1996 1995
---- ----
Weighted Weighted
Average Average
Interest Interest
Amount Rate Amount Rate
------ ---- ------ ----
NOW accounts $26,477,271 1.54% $ 26,292,766 2.02%
Non-interest bearing accounts 7,594,466 --- 7,042,519 ---
Money market and other accounts 51,407,656 4.05 41,364,855 4.10
Savings and club accounts 34,541,096 2.77 40,043,245 2.77
----------- ---- ------------- ----
Subtotal 120,020,489 2.87 114,743,385 2.91
----------- ---- ------------- ----
Certificates by maturity:
6 months or less 78,431,089 5.26 58,010,512 5.30
6 months to 1 year 34,616,074 5.50 44,724,687 5.51
1 to 2 years 36,985,319 5.51 26,548,551 5.69
2 to 3 years 9,953,736 5.71 14,325,846 5.48
Over 3 years 9,912,572 5.94 11,614,071 6.09
----------- ---- ------------- ----
Total certificates 169,898,790 5.43 155,223,667 5.50
----------- ---- ------------- ----
Subtotal 289,919,279 4.37% 269,967,052 4.40%
==== ====
Accrued interest payable 378,408 208,686
------------ ------------
Total $290,297,687 $270,175,738
============ ============
Jumbo Certificates of Deposits are accounts in excess of $95,000 that
are solicited directly or through brokers in the national market. At
December 31, 1996 and 1995 the Company had $35,267,599 and $27,589,266,
respectively, in Jumbo Certificates of Deposit of which $14,714,990 and
$15,733,969, respectively, were brokered deposits.
At December 31, 1996 and 1995, mortgage loans and MBS aggregating
$1,616,821 and $813,776, respectively, were pledged for public fund
deposits as required by the New Jersey Department of Banking's
Governmental Unit Deposit Protection Act.
REMICS with amortized costs of $498,229 and $688,213 and market values
of $492,313 and $682,941 were pledged for savings deposits at December
31, 1996 and 1995, respectively.
Following is a summary of interest expense by type of account:
December 31,
1996 1995 1994
---- ---- ----
NOW $ 407,851 $ 517,561 $ 478,614
Money market and other 1,858,601 1,359,524 962,891
Savings and club 1,032,328 1,174,685 1,330,618
Certificate 8,822,040 8,127,383 5,582,427
----------- ----------- ----------
Total $12,120,820 $11,179,153 $8,354,550
=========== =========== ==========
Interest paid on deposits for the years ended December 31, 1996, 1995
and 1994 was $11,951,098, $11,182,881 and $8,286,644, respectively.
31
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
12. BORROWINGS FROM FEDERAL HOME LOAN BANK
Borrowings from the Federal Home Loan Bank at December 31, 1996 and
1995 consisted of the following:
December 31,
1996 1995
---- ----
Weighted Weighted
Average Average
Interest Interest
Amount Rate Amount Rate
------ ---- ------ ----
Maturing during:
1996 $ --- ---% $ 52,500,000 (1)5.73%
1997 94,061,750 (1)5.69 28,399,150 5.84
1998 19,828,180 5.99 15,265,780 5.87
1999 15,875,000 6.03 3,625,000 6.77
2000 6,257,370 6.58 6,007,370 6.56
2001 600,000 7.12 --- ---
------------ ---- ------------ ----
Total $136,622,300 5.82% $105,797,300 5.86%
============ ==== ============ ====
------------------------------------
(1) Borrowing rates on the line of credit are presented based on a 31
day average rate.
The Bank has a line of credit at the Federal Home Loan Bank for
$47,157,230 of which $38,428,000 was outstanding at December 31, 1996.
The interest rate adjusts daily based on the Federal Funds rate.
Borrowings from the Federal Home Loan Bank include loans that adjust
quarterly based on the London Interbank Offered Rate (LIBOR).
Adjustable borrowings totaled $10,000,000 at December 31, 1996, and at
December 31, 1995.
Borrowings from the Federal Home Loan Bank at December 31, 1996 also
include securities sold under agreements to repurchase of $27,297,000.
