-----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, BUn6e5HEkpyZ93TnULa+VgA5qmxFfdTR5Wwjjt8RCrtKvbkRxmZ+4Ght+PGON/At hMgWQsGa4f14HSxBD8vwDQ== 0000928385-97-000533.txt : 19970329 0000928385-97-000533.hdr.sgml : 19970329 ACCESSION NUMBER: 0000928385-97-000533 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PAMRAPO BANCORP INC CENTRAL INDEX KEY: 0000854071 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 222984813 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18014 FILM NUMBER: 97567669 BUSINESS ADDRESS: STREET 1: 611 AVE C CITY: BAYONNE STATE: NJ ZIP: 07002 BUSINESS PHONE: 2013394600 MAIL ADDRESS: STREET 2: 611 AVENUE C CITY: BAYONNE STATE: NY ZIP: 07002 10-K 1 FORM 10-K Washington, DC 20549 FORM 10-K Annual report pursuant to Section 13 of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 Commission File No. 0-18014 PAMRAPO BANCORP, INC. (exact name of registrant as specified in its charter) DELAWARE 22-2984813 (State or other jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 611 Avenue C, Bayonne, New Jersey 07002 (Address of principal executive offices) Registrant's telephone number, including area code: (201) 339-4600 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 $0.01 per share (Title of class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the 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 the Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant, i.e., persons other than directors and executive officers of the registrant is $48,331,723 and is based upon the last sales price as quoted on The Nasdaq Stock Market for March 20, 1997. The Registrant had 2,868,094 shares outstanding as of March 20, 1997. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996 ARE INCORPORATED BY REFERENCE INTO PARTS I AND II OF THIS FORM 10-K. PORTIONS OF THE PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K. INDEX
PART I PAGE ---- Item 1. Business............................................... 1 Item 2. Properties............................................. 39 Item 3. Legal Proceedings...................................... 41 Item 4. Submission of Matters to a Vote of Security Holders.... 42 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters........................ 42 Item 6. Selected Financial Data................................ 42 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 42 Item 8. Financial Statements and Supplementary Data............ 42 Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclosure................. 42 PART III Item 10. Directors and Executive Officers of the Registrant..... 43 Item 11. Executive Compensation................................. 43 Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 43 Item 13. Certain Relationships and Related Transactions......... 43 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................. 44
SIGNATURES PART I ITEM 1. BUSINESS. - ----------------- Pamrapo Bancorp, Inc. (also referred to as the "Company" or the "Registrant") was incorporated under Delaware law on June 26, 1989. On November 10, 1989, the Registrant acquired Pamrapo Savings Bank, S.L.A. (the "Bank" or "Pamrapo") as a part of the Bank's conversion from a New Jersey chartered savings association in mutual form to a New Jersey chartered stock savings association. The Registrant is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission ("SEC"). Currently, the Registrant does not transact any material business other than through its sole subsidiary, the Bank. Pamrapo was organized in 1886 as the Pamrapo Building and Loan Association. On October 6, 1952, it changed its name to Pamrapo Savings and Loan Association, a New Jersey chartered savings and loan association in mutual form, and in 1988 it changed its name to Pamrapo Savings Bank, S.L.A. The Bank's principal office is located in Bayonne, New Jersey. Its deposits are insured up to applicable limits by the Savings Association Insurance Fund (the "SAIF") which is administered by the FDIC. At December 31, 1996, the Bank had total assets of $362.3 million, deposits of $304.0 million and stockholders' equity of $47.0 million before elimination of intercompany accounts with the Company, respectively. As a community-oriented institution, the Bank is principally engaged in attracting retail deposits from the general public and investing those funds in fixed-rate one- to four-family residential mortgage loans and, to a lesser extent, in multi-family residential mortgage loans, commercial real estate loans, home equity and second mortgage loans, consumer loans and mortgage-backed securities. The Bank's revenues are derived principally from interest on loans and mortgage-backed securities, interest and dividends on investment securities and short-term investments, and other fees and service charges. The Bank's primary sources of funds are deposits and, to a lesser extent, Federal Home Loan Bank of New York ("FHLB-NY") advances and other borrowings. MARKET AREA The Bank, which is headquartered in Bayonne, New Jersey, conducts its business through eight retail banking offices, six of which are located in Bayonne, New Jersey, one in Hoboken, New Jersey and one in Fort Lee, New Jersey. The Bank's deposit base is located primarily in Hudson County, with a large concentration in Bayonne, an older, stable, residential community of one-family and two-family residences and middle income families who have lived in the area for many years. The communities in which the Bank's branches are located are strategically located in the New York City metropolitan area and many residents of these communities commute to Manhattan to work on a daily basis. The Bank's lending activities have also been concentrated in Hudson County and to a lesser extent in Bergen, Monmouth and Ocean Counties, areas which have had a high level of new development in recent years. LENDING ACTIVITIES GENERAL. Pamrapo principally originates fixed-rate mortgage loans on one- to four-family residential dwellings primarily for retention in its own portfolio. The Bank also originates acquisition, development and construction loans in addition to multi-family and commercial real estate loans. At December 31, 1996, the Bank's total gross loans outstanding amounted to $212.8 million, of which $151.2 million consisted of loans secured by one- to four-family residential properties, $2.0 million consisted of construction and land loans, and $55.7 million consisted of loans secured by multi-family and commercial real estate. Substantially all of the Bank's real estate loan portfolio consists of conventional mortgage loans, of which $1.5 million are either insured by the Federal Housing Administration ("FHA") or partially guaranteed by the Veterans Administration ("VA"). 2 LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of the Bank's loan and mortgage-backed securities portfolios in dollar amounts and in percentages at the dates indicated:
AT DECEMBER 31, ----------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ----------------------------------------------------------------------------------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (In thousands) REAL ESTATE MORTGAGE LOANS: CONVENTIONAL LOANS: Permanent: Fixed-rate.................... $181,674 84.16% $174,984 81.24% $179,492 80.68% $175,034 80.24% $168,727 81.35% Adjustable rate............... 9,333 4.32 8,703 4.04 7,823 3.52 7,131 3.27 5,453 2.63 Construction(1).................. 4,708 2.18 5,530 2.57 3,572 1.60 3,584 1.64 1,986 .96 Guaranteed by VA or insured by FHA................ 3,752 1.74 3,037 1.41 2,404 1.08 1,958 .90 1,520 .73 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total mortgage loans............... 199,467 92.40 192,254 89.26 193,291 86.88 187,707 86.05 177,686 85.67 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ CONSUMER LOANS: Passbook or certificate.......... 739 0.34 537 .25 481 .22 441 .20 391 .19 Home improvement................. 587 0.27 539 .25 535 .24 501 .23 446 .22 Equity and second mortgages...... 19,015 8.81 26,286 12.20 31,622 14.21 31,487 14.43 30,683 14.79 Education........................ 1,218 0.56 1,377 .64 1,820 .82 1,691 .78 1,351 .65 Automobile....................... 821 0.38 848 .39 920 .41 1,074 .49 1,107 .53 Personal......................... 984 0.46 1,267 .59 1,302 .59 1,188 .55 1,158 .56 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total consumer loans............... 23,364 10.82 30,854 14.32 36,680 16.49 36,382 16.68 35,136 16.94 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans........................ 222,831 103.22 223,108 103.58 229,971 103.37 224,089 102.73 212,822 102.61 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ LESS: Allowance for loan losses......... 3,100 1.44 4,000 1.86 3,650 1.64 2,725 1.25 2,800 1.35 Loans in process.................. 767 0.35 976 .45 1,162 .52 852 .39 466 .22 Deferred loan fees and discounts.. 3,077 1.43 2,736 1.27 2,687 1.21 2,372 1.09 2,151 1.04 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total.............................. 6,944 3.22 7,712 3.58 7,499 3.37 5,949 2.73 5,417 2.61 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total net loans.................... $215,887 100.00% $215,396 100.00% $222,472 100.00% $218,140 100.00% $207,405 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== MORTGAGE-BACKED SECURITIES: GNMA (2).......................... $ -- --% $ 510 .41% $ 950 .79% $ 849 .75% $ 707 .65% FHLMC (3)(5)...................... 100,460 83.44 102,221 82.96 95,972 79.54 89,234 79.12 86,023 78.34 FNMA (4)(5)....................... 19,191 15.94 19,390 15.74 22,769 18.87 22,066 19.56 22,736 20.71 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total mortgage-backed securities... 119,651 99.38 122,121 99.11 119,691 99.20 112,149 99.43 109,466 99.70 ADD/LESS:.......................... Premiums(discounts), net(5)....... 743 0.62 1,092 .89 1,070 .89 881 .78 749 .68 Unrealized loss on securities available for sale.............. -- -- -- -- (105) (.09) (239) (.21) (419) (.38) -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Net mortgage-backed securities..... $120,394 100.00% $123,213 100.00% $120,656 100.00% $112,791 100.00% $109,796 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
(1) Includes acquisition and development and land loans. (2) Government National Mortgage Association ("GNMA"). (3) Federal Home Loan Mortgage Corporation ("FHLMC"). (4) Federal National Mortgage Association ("FNMA"). (5) Includes available for sale securities having a principal balance of $6,690,000 and a net premium of $39,000 for 1994, a principal balance of $16,053,000 and a net premium of $412,000 for 1995, and a principal balance of $13,145,000 and a net premium of $344,000 for 1996. 3 The following table sets forth the composition of the Bank's gross loan portfolio by type of security at the dates indicated.
AT DECEMBER 31 ---------------------------------------------------------------------- 1994 1995 1996 --------------------- ----------------------- ---------------------- PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL ----------- ---------- ----------- ----------- ----------- ----------- (In thousands) One- to four-family............. $164,277 71.44% $159,934 71.37% $151,175 71.04% Multi-family.................... 33,974 14.77 33,658 15.02 34,051 16.00 Commercial real estate.......... 23,625 10.27 22,519 10.05 21,604 10.15 Construction and land........... 3,572 1.55 3,584 1.60 1,985 .93 Consumer-secured and unsecured.. 4,523 1.97 4,394 1.96 4,007 1.88 -------- ------ -------- ------ -------- ------ Total gross loans............. $229,971 100.00% $224,089 100.00% $212,822 100.00% ======== ====== ======== ====== ======== ======
4 ORIGINATION, PURCHASE AND SALE OF LOANS AND MORTGAGE-BACKED SECURITIES. The following table sets forth the Bank's loan originations, purchases, sales and principal repayments for the periods indicated.
YEAR ENDED DECEMBER 31, ------------------------------ 1994 1995 1996 ------------------------------ (In thousands) MORTGAGE LOANS (GROSS): At beginning of period........................... $192,254 $193,291 $187,707 -------- -------- -------- Mortgage loans originated: One- to four-family residential................. 15,009 7,082 10,462 Multi-family residential........................ 10,514 4,950 4,654 Commercial...................................... 4,333 4,474 1,477 Construction(1)................................. 1,543 642 1,810 -------- -------- -------- Total mortgage loans originated............... 31,399 17,148 18,403 -------- -------- -------- Mortgage loans purchased......................... 627 62 109 -------- -------- -------- Transfer to REO.................................. 1,439 1,190 2,176 Charge offs...................................... 782 976 398 Repayments....................................... 28,768 20,628 25,959 -------- -------- -------- Total mortgage repayments and other reductions 30,989 22,794 28,533 -------- -------- -------- At end of period................................. $193,291 $187,707 $177,686 ======== ======== ======== CONSUMER LOANS (GROSS): At beginning of period........................... $ 30,854 $ 36,681 $ 36,382 Consumer loans originated........................ 44,626 8,050 8,102 Consumer loans sold.............................. -- 765 771 Charge-offs...................................... 129 365 240 Repayments....................................... 38,670 7,219 8,337 -------- -------- -------- At end of period................................. $ 36,681 $ 36,382 $ 35,136 ======== ======== ======== MORTGAGE-BACKED SECURITIES (GROSS): At beginning of period........................... $122,121 $119,691 $112,149 Mortgage-backed securities purchased............. 26,235 8,023 12,699 Repayments....................................... 28,665 15,565 15,382 -------- -------- -------- At end of period................................. $119,691 $112,149 $109,466 ======== ======== ========
___________________ (1) Includes acquisition and development and land loans. 5 LOAN MATURITY. The following table sets forth the maturity of the Bank's loan portfolio at December 31, 1996. The table does not include prepayments or scheduled principal repayments. Prepayments and scheduled principal repayments on mortgage loans totaled $28.8 million, $20.6 million, and $26.0 million for the years ended December 31, 1994, 1995 and 1996 respectively.
