-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FX2OuZNDlL6/VtTMrpH9Lp3ZPKcWTzTwQ+mBIhKbD9qAgb8KOh70BVQwV0Eli4ze NHnNlk1NNesm6f6u6ziDZw== 0000835345-96-000009.txt : 19961001 0000835345-96-000009.hdr.sgml : 19961001 ACCESSION NUMBER: 0000835345-96-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLLECTIVE BANCORP INC CENTRAL INDEX KEY: 0000835345 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 222942769 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-17515 FILM NUMBER: 96636898 BUSINESS ADDRESS: STREET 1: 158 PHILADELPHIA AVE CITY: EGG HARBOR CITY STATE: NJ ZIP: 08215 BUSINESS PHONE: 6096251110 MAIL ADDRESS: STREET 1: C/O BERNARD BERKMAN 158 PHILADELPHIA AVE STREET 2: PO BOX 316 CITY: EGG HARBOR CITY STATE: NJ ZIP: 08215 10-K 1 10-K FOR THE YEAR ENDED JUNE 30, 1996 ================================================================================ - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1996 OR [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File number 0-17515 COLLECTIVE BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 22-2942769 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 716 West White Horse Pike Cologne , New Jersey 08213 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (609) 625-1110 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common stock, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was $536,059,755 as of August 31, 1996. The number of shares outstanding of common stock, par value $.01 per share, was 20,421,324 shares as of August 31, 1996. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement dated September 18, 1996 - Parts I, III and IV 1996 Annual Report to Stockholders for the fiscal year ended June 30, 1996 - - Parts I, II and IV - -------------------------------------------------------------------------------- ================================================================================ PART I Item 1. Business General. Collective Bancorp, Inc. ("Collective" or the "Holding Company"), formed in December 1988, is a Delaware business corporation headquartered in Cologne, New Jersey. Collective is a non-diversified unitary savings and loan holding company within the meaning of the Home Owners' Loan Act which conducts its operations through a federally insured savings bank subsidiary, Collective Bank ("Collective Bank" or the "Bank"). As such, Collective is registered as a holding company with the Office of Thrift Supervision ("OTS") and is subject to OTS regulation, examination, supervision, and reporting requirements. Collective Bank was chartered by the State of New Jersey in 1927 as Collective Building and Loan Association. In 1943, the Bank obtained federal insurance of accounts and changed its name to Collective Savings and Loan Association. In 1951, it assumed the name Collective Federal Savings and Loan Association when it converted from a state to a federal charter. In 1984, Collective Federal converted to a federally chartered stock association. In 1986, Collective Federal adopted a federal savings bank charter and changed its name to Collective Federal Savings Bank. In 1994, Collective Federal Savings Bank changed its name to Collective Bank. On August 30, 1996, Collective received approval from the Board of Governors of the Federal Reserve System to become a bank holding company under the Bank Holding Company Act of 1956 ("BHC Act") in connection with its pending acquisition of Continental Bancorporation and its subsidiary, Continental Bank of New Jersey ("Continental Bank") which is a state-chartered commercial bank. As a registered bank holding company under the BHC Act, Collective will be subject to Federal Reserve regulation, examination, supervision, and reporting requirements. The acquisition is expected to close in October 1996. At July 31, 1996, Continental Bank had four branch offices and deposits of approximately $125 million. Prior to the year ended June 30, 1996, the Bank acquired the deposit liabilities and certain assets, including various branch offices of other savings institutions, from regulatory authorities or the private sector. In April 1995, Collective acquired the deposit liabilities and certain assets of seven New Jersey offices of Sovereign Bank. In April and May 1994, Collective acquired the deposit liabilities and certain assets of Hansen Federal Savings Bank ("Hansen") and White Horse Federal Saving and Loan Association ("White Horse") from the Resolution Trust Corporation. In February 1993, Collective Bank purchased certain assets and assumed the deposit liabilities of four New Jersey offices of First Nationwide Bank. In April 1993, Collective acquired Montclair Bancorp, Inc. ("Montclair") and its subsidiary, Montclair Savings Bank. Montclair has since been liquidated and Montclair Savings Bank has been merged into Collective Bank. In total since fiscal 1991, the Bank has added the deposits of 47 offices of various institutions amounting to $1.429 billion through business combinations. Collective Bank is a member of the Federal Home Loan Bank System, holds stock in the Federal Home Loan Bank ("FHLB") of New York, and is subject to supervision, examination, and regulation by the OTS. Collective Bank has its deposit accounts insured by the Federal Deposit Insurance Corporation ("FDIC") through the Savings Association Insurance Fund ("SAIF"). The deposits acquired from Montclair and certain deposits acquired from Sovereign Bank are insured by the FDIC through the Bank Insurance Fund ("BIF"). Continental Bank is also a member of the Federal Home Loan Bank System and holds stock in the FHLB of New York. Its deposits are insured by the FDIC through the BIF. Continental Bank is subject to regulation, examination, and supervision by the FDIC and the New Jersey Department of Banking. The Bank is principally engaged in the business of attracting deposits from the general public and using those deposits, together with borrowings and other funds, to originate loans secured by real estate, to purchase mortgage-backed securities, and, to a lesser extent, to originate various types of consumer and commercial loans and make other investments. Funds for the Bank's lending activities are principally derived from deposits of its savings customers, amortization and prepayment of outstanding loans, advances from the FHLB, other short-term borrowings, sales of loans and securities, and net income. The principal expenses of the Bank are interest paid on deposits, advances and other borrowings, and operating expenses. 2 At June 30, 1996, Collective had total assets of $5.145 billion, deposits of $3.254 billion, loans and mortgage-backed securities of $4.622 billion, and stockholders' equity of $364.3 million. Collective's operations are conducted through a network of 78 banking offices and 5 loan origination offices of Collective Bank in New Jersey and Delaware. 3 SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA Financial Condition and Other Data
June 30 ---------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Total assets................................. $5,145,471 $5,110,517 $4,589,258 $3,466,047 $2,499,669 Loans........................................ 2,553,336 2,379,522 1,925,394 1,648,664 1,349,415 Mortgage-backed securities................... 2,068,687 2,191,245 2,299,996 1,488,896 869,937 Investments.................................. 343,410 351,941 187,819 46,617 73,324 Deposits..................................... 3,254,387 3,277,823 3,003,962 2,791,978 2,114,149 FHLB advances................................ - 395,000 365,000 135,000 80,000 Securities sold under agreements to repurchase and other borrowings........... 1,473,448 1,052,920 895,915 177,173 69,839 Core deposit premium......................... 8,191 10,873 10,727 4,476 4,539 Goodwill..................................... 16,116 18,103 14,352 - 1,074 Stockholders' equity (net worth)............. 364,304 327,792 279,728 234,581 192,088 Number of: Customer service facilities (all full service)............................. 78 79 78 69 58 Loans........................................ 37,414 37,066 32,068 32,206 29,417 Savings accounts.......................... 420,890 427,411 420,538 371,998 307,615
Year Ended June 30 ---------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Return on assets (net income divided by average total assets).................. 1.07% 1.18% 1.48% 1.76% 1.30% Return on equity (net income divided by average net worth)..................... 15.71 19.10 23.19 23.39 19.01 Average equity-to-assets ratio (average net worth divided by average total assets)..................... 6.81 6.16 6.37 7.53 6.85 Year-end equity-to-assets ratio (year-end net worth divided by year-end total assets).................... 7.08 6.41 6.10 6.77 7.68 Dividend payout ratio (dividends divided by net income).................... 31.79 22.95 19.43 14.63 12.77
4
OPERATING DATA Year Ended June 30 ------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Dollar amounts in thousands) Total interest & dividend income $355,685 $336,317 $269,570 $215,985 $216,123 Total interest expense. 213,913 195,856 123,759 102,092 130,665 -------- -------- -------- -------- -------- Net interest & dividend 141,772 140,461 145,811 113,893 85,458 Provision for loan losses 2,035 240 2,352 3,017 1,453 Other income 15,597 13,443 7,660 11,385 17,768 Other expense 70,531 65,478 58,690 49,426 49,145 -------- -------- -------- -------- -------- Income before income taxes 84,803 88,186 92,429 72,835 52,628 Provision for income taxes 30,303 30,644 33,062 25,936 20,232 Cumulative effect of accounting change - - - 2,642 - -------- -------- -------- -------- -------- Net income $ 54,500 $ 57,542 $ 59,367 $ 49,541 $ 32,396 ======== ======== ======== ======== ======== Interest rate spread at end of year 2.76 % 2.56 % 3.29 % 4.14 % 3.64 % Interest rate spread during year 2.70 2.86 3.73 4.02 3.38 ======== ======== ======== ======== ========
QUARTERLY OPERATING DATA Three Months Ended ---------------------------------------------------------------------------------------------------------- June Mar. Dec. Sept. June Mar. Dec. Sept. June Mar. Dec. Sept. 30, 31, 31, 30, 30, 31, 31, 30, 30, 31, 31, 30, 1996 1996 1995 1995 1995 1995 1994 1994 1994 1994 1993 1993 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (Dollar amounts in thousands except per share data) Total interest & dividend income...... $89,412 $88,447 $88,958 $88,868 $88,659 $85,860 $81,909 $79,888 $77,707 $69,121 $61,643 $61,099 Total interest expense 52,083 52,230 54,438 55,163 55,301 52,696 46,170 41,689 37,969 31,212 27,546 27,031 Net interest income... 37,329 36,217 34,520 33,705 33,358 33,164 35,739 38,199 39,738 37,909 34,097 34,068 Provision for loan losses............... 935 410 403 286 - - 5 235 638 772 286 656 Gain (loss) on sale of loans, mortgage- backed securities & investments.......... 27 (162) 560 634 297 (17) (48) (243) 348 233 1,188 953 Unrealized appreciation on trading securities. - - - - 201 - - - - - - - Unrealized depreciation on available for sale securities............ - - - - - - - - (5,648) - - - Net income............. 14,659 13,523 13,121 13,197 13,625 12,950 14,978 15,989 12,886 16,054 15,471 14,956 Interest rate spread at end of period......... 2.76 % 2.82 % 2.70 % 2.65 % 2.56 % 2.59 % 2.93 % 3.20 % 3.29 % 3.51 % 3.76 % 4.10 % Interest rate spread during period (annualized).......... 2.80 2.78 2.68 2.63 2.56 2.61 3.02 3.23 3.36 3.59 3.91 4.06 Primary earnings per share................. $ 0.72 $ 0.66 $ 0.64 $ 0.65 $ 0.66 $ 0.63 $ 0.73 $ 0.78 $ 0.63 $ 0.78 $ 0.75 $ 0.73 Fully diluted earnings per share............. 0.72 0.66 0.64 0.65 0.66 0.63 0.73 0.78 0.63 0.78 0.75 0.73
5
AVERAGE STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION (Dollar amounts in thousands) Year Ended June 30 ---------------------------------------------------------------------------------------------------------- 1996 1995 1994 -------------------------------- ----------------------------------- ----------------------------------- Average Average Average Average Average Average ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate ----------- ---------- -------- ------------ ---------- --------- ------------ ---------- --------- Mortgage loans receivable, net(1).... $2,259,132 $175,448 7.77% $1,972,032 $150,044 7.61% $1,551,156 $117,246 7.56% Mortgage-backed securities............ 2,126,690 140,783 6.62 2,205,133 147,280 6.68 1,871,330 129,993 6.95 Other loans(1)......... 170,332 15,893 9.33 163,898 14,540 8.87 160,987 11,771 7.31 Federal funds sold..... 18,733 1,016 5.42 21,345 1,097 5.14 28,508 947 3.32 Investment securities.. 309,400 21,513 6.95 263,678 20,116 7.63 90,426 6,375 7.05 Repurchase agreements.. 17,461 1,032 5.91 57,714 3,240 5.61 75,246 3,238 4.30 ----------- ---------- -------- ------------ ---------- --------- ------------ ---------- --------- Total interest-earning assets............... $4,901,748 $355,685 7.26% $4,683,800 $336,317 7.18% $3,777,653 $269,570 7.14% Other assets........... 191,334 208,769 238,512 ----------- ------------ ------------ Total assets.......... $5,093,082 $4,892,569 $4,016,165 =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Non-interest bearing demand accounts....... $ 101,964 - - $ 88,259 - - $ 60,722 - - NOW accounts........... 744,417 $ 21,722 2.92% 717,416 $ 20,289 2.83% 646,870 $ 15,383 2.38% Savings deposits....... 551,938 14,329 2.60 601,258 15,427 2.57 603,732 16,044 2.66 Time deposits.......... 1,814,812 95,449 5.26 1,672,897 79,854 4.77 1,531,475 63,759 4.16 Short-term borrowings.. 1,476,564 81,871 5.54 1,451,165 79,680 5.49 765,596 27,634 3.61 Long-term borrowings 6,481 542 8.36 7,477 606 8.10 22,203 939 4.23 ----------- ---------- -------- ------------ ---------- --------- ------------ ---------- --------- Total interest-bearing liabilities.......... $4,696,176 $213,913 4.56% $4,538,472 $195,856 4.32% $3,630,598 $123,759 3.41% Other liabilities...... 49,986 52,769 129,537 ----------- ------------ ------------ Total liabilities..... 4,746,162 4,591,241 3,760,135 Stockholders' equity... 346,920 301,328 256,030 ----------- ------------ ------------ Total liabilities & stockholders' equity $5,093,082 $4,892,569 $4,016,165 =========== ---------- -------- ============ ---------- --------- ============ ---------- --------- Net Interest Income / Spread................. $141,772 2.70% $140,461 2.86% $145,811 3.73% ========== ======== ========== ========= ========== ========= Net Interest Margin(2). 2.89% 3.00% 3.86% ======== ========= ========= (1) 1995 and 1994 data has been restated to reflect the reclassification of commercial loans collateralized by real estate from other loans to mortgage loans receivable, net. (2) Net interest income divided by average interest-earning assets
6 The following table sets forth data with respect to spreads and yields for and at the end of periods indicated. Data for the periods are based on interest income/expense for the period divided by the average interest-earning assets/interest-bearing liabilities during the period. Data at the end of the periods is based on weighted average yields and rates on interest-earning assets and interest-bearing liabilities outstanding at the end of such periods.
Year Ended June 30 -------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 For the End of For the End of For the End of For the End of For the End of Period Period Period Period Period Period Period Period Period Period -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Weighted average yield earned on: Loan portfolio........ 7.88% 7.80% 7.70% 7.81% 7.53% 7.33% 8.53% 8.08% 9.65% 9.20% Mortgage-backed security portfolio.... 6.62 6.58 6.68 6.66 6.95 6.61 7.78 7.49 8.85 8.28 Investment portfolio.. 6.82 6.56 7.13 7.38 5.44 6.54 4.97 4.40 6.28 5.51 All interest-earning assets................ 7.26 7.20 7.18 7.27 7.14 6.91 8.02 7.66 9.12 8.49 Weighted average rate paid on: Deposits.............. 4.09 4.05 3.75 4.13 3.35 3.31 4.03 3.53 5.79 4.83 FHLB advances and other borrowed funds................. 5.56 5.28 5.50 5.97 3.63 4.27 3.59 3.31 5.21 5.11 All interest-bearing liabilities........... 4.56 4.44 4.32 4.71 3.41 3.62 4.00 3.52 5.74 4.85 Spread between weighted average yield on interest-earning assets and weighted average rate paid on interest-bearing liabilities............ 2.70 2.76 2.86 2.56 3.73 3.29 4.02 4.14 3.38 3.64 Net interest margin(1).............. 2.89 3.00 3.86 4.23 3.61 (1) Net interest margin differs from net interest spread as a result of differences between the amounts of average interest-earning assets and average interest-bearing liabilities in any given period.
7
NET INTEREST AND DIVIDEND INCOME Year Ended June 30 ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Amounts in thousands) Interest & dividend income: Interest on mortgage loans (1)........ $175,448 $150,044 $117,246 $108,263 $127,382 Interest on other loans(1)............ 15,893 14,540 11,771 11,660 9,067 Interest on mortgage-backed securities.......................... 140,783 147,280 129,993 89,151 68,058 Interest & dividends on investments......................... 23,561 24,453 10,560 6,911 11,616 ------------- ------------ ------------ ------------ ------------ Total interest & dividend income....... 355,685 336,317 269,570 215,985 216,123 ------------- ------------ ------------ ------------ ------------ Interest expense: Interest on deposits.................. 131,500 115,570 95,186 93,938 120,080 Interest on FHLB advances and other borrowed funds................ 82,413 80,286 28,573 8,154 10,585 ------------- ------------ ------------ ------------ ------------ Total interest expense................. 213,913 195,856 123,759 102,092 130,665 ------------- ------------ ------------ ------------ ------------ Net interest & dividend income.......... $141,772 $140,461 $145,811 $113,893 $ 85,458 ============= ============ ============ ============ ============ (1) 1995 and 1994 data has been restated to reflect the reclassification of commercial loans collateralized by real estate from other loans to mortgage loans receivable, net.
CHANGES IN NET INTEREST AND DIVIDEND INCOME Year Ended June 30 ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (Amounts in thousands) Increase (decrease) in interest & dividend income: Interest on loans..................... $26,757 $35,567 $ 9,094 $(16,526) $(16,883) Interest on mortgage-backed securities (6,497) 17,287 40,842 21,093 839 Interest & dividends on investments... (892) 13,893 3,649 (4,705) (931) ------------- ------------ ------------ ------------ ------------ Total change in interest & dividend income..................... 19,368 66,747 53,585 (138) (16,975) ------------- ------------ ------------ ------------ ------------ Increase (decrease) in interest expense: Interest on deposits.................. 15,930 20,384 1,248 (26,142) (12,994) Interest on FHLB advances and other borrowed funds................ 2,127 51,713 20,419 (2,431) (24,929) ------------- ------------ ------------ ------------ ------------ Total change in interest expense........ 18,057 72,097 21,667 (28,573) (37,923) ------------- ------------ ------------ ------------ ------------ Net change in net interest & dividend income....................... $ 1,311 $(5,350) $31,918 $28,435 $ 20,948 ============= ============ ============ ============ ============
8 Rate-Volume Analysis. The following schedule shows the changes in net interest income from the prior year. It distinguishes between the changes in interest income and interest expense related to outstanding balances and to average interest rates paid. Changes not solely due to changes in rate or volume have been included in the category "rate-volume".
RATE-VOLUME ANALYSIS Year Ended June 30 --------------------------- Increase (decrease) in interest and dividend income attributable to: 1996 1995 ---------- ----------- (Amounts in thousands) Mortgage Loans(1) Volume.................................................. $21,790 $31,812 Rate.................................................... 3,155 776 Rate-volume............................................. 459 210 Other Loans(1) Volume.................................................. 569 212 Rate.................................................... 754 2,511 Rate-volume............................................. 30 46 Mortgage-Backed Securities Volume.................................................. (5,221) 23,241 Rate.................................................... (1,323) (5,053) Rate-volume............................................. 47 (901) Federal Funds Sold Volume.................................................. (134) (239) Rate.................................................... 60 519 Rate-volume............................................. (7) (130) Investment Securities Volume.................................................. 3,501 12,212 Rate.................................................... (1,793) 524 Rate-volume............................................. (311) 1,005 Repurchase Agreements Volume.................................................. (2,260) (754) Rate.................................................... 173 986 Rate-volume............................................. (121) (230) ---------- ----------- Net increase in interest and dividend income.............. $19,368 $66,747 ---------- -----------
Increase (decrease) in interest expense attributable to: NOW Accounts Volume................................................... $ 763 $ 1,678 Rate..................................................... 646 2,911 Rate-volume.............................................. 24 317 Time Deposits Volume................................................... 6,703 5,890 Rate..................................................... 8,197 9,342 Rate-volume.............................................. 696 863 Savings Deposits Volume................................................... (1,264) (76) Rate..................................................... 180 (543) Rate-volume.............................................. (15) 2 Short-Term Borrowings Volume................................................... 1,453 24,764 Rate..................................................... 726 14,393 Rate-volume.............................................. 13 12,889 Long-Term Borrowings Volume................................................... (81) (622) Rate..................................................... 19 859 Rate-volume.............................................. (3) (570) ---------- ----------- Net increase in interest expense.......................... $18,057 $72,097 ---------- ----------- Net increase (decrease) in net interest and dividend income $ 1,311 $ (5,350) ========== =========== (1) 1995 and 1994 data has been restated to reflect the reclassification of commercial loans collateralized by real estate from other loans to mortgage loans receivable, net
9 Investment Activities Under OTS regulations, the Bank is generally permitted to make certain investments. Among these investments are securities of the United States government, federal agency, state and municipal, and other specified securities. The Bank is also required to maintain a minimum level of liquid assets which may be invested in specified securities. The following table sets forth the composition of the Bank's investment portfolio on the dates indicated.
June 30 ---------------------------------------------------------------------------- 1996 1995 1994 ------------------------------------ ----------------- ----------------- (Amounts in thounds) Gross Estimated Gross Gross Amortized Cost Market Value Amortized Cost Amortized Cost ----------------- ----------------- ----------------- ----------------- Available for sale: Federal National Mortgage Association ("FNMA") preferred stock.............................. $ 31,600 $ 31,364 - - Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock.............................. 35,875 35,875 $ 35,875 $ 35,875 ----------------- ----------------- ----------------- ----------------- Subtotal............................... 67,475 67,239 35,875 35,875 ----------------- ----------------- ----------------- ----------------- Held for investment: U.S. government and agency obligations................. 220,460 215,801 279,585 114,969 State & municipals................... 9,979 10,117 12,227 8,390 Other investments.................... 629 629 678 835 Federal Home Loan Bank stock......... 45,103 45,103 23,389 27,750 ----------------- ----------------- ----------------- ----------------- Subtotal............................... 276,171 271,650 315,879 151,944 ----------------- ----------------- ----------------- ----------------- Total.................................. $343,646 $338,889 $351,754 $187,819 ================= ================= ================= =================
The investment portfolio at June 30, 1996 categorized by maturity is as follows.
(Dollar amounts in thousands) Gross Weighted Amortized Cost Average Yield -------------------------------------- No maturity............................................... $ 112,578 7.88% Due in one year or less................................... 7,545 6.02 Due after one year through five years..................... 106,952 6.47 Due after five years through ten years.................... 63,296 7.16 Due after ten years....................................... 53,275 7.59 ----------------- Total..................................................... $ 343,646 =================
10 Lending Activities General. Collective Bank historically concentrated its lending activities in conventional first mortgage loans secured by residential property, and, to a lesser extent, commercial property. Residential mortgage loans, including construction loans, have been secured predominantly by single family homes. In recent years as competition in the residential mortgage market has increased and resulting profit margins have decreased, Collective Bank has increasingly turned to commercial and consumer lending as an alternative source of earning assets. Substantially all of the Bank's mortgage loans include a "due on sale" clause which provides the Bank with a contractual right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the real property subject to the mortgage. It is the policy of the Bank, with limited exceptions, to enforce due on sale provisions. That provides the Bank with the opportunity to adjust the rate of interest on existing fixed rate loans by negotiating a new rate at the time of sale. The Bank continues to emphasize the origination of adjustable rate mortgages which have interest rates that adjust periodically over the life of the loan based on a variety of indices. That strategy was initiated in order to better match the costs and maturities of interest sensitive liabilities with the yields and maturities of interest sensitive assets. Fixed rate, fixed-term mortgage loans are made on terms which will permit them to be sold in the secondary market. The original contractual maturity on all loans generally ranges from 10 to 30 years; however, experience has shown that, because of prepayments, the average life of residential loans is substantially shorter. Mortgage instruments offered by the Bank include fixed rate 10, 15, and 30 year fully amortizing loans and several forms of adjustable rate mortgages which have interest rate and payment adjustments made on scheduled intervals. Adjustable rate mortgage products provide for interest adjustment intervals ranging from 1 month to 7 years with payment adjustments that generally occur on an annual basis. Interest adjustments are based on a variety of indices including U.S. Treasury indices, prime rate, and the cost of funds as provided by the 11th District Federal Home Loan Bank. Commercial loans offered by the Bank include fixed-term loans secured by real estate or business assets and commercial lines of credit. Commercial lines of credit are secured by real estate or business assets and are available for inventory expansion or working capital. Consumer loans include fixed-rate home equity loans, home improvement loans, savings account loans, education loans, automobile loans, personal loans, and variable rate home equity lines of credit indexed to the prime rate. 11 Loan Portfolio Analysis The following tables set forth the composition of the Bank's gross loan portfolio by type of loan and type of collateral on the dates indicated.