These agreements are due within 30 days and have an interest rate of
5.61%. Securities sold under agreement to repurchase were
collateralized by mortgage-backed securities with amortized costs of
$28,935,254 and market values of approximately $28,816,102. There were
no securities sold under agreements to repurchase with the Federal Home
Loan Bank as of December 31, 1995.
Borrowings from the Federal Home Loan Bank averaged $120,987,383 and
$93,037,610 and the maximum outstanding at any month-end was
$147,509,300 and $105,797,300 during the years ended December 31, 1996
and 1995, respectively.
Borrowings from the Federal Home Loan Bank are collateralized by
Federal Home Loan Bank stock and substantially all first mortgage
loans.
Interest expense on borrowings from Federal Home Loan Bank was as
follows:
Years Ended December 31,
1996 1995 1994
---- ---- ----
Federal Home Loan Bank borrowings $6,702,751 $5,443,740 $4,269,188
Amortization of fair market premium --- (20,670) (41,340)
---------- ---------- ----------
Total $6,702,751 $5,423,070 $4,227,848
========== ========== ==========
32
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Interest paid on borrowings from Federal Home Loan Bank for the years
ended December 31, 1996, 1995 and 1994 was $6,622,854 , $5,420,238 and
$4,290,920, respectively.
13. OTHER BORROWED FUNDS
Other borrowed funds at December 31, 1996 and 1995 consisted of the
following securities sold under agreements to repurchase.
December 31,
1996 1995
---- ----
Weighted Weighted
Average Average
Interest Interest
Amount Rate Amount Rate
------ ---- ------ ----
Maturing during:
1996 $ --- ---% $44,329,000 6.00%
1997 16,526,000 5.60 --- ---
1998 --- --- --- ---
1999 20,000,000 5.84 --- ---
----------- ---- ----------- ----
1996 $36,526,000 5.73% $44,329,000 6.00%
=========== ==== =========== ====
These agreements are treated as borrowings. Securities sold under
agreement to repurchase were collateralized by MBS and U.S. Government
agency securities with amortized costs of $37,754,947 and $45,839,563
and market values of approximately $38,174,048 and $45,870,272 at
December 31, 1996 and 1995, respectively. The MBS and U.S. Government
agency securities underlying the agreements were delivered to, and are
held by the dealers who arranged the transactions. Securities sold
under agreements to repurchase averaged $43,966,833 and $39,317,783 and
the maximum amount outstanding at any month-end was $54,967,000 and
$44,516,000 during the years ended December 31, 1996 and 1995,
respectively.
Interest expense on other borrowed funds for the years ended December
31, 1996, 1995 and 1994 was $2,540,055, $2,370,051 and $1,318,329,
respectively.
Interest paid on other borrowed funds for the years ended December 31,
1996, 1995 and 1994 was $2,587,178, $2,287,399 and $1,139,935,
respectively.
14. SAIF RECAPITALIZATION ASSESSMENT
On September 30, 1996, the Deposit Insurance Funds Act of 1996, which
includes the recapitalization of the Savings Association Insurance Fund
(SAIF), became law. Accordingly, all depository institutions with SAIF
insured deposits were charged a one-time special assessment on their
SAIF-assessable deposits as of March 31, 1995 at the rate of 65.7 basis
points, paid on November 27, 1996. The Bank's assessment was
$1,564,323. SAIF will reduce the insurance premium from $.23 per $100
of deposits to $.0648 per $100 of deposits starting in 1997.
15. INCOME TAXES
The Bank was previously permitted under the Internal Revenue Code (the
Code) to deduct an annual addition to the reserve for bad debts in
determining taxable income, subject to certain limitations.
The Bank's deduction was based upon the percentage of taxable income
method as defined by the Code. The bad debt deduction allowable under
this method equaled 8% of taxable income determined without
33
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
regard to that deduction and with certain adjustments. This addition
differed from the bad debt experience used for financial accounting
purposes.