ONE- TO CONSUMER- FOUR-FAMILY MULTI-FAMILY SECURED RESIDENTIAL AND COMMERCIAL CONSTRUCTION AND UNSECURED MORTGAGE LOANS(1) REAL ESTATE LOANS LOANS(2) LOANS TOTAL ------------------- ----------------- --------------- ---------- ------------ (In thousands) Amounts due: Within 1 year..................... $ 285 $ 1,006 $1,685 $ 453 $ 3,429 -------- ------- ------ ------ -------- After 1 year: 1 to 3 years.................... 1,020 247 119 1,345 2,731 3 to 5 years.................... 5,155 1,284 -- 599 7,038 5 to 10 years................... 28,444 16,628 70 709 45,851 10 to 20 years.................. 77,422 35,745 111 901 114,179 Over 20 years................... 38,849 745 -- -- 39,594 -------- ------- ------ ------ -------- Total due after 1 year........ 150,890 54,649 300 3,554 209,393 -------- ------- ------ ------ -------- Total amounts due................. $151,175 $55,655 $1,985 $4,007 212,822 ======== ======= ====== ====== Less: Allowance for loan losses....... 2,800 Loans in process................ 466 Deferred loan fees and discounts 2,151 -------- Loans receivable, net............. 5,417 -------- Total............................. $207,405 ========
_______________________________ (1) Includes equity and second mortgages. (2) Includes acquisition and development and land loans. 6 The following table sets forth at December 31, 1996, the dollar amount of all mortgage and consumer loans, excluding construction loans, due after December 31, 1997, which have fixed interest rates or adjustable interest rates:
DUE AFTER DECEMBER 31, 1997 ------------------------------- TOTAL DUE FLOATING OR AFTER ONE FIXED RATES ADJUSTABLE RATES YEAR ------------- ------------------ --------- (In thousands) One- to four-family residential (1)... $146,706 $4,184 $150,890 Construction loans.................... 300 -- 300 Multi-family and commercial real 53,380 1,269 54,649 estate............................... Consumer-secured and unsecured loans.. 3,554 -- 3,554 -------- ------ -------- Totals.............................. $203,940 $5,453 $209,393 ======== ====== ======== - --------------------
(1) Includes equity and second mortgages. RESIDENTIAL MORTGAGE LENDING. Pamrapo presently originates first mortgage loans secured by one- to four-family residences, multi-family residences and commercial real estate. As of December 31, 1996, 95.8% of gross mortgage loans were fixed-rate loans and 4.2% were ARMs or shorter term construction loans, and were principally originated for the Bank's portfolio. Residential loan originations are generally obtained from existing or past customers and members of the local community. As of December 31, 1996, $185.2 million or 87.0% of the Bank's total gross loan portfolio consisted of one- to four-family and multi- family residential mortgage loans, home improvement loans, second mortgage loans and home equity loans. Of this amount $151.2 million were one- to four-family and $34.0 million were multi-family. The one- to four-family residential loans originated by the Bank are primarily fixed-rate mortgages, generally with terms of 15 or 25 years. Typically, such homes in the Bayonne area are one- or two-family owner-occupied dwellings. The Bank generally makes one- to four-family residential mortgage loans in amounts up to 80% of the appraised value of the secured property. The Bank will originate loans with loan-to-value ratios up to 90% within the local community, provided that private mortgage insurance on the amount in excess of such 80% ratio is obtained. Mortgage loans in the Bank's portfolio generally include due-on-sale clauses, which provide the Bank with the contractual right to demand the loan immediately due and payable in the event that the borrower transfers ownership of the property that is subject to the mortgage. It is the Bank's policy to enforce due-on-sale provisions. As of December 31, 1996, the interest rate for one- to four-family residential fixed-rate mortgages offered by the Bank was 6.75% on 15-year loans and 7.25% on 25-year loans. An origination fee of 2.5% is usually charged. 7 The Bank also originates loans on multi-family residences. Such residences generally consist of 6 to 24 units. Such loans are generally fixed-rate loans with interest rates 1% higher than those offered on one- to four-family residences. An origination fee of 3% is usually charged. The Bank generally makes multi-family residential loans in amounts up to 75% of the appraised value of the secured property. Such appraisals are based primarily on the income producing ability of the property. The terms of multi-family residential loans range from 10 to 15 years. As of December 31, 1996, $34.0 million or 16.0% of the Bank's total gross loan portfolio consisted of multi-family residential loans. Upon receipt of an application for a mortgage loan from a prospective borrower, a credit report is ordered to verify information relating to the applicant's employment, income and credit standing. A preliminary inspection of the subject premises is made by at least one member of the Executive Committee. The report of that inspection is brought before the Executive Committee or the full Board of Directors to approve the amount of the loan and the terms. Approval is given subject to a report of value from an independent appraiser and credit approval. Any mortgage application of $300,000 or more is not considered at an Executive Committee meeting but held over for the Board of Director's meeting. Approval of credit is given by the Bank's president or loan officer. It is the Bank's policy to obtain title insurance on all real estate loans. Borrowers also must obtain hazard insurance and flood insurance, if required, prior to closing. The Bank generally requires borrowers to advance funds on a monthly basis together with each payment of principal and interest to a tax escrow account from which the Bank can make disbursements for items such as real estate taxes and certain insurance premiums, if any, as they become due. ACQUISITION, DEVELOPMENT AND CONSTRUCTION LENDING. The Bank originates loans to finance the construction of one- to four-family dwellings, multi-family dwellings and, to a lesser extent, commercial real estate. It also originates loans for the acquisition and development of unimproved property to be used principally for residential purposes in cases where the Bank is to provide the construction funds to improve the properties. The interest rates and terms of the construction and land development loans vary, depending upon market conditions, the size of the construction or development project and negotiations with the borrower. Advances are generally made to the borrower to cover actual construction costs incurred. On larger constructions loans, the Bank requires the project to be built out in phases. Advancement of funds is dependent upon completion of the project stages. The Bank generally limits its exposure to 75% of the projected market value of the completed project. The amount of the loans are generally determined as follows: (i) land acquisition loans with no immediate plans for construction are limited to 65% of the appraised value of the land; (ii) acquisition and development loans are limited to 65% of appraised value of the improved lot not to exceed 150% of the original acquisition cost and (iii) in addition to the disbursement for acquisition and development, in an acquisition, development and construction loan, the Bank will not advance more than 90% of the construction costs. Prior to making any disbursements, the Bank requires that the projects securing the construction and development loans be inspected. The Bank will finance the construction of properties without a prospective buyer or without permanent take-out financing in place at the time of origination. 8 The underwriting criteria used by the Bank are designed to evaluate and minimize the risks of each construction loan. Among other things, the Bank generally considers an appraisal of the project, the reputation of the borrower and the contractor, the amount of the borrower's equity in the project, independent valuations and review of cost estimates, plans and specifications, preconstruction sale and leasing information, current and expected economic conditions in the area of the project, cash flow projections of the borrower, and, to the extent available, guarantees by the borrower and/or third parties. Virtually all of the Bank's acquisition, development and construction loan portfolio is secured by real estate properties located in northern and central New Jersey. Acquisition, development and construction lending is generally considered to involve a higher level of risk than one- to four-family permanent residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on development projects, real estate developers and managers. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As of December 31, 1996, the Bank's acquisition, development and construction loans varied in size from $24,500 to $350,000, net of loans in process, and represented .93% of total gross loans. COMMERCIAL REAL ESTATE LENDING. Loans secured by commercial real estate totaled $21.6 million, or 10.2% of the Bank's total gross loan portfolio, at December 31, 1996. Commercial real estate loans are generally originated in amounts up to 70% of the appraised value of the property. Such appraised value is determined by an independent appraiser previously approved by the Bank. The Bank's commercial real estate loans are secured by improved property such as office buildings, retail stores, warehouses and other non-residential buildings. Once the loan has been determined to be creditworthy and of sufficient property value, in the case of corporate borrowers, the Bank obtains a personal guaranty from third party principals of the corporate borrower as supplemental security on the loan. This enables the Bank to proceed against the guarantor in the event of default without first exhausting remedies against the borrower. Inquiry as to collectability pursuant to such third party guarantees may be made by means of review of other properties secured by the Bank, personal interviews with the applicants, review of the applicant's personal financial statements and income tax returns and review of credit bureau reports. Borrowers must personally guarantee loans made for commercial real estate. Commercial real estate loans have terms ranging from 5 to 15 years and are generally fixed-rate loans. Loans secured by commercial real estate properties are generally larger and involve a greater degree of risk than residential mortgage loans. Because payments on loans secured by commercial real estate properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. Emphasis is placed on the income producing capability of the collateral rather than on management-intensive projects. CONSUMER LENDING. The Bank offers various other secured and unsecured consumer loan products such as equity and second mortgage loans, automobile loans, personal loans, passbook loans and government guaranteed educational loans. At December 31, 1996, the balance of such 9 loans was $35.1 million, or 16.5% of the Bank's total gross loan portfolio. $30.7 million, or 87.5% of total consumer loans are represented by equity loans and second mortgages, down from $31.5 million at December 31, 1995. LOAN REVIEW. The Bank has a formalized loan review policy, providing for detailed post-closing reviews for all loans over $150,000 and a random sampling of loans under $150,000. After review, reports are made to the mortgage and loan officers and the Board of Directors. Classification determination is presently the responsibility of the Asset Classification Committee. See "- Classification of Assets." The purpose of these procedures is to enhance the Bank's ability to properly document the loans it originates and to improve the performance of such loans. LENDING AUTHORITY. The Bank's Executive Committee has the authority to approve loans up to $300,000. All loans in excess of $300,000 must be approved by the Bank's Board of Directors. The Bank's Vice President and Loan Officer has the authority to approve consumer and equity loans of up to $40,000. LOAN SERVICING. The Bank originates all of the loans that it has sold and services for other investors. Pamrapo receives fees for these servicing activities, which include collecting and remitting loan payments, inspecting the properties and making certain insurance and tax payments on behalf of the borrowers. At December 31, 1996 the Bank was servicing $6.2 million of loans for others. There were no new loans sold in 1996 which required servicing . LOAN ORIGINATION FEES AND OTHER FEES. Loan origination fees and certain related direct loan origination costs are deferred and the resulting net amount is amortized over the life of the related loan as an adjustment to the yield of such loans. In addition, commitment fees are required to be offset against related direct costs and the resulting net amount generally recognized over the life of the related loans as an adjustment of yield or if the commitment expires unexercised, recognized upon expiration of the commitment. The Bank had $2.2 million in deferred origination fees and discounts at December 31, 1996. NON-PERFORMING ASSETS When a borrower fails to make a required payment by the fifteenth day of the month in which the payment is due, the Bank sends a late notice advising the borrower that the payment has not been received. In most cases delinquencies are cured promptly; however, if a loan has been delinquent for more than 60 days, the Bank reviews the loan status more closely and, where appropriate, appraises the condition of the property and the financial circumstances of the borrower. Based upon the results of any such investigation, the Bank (1) may accept a repayment program for the arrearage from the borrower; (2) may seek evidence, in the form of a listing contract, of efforts by the borrower to sell the property if the borrower has stated that he is attempting to sell; (3) may request a deed in lieu of foreclosure or (4) generally will initiate foreclosure proceedings when a loan payment is delinquent for more than three monthly installments. 10 The following table sets forth information regarding non-accrual loans, loans which are 90 days or more delinquent but on which the Bank is accruing interest and other real estate owned held by the Bank at the dates indicated:
AT DECEMBER 31, ----------------------------------------------- 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- (In thousands) ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS: Non-accrual loans............ $ 3,936 $ 4,430 $ 5,122 $ 5,099 $ 4,532 Accruing loans 90 days overdue..................... 4,642 4,136 2,928 2,326 2,993 ------- ------- ------- ------- ------- Total...................... 8,578 8,566 8,050 7,425 7,525 ------- ------- ------- ------- ------- MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LOANS: Non-accrual loans............ 1,505 2,472 2,905 2,014 1,881 Accruing loans 90 days overdue..................... 1,135 1,208 642 890 542 ------- ------- ------- ------- ------- Total...................... 2,640 3,680 3,547 2,904 2,423 ------- ------- ------- ------- ------- CONSTRUCTION LOANS:(1) Non-accrual loans............ 1,923 1,331 686 237 237 Accruing loans 90 days overdue..................... -- 13 -- -- -- ------- ------- ------- ------- ------- Total...................... 1,923 1,344 686 237 237 ------- ------- ------- ------- ------- CONSUMER LOANS: Non-accrual loans............ 586 567 512 274 277 Accruing loans 90 days overdue..................... 125 108 33 23 30 ------- ------- ------- ------- ------- Total...................... 711 675 545 297 307 ------- ------- ------- ------- ------- TOTAL NON-PERFORMING LOANS: Non-accrual loans............ 7,950 8,800 9,225 7,624 6,927 Accruing loans 90 days overdue..................... 5,902 5,465 3,603 3,239 3,565 ------- ------- ------- ------- ------- Total...................... $13,852 $14,265 $12,828 $10,863 $10,492 ======= ======= ======= ======= ======= Total foreclosed real estate, net of related reserves.................. $ 1,182 $ 831 $ 1,118 $ 1,467 $ 1,996 ======= ======= ======= ======= ======= Total non-performing loans and foreclosed real estate to total assets........... 3.76% 3.83% 3.63% 3.32% 3.44% ======= ======= ======= ======= =======