June 30 ------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------ ------------------ ------------------- ------------------ ------------------ Amount % Amount % Amount % Amount % Amount % ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ (Dollar amounts in thousands) Loan by type: Real estate: Conventional: Existing property..... $2,296,168 89.1% $2,114,092 88.0% $1,662,089 84.8% $1,376,044 81.9% $1,132,316 82.6% Construction.......... 39,80 1.5 26,290 1.1 40,320 2.1 30,234 1.8 12,920 1.0 Insured or guaranteed: FHA or VA............. 81,075 3.2 88,664 3.7 95,816 4.9 114,763 6.8 110,936 8.1 Other.................. 160,523 6.2 174,073 7.2 160,187 8.2 159,836 9.5 114,275 8.3 ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total............... $2,577,571 100.0% $2,403,119 100.0% $1,958,412 100.0% $1,680,877 100.0% $1,370,447 100.0% ========== ====== ========== ====== ========== ====== ========== ====== ========== ====== Loans by type of collateral: Residential: Single family.......... $2,315,566 89.8% $2,173,700 90.4% $1,785,292 91.2% $1,539,258 91.6% $1,306,708 95.3% Other dwelling units... 4,639 0.2 21,210 0.9 6,416 0.3 4,838 0.3 7,839 0.6 Commercial, industrial, and other properties... 238,706 9.3 189,816 7.9 152,396 7.8 118,523 7.0 21,313 1.6 Other................... 18,660 0.7 18,393 0.8 14,308 0.7 18,258 1.1 34,587 2.5 ---------- ------ ---------- ----- ---------- ------ ---------- ------ ---------- ------ Total................ $2,577,571 100.0% $2,403,119 100.0% $1,958,412 100.0% $1,680,877 100.0% $1,370,447 100.0% ========== ====== ========== ====== ========== ====== ========== ====== ========== ======
The above analysis reflects the composition of the loan portfolio (excluding loans available for sale) before considering deferred loan fees, deferred discounts, loans in process, and allowance for loan losses. See Note 6 to the Consolidated Financial Statements of Collective Bancorp, Inc. and Subsidiary incorporated herein by reference. On July 1, 1994, Collective adopted the provisions of Statement of Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Data for 1992 through 1994 has been restated to conform with the 1995 and 1996 presentations. 12 Loan Maturity The following table sets forth the scheduled contractual gross loan maturity distribution at June 30, 1996 without consideration of interim loan repricing.
1 Year 1 to 5 After 5 or Less Years Years Total ------------ ------------ ------------ ------------ (Amounts in thousands Maturity Distribution: Real estate mortgage loans......... $22,525 $147,804 $2,219,268 $2,389,597 Real estate construction loans............................ 27,451 - - 27,451 Installment loans.................. 19,754 38,097 102,672 160,523 ------------ ------------ ------------ ------------ Total............................ $69,730 $185,901 $2,321,940 $2,577,571 ============ ============ ============ ============
Loans Maturing After One Year: Fixed interest rates........................ $ 858,029 Floating or adjustable interest rates....... 1,649,812 ------------ Total....................................... $2,507,841 =============
13 Geographic Lending Area Federal regulations permit the making of real estate loans throughout the United States, provided that the Bank continues to meet the provisions of the Community Reinvestment Act relating to servicing the credit needs of the communities in which it operates offices. Mortgage assets secured by property outside of New Jersey include loans, loan participations, and securitized loans (mortgage-backed securities) originated by Collective Bank's subsidiary service corporation or purchased in the secondary market, primarily from savings and loan associations, the Government National Mortgage Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC"), and the Federal National Mortgage Association ("FNMA"). Mortgage assets also include conventional mortgage-backed securities and mortgage derivative securities purchased from broker-dealers. See Note 6 to the Consolidated Financial Statements included in the 1996 Annual Report to stockholders for information on geographic lending concentration. Loan Originations, Purchases, and Sales The primary lending activity of the Bank has been granting loans to enable borrowers to purchase existing homes, construct new homes, or refinance existing mortgage loans. While the great majority of loan originations are conventional first mortgage, single-family loans, the portfolio also includes loans on two-to-four-family dwellings, multi-family housing (over four units both conventional and Federal Housing Administration ("FHA") insured), commercial and industrial properties, and loans made for the development of unimproved real estate to be used for residential housing. At June 30, 1996, 90% of the Bank's total loan portfolio consisted of loans secured by one-to-four-family dwellings. The Bank's loan originations in fiscal 1996, 1995, and 1994 were approximately $634 million, $691 million, and $895 million, respectively. The Bank has been an active purchaser of whole loans and participations in loans. Of the mortgage assets added to the portfolio in fiscal years 1996, 1995, and 1994, approximately $24 million, $96 million, and $0.4 million, respectively, were loans purchased from other lenders. Loan originations are derived from a number of sources. Residential loan originations can be attributed to real estate broker referrals, present savers and borrowers, correspondents, builders, attorneys, and walk-in customers in both loan origination and retail branch offices, as well as direct solicitation by the Bank's loan solicitor sales force. Commercial loan originations emanate from many of the same sources. Regulations of the OTS limit the amount which savings banks may lend in relationship to the appraised value of the real estate securing the loan, as determined by an appraisal obtained at the time of loan origination. Regulations permit a maximum loan-to-value ratio of 100% for one-to-four-family dwellings and 90% for all other real estate loans. The Bank's general policies currently limit the maximum loan-to-value ratio on single-family conventional loans to 95%, with the condition that private mortgage insurance be required on any home loans with loan-to-value ratios in excess of 80%. Generally, multi-family residential real estate loans do not exceed 80% of value and commercial real estate loans do not exceed 75% of value. 14 The Bank obtains title insurance insuring the priority of the lien on substantially all of its real estate loans and requires that fire and extended coverage casualty insurance be maintained in amounts at least equal to the amounts of the loans. All sales of whole loans and participations in loans originated by the Bank have been made without recourse by the purchaser of the loans. The following table shows the Bank's loan origination, purchase, sale, and repayment activity, before considering deferred loan fees, deferred discounts, loans in process, and allowance for loan losses, for the periods indicated.
Year Ended June 30 ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (Amounts in thousands) Loans Originated: Real estate loans: Construction loans.............. $ 45,923 $ 66,035 $ 60,056 $ 47,902 $ 24,232 Mortgage loans.................. 368,587 433,005 711,055 338,732 226,832 Home equity loans............... 66,885 34,967 9,352 6,850 5,400 Home improvement loans.......... 10 111 90 823 - ---------- ---------- ---------- ---------- ---------- Total real estate.............. 481,405 534,118 780,553 394,307 256,464 ---------- ---------- ---------- ---------- ---------- Other loans: Savings account loans........... 3,058 4,713 3,555 3,901 4,712 Education loans................. 6,909 9,273 9,959 4,808 2,703 Commercial loans................ 114,053 115,318 67,336 46,835 21,260 Personal loans.................. 4,050 3,847 564 1,286 2,812 Home equity credit line......... 24,526 23,564 33,453 55,104 43,638 ---------- ---------- ---------- ---------- ---------- Total other.................... 152,596 156,715 114,867 111,934 75,125 ---------- ---------- ---------- ---------- ---------- Total loans originated......... 634,001 690,833 895,420 506,241 331,589 ---------- ---------- ---------- ---------- ---------- Loans & participations purchased.. 23,990 95,583 407 - 12,132 ---------- ---------- ---------- ---------- ---------- Total loans originated & purchased................... 657,991 786,416 895,827 506,241 343,721 ---------- ---------- ---------- ---------- ---------- Loans & participations sold....... 107,707 43,199 11,075 38,676 125,280 ---------- ---------- ---------- ---------- ---------- Loan Repayments: Real estate loans: Construction/mortgage loans..... 255,220 156,030 301,064 290,807 268,514 Home equity loans............... 21,658 8,787 12,372 10,881 12,156 Home improvement................ 131 212 392 1,629 1,217 ---------- ---------- ---------- ---------- ---------- Total real estate loans repaid.................. 277,009 165,029 313,828 303,317 281,887 ---------- ---------- ---------- ---------- ---------- Other loans: Savings account loans........... 4,091 5,126 5,405 4,266 4,455 Education loans................. 1,095 1,104 4,571 4,198 1,720 Commercial loans................ 59,549 77,564 8,114 22,334 10,887 Personal loans.................. 2,370 1,402 2,080 4,220 4,012 Home equity credit line......... 37,103 36,369 2,296 43,449 26,040 ---------- ---------- ---------- ---------- ---------- Total other loans repaid....... 104,208 121,565 102,466 78,467 47,114 ---------- ---------- ---------- ---------- ---------- Total loan repayments.......... 381,217 286,594 416,294 381,784 329,001 ---------- ---------- ---------- ---------- ---------- Net Change..................... $169,067 $456,623 $468,458 $ 85,781 $(110,560) ========== ========== ========== ========== ==========
15 Loan Fees and Service Charges In addition to interest earned on loans, the Bank receives fees in connection with loan originations, loan prepayments, loan modifications, late payments, changes of property ownership, and miscellaneous related services. Funds collected from those sources vary significantly with the volume and type of loans made and purchased and competitive factors. Income also is produced through the servicing of loans for others. The following table sets forth information for the Bank concerning loan yields, loan fees, deferred loan fees, and unearned discounts on its loan portfolio for each of the years in the five-year period ended June 30, 1996.
Year Ended June 30 ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------ ------------ ------------- ------------- (Dollar amounts in thousands) Weighted average yield on loan portfolio during the period........... 7.88 % 7.70 % 7.53 % 8.53 % 9.65 % Loan fees................................ $5,070 $8,272 $7,316 $10,100 $7,048 Loan fees expressed as % of total loans originated and purchased during period......................... 0.77 % 1.05 % 0.82 % 2.00 % 2.05 % Deferred loan fees on mortgage loans at end of period...................... $4,976 $6,511 $4,012 $7,588 $7,307 Deferred discounts on mortgage loans at end of period...................... $800 $575 $582 $372 $9,930
Classified Assets, Delinquent Loans, and Allowance for Losses The OTS has adopted an asset classification system for insured institutions which covers all problem assets. Under that classification system, problem assets of insured institutions are classified as "substandard", "doubtful", or "loss", depending on the presence of certain characteristics discussed below. An asset is considered substandard if it is inadequately protected by the current net worth and paying capability of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful possess the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectable and of such little value that there is no basis to continue to carry the asset as an asset without the establishment of a specific loss reserve. An insured institution is required to establish a general allowance for loan losses in an amount deemed prudent by management to recognize the inherent risk associated with the institution's lending activities, including consideration of the institution's classified assets. Such general allowances, unlike specific allowances, are not allocated to particular problem assets. When an insured institution classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is required to be consistent with generally accepted accounting principles and is subject to review by the institution's principal regulator, the Regional Director of the OTS, who can order the establishment of additional general or specific loss allowances. In connection with the filing of its periodic reports to the OTS, the Bank regularly reviews the problem assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of such periodic review, management had identified $20.5 million of classified assets, or 0.40% of total assets as classified assets at June 30, 1996. 16 The following table sets forth information regarding restructured loans, classified loans, and real estate held by the Bank at the dates indicated. These amounts are shown net of specific allowances provided for each category. On July 1, 1994, Collective adopted the provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). Data for 1992 through 1994 has been restated to conform with the 1995 and 1996 presentations.
June 30 ---------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------- ------------ ------------ ----------- ----------- (Dollar amounts in thousands) Restructured loans............................... - - - - - Nonaccrual loans: Residential one-to-four-dwelling units......... $15,803 $15,929 $21,326 $28,859 $14,258 Residential construction....................... 409 346 1,374 1,403 622 Commercial real estate......................... 6,947 5,551 10,713 10,520 2,557 Consumer....................................... 7 50 29 68 193 ----------- ------------ ------------ ----------- ----------- Total before specific loss allowances............ 23,166 21,876 33,442 40,850 17,630 Less specific loss allowances.................... 6,055 5,753 9,145 9,559 1,594 ----------- ------------ ------------ ----------- ----------- Net classified loans............................. 17,111 16,123 24,297 31,291 16,036 ----------- ------------ ------------ ----------- ----------- Real estate acquired in settlement of loans...... 3,667 4,390 7,841 9,620 13,024 Less specific loss allowances.................... 302 438 641 3,061 4,444 ----------- ------------ ------------ ----------- ----------- Real estate acquired in settlement of loans(1)... 3,365 3,952 7,200 6,559 8,580 ----------- ------------ ------------ ----------- ----------- Total classified assets.......................... $20,476 $20,075 $31,497 $37,850 $24,616 =========== ============ ============ =========== =========== Total classified assets as a percent of total assets....................... 0.40% 0.39% 0.69% 1.09% 0.98% =========== ============ ============ =========== =========== (1) Does not include real estate acquired in settlement of loans and specific loss allowances related to properties under agreement of sale.
Based upon its evaluation of the loan portfolio, it is management's policy to provide valuation allowances for estimated losses on loans when it determines that a significant and permanent decline in value has occurred and that losses are reasonably expected to be incurred on the loans. Although management believes that it uses the best information available at the time such determinations are made, future adjustments to allowances could be necessary. At June 30, 1996, Collective had valuation allowances for loans amounting to $12.9 million. During fiscal 1995, Collective adopted the provisions of SFAS 114 and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan" ("SFAS 118"), which amends SFAS 114. The adoption of these standards did not significantly alter the amount of loans classified as impaired or any related allowances. SFAS 114 requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective rate or, as a practical expedient, the loan's observable market price, or the fair value of the collateral may be used if the loan is collateral dependent. In applying the provisions of SFAS 114 and SFAS 118, Collective utilizes the fair value of the collateral for measurement of substantially all impaired mortgage loans and commercial loans. To a lesser extent, where loans are not collateral dependent, the present value of expected future cash flows is utilized. When a borrower fails to make a required payment on a loan, the Bank attempts to cure the default by contacting the borrower. In general, contacts are made after a payment is more than 15 days past due, and a late charge is assessed at that time. In most cases, defaults are cured promptly. If the delinquency on a mortgage loan exceeds 90 days and is not cured through the Bank's normal collection procedures or an acceptable arrangement is not worked out with the borrower, the Bank will institute measures to remedy the default, including commencing a foreclosure action or in special circumstances accepting a voluntary deed of the security property in lieu of foreclosure from the mortgagor. If foreclosure is effected, the property is sold at a public auction in which the Bank may participate as a bidder. If the Bank is the successful bidder, acquired real estate is then included in the Bank's "real estate acquired in settlement of loans" ("REO") account until it is sold. 17 Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified as REO until it is sold. When property is acquired, it is recorded at the lower of cost or fair value less estimated costs of sale at the date of acquisition. Any writedown resulting therefrom is charged to the allowance for loan losses. Interest accrual ceases when the loan becomes 90 days delinquent, and all costs incurred from that date in maintaining the property are expensed. Costs incurred for the improvement and development of such property are capitalized to the extent realizable. Summary of Loan Loss Experience The following table depicts an analysis of the Bank's allowance for loan losses for the years indicated.
Year Ended June 30 ------------------------------------------------------------- 1996 1995 1994 ------------ ------------- ------------ (Dollar amounts in thousands) Beginning balance.................................. $14,126 $18,006 $22,291 Charge-offs: Real estate - mortgage........................... 2,975 2,573 5,220 Real estate - construction....................... 174 - 333 Commercial....................................... 640 1,526 814 Home equity...................................... 170 2 204 Other............................................ 194 19 66 ------------ ------------- ------------ 4,153 4,120 6,637 ------------ ------------- ------------ Recoveries: Real estate - mortgage........................... 543 - - Real estate - construction....................... - - - Commercial....................................... 116 - - Home equity...................................... 113 - - Other............................................ 111 - - ------------ ------------- ------------ 883 - - ------------ ------------- ------------ Net charge-offs.................................... 3,270 4,120 6,637 ------------ ------------- ------------ Additions charged to operations.................... 2,035 240 2,352 ------------ ------------- ------------ Ending balance..................................... $12,891 $14,126 $18,006 ============ ============= ============ Ratio of net charge-offs during the period to average loans outstanding during the period 0.13% 0.19% 0.39% ============ ============= ============
The following sets forth the allocation of the Bank's allowance for loan losses at the dates indicated.
June 30 ------------------------------------------------------------- 1996 1995 1994 ------------ ------------- ------------ (Amounts in thousands) Real estate - mortgage............ $ 5,403 $ 7,550 $10,446 Real estate - construction........ 265 439 503 Commercial........................ 6,642 5,432 6,501 Home equity....................... 486 527 512 Other............................. 95 178 44 ------------ ------------- ------------ Total............................. $12,891 $14,126 $18,006 ============ ============= ============
18 Mortgage-Backed Security Activities The Bank has been an active purchaser of mortgage-backed securities ("MBS's"), including mortgage derivative securities consisting primarily of collateralized mortgage obligations ("CMO's"). Also, the Bank generally securitizes originated loans that it may sell in the secondary market. At the time of purchase, the Bank's CMO's generally were considered to be medium-term investments. The cash flows and estimated lives of such CMO's can be volatile during periods of changing interest rates, particularly during periods of rising interest rates when the estimated average lives can extend to approximate the lives of longer-term securities. The Bank did not purchase any CMO's during fiscal 1996. Mortgage-backed securities purchased during the 1996, 1995, and 1994 fiscal years amounted to approximately $113 million, $165 million, and $1.679 billion, respectively. Such purchases included securitizations of loans originated by Collective in 1996, 1995, and 1994 amounting to $14 million, $32 million, and $211 million, respectively. The following table sets forth the composition of the Bank's mortgage-backed security portfolio by category.
June 30 ---------------------------------------------------------------------------- 1996 1995 1994 ------------------------------------ ----------------- ----------------- (Amounts in thousands) Gross Estimated Gross Gross Amortized Cost Fair Value Amortized Cost Amortized Cost ----------------- ----------------- ----------------- ----------------- Trading securities: FHLMC pass-through certificates........................ - - $ 13,127 - ----------------- ----------------- ----------------- ----------------- Available for sale: Collateralized mortgage obligations......................... - - - $ 96,719 GNMA pass-through certificates........................ $ 6,461 $ 6,928 $ 8,236 9,683 FHLMC pass-through certificates........................ 66,355 67,921 56,030 68,783 FNMA pass-through certificates........................ 20,290 20,196 10,156 6,401 ----------------- ----------------- ----------------- ----------------- Subtotal............................. 93,106 95,045 74,422 181,586 ----------------- ----------------- ----------------- ----------------- Held to maturity: Collateralized mortgage obligations......................... 1,546,690 1,487,520 1,661,020 1,716,807 GNMA mortgage-backed securities.......................... 3,485 3,508 3,990 4,405 FHLMC mortgage-backed securities.......................... 159,995 156,410 168,272 126,259 FNMA mortgage-backed securities.......................... 263,472 249,393 267,062 270,939 ----------------- ----------------- ----------------- ----------------- Subtotal............................. 1,973,642 1,896,831 2,100,344 2,118,410 ----------------- ----------------- ----------------- ----------------- Total................................ $2,066,748 $1,991,876 $2,187,893 $2,299,996 ================= ================= ================= =================
19 The mortgage-backed security portfolio at June 30, 1996 categorized by contractual maturity is as follows.
(Dollar amounts in thousands) Gross Weighted Amortized Cost Average Yield ------------------------------------ Due in one year or less............................................... $ 34,381 6.99% Due after one year through five years................................. 940,950 6.67 Due after five years through ten years................................ 522,385 6.83 Due after ten years................................................... 569,032 6.61 ----------------- Total................................................................. $2,066,748 =================
Actual maturities will differ from contractual maturities due to prepayments. Retail Banking Retail Banking operations consist of two major functions, deposit gathering activities and loan originations. Deposit gathering activities consist of selling savings, time, and checking deposits. The deposit customers of the Bank are mainly individuals. However, the Bank is steadily increasing its share of business and governmental customers. Savings instruments consist of regular savings accounts in passbook or statement form, money market accounts, and certificates of deposit ranging in term from seven (7) days to ten (10) years. These savings instruments may also be used as an investment vehicle for individual retirement accounts ("IRA's") and self-employed retirement accounts ("KEOGH's"), which are managed by the Bank. Checking accounts, which comprise an increasing portion of the Bank's deposits, are marketed to the public in interest bearing ("NOW") and non-interest bearing versions. Checking deposits provide the Bank with a major source of low cost funds and significant fee income. One-to-four-family mortgages, consumer loans, and business loans are originated through the retail offices. Mortgage loan originations consist of a variety of fixed rate and adjustable rate loans. The consumer loans that are available include revolving home equity credits, student loans, auto loans, and personal loans. Business loans are made for either a fixed term or as a line of credit. Mortgage loans and consumer loans are offered to individuals from the general population in the Bank's market areas. Business loans are made to creditworthy establishments and professionals. See "Lending Activities", page 10. Other traditional banking services are performed for the convenience of the Bank's deposit and loan customers, as well as to provide the Bank with additional sources of fee income. Those services include: . The sale and redemption of U.S. Savings Bonds . Bond coupon redemption services . Electronic banking . Pay-by-phone banking . Sale of money orders . Sale of travelers checks . ATM (Automatic Teller Machine) Services . Direct deposit of payroll or pension . Cash management services 20 The following table sets forth by various rate categories the total amount of certificate accounts of the Bank at June 30, 1996 and the amount of certificate accounts maturing in each of the following three fiscal years and subsequent to June 30, 1999.
Total 2.00% to 7.00% to 9.00% to 11.00% to 13.00% to Accounts 6.99% 8.99% 10.99% 12.99% 16.99% -------------- -------------- -------------- -------------- ------------- ------------- (Amounts in thousands) Maturing in Quarter Ended: September 30, 1996............. $ 629,742 $ 624,570 $ 5,049 - - $123 December 31, 1996.............. 183,335 182,676 655 - $ 1 3 March 31, 1997................. 222,608 222,241 295 $ 72 - - June 30, 1997.................. 235,423 235,220 203 - - - September 30, 1997............. 238,616 238,441 175 - - - December 31, 1997.............. 45,689 43,832 922 932 3 - March 31, 1998................. 60,191 58,464 1,567 160 - - June 30, 1998.................. 26,832 24,897 1,662 273 - - September 30, 1998............. 27,290 26,370 692 228 - - December 31, 1998.............. 8,997 8,526 406 51 14 - March 31, 1999................. 5,951 4,510 1,268 140 33 - June 30, 1999.................. 8,320 7,444 582 285 9 - Thereafter..................... 112,107 109,104 2,943 16 37 7 -------------- -------------- -------------- -------------- ------------- ------------- Total certificates............. $1,805,101 $1,786,295 $16,419 $2,157 $ 97 $133 ============== ============== ============== ============== ============= =============
Demand deposits, passbook savings and investments accounts, and savings certificates by interest rate as of June 30, 1996 and 1995 were as follows.