In August 1996, The Small Business Job Protection Act (the Act) was
signed into law. The Act repealed the percentage of taxable income
method of accounting for bad debts for thrift institutions effective
for years beginning after December 31, 1995. The Act provides that bad
debt reserves accumulated prior to 1988 be exempt from recapture. Bad
debt reserves accumulated after 1987 ("applicable excess reserves") are
subject to recapture. The Act requires the Bank as of January 1, 1996
to change its method of computing reserves for bad debts to the
experience method. The bad debt deduction allowable under this method
is available to financial institutions with assets less than $500
million. Generally, this method will allow the Bank to deduct an annual
addition to the reserve for bad debts equal to the increase in the
balance of the Bank's reserve for bad debts at the end of the year to
an amount equal to the percentage of total loans at the end of the
year, computed using the ratio of the previous six years net chargeoffs
divided by the sum of the previous six years total outstanding loans at
year end. If a financial institution's assets exceed $500 million, it
will be permitted to deduct only actual bad debts as they occur.
The Act requires that a thrift institution subject to the change in its
method of computing reserves for bad debts treat such change as a
change in a method of accounting determined solely with respect to the
"applicable excess reserves" of the institution. The amount of the
applicable excess reserves will be taken into account ratably over a
six-taxable year period, beginning with the first taxable year after
December 31, 1995. The timing of this recapture may be delayed for a
two-year period provided certain residential loan origination
requirements are met. The amount of applicable excess reserves subject
to recapture totaled approximately $952,000 and the related tax
liability included in the Bank's net deferred taxes totaled $342,743 at
December 31, 1995. For financial reporting purposes, the Bank will not
incur any additional tax expenses. At December 31, 1996, under FAS 109,
deferred taxes were provided on the difference between the book reserve
at December 31, 1995 and the applicable excess reserve in the amount
equal to the Bank's increase in the tax reserve from December 31, 1987
to December 31, 1995. Retained earnings includes approximately
$3,229,000 representing bad debt deductions for which no deferred
income taxes have been provided at December 31, 1996 and 1995. Under
the Code, this amount may become taxable if dissolution, liquidation or
certain other distributions occur. However, under FAS 109, the Bank is
not required to provide deferred taxes for reserves established prior
to December 1987.The following are the major sources of temporary
differences and their deferred tax effect at December 31, 1996 and
1995:
December 31,
1996 1995
---- ----
Deferred Tax Assets:
Credit loss reserve $1,353,775 $1,282,439
Unrealized loss on securities available-for-sale 489,602 73,830
Deposit premium 131,592 65,120
Acquisition costs --- 32,435
Deferred loan fees --- 122,378
---------- ----------
Total deferred tax assets 1,974,969 1,576,202
---------- ----------
Deferred Tax Liabilities:
Deferred loan fees 141,954 ---
Unrealized loss on loans held for sale 89,402 20,151
Depreciation 53,065 26,887
Excess reserves subject to recapture 342,743 356,232
Purchase accounting adjustments 375 13,388
---------- ----------
Total deferred tax liabilities 627,539 416,658
---------- ----------
Net deferred tax asset 1,347,430 1,159,544
Valuation allowance --- (617,071)
---------- ----------
Net deferred tax asset after valuation allowance $1,347,430 $ 542,473
========== ==========
34
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The Company's effective tax rate differs from the statutory federal
income tax rate for the following reasons:
Years Ended December 31,
1996 1995 1994
---- ---- ----
Percentage Percentage Percentage
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
Tax at statutory rate $1,808,943 34.0% $2,506,110 34.0% $2,277,202 34.0%
Increase (decrease) in
taxes resulting from:
Accretion of excess of
fair value over cost (84,644) (1.6) (84,644) (1.2) (84,660) (1.3)
Increase in valuation
allowance for
deferred tax asset 115,132 2.2 129,404 1.8 194,132 2.9
Tax-free interest (13,781) (.3) (9,515) (.1) (10,806) (.2)
State income tax, net
of federal benefit 86,790 1.6 151,140 2.0 133,650 2.0
Other, net (145,237) (2.7) (32,495) (.4) (14,968) (.2)
---------- ---- ---------- ---- ---------- ----
Total current and
deferred income taxes $1,767,203 33.2% $2,660,000 36.1% $2,494,550 37.2%
========== ==== ========== ==== ========== ====
Deferred federal income tax expense (benefit) consisted of the
following tax effects of temporary differences:
Years Ended December 31,
1996 1995 1994
---- ---- ----
Accelerated depreciation $ 26,178 $ 14,400 $ 10,327
Deferred loan fees 264,332 42,319 137,858
Acquisition costs 32,435 38,160 54,111
Bad debt (13,489) 149,952 92,880
Loan loss reserve (net) 43,796 40,487 (30,674)
Loans held for sale 69,251 (246,963) 267,114
Deposit premium (66,472) (65,120) ---
Other, net (13,013) (22,765) (85,403)
-------- -------- --------
Total $343,018 $(49,530) $446,213
======== ======== ========
The Company made income tax payments of $1,711,880, $2,538,696 and
$2,107,181 during the years ended December 31, 1996, 1995 and 1994,
respectively.