____________________ (1) Includes acquisition and development loans. At December 31, 1994, 1995, and 1996 nonaccrual loans for which interest has been discontinued totaled approximately $9.2 million, $7.6 million, and $6.9 million, respectively. During the years ended December 31, 1994, 1995 and 1996, the Bank recognized interest income of approximately $451,000, $260,000 and $172,000, respectively, on these loans. Interest income that would have been recorded, had the loans been on the accrual status, would have amounted to approximately $934,000, $745,000 and $665,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The Bank is not committed to lend additional funds to the borrowers whose loans have been placed on nonaccrual status. 11 DELINQUENT LOANS. At December 31, 1994, 1995 and 1996, respectively, delinquencies in the Bank's portfolio were as follows:
AT DECEMBER 31, 1994 AT DECEMBER 31, 1995 ------------------------------------------ ----------------------------------------- 60 - 89 DAYS 90 DAYS OR MORE 60 - 89 DAYS 90 DAYS OR MORE ------------------ ------------------ ------------------ ------------------ NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL OF BALANCE OF BALANCE OF BALANCE OF BALANCE LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS ------ --------- ------ --------- ------ --------- ------ --------- (In thousands) Delinquent loans........... 42 $2,635 165 $12,828 56 $2,286 153 $10,863 As a percent of total gross loans............... 1.15% 5.58% 1.02% 4.85% At December 31, 1996 ---------------------------------------- 60 - 89 Days 90 Days or more ---------------------------------------- Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans ------ --------- ------ --------- (In thousands) Delinquent loans........... 52 $3,660 146 $10,492 As a percent of total gross loans............... 1.72% 4.93%
12 As of December 31, 1996, the Bank had 146 loans which were 90 days or more past due totaling $10.5 million. The average balance of such loans was approximately $71,900. Management is of the opinion that the Bank will not incur any additional substantial losses on such loans, giving consideration to existing loan loss reserves. Most of the loans are of moderate size; six of the loans have loan balances greater than $200,000, the largest of which is $296,000. All loans are within the Bank's lending areas. The Bank's level of non-performing loans 90 days or more delinquent decreased from $10.9 million at December 31, 1995 to $10.5 at December 31, 1996. The total of such loans in the lower risk one-to four-family residential category increased to $7.5 million or 71.7% of non-performing loans 90 days or more delinquent at December 31, 1996, when compared with $7.4 million, or 68.4% at December 31, 1995. Non-performing multi-family residential, commercial real estate and construction loans, loans normally having greater elements of risk, decreased from $3.1 million at December 31, 1995, to $2.7 million at December 31, 1996, which represents a decrease of 15.3%. The decrease in non-performing loans can be attributed to the Bank's greater emphasis on collection efforts. CLASSIFIED ASSETS. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered to be of lesser quality as "substandard," "doubtful" or "loss" assets. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "special mention" by management. A classification of either substandard or doubtful requires the establishment of general allowances for loan losses in an amount deemed prudent by management. Assets classified as "loss" require either a specific allowance for losses equal to 100% of the amount of the asset so classified or a charge off of such amount. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. The OTS, in conjunction with the other federal banking agencies, recently adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation allowances. Generally, the policy statement requires that institutions have effective systems and controls to identify, monitor and address asset quality problems; have analyzed all significant factors that affect the collectability of the portfolio in a reasonable manner; and have established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. Management of the Bank has classified $12.3 million of its assets as substandard and approximately $840,000 as loss based upon its review of the Bank's loan and foreclosed real estate portfolios. Such review, among other things, takes into consideration the appraised value of underlying collateral, economic conditions and paying capacity of the borrowers. However, 13 the Bank's Asset Classification Committee carefully monitors all of the Bank's delinquent loans to determine whether or not they should be classified. At a minimum, the Bank classifies all foreclosed real estate and non-performing loans 90 days or more delinquent as substandard assets. At December 31, 1996, the allowance for loan losses totaled $2.8 million. ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of all loans of which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. During the years ended December 31, 1994, 1995 and 1996, gross charge-offs totaled $911,000, $1.3 million and $638,000, respectively. A majority of the charge-offs in all three years resulted from the transferring of loans to foreclosed real estate and charging-off the difference between the carrying value of the loans and the fair values of the properties securing such loans to the loan loss allowance. The following table sets forth the activity of the Bank's allowance for loan losses at the dates indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------- 1992 1993 1994 1995 1996 ----- ------ ------ ------ ------ (In thousands) Balance at beginning of period...... $3,350 $3,100 $4,000 $3,650 $2,725 Provision for loan losses........... 1,933 1,224 495 411 644 Charge-offs:........................ Real estate mortgage loans..... 2,070 290 879 1,008 404 Consumer loans................. 114 35 32 333 234 Recoveries..................... 1 1 66 5 69 ------ ------ ------ ------ ------ Net charge-offs..................... 2,183 324 845 1,336 569 ------ ------ ------ ------ ------ Balance at end of period............ $3,100 $4,000 $3,650 $2,725 $2,800 ------ ====== ====== ====== ====== Ratio of net charge offs during the period to average loans receivable during the period..... .99% .15% .38% .61% .27% Ratio of allowance for loan losses to total outstanding loans (gross) at end of period... 1.39% 1.79% 1.59% 1.22% 1.32% Ratio of allowance for loan losses to non-performing loans 22.38% 28.04% 28.45% 25.09% 26.69%
14 The following table sets forth the breakdown of the allowance for loan losses by loan category for the periods indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation to the allowance by category is not necessarily indicative of further losses and does not restrict the use of the allowance to absorb losses in any category.
AT DECEMBER 31, -------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ----------- AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT ------ ------ ------ ------ ------ (Dollars in thousands) Real estate mortgage loans (1).. $2,500 $3,400 $3,050 $2,325 $2,450 Consumer loans.................. 600 600 600 400 350 ------ ------ ------ ------ ------ Total allowance................. $3,100 $4,000 $3,650 $2,725 $2,800 ====== ====== ====== ====== ======
- -------------------- (1) Includes equity and second mortgages. MORTGAGE-BACKED SECURITIES The Bank has significant investments in mortgage-backed securities and has, during periods when loan demand was low and the interest yields on alternative investments was minimal, utilized such investments as an alternative to mortgage lending. All of the securities in the portfolio were insured or guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") and have coupon rates as of December 31, 1996 ranging from 5.50% to 10.00%. At December 31, 1996 the unamortized principal balance of mortgage- backed securities, both held to maturity and available for sale, totaled $109.5 million or 30.2% of total assets. The carrying value of such securities amounted to $120.7 million, $112.8 million and $109.8 million at December 31, 1994, 1995 and 1996, respectively, and the fair market value of such securities totaled approximately $113.0 million, $113.6 million and $109.2 million at December 31, 1994, 1995 and 1996, respectively. The following table sets forth the contractual maturities of the Bank's gross mortgage-backed securities portfolio which includes available for sale and held to maturity at December 31, 1996.
CONTRACTUAL MATURITIES DUE IN YEAR(S) ENDED DECEMBER 31, ------------------------------------------------------------------ 1998- 2000- 2002- 2007- 2017 AND 1997 1999 2001 2006 2016 THEREAFTER TOTAL --------- -------- -------- -------- --------- --------- --------- (In thousands) Mortgage-backed securities: Held to maturity.... $ -- $ -- $ 441 $8,914 $83,368 $ 3,599 $ 96,322 Available for sale.. 584 3,060 -- -- -- 9,500 13,144 ----- ------ ------ ------ ------- ------- -------- Total.............. $ 584 $3,060 $ 441 $8,914 $83,368 $13,099 $109,466 ===== ====== ====== ====== ======= ======= ========
15 Mortgage-backed securities are a low risk investment for the Bank. The Bank's substantial investment in mortgage-backed securities will significantly enhance the Bank's ability to meet risk based capital requirements as mortgage- backed securities are assigned a risk rating, generally from 0% to 20%. Based on historical experience, the Bank believes that the mortgage-backed securities will be repaid significantly in advance of the stated maturities reflected in the above table. INVESTMENT ACTIVITIES SAIF-insured savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, SAIF-insured savings institutions may also invest their assets in commercial paper, corporate debt securities and mutual funds whose assets conform to the investments that a SAIF- insured savings institution is otherwise authorized to make directly. The Board of Directors sets the investment policy of the Bank. This policy dictates that investments will be made based on the safety of the principal, liquidity requirements of the Bank and the return on the investment and capital appreciation. The Bank's Chief Executive Officer may make investments up to $5.0 million, subject to ratification by the Bank's Board of Directors. The Bank's conservative policy does not permit investment in junk bonds or speculative strategies based upon the rise and fall of interest rates. Pamrapo's goal, however, has always been to realize the greatest possible return commensurate with its interest rate risk. Pamrapo has emphasized shorter term securities for their liquidity to increase sensitivity of its investment securities to changes in interest rates. As a member of the FHLB-NY, the Bank is required to maintain liquid assets at minimum levels which vary from time to time. See "Regulation - Federal Home Loan Bank System." The Bank's liquid investments primarily include federal agency securities, overnight deposits and federal funds. The average liquidity for the month of December 1996 was 9.90%, which exceeded the minimum level of 5.0% prescribed by the OTS. 16 INVESTMENT PORTFOLIO The following table sets forth certain information regarding the Bank's investment portfolio, which includes available for sale securities carried at fair value and held to maturity, at the dates indicated:
AT DECEMBER 31, ------------------------------------------------------------- 1994 1995 1996 ------------------ ------------------- ------------------- CARRYING FAIR CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE VALUE VALUE -------- -------- -------- -------- -------- -------- (In thousands) INVESTMENTS: U.S. Government (including federal agencies) held to maturity....... $ 1,997 $ 1,870 $ -- $ -- $ -- $ -- U.S. Government (including federal agencies) available for sale..... 13,042 12,824 12,020 12,136 8,000 8,023 Mutual Funds available for sale........... -- -- -- -- 1,049 1,049 Equity securities available for sale...... 7 23 7 64 7 91 FHLB-NY stock............................. 3,025 3,025 3,073 3,073 2,979 2,979 Net unrealized (loss) gain on available for sale securities...................... (202) -- 173 -- 107 -- ------- ------- ------- ------- ------- ------- Total investment securities.............. $17,869 $17,742 $15,273 $15,273 $12,142 $12,142 ======= ======= ======= ======= ======= ======= OTHER INTEREST-EARNING ASSETS: Overnight deposits........................ $ 1,300 $ 1,300 $ 4,500 $ 4,500 $ 9,000 $ 9,000 Certificates of deposit................... 99 99 99 99 -- -- Federal funds sold........................ 100 100 100 100 100 100 ------- ------- ------- ------- ------- ------- Total other interest-earning assets...... $ 1,499 $ 1,499 $ 4,699 $ 4,699 $ 9,100 $ 9,100 ======= ======= ======= ======= ======= ======= Total investment portfolio............... $19,368 $19,241 $19,972 $19,972 $21,242 $21,242 ======= ======= ======= ======= ======= =======
As of December 31, 1996, most of the Bank's investment securities were issued by the U.S. Government and its agencies having a carrying value of $8.0 million, a weighted average yield of 6.8% and maturities of five years or less. The Bank has no investments with any one issuer, other than the U.S. Government and Federal agencies, which exceed ten percent of stockholders' equity. 17 SOURCES OF FUNDS GENERAL. Deposits are the primary source of the Bank's funds for use in lending and for other general business purposes. In addition to deposits, the Bank obtains funds from advances from the FHLB-NY and other borrowings. DEPOSITS. Pamrapo offers a variety of deposit accounts having a wide range of interest rates and terms. The Bank's deposits consist of regular savings, non- interest bearing demand, NOW and Super NOW, money market and certificate accounts. Pamrapo's deposits are obtained primarily from the Hudson County area. Pamrapo had acquired brokered deposits totaling $5.3 million, at December 31, 1996, as compared to $5.4 million at December 31, 1995. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain deposits. The $1.9 million or .64% increase in total deposits from $298.9 million at December 31, 1995 to $300.8 million at December 31, 1996 was the result a more competitive interest rate environment. The flow of deposits is influenced significantly by general economic conditions, changes in the money market and prevailing interest rates and competition. 18 DEPOSIT PORTFOLIO. The following table sets forth the distribution and weighted average nominal interest rate of the Bank's deposit accounts at the dates indicated:
AT DECEMBER 31. ------------------------------------------------------------------------------------------------- 1994 1995 1996 ------------------------------- ----------------------------- --------------------------------- WEIGHTED WEIGHTED WEIGHTED % OF AVERAGE % OF AVERAGE % OF AVERAGE TOTAL NOMINAL TOTAL NOMINAL TOTAL NOMINAL AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE ---------- -------- -------- -------- --------- -------- --------- -------- ---------- (In thousands) Passbook and club accounts........ $127,968 41.83% 2.74% $113,072 37.83% 2.74% $116,712 38.80% 2.74% 0.00% demand...................... 10,097 3.30 0.00 9,789 3.27 0.00 8,320 2.76 0.00 NOW............................... 16,497 5.39 2.50 17,748 5.94 2.50 17,207 5.72 2.50 Super NOW......................... 171 .06 2.50 221 .07 2.50 179 .06 2.50 Money market demand............... 24,482 8.00 2.70 22,773 7.62 2.69 22,152 7.37 2.98 -------- ------ -------- ------ -------- ------ Total passbook, club, NOW, and money market accounts.......... 179,215 58.58 2.56 163,603 54.73 2.54 164,570 54.71 2.60 -------- ------ -------- ------ -------- ------ Certificate accounts: 91-day money market.............. 1,571 .51 3.75 979 .33 4.34 1,297 .43 4.51 26-week money market............. 45,356 14.83 3.87 56,296 18.83 4.83 36,161 12.02 4.69 12- to 30-month money market..... 32,491 10.62 3.91 33,769 11.30 5.16 55,071 18.31 5.04 30- to 48-month money market..... 7,441 2.43 5.11 7,849 2.63 5.44 8,551 2.84 5.65 IRA and KEOGH.................... 33,638 11.00 4.24 30,272 10.13 4.91 28,829 9.59 4.92 Negotiated rate.................. 6,198 2.03 5.48 6,133 2.05 6.08 6,306 2.10 6.00 -------- ------ -------- ------ -------- ------ Total certificates.............. 126,695 41.42 4.13 135,298 45.27 5.03 136,215 45.29 5.02 -------- ------ -------- ------ -------- ------ Total deposits.................. $305,910 100.00% 3.21% $298,901 100.00% 3.67% $300,785 100.00% 3.69% ======== ====== ===== ======== ====== ===== ======== ====== ====
19 The following table sets forth the deposit activity of the Bank for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 ----------- --------- ------- (In thousands) Deposits (less than) withdrawals...... $(31,673) $(17,759) $(9,291) Interest credited..................... 10,030 10,750 11,175 -------- -------- ------- Net (decrease) increase in deposits.. $(21,643) $ (7,009) $ 1,884 ======== ======== =======
The following table sets forth, by various rate categories, the amount of certificate accounts outstanding as of the dates indicated and the periods to maturity of the certificate accounts outstanding at December 31, 1996.