June 30 Average Rate at ----------------------------------------- Deposit Category by Type June 30, 1996 1996 1995 --------------------- --------------- -------------- (Dollar amounts in thousands) Non-interest bearing..................... - $ 95,792 $ 76,705 Commercial, interest bearing............. 4.07% 130,482 87,388 NOW accounts............................. 1.76% 275,407 283,798 Super NOW accounts....................... 3.48% 102,406 80,164 --------------- -------------- Total demand deposits 604,087 528,055 --------------- -------------- Passbook accounts........................ 2.60% 549,055 556,559 Clubs.................................... 3.61% 8,039 7,957 Money market passbook accounts........... 2.77% 115,469 110,426 Super money market....................... 4.05% 172,636 158,099 --------------- -------------- Total passbook savings and investment accounts.................. 845,199 833,041 --------------- -------------- Savings certificates: 2.00% - 6.99% 1,786,295 1,873,452 7.00% - 8.99% 16,419 27,467 9.00% - 10.99% 2,157 15,574 11.00% - 12.99% 97 228 13.00% - 14.99% 7 6 15.00% - 16.99% 126 - --------------- -------------- Total savings certificates............... 1,805,101 1,916,727 --------------- -------------- Total deposits........................... $3,254,387 $3,277,823 =============== ==============
21 The following table sets forth the composition of the Bank's deposit balances at June 30, 1996 by type and date of maturity. Such amounts are also expressed as a percentage of total deposits.
Total Fixed and Negotiated Accounts Variable Rate Certificates % of at June 30, Rate ($100,000 Total 1996 Certificates or more) Deposits --------------- -------------- -------------------- ------------- (Dollar amounts in thousands) Passbook and statement accounts............ $ 845,199 26.0% Non-interest bearing....................... 95,792 2.9% Commercial, interest bearing............... 130,482 4.0% NOW accounts............................... 275,407 8.5% Super NOW accounts......................... 102,406 3.1% --------------- ------------- Total non-certificates................... $1,449,286 44.5% --------------- ------------- Certificate accounts maturing in quarter ended: September 30, 1996......................... $ 629,742 $ 506,969 $ 122,773 19.4% December 31, 1996.......................... 183,335 178,102 5,233 5.6% March 31, 1997............................. 222,608 222,508 100 6.8% June 30, 1997.............................. 235,423 235,322 101 7.2% September 30, 1997......................... 238,616 238,616 - 7.3% December 31, 1997.......................... 45,689 44,689 1,000 1.4% March 31, 1998............................. 60,191 60,191 - 1.9% June 30, 1998.............................. 26,832 26,832 - 0.8% September 30, 1998......................... 27,290 27,290 - 0.8% December 31, 1998.......................... 8,997 8,997 - 0.3% March 31, 1999............................. 5,951 5,951 - 0.2% June 30, 1999.............................. 8,320 8,320 - 0.3% Thereafter................................. 112,107 112,107 - 3.5% --------------- -------------- -------------------- ------------- Total certificates....................... $1,805,101 $1,675,894 $ 129,207 55.5% --------------- ============== ==================== ------------- Total deposits........................... $3,254,387 100.0% =============== =============
The following table shows the net increase in deposits for the Bank by major account category for the periods indicated.
Year Ended June 30 --------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------- ------------- (Amounts in thousands) Net increase (decrease) in: Demand deposits........................... $ 76,032 $ 56,780 $ 98,286 $ 83,276 $ 98,968 Passbook savings and investment accounts................................ 12,158 (135,371) 144,698 298,670 87,709 Savings certificates...................... (111,626) 352,452 (31,000) 295,883 (48,961) ------------- ------------- ------------- ------------- ------------- Net (decrease) increase in deposits......... $(23,436) $273,861 $211,984 $677,829 $137,716 ============= ============= ============= ============= =============
22 Deregulated certificates have penalties of loss of interest ranging from the loss of one week to three months' interest. As of June 30, 1996, 55.5% of all deposits were certificate accounts. The following table shows the deposits activity and the weighted average cost of deposits as of the dates indicated.
Year ended June 30 --------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------- ------------- ------------- -------------- (Dollar amounts in thousands) Net (decrease) increase in deposits before acquisitions......... $(153,807) $ 55,317 $(173,451) $(113,133) $(111,079) Deposits from acquisitions............. - 99,818 286,099 704,415 141,246 ------------- ------------- ------------- ------------- -------------- Net (decrease) increase before interest credited.................... (153,807) 155,135 112,648 591,282 30,167 Interest credited...................... 130,371 118,726 99,336 86,547 107,549 ------------- ------------- ------------- ------------- -------------- Net (decrease) increase in deposits.... $ (23,436) $ 273,861 $ 211,984 $ 677,829 $ 137,716 ============= ============= ============= ============= ============== Weighted average interest cost of deposits during period............... 4.09% 3.75% 3.35% 4.03% 5.79% ============= ============= ============= ============= ==============
Borrowings The FHLB provides a reserve credit facility to its members both for the purpose of meeting the members' demand for funds when savings flows are insufficient and to enable its members to fix their cost of funds for longer terms through a long-term, fixed-rate program. Advances from the FHLB are made on the security of the FHLB capital stock owned by the Bank as well as certain of its mortgage loans, and the Bank must meet certain standards related to creditworthiness in connection with the advances. For interest rates and maturities, see Note 12 to the Consolidated Financial Statements of Collective Bancorp, Inc. and Subsidiary. Other borrowings primarily represent funds obtained from brokers under security repurchase agreements. Those transactions are only effected through primary government bond dealers of the Federal Reserve Bank of New York. They are secured by U.S. Treasury obligations, FHLMC securities, FNMA securities, and GNMA securities. From time to time, borrowings are obtained for the purchase of mortgage loans or mortgage-backed securities through other sources. The loans or securities that are purchased normally secure the borrowings from those sources. The following table sets forth the composition of Collective's Federal Home Loan Bank advances and other borrowed funds on the dates indicated.
June 30 --------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------------- -------------- ------------- -------------- -------------- (Dollar amounts in thousands) FHLB advances............................ - $ 395,000 $ 365,000 $ 135,000 $ 80,000 Securities sold under agreements to repurchase(1)........................ $1,465,980 1,044,596 886,252 171,228 64,042 Other borrowings......................... 7,468 8,324 9,663 5,945 5,797 -------------- -------------- ------------- -------------- -------------- Total borrowings......................... $1,473,448 $1,447,920 $1,260,915 $ 312,173 $ 149,839 ============== ============== ============= ============== ============== Weighted average cost of borrowings during period.......................... 5.56% 5.50% 3.63% 3.59% 5.21% ============== ============== ============= ============== ============== (1) Securities sold under agreements to repurchase at June 30, 1996 consisted of U.S. Government agency obligations maturing through July 29, 1996.
23 Competition The Bank experiences substantial competition in attracting and retaining deposits and in making real estate, consumer, and commercial loans. The primary factors in competing for deposits are interest rates, convenience of office locations, and customer service. Direct competition for deposits comes from savings and loan associations, commercial banks and credit unions, and, more recently, other financial services companies. Additional significant competition for deposits comes from corporate and government securities and money market funds, which may yield higher interest rates than instruments offered by savings banks. The primary factors in competing for loans are interest rates and rate adjustment provisions, loan maturity, loan fees, and the quality of service to borrowers. Competition for origination of loans normally comes from savings and loan associations, savings banks, commercial banks, mortgage banking companies, and insurance companies. Employees At June 30, 1996, Collective and its subsidiary employed 884 full-time and 229 part-time employees. Management considers its relations with its employees to be good. The Bank provides its employees with a comprehensive benefits program, including basic and major medical insurance, dental insurance, life insurance, long term disability insurance, employee stock ownership plan, and thrift and profit sharing plans. Such employee benefits are considered by management to be generally comparable with employee benefits provided by other major employers in its market area. Regulatory Matters General. Collective Bancorp, as a unitary savings and loan holding company, and Collective Bank, as a federally chartered, FDIC insured savings bank, are subject to extensive federal regulation, primarily by the OTS and to a lesser extent by the Federal Deposit Insurance Corporation ("FDIC"). The Bank must file reports with the OTS and FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions, such as mergers with or acquisitions of other savings institutions. There are periodic examinations by the OTS and the FDIC to test the Bank's compliance with various regulatory requirements. As a savings and loan holding company, Collective is also required to file certain reports with, is subject to periodic examinations by, and otherwise is required to comply with the rules and regulations of the OTS relating to holding companies. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss allowances for regulatory purposes. Any change in such regulation, whether by the OTS, the FDIC, or the Congress, could have a material adverse impact on Collective, the Bank, and their operations. Federal Deposit Insurance Corporation Improvement Act of 1991. On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") became law. While FDICIA primarily addresses additional sources of funding for the Bank Insurance Fund ("BIF"), which insures the deposits of commercial banks and savings banks, it also imposes a number of new mandatory supervisory measures on savings associations and banks. FDICIA requires financial institutions to take certain actions relating to their internal operations, including: providing annual reports on financial condition and management to the appropriate federal banking regulators, having an annual independent audit of financial statements performed by an independent public accountant, and establishing an independent audit committee comprised solely of outside directors. FDICIA also imposes certain operational and managerial standards on financial institutions relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees, and benefits. The banking regulators adopted final regulations implementing those standards in May 1993 to become effective for fiscal years beginning after December 31, 1992. FDICIA also requires the FDIC to assess deposit insurance premiums based on risk. Regulations implementing those standards became effective January 1, 1993. 24 FDICIA establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under that system, which became effective on December 19, 1992, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's level of capitalization. Generally, subject to a narrow exception, FDICIA requires the banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. FDICIA authorizes the banking regulators to specify the ratio of tangible capital to assets at which an institution becomes critically undercapitalized and requires that ratio to be no less than 2% of assets. Under the OTS final rule implementing the prompt corrective action provisions, a savings institution that has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater is deemed to be "well-capitalized". An institution with a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater is considered to be "adequately capitalized". A savings institution that has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio that is less than 4.0% is considered "undercapitalized". A savings institution that has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized", and a savings institution that has a tangible equity (core capital, minus intangible assets other than supervisory goodwill and purchased mortgage servicing rights) to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized". Under the rule, the Bank is considered to be "well-capitalized". Other provisions of FDICIA require financial institutions to provide supplemental disclosure in financial statements filed with the regulators of the estimated fair market value of assets and liabilities, permit thrift institutions to acquire commercial banks and commercial banks to acquire thrift institutions, and increase the amount of consumer loans that a savings association may invest in from 30% to 35% of total assets. QTL Requirement. Under the qualified thrift lender ("QTL") test, savings institutions are required to maintain 65% of their portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business, and liquid assets equal to 20% of total assets) in "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities and stock issued by any Federal Home Loan Bank, Fannie Mae and Freddie Mac) and to continue to meet such test for each subsequent two-year period. An institution which fails the QTL test is prohibited from: (1) engaging in any new activity not permissible for a national bank, (2) paying dividends unless in compliance with national bank regulations, and (3) obtaining new advances from the FHLB System. In addition, a savings institution failing to comply with the QTL requirements is required to convert to a bank charter within three years, unless it requalifies as a QTL within a one-year period and retains such QTL status thereafter. If such conversion or requalification does not occur within three years, the association must repay all FHLB advances, divest all investments, and cease all activities not permissible for a national bank. In addition, within one year of failure, any holding company of the failing savings association must register and become subject to the regulations applicable to bank holding companies under the Bank Holding Company Act ("BHC Act"). An institution can lose its QTL status at any time after that date, if its percentage of qualified thrift investments, averaged over the immediately preceding two year period, falls below 70%. Institutions are required to report their qualified thrift investments to the OTS on a quarterly basis. As of June 30, 1996, the Bank maintained 97% of its portfolio assets in qualified thrift investments, which met the QTL test. Capital Requirements. The OTS regulations include three separate measurements of capital adequacy: a leverage ratio, a tangible capital standard, and a risk-based capital standard. The OTS capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and retained earnings, certain non-cumulative perpetual preferred stock, and related surplus. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital. The capital regulations also require that savings institutions maintain a leverage (core capital) ratio of 3% to adjusted total assets as defined by the regulations. Core capital is defined as common stockholders' equity (including retained earnings), non-cumulative perpetual preferred stock and related surplus, minority interests in equity accounts of consolidated subsidiaries, less intangibles; up to 25% of other intangibles which meet separate saleability and market valuation tests; and certain purchased mortgage servicing rights. No goodwill or core deposit intangibles may be included in core capital. 25 The OTS capital regulation requires that, in meeting the leverage ratio and tangible and risk-based capital standards, savings institutions must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank (a "non-qualifying subsidiary"). At June 30, 1996, the Bank did not have a non-qualifying subsidiary. The risk-based capital standard for savings institutions requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 8%. In determining the amount of risk-weighted assets, all assets, including certain off-balance-sheet assets, are multiplied by risk-weights ranging from 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of assets. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, and allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-adjusted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. At June 30, 1996, the Bank met each of its capital requirements. See Note 16 to the Consolidated Financial Statements included in the 1996 Annual Report to stockholders for a comparison of the Bank's regulatory capital ratios at June 30, 1996 with the minimum requirements. Limitation on Dividends and Other Capital Distributions. The OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger, and other distributions charged against capital. An institution that exceeds all capital requirements before and after the proposed capital distribution and has not been advised by the OTS that it is in need of more than normal supervision, can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to 100% of its net income to date during the calendar year plus an amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its capital requirements) at the beginning of the calendar year, or 75% of its net income for the most recent four quarters, whichever is greater. Any additional capital distributions require prior regulatory approval. A savings institution that does not meet its current regulatory capital requirement before or after payment of a proposed capital distribution can not make any capital distributions without the prior written approval of the OTS. Such institutions, however, may make capital distributions consistent with approved capital plans. In addition, the OTS can prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe and unsound practice. As of June 30, 1996, the Bank exceeded all of its minimum capital requirements and had not been notified by the OTS that it is in need of more than normal supervision. Thus, the Bank need only provide the OTS with thirty-days advance notice of any proposed declaration of a dividend to the Holding Company. Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured depositor and by the BIF to a maximum of $100,000 for each insured depositor with respect to the deposits acquired from Montclair Savings Bank and Sovereign Bank. Under the FDIC risk-based assessment system for insured depository institutions, the assessment rate depends on the assessment risk classification assigned to the institution by the FDIC, based upon the institution's level of capitalization and the FDIC's judgment of the risk posed by the institution. Institutions are assigned to one of three capital groups - well capitalized, adequately capitalized, or less than adequately capitalized - based on whether they meet defined capital ratios, and to one of three supervisory subgroups within the capital group - healthy, of supervisory concern, or of substantial supervisory concern - based on supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. The assessment rate for SAIF-insured institutions ranges from 0.23% to 0.31% with an average assessment rate of 0.259%. At the present time, the Bank is assigned an assessment rate of 0.23%. 26 In June 1995, the FDIC virtually eliminated assessments for well capitalized BIF members. As a result of that change, approximately 91% of BIF members pay only the minimum assessment for deposit insurance. The FDIC retained the existing assessment rate schedule of 23 to 31 basis points applicable to SAIF member institutions. In announcing the new schedule, the FDIC noted that the premium differential may have adverse consequences for SAIF members, including reduced earnings and an impaired ability to raise funds in the capital markets. In addition, SAIF members, such as the Bank, could be placed at a substantial disadvantage to BIF members with respect to pricing of loans and deposits and the ability to achieve lower operating costs. Several alternatives to mitigate the effect of the BIF/SAIF premium disparity have been suggested including, among others, the merger of BIF and SAIF or the assessment of a one-time fee on the deposits held by SAIF members to recapitalize the SAIF fund. Various bank regulators have recently proposed to Congress that a special one-time assessment of between 75-85 basis points be adopted to recapitalize the SAIF fund. This would allow adoption of an ongoing assessment schedule similar to that applicable to BIF members. The proposal also contemplates an eventual merger of the BIF and SAIF into one fund and the elmination of the thrift charter. It cannot be predicted whether this or any other legislation regarding the disparity will be enacted. Any such legislation may have an adverse effect on the operating expenses, provisions for income taxes, and results of operations of the Bank. Federal Home Loan Bank System. The Bank is a member of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Bank, as a member of the FHLB-New York, is required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB-New York, whichever is greater. The Bank is in compliance with this requirement, with an investment in FHLB-New York stock at June 30, 1996 of $45.1 million. FIRREA provides that FHLB advances be secured by specified types of collateral and be obtained only for the purpose of providing funds for residential housing finance, and that regulations be adopted establishing standards of community investment and service that must be met by members seeking to receive FHLB advances. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") requires the FHLB to pay approximately $300 million per year from their annual earnings in order to provide funds for the repayment of bonds sold by the Resolution Funding Corporation ("REFCORP"), the agency created by FIRREA to raise funds to be used for the resolution of insolvent savings institutions. In addition, the FHLBs were required to pay from their reserves and undivided profits approximately $1.8 billion to purchase stock in the REFCORP. The FHLBs are also required under FIRREA to contribute a percentage of their earnings to affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. For the years ended June 30, 1994, 1995 and 1996, dividends from the FHLB-New York to the Bank amounted to $2.1 million, $1.7 million, and $2.4 million, respectively. Should dividends be reduced or interest on future FHLB advances increased, the Bank's net interest income might also be reduced. Furthermore there cannot be any assurance that the impact of the FIRREA on the FHLBs will not also cause a decrease in the value of the FHLB-New York stock held by the Bank. Regulation of the Holding Company. The Holding Company is subject to OTS regulations, examinations, supervision, and reporting requirements. In addition, the OTS has enforcement authority over the Holding Company and any non-savings institution subsidiaries established by it. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. 27 The Home Owners' Loan Act ("HOLA") prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from (1) acquiring control of, or acquiring by merger or purchase of assets, another savings institution or holding company thereof, without prior written approval of the OTS, (2) acquiring or retaining, with certain exceptions, more than 5% of a non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA, or (3) acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community, and competitive factors. As a unitary savings and loan holding company, Collective generally will not be restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a QTL. Upon any acquisition by the Holding Company of another SAIF-insured institution, a federal savings bank insured by the BIF, or a state-chartered BIF-insured savings bank meeting the QTL test that is deemed to be a savings institution by OTS, except for a supervisory acquisition, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the BHC Act, subject to the prior approval of the OTS, and activities in which multiple savings and loan holding companies were authorized by regulation to engage in on March 5, 1987. Such activities include mortgage banking, consumer finance, operation of a trust company, and certain types of securities brokerage. The services and activities in which multiple holding companies were authorized to engage on March 5, 1987 generally correspond to the activities which are permitted for service corporations of federally chartered savings institutions. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. Taxation Collective and its subsidiary file a consolidated federal income tax return on a fiscal year basis. The provision for income taxes is calculated under the net change method. Under the net change method, the tax effects of changes in tax and book assets and liabilities are computed at current tax rates. The federal statutory rate was 35% for the years ended June 30, 1996, 1995, and 1994. Savings institutions which meet certain definitional tests and other conditions prescribed by the Internal Revenue Code are allowed annual deductions for additions to their bad debt reserve. A qualifying institution may elect annually to compute this deduction as a percentage of taxable income before such deduction or based upon actual loss experience. During fiscal 1994, 1995, and 1996 Collective Bank employed the percentage of taxable income method. Under the percentage of taxable income method, savings institutions are allowed to deduct eight percent of annual taxable income (adjusted to exclude certain amounts) for annual additions to their bad debt reserve established for federal income tax purposes. This eight percent amount, however, must be reduced (but not below zero) by the amount of the deduction allowed for losses on nonqualifying loans. Furthermore, the bad debt reserve deduction under the percentage of taxable income method is available only to the extent that the total amount accumulated in the bad debt reserve for qualifying real property loans does not exceed six percent of such loans outstanding at year-end. The deduction is further limited to the greater of (1) the amount equal to the addition to the bad debt reserve for losses on qualifying real property loans under the experience method, or (2) the amount which, when added to the addition to the bad debt reserve for losses on nonqualifying loans, equals the amount by which 12% of total deposits or withdrawable accounts at year-end exceeds the sum of surplus, undivided profits, and reserves at the beginning of the year. The amounts of bad debt reserve deductions taken by Collective Bank to date have been substantially below the maximum amounts permitted under the foregoing limitations. 28 On August 20, 1996, legislation was enacted repealing Section 593 of the Internal Revenue Code which had permitted the use of the percentage of taxable income bad debt deduction method. Therefore, effective July 1, 1997, Collective will no longer be allowed to use such method. The legislation also provided for recapture of a thrift institution's post-1987 excess bad debt reserves resulting from use of the percentage of taxable income bad debt method. The tax on the excess bad debt reserves is payable over a six-year period commencing with Collective's 1997 fiscal year. A two-year deferral to fiscal 1999 for commencement of the six-year payment period will be available to Collective if it meets a specified residential loan production test. It has not yet been determined whether Collective will meet such test during fiscal 1997. At June 30, 1996, Collective's post-1987 excess tax bad debt reserves amounted to $14.8 million. The legislation will not have a material impact on Collective's financial condition or results of operations because deferred taxes, amounting to $5.5 million, have been provided on such excess reserves. Earnings appropriated to bad debt reserves established for income tax purposes cannot be used for any purpose other than to absorb bad debt losses without payment of federal income taxes by the Bank on the amounts so used at the then current tax rate. In addition, if such reserves are used to pay dividends or to make other distributions with respect to its stock (such as distributions in redemption of its stock), they would be subject to taxation at the then current corporate tax rates, on an amount approximately one and one-third times the actual amount of any such distribution. Dividends may be paid out of unappropriated retained earnings without the imposition of any tax on the Bank to the extent that the amounts paid as dividends do not exceed earnings and profits as calculated for federal income tax purposes. Collective files income tax returns as part of a consolidated group. By filing a consolidated return, the Bank is subject to a Department of the Treasury regulation that requires savings institutions which file income tax returns as part of a consolidated group to reduce proportionately their bad debt deduction for certain tax losses incurred by non-savings and loan members of the consolidated group. The most recent completed examination by the IRS of the tax returns of Collective was through the calendar year 1991. There were no changes made to Collective's taxable income as originally reported. 29 Offices Collective's executive offices are located at 716 West White Horse Pike, Cologne, New Jersey 08213. Collective Bank operates 78 branch offices at the locations described below. Collective Bank also operates one office through its mortgage banking subsidiary, Collective Mortgage Services, Inc., at the location described below. Item 2. Properties The following table lists certain information concerning each of Collective's office locations and other properties as of June 30, 1996.