A recovery of a valuation allowance related to deferred income taxes
was recognized in the amount of $732,203 during the quarter ended
September 30, 1996. The recovery was recognized after considering the
impact of a recent change in the Code related to the bad debt deduction
and the estimated timing of temporary differences related to deferred
loan fees for tax purposes.
16. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. The Office of Thrift
Supervision (OTS) sets forth capital standards applicable to all
thrifts. 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 Bank's
35
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
financial statements. 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.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of tangible and core capital (as defined in
the regulations) to adjusted assets (as defined), and of Tier I and
total capital (as defined) to risk-weighted assets (as defined). As of
December 31, 1996, management believes that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the OTS
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 tangible, core and
risk-based ratios. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The Bank's regulatory capital amounts differ from those presented under
GAAP. The following is a reconciliation of GAAP capital to regulatory
capital at December 31, 1996 and 1995.
Regulatory Capital
Core, Tangible
and Tier 1 Risk-Based Total Risk-Based
--------------------- ----------------
(in thousands)
At December 31, 1996
GAAP capital $32,029 $32,029
Deposit premium (631) (631)
Investment in subsidiary (145) (145)
Unrealized losses on certain available for sale securities 876 876
Equity investment --- (75)
Allowance for credit losses --- 2,571
------- -------
Regulatory capital $32,129 $34,625
======= =======
At December 31, 1995
GAAP capital $30,103 $30,103
Deposit premium (889) (889)
Investment in subsidiary (156) (156)
Unrealized losses on certain available for sale securities 164 164
Equity investment --- (75)
Allowance for credit losses --- 2,525
------- -------
Regulatory capital $29,222 $31,672
======= =======
36
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The table below presents the Bank's actual and regulatory required
capital amounts for core, tangible, tier 1 risk-based and total
risk-based capital for the years ended December 31, 1996 and 1995.
Required to be
Required for Well Capitalized
Capital Adequacy Under Prompt
Actual Purposes Corrective Action
-------------------- ---------------------- --------------------
Amount Percentage Amount Percentage Amount Percentage
-------------------- ---------------------- --------------------
(dollars in thousands)
At December 31, 1996:
Core (Leverage) $32,129 6.45% $14,938 3.0% $24,897 5.0%
Tangible 32,129 6.45 7,469 1.5 N/A N/A
Tier I risk-based 32,129 15.62 8,226 4.0 12,339 6.0
Total risk-based 34,625 16.84 16,452 8.0 20,565 10.0
At December 31, 1995:
Core (Leverage) 29,222 6.47% 13,556 3.0% 22,593 5.0%
Tangible 29,222 6.47 6,778 1.5 N/A N/A
Tier I risk-based 29,222 14.47 8,080 4.0 12,120 6.0
Total risk-based 31,672 15.68 16,159 8.0 20,199 10.0
17. EMPLOYEE STOCK OWNERSHIP PLANS
A non-leveraged Employee Stock Ownership Plan (Plan) is provided for
eligible employees. The Plan contains provisions which allow employees
to enter into salary reduction arrangements intended to qualify under
Section 401(k) of the Code. The number of allocated shares in the Plan
was 183,681 and 166,351 at December 31, 1996 and 1995, respectively.
The allocation includes shares purchased by plan participants funded by
their own self-directed contributions.