AT DECEMBER 31, 1996, AT DECEMBER 31, MATURING IN ------------------------------ ------------------------------------------ ONE YEAR TWO THREE GREATER THAN 1994 1995 1996 OR LESS YEARS YEARS THREE YEARS -------- -------- -------- -------- ------- ------ ------------ (In thousands) CERTIFICATE ACCOUNTS: 2.99% or less.......... $ 649 $ 613 $ 60 $ 60 $ -- $ -- $ -- 3.00% to 4.99%......... 105,357 71,416 82,499 75,583 5,736 140 1,040 5.00% to 5.99%......... 13,787 41,615 45,518 33,948 8,665 1,817 1,088 6.00% to 6.99%......... 5,430 20,186 7,302 3,072 1,334 1,011 1,885 7.00% to 7.99%......... 452 1,308 815 -- 7 119 689 8.00% to 8.99%......... 1,020 141 6 -- 6 -- -- 9.00% to 9.99%......... -- 19 15 -- -- 15 -- -------- -------- -------- -------- ------- ------ ------ Total............. $126,695 $135,298 $136,215 $112,663 $15,748 $3,102 $4,702 ======== ======== ======== ======== ======= ====== ======
20 At December 31, 1996, the Bank had outstanding $20.0 million in certificate accounts in amounts of $100,000 or more maturing as follows:
AMOUNT -------------- (In thousands) Three months or less............................. $ 5,237 Over three through six months.................... 5,753 Over six through 12 months....................... 5,807 Over 12 months................................... 3,237 ------- Total.......................................... $20,034 =======
BORROWINGS. Although deposits are the Bank's primary source of funds, the Bank utilizes borrowings when they are a less costly source of funds or can be invested at a positive rate of return. Pamrapo obtains advances from the FHLB-NY upon the security of its capital stock of the FHLB-NY and certain of its mortgage loans and mortgage-backed securities. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. As of December 31, 1996, outstanding advances from the FHLB-NY amounted to $3.5 million. The following table sets forth certain information regarding FHLB-NY advances at the dates indicated:
AT DECEMBER 31, ------------------------- 1994 1995 1996 ------------------------- (In thousands) FIXED-RATE ADVANCES FROM THE FHLB-NY: 4.03% due 1995........................ $ 3,000 $ -- $ -- 5.93% due 1995........................ 5,000 -- -- 6.60% due 1995........................ 5,000 -- -- 6.45% due 1996........................ -- 3,000 -- 6.63% due 1996........................ 4,000 4,000 -- 6.47% due 1999........................ -- -- 3,000 5.10% due 2001........................ 243 243 243 4.62% due 2003........................ 340 340 340 ------- ------ ------ Total advances from the FHLB-NY.... $17,583 $7,583 $3,583 ======= ====== ======
21 The Bank obtained a mortgage loan of $325,000 in connection with the purchase of premises. The mortgage loan carries an interest rate of 8% and is amortized over a 12 year term. The unpaid mortgage loan balance at December 31, 1996 amounted to $293,094. See Note 10 to the Consolidated Financial Statement, for the fiscal year ended December 31, 1996, contained in the 1996 Annual Report to Shareholders attached hereto as Exhibit 13 for a discussion of the loan to the Employee Stock Ownership Plan. COMPETITION Pamrapo has substantial competition for both loans and deposits. The New York City metropolitan area has a high density of financial institutions, many of which are significantly larger and have substantially greater financial resources than the Bank, and all of which are competitors of the Bank to varying degrees. The Bank faces significant competition both in making mortgage loans and in attracting deposits. The Bank's competition for loans comes principally from savings and loan associations, savings banks, mortgage banking companies, insurance companies, commercial banks and other institutional lenders. Its most direct competition for deposits has historically come from savings and loan associations, savings banks, commercial banks, credit unions and other financial institutions. The Bank faces additional competition for deposits from short- term money market funds and other corporate and government securities funds. The Bank faces increased competition among financial institutions for deposits. Competition also may increase as a result of the continuing reduction in the effective restrictions on the interstate operations of financial institutions and legislation authorizing the acquisition of thrifts by Banks. The Bank competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers and real estate brokers. It competes for deposits through pricing, service and by offering a variety of deposit accounts. New powers for thrift institutions provided by New Jersey and federal legislation enacted in recent years have resulted in increased competition between savings banks and other financial institutions for both deposits and loans. Management believes that implementation of new powers set forth in such recent legislation is expected to intensify this competition. SUBSIDIARIES Pamrapo is generally permitted under New Jersey law and the regulations of the Commissioner of the New Jersey Department of Banking (the "Commissioner") to invest an amount equal to 3% of its assets in subsidiary service corporations. As of December 31, 1996, Pamrapo had $1.6 million, or .44%, of its assets invested in Pamrapo Service Corporation (the "Corporation"), a wholly owned subsidiary of the Bank. In the past, the Corporation has entered into real estate joint ventures for the principal purpose of land acquisition and development. However, the Corporation has disposed of all such real estate joint ventures. Currently, the Corporation's only investments are in bank premises and real estate held for investment. 22 Under OTS regulation, investments in and loans to subsidiaries not engaged in activities permissible to national banks, such as the real estate investment activities previously entered into by the Bank, generally are required to be deducted from capital. Although the Bank will continue to consider joint venture opportunities, it will do so with the effects of the OTS regulations in mind. The Bank currently has no plans to enter into any joint ventures. YIELDS EARNED AND RATES PAID The Bank's earnings depend primarily on its net interest income. Net interest income is affected by (i) the volume of interest-earning assets and interest- bearing liabilities, (ii) rates of interest earned on interest-earning assets and rates paid on interest-bearing liabilities and (iii) the difference ("interest rate spread") between rates of interest earned on interest-earning assets and rates paid on interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. A large portion of the Bank's real estate loans are long-term, fixed-rate loans. Accordingly, the average yield recognized by the Bank on its total loan portfolio changes slowly and generally does not keep pace with changes in interest rates on deposit accounts and borrowings. At December 31, 1996, approximately 95.8% of the Bank's gross mortgage loan portfolio, excluding mortgage-backed securities, consisted of fixed-rate mortgage loans with original terms consisting primarily of 15 to 30 years. Accordingly, when interest rates rise, the Bank's yield on its loan portfolio increases at a slower pace than the rate by which its cost of funds increases, which may adversely impact the Bank's interest rate spread. The following tables set forth for the periods indicated information regarding the average balances of interest-earning assets and interest-bearing liabilities, the dollar amount of interest income earned on such assets and the resultant yields, the dollar amount of interest expense paid on such liabilities and the resultant costs. The tables also reflect the interest rate spread for such periods, the net yield on interest-earning assets (i.e., net interest income as a percentage of average interest-earning assets) and the ratio of average interest-earning assets to average interest-bearing liabilities. Average balances are based on month-end amounts. 23
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 1994 1995 1996 --------------------------- ----------------------------- ----------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST ------- -------- ------- ------- -------- -------- ------- -------- -------- (In thousands) INTEREST-EARNING ASSETS: Loans(1)............................. $219,697 $20,368 9.27% $220,001 $20,445 9.29% $213,122 $19,191 9.00% Mortgage-backed securities........... 126,147 8,464 6.71 115,803 7,696 6.65 108,500 7,324 6.75 Investments.......................... 18,039 1,143 6.34 11,195 779 6.96 11,725 906 7.73 Other interest-earning assets........ 10,140 491 4.84 8,332 651 7.81 12,599 614 4.87 -------- ------- -------- ------- -------- ------- Total interest-earning assets....... 374,023 30,466 8.15 355,331 29,571 8.32 $345,946 28,035 8.10 -------- ------- -------- ------- -------- ------- NON-INTEREST-EARNING ASSETS........... 20,504 21,167 21,301 -------- -------- -------- Total assets(1)..................... $394,527 $376,498 $367,247 ======== ======== ======== INTEREST-BEARING LIABILITIES: Passbook and club account............ $138,335 $ 3,835 2.77 120,209 3,316 2.76 114,939 3,166 2.75 NOW and money market accounts........ 42,090 1,198 2.85 37,645 1,076 2.86 33,481 1,079 3.22 Certificates of deposits............. 129,727 4,976 3.84 131,520 6,341 4.82 142,551 6,930 4.86 Advances and other borrowings........ 12,476 617 4.95 11,679 723 6.19 3,369 206 6.11 -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities.. 322,628 10,626 3.29 301,053 11,456 3.81 294,340 11,381 3.87 -------- ------- -------- ------- -------- ------- NON-INTEREST-BEARING LIABILITIES: Non-interest-bearing demand accounts. 10,620 $ 13,114 11,004 Other................................ 7,823 4,366 5,606 -------- -------- -------- Total non-interest-bearing demand liabilities......................... 18,443 17,480 16,610 -------- -------- -------- Total liabilities................... 341,071 318,533 310,950 Stockholders' equity.................. 53,456 57,965 56,297 -------- -------- -------- Total liabilities and stockholders' equity......................... $394,527 $376,498 $367,247 ======== ======== ======== Net interest income/interest rate spread............................... $19,840 4.86% $18,115 4.51% $16,654 4.23% Net interest-earning assets/net yield ======= ==== ======= ==== ======= ==== on interest-earning assets........... $51,395 5.30% $54,278 5.10% $51,606 4.81% ======= ===== ======= ===== ======= ==== Ratio of average interest-earning assets to average interest-bearing liabilities......................... 1.16x 1.18x 1.17x ======== ======== ========
_____________________________ (1) Non-accruing loans are part of the average balances of loans outstanding. 24 INTEREST RATE SENSITIVITY ANALYSIS The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1996, which are expected to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the contractual terms of the asset or liability. Loans and mortgage-backed securities that have adjustable rates are shown as being due in the period during which the interest rates are next subject to change. The Bank has assumed that its passbook savings and club accounts which totaled $116.7 million at December 31, 1996, are withdrawn at the following rates, 17.00%, 31.11%, 29.44%, 52.96%, 77.87% and 100.00% on the cumulative declining balance of such accounts during the periods shown. The Bank has further assumed that its money market accounts which totaled $22.1 million at December 31, 1996, are withdrawn at the following rates, 79.00%, 52.39%, 52.39%, 84.36%, 97.62% and 100.00% on the cumulative declining balance of such accounts during the periods shown. Additionally, the Bank has assumed that its NOW and Super NOW accounts which totaled $17.4 million at December 31, 1996, are withdrawn at the following rates, 37.00%, 53.76%, 31.11%, 60.62%, 84.47% and 100.00% on the cumulative declining balance of such accounts during the periods shown. 25
MORE THAN MORE THAN MORE THAN MORE THAN 1 YEAR 1 YEAR TO 3 YEARS TO 5 YEARS TO 10 YEARS TO MORE THAN OR LESS 3 YEARS 5 YEARS 10 YEARS 20 YEARS 20 YEARS TOTAL --------- ---------- ----------- ---------- ----------- ---------- ----- (In thousands) INTEREST-EARNING ASSETS: Loans........................................ $ 3,429 $ 2,731 $ 7,038 $ 45,851 $114,179 $39,594 $212,822 Mortgage-backed securities(1)................ 584 3,060 441 8,914 83,368 13,099 109,466 Investments(1)(2)............................ 5,058 2,000 998 -- 1,000 -- 9,056 Other interest-earning assets(3)............. 12,079 -- -- -- -- -- 12,079 --------- --------- --------- --------- -------- ------- -------- Total interest-earning assets............... 21,150 7,791 8,477 54,765 198,547 52,693 343,423 --------- --------- --------- --------- -------- ------- -------- INTEREST-BEARING LIABILITIES: NOW and Super NOW accounts(4)................ 6,433 5,889 1,576 2,115 1,161 213 17,387 Money market accounts........................ 17,500 2,437 1,160 890 161 4 22,152 Passbook and club accounts................... 19,841 30,137 19,647 24,938 17,248 4,901 116,712 Certificate accounts......................... 112,663 18,850 4,322 380 -- -- 136,215 Advances and other borrowings................ -- 3,000 243 340 293 -- 3,876 --------- --------- --------- --------- -------- ------- -------- Total interest-bearing liabilities.......... 156,437 60,313 26,948 28,663 18,863 5,118 296,342 --------- --------- --------- --------- -------- ------- -------- Interest sensitivity gap per period............ $(135,287) $ (52,522) $ (18,471) $ 26,102 $179,684 $47,575 $ 47,081 ========= ========= ========= ========= ======== ======= ======== Cumulative interest sensitivity gap............ $(135,287) $(187,809) $(206,280) $(180,178) $ (494) $47,081 ========= ========= ========= ========= ======== ======= Cumulative gap as a percent of total assets.... (37.28)% (51.75)% (56.84)% (49.65)% (.14)% 12.97% ========= ========= ========= ========= ======== ======= Cumulative interest-sensitive assets as a percent of interest-sensitive liabilities.. 13.52% 13.35% 15.35% 33.85% 99.83% 115.89% ========= ========= ========= ========= ======== =======
- ------------------------------------- (1) Includes available for sale securities. (2) Includes marketable equity securities which have no stated maturity. (3) Includes FHLB-NY common stock. (4) Excluding non-interest bearing demand accounts. 26 RATE/VOLUME ANALYSIS Changes in net interest income are attributable to three factors: (i) a change in volume or amount of an interest-earning asset or interest-bearing liability, (ii) a change in interest rates or (iii) a change caused by a combination of changes in volume and interest rate. The table below sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods indicated, reflecting the extent to which such changes are attributable to changes in volume and changes in rate. The amount attributable to a change in volume or amount is calculated by multiplying the average interest rate for the prior period by the increase (decrease) in the average balance of the related asset or liability. The amount attributable to a change in rate is calculated by multiplying the increase (decrease) in the average interest rate from the prior period by the average balance of the related asset or liability for the prior period. The rate/volume change represents a change in rate multiplied by a change in volume and is allocated proportionately to volume and rate changes.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------- 1995 v. 1994 1996 v. 1995 ------------------------------------ --------------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO ------------------------------------ --------------------------------------- VOLUME RATE NET VOLUME RATE NET -------- ------ ----- -------- ------ ----- (In thousands) Interest income: Loans............................. $ 30 $ 47 $ 77 $(627) $(627) $(1,254) Mortgage-backed securities........ (691) (77) (768) (488) 115 (373) Investments....................... (467) 103 (364) 38 89 127 Other interest-earning assets..... (98) 258 160 261 (298) (37) ------- ------- ------- ----- ----- ------- Total interest-earning assets.. (1,226) 331 (895) (816) (721) (1,537) ------- ------- ------- ----- ----- ------- Interest expense: Passbook and club accounts........ (505) (14) (519) (139) (11) (150) NOW and money market accounts.......................... (126) 4 (122) (119) 121 2 Certificates of deposit............. 70 1,295 1,365 536 53 589 Advances and other borrowings (41) 147 106 (509) (8) (517) ------- ------- ------- ----- ----- ------- Total interest-bearing liabilities...................... (602) 1,432 830 (231) 155 (76) ------- ------- ------- ----- ----- ------- Net change in net interest income... $ (624) $(1,101) $(1,725) $(585) $(876) $(1,461) ======= ======= ======= ===== ===== =======