Net Carrying Value Lease of Real Property Expiration ---------------------------------------------------------- Office Location Owned Leased ----------------- ----------------- Main office 150-158 Philadelphia Avenue Egg Harbor, New Jersey 08215................... $ 289,792 200 Philadelphia Avenue Egg Harbor, New Jersey 08215................... - - - 223 Philadelphia Avenue Egg Harbor, New Jersey 08215................... 170,702 Hamilton Industrial Park 1800 Atlantic Avenue Mays Landing, New Jersey 08330................. 5,374,761 716 W. White Horse Pike Cologne, New Jersey 08213...................... 1,045,497 Hamilton Pl., Unit 5 5270 Oakwood Blvd. Mays Landing, New Jersey 08330................. $13,088 12/31/98 402 Hamberg Avenue Egg Harbor, New Jersey 08215................... 3,402 4/30/98 Route 34 and Lloyd Road Aberdeen, New Jersey 07747..................... 553,146 221 New Jersey Avenue Absecon, New Jersey 08201...................... 1,224,508 151 New Jersey Avenue Absecon, New Jersey 08201...................... 131,045 134 New Jersey Avenue Absecon, New Jersey 08201...................... 3,489 8/31/96 (1)
30
Net Carrying Value Lease of Real Property Expiration ---------------------------------------------------------- Office Location Owned Leased ----------------- ----------------- Ventnor and LaClede Place Atlantic City, New Jersey 08401................ $ 362,378 1125 Atlantic Avenue Atlantic City, New Jersey 08401................ $ 63,418 4/30/97 2815 Beach Haven Blvd. Beach Haven, New Jersey 08008.................. 330,913 Beckett Village, Logan Township Beckett, New Jersey 08085...................... 3,790 2/28/99 321 Franklin Avenue Belleville, New Jersey 07109................... 227,327 Berlin Shopping Center 340 S. White Horse Pike Berlin, New Jersey 08009....................... 388,105 324 Broad Street Bloomfield, New Jersey 07003................... 477,645 44 Main Street Bloomingdale, New Jersey 07403................. 542,127 321 West Main Street Boonton, New Jersey 07005...................... 27,627 6/30/98 545 Brick Boulevard Bricktown, New Jersey 08723.................... 903,042 32nd & Revere Road Brigantine, New Jersey 08203................... 566,222 130 Main Street Butler, New Jersey 07405....................... 161,507 1400 Route 23 Butler, New Jersey 07405....................... 356,703 Cardiff Circle Shopping Center Blackhorse Pike & Washington Ave. Cardiff, New Jersey 08232...................... 198,848 4/30/03 508 Pompton Avenue Cedar Grove, New Jersey 07009.................. 79,657
31
Net Carrying Value Lease of Real Property Expiration ---------------------------------------------------------- Office Location Owned Leased ----------------- ----------------- 1 Ellisburg Circle Cherry Hill, New Jersey 08034.................. $ 16,616 7/11/96 (2) Route 130 South & Cinnaminson Avenue Cinnaminson, New Jersey 08077.................. 78,633 9/30/03 6 Bloomfield Avenue Denville, New Jersey 07834..................... $714,528 405 North Avenue Dunellen, New Jersey 08812..................... 403,207 Route 18 & West Ferris Street East Brunswick, New Jersey 08816............... 533,308 315 Route 35, Plaza 35 Center Eatontown, New Jersey 07724.................... 33,857 9/30/98 Oakwood Plaza, 159 Wood Avenue Edison, New Jersey 08812....................... 43,443 12/31/98 Barkalow Avenue and Route 9 Freehold, New Jersey 07728..................... 787,292 227 Ridgewood Avenue Glen Ridge, New Jersey 07028................... 246,902 726 Bloomfield Avenue Glen Ridge, New Jersey 07028................... 786,300 Broadway & Monmouth Streets Gloucester, New Jersey 08030................... 93,007 Routes 30 and 206 Hammonton, New Jersey 08037.................... 407,186 209 Bellevue Avenue Hammonton, New Jersey 08037.................... 945,633 335 Harrison Avenue Harrison, New Jersey 07029..................... 246,081 301 Raritan Avenue Highland Park, New Jersey 08904................ 289,278 Bergen Avenue & Montgomery Street Jersey City, New Jersey 07306.................. 347,678
32
Net Carrying Value Lease of Real Property Expiration ---------------------------------------------------------- Office Location Owned Leased ----------------- ----------------- Hudson Mall, Hwy. 440 Jersey City, New Jersey 07304.................. $ 6,936 2/28/00 504 Route 9 Lanoka Harbor, New Jersey 08731............... $ 251,753 Central Square 609 New Road Linwood, New Jersey 08221...................... 4,347 6/30/97 609 East Bay Avenue Manahawkin, New Jersey 08731................... 13,962 1/31/97 324 Route 72 West Manahawkin, New Jersey 08731................... 1,250,954 Broadway and Monmouth Streets Mantua, New Jersey 08051....................... 216,491 7903 Ventnor Avenue Margate, New Jersey 08402...................... 294,963 906 Marlton Pike (Route 70) Marlton, New Jersey 08053...................... 23,115 4/10/97 Plaza 9 Shopping Center Route 9 Marmora, New Jersey 08223...................... 3,983 6/30/98 525 Cape May Avenue Mays Landing, New Jersey 08330................. 91,871 2nd Street & Cape May Avenue Mays Landing, New Jersey 08330................. 22,952 28-30 South Main Street Medford, New Jersey 08055...................... 159,711 690 Stokes Road Medford Lakes, New Jersey 08055................ 260,980 3745 Quaker Bridge Road Mercerville, New Jersey 08619.................. 537,152 Midland & Claremont Avenue Montclair, New Jersey 07974................... 55,059
33
Net Carrying Value Lease of Real Property Expiration ---------------------------------------------------------- Office Location Owned Leased ----------------- ----------------- 441 Bloomfield Avenue Montclair, New Jersey 07974................... $ 100,084 66 Park Street Montclair, New Jersey 07974................... - 9/30/96 193 Change Bridge Road Montville, New Jersey 07045.................... $ 2,545 3/31/99 1 Park Drive Mount Holly, New Jersey 08060.................. 81,522 Mathistown & Radio Roads Mystic Island, New Jersey 08087................ 694,530 8 Jacobstown Road New Egypt, New Jersey 08533.................... 477,132 Village Shopping Center New Providence, New Jersey 07974............... 1,887 12/31/00 3305 Bayshore Road Breakwater Plaza North Cape May, New Jersey 08204............... 12,125 8/1/96 (2) 3852 Bayshore Road North Cape May, New Jersey 08204............... 179,055 26th & Delaware Avenue North Wildwood, New Jersey 08260............... 19,645 7/1/96 (2) Tilton Road and Cresson Avenue Northfield, New Jersey 08225................... 68,473 8/25/11 661 Asbury Avenue Ocean City, New Jersey 08226................... 287,669 34th & Simpson Avenue Ocean City, New Jersey 08226................... 266,915 Route 35 & West Park Avenue Ocean Township, New Jersey 07712............... 1,340 3/31/98 6725 Black Horse Pike Pleasantville, New Jersey 08232................ 211,073 1/15/02
34
Net Carrying Value Lease of Real Property Expiration ---------------------------------------------------------- Office Location Owned Leased ----------------- ----------------- 1515 Wildwood Boulevard Rio Grande, New Jersey 08242................... $ 509,034 600 Broad Street Riverton, New Jersey $ 3,784 8/31/97 Rockaway Townsquare Mall Rockaway, New Jersey 07866..................... 12,824 12/31/03 156 Eagle Rock Avenue Roseland, New Jersey 07068..................... 432,116 Bethel Road & Route 9 Somers Point, New Jersey 08244................. 465,044 8 South Orange Avenue South Orange, New Jersey 07079................. 650,157 916 Fischer Blvd. Toms River, New Jersey 08753................... 21,060 8/31/99 864 Route 37 West Store #12 & Pad Site Toms River, New Jersey 08753................... 498,917 4/30/97 3144 South Broad Street Mercer, New Jersey 08610....................... 291,937 560 Valley Road Upper Montclair, New Jersey 07043.............. 51,555 5301 Wellington Avenue Ventnor, New Jersey 08406...................... 166,704 7319 Ventnor Avenue Ventnor, New Jersey 08406...................... 338,841 975 North Main Road & Oak Road Vineland, New Jersey 08360..................... 440,552 2802 Delsea Drive & Sherman Avenue Vineland, New Jersey 08360..................... 403,311 Kings Highway and Mantua Grove Road West Deptford, New Jersey 08086................ 149,764
35
Net Carrying Value Lease of Real Property Expiration ---------------------------------------------------------- Office Location Owned Leased ----------------- ----------------- 421 Crystal Lake Road Westmont, New Jersey 08108..................... $ 10,926 4/30/00 2201 Silverside Road Wilmington, Delaware 19810..................... 49,724 9/30/97 Stoney Batter Office Center 5301 Limestone Road Wilmington, Delaware 19808..................... - 10/31/97 22 North Broad Street Woodbury, New Jersey 08016..................... $ 559,308 157 North Broad Street Woodbury, New Jersey 08016..................... - 9/30/98 (1) Collective Bank abandoned this office location when the lease agreement expired on August 31, 1996. (2) Renewal of lease agreement is pending; current agreement is being extended on a month by month basis.
Data Processing Equipment During 1996 data processing services were performed by Collective Bank's data processing center under a facilities management arrangement with Alltel, Inc. At June 30, 1996, the net book value of data processing equipment was $6.3 million. Item 3. Legal Proceedings There are no material pending legal proceedings to which Collective or its subsidiary is a party or to which any of their property is subject. Item 4. Submission of Matters to a Vote of Security Holders None 36 Part II The information required by Items 5, 6, 7, and 8 is included in Collective's 1996 Annual Report to stockholders which is incorporated herein by reference.
Annual Report Page --------------------- Item 5. Market for Registrant's Common Equity and Related 1, 52 and Stockholder Matters............................................... Inside Back Cover There were 1,391 common stockholders of record as of August 31, 1996. Item 6. Selected Financial Data........................................... 51 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 18 Item 8. Financial Statements and Supplementary Data....................... 24 - 49 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None
37 PART III Item 10. Directors and Executive Officers of the Registrant See the Proxy Statement of Collective dated September 18, 1996, "Information with Respect to Nominees, Continuing Directors and Named Executive Officers" and "Meetings and Committees of the Board of Directors", pages 4-6, which sections are incorporated herein by reference. The principal occupation of each executive officer who is not a director of Collective for the last five years is set forth below: Scott T. Page, Senior Executive Vice President - Secretary, joined Collective in 1983. From July 1988 to June 1991, he served as Senior Vice President and Secretary of Collective. In June 1991, he was named Executive Vice President and Secretary, and in September 1992 he was promoted to Senior Executive Vice President and Secretary. Bernard H. Berkman, Executive Vice President and Chief Accounting Officer joined Collective in 1990. Prior to 1990, Mr. Berkman was a partner in the accounting firm of Deloitte & Touche LLP, specializing in Thrift industry and SEC matters. Item 11. Executive Compensation See the Proxy Statement of Collective dated September 18, 1996, "Executive Compensation", page 7, which section is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management (a) Security Ownership of Certain Beneficial Owners See the Proxy Statement of Collective dated September 18, 1996, "Principal Holders of Common Stock", page 3, which section is incorporated herein by reference. (b) Security Ownership of Management See the Proxy Statement of Collective dated September 18, 1996, "Election of Directors", page 4, which section is incorporated herein by reference. (c) Changes in Control None Item 13. Certain Relationships and Related Transactions See the Proxy Statement of Collective dated September 18, 1996, "Transactions with Certain Related Persons", page 12, which section is incorporated herein by reference. 38 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)1. Financial Statements The following information is included in Collective's 1996 Annual Report to stockholders, portions of which are incorporated herein by reference: Statements of Consolidated Financial Condition at June 30, 1996 and 1995 Statements of Consolidated Operations for the years ended June 30, 1996, 1995, and 1994 Statements of Consolidated Stockholders' Equity for the years ended June 30, 1996, 1995, and 1994 Statements of Consolidated Cash Flows for the years ended June 30, 1996, 1995, and 1994 Notes to Consolidated Financial Statements Independent Auditors' Report 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts for the years ended June 30, 1996, 1995, and 1994 All other financial statement schedules are omitted because of the absence of the conditions under which they are required or because the required information is set forth in the consolidated financial statements or notes thereto. 3. Exhibits (2) Agreement and Plan of Merger by and between Collective Bancorp, Inc., CBAC Corp. and Continental Bancorporation dated as of the 21st day of May 1996, which is incorporated herein by reference to Exhibit 7.2 of Schedule 13D as filed with the Securities and Exchange Commission on June 12, 1996. (3) (i) Certificate of incorporation, as amended through October 25, 1993 - See Exhibit (3)(i) to Annual Report on Form 10-K for the year ended June 30, 1994, which is incorporated herein by reference. (ii) By-Laws, as amended January 20, 1995. (10) Material Contracts (iii)(A)(1) Executive Compensation Program, incorporated by reference to Exhibit 10.1 to the Form S-4 as filed with the Securities and Exchange Commission on June 22, 1988. (iii)(A)(2) Employment agreement, Thomas H. Hamilton, dated December 20, 1993, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. (iii)(A)(3) Employment agreement, Thomas H. Hamilton, dated December 20, 1993, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. 39 (iii)(A)(4) Termination agreement, Edward J. McColgan, dated December 14, 1993, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. (iii)(A)(5) Termination agreement, Arthur L. Foster, dated December 14, 1993, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. (iii)(A)(6) Termination agreement, Richard J. Ims, dated December 14, 1993, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. (iii)(A)(7) Termination agreement, Albert A. Kuehner, dated December 14, 1992, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. (iii)(A)(8) Termination agreement, Harry G. Miller, incorporated by reference to the above-referenced Form S-4. (iii)(A)(9) Termination agreement, Scott T. Page, dated December 14, 1993, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. (iii)(A)(10) Termination agreement, Bernard H. Berkman, dated December 14, 1993, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. (iii)(A)(11) Termination agreement, Robert D. Pierson, dated December 14, 1993, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. (iii)(A)(12) Termination agreement, John Palmer, dated December 14, 1993, incorporated by reference to the above-referenced Form 10-K for the year ended June 30, 1994. (iii)(A)(13) Collective Federal Stock Option Plan, incorporated by reference to the above-referenced Form S-4. (iii)(A)(14) Collective Bancorp, Inc. Restricted Stock Plan dated August 17, 1992. See Appendix A of Proxy Statement dated September 18, 1992, which is incorporated herein by reference. (iii)(A)(15) 1993 Non-Employee Directors' and Qualified Consultant's Restricted Stock Award Plan. See Appendix A of Proxy Statement dated September 26, 1994 (Exhibit 22 to Form 10-K for the year ended June 30, 1994) which is incorporated herein by reference. (11) Computation of Earnings Per Share (13) 1996 Annual Report to stockholders Such report, except for those portions thereof which are expressly incorporated by reference in this filing, is furnished for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of this filing. (21) Subsidiaries of Collective Bancorp, Inc. (22) Proxy Statement dated September 18, 1996 (23) Consents of Independent Auditors (27) Financial Data Schedule (b) Reports on Form 8-K None 40 Collective Bancorp, Inc. and Subsidiary Financial Statement Schedules and Independent Auditors' Reports TABLE OF CONTENTS Schedule II - Valuation and Qualifying Accounts................ 42 Independent Auditors' Reports................................. 43 and 44 41 SCHEDULE II COLLECTIVE BANCORP, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED JUNE 30, 1996, 1995, AND 1994 (Amounts in thousands)
Col.B Col. C - Additions Col.D Col.E -------------- ----------------------------------- ------------------ ------------- (1) (2) Balance at Charged to Charged to Balance at Beginning Costs and Other Accounts Deductions End of Uncollected Interest of Period Expenses (Describe) (Describe) Period -------------------------- -------------- -------------- ------------------- ------------------ ------------- 1996.................. $ 655 $ 553 - $ 534 $ 674 (Interest write-off) 1995.................. $ 600 $ 449 - $ 394 $ 655 (Interest write-off) 1994.................. $ 850 $ 282 - $ 532 $ 600 (Interest write-off)
(1) (2) Balance at Charged to Charged to Balance at Reserve for Beginning Costs and Other Accounts Deductions End of Loan Losses of Period Expenses (Describe) (Describe) Period -------------------------- -------------- -------------- ------------------- ------------------ ------------- 1996.................. $14,126 $ 2,035 - $ 3,270 $12,891 (Charge-offs & adjustments, net) 1995.................. $18,006 $ 240 - $ 4,120 $14,126 (Charge-offs & adjustments, net) 1994.................. $22,291 $ 2,352 - $ 6,637 $18,006 (Charge-offs & adjustments, net)
Reserve for (1) (2) Real Estate Acquired Balance at Charged to Charged to Balance at in Settlement of Beginning Costs and Other Accounts Deductions End of Loans of Period Expenses (Describe) (Describe) Period -------------------------- -------------- -------------- ------------------- ------------------ ------------- 1996................. $ 694 $ 278 - $ 280 $ 692 (Charge-offs & adjustments, net) 1995................. $ 1,164 $ 230 - $ 700 $ 694 (Charge-offs & adjustments, net) 1994................. $ 3,344 $ 1,127 - $ 3,307 $ 1,164 (Charge-offs & adjustments, net)
On July 1, 1994, Collective adopted the provisions of SFAS 114. Reserves for loan losses and for real estate acquired in settlement of loans data for fiscal 1994 has been restated to conform with the 1995 and 1996 presentations. 42 INDEPENDENT AUDITORS' REPORT The Board of Directors of Collective Bancorp, Inc.: Under date of July 31, 1996, we reported on the statement of consolidated financial condition of Collective Bancorp, Inc. as of June 30, 1996 and the related statements of consolidated operations, stockholders' equity, and cash flows for the year then ended as contained in the 1996 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule as listed in the accompanying table of contents. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audit. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Short Hills, New Jersey July 31, 1996 43 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors of Collective Bancorp, Inc.: We have audited the statement of consolidated financial condition of Collective Bancorp, Inc. and subsidiary as of June 30, 1995 and the related statements of consolidated operations, stockholders' equity and cash flows for each of the two years in the period ended June 30, 1995 as contained in the 1996 annual report to stockholders before the restatement of the statements of consolidated cash flows to reflect the retroactive reclassification of various amounts as investing activities which were previously classified as operating activities for the year ended June 30, 1995 and 1994 (not included herein). Our audits also included the financial statement schedules listed in the Index at Item 14(a)2 for each of the two years in the period ended June 30, 1995. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules 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, such consolidated financial statements present fairly, in all material respects, the financial position of Collective Bancorp, Inc. and subsidiary at June 30, 1995, and the results of their operations and their cash flows befor the restatement as described in the first paragraph for each of the two years in the period ended June 30, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. Effective July 1, 1994, Collective Bancorp, Inc. changed its method of accounting for impairment of loans and for investments in certain debt and equity securities, to conform with Statements of Financial Accounting Standards No. 114, 115, and 118. DELOITTE & TOUCHE LLP Parsippany, New Jersey August 25, 1995 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COLLECTIVE BANCORP, INC. THOMAS H. HAMILTON - -------------------------------------- Thomas H. Hamilton September 27, 1996 President, Chairman & Chief Executive Officer EDWARD J. MCCOLGAN - -------------------------------------- Edward J. McColgan September 27, 1996 Vice Chairman & Chief Financial Officer BERNARD H. BERKMAN - -------------------------------------- Bernard H. Berkman September 27, 1996 Executive Vice President & Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date THOMAS H. HAMILTON - -------------------------------------- Thomas H. Hamilton Director, President, Chairman & September 27, 1996 Chief Executive Officer - -------------------------------------- Wesley J. Bahr Director September 27, 1996 - -------------------------------------- George W. French Director September 27, 1996 - -------------------------------------- Miles Lerman Director September 27, 1996 - -------------------------------------- David S. MacAllaster Director September 27, 1996 EDWARD J. MCCOLGAN - -------------------------------------- Edward J. McColgan Director, Vice Chairman & September 27, 1996 Chief Financial Officer WILLIAM R. MILLER - -------------------------------------- William R. Miller Director September 27, 1996 ROBERT F. MUTSCHLER, JR. - -------------------------------------- Robert F. Mutschler, Jr. Director September 27, 1996 HERMAN O. WUNSCH - -------------------------------------- Herman O. Wunsch Director September 27, 1996
45 EX-11 2 10-K FOR THE YEAR ENDED JUNE 30, 1996 COLLECTIVE BANCORP, INC. COMPUTATION OF EARNINGS PER SHARE OF COMMON STOCK
PRIMARY 1996 1995 1994 -------------------------------------------------------------------- EARNINGS: Net income.................................... $54,500,430 $57,541,570 $59,366,538 =================== =================== ================== SHARES: Weighted average number of common shares outstanding.................... 20,383,512 20,285,000 20,206,000 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options(1)........................... 273,371 284,140 356,753 Unallocated ESOP Shares....................... (206,503) - - Treasury stock................................ (4,614) - - -------------------------------------------------------------------- Weighted average number of common shares outstanding as adjusted............... 20,445,766 20,569,140 20,562,753 ==================================================================== Primary earnings per share of common stock.................................. $2.67 $2.80 $2.89 ==================================================================== ASSUMING FULL DILUTION EARNINGS: Net income.................................... $54,500,430 $57,541,570 $59,366,538 ==================================================================== SHARES: Weighted average number of common shares outstanding.................... 20,383,512 20,285,000 20,206,000 Assuming exercise of options reduced by the number of shares which could have been purchased with the proceeds from exercise of such options(2)........................... 273,371 294,904 366,028 Unallocated ESOP Shares....................... (206,503) - - Treasury Stock................................ (4,614) - - -------------------------------------------------------------------- Weighted average number of common shares outstanding as adjusted............... 20,445,766 20,579,904 20,572,028 ==================================================================== Fully diluted earnings per share of common stock................................ $2.67 $2.80 $2.89 ==================================================================== (1) Assumes the proceeds obtained from the exercise of options were used to purchase common shares at the average market price during the year. (2) Assumes the proceeds obtained from the exercise of stock options were used to purchase common shares at the market price at the close of the year if such price was higher than the average price during the year.
46 EX-21 3 10-K FOR THE YEAR ENDED JUNE 30, 1996 COLLECTIVE BANCORP, INC. Form 10-K For the Year Ended June 30, 1996 Subsidiaries of the Registrant Collective Bank 158 Philadelphia Avenue Egg Harbor, NJ 08215 Incorporated under the laws of the United States of America Subsidiaries of Collective Bank Collective Financial Services, Inc. 158 Philadelphia Avenue Egg Harbor, NJ 08215 State of Incorporation - New Jersey Collective Mortgage Services, Inc. 158 Philadelphia Avenue Egg Harbor, NJ 08215 State of Incorporation - Delaware 47 EX-23 4 10-K FOR THE YEAR ENDED JUNE 30, 1996 EXHIBIT(23)a INDEPENDENT AUDITOR'S CONSENT The Board of Directors Collective Bancorp, Inc and Subsidiary: We consent to the incorporation by reference in Registration Statement No. 33-42856 on form S-8, Registration Statement No. 33-42857 on S-8, Registration Statement No. 33-85498 on S-8, and Registration Statement No. 33-85500 on S-8 of Collective Bancorp, Inc. and Subsidiary of our reports dated July 31, 1996, relating to the statement of consolidated financial condition of Collective Bancorp, Inc. and Subsidiary as of June 30, 1996 and the related statements of consolidated operations, stockholders' equity, and cash flows for the year ended June 30, 1996 and the related schedules, which reports appear in the June 30, 1996 Annual Report on form 10-K of Collective Bancorp, Inc. and Subsidiary. KPMG PEAT MARWICK LLP Short Hills, New Jersey September 27, 1996 48 EXHIBIT(23)b INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-42856, 33-42857, 33-85498 and 33-85500 of Collective Bancorp, Inc. on Form S-8 of our report dated August 25, 1995, appearing in this Annual Report on Form 10-K of Collective Bancorp, Inc. for the year ended June 30, 1996. DELOITTE & TOUCHE LLP Parsippany, New Jersey September 27, 1996 49 EX-13 5 1996 ANNUAL REPORT TO STOCKHOLDERS FINANCIAL HIGHLIGHTS
Year Ended June 30 ------------------------------------------------------------------------------- (Dollars amounts in thousands except per share data) 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Net Income $ 54,500 $ 57,542 $ 59,367 $ 49,541 $ 32,396 Total Interest and Dividend Income 355,685 336,317 269,570 215,985 216,123 Net Interest Income 141,772 140,461 145,811 113,893 85,458 Net Income Per Share $2.67 $2.80 $2.89 $2.41 $1.67 Dividends Declared Per Share 0.85 0.65 0.57 0.36 0.21 Return on Average Assets 1.07% 1.18% 1.48% 1.76% 1.30% Return on Average Equity 15.71% 19.10% 23.19% 23.39% 19.01% Yield on Loans and Investments 7.26% 7.18% 7.14% 8.02% 9.12% Cost of Funds (1) 4.37% 4.18% 3.28% 3.79% 5.51% Net Interest Margin (2) 2.89% 3.00% 3.86% 4.23% 3.61% - ----------------------------------------------------------------------------------------------------------------------------------
June 30 ---------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- Assets $5,145,471 $5,110,517 $4,589,258 $3,466,047 $2,499,669 Loans and Mortgage-Backed Securities 4,622,022 4,570,767 4,225,390 3,137,560 2,219,352 Deposits 3,254,387 3,277,823 3,003,962 2,791,978 2,114,149 Borrowings 1,473,448 1,447,920 1,260,915 391,773 149,839 Stockholders' Equity 364,304 327,792 279,728 234,581 192,088 Common Shares Outstanding 20,374,141 20,356,768 20,265,476 20,153,287 20,087,600 Stockholders' Equity Per Share $17.88 $16.10 $13.80 $11.64 $9.56 Net Worth Ratio 7.08% 6.41% 6.10% 6.77% 7.68% Core Capital Ratio (3) 6.60% 5.89% 5.75% 6.58% 6.53% Tangible Capital Ratio (3) 6.60% 5.89% 5.75% 6.58% 6.49% Risk-Based Capital Ratio (3) 17.30% 16.46% 16.45% 17.48% 14.86% Classified Assets As Percent of Total Assets 0.40% 0.39% 0.69% 1.09% 0.98% - ------------------------------------------------------------------------------------------------------------------------------------ (1) Adjusted for excess of average interest-earning assets over average interest-bearing liabilities. (2) Net interest income divided by average interest-earning assets. (3) These ratios pertain to Collective Bank only.