The Board of Directors approved matching contributions to the Plan with
respect to those employees who elected salary reduction contributions.
In addition, a discretionary profit sharing contribution may be
approved by the Board of Directors. The total Plan contribution,
including the discretionary profit sharing contribution, totaled
$270,880, $216,000 and $150,000 for the years ended December 31, 1996,
1995 and 1994, respectively.
18. STOCK OPTIONS
The Shareholders approved the adoption by the Board of Directors of an
Employee Stock Compensation Program and Stock Option Plan for
Non-Employee Directors (the Programs). Pursuant to the Programs, stock
options may be granted which qualify as incentive stock options as well
as stock options that do not qualify as incentive options under the
Code. Non-employee directors, full-time officers, and key employees are
eligible to receive options under the Programs. There are 417,700
shares of Common Stock available for issuance under the Programs after
the four-for-three stock split declared by the Board of Directors on
January 7, 1997.
A summary of the Company's Programs at December 31, 1996, 1995 and 1994
and changes during the years then ended is presented in the table
below.
37
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- --------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
Beginning balance 81,441 $10.54 74,424 $ 8.08 127,321 $ 4.20
Granted 41,029 14.52 26,385 12.59 29,780 10.13
Exercised (1,509) 2.85 (16,271) 2.85 (82,677) 2.85
Forfeiture 0 --- (3,097) 9.28 0 ---
------- ------ ------ ------ ------ ------
Ending balance 120,961 $11.99 81,441 $10.54 74,424 $ 8.08
======= ====== ====== ====== ====== ======
Exercisable at end of year 0 1,509 17,780
======= ====== ======
Exercise prices for options outstanding as of December 31, 1996 ranged
from $9.28 to $14.63. The weighted average remaining contractual life
of those options was 8.55 years.
For years beginning January 1, 1995, pro forma information regarding
net income and earnings per share is required by FAS 123. The
Black-Scholes option pricing model was used to estimate the fair value
of options granted during 1996 and 1995. The Black-Scholes model does
not consider vesting and transfer restrictions. The model requires
input of highly subjective assumptions including the expected stock
price volatility. Because input assumptions can materiality affect the
fair value estimate, in management's opinion the model does not
necessarily provide a reliable single measure of the fair value of its
employee stock options. The following table sets forth for the periods
indicated information regarding (1) risk-free interest rates; (2)
dividend yields; (3) volatility factors of the expected market price of
the common stock; (4) weighted-average expected lives of the options;
and (5) the weighted-average fair value of options granted.
Fair value information:
1996 1995
---- ----
Risk-free interest rates 6.28% 5.92%
Dividend yields 2.55% 2.67%
Volatility 23.86% 24.84%
Expected life in years 7.5 7.5
Fair value of options granted $4.40 $3.71
In accordance with APB 25 under the intrinsic value based method, the
Company is required to recognize compensation expense for the excess of
the quoted market price of the stock at the grant date over the amount
an employee or non-employee director must pay to acquire the stock.
Since all stock options are granted at market, no compensation expense
was recognized at the grant date.
Since the Company has elected to remain with the accounting in APB 25,
disclosures of net income and earnings per share are required as if the
fair value based method of accounting defined in FAS 123 had been
applied. All options granted to date have 10 year terms and vest and
become fully exercisable three years after the grant date. For the
purpose of pro forma disclosure, the estimated fair value of the
options are amortized to expense over the options' vesting period.
Compensation expense related to options granted prior to amortization
totaled $180,272 and $97,727 for the years ended December 31, 1996 and
1995, respectively. Since all options vest over a three year period,
compensation expense of $40,987 and $6,978 are reflected in the pro
forma adjustments. Additionally, since stock options granted to outside
directors do not qualify as incentive stock options under the Code,
they have been tax effected in the pro forma presentation.
38
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
The Company's net income, primary EPS and fully diluted EPS as reported
and on a pro forma basis for the years indicated were as follows:
Years ended December 31,
1996 1995
---- ----
Net Income As Reported $4,285,420 $4,710,912
Pro Forma $4,250,811 $4,706,447
Primary EPS As Reported $1.57 $1.74
Pro Forma $1.56 $1.73
Fully Diluted EPS As Reported $1.57 $1.73
Pro Forma $1.56 $1.73
Because the FAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation expense may not be representative of that to be expected
in future years.
19. COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and letters of credit which involve, in varying degrees,
elements of credit and interest rate risk that are not recognized in
the consolidated statements of financial condition.
Exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual amount of those instruments. The Company
uses the same credit policies in making commitments as it does for on
balance-sheet instruments.
Commitments outstanding at December 31, 1996 and 1995 consisted of the
following:
December 31,
1996 1995
---- ----
Fixed rate mortgage loans (current market rates
6.625% to 8.125% at December 31, 1996) $ 2,310,300 $1,686,700
Adjustable rate mortgage loans 1,106,820 ---
Purchase of fixed rate mortgage loans 7,189,033 ---
Unused lines of credit 5,420,592 4,618,605
Letters of credit 573,766 1,176,358
Consumer loans 564,258 207,794
Loans in process 1,222,037 1,680,884
----------- ----------
Total $18,386,806 $9,370,341
=========== ==========
At December 31, 1996, all commitments are expected to be funded within
one year.
20. RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends
that it may declare without prior regulatory approval. At December 31,
1996, approximately $12,042,000 of retained earnings were available for
dividend declaration without prior regulatory approval.
39
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
21. RELATED PARTIES
The Company effected securities transactions through companies which
are controlled by a member of the Board of Directors. The Director is
the president and managing partner of these companies which are
broker-dealers of securities. The transactions consist of purchases
from and sales to these broker-dealers of mortgage-backed securities
and other investment securities in the ordinary course of business. The
aggregate amount of securities purchased from these broker-dealers
during 1996, 1995 and 1994 were approximately $22 million, $23 million
and $47 million, respectively. Total securities transactions for 1996,
1995 and 1994 were $91 million, $73 million and $93 million,
respectively. The aggregate amount of securities sold to these
broker-dealers during 1996 was $1.6 million. The aggregate amount of
securities sold during 1996 was $13 million. There were no accounts
payable/receivable to or from these companies at December 31, 1996 and
1995. During 1994, the Bank entered into reverse repurchase agreements
with these broker-dealers in the amount of $32 million. Offers to
purchase from or sell to other unaffiliated broker-dealers are
solicited at the time of the purchase or sale to ensure that the terms
of these securities transactions are comparable to the terms that could
be obtained from other unaffiliated broker-dealers.
22. LITIGATION AND SETTLEMENTS
The Company is involved in litigation arising in the normal course of
business. In management's opinion, the resolution of all pending
litigation will not have a material adverse effect on its financial
position, liquidity or results of operations. In March 1995, the Bank
received $672,000 in settlement of an insurance claim and in December
1994 received $880,000 in settlement of litigation in regards to the
Fidelity Mutual acquisition. Each amount is included in other income in
the consolidated statements of income for the respective year.
23. PARENT COMPANY FINANCIAL INFORMATION
First Home Bancorp Inc. is a holding company organized under New Jersey
law. It was organized by the Bank for the purpose of acquiring all of
the capital stock of the Bank in connection with the reorganization of
the Bank to the holding company form. The Company was formed on
February 22, 1996 and the reorganization was consummated on May 31,
1996.
40
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Condensed financial statements of First Home Bancorp Inc. are as
follows:
CONDENSED STATEMENT OF FINANCIAL CONDITION
December 31, 1996
ASSETS
Cash and amounts due from depository institutions $ 16,019
Interest-earning deposits 483,928
Investment in subsidiary bank 32,029,276
Prepaid expenses and other assets 393,963
-----------
TOTAL ASSETS $32,923,186
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 278,424
-----------
TOTAL LIABILITIES 278,424
Shareholders' equity:
Common stock - no par value ---
Paid in capital excess of par 8,922,941
Retained earnings 24,592,225
Unrealized loss on securities available for sale, net (870,404)
-----------
Total shareholders' equity 32,644,762
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $32,923,186
===========
CONDENSED STATEMENT OF INCOME
Period from February 22, 1996
through December 31, 1996
Interest income and dividends $ 8,928
Dividend from subsidiary bank 1,300,000
Equity in undistributed earnings of subsidiary bank 3,009,178
-----------
Total income 4,318,106
Other operating expenses 41,236
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Net income before taxes 4,276,870
Income tax benefit 8,550
-----------
Net income $ 4,285,420
===========
41
First Home Bancorp Inc.