27 REGULATION AND SUPERVISION GENERAL The Company, as a savings and loan holding company, is required to file certain reports with, and otherwise comply with the rules and regulations of the OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the activities of savings institutions, such as the Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI Act"). The Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the 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. The OTS and/or the FDIC conduct periodic examinations to test the Bank's safety and soundness and compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is 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 and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company, the Bank and their operations. Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions and their holding companies set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Bank and the Company. HOLDING COMPANY REGULATION The Company is a nondiversified unitary savings and loan holding company within the meaning of the HOLA. As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a qualified thrift lender ("QTL"). See "Federal Savings Institution Regulation - QTL Test." Upon any non-supervisory acquisition by the Company of another savings institution or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, 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) 28 of the Bank Holding Company Act ("BHC Act"), subject to the prior approval of the OTS, and certain activities authorized by OTS regulation. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of the voting stock of another savings institution or holding company thereof, without prior written approval of the OTS; acquiring or retaining, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of a depository institution that is not insured by the FDIC. 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. 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: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions. Although savings and loan holding companies are not subject to specific capital requirements or specific restrictions on the payment of dividends or other capital distributions, HOLA does prescribe such restrictions on subsidiary savings institutions as described below. The Bank must notify the OTS 30 days before declaring any dividend to the Company. In addition, the financial impact of a holding company on its subsidiary institution is a matter that is evaluated by the OTS and the agency has authority to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to the safety and soundness of the institution. FEDERAL SAVINGS INSTITUTION REGULATION CAPITAL REQUIREMENTS. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital ratio (3% for institutions receiving the highest rating on the CAMEL financial institution rating system), and, together with the risk-based capital standard itself, a 4% Tier I risk-based capital standard. Core capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain purchased mortgage servicing rights and credit card relationships. The OTS regulations also require that, in meeting the tangible, leverage (core) and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. 29 The risk-based capital standard for savings institutions requires the maintenance of Tier I (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. The components of Tier I (core) capital are equivalent to those discussed earlier. 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 the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The OTS regulatory capital requirements also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings institution's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200 basis point increase or decrease in market interest rates divided by the estimated economic value of the institution's assets. In calculating its total capital under the risk-based capital rule, a savings institution whose measured interest rate risk exposure exceeds 2% must deduct an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the institution's assets. The Director of the OTS may waive or defer a savings institution's interest rate risk component on a case-by-case basis. A savings institution with assets of less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. For the present time, the OTS has deferred implementation of the interest rate risk component. At December 31, 1995, the Bank met each of its capital requirements, in each case on a fully phased-in basis and it is anticipated that the Bank will not be subject to the interest rate risk component.
CAPITAL EXCESS ---------------------- ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED CAPITAL CAPITAL AMOUNT PERCENT PERCENT ------- -------- ------------ ------- -------- (Dollars in thousands) Tangible..... $45,440 $ 5,412 $40,028 12.59% 1.50% Core (Leverage)... $45,440 $10,824 $34,616 12.59% 3.00% Risk-based... $47,400 $14,389 $33,011 26.35% 8.00%
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of undercapitalization. 30 Generally, a savings institution is considered "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted assets is at least 6%, its ratio of core capital to total assets is at least 5%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings institution generally is considered "adequately capitalized" if its ratio of total capital to risk- weighted assets is at least 8%, its ratio of Tier I (core) capital to risk- weighted assets is at least 4%, and its ratio of core capital to total assets is at least 4% (3% if the institution receives the highest CAMEL rating). A savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Bank are presently insured by the SAIF. Both the SAIF and the Bank Insurance Fund ("BIF"), (the deposit insurance fund that covers most commercial bank deposits), are statutorily required to be recapitalized to a 1.25% of insured reserve deposits ratio. Until recently, members of the SAIF and BIF were paying average deposit insurance premiums of between 24 and 25 basis points. The BIF met the required reserve in 1995, whereas the SAIF was not expected to meet or exceed the required level until 2002 at the earliest. This situation was primarily due to the statutory requirement that SAIF members make payments on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. In view of the BIF's achieving the 1.25% ratio, the FDIC ultimately adopted a new assessment rate schedule of from 0 to 27 basis points under which 92% of BIF members paid an annual premium of only $2,000. With respect to SAIF member institutions, the FDIC adopted a final rule retaining the existing assessment rate schedule applicable to SAIF member institutions of 23 to 31 basis points. As long as the premium differential continued, it may have had 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 were placed at a substantial competitive disadvantage to BIF members with respect to pricing of loans and deposits and the ability to achieve lower operating costs. 31 On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special one-time assessment on SAIF member institutions, including the Bank, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable November 27, 1996 (the "SAIF Special Assessment"). The SAIF Special Assessment was recognized by the Bank as an expense in the quarter ended December 31, 1996 and is generally tax deductible. The SAIF Special Assessment recorded by the Bank amounted to $2.02 million on a pre-tax basis and $1.30 million on an after-tax basis. The Funds Act also spreads the obligations for payment of the FICO bonds across all SAIF and BIF members. Beginning on January 1, 1997, BIF deposits will be assessed for FICO payment of 1.3 basis points, while SAIF deposits will pay an estimated 6.5 basis points. Full pro rata sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999, provided no savings associations remain as of that time. As a result of the Funds Act, the FDIC recently proposed to lower SAIF assessment to 0 to 27 basis points effective January 1, 1997, a range comparable to that of BIF members. SAIF members will also continue to make the higher FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an on-going basis, whether the savings association charter will be eliminated or whether the BIF and SAIF will eventually be merged. The Bank's assessment rate for fiscal 1996 ranged from 6.48 to 23 basis points and the premium paid exclusive of the SAIF Special Assessment for this period was $662,000. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. THRIFT RECHARTERING LEGISLATION. The Funds Act provides that the BIF and SAIF will merge on January 1, 1999 if there are no more savings associations as of that date. That legislation also requires that the Department of Treasury submit a report to Congress by March 31, 1997 that makes recommendations regarding a common financial institutions charter, including whether the separate charters for thrifts and banks should be abolished. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter and abolish the OTS have been introduced in Congress. The bills would require federal savings institutions to convert to a national bank or some type of state charter by a specified date (January 1, 1998 in one bill, June 30, 1998 in the other) or they would automatically become national banks. Converted federal thrifts would generally be required to conform their activities 32 to those permitted for the charter selected and divestiture of nonconforming assets would be required over a two year period, subject to two possible one year extensions. State chartered thrifts would become subject to the same federal regulation as applies to state commercial banks. Holding companies for savings institutions would become subject to the same regulation as holding companies that control commercial banks, with a limited grandfather provision for unitary savings and loan holding company activities. The Bank is unable to predict whether such legislation would be enacted, the extent to which the legislation would restrict or disrupt its operations or whether the BIF and SAIF funds will eventually merge. LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain financial instruments and bullion. At December 31, 1996, the Bank's limit on loans to one borrower was $6.8 million. At December 31, 1996, the Bank's largest aggregate outstanding balance of loans to one borrower was $4.1 million. QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings and loan association is required to maintain at least 65% of its "portfolio assets" (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain "qualified thrift investments" (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period. A savings institution that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 1996, the Bank maintained 88.3% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. LIMITATION ON CAPITAL DISTRIBUTIONS. 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. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions would require prior regulatory approval. In the event the Bank's capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS 33 determines that such distribution would constitute an unsafe or unsound practice. In December 1994, the OTS proposed amendments to its capital distribution regulation that would generally authorize the payment of capital distributions without OTS approval provided that the payment does not cause the institution to be undercapitalized within the meaning of the prompt corrective action regulation. However, institutions in a holding company structure would still have a prior notice requirement. At December 31, 1996, the Bank was a Tier 1 Bank. LIQUIDITY. The Bank is required to maintain an average daily balance of specified liquid assets equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement is currently 5% but may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions. OTS regulations also require each member savings institution to maintain an average daily balance of short-term liquid assets at a specified percentage (currently 1%) of the total of its net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's liquidity and short-term liquidity ratios for December 31, 1996 were 9.9% and 4.8% respectively, which exceeded the applicable requirements. The Bank has never been subject to monetary penalties for failure to meet its liquidity requirements. ASSESSMENTS. Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi-annual basis, are computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly thrift financial report. The assessments paid by the Bank for the fiscal year ended December 31, 1996 totalled $91,000. BRANCHING. OTS regulations permit nationwide branching by federally chartered savings institutions to the extent allowed by federal statute. This permits federal savings institutions to establish interstate networks and to geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in transactions with related parties or "affiliates" (e.g., any company that controls or is under common control with an institution, including the Company and its non-savings institution subsidiaries) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any 34 affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. The Bank's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other things, such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and to not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Regulation O also places individual and aggregate limits on the amount of loans the Bank may make to insiders based, in part, on the Bank's capital position and requires certain board approval procedures to be followed. ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations. STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") and a final rule to implement safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards set forth in the Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; asset quality; earnings; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final rule establishes deadlines for the submission and review of such safety and soundness compliance plans when such plans are required. 