Annual Report Page 1 Financial Review.................................................... 18 Statements of Consolidated Financial Condition...................... 24 Statements of Consolidated Operations............................... 25 tatements of Consolidated Stockholders' Equity...................... 26 Statements of Consolidated Cash Flows............................... 27 Notes to Consolidated Financial Statements.......................... 28 Independent Auditors' Report........................................ 49 17 FINANCIAL REVIEW Overview Although fiscal 1996 net income and earnings per share were lower than they were in fiscal 1994 and 1995, the 1996 returns on average assets and average equity were substantially above the medians for publicly-held thrift institutions as follows:
Publicly-Held Collective Thrifts(1) - -------------------------------------------------------------------------------- Return on average assets................... 1.07% 0.90% Return on average equity................... 15.71% 8.50% (1) Source: SNL Securities
At June 30, 1996, Collective's classified (non-performing) assets ratio was 0.40% compared to 0.62%(1) for all publicly-held thrifts. Financial Condition At June 30, 1996, stockholders' equity amounted to $364.3 million, or $17.88 per share, compared to $327.8 million, or $16.10 per share at June 30, 1995. The ratio of stockholders' equity to total assets was 7.08% at June 30, 1996 compared to 6.41% at June 30, 1995. The increase in stockholders' equity resulted primarily from net income of $54.5 million less dividends on common stock of $17.3 million. Dividends were 31.8% of earnings in 1996 compared to 22.9% in 1995 and 19.4% in 1994. 1996 represented the sixth consecutive year in which dividend payments have been increased. The increase in the ratio of equity to assets from 1995 to 1996 resulted from an 11.1% increase in equity while assets increased only 0.7%. Total assets were $5.145 billion at June 30, 1996, an increase of $35.0 million over the preceding year-end. The increase in assets was comprised of the following elements (in millions): Trading securities............................ $ (13.3) Loans and securities held/available for sale.. 48.0 Investment securities......................... (39.7) Loans receivable, net......................... 174.4 Mortgage-backed securities.................... (126.7) Other, net.................................... (7.7) --------- Total......................................... $ 35.0 ---------
The decrease in trading securities resulted from the sale of $13.3 million in July 1995. The increase in securities available for sale resulted primarily from the purchase of $31.6 million of Federal National Mortgage Association preferred stock which was immediately classified as available for sale. Mortgage-backed securities ("MBS's") available for sale also increased $16.2 million. The decrease in investment securities was comprised primarily of maturing or called U.S. government and agency obligations partially offset by an increase in stock of the Federal Home Loan Bank of New York . Loans receivable, net increased during fiscal 1996 because loans purchased and originated for investment exceeded sales and repayments. During fiscal 1996, 83.1% of total loan production met Collective's criteria for investment because it consisted of higher yield thirty-year fixed rate mortgages, adjustable rate mortgages, ten and fifteen-year fixed rate mortgages, commercial loans, or consumer loans. The increase in loans receivable, net was comprised of the following elements (in millions): Total originations............................ $ 634.0 Originations for sale......................... (107.7) Purchases..................................... 24.0 Repayments.................................... (381.2) Other, net.................................... 5.3 -------- Total......................................... $ 174.4 --------
18 The decrease in MBS's held for investment occurred as Collective sought to decrease its reliance on collateralized mortgage obligations ("CMO's") as an investment vehicle. Collective's CMO portfolio decreased by $114.3 million in fiscal 1996 and other conventional MBS's decreased by $12.4 million. At June 30, 1996, the investment and MBS portfolios included gross unrealized gains of $2.2 million and gross unrealized losses of $83.6 million. Collective has the positive intent and ability to hold these securities to maturity under all foreseeable economic conditions. Therefore, it is not expected that any gains or losses will be realized. In recent years, since authoritative guidance and/or accounting standards have been developed for the definitive classification of securities, Collective has not sold securities from its held to maturity portfolios. Collective has always been able to satisfy its liquidity needs from the cash flows from operating and financing activities, and there is no present indication that Collective will not be able to do so in the future. Unrealized gains or losses in Collective's held to maturity securities portfolios are a function of the interest rate environment at any given point in time and, therefore, are only temporary in nature. During fiscal 1996, deposits decreased $23.4 million. The decrease in deposits was comprised of the following elements (in millions): Demand deposits............................... $ 76.0 Savings and investment accounts............... 12.2 Savings certificates.......................... (111.6) -------- Total......................................... $ (23.4) --------
The increase in demand deposits resulted from Collective's continuing campaign to attract lower cost checking accounts, both personal and commercial. At June 30, 1996, demand deposits amounted to 18.6% of total deposits compared to 16.1% at the end of the preceding year. In a changing interest rate environment, deposit interest rates generally do not adjust as rapidly as rates on certain other investments. The decrease in savings certificates occurred because depositors sought alternative investment vehicles with higher yields. Such decrease was primarily in the fifteen month and jumbo (in excess of $100,000) categories, partially offset by an increase in the six month, eight month, twelve month and twenty-four month categories as certificates were priced to retain and attract deposits selectively. The net increase in borrowings, primarily reverse repurchase agreements, was used to fund the asset growth and to replace maturing savings certificates. Interest Rate Sensitivity Collective's interest rate sensitivity is determined by 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"). 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 adversely affects net interest income while a positive gap increases net interest income. During a period of declining interest rates, a negative gap increases net interest income while a positive gap adversely affects net interest income. Collective's net interest income tends to decrease in periods of rising interest rates because its interest-bearing liabilities generally reprice faster than its interest-earning assets. (See the "Maturity and Rate Sensitivity Analysis", page 50.) Collective's net interest income also tends to decrease in periods when there is a relatively flat yield curve. (The yield curve is a reflection of the difference between long-term interest rates, represented by the 30-year U.S. Treasury Bond, and short-term interest rates, represented by the 3-month U.S. Treasury Bill.) Conversely, Collective's net interest income tends to increase in periods of falling interest rates and in periods when there is a relatively steep yield curve because the difference between the yields Collective receives on its longer-term loans and securities and the rates it pays on its shorter-term deposits and borrowings increases. 19 A comparison of Collective's gap position at June 30, 1996 and 1995 follows:
(Dollar amounts in thousands) 1996 1995 - -------------------------------------------------------------------------------------------------- 1 year or less: Gap amount $(1,351,227) $(1,403,465) Gap as a percent of assets (26.3)% (27.5)% 1 year to 5 years: Gap amount $ 852,794 $ 673,043 Cumulative gap as a percent of assets (9.7)% (14.3)% Over 5 years: Gap amount $ 835,469 $ 1,000,208 Cumulative gap amount $ 337,036 $ 269,786 Cumulative gap as a percent of assets 6.6 % 5.3 % - --------------------------------------------------------------------------------------------------
The negative one-year gap decreased in 1996 primarily because of the decrease in MBS's and increases in adjustable rate mortgage, commercial, and consumer loans. Liquidity and Capital Resources Collective Bank is required by regulation to maintain certain levels of liquidity. Regulations currently in effect require that Collective Bank maintain liquid assets of not less than 5% of its net withdrawable deposits and short-term borrowings, of which at least 1% must be short-term liquid assets. Management believes that Collective Bank was in compliance with these requirements throughout the three years ended June 30, 1996. At June 30, 1996 and 1995, Collective Bank had total liquidity ratios of 5.2% and 5.5% and short-term liquidity ratios of 2.5% and 3.0%, respectively. Collective's net worth ratio increased from 6.10% at June 30, 1994 to 6.41% at June 30, 1995 and 7.08% at June 30, 1996. (See note 16 to the consolidated financial statements for a discussion of Collective Bank's regulatory capital requirements.) At June 30, 1996, capital resources were sufficient to meet outstanding loan commitments of $126.4 million and commitments on unused lines of credit of $123.8 million. At June 30, 1996, Collective had no other material commitments for capital resources, other than a pending business combination. (See note 2 to the consolidated financial statements.) Asset originations and purchases during the three years ended June 30, 1996 were funded from normal sources including cash collections of loan and MBS principal and interest, deposit flows, borrowings, and business combinations. In fiscal 1996, net cash provided by operating activities increased $26.7 million primarily because of proceeds from the sale of trading securities as well as increases in net interest cash flow, financial service fees, other income associated with demand deposit accounts, and reduced income taxes paid. The decrease in cash provided by operating activities of $6.8 million from 1994 to 1995 resulted primarily from reduced net interest cash flow, increased operating expenses, and increased income tax payments partially offset by increased fee income. Net cash used in investing activities decreased by $348.0 million from fiscal 1995 to fiscal 1996 because of decreased purchases of loans and MBS's, combined with increased repayments of loan principal and cash generated from maturing U.S. government and agency obligations, substantially offset by the absence of any cash obtained in business combinations. The decrease of $619.4 million in cash used for investing activities from 1994 to 1995 resulted from decreased purchases of MBS's and loan originations partially offset by reduced loan and MBS principal repayments, sale of MBS's, and cash obtained in business combinations. The reduced investing activity in fiscal 1995 was caused by rising interest rates which reduced loan demand in general and ended the refinancing boom of the preceding two years. Other factors in the reduced investing activity were the scarcity of suitable alternative investment vehicles as Collective elected to reduce its purchases of CMO's. Pursuant to Collective's investment policy, 83.1% of total loan originations was retained for investment in fiscal 1996 compared to 93.6% in 1995 and 77.4% in 1994. Loan and MBS principal repayment collections were 12.0%, 10.5%, and 34.3% of the average balances for fiscal 1996, 1995, and 1994, respectively. The decrease from 1994 to 1995 resulted from reduced loan refinancings caused by rising interest rates. The sales of securities available for sale in 1995 consisted primarily of U.S. government and agency obligations. The decrease in deposit cash flows in 1996 compared to 1995 resulted from increased demand deposits and reduced savings certificates as discussed in "Financial Condition" on page 19. The increase in deposit cash flows from 1994 to 1995, before business acquisitions, was primarily in the six month, twelve month, twenty-four month, and jumbo certificate of deposit categories as depositors sought alternative investment vehicles with higher yields as deposit rates decreased during most of 1995. 20 Cash flows from Federal Home Loan Bank ("FHLB") advances and other borrowings decreased in fiscal 1996 compared to 1995 as Collective replaced maturing borrowings with lower cost reverse repurchase agreements and dollar rolls. Cash flows from FHLB advances and other borrowings decreased in fiscal 1995 compared to 1994 as Collective reduced its purchases of MBS's compared with the preceding two years and slowed its rate of asset growth. Assets grew by $35.0 million, or 0.7%, in 1996 compared to growth of $521.3 million, or 11.4%, in 1995, and $1.123 billion, or 32.4%, in 1994. As indicated in note 11 to the consolidated financial statements, 83.6% of Collective's deposits at June 30, 1996 had no contractual maturity or contractual maturities of one year or less. Approximately $974.9 million, or 30.0%, of such deposits are considered core deposits and not sensitive to changing interest rates. Past experience indicates that any deposit runoff can be replaced with new deposits through aggressive marketing and pricing strategies or business acquisitions. During the three-year period ended June 30, 1996, Collective's level of deposits, without those obtained in business acquisitions, remained virtually unchanged despite a generally unfavorable interest-rate environment for depositors during that period. Therefore, management does not anticipate any excessive runoff in the level of deposits in the foreseeable future. If unforeseen circumstances should result in a substantial decrease in Collective's level of deposits to the extent that a potential liquidity problem occurs, Collective could alleviate such problem through any of several available alternatives. These include the acquisition of deposits through aggressive marketing and/or pricing strategies, the acquisition of deposits through business combinations, the sale of available for sale assets, borrowings, and capital additions. Results of Operations Collective's net income is determined primarily by the difference between the interest earned on its investment, loan, and MBS portfolios and the interest paid on its deposits and borrowings. Other primary factors in determining Collective's profitability are its levels of other income and operating expenses. During the first eight months of fiscal 1994, Collective pursued a strategy of increasing its earning assets by using short-term borrowings, primarily repurchase agreements, to finance the purchase of medium-term MBS's, primarily CMO's. In the final four months of fiscal 1994, Collective began to decrease the use of this strategy in response to rising interest rates and a flattening yield curve. During fiscal 1995 Collective further reduced this leveraging strategy as interest rates continued to rise. Although interest rates generally declined in fiscal 1996, the effect on net interest income was not material because of a much flatter yield curve. Longer-term interest rates decreased much more than did shorter-term interest rates. The spread between 30-year U.S. Treasury Bonds and 3-month U.S. Treasury Bills averaged 1.27%, 2.03%, and 3.33% in fiscal 1996, 1995, and 1994, respectively(2). The leveraging strategy resulted in cumulative increased average borrowings of $581.5 million, $1.259 billion, and $1.259 billion in fiscal 1994, 1995, and 1996, respectively. The net interest spread resulting from the leveraging activities averaged 2.92%, 1.25% and 1.20% in fiscal 1994, 1995, and 1996, respectively. These spreads produced additional net interest income of approximately $17.0 million, $15.7 million, and $15.1 million in those years, respectively. Collective discontinued this leveraging strategy because of the declining spread and a desire not to incur additional interest-rate risk through increased short-term borrowings. Net income for the year ended June 30, 1996 decreased $3.0 million, or 5.29%, from fiscal 1995 because operating expenses increased $5.1 million, or 7.7%, due to continued expansion of the retail and commercial banking operations combined with an increase in the provision for loan losses of $1.8 million because of the growth in the loan portfolio, particularly commercial loans. These factors were partially offset by an increase in net interest income of $1.3 million, an increase in other income of $2.2 million, and a decrease in income taxes of $0.3 million. The increase in net interest income in 1996 resulted from growth in average interest-earning assets of $217.9 million resulting from the business acquisition in late fiscal 1995 and other asset growth, offset by a reduction in the net interest margin from 3.00% in 1995 to 2.89% in 1996. The decrease in the net interest margin was comprised of an 8 basis point gain in the yield on interest-earning assets while the cost of funds increased 19 basis points. The increase in other income resulted from increased gains on the sale of loans and securities and an increase in financial service fees. Financial service fee income increased in 1996 because of the growth in checking deposits and a more aggressive strategy in charging and collecting fees related to deposit accounts. Loan servicing income increased in 1996 as loans serviced for others increased from $695.1 million at June 30, 1995 to $707.8 million at June 30, 1996. Gain on sale of loans and securities increased in 1996 as a smaller portion of Collective's loan originations were retained for investment and declining long-term interest rates increased the gains on most sales. (2)Source:Bloomberg L.P. 21 The increase in operating expenses from 1995 to 1996 generally resulted from the 1995 business combination and other asset growth. Loan expense increased in 1996 despite lower loan originations because of costs associated with increased commercial lending activity. Net income for the year ended June 30, 1995 decreased $1.8 million, or 3.1%, from fiscal 1994 primarily because net interest income before provision for loan losses decreased $5.4 million, or 3.7%, and operating expenses increased $6.8 million, or 11.6%. These factors were partially offset by a decrease in the loan loss provision of $2.1 million, an increase in other income of $5.8 million, and a decrease in income taxes of $2.4 million. The decrease in net interest income during 1995 resulted from a decline in the net interest margin from 3.86% in 1994 to 3.00% in 1995. The decrease in the net interest margin was comprised of a 4 basis point gain in the yield on interest-earning assets while the cost of funds increased 90 basis points. The decrease in the net interest margin was partially offset by growth in average interest-earning assets of $906.1 million resulting from the business acquisitions in late fiscal 1994 and fiscal 1995 and other asset growth. Other income increased in 1995 primarily because of the non-recurring charge of $5.6 million in 1994 for the unrealized depreciation on CMO's that were transferred from available for sale to held to maturity in accordance with revised Office of Thrift Supervision ("OTS") regulatory policy. This amount is being accreted back into income over the remaining lives of the securities. Financial service fee income increased in 1995 because of the growth in checking deposits and a more aggressive strategy in charging and collecting fees related to deposit accounts. Loan servicing income decreased in 1995 as loans serviced for others decreased from $725.4 million at June 30, 1994 to $695.1 million at June 30, 1995 because of refinancings in the preceding two years and the smaller volume of loan sales in 1995. Other expense increased in 1995 compared to 1994 primarily as a result of the business combinations and other asset growth. Collective's ratio of classified assets, which include both non-performing loans and real estate acquired in settlement of loans, to total assets was 0.40%, 0.39%, and 0.69% at the end of fiscal 1996, 1995, and 1994, respectively. Net classified assets amounted to $20.5 million, $20.1 million, and $31.5 million at the end of those years. During fiscal 1996, Collective increased its general provision for loan losses to provide for potential losses against the higher risk characteristics of an increased portfolio of commercial loans. In 1995 and 1994, Collective was able to reduce its loan loss provisions as classified assets were reduced through effective management and disposition of such assets. In addition to a reduction in the amount of classified assets in 1995 and 1994, the quality of the inventory improved as older foreclosed assets were disposed of and many seriously delinquent loans were foreclosed or brought current. Additionally, collection efforts generally were intensified. A trend of stabilization in real estate values during the period was another contributing factor to the improved classified asset ratios as were lower monthly payments for many borrowers who refinanced their mortgage loans in 1993 and 1994. See note 1 to the consolidated financial statements for a discussion of the factors that management considers in making provisions for potential loan and real estate losses. Collective's ratio of operating expenses to average assets was 1.28%, 1.28%, and 1.41% in fiscal 1996, 1995, and 1994, respectively, as Collective was able to integrate the business combinations and other asset growth in an efficient manner. The effective income tax rate was 35.7%, 34.7%, and 35.8% in fiscal 1996, 1995, and 1994, respectively. The lower rate in 1995 resulted from certain unanticipated income tax refunds and increased tax-exempt income. Financial Institution Legislation and Regulation. Collective Bank is subject to extensive regulation, supervision, and examination by the OTS, as its chartering authority and primary federal regulator, and by the Federal Deposit Insurance Corporation ("FDIC"), which insures its deposits up to applicable limits. Such regulation and supervision establish a comprehensive framework of activities in which an institution can engage and are intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities. Any change in such regulation, whether by the OTS, the FDIC, or the Congress, could have a material impact on Collective Bank and its operations. On December 19, 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "Act") became law. While the Act primarily addresses additional sources of funding for the Bank Insurance Fund ("BIF") which insures the deposits of banks, the Act also adopted a number of new mandatory supervisory measures applicable to banks, savings and loan associations, and federal savings banks such as Collective Bank. Those measures primarily were designed to reduce the cost to the insurance funds of resolving problems presented by undercapitalized institutions. 22 For example, the regulatory agencies adopted regulations, effective December 19, 1992, providing for certain supervisory actions against undercapitalized institutions. The severity of such action depends upon the degree of undercapitalization. The federal regulatory agencies were also required to adopt and enforce final regulations prescribing standards relating to a variety of operating matters such as internal controls, information systems and external audit requirements, loan documentation and credit underwriting, interest rate exposure, asset growth and quality, and employee compensation. Most of those regulations had been implemented by June 30, 1996. The Act also authorizes the FDIC to assess deposit insurance premiums based on risk. The Act has not had, nor is it expected to have, a material impact on the financial condition or results of operations of Collective. The deposits of savings institutions, such as Collective Bank, are presently insured by the Savings Association Insurance Fund ("SAIF"). SAIF and BIF are the two insurance funds administered by the FDIC. On August 8, 1995, in recognition of BIF achieving its mandated reserve ratio, the FDIC revised the premium schedule for BIF members to essentially eliminate insurance premiums for deposits of well capitalized and healthy institutions (as compared to the current range of .23% to .31% of deposits for SAIF-insured institutions). The lower premiums for BIF deposits became effective as of June 1, 1995. Without a substantial increase in premium rates, the imposition of special assessments, or other significant developments, such as a merger of SAIF and BIF, it is not anticipated that SAIF will be adequately recapitalized until 2002. As a result of the disparity in BIF and SAIF premium rates, SAIF members have been placed at a significant competitive disadvantage in relation to BIF members with respect to the pricing of loans and deposits and the ability to lower their operating costs. At June 30, 1996, Collective Bank's SAIF and BIF assessment bases amounted to $2.593 billion and $530.6 million, respectively. See note 15 to the consolidated financial statements for a discussion of proposed legislation affecting Collective Bank. 23 STATEMENT OF CONSOLIDATED FINANCIAL CONDITION
June 30 (Dollar amounts in thousands except per share data) 1996 1995 - --------------------------------------------------------------------------------------------------- ASSETS Cash $ 65,084 $ 66,256 Federal funds sold 3,646 3,717 --------------------------- Total cash and cash equivalents 68,730 69,973 Trading securities, at market value (note 7) -- 13,328 Loans held for sale, at amortized cost, market value of $5,231 in 1996 and $5,836 in 1995 (note 6) 5,186 5,815 Securities available for sale, at market value (notes 5 and 7) 162,284 113,635 Investment securities, at amortized cost, market value of $271,650 in 1996 and $317,221 in 1995 (note 5) 276,171 315,879 Loans receivable, net (notes 6, 12, and 15) 2,548,150 2,373,706 Mortgage-backed securities, market value of $1,896,831 in 1996 and $2,027,783 in 1995 (notes 7 and 12) 1,973,642 2,100,344 Real estate acquired in settlement of loans, net (note 8) 5,427 6,476 Land, office buildings, and equipment, net (note 9) 39,239 39,313 Other assets (notes 7, 10, and 13) 42,335 43,072 Core deposit premium (note 2) 8,191 10,873 Goodwill (note 2) 16,116 18,103 --------------------------- Total assets $5,145,471 $5,110,517 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (note 11) Demand deposits, non-interest bearing $ 95,792 $ 76,705 Demand deposits, interest bearing 508,295 451,350 Savings and investment accounts 845,199 833,041 Savings certificates 1,805,101 1,916,727 --------------------------- Total deposits 3,254,387 3,277,823 Federal Home Loan Bank advances (note 12) -- 395,000 Other borrowed funds (notes 7 and 12) 1,473,448 1,052,920 Payable to brokers for securities purchased (note 12) -- 7,600 Advance payments by borrowers for taxes and insurance 26,852 29,462 Other liabilities (note 13) 26,480 19,920 --------------------------- Total liabilities 4,781,167 4,782,725 ---------------------------- Commitments (notes 9 and 15) Stockholders' equity (notes 5, 7, 12, 16 and 17) Common stock, par value $.01 per share; authorized - 37,000,000 shares; issued - 20,418,641 shares in 1996 and 20,356,768 shares in 1995; outstanding - 20,374,141 shares in 1996 and 20,356,768 shares in 1995 204 204 Preferred stock, par value $.01 per share; authorized 2,500,000 shares; none outstanding -- -- Additional paid-in capital 59,699 59,299 Treasury stock, at cost; 44,500 shares (1,093) -- ESOP debt (notes 12 and 14) (5,816) (6,892) Unrealized appreciation on available for sale securities, net of tax (note 13) 1,090 2,136 Retained earnings, substantially restricted 310,220 273,045 --------------------------- Total stockholders' equity 364,304 327,792 --------------------------- Total liabilities and stockholders' equity $5,145,471 $5,110,517 - --------------------------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements.