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
CONDENSED STATEMENT OF CASH FLOWS
Period from February 22, 1996
through December 31, 1996
OPERATING ACTIVITIES:
Net income $ 4,285,420
Equity in undistributed earnings of subsidiary bank (3,009,178)
Net other (115,539)
-----------
Net cash used in operating activities 1,160,703
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INVESTING ACTIVITIES:
Investment in subsidiary stock (100)
-----------
Net cash provided by investing activities (100)
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FINANCING ACTIVITIES:
Cash dividends and cash in lieu of fractional shares (764,958)
Company formation 100,000
Proceeds from exercise of common stock options 4,302
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Net cash used in financing activities (660,656)
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INCREASE IN CASH AND CASH EQUIVALENTS 499,947
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 0
-----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 499,947
===========
42
First Home Bancorp Inc.
Report of Independent Public Accountants
--------------------------------------------------------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of
First Home Bancorp Inc.:
We have audited the accompanying consolidated statements of financial condition
of First Home Bancorp Inc. and subsidiaries (the "Company") as of December 31,
1996 and 1995, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Home Bancorp Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ LLP
Philadelphia, Pa.
February 10, 1997
43
First Home Bancorp Inc.
Corporate Information
--------------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of First Home Bancorp Inc. will be held on April 25, 1997 at
10:30 a.m. at the Holiday Inn, Exit 10, I-295 at Pureland Industrial Complex,
Bridgeport, New Jersey.
STOCK LISTING
The Company's common stock is traded on the Nasdaq National Market tier of the
Nasdaq Stock Market under the symbol: "FSPG". Trading information on the
Company's common stock can be located in the financial section of most major
newspapers.
ANNUAL REPORT ON FORM 10-K AND OTHER
INVESTOR INFORMATION
The Company will furnish upon written request at no charge to any shareholder a
copy of the Annual Report on Form 10-K for the year ended December 31, 1996 and
the exhibits thereto required to be filed with the Securities Exchange
Commission under the Securities Exchange Act of 1934 by writing to:
▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇
First Home Bancorp Inc.
P.O. Box 189
Pennsville, NJ 08070
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
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ACCOUNTANTS
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SECURITIES COUNSEL
Blank Rome ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇
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GENERAL COUNSEL
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CARNEYS POINT
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ELMER
Main Street and ▇▇▇▇▇▇▇ Highway
Elmer, NJ 08318
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GIBBSTOWN
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NEWFIELD
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Newfield, NJ 08344
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PENNSAUKEN
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First State Plaza
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44
First Home Bancorp Inc.
Directors and Officers
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First Home Bancorp Inc.
Board of Directors
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OFFICERS
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President, Chief Executive Officer
and Chairman of the Board
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Senior Executive Vice President,
Chief Financial Officer and Secretary
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Executive Vice President
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Executive Vice President
FIRST HOME SAVINGS BANK, F.S.B.
EXECUTIVE OFFICERS
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President, Chief Executive Officer
and Chairman of the Board
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Senior Executive Vice President,
Chief Operating Officer
Chief Financial Officer and Secretary
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Executive Vice President
Loan and Deposit Operations
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Executive Vice President
Retail Banking
OFFICERS AND MANAGERS
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Manager, Consumer Lending
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Assistant Vice President
Branch Operations Officer
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Manager, Newfield Office
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Assistant Vice President
Business Development Officer
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Vice President
Investment Officer
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Vice President
Mortgage Manager
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Business Development Officer
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Manager, Human Resources
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Assistant Secretary
Administrative Assistant
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Manager, Carneys Point Office
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Vice President/Marketing
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Manager, Westmont Office
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Business Development Officer
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Controller
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Business Development Officer
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Vice President
Senior Administration Officer
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Data Processing Manager
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Assistant Vice President
Compliance/Security Officer