35 FEDERAL RESERVE SYSTEM The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $49.3 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts aggregating greater than $49.3 million, the reserve requirement is $1.48 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $49.3 million. The first $4.4 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The Bank is in compliance with the foregoing requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the OTS. NEW JERSEY LAW The Bank is chartered under and its basic banking and corporate powers are provided by New Jersey law. The Commissioner regulates the Bank's internal business procedures as well as its deposits, lending and investment activities. The Commissioner must approve changes to the Bank's Certificate of Incorporation, the establishment or relocation of branch offices and mergers. In addition, the Commissioner conducts periodic examinations of the Bank and maintains certain enforcement authority. Certain of the areas regulated by the Commissioner are not subject to similar regulation by the OTS. Legislation enacted in New Jersey (the "New Jersey Act") provides that upon satisfaction of certain triggering conditions, as determined by the Commissioner, insured institutions or savings and loan holding companies located in a state which has reciprocal legislation in effect on substantially the same terms and conditions as stated in the New Jersey Act may acquire, or be acquired by, New Jersey insured institutions or holding companies on either a regional or national basis. The New Jersey Act explicitly prohibits interstate branching. An institution for sale under the New Jersey Department of Banking's emergency power provisions is not subject to these restrictions. FEDERAL AND STATE TAXATION FEDERAL TAXATION GENERAL. The Company and the Bank report their income on a consolidated basis and the accrual method of accounting, and are subject to federal income taxation in the same manner as other corporations with some exceptions, including particularly the Bank's reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to the Bank or the 36 Company. The Bank has not been audited by the IRS within the last seven years. For its 1996 taxable year, the Bank is subject to a maximum federal income tax rate of 34%. BAD DEBT RESERVES. For fiscal years beginning prior to December 31, 1995, thrift institutions which qualified under certain definitional tests and other conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans (generally secured by interests in real property improved or to be improved) under (i) the Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience Method. The reserve for nonqualifying loans was computed using the Experience Method. The Small Business Job Protection Act of 1996 (the "1996 Act"), which was enacted on August 20, 1996, requires savings institutions to recapture (i.e., take into income) certain portions of their accumulated bad debt reserves. The 1996 Act repeals the reserve method of accounting for bad debts effective for tax years beginning after 1995. Thrift institutions that would be treated as small banks are allowed to utilize the Experience Method applicable to such institutions, while thrift institutions that are treated as large banks (those generally exceeding $500 million in assets) are required to use only the specific charge-off method. Thus, the PTI Method of accounting for bad debts is no longer available for any financial institution. A thrift institution required to change its method of computing reserves for bad debts will treat such change as a change in method of accounting, initiated by the taxpayer, and having been made with the consent of the IRS. Any Section 481(a) adjustment required to be taken into income with respect to such change generally will be taken into income ratably over a six- taxable year period, beginning with the first taxable year beginning after 1995, subject to the residential loan requirement. Under the residential loan requirement provision, the recapture required by the 1996 Act will be suspended for each of two successive taxable years, beginning with the Bank's current taxable year, in which the Bank originates a minimum of certain residential loans based upon the average of the principal amounts of such loans made by the Bank during its six taxable years preceding its current taxable year. Under the 1996 Act, for its current and future taxable years, the Bank is not permitted to make additions to its tax bad debt reserves. In addition, the Bank is required to recapture (i.e., take into income) over a six year period the excess of the balance of its tax bad debt reserves as of December 31, 1995, other than its supplemental reserve for losses on loans, over the balance of such reserves as of December 31, 1987. As a result of such recapture, the Bank will incur an additional tax liability of approximately $150,000 which is expected to be paid beginning in 1996 over a six year period. DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend distributions" to the Company, such distributions will be considered to have been made from the Bank's unrecaptured tax bad debt reserves (including the balance of its reserves as of December 31, 1987) to the 37 extent thereof, and then from the Bank's supplemental reserve for losses on loans, to the extent thereof, and an amount based on the amount distributed (but not in excess of the amount of such reserves) will be included in the Bank's income. Non-dividend distributions include distributions in excess of the Bank's current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Bank's current or accumulated earnings and profits will not be so included in the Bank's income. The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Thus, if the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the amount of such distribution (but not in excess of the amount of such reserves) would be includable in income for federal income tax purposes, assuming a 35% federal corporate income tax rate. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. SAIF RECAPITALIZATION ASSESSMENT. The Funds Act levies a 65.7-cent fee on every $100 of thrift deposits held on March 31, 1995. For financial statement purposes, this assessment was reported as an expense for the quarter ended September 30, 1996. The Funds Act includes a provision which states that the amount of any special assessment paid to capitalize SAIF under this legislation is deductible under Section 162 of the Code in the year of payment. CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code (the "Code") imposes a tax on alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method is treated as a preference item for purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating loss carryovers. AMTI is increased by an amount equal to 75% of the amount by which a corporation's adjusted current earnings exceeds its AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986, and before January 1, 1996, an environmental tax of .12% of the excess of AMTI (with certain modifications) over $2.0 million is imposed on corporations, including the Company and the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. The Company and the Bank do not expect to be subject to the AMT. DIVIDENDS RECEIVED DEDUCTION. The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is generally 70% in the case of dividends received from unaffiliated corporations with which the Company and the Bank will not file a consolidated tax return, except that if the Company or the Bank own more than 20% of the stock of a corporation distributing a dividend, 80% of any dividends received may be deducted. 38 STATE AND LOCAL TAXATION NEW JERSEY TAXATION. The Bank is taxed under the New Jersey Savings Institutions Tax Act. The tax is an annual privilege tax imposed at a rate of 3% of the net income of the Bank has reported for federal income tax purposes with certain modifications. The Company is taxed under the New Jersey Corporation Business Tax Act. If it meets certain tests, the Company would be taxed as an investment company at an effective annual rate of approximately 2.25% of New Jersey taxable income. If it fails to meet such test, it will be taxed at an annual rate of approximately 9% of New Jersey taxable income. As a Delaware business corporation, the Company will be required to file annual returns with the Secretary of the State of Delaware and pay an annual Delaware franchise tax. The Bank's subsidiary, Pamrapo Service Corporation, which is taxed at an annual rate of 9%, files its own tax return. PERSONNEL As of December 31, 1996, the Bank had 80 full-time employees and 44 part-time employees. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employers to be good. ITEM 2. PROPERTIES. - ------------------- The Bank conducts its business through eight branch offices and one administrative office, all of which are located in Hudson County, New Jersey and two of which are drive-up facilities. The Bank has automatic teller machines at six of its eight branch facilities. The following table sets forth information relating to each of the Bank's offices as of December 31, 1996. The total net book value of the Bank's premises and equipment at December 31, 1996 was $3.6 million. 39
YEAR NET LOCATION OFFICE OPENED BOOK VALUE - ----------------------------------- ------------- ---------- (In thousands) EXECUTIVE OFFICE 591 Avenue C Bayonne, New Jersey.............. 1985 $ 648 BRANCH OFFICES 611 Avenue C Bayonne, New Jersey.............. 1984 454 155 Broadway Bayonne, New Jersey.............. 1973 159 175 Broadway Bayonne, New Jersey.............. 1985 --(1) 861 Broadway Bayonne, New Jersey.............. 1962 186 987 Broadway Bayonne, New Jersey.............. 1977 309 401-403 Washington Street Hoboken, New Jersey.............. 1990 579 1475 Bergen Boulevard Fort Lee, New Jersey............. 1990 --(2) 544 Broadway Bayonne, New Jersey.............. 1995 --(2) 595-597 Avenue C Bayonne, New Jersey.............. (3) 405 609-611 Avenue C Bayonne, New Jersey.............. (4) 295 ------ Net book value of properties..... 3,035 Furnishings and equipment........ 596 ------ Total premises and equipment.. $3,631 ======
- ---------------------- (1) The net book value of the property is included in investment in real estate. (2) Leased Property. (3) To be renovated. (4) To be used for parking. 40 ITEM 3. LEGAL PROCEEDINGS. On February 15, 1994, Bank Polska Kasa Opieki, S.A. ("Pekao") filed an action against the Bank and Chemical Bank ("Chemical") in the United States District Court for the District of New Jersey. The suit arises out of a $2.0 million check drawn by Pekao, certified by Chemical, and accepted for deposit at the Bank. In accepting the check for deposit, the Bank relied both upon representations made by a local attorney, Donald J. Meliado, Esq. ("Meliado"), and upon Chemical's certification of the check. Pekao alleges that the endorsement of the check was fraudulent and resulted in its losing $2.0 million, plus interest and costs, and that the losses are the responsibility of Chemical and the Bank. Chemical filed a cross-claim against the Bank on or about May 5, 1994. On May 11, 1994, the Bank filed an Answer to the Complaint as well as a counterclaim against Pekao, cross-claim against Chemical and Third-Party Complaint against Meliado, that deny that the Bank is responsible for any of the losses sustained by Pekao. In the counterclaim, the Bank alleges that Pekao's own conduct resulted in the loss and requests that Pekao indemnify the Bank for any losses sustained by the Bank in the suit. Against Chemical, the cross-claim alleges that Chemical is responsible to the Bank for any losses sustained as a result of the certification. The Third-Party Complaint alleges that the Bank relied upon Meliado's representations concerning the check and requests indemnification and contribution to the Bank for any losses. On December 11, 1995, the Court granted the Bank's motion for partial summary judgment dismissing Pekao's claims against the Bank. On the same date, the Court also denied Meliado's motion for summary judgment against the Bank. The Bank's cross-claim against Chemical was dismissed by the Court on February 2, 1995. As a result of these rulings, the only claims remaining are: (i) Pekao's direct claims against Chemical; (ii) Chemical's cross-claim against the Bank for indemnification and counsel fees; and (iii) the Bank's claim for indemnification against Meliado. Pretrial discovery is ongoing. The Bank is contesting liability, which at this point could only arise if Pekao succeeds on its claims against Chemical. In that connection, Chemical has substantial defenses which, if successful, would result in a judgment in its favor dismissing Pekao's claim against it. The Bank has also made a demand upon its insurance carrier for reimbursement of any losses, including all counsel fees, ultimately sustained by the Bank. The insurance carrier has preliminary denied coverage, but has indicated a willingness to settle. There is currently pending before the Court cross- motions for summary judgement both by Chemical and Pekao. It is anticipated that the motions will be argued in late March, 1997. In the interim, all parties are exploring settlement as to the litigation. In addition, the Bank is exploring settlement of the insurance coverage issues. Although the Bank believes it will ultimately obtain a favorable resolution both as to the litigation and the insurance coverage issue, both the outcome of the litigation and the Bank's demand for insurance coverage cannot be predicted at this time. 41 The Bank is also a party to litigation which arises primarily in the ordinary course of business. In the opinion of management, the ultimate disposition of such litigation should not have material effect on the consolidated financial position of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------------------------------------------------------------ None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. - ------------------------------------------------------------------------------ Information relating to the market for Registrant's common stock and related stockholder matters appears under Market for Common Stock and Related Matters in the Registrant's 1996 Annual Report to Stockholders on page 35 and is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. - -------------------------------- The selected financial data appears under Selected Consolidated Financial Condition and Other Data of the Corporation in the Registrant's 1996 Annual Report to Stockholders on page 34 and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS. --------------------- The above-captioned information appears under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Registrant's 1996 Annual Report to Stockholders on pages 4 through 10 and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ---------------------------------------------------- The Consolidated Financial Statements and related notes thereto, of Pamrapo Bancorp, Inc. and its subsidiaries, together with the report thereon by Radics & Co., LLC appears in the Registrant's 1996 Annual Report to Stockholders on pages 11 through 32 and are incorporated herein by reference. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ----------------------------------------------------------------------- FINANCIAL DISCLOSURE. -------------------- Not Applicable. 42 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------ The information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 16, 1997 at pages 5 and 6. ITEM 11. EXECUTIVE COMPENSATION. - -------------------------------- The information relating to executive compensation is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 16, 1997 at pages 7 through 15 excluding the Stock Performance Graph and the Compensation Committee Report. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. - ------------------------------------------------------------------------ The information relating to security ownership of certain beneficial owners and management is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 16, 1997 at pages 3, 5 and 6. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------------------------------------------------------- The information relating to certain relationships and related transactions is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 16, 1997 at page 16. 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K. - --------------------------------------------------------------------------- (a) The following documents are filed as a part of this report: (1) Consolidated Financial Statements of Pamrapo Bancorp, Inc. are incorporated by reference to the indicated pages of the 1996 Annual Report to Stockholders.