24 STATEMENT OF CONSOLIDATING OPERATIONS
Year Ended June 30 (Dollar amounts in thousands except per share data) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- INTEREST INCOME Interest on mortgage loans $175,448 $150,044 $117,246 Interest on other loans 15,893 14,540 11,771 Interest on mortgage-backed securities 140,783 147,280 129,993 Interest and dividends on investments 23,561 24,453 10,560 ------------------------------------ Total interest and dividend income 355,685 336,317 269,570 ------------------------------------ INTEREST EXPENSE Interest on deposits (note 11) 131,500 115,570 95,186 Interest on Federal Home Loan Bank advances and other borrowed funds 82,413 80,286 28,573 ------------------------------------ Total interest expense 213,913 195,856 123,759 ------------------------------------ Net interest income before provision for loan losses 141,772 140,461 145,811 Provision for loan losses (note 6) 2,035 240 2,352 ------------------------------------ Net interest income after provision for loan losses 139,737 140,221 143,459 ------------------------------------ OTHER INCOME Loan servicing 4,143 3,891 4,279 Gain (Loss) on sale of loans and securities 1,060 (11) 2,722 Unrealized appreciation on trading securities -- 201 -- Unrealized depreciation on available for sale securities -- -- (5,648 Financial service fees and other income 10,394 9,362 6,307 ------------------------------------ Total other income 15,597 13,443 7,660 ------------------------------------ Total income before other expense 155,334 153,664 151,119 ------------------------------------ OTHER EXPENSE Compensation and employee benefits (note 14) 28,602 27,490 23,832 Occupancy expense 10,746 9,986 8,703 Advertising 1,298 1,165 812 Deposit insurance 6,085 6,796 6,093 Computer services 4,782 4,556 4,178 Loan expense 2,905 2,350 3,760 Real estate operations 687 (1,137) 444 Amortization of intangibles 4,669 4,202 1,573 Other expenses 10,757 10,070 9,295 ------------------------------------ Total other expense 70,531 65,478 58,690 ------------------------------------ Income before income taxes 84,803 88,186 92,429 Income taxes (note 13) 30,303 30,644 33,062 ------------------------------------ Net income $ 54,500 $ 57,542 $ 59,367 ------------------------------------ PER SHARE DATA Primary net income per share $2.67 $2.80 $2.89 Fully diluted net income per share $2.67 $2.80 $2.89 Dividends per common share $0.85 $0.65 $0.57 Average primary shares outstanding 20,445,766 20,569,140 20,562,753 Average fully diluted shares outstanding 20,445,766 20,579,904 20,572,028 ---------------------------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements.
25 STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
Unrealized Appreciation Additional on Available (Dollar amounts in thousands Common Paid-In Treasury ESOP for Sale Retained except per share data) Stock Capital Stock Debt Securities Earnings Total - ------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1993 $202 $58,055 -- $(4,551) -- $180,875 $234,581 - ------------------------------------------------------------------------------------------------------------------------------ Net income for year ended June 30, 1994 -- -- -- -- -- 59,367 59,367 Stock options exercised 1 563 -- -- -- -- 564 Dividends on common stock - $.57 per share -- -- -- -- -- (11,535) (11,535) Additional ESOP debt -- -- -- (4,060) -- -- (4,060) ESOP debt repayment -- -- -- 811 -- -- 811 - ------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1994 203 58,618 -- (7,800) -- 228,707 279,728 - ------------------------------------------------------------------------------------------------------------------------------ Net income for year ended June 30, 1995 -- -- -- -- -- 57,542 57,542 Stock options exercised 1 681 -- -- -- -- 682 Dividends on common stock - $.65 per share -- -- -- -- -- (13,204) (13,204) ESOP debt repayment -- -- -- 908 -- -- 908 Securities valuation -- -- -- -- $2,136 -- 2,136 - ------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1995 204 59,299 -- (6,892) 2,136 273,045 327,792 - ------------------------------------------------------------------------------------------------------------------------------ Net income for year ended June 30, 1996 -- -- -- -- -- 54,500 54,500 Stock options exercised -- 279 -- -- -- -- 279 Dividends on common stock - $.85 per share -- -- -- -- -- (17,325) (17,325) Purchase of treasury stock -- -- $(1,093) -- -- -- (1,093) ESOP debt repayment -- -- -- 1,076 -- -- 1,076 ESOP shares released -- 121 -- -- -- -- 121 Securities valuation -- -- -- -- (1,046) -- (1,046) - ------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 1996 $204 $59,699 $(1,093) $(5,816) $1,090 $310,220 $364,304 - ------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to the consolidated financial statements.
26 STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended June 30 (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- Operating Activities Interest received $ 351,477 $ 324,519 $ 255,888 Interest paid (213,400) (195,206) (121,475) Operating expenses (67,255) (64,940) (60,146) Sales of trading securities 13,328 -- -- Loan fees 5,070 8,272 7,316 Other income received 15,797 13,242 7,660 Income taxes paid (23,249) (30,704) (27,260) ------------------------------------ Net cash provided by operating activities 81,768 55,183 61,983 ------------------------------------ Investing Activities Loan originations (634,001) (690,833) (895,420) Purchases of loans (23,990) (95,583) (407) Purchases of mortgage-backed securities (14,023) (128,306) (1,578,796) Repayment of loan principal 381,217 286,594 416,294 Repayment of mortgage-backed security principal 145,074 150,433 749,117 Sales of loans held for sale 107,707 43,199 11,075 Reduction of payable to brokers -- -- (79,600) Purchases of investment securities (330,971) (196,846) (152,734) Sales of securities available for sale -- 18,961 26 Purchases of mortgage-backed securities available for sale (98,937) (36,407) (99,875) Sales of mortgage-backed securities available for sale 60,204 110,342 269,869 Repayment of principal on mortgage-backed securities available for sale 19,084 19,901 63,204 Maturities of investment securities 331,549 21,571 11,528 Net decrease in real estate owned 1,048 2,045 5,673 Net change in loans maturing in 3 months or less (5,000) -- -- Cash obtained from acquisitions -- 90,929 264,938 Other investing, net (533) (5,636) (13,958) ------------------------------------ Net cash used for investing activities (61,572) (409,636) (1,029,066) ------------------------------------ Financing Activities Net change in deposits (23,436) 174,043 (74,114) Net change in Federal Home Loan Bank advances (395,000) 30,000 230,000 Net change in other borrowed funds 420,528 157,005 718,742 Net (decrease) increase in advance payments by borrowers for taxes and insurance (2,610) 3,543 (1,179) Dividends paid (16,304) (12,172) (10,913) Other financing, net (4,617) 1,057 (15,083) ------------------------------------ Net cash (used for) provided by financing activities (21,439) 353,476 847,453 ------------------------------------ Net decrease in cash and cash equivalents (1,243) (977) (119,630) Cash and cash equivalents, beginning of period 69,973 70,950 190,580 ------------------------------------ Cash and cash equivalents, end of period $ 68,730 $ 69,973 $ 70,950 ------------------------------------ Reconciliation of Net Income to Net Cash Provided by Operating Activities Net income $ 54,500 $ 57,542 $ 59,367 Net change in trading securities 13,328 -- -- Amortization and accretion of deferred charges and credits, net (2,462) (5,985) (4,484) Amortization of intangibles 4,669 4,202 1,573 Accrued income and expense 16,784 6,447 13,763 Deferred income and expense (13,131) (12,618) (15,817) Provision for loan and real estate owned losses 2,312 470 3,478 Depreciation and amortization 4,692 4,217 3,292 ESOP debt repayment 1,076 908 811 ------------------------------------ Net cash provided by operations $ 81,768 $ 55,183 $ 61,983 ------------------------------------
Supplemental Schedule of 1996 Noncash Investing Activities During the year ended June 30, 1995, Collective assumed deposit liabilities and purchased real property from Sovereign Bank partially offset by the sale of certain Collective deposit liabilities. The fair values of net liabilities assumed and noncash assets acquired were $100,035,000 and $1,531,000, respectively. During fiscal 1994, mortgage-backed securities in the amount of $203,519,000 were reclassified from held to maturity to available for sale. During the year ended June 30, 1994, Collective acquired Hansen Federal Savings Bank and White Horse Federal Savings and Loan. The fair values of the noncash assets acquired were $21,208,000 and $3,050,000, respectively, and the fair values of the liabilities assumed were $248,605,000 and $37,494,000, respectively. During fiscal 1996, 1995, and 1994, the balance of loans receivable transferred to real estate acquired in settlement of loans was $9,436,000, $12,448,000, and $15,671,000,respectively. See accompanying notes to the consolidated financial statements. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Collective Bancorp, Inc. and subsidiary ("Collective") follow accounting principles and reporting practices normally followed by thrift institutions, which are in conformity with generally accepted accounting principles. The more significant accounting policies are summarized below. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Collective and its wholly-owned subsidiary, Collective Bank. Collective's business is conducted primarily through Collective Bank and subsidiaries ("Collective Bank"). All significant intercompany transactions and balances have been eliminated. 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 as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand and in banks, federal funds sold and interest-bearing deposits and securities purchased under agreements to resell with original maturities of three months or less. Investment Policy Collective classifies all mortgage-backed and investment securities as either held to maturity, available for sale, or trading in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Mortgage-backed and investment securities held to maturity are carried at cost adjusted for amortization of premiums and accretion of discounts over the term of the related securities using the interest method. Collective has the ability and positive intent to hold these securities to maturity, and, accordingly, adjustments are not made for temporary declines in fair value below amortized cost. A decline in the fair value of any held to maturity security that is deemed other than temporary is charged to earnings. The investment in Federal Home Loan Bank stock is carried at cost. Mortgage-backed and investment securities classified as available for sale are carried at fair (market) value with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. Realized gains and losses are reported in earnings. Trading securities are stated at fair value. Unrealized gains and losses are included in earnings. Loans Receivable Loans receivable, other than loans held for sale, are stated at unpaid principal balance less unearned discounts, unamortized premiums, net deferred loan origination and commitment fees, and the allowance for loan losses. Discounts and premiums are recognized in income using the level-yield method over the estimated lives of the loans. Loans held for sale are carried at the lower of cost or market with any unrealized losses charged to earnings. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net fee or cost is recognized in interest income using the level-yield method over the contractual life of the specifically identified loans or recognized as the loans are sold or prepaid. At the discretion of management, Collective provides an allowance for accrued interest on loans which are more than 90 days past due. This allowance is netted against accrued interest receivable, which is included in other assets for financial statement purposes. Income is subsequently recognized only to the 28 extent that cash payments are received and, in management's judgment, the borrower's ability to make periodic interest and principal payments is probable, in which case the loan is returned to accrual status. Real Estate Acquired in Settlement of Loans Real estate acquired in settlement of loans is carried at the lower of fair value, less estimated costs to sell, or cost (carrying value or fair value at the date of acquisition). Specific valuation allowances on real estate owned are recorded through a charge to earnings if there is a further deterioration in fair value. Subsequent costs directly related to the completion of construction or improvement of the real estate are capitalized to the extent realizable. Gains and losses on sale of real estate are recognized upon disposition of the property to the extent allowable based on accounting requirements. Carrying costs, such as maintenance, interest, and taxes, are charged to operations as incurred. Land, Office Buildings, and Equipment Land, 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 resulting gain or loss is included in income. The costs of maintenance and repairs are charged to operating expense as incurred. The cost of major additions and improvements is capitalized. Income Taxes Collective 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" ("SFAS 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. Core Deposit Premium The premium resulting from the valuation of core deposits acquired in business combinations or in the purchase of branch offices is amortized using the interest method over a period not exceeding the estimated average remaining life of the existing customer deposit base acquired. Amortization periods are monitored to determine if events and circumstances require such periods to be reduced. Goodwill The cost in excess of the fair value of the net tangible and identified intangible assets acquired in the purchase of a banking or thrift institution ("goodwill") is amortized to expense over the estimated remaining life of the long-term interest-earning assets acquired. Goodwill recorded in the purchase of branch offices is amortized to expense using the straight line method over the estimated life of the deposits acquired, generally ten years. Sale of Loans and Mortgage-Backed Securities Gains and losses on the sale of loans and MBS's consist of both a cash and a present value gain or loss. A cash gain or loss is recognized to the extent that the sale proceeds exceed or are less than the carrying value of the loans and MBS's at the time of sale. The carrying value is determined by adjusting the 29 unpaid principal balance by net deferred loan fees, premiums, discounts, and the portion of the basis allocated to capitalized (originated) mortgage servicing rights ("OMSR") in accordance with Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights". A present value gain or loss (excess servicing) relating to sales of MBS's and loans sold with servicing retained is calculated based on the difference between the MBS or loan interest rate and the net yield to the investor excluding a normal servicing fee and considering estimated prepayments on such loans. The resulting servicing rights, both OMSR and excess, are amortized in proportion to and over the estimated period servicing income is earned using the level yield method. Amortization or accretion of these amounts is monitored and adjusted, if necessary, on a periodic basis to reflect prepayments if higher than originally anticipated. Provisions for Losses Provisions for losses include charges to reduce the carrying value of loans receivable and real estate acquired in settlement of loans to their fair value. Such provisions are based on management's estimates using past experience, known and inherent risks in the loan and real estate owned portfolios, adverse situations that may affect borrowers' ability to repay, estimated value of any underlying loan collateral or real estate owned, and current economic conditions. Provisions for losses on real estate acquired in settlement of loans are included in real estate operations expense in the Statements of Consolidated Operations. Recovery of the carrying value of such loans and real estate is dependent to a great extent on conditions that may be beyond management's control. In the opinion of management, Collective has made adequate loss provisions based on all available and relevant information affecting the loan and real estate portfolios. It must be understood, however, that there are inherent risks and uncertainties related to the operation of a financial institution. By necessity, Collective's consolidated financial statements are dependent upon estimates, appraisals, and evaluations of loans. Therefore, the possibility exists that abrupt changes in such estimates, appraisals, and evaluations might be required because of changing economic conditions and the economic prospects of borrowers. Recently Issued Accounting Standards In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"). SFAS 114 addresses the criteria for accounting for loans that have been impaired. It requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective rate or, as a practical expedient, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Although SFAS 114 is effective for fiscal years beginning after December 15, 1994, Collective elected to adopt the Statement for its fiscal year ended June 30, 1995. Upon adoption on July 1, 1994, Collective reclassified $17,307,000 of loans foreclosed in-substance and $6,312,000 in related reserves from real estate acquired in settlement of loans to loans receivable in the Statements of Consolidated Financial Condition. In November 1993, the Accounting Standards Division of the American Institute of Certified Public Accountants issued Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). This SOP provides guidance on employers' accounting for employee stock ownership plans ("ESOP"). The SOP addresses measurement of compensation cost, the treatment of dividends on shares held by an ESOP, and the financial reporting of leveraged and nonleveraged ESOP transactions. Collective adopted SOP 93-6 effective July 1, 1994. The adoption did not have a material effect on Collective's financial condition or results of operations. In October 1994, the FASB issued Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan" ("SFAS 118"). SFAS 118 amends SFAS 114 to eliminate the provisions that described how a creditor should report income on an impaired loan. It also amends certain disclosure requirements of SFAS 114. The Statement is effective for fiscal years beginning after December 31, 1994, although earlier application is encouraged. 30 Collective adopted the provisions of SFAS 118 during its fiscal year ended June 30, 1995. It did not have a material effect on Collective's financial condition or results of operations. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable intangibles to be 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 result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the asset, an impairment loss is recognized. The Statement also requires that long-lived assets and certain identifiable intangibles be reported at the lower of carrying amount or fair value less cost to sell. The Statement is effective for Collective's fiscal year beginning July 1, 1996. The adoption of SFAS 121 is not expected to have a material effect on Collective's financial condition or results of operations. In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 amends Statement of Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking Activities" ("SFAS 65"), to require that a mortgage banking enterprise recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. The Statement applies prospectively in fiscal years beginning after December 15, 1995 although earlier application is encouraged. Collective adopted the provisions of SFAS 122 in its fiscal year ended June 30, 1995. The adoption did not have a material effect on Collective's financial condition or results of operations (see note 7). In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Those plans include all arrangements by which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of the employer's stock. SFAS 123 also applies to transactions in which an entity issues its equity instruments to acquire goods or services from nonemployees. The Statement provides a fair value based method for measuring compensation cost associated with stock-based compensation and also allows, as an alternative, the intrinsic value based method which is prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Since most stock compensation plans have no intrinsic value at grant date, the latter method often results in no recognition of compensation cost. Under SFAS 123 entities that elect to remain with the intrinsic value based method must also make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting had been applied. The Statement applies to transactions entered into in fiscal years that begin after December 15, 1995, though they may be adopted on issuance. Pro forma disclosures required for entities that elect to measure compensation cost using the intrinsic value based method must include the effects of all awards granted in fiscal years that begin after December 15, 1994. Collective intends to continue accounting for stock-based compensation under APB 25 and will include the pro forma disclosures required by SFAS 123 in financial statements issued for fiscal years beginning July 1, 1996. In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS125 amends portions of SFAS 115, amends and extends to all servicing assets and liabilities the accounting standards for mortgage servicing rights now in SFAS 65, and supersedes SFAS 122. 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. SFAS 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. The adoption of the Statement is not expected to have a material effect on Collective's financial condition or results of operations. 31 Reclassifications Certain amounts in the consolidated financial statements of prior years have been reclassified to conform with the presentation used in the current year. 2. Business Combinations On May 21, 1996, Collective entered into an agreement to acquire Continental Bancorporation, a state chartered commercial bank with assets of approximately $187,000,000 (unaudited) at June 30, 1996. The acquisition is subject to regulatory approval, is anticipated to be completed by December 1996, and will be accounted for under the purchase method of accounting. On April 21, 1995, Collective purchased certain assets and assumed the deposit account liabilities of seven offices of Sovereign Bancorp, Inc. ("Sovereign") pursuant to an agreement entered into on January 17, 1995. As part of this same agreement, Sovereign purchased certain assets and assumed the deposit account liabilities of Collective's Wilmington, Delaware office. The net deposit liabilities assumed by Collective amounted to $99,818,000 and the net assets received, consisting primarily of cash, amounted to $92,210,000. The fair value of liabilities assumed exceeded the fair value of tangible assets acquired by $8,334,000. This was allocated to core deposit premium and goodwill of $2,819,000 and $5,515,000, respectively. The acquisition was accounted for by the purchase method. On May 6, 1994, Collective purchased certain assets and assumed the deposit account liabilities of White Horse Federal Savings and Loan Association from the Resolution Trust Corporation. The deposit liabilities assumed amounted to $37,494,000, and the assets received consisted primarily of cash amounting to $35,322,000. The fair value of liabilities assumed exceeded the fair value of tangible assets acquired by $2,315,000. This was allocated to core deposit premium and goodwill of $1,359,000 and $956,000, respectively. The acquisition was accounted for by the purchase method. On April 15, 1994, Collective purchased certain assets and assumed the deposit account liabilities of Hansen Federal Savings Bank from the Resolution Trust Corporation. The deposit liabilities assumed amounted to $248,605,000, and the assets received consisted primarily of cash amounting to $231,073,000. The fair value of liabilities assumed exceeded the fair value of tangible assets acquired by $19,811,000. This was allocated to core deposit premium and goodwill of $6,220,000 and $13,591,000, respectively. The acquisition was accounted for by the purchase method. The following summarizes the business combinations of Collective during the three years in the period ended June 30, 1996, all of which were accounted for by the purchase method of accounting:
Cash Name of Institution/Branches Acquired Deposits Premiums Intangibles (Dollar amounts in thousands Date Acquired Paid Recorded - ------------------------------------------------------------------------------------------------- Hansen Federal Savings (9 offices) 04/15/94 $248,605 $18,145 $19,811 White Horse Federal Savings (2 offices) 05/06/94 37,494 2,301 2,315 Sovereign Bank (7 offices) 04/21/95 99,818 7,481 8,334 - ------------------------------------------------------------------------------------------------- Total $385,917 $27,927 $30,460 - -------------------------------------------------------------------------------------------------
The results of the acquired entities have been included in the Statements of Consolidated Operations from the dates of acquisition. The acquisitions did not have a material effect on the results of operations for the year of acquisition. If all the acquisitions had occurred at the beginning of the year of acquisition or the preceding year, the effect on such years also would have not been material. 32 The balances of purchase accounting adjustments at June 30, 1996, resulting from prior year acquisitions, and the accretion and amortization of such adjustments (net increase or decrease in income) are summarized as follows:
Balance as of June 30 Year ended June 30 --------------------- -------------------------------- (Dollar amounts in thousands) 1996 1995 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Premiums and discounts on loans receivable $ 800 $ 575 $ 225 $ (19) $ 966 Premiums and discounts on other assets and liabilities (542) 99 (641) 1,311 2,621 Core deposit premium 8,191 10,873 (2,682) (2,672) (1,330) Goodwill 16,116 18,103 (1,987) (1,530) (243) - ---------------------------------------------------------------------------------------------- Total $24,565 $29,650 $(5,085) $(2,910) $ 2,014 - ----------------------------------------------------------------------------------------------
3.Fair Values of Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), requires disclosure of fair value information about financial instruments, whether or not recognized on the balance sheet, for which it is practicable to estimate that value. The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced liquidation. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Because no quoted market price exists for a significant portion of Collective's financial instruments, the fair values of such financial instruments are derived based on the amount and timing of future cash flows, estimated discount rates, as well as management's best judgment with respect to current economic conditions. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. The fair value information provided is indicative of the estimated fair values of those financial instruments and should not be interpreted as an estimate of the value of Collective, taken as a whole. The disclosures do not address the value of recognized and unrecognized non-financial assets and liabilities or the value of future anticipated business.
June 30, 1996 June 30, 1995 ----------------------- ------------------------- Carrying Estimated Carrying Estimated (Dollar amounts in thousands) Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------------- Financial Assets: Cash and cash equivalents $ 68,730 $ 68,730 $ 69,973 $ 69,973 Trading securities -- -- 13,328 13,328 Loans held for sale 5,186 5,231 5,815 5,836 Securities available for sale 162,284 162,284 113,635 113,635 Investment securities 276,171 271,650 315,879 317,221 Loans receivable 2,548,150 2,505,002 2,373,706 2,362,223 Mortgage-backed securities 1,973,642 1,896,831 2,100,344 2,027,783 Capitalized loan servicing rights 4,232 5,795 3,638 3,638 Liabilities: Deposits 3,254,387 3,249,977 3,277,823 3,286,262 Federal Home Loan Bank advances -- -- 395,000 395,000 Other borrowed funds 1,473,448 1,473,448 1,052,920 1,052,920 Off Balance Sheet Instruments: Loan servicing rights -- 8,642 -- 7,329 Nonfinancial Instruments: Core deposit intangible 8,191 93,880 10,873 65,178 - ---------------------------------------------------------------------------------------------------------------------------
33 The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and cash equivalents - The carrying amount of these items is a reasonable estimate of their fair value. Trading securities, loans held for sale, and securities available for sale - The fair value of these items is calculated by using the quoted market price of securitized loans and securities. Investment securities - The fair values are based on quoted market prices or dealer quotes. The fair values of restricted equity securities are estimated to approximate their carrying values. Loans receivable - For certain homogeneous categories of loans, such as fixed and variable residential mortgages, fair value is estimated using quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other loan types is estimated by discounting the future cash flows and prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types were fair valued at carrying value because of their floating rate or expected maturity characteristics. Mortgage-backed securities - Estimated fair value for mortgage-backed securities issued by quasi-governmental agencies is based on quoted market prices where available or discounted cash flows. The fair value of mortgage-backed securities issued by non-quasi-governmental agencies is estimated based on similar securities with quoted market prices and adjusted for any differences in credit ratings or maturities. Capitalized loan servicing rights - Capitalized loan servicing rights are comprised of excess servicing and originated mortgage servicing rights ("OMSR") in accordance with SFAS 122. The fair value of excess servicing on loans serviced for others was determined based on the estimated discounted net cash flows to be received less the normal costs of servicing. The estimated fair value of OMSR approximates the amount for which the servicing currently could be sold. Deposits - The fair value of demand deposits, savings accounts, and money market accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. FHLB advances and other borrowed funds - Estimated fair value is based on rates currently available to Collective Bank for debt with similar remaining maturities. Loan servicing rights - The fair value of off balance sheet loan servicing rights approximates the amount for which the servicing currently could be sold. Core deposit valuation - The estimated fair value ascribed to core deposits is calculated based on an estimate of cost savings from the low cost of such deposits over their estimated life, discounted using an incremental cost of funds rate. 4. Securities Purchased Under Agreements to Resell Collective enters into purchases of securities under agreements to resell. There were no agreements outstanding at June 30, 1996 and 1995, but during the year securities purchased under agreements to resell were delivered by entry into accounts maintained by Collective Bank at the Federal Reserve Bank of Philadelphia. These securities averaged $17,461,000 and $57,714,000 for 1996 and 1995, respectively, with maximum amounts outstanding at any month-end of $102,969,000 and $86,390,000, respectively. 34 5. Investment Securities Investment securities consisted of the following:
June 30, 1996 ---------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Available for sale FNMA Preferred Stock $ 31,600 -- $ (236) $ 31,364 FHLMC Preferred Stock 35,875 -- -- 35,875 - ----------------------------------------------------------------------------------------------- Total $ 67,475 -- $ (236) $ 67,239 - ----------------------------------------------------------------------------------------------- Held to maturity U.S. government and agency obligations $220,460 $ 64 $(4,723) $215,801 State and municipals 9,979 138 -- 10,117 Federal Home Loan Bank stock (note 12) 45,103 -- -- 45,103 Other investments 629 -- -- 629 - ----------------------------------------------------------------------------------------------- Total $276,171 $202 $(4,723) $271,650 - -----------------------------------------------------------------------------------------------
June 30, 1995 ---------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Available for sale FHLMC Preferred Stock $ 35,875 $ 187 -- $ 36,062 - ----------------------------------------------------------------------------------------------- Held to maturity U.S. government and agency obligations $279,585 $1,206 $(18) $280,773 State and municipals 12,227 155 (1) 12,381 Federal Home Loan Bank stock (note 12) 23,389 -- -- 23,389 Other investments 678 -- -- 678 - ----------------------------------------------------------------------------------------------- Total $315,879 $1,361 $(19) $317,221 - -----------------------------------------------------------------------------------------------
Investment securities at June 30, 1996:
Estimated Amortized Market (Dollar amounts in thousands) Cost Value - ----------------------------------------------------------------------------------------------- Available for sale No maturity $ 67,475 $ 67,239 - ----------------------------------------------------------------------------------------------- Held to maturity No maturity $ 45,103 $ 45,103 Due in one year or less 7,545 7,545 Due after one year through five years 106,952 105,191 Due after five years through ten years 63,296 62,396 Due after ten years 53,275 51,415 - ----------------------------------------------------------------------------------------------- Total $276,171 $271,650 - -----------------------------------------------------------------------------------------------
35 6. Loans Receivable Loans receivable consisted of the following:
June 30 1996 1995 ------------------------------------------------------ Estimated Estimated (Dollar amounts in thousands) Amount Fair Value Amount Fair Value - ---------------------------------------------------------------------------------------------- First mortgage loans - Conventional $2,026,125 $1,979,102 $1,944,946 $1,928,508 FHA 37,580 37,772 41,257 42,746 VA 43,495 43,733 47,407 49,058 Construction and development loans 39,805 39,604 26,290 26,159 - ---------------------------------------------------------------------------------------------- 2,147,005 2,100,211 2,059,900 2,046,471 - ---------------------------------------------------------------------------------------------- FHA Title I improvement loans 291 324 410 453 Loans to depositors, secured by savings accounts 3,137 3,192 4,170 4,204 Second mortgage loans 102,610 106,693 57,383 60,250 Education loans 9,463 9,520 9,992 9,923 Home equity credit lines 70,299 69,717 77,217 76,530 Commercial loans 238,706 238,759 189,816 189,662 Other loans 6,060 6,007 4,231 4,143 - ---------------------------------------------------------------------------------------------- 2,577,571 2,534,423 2,403,119 2,391,636 - ---------------------------------------------------------------------------------------------- Less - Deferred loan fees 4,976 4,976 6,511 6,511 Deferred discounts (800) (800) (575) (575) Loans in process 12,354 12,354 9,351 9,351 Allowance for loan losses 12,891 12,891 14,126 14,126 - ---------------------------------------------------------------------------------------------- Total $2,548,150 $2,505,002 $2,373,706 $2,362,223 - ----------------------------------------------------------------------------------------------
Activity in the allowance for loan losses, established primarily for mortgage loans, was as follows:
Year Ended June 30 - ---------------------------------------------------------------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Beginning balance $14,126 $18,006 $22,291 Provision for losses 2,035 240 2,352 Charge-offs and adjustments, net (3,270) (4,120) (6,637) - ---------------------------------------------------------------------------------------------- Ending balance $12,891 $14,126 $18,006 - ----------------------------------------------------------------------------------------------
36 Nonperforming (impaired) loans at June 30, 1996 and 1995 were $23,166,000 and $21,876,000, respectively before specific allowances of $6,055,000 at June 30, 1996 and $5,753,000 at June 30, 1995. The allowance for delinquent interest on loans (included in other assets) totalled $674,000 at June 30, 1996 and $655,000 at June 30, 1995. (See note 1, "Loans Receivable", for a discussion of Collective's policy for recognizing interest income on impaired loans, including the treatment of payments received.) Nonperforming loans averaged $24,650,000, $26,077,000, and $38,768,000 for the years ended June 30, 1996, 1995, and 1994, respectively. No interest income was recognized on those loans during the period of impairment. At June 30, 1996, 1995, and 1994 the balance of loans serviced for others was $707,793,000, $695,069,000, and $725,440,000, respectively. Servicing loans generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors, and foreclosure processing. Loan servicing income includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees. In connection with loans serviced for others, Collective held borrowers' escrow balances of $7,566,000 and $8,086,000 at June 30, 1996 and 1995, respectively. At June 30, 1996 and 1995, Collective maintained an inventory of first mortgage loans held for sale of $5,186,000 and $5,815,000, respectively. No valuation allowance was established at June 30, 1996 and 1995 as the market value of those loans exceeded their carrying value. Collective originates and purchases adjustable and fixed interest rate loans. At June 30, 1996, the composition of these loans was as follows:
(Dollar amounts in thousands) Fixed Rate Adjustable Rate - ----------------------------------------------------------------------------------------------- Term to maturity Book Value Term to rate adjustment Book Value - ----------------------------------------------------------------------------------------------- 1mo. - 1yr. $ 3,220 1mo. - 1yr. $ 923,950 1yr. - 3yr. 9,899 1yr. - 2yr. 49,580 3yr. - 5yr. 25,023 2yr. - 3yr. 134,494 5yr. - 10yr. 107,954 3yr. - 5yr. 394,427 10yr. - 20yr. 349,973 5yr. - 10yr. 214,279 Over 20 yr. 364,772 - ----------------------------------------------------------------------------------------------- Total $860,841 Total $1,716,730 - -----------------------------------------------------------------------------------------------
The adjustable rate loans have interest rate adjustment limitations and are generally indexed to the 1-year and 3-year U.S. Treasury Note rates and the Federal Home Loan Bank Eleventh District cost of funds. Future market factors may affect the correlation of the interest rate adjustment with the rates paid on the short-term deposits and borrowings that have been primarily utilized to fund these loans. At June 30, 1996, 71% of loans receivable were collateralized by property located in New Jersey while other major concentrations included the states of Pennsylvania, Delaware, and New York with 9%, 5%, and 3%, respectively. 37 7. Mortgage-Backed Securities Mortgage-backed securities consisted of the following:
June 30, 1996 -------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Available for sale GNMA pass-through certificates $ 6,461 $ 467 -- $ 6,928 FHLMC and FNMA pass- through certificates 86,645 2,569 $ (1,097) 88,117 - ----------------------------------------------------------------------------------------------- Total $ 93,106 $3,036 $ (1,097) $95,045 - ----------------------------------------------------------------------------------------------- Held to maturity GNMA pass-through certificates $ 3,485 $ 35 $ (12) $ 3,508 FHLMC and FNMA pass- through certificates 423,467 1,129 (18,793) 405,803 Collateralized mortgage obligations 1,546,690 872 (60,042) 1,487,520 - ----------------------------------------------------------------------------------------------- Total $1,973,642 $2,036 $(78,847) $1,896,831 - -----------------------------------------------------------------------------------------------
June 30, 1995 -------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollar amounts in thousands) Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- Trading securities FHLMC pass-through certificates $ 13,127 $ 201 -- $ 13,328 - ----------------------------------------------------------------------------------------------- Available for sale GNMA pass-through certificates $ 8,236 $ 573 -- $ 8,809 FHLMC and FNMA pass- through certificates 66,186 2,578 -- 68,764 - ----------------------------------------------------------------------------------------------- Total $ 74,422 $3,151 -- $ 77,573 - ----------------------------------------------------------------------------------------------- Held to maturity GNMA pass-through certificates $ 3,990 $ 104 $ (9) $ 4,085 FHLMC and FNMA pass- through certificates 435,334 2,100 (10,350) 427,084 Collateralized mortgage obligations 1,661,020 4,120 (68,526) 1,596,614 - ----------------------------------------------------------------------------------------------- Total $2,100,344 $6,324 $(78,885) $2,027,783 - -----------------------------------------------------------------------------------------------
Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At June 30, 1996 and 1995, mortgage-backed securities in the amount of $1,564,083,000 and $1,118,679,000, respectively, including accrued interest, with respective market values of $1,492,668,000 and $1,072,516,000, collateralized certain securities sold under agreements to repurchase (see note 12). At June 30, 1996 and 1995, the balance of unencumbered mortgage-backed securities was $512,365,000 and $1,080,082,000, respectively. Capitalized servicing rights recorded on the sale of loans and MBS amounted to approximately $1,713,000, $531,000, and $2,134,000, respectively for the years ended June 30, 1996, 1995, and 1994. The unamortized balance of capitalized servicing rights was $4,232,000 and $3,832,000 at June 30, 1996 and 1995, respectively, and is included in other assets. During fiscal 1996, 1995, and 1994, amortization of capitalized servicing rights amounted to $1,313,000, $1,089,000, and $1,338,000, respectively. Net realized gains on the sale of mortgage-backed securities were $1,202,000, $206,000, and $1,800,000 for the years ended June 30, 1996, 1995, and 1994, respectively. 38 8. Real Estate Acquired in Settlement of Loans Real estate acquired in settlement of loans consisted of the following:
June 30 ------------------------ (Dollar amounts in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------------- Real estate acquired in settlement of loans $6,119 $7,170 Allowance for losses (692) (694) - ---------------------------------------------------------------------------------------------------- Total $5,427 $6,476 - ----------------------------------------------------------------------------------------------------
Activity in the allowance for real estate losses was as follows:
Year Ended June 30 ---------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Beginning balance $694 $1,164 $3,344 Provision for losses 278 230 1,127 Charge-offs and adjustments, net (280) (700) (3,307) - ---------------------------------------------------------------------------------------------------- Ending balance $692 $ 694 $1,164 - ----------------------------------------------------------------------------------------------------
9. Land, Office Buildings, and Equipment Land, office buildings, and equipment are summarized by major classification as follows:
June 30 ------------------------- (Dollar amounts in thousands) Estimated Useful Life 1996 1995 - ---------------------------------------------------------------------------------------------------- Land -- $ 7,484 $ 7,355 Buildings and leasehold improvements 10-30 yrs. 30,274 27,834 Office equipment 5-10 yrs. 10,859 10,260 Computer equipment 3-5 yrs. 15,593 14,178 - ---------------------------------------------------------------------------------------------------- 64,210 59,627 Accumulated depreciation and amortization (24,971) (20,314) - ---------------------------------------------------------------------------------------------------- Total $39,239 $39,313 - ----------------------------------------------------------------------------------------------------
Total depreciation and amortization expense for the years ended June 30, 1996, 1995, and 1994 was $4,692,000, $4,217,000, and $3,292,000, respectively. Collective leases certain of its branch offices under operating leases. Total rental expense was $1,230,000 in 1996, $1,103,000 in 1995, and $1,226,000 in 1994. Minimum lease commitments for each of the next five fiscal years and thereafter are as follows: ----------------------------------------------------------- 1997........................................... $ 853,596 1998........................................... 611,850 1999........................................... 444,548 2000........................................... 329,529 2001........................................... 263,379 2002 and beyond................................ 899,317 -----------------------------------------------------------
10. Accrued Interest Receivable Accrued interest receivable, included in other assets, consisted of the following:
June 30 ------------------------- (Dollar amounts in thousands) 1996 1995 - ----------------------------------------------------------------------------------------------------- Investments $ 3,999 $ 4,350 Loans 15,181 13,655 Mortgage-backed securities 9,699 11,347 - ----------------------------------------------------------------------------------------------------- Total $28,879 $29,352 - -----------------------------------------------------------------------------------------------------
39 11 Deposits Demand, savings and investment, and certificate accounts were as follows:
June 30, 1996 June 30, 1995 (Dollar amounts --------------------------------- ------------------------------------ in thousands) Estimated Estimated By type Amount Percent Fair Value Amount Percent Fair Value - ----------------------------------------------------------------------------------------------- Demand deposits Non-interest bearing $ 95,792 2.94% $ 95,792 $ 76,705 2.34% $ 76,705 NOW 405,889 12.47% 463,792 371,186 11.32% 371,186 Super NOW 102,406 3.15% 44,503 80,164 2.45% 80,164 - ----------------------------------------------------------------------------------------------- Total 604,087 604,087 528,055 528,055 - ----------------------------------------------------------------------------------------------- Savings and investment accounts Regular savings 549,055 16.87% 549,055 556,559 16.98% 556,559 Money market 115,469 3.55% 115,469 110,426 3.37% 110,426 Clubs 8,039 0.25% 8,039 7,957 0.24% 7,957 Super money market 172,636 5.30% 172,636 158,099 4.82% 158,099 - ----------------------------------------------------------------------------------------------- Total 845,199 845,199 833,041 833,041 - ----------------------------------------------------------------------------------------------- Certificates 7-31 Day 22,361 0.69% 22,361 24,823 0.76% 24,823 91 Day 15,570 0.48% 15,577 11,104 0.34% 11,104 6 Month 188,999 5.81% 189,447 133,621 4.08% 133,603 8 Month 201,149 6.18% 201,364 5,095 0.15% 5,116 9 Month 46,450 1.43% 46,500 300,501 9.17% 301,762 12 Month 230,760 7.09% 231,357 127,432 3.89% 127,021 15 Month 77,915 2.39% 77,853 302,819 9.24% 303,950 18-24 Month 369,970 11.37% 371,702 272,793 8.32% 272,988 30 Month 19,587 0.60% 19,568 30,151 0.92% 29,707 36 Month 27,219 0.84% 27,163 57,962 1.77% 57,357 4-6 Year 84,827 2.61% 84,656 88,436 2.70% 86,679 7-10 Year 8,837 0.27% 8,999 11,468 0.35% 11,473 Regulated fixed rate 2,056 0.06% 2,047 3,431 0.10% 3,435 IRA/Keogh 380,194 11.68% 372,874 394,034 12.02% 403,084 Certificates in excess of $100,000 129,207 3.97% 129,223 153,057 4.67% 153,064 - ----------------------------------------------------------------------------------------------- Total 1,805,101 1,800,691 1,916,727 1,925,166 - ----------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- Total $3,254,387 100.00% $3,249,977 $3,277,823 100.00% $3,286,262 - -----------------------------------------------------------------------------------------------
Total certificates at year end June 30, 1996 by maturity:
(Dollar amounts in thousands) Amount Avg. Rate - ----------------------------------------------------------------------------------------------- Within 1 Year $1,271,108 5.10% 1998 371,328 5.37% 1999 50,558 5.79% 2000 79,562 5.95% 2001 14,371 5.96% After 2001 18,174 5.24% - ----------------------------------------------------------------------------------------------- Total $1,805,101 - -----------------------------------------------------------------------------------------------
40 At June 30, 1996 and 1995, Collective Bank did not have any brokered deposits. The weighted average interest rate payable on deposits at June 30, 1996 and 1995 was 4.05% and 4.13%, respectively. Interest expense on deposits was as follows:
Year Ended June 30 ---------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Certificates $ 95,450 $ 79,854 $63,759 Demand deposits 12,128 9,644 7,899 Saving and investment accounts 23,922 26,072 23,528 - ----------------------------------------------------------------------------------------------- Total $131,500 $115,570 $95,186 - -----------------------------------------------------------------------------------------------
12. Federal Home Loan Bank Advances and Other Borrowed Funds Federal Home Loan Bank advances:
June 30 -------------------------------------------- Estimated Estimated (Dollar amounts in thousands) 1996 Fair Value 1995 Fair Value - ----------------------------------------------------------------------------------------------- Maturing during fiscal 1996 -- -- $395,000 $395,000 - ----------------------------------------------------------------------------------------------- Total -- -- $395,000 $395,000 - -----------------------------------------------------------------------------------------------
Advances are collateralized by stock in the Federal Home Loan Bank of New York and certain mortgage loans under a blanket pledge agreement. At June 30, 1995, the balance of loans collateralizing Federal Home Loan Bank advances under the blanket pledge agreement was $411,110,000. The weighted average interest rate on these advances was 6.00%. Other borrowed funds:
June 30 ------------------------------------------------ Weighted Average Interest Rate At Estimated Estimated (Dollar amounts in thousands) June 30, 1996 1996 Fair Value 1995 Fair Value - ----------------------------------------------------------------------------------------------- Securities sold under agreements to repurchase (see note 7) 5.27% $1,465,980 $1,465,980 $1,044,596 $1,044,596 Other short-term borrowings Variable 1,652 1,652 1,432 1,432 ESOP debt 7.99% 5,816 5,816 6,892 6,892 - ----------------------------------------------------------------------------------------------- Total $1,473,448 $1,473,448 $1,052,920 $1,052,920 - -----------------------------------------------------------------------------------------------
At June 30, 1995, the weighted average interest rates on securities sold under agreements to repurchase, other short-term borrowings, and ESOP debt were 5.94%, variable, and 8.77%, respectively. Collective enters into sales of securities under fixed-coupon reverse repurchase agreements and fixed-coupon dollar reverse repurchase agreements. Such agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the Statements of Consolidated Financial Condition. The dollar amount of securities underlying the agreements are book entry securities. During the period of such agreements, the securities were delivered by entry into the counterparty's account at the Federal Reserve Bank of Philadelphia (or in the case of GNMA mortgage-backed securities, to MBS Clearing Corporation or in the case of other mortgage-backed securities, to a third-party custodian's account that explicitly recognizes Collective's interest in the securities). At June 30, 1996 and 1995, agreements outstanding to repurchase the same securities were $1,179,526,000 and $826,651,000, respectively. At June 30, 1996 and 1995, agreements to repurchase substantially identical securities were $286,454,000 and $217,945,000, respectively. Agreements to repurchase the same securities and agreements to repurchase substantially identical securities averaged $1,437,905,000 and $1,114,789,000 during the years ended June 30, 1996 and 1995, respectively. The maximum amounts outstanding at any month-end under such agreements during fiscal 1996 and 1995 were $1,595,501,000 and $1,375,212,000, respectively. Accrued interest payable 41 on these agreements at June 30, 1996 and 1995 was $3,691,000 and $2,370,000, respectively. The June 30, 1996 agreements will mature through July 29, 1996. The June 1995 payable to brokers for securities purchased represents the purchase of U.S. agency securities. The purchase closed in July 1995 and was funded by the liquidation of short-term investments (cash equivalents) and short-term borrowings. 13. Income Taxes The income tax provision is comprised of the following components:
Year Ended June 30 ----------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Current provision $26,836 $26,571 $31,267 Deferred provision 3,467 4,073 1,795 - ----------------------------------------------------------------------------------------------- Total income tax provision $30,303 $30,644 $33,062 - -----------------------------------------------------------------------------------------------
The liability for income taxes at June 30, 1996 and 1995 in the Statements of Consolidated Financial Condition (included in other liabilities) includes a net deferred tax liability of $3,222,000 and $2,060,000, respectively that have been provided for the temporary differences between the tax bases and financial statement carrying amounts of assets and liabilities. The liability at June 30,1996 and 1995 includes $613,000 and $1,202,000, respectively, recorded as a result of the adoption of SFAS 115 which is netted against the unrealized appreciation adjustment recorded in stockholders' equity. The major sources of temporary differences and their deferred tax effects are as follows:
June 30 --------------------- (Dollar amounts in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------- Deferred Tax Assets: Loan loss reserve - book $ 2,782 $ 3,350 Deferred loan fees (net of expenses) 253 868 Unamortized discount on held to maturity securities 1,875 1,866 Amortizable intangibles 259 288 Directors fees 522 448 - --------------------------------------------------------------------------------------------- Total deferred tax assets 5,691 6,820 - --------------------------------------------------------------------------------------------- Deferred Tax Liabilities: Loan loss reserve - tax 5,483 4,832 Unrealized appreciation on trading and available for sale securities 613 1,234 Depreciation 1,312 1,051 Excess servicing 81 131 Purchase accounting 1,258 1,397 Other, net 166 235 - --------------------------------------------------------------------------------------------- Total deferred tax liabilities 8,913 8,880 - --------------------------------------------------------------------------------------------- Net deferred tax (liability) asset $(3,222) $(2,060) - ---------------------------------------------------------------------------------------------
42 A reconciliation of the statutory income tax provision to the effective income tax provision is as follows:
Year Ended June 30 ---------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Income tax at federal statutory rate (35%) $29,681 $30,865 $32,429 Tax-exempt interest (164) (129) (164) ESOP dividends (157) (274) (208) Dividends received deduction (662) (544) (497) State income tax provision (net of federal benefit) 1,692 1,684 1,777 Benefit due to federal income tax rate change -- -- (136) Other, net (87) (958) (139) - ---------------------------------------------------------------------------------------------- Total income tax provision $30,303 $30,644 $33,062 - ----------------------------------------------------------------------------------------------
Savings banks that meet certain definitions, tests, and other conditions prescribed by the Internal Revenue Code ("IRC") are allowed to deduct, with limitations, a bad debt deduction. This deduction can be computed as a percentage of taxable income before such deduction or based upon actual loss experience. During fiscal years 1996, 1995, and 1994, Collective employed the percentage of taxable income method. Pursuant to SFAS 109, Collective is not required to provide deferred taxes on its tax loan loss reserve as of December 31, 1987. The amount of this reserve on which no deferred taxes have been provided is approximately $27,900,000. This reserve could be recognized as taxable income and create a current and/or deferred tax liability using the income tax rates then in effect if one of the following occur: (1) Collective's retained earnings represented by this reserve is used for purposes other than to absorb losses from bad debts, including dividends or distributions in liquidation, (2) Collective fails to meet the definitions, tests, or other conditions provided by the IRC for a qualified Savings and Loan Association, or (3) there is a change in the federal tax law. See note 16 for proposed changes to the IRC or federal tax law affecting the bad debt deduction and tax loan loss reserve. Collective recently completed an examination by the Internal Revenue Service for the year ended December 31, 1991. There were no changes made to Collective's taxable income as originally reported to the Internal Revenue Service 14. Benefit Plans Collective maintains an Employee Stock Ownership Plan ("ESOP"), a defined contribution plan covering all eligible employees. Prior to July 1, 1994, Collective accounted for ESOP transactions in accordance with AICPA Statement of Position 76-3, "Accounting Practices for Certain Employee Stock Ownership Plans" ("SOP 76-3"). Effective July 1, 1994, Collective adopted the provisions of SOP 93-6 which supersedes SOP 76-3. These accounting rules address the method of measuring compensation, the classification of dividends on ESOP shares, and the treatment of ESOP shares for the computation of earnings per share. Upon adoption, SOP 93-6 applied to unallocated shares purchased by the ESOP after December 31, 1992 while unallocated shares purchased prior to December 31, 1992 continued to be accounted for under SOP 76-3. At June 30, 1996, there were 407,679 unallocated shares in the ESOP. Of this total, 196,200 shares were subject to SOP 76-3 while 211,479, comprised of 15,486 shares committed to be released and 195,994 suspense shares (market value of $4,630,000 at June 30, 1996), were subject to SOP 93-6. Dividends received on allocated shares in the ESOP are added directly to the participant accounts while dividends received on unallocated shares are used toward repayment of principal on the ESOP debt. Amounts committed to be released and, in turn, provided for repayment of loan principal are recognized as compensation expense at fair value. Unallocated shares falling under SOP 76-3 are considered to be outstanding in calculating earnings per share. Unallocated shares subject to SOP 93-6 that have not been committed to be released are not treated as outstanding in calculating earnings per share. The ESOP allocated 118,985 and 134,723 shares of Collective's stock to employees during the plan years ended November 30, 1995 and 1994, respectively. 43 Contributions to the ESOP are allocated among the participants based on compensation. During 1988, the ESOP trustee entered into a loan agreement with a commercial bank to borrow $1,900,000, which was used to finance the purchase of 480,280 shares of common stock of Collective. The loan had a term of seven years with a rate equal to 90.1% of the prime rate of the commercial bank. This loan was refinanced on December 30, 1991. The new note which had a term of thirty nine months with a rate equal to 90.1% of the prime rate of the lender was paid off on March 31, 1995. In November 1991, the ESOP trustee entered into another loan agreement with a commercial bank to borrow $4,050,000, which was used to finance the purchase of 492,593 shares of common stock of Collective. This loan had a term of seven years with a floating rate tied to 265 basis points over the Federal Funds effective rate established by the lender or 25 basis points over the bank's prime rate, whichever method Collective elects to apply to future periods on the annual anniversary date. To date, the Federal Funds effective rate has been utilized and has proven to be lower than the prime rate alternative. In June 1993, the ESOP trustee modified the agreement with the commercial bank to provide an additional $5,000,000 line of credit. As of June 30, 1994, the entire line of credit had been drawn for the purchase of 242,836 shares. The additional $5,000,000 was an interest only loan for a period of two years with interest calculated in the same manner as the original $4,050,000 loan discussed above. In June 1995 the loan began a ten year principal repayment. At June 30, 1996, the total ESOP debt outstanding was $5,816,000. Collective also has a voluntary thrift plan (a qualifying plan under 401K of the Internal Revenue Code) in which substantially all of the employees are eligible to participate. Annual contributions to the plan are made at the discretion of the Board of Directors based upon the income of Collective as defined and funded annually. Benefits under the plan are deferred until retirement, termination, or withdrawal upon request. Contributions made for plan years ended November 30, 1995, 1994, and 1993 were $902,835, $782,063, and $766,359, respectively. 15. Commitments and Contingencies At June 30, 1996 and 1995 Collective had outstanding mortgage loan origination commitments of approximately $73,445,000 and $47,682,000, respectively, with interest rates ranging from 4.25% to 11.88% and 3.00% to 9.50%, respectively. Of the total at June 30, 1996, variable rate commitments totalled $57,779,000 at interest rates of 4.25% to 11.88% with the balance of $15,666,000 representing fixed rate commitments at 6.00% to 11.88%. At June 30, 1995, variable rate commitments totalled $17,718,000 at interest rates of 3.00% to 8.50% with the balance of $29,964,000 representing fixed rate commitments at 6.75% to 9.50%. At June 30, 1996 and 1995 Collective had outstanding non-mortgage loan origination commitments of approximately $52,989,000 and $53,974,000, respectively. Collective evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. Management expects that these loans will be disbursed within the next twelve months. At June 30, 1996 and 1995, Collective had outstanding commitments on unused lines of credit of $123,822,000 and $92,991,000, respectively. These commitments may not represent future cash requirements since many commitments may not be drawn upon. Collective and its subsidiary may, from time to time, be defendants in legal proceedings relating to the conduct of their businesses. In the best judgement of management, the consolidated financial position, results of operations, and cash flows of Collective or its subsidiary will not be affected materially by the final outcome of any pending legal proceedings or other contingent liabilities and commitments. Legislation pending in Congress would impose a one-time assessment, currently estimated at between 75 and 85 basis points, on the amount of deposits held as of March 31, 1995 by Savings Association Insurance Fund ("SAIF")-member institutions, including Collective Bank, a wholly-owned subsidiary of Collective, to recapitalize the SAIF to the required level of 1.25% of insured deposits. If the assessment is made at the 85 basis point proposed rate, the effect on Collective Bank would be a pre-tax charge of approximately $22 million, or $14 million after tax (36% assumed tax rate). 44 Certain proposed legislation also would require the recapitalized SAIF to be merged with the Bank Insurance Fund into a new Deposit Insurance Fund no later than January 1, 1998, provided the thrift charter has been eliminated by that date. The elimination of the thrift charter, by requiring thrifts, including Collective Bank, to convert to state or national commercial bank charters, would be effected via separate legislation enacted by the end of calendar 1997. Additional proposed legislation would repeal Section 593 of the IRC for taxable years beginning after December 31, 1995. Section 593 allows certain thrift institutions, including Collective Bank, to use a percentage-of-taxable income bad debt accounting method, if more favorable than the specific charge-off method, for federal income tax purposes. Since 1993, Collective has used the percentage-of-taxable income method in its income tax returns. The enactment of the proposed legislation could cause Collective's effective income tax rate to increase, thereby negatively impacting net income. Management cannot predict whether such proposals, or similar legislation, will be enacted, or if enacted, the ultimate effect on Collective's financial condition or results of operations, except as indicated above. 16. Stockholders' Equity The OTS sets forth capital standards applicable to all thrifts. These standards include a core capital requirement, a tangible capital requirement, and a risk-based capital requirement. The following table presents Collective Bank's position relative to the three capital requirements. Collective Bank exceeds all of the requirements at June 30, 1996. At June 30, 1996 Collective Bank exceeded the minimum capital requirements as follows:
(Dollar amounts in thousands) Amount Percent - ----------------------------------------------------------------------------------------------- Tangible Capital: Actual $337,759 6.60% Required 76,821 1.50% - ----------------------------------------------------------------------------------------------- Excess $260,938 5.10% - ----------------------------------------------------------------------------------------------- Core (Tier 1) Capital: Actual $337,759 6.60% Required 153,642 3.00% - ----------------------------------------------------------------------------------------------- Excess $184,117 3.60% - ----------------------------------------------------------------------------------------------- Risk-based Capital: Actual $344,595 17.30% Required 159,316 8.00% - ----------------------------------------------------------------------------------------------- Excess $185,279 9.30% - -----------------------------------------------------------------------------------------------
Prompt Corrective Action ("PCA") regulations that are required by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") require specific supervisory actions as capital levels decrease. The specifications of the capital categories are shown below:
Tier 1 Tangible Total Risk- Tier 1 Risk- Leverage Capital Ratio Capital Ratio based Ratio based Ratio(1) Ratio - ------------------------------------------------------------------------------------------------------------- Well-capitalized N/A Greater than or Greater than or Greater than or equal to 10% equal to 6% equal to 5% Adequately capitalized N/A Greater than or Greater than or Greater than or equal to 8% equal to 4% equal to 4% Under Capitalized N/A Less than 8% Less than 4% Less than 4% Significantly undercapitalized N/A Less than 6% Less than 3% Less than 3% Critically undercapitalized Less than or N/A N/A N/A equal to 2% - -------------------------------------------------------------------------------------------------------------- (1) Total Core (Tier 1) Capital divided by risk-adjusted assets.
Because of Collective Bank's regulatory capital requirements, $65,844,000 of its retained earnings is unavailable for distribution to Collective. 45 17. Stock Options Collective has two stock option plans which call for a total of 1,696,000 shares of common stock to be reserved for issuance for the benefit of directors, officers, and other key employees. Under the terms of the plans, options are granted at not less than the fair market value of the shares at the date of grant, require a two to five-year holding period before they may be exercised, and may not have a maximum term of more than ten years. Activity in the stock option plans for each of the three years ended June 30, 1994, 1995, and 1996 was as follows:
Option Price At time of Grant -------------------------------------- Number of Shares Per Share Total - -------------------------------------------------------------------------------------------------- Balance, June 30, 1993 512,438 $ 1.313 - $13.250 $2,604,609 Granted 82,370 4.313 - 21.000 1,509,909 Expired (4,975) 1.313 - 21.000 (67,644) Exercised (103,189) 1.313 - 13.250 (381,185) - -------------------------------------------------------------------------------------------------- Balance, June 30, 1994 486,644 2.844 - 21.000 3,665,689 Granted 79,850 15.625 - 21.500 1,395,162 Expired (5,560) 2.8375 - 21.000 (91,051) Exercised (89,242) 2.8375 - 18.250 (640,712) - -------------------------------------------------------------------------------------------------- Balance, June 30, 1995 471,692 3.1875 - 21.000 4,329,088 Granted 9,200 20.000 - 24.875 219,100 Expired (6,200) 3.1875 - 21.000 (104,556) Exercised (61,885) 3.1875 - 18.250 (280,513) - -------------------------------------------------------------------------------------------------- Balance, June 30, 1996 412,807 $3.1875 - $24.875 $4,163,119 - --------------------------------------------------------------------------------------------------
At June 30, 1996 and 1995, exercisable options were 112,140 and 130,274, respectively. The balance of shares reserved for issuance under the stock option plans was 33,790 at June 30, 1996. Collective has a restricted stock award plan which calls for a total of 75,000 shares of common stock to be reserved for issuance for the benefit of officers and other employees. Under the terms of the plan, stock granted is subject to certain transfer restrictions. These restrictions lapse over a two-year period. At June 30, 1996, 72,012 shares remained unissued under this plan. Collective also has a restricted stock award program which calls for a total of 10,000 shares of common stock to be reserved for issuance for the benefit of non-employee directors and qualified consultants. Restrictions on shares awarded under this plan lapse over a three-year period. At June 30, 1996, 2,000 shares remained unissued under this plan. 46 18. Parent Company Financial Information The following information on Collective Bancorp, Inc. (parent company only) should be read in conjunction with the other Notes to Consolidated Financial Statements. Statements of Financial Condition
June 30 ----------------------- (Dollar amounts in thousands) 1996 1995 - ---------------------------------------------------------------------------------------------- Assets: Cash $ 3,204 $ 8,732 Investment in subsidiary 371,910 329,824 Other assets 117 211 - ---------------------------------------------------------------------------------------------- Total $375,231 $338,767 - ---------------------------------------------------------------------------------------------- Liabilities and Stockholders' Equity: ESOP debt $ 5,816 $ 6,892 Other liabilities 5,111 4,083 - ---------------------------------------------------------------------------------------------- Total liabilities 10,927 10,975 - ---------------------------------------------------------------------------------------------- Stockholders' Equity: Common stock 204 204 Additional paid-in capital 59,699 59,299 Treasury stock (1,093) -- ESOP debt (5,816) (6,892) Unrealized appreciation on available for sale securities 1,090 2,136 Retained earnings 310,220 273,045 - ---------------------------------------------------------------------------------------------- Total stockholders' equity 364,304 327,792 - ---------------------------------------------------------------------------------------------- Total $375,231 $338,767 - ----------------------------------------------------------------------------------------------
Statements of Operations
Year Ended June 30 --------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Income and expenses: Equity in earnings of subsidiary $55,012 $58,011 $59,747 Expenses (377) (348) (298) - ---------------------------------------------------------------------------------------------- Income before taxes 54,635 57,663 59,449 Income taxes (135) (121) (82) - ---------------------------------------------------------------------------------------------- Net income $54,500 $57,542 $59,367 - ----------------------------------------------------------------------------------------------
47 Statements of Cash Flows
Year Ended June 30 - ---------------------------------------------------------------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------------------- Operating activities: Dividend income $12,000 $19,000 $ 8,000 Operating expenses (271) (171) (437) Income taxes paid (140) (131) (66) - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities 11,589 18,698 7,497 - ---------------------------------------------------------------------------------------------- Financing activities: Dividends on common stock (16,304) (12,172) (10,913) ESOP debt incurred -- -- (4,060) Net increase in other liabilities -- -- 4,060 Other financing, net (813) 682 564 - ---------------------------------------------------------------------------------------------- Net cash used for financing activities (17,117) (11,490) (10,349) - ---------------------------------------------------------------------------------------------- Net (decrease) increase in cash (5,528) 7,208 (2,852) Cash at beginning of period 8,732 1,524 4,376 - ---------------------------------------------------------------------------------------------- Cash at end of period $ 3,204 $ 8,732 $ 1,524 - ---------------------------------------------------------------------------------------------- Reconciliation of net income to net cash provided by operating activities: Net income $54,500 $57,542 $59,367 Increase (decrease) in deferred expense 105 177 (139) (Decrease) increase in accrued expense (4) (10) 16 Equity in earnings of subsidiary (55,012) (58,011) (59,747) Dividends received from subsidiary 12,000 19,000 8,000 - ---------------------------------------------------------------------------------------------- Net cash provided by operations $11,589 $18,698 $ 7,497 - ----------------------------------------------------------------------------------------------
48 INDEPENDENT AUDITORS' REPORT KPMG Peat Marwick LLP The Board of Directors of Collective Bancorp, Inc.: We have audited the accompanying statement of consolidated financial condition of Collective Bancorp, Inc. and subsidiary as of June 30, 1996 and the related statements of consolidated operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying financial statements of Collective Bancorp, Inc. and subsidiary as of June 30, 1995 were audited by other auditors, whose report thereon dated August 25, 1995 expressed an unqualified opinion on those statements. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Collective Bancorp, Inc. and subsidiary at June 30, 1996 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Short Hills, New Jersey July 31, 1996 49 MATURITY AND RATE SENSITIVITY ANALYSIS(1) (Unaudited)
1 Year 1 Year Over (Dollar amounts in thousands) or Less to 5 Years 5 Years Total - ------------------------------------------------------------------------------------------------------------------------------- Assets: Mortgage loans: Balloon and adjustable rate first mortgages $ 726,623 $ 463,305 $ 196,779 $1,386,707 Fixed rate mortgages(2) 190,975 411,173 403,957 1,006,105 Mortgage-backed securities(3) 394,967 1,202,156 471,564 2,068,687 Consumer and commercial loans 123,608 34,472 2,444 160,524 Federal funds sold 3,646 -- -- 3,646 Investment securities(4) 342,993 -- 417 343,410 - ------------------------------------------------------------------------------------------------------------------------------- Total rate sensitive assets $ 1,782,812 $2,111,106 $1,075,161 $4,969,079 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities: Fixed maturity deposits $ 1,271,108 $ 515,819 $ 18,174 $1,805,101 NOW accounts -- 508,295 -- 508,295 Money market demand accounts 288,105 -- -- 288,105 Passbook accounts 101,378 234,198 221,518 557,094 Other borrowings 1,473,448 -- -- 1,473,448 - ------------------------------------------------------------------------------------------------------------------------------- Total rate sensitive liabilities $ 3,134,039 $1,258,312 $ 239,692 $4,632,043 - ------------------------------------------------------------------------------------------------------------------------------- Dollar gap(5) $(1,351,227) $ 852,794 $ 835,469 $ 337,036 - ------------------------------------------------------------------------------------------------------------------------------- (1) As presented in the above table, Collective calculates interest rate sensitivity information employing techniques developed by the Office of Thrift Supervision. (2) Includes $5,186 of loans classified as held for sale. (3) Includes $95,045 of mortgage-backed securities classified as available for sale. (4) Includes $67,239 of securities classified as available for sale. (5) Rate sensitive assets less rate sensitive liabilities.
RATE-VOLUME ANALYSIS (Unaudited)
Year Ended June 30 ----------------------------------------- (Dollar amounts in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Increase (Decrease) in net interest income attributable to: Volume: Loans $21,460 $31,937 $ 26,047 Mortgage-backed securities (5,221) 23,241 56,374 Investments 1,107 11,219 3,312 Deposits (6,202) (7,492) (18,304) Borrowed funds (1,372) (24,142) (19,895) - ------------------------------------------------------------------------------------------------------------------------------- 9,772 34,763 47,534 - ------------------------------------------------------------------------------------------------------------------------------- Rate: Loans 4,724 3,208 (13,997) Mortgage-backed securities (1,323) (5,053) (9,512) Investments (1,560) 2,029 225 Deposits (9,023) (11,710) 14,274 Borrowed funds (745) (15,252) (192) - ------------------------------------------------------------------------------------------------------------------------------- (7,927) (26,778) (9,202) - ------------------------------------------------------------------------------------------------------------------------------- Rate-Volume: Loans 573 422 (2,957) Mortgage-backed securities 47 (901) (6,020) Investments (439) 645 114 Deposits (705) (1,182) 2,781 Borrowed funds (10) (12,319) (332) - ------------------------------------------------------------------------------------------------------------------------------- (534) (13,335) (6,414) - ------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in net interest income $ 1,311 $ (5,350) $ 31,918 - -------------------------------------------------------------------------------------------------------------------------------
50 SELECTED FINANCIAL DATA
(Dollar amounts in thousands) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- At June 30: Total assets $5,145,471 $5,110,517 $4,589,258 $3,466,047 $2,499,669 Loans receivable and mortgage-backed securities, net 4,622,023 4,570,767 4,225,390 3,137,560 2,219,352 Investment securities(1) 347,056 355,657 191,349 184,737 188,219 Deposits 3,254,387 3,277,823 3,003,962 2,791,978 2,114,149 Federal Home Loan Bank advances -- 395,000 365,000 135,000 80,000 Other borrowed funds 1,473,448 1,052,920 895,915 256,773 69,839 Stockholders' equity (net worth) 364,304 327,792 279,728 234,581 192,088 Net worth ratio 7.08% 6.41% 6.10% 6.77% 7.68% Classified asset ratio 0.40% 0.39% 0.69% 1.09% 0.98% Customer service facilities (all full service) 78 79 78 69 58 Number of real estate loans 37,414 37,066 32,068 32,206 29,417 Number of savings accounts 420,890 427,411 420,538 371,998 307,615 For the year ended June 30: Total income $ 371,282 $ 349,760 $ 277,230 $ 227,371 $ 233,891 Net interest income 141,772 140,461 145,811 113,893 85,458 Net income 54,500 57,542 59,367 49,541 32,396 (Decrease) Increase in deposits (23,436) 273,861 211,984 677,829 137,716 Loans originated 634,001 690,833 895,420 506,240 331,588 Loans and mortgage-backed securities purchased 136,950 260,296 1,679,078 893,475 357,885 Loans and mortgage-backed securities sold 181,238 153,542 280,944 299,190 261,378 Yield on average interest-earning assets 7.26% 7.18% 7.14% 8.02% 9.12% Cost of average interest-bearing liabilities(2) 4.37% 4.18% 3.28% 3.79% 5.51% Interest margin 2.89% 3.00% 3.86% 4.23% 3.61% Return on assets (net income divided by average total assets) 1.07% 1.18% 1.48% 1.76% 1.30% Return on equity (net income divided by average stockholders' equity) 15.71% 19.10% 23.19% 23.39% 19.01% Dividend payout ratio 31.79% 22.95% 19.43% 14.63% 12.77% - --------------------------------------------------------------------------------------------------------------------------- (1) Includes investment securities, federal funds sold, interest-bearing deposits, and securities purchased under agreements to resell. (2) Adjusted for excess of interest-earning assets over interest-bearing liabilities.
QUARTERLY OPERATING DATA (Unaudited)
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 Mar. 31 Dec. 31 Sep. 30 (Dollar amounts in thousands) 1996 1996 1995 1995 1995 1995 1994 1994 - ------------------------------------------------------------------------------------------------------------------------------ Interest income $89,412 $88,447 $88,958 $88,868 $88,659 $85,860 $81,909 $79,888 Interest expense 52,083 52,230 54,438 55,163 55,301 52,696 46,170 41,689 Provision for loan losses 935 410 403 286 -- -- 5 235 Gain (Loss) on sale of loans, mortgage-backed securities, and investments 27 (162) 560 634 498 (17) (48) (243) Net income 14,659 13,523 13,121 13,197 13,625 12,950 14,978 15,989 Primary earnings per share 0.72 0.66 0.64 0.65 0.66 0.63 0.73 0.78 Fully diluted earnings per share 0.72 0.66 0.64 0.65 0.66 0.63 0.73 0.78 - ------------------------------------------------------------------------------------------------------------------------------
51 COMMON STOCK (Unaudited) Collective's common stock is traded on the NASDAQ Stock Market under the symbol COFD. The following table sets forth for the periods indicated the range of the high and low trade price information.
Calendar Year ----------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------------- High Low High Low High Low - ----------------------------------------------------------------------------------------------- First Quarter 28 1/4 22 1/2 20 11/16 15 7/8 21 1/8 17 1/2 Second Quarter 25 23 23 17 3/4 23 3/4 17 1/2 Third Quarter -- -- 26 1/16 20 22 5/8 19 5/8 Fourth Quarter -- -- 27 5/8 23 1/2 19 1/2 15 5/8 - -----------------------------------------------------------------------------------------------
52 STOCKHOLDER INFORMATION Main Office Collective Bancorp, Inc. 716 West White Horse Pike Cologne, New Jersey 08213 Mailing Address: P.O. Box 316 Egg Harbor, New Jersey 08215 Transfer Agent and Registrar FCTC Transfer Services, Inc. 111 Wood Avenue South Suite 206 Iselin, New Jersey 08830 (908) 205-4511 Stock Listing Collective Bancorp's stock is traded on The Nasdaq Stock Market. The common stock symbol is COFD. Form 10-K Collective Bancorp's Annual Report on Form 10-K will be furnished on written request without charge to those requesting a copy from the Investor Relations Department. Annual Stockholders' Meeting The Annual Meeting of Stockholders will convene at 10:00 a.m., Wednesday, October 16, 1996 at the Ram's Head Inn, 9 West White Horse Pike, Absecon, New Jersey. Holders of common stock of record as of August 30, 1996 will be eligible to vote. Information Analysts and investors seeking financial information about Collective Bancorp should contact: Investor Relations Department (609) 625-1110 Inside back cover EX-27 6 FDS
9 1000 This schedule contains summary financial information extracted from the Statements of Consolidated Financial Condition as of June 30, 1996 and the Statements of Consolidated Operations for the twelve months ended June 30, 1996 and is qualified in its entirety by reference to such financial statements. 1000 YEAR JUN-30-1996 JUN-30-1996 65,084 0 3,646 0 167,470 2,249,813 2,168,481 2,548,150 0 5,145,471 3,254,387 1,473,448 53,332 0 0 0 204 364,100 5,145,471 191,341 164,344 0 355,685 131,500 82,413 141,772 2,035 1,060 70,531 84,803 84,803 0 0 54,500 2.67 2.67 7.26 23,166 0 0 0 14,126 3,270 0 12,891 12,891 0 0
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