PAGE ---- Consolidated Statements of Financial Condition as of December 31, 1995 and 1996.................................... 11 Consolidated Statements of Income for the Years Ended December 31, 1994, 1995 and 1996.............................. 12 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1994, 1995 and 1996.......... 13 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996..................... 14-15 Notes to Consolidated Financial Statements...................... 16-31 Independent Auditors' Report....................................... 32
The remaining information appearing in the 1996 Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. 44 (3) Exhibits (a) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Pamrapo Bancorp, Inc.* 3.2 Bylaws of Pamrapo Bancorp, Inc.* 4.0 Stock Certificate of Pamrapo Bancorp, Inc.* 10.1 Employment Agreement between the Bank and William J. Campbell.* 10.2 Employment Agreement between the Company and William J. Campbell.* 10.3 Special Termination Agreement (Delikat).* 10.4 Special Termination Agreement (Thomas).* 10.5 Special Termination Agreement (Russo).* 10.6 Pamrapo Bank, S.L.A. Employee Stock Ownership Plan and Trust.* 10.8 Management Recognition and Retention Plan and Trust.* 10.9 Incentive Stock Option Plan.* 10.10 Stock Option Plan for Outside Directors.* 10.11 Outside Directors' Consultation and Retirement Plan.* 10.12 Board of Directors' Compensation and Trust Agreement.* 10.13 Standstill Agreement between Pamrapo Bancorp, Inc., and Roger T. Conlan dated March 12, 1997.** 11.0 Computation of earnings per share (filed herewith) 13.0 Portions of the 1996 Annual Report to Stockholders (filed herewith). 21.0 Subsidiary information is incorporated herein by reference to "Part I -Subsidiaries." 23.0 Consent of Auditors (filed herewith). 27.0 Financial Data Schedule (filed herewith) 99.1 Form 11-K (to be filed subsequently).
- -------------------------- * Incorporated herein by reference to the Form S-1, Registration Statement, as amended, filed on August 11, 1989, Registration No. 33-30370. ** Incorporated herein by reference to the Form 8-K filed on March 25, 1997. 45 SIGNATURES Pursuant to the requirements of Section 13 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. PAMRAPO BANCORP, INC. By: /s/ William J. Campbell ----------------------- William J. Campbell President DATED: March 25, 1997 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- /s/ William J. Campbell President, Chief Executive Officer March 25, 1997 - ----------------------- William J. Campbell and Director /s/ Gary J. Thomas Treasurer/Chief Financial Officer March 25, 1997 - ----------------------- Gary J. Thomas (Principal Financial and Accounting Officer) /s/ Daniel J. Massarelli Chairman of the Board and Director March 25, 1997 - ------------------------ Daniel J. Massarelli /s/ John A. Morecraft Vice Chairman of the Board and Director March 25, 1997 - --------------------- John A. Morecraft /s/ James J. Kennedy Director March 25, 1997 - -------------------- James J. Kennedy /s/ Jaime Portela Director March 25, 1997 - ----------------- Dr. Jaime Portela /s/ Francis J. O'Donnell Director March 25, 1997 - ------------------------ Francis J. O'Donnell
46 EX-11 2 EXHIBIT 11 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE EXHIBIT NO. 11 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, 1996 ----------------- Net income $2,964,868 Weighted average shares outstanding 3,304,417 Common stock equivalents due to dilutive effect on stock options 4,123 ---------- Total weighted average common shares and equivalents outstanding 3,308,540 ========== Primary earnings per share $ .90 ========== Total weighted average common shares and equivalents outstanding for fully diluted computation 3,308,540 ========== Fully diluted earnings per share $ .90 ==========
EX-13 3 EXHIBIT 13 EXHIBIT 13 1996 ANNUAL REPORT TO STOCKHOLDERS PAMRAPO BANCORP, INC. (NASDAQ/PBCI) IS THE HOLDING COMPANY FOR PAMRAPO SAVINGS BANK, S.L.A., FOUNDED IN 1886. PAMRAPO IS A COMMUNITY BANK SERVING HUDSON AND BERGEN COUNTIES THROUGH OFFICES IN BAYONNE, HOBOKEN AND FORT LEE, N.J. FINANCIAL SERVICES INCLUDE A FULL RANGE OF DEPOSIT, MORTGAGE AND CONSUMER LOAN PRODUCTS, AS WELL AS ANNUITIES AND MUTUAL FUNDS. TOTAL DEPOSITS AT DECEMBER 31, 1996 WERE $301 MILLION AND PRIMARILY CONSIST OF FIXED MATURITY (45%), PASSBOOK (39%), MONEY MARKET (7%), TRANSACTION (6%) AND NON-INTEREST BEARING (3%) DEPOSITS. THE BANK'S $213 MILLION GROSS LOAN PORTFOLIO CONSISTS ON ONE-TO-FOUR FAMILY \MULTI- FAMILY RESIDENTIAL MORTGAGE LOANS (72%), CONSTRUCTION AND COMMERCIAL REAL ESTATE LOANS (11%) AND CONSUMER LOANS (17%). IN ADDITION, THE BANK HAS A PORTFOLIO OF MORTGAGE-BACKED SECURITIES TOTALLING $110 MILLION.
INDEX Financial Highlights....................................................... 1 Letter to Stockholders..................................................... 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.............................. 4 Consolidated Statements of Financial Condition............................. 11 Consolidated Statements of Income.......................................... 12 Consolidated Statements of Changes in Stockholders' Equity................. 13 Consolidated Statements of Cash Flows...................................... 14 Notes to Consolidated Financial Statements................................. 16 Independent Auditors' Report............................................... 32 Management Responsibility Statement........................................ 33 Selected Consolidated Financial Condition and Other Data of the Corporation.............................................. 34 Stockholder Information.................................................... 35 Corporate Information...................................................... 36
Financial Highlights
1994 1995 1996 - ---------------------------------------------------------------------- FOR THE YEAR (In thousands) Interest income $ 30,466 $ 29,571 $ 28,035 Interest expense 10,626 11,456 11,381 Net interest income 19,840 18,115 16,654 Net income 7,178 5,628 2,965 - ---------------------------------------------------------------------- AVERAGE FOR THE YEAR (In thousands) Assets $394,527 $376,498 $367,247 Loans receivable 219,697 220,001 213,122 Mortgage-backed securities 126,147 115,803 108,500 Investment securities 18,039 11,195 11,725 Deposits 320,772 302,488 301,975 Stockholders' Equity 53,456 57,965 56,297 - ---------------------------------------------------------------------- SIGNIFICANT PERCENTAGES Return on Average Assets 1.82% 1.49% 0.81% Return on Average Equity 13.43% 9.71% 5.27% Interest Rate Spread 4.86% 4.51% 4.23% - ---------------------------------------------------------------------- YEAR END (In thousands) Assets $384,085 $371,365 $362,910 Loans receivable 222,472 218,140 207,405 Securities available for sale 19,471 28,427 22,232 Mortgage-backed securities 114,032 96,565 96,727 Investment securities 2,096 99 -- Deposits 305,910 298,901 300,785 Stockholders' Equity 55,372 59,375 53,509 - ----------------------------------------------------------------------
1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Pamrapo Bancorp, Inc. (the "Company") owns 100% of the issued and outstanding stock of Pamrapo Savings Bank, SLA (the "Bank"), which is the primary asset of the Company. The Company's business is conducted principally through the Bank. BUSINESS OF THE COMPANY The Bank's principal business has been and continues to be attracting retail deposits from the general public and investing those deposits, together with funds generated from operations, primarily in one-to-four family, owner occupied residential mortgage loans. In addition, in times of low loan demand, the Bank will invest in mortgage-backed securities to supplement its lending portfolio. The Bank also invests, to a lesser extent, in multi-family residential mortgage loans, commercial real estate loans, home equity and second mortgage loans, and consumer loans. The earnings of the Bank depend primarily upon the level of net interest income, which is the difference between the interest earned on assets such as loans, mortgage-backed securities, investments and other interest-earning assets and the interest paid on liabilities such as deposits and borrowings. Net interest income is affected by many factors, including regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flow. Net interest income is also affected by the amount, composition and relative interest rates of the Bank's assets and liabilities and by the repricing of such assets and liabilities. The Bank is vulnerable to interest rate fluctuations to the extent that its interest-bearing liabilities mature or reprice more rapidly than its interest-earning assets. Such asset/liability structure may result in lower net interest income during periods of rising interest rates and may be beneficial in times of declining interest rates. The Bank's net income is also affected by provisions for loan losses, non-interest income, non-interest expenses and income taxes. FINANCIAL CONDITION The Company's consolidated assets at December 31, 1996 totaled $362.9 million, which represents a decrease of $8.5 million, or 2.29%, when compared to $371.4 million at December 31, 1995. Investment securities held to maturity of $99,000 at December 31, 1995 matured during the year ended December 31, 1996. Securities available for sale decreased $6.2 million, or 21.83%, to $22.2 million at December 31, 1996 when compared with $28.4 million at December 31, 1995. The decrease during the year ended December 31, 1996 resulted primarily from proceeds from maturities and calls of and repayments on securities available for sale amounting to $8.8 million along with an increase of unrealized loss on such portfolio of $247,000 which offset purchases of securities available for sale of $3.0 million. Mortgage-backed securities held to maturity totaled $96.7 million and $96.6 million at December 31, 1996 and 1995, respectively. During the year ended December 31, 1996, purchases totaled $12.7 million and principal repayments amounted to $12.5 million. Net loans amounted to $207.4 million and $218.1 million at December 31, 1996 and 1995, respectively, which represents a decrease of $10.7 million or 4.91%. During the year ended December 31, 1996, loan principal repayments exceeded loan originations by $7.7 million due to a lack in loan demand. During the year ended December 31, 1996, the Bank transferred eighteen mortgage loans totaling $2.2 million to foreclosed real estate. Additionally, the Bank provided $644,000 as a provision for loan losses during the year ended December 31, 1996. At December 31, 1996 and 1995, loans delinquent ninety days or more totaled $10.5 million or 5.06% of loans receivable and $10.9 million or 4.98% of loans receivable, respectively. 4 Foreclosed real estate amounted to $2.0 million and $1.5 million at December 31, 1996 and 1995, respectively. At December 31, 1996, foreclosed real estate consisted of twenty one properties, of which fourteen were residential, four were land and three were commercial properties. During the year ended December 31, 1996, thirteen properties with a combined book value of $1.5 million were sold and another five properties with a combined book value of $317,000 remain under contract for sale. At December 31, 1995, foreclosed real estate consisted of sixteen properties, of which nine were residential, six were land and one was a commercial property. At December 31, 1996 and 1995, non-performing assets totaled $12.5 million or 3.44% of total assets and $12.4 million or 3.32% of total assets, respectively. Other assets amounted to $1.9 million and $640,000 at December 31, 1996 and 1995, respectively. The increase during 1996 was primarily due to an increase in refundable income taxes of $900,000. Total deposits at December 31, 1996 increased $1.9 million to $300.8 million compared to $298.9 million at December 31, 1995. Advances from the Federal Home Loan Bank of New York ("FHLB-NY") totaled $3.6 million and $7.6 million at December 31, 1996 and 1995, respectively. The decrease, during the year ended December 31, 1996, in advances from the FHLB-NY resulted from repayments of advances of $11.0 million offset in part by new advances of $7.0 million. Stockholders' equity amounted to $53.5 million and $59.4 million at December 31, 1996 and 1995, respectively. During the years ended December 31, 1996 and 1995, net income of $3.0 million and $5.6 million, respectively, was recorded and cash dividends of $3.3 million and $2.4 million, respectively, were paid on the Company's common stock. The dividend paid during the year ended December 31, 1996 includes a special cash dividend of $0.10 per share, an aggregate of $345,000, declared on December 19, 1995 by the Board of Directors of the Company, payable on January 19, 1996 to the Company's shareholders of record on January 5, 1996. During the year ended December 31, 1996, the Company repurchased 294,000 shares of its common stock at prices ranging from $18.75 to $23.00 per share totalling $6.2 million, under the stock repurchase program and reissued 56,930 shares of its common stock from treasury stock for $328,000 as a result of the excercise of stock options by directors, officers and employees. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 NET INCOME Net income decreased by $2.6 million, or 47.32%, to $3.0 million during the year ended December 31, 1996 compared with $5.6 million for the year ended December 31, 1995. The decrease in net income during the 1996 period was primarily from a charge of $2.0 million to recapitalize the Savings Association Insurance Fund ("the SAIF"). During the year ended December 31, 1996, a one-time special assessment was levied amounting to 65.7 basis points on SAIF assessable deposits held as of March 31, 1995. The after-tax charge of $1.3 million reduced net income for the year ended December 31, 1996 by $.40 per share. In addition, the results also reflect decreases in total interest income of $1.5 million and in non-interest income of $86,000, along with increases in non-interest expenses of $705,000, excluding the aforementioned special assessment and provision for loan losses of $233,000, which more than offset decreases in total interest expense of $75,000 and income taxes of $1.8 million. INTEREST INCOME Interest income on loans during the year ended December 31, 1996 decreased by $1.2 million, or 5.88%, to $19.2 million when compared to $20.4 million during 1995. During the years ended December 31, 1996 and 1995, the yield earned on the loan portfolio was 9.00% and 9.29% respectively. The average balance of loans outstanding during the years ended December 31, 1996 and 1995, totaled $213.1 million and $220.0 million, respectively. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D Interest on mortgage-backed securities decreased $373,000, or 4.84%, during the year ended December 31, 1996 to $7.3 million compared to $7.7 millon for 1995. During the year ended December 31, 1996, the average balance of mortgage-backed securities outstanding decreased $7.3 million, or 6.31%. The yield earned on the mortgage-backed securities portfolio increased six basis points from 6.65% in 1995 to 6.71% in 1996. The decrease in the average balance of mortgage-backed securities during 1996 resulted primarily from principal repayments which more than offset purchases of mortgage-backed securities. Interest earned on investment securities increased by $127,000, or 16.30%, to $906,000 for the year ended December 31, 1996, when compared to $779,000 for 1995. The increase resulted from an increase of $530,000, or 4.73%, in the average balance of the investment securities portfolio, which includes U.S. Government and agency obligations, along with an increase of 77 basis points in the yield earned on the investment securities portfolio from 6.96% in 1995 to 7.73% in 1996. Interest on other interest-earning assets decreased $37,000, or 5.68%, to $614,000 during the year ended December 31, 1996, compared to $651,000 for 1995. Such decrease was attributable to a decrease of 294 basis points in the yield earned on other interest-earning assets from 7.81% in 1995 to 4.87% in 1996, which more than offset an increase of $4.3 million, or 51.21%, in the average balance of other interest-earning assets outstanding. Such increase in the average balance of other interest-earning assets outstanding was primarily a result of increased levels of interest-bearing deposits in other banks. INTEREST EXPENSE Interest on deposits increased $441,000, or 4.11%, to $11.2 million during the year ended December 31, 1996 compared to $10.7 million for 1995. The increase during 1996 was attributable to an increase of 13 basis points in the Bank's average cost of interest-bearing deposits to 3.84% for 1996 from 3.71% for 1995, which more than offset a decrease of $1.6 million, or .55%, in the average balance of interest-bearing deposits outstanding. The increase in the Bank's cost of interest-bearing deposits reflected a trend of higher general market interest rates paid on deposits. Interest on advances and other borrowed money decreased $517,000, or 71.51%, to $206,000 during the year ended December 31, 1996 compared to $723,000 for 1995. The decrease during 1996 was attributable to a decrease of $8.3 million in the average balance of advances and other borrowings outstanding, along with a decrease of eight basis points in the Bank's cost of borrowings to 6.11% for 1996 from 6.19% for 1995. NET INTEREST INCOME Net interest income for the year ended December 31, 1996, decreased $1.4 million, or 8.07%, from $18.1 million for 1995 to $16.7 million for 1996. The Bank's net interest rate spread decreased from 4.51% in 1995 to 4.23% in 1996 and its interest rate margin decreased from 5.10% in 1995 to 4.81% in 1996. These decreases primarily resulted from a six basis point increase in the cost of average interest-bearing liabilities from 3.81% in 1995 to 3.87% in 1996, along with a 22 basis point decrease in the yield on interest-earning assets to 8.10% in 1996 from 8.32% in 1995. PROVISION FOR LOAN LOSSES During the years ended December 31, 1996 and 1995, the Bank provided $644,000 and $411,000, respectively, for loan losses. At December 31, 1996 and 1995, the Bank's loan portfolio included loans totaling $10.5 million and $10.9 million, respectively, which were delinquent ninety days or more. The Bank maintains an allowance for loan losses based on 6 management's evaluation of the risks inherent in its loan portfolio which gives due consideration to changes in general market conditions and in the nature and volume of the Bank's loan activity. The allowance for loan losses amounted to $2.8 million at December 31, 1996, representing 1.32% of total loans and 26.69% of loans delinquent ninety days or more compared to an allowance of $2.7 million at December 31, 1995, representing 1.22% of total loans and 25.09% of loans delinquent ninety days or more. During the years ended December 31, 1996 and 1995, the Bank charged off loans aggregating $638,000 and $1.3 million, respectively. The Bank monitors its loan portfolio and intends to continue to provide for loan losses based on its ongoing periodic review of the loan portfolio and general market conditions. NON-INTEREST INCOME Non-interest income decreased by $85,000, or 11.56%, to $650,000 during the year ended December 31, 1996 as compared to $735,000 for 1995. The decrease in non- interest income during 1996 resulted primarily from decreases in fees and service charges of $25,000 and miscellaneous income of $60,000. NON-INTEREST EXPENSES Non-interest expenses increased $2.7 million, or 27.83%, to $12.5 million during the year ended December 31, 1996 compared to $9.8 million for 1995. The increase during the year ended December 31, 1996 was primarily attributable to a one-time SAIF assessment of $2.0 million. Non-interest expenses other than a one-time SAIF assessment of $2.0 million increased $705,000, or 7.19%, in 1996 over the 1995 levels. Salaries and employee benefits, the major component of non-interest expenses, increased $221,000, or 4.55%, during the year ended December 31, 1996, while occupancy, equipment, legal, loss on foreclosed real estate and miscellaneous expenses increased by $104,000, $1,000, $66,000, $80,000 and $339,000, respectively, which increases were partially offset by decreases in advertising and federal insurance premium (exclusive of a one-time SAIF assessment) of $49,000 and $56,000, respectively. Non-interest expenses during the year ended December 31, 1996 include a non-recurring expense of $300,000 related to the 1996 Annual Meeting of Stockholders. INCOME TAXES Income tax expense totaled $1.2 million and $3.0 million during the years ended December 31, 1996 and 1995, respectively. The decrease in 1996 resulted primarily from a decrease in pre-tax income of $4.5 million from 1995 and a reduction of income tax expense of $250,000 resulting from the exercise of non- statutory stock options. RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 NET INCOME Net income decreased by $1.6 million, or 21.60%, to $5.6 million during the year ended December 31, 1995 compared with $7.2 million for the year ended December 31, 1994. The decrease in net income during the 1995 period was primarily due to decreases in total interest income of $895,000 and in non-interest income of $50,000, along with increases in total interest expense of $830,000 and in non- interest expenses of $691,000, which more than offset decreases in the provision for loan losses of $84,000 and in income taxes of $833,000. INTEREST INCOME Interest income on loans during the year ended December 31, 1995 increased nominally by $77,000, or 0.38%, to $20.445 million when compared to $20.368 million during 1994. During the years ended December 31, 1995 and 1994, the yield earned on the loan portfolio was 9.29% and 9.27%, respectively. The average balance of loans outstanding, during the years ended December 31, 1995 and 1994, totaled $220.0 million and $219.7 million, respectively. Interest on mortgage-backed securities decreased $767,000, or 9.06%, during the year ended December 31, 1995 to $7.7 million compared to $8.5 millon for 1994. During the year 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D ended December 31, 1995, the average balance of mortgage-backed securities outstanding decreased $10.3 million, or 8.20%. In addition, the yield earned on the mortgage-backed securities portfolio decreased six basis points from 6.71% to 6.65%. The decrease in the average balance of mortgage-backed securities during 1995 resulted primarily from principal repayments which more than offset purchases of mortgage-backed securities. Interest earned on investment securities decreased by $364,000, or 31.85%, to $779,000 for the year ended December 31, 1995, when compared to $1.1 million for 1994. The decrease resulted from a decrease of $6.8 million, or 37.94%, in the average balance of the investment securities portfolio, which more than offset an increase of 62 basis points in the yield earned on the investment securities portfolio from 6.34% in 1994 to 6.96% in 1995. Interest on other interest-earning assets increased $160,000, or 32.59%, to $651,000 during the year ended December 31, 1995, compared to $491,000 for 1994. Such increase was attributable to an increase of 297 basis points in the yield earned on other interest-earning assets from 4.84% in 1994 to 7.81% in 1995, which more than offset a decrease of $1.8 million, or 17.83%, in the average balance of other interest-earning assets outstanding. Such decrease in the average balance of other interest-earning assets outstanding was primarily as a result of decreased levels of interest-bearing deposits in other banks. INTEREST EXPENSE Interest on deposits increased $725,000, or 7.24%, to $10.7 million during the year ended December 31, 1995 compared to $10.0 million for 1994. The increase during 1995 was attributable to an increase of 48 basis points in the Bank's average cost of interest-bearing deposits to 3.71% for 1995 from 3.23% for 1994, which offset a decrease of $20.8 million, or 6.70%, in the average balance of interest-bearing deposits outstanding. The increase in the Bank's cost of interest-bearing deposits reflected a trend of higher general market interest rates paid on deposits, which levelled off during the year ended December 31, 1994 before increasing in 1995. Interest on advances and other borrowed money increased $106,000, or 17.18%, to $723,000 during the year ended December 31, 1995 compared to $617,000 for 1994. The increase during 1995 was attributable to an increase of 124 basis points in the Bank's cost of borrowings to 6.19% for 1995 from 4.95% for 1994, which was partially offset by a decrease of $797,000 in the average balance of advances and other borrowings outstanding. NET INTEREST INCOME Net interest income for the year ended December 31, 1995, decreased $1.7 million, or 8.70%, from $19.8 million for 1994 to $18.1 million for 1995. The Bank's net interest rate spread decreased from 4.86% in 1994 to 4.51% in 1995 and its interest rate margin decreased from 5.30% in 1994 to 5.10% in 1995. These decreases primarily resulted from a 52 basis point increase in the cost of average interest-bearing liabilities from 3.29% in 1994 to 3.81% in 1995, which was partially offset by a 17 basis point increase in the yield on interest- earning assets to 8.32% in 1995 from 8.15% in 1994. PROVISION FOR LOAN LOSSES During the years ended December 31, 1995 and 1994, the Bank provided $411,000 and $495,000, respectively, for loan losses. At December 31, 1995 and 1994, the Bank's loan portfolio included loans totaling $10.9 million and $12.8 million, respectively, which were delinquent ninety days or more. The Bank maintains an allowance for loan losses based on management's evaluation of the risks inherent in its loan portfolio which gives due consideration to changes in general market conditions and in the nature and volume of the Bank's loan activity. The allowance for loan losses amounted to $2.7 8 million at December 31, 1995, representing 1.22% of total loans and 25.09% of loans delinquent ninety days or more compared to an allowance of $3.7 million at December 31, 1994, representing 1.59% of total loans and 28.91% of loans delinquent ninety days or more. During the years ended December 31, 1995 and 1994, the Bank charged off loans aggregating $1.3 million and $911,000, respectively. The Bank monitors its loan portfolio and intends to continue to provide for loan losses based on its ongoing periodic review of the loan portfolio and general market conditions. NON-INTEREST INCOME Non-interest income decreased nominally by $50,000 to $735,000 during the year ended December 31, 1995 as compared to $785,000 for 1994. The decrease in non- interest income during 1995 resulted primarily from decreases in gain on sale of securities available for sale of $35,000 and miscellaneous income of $45,000 which offset an increase in fees and service charges of $30,000. During the year ended December 31, 1994, proceeds from sales of securities available for sale totaled $1.5 million and a net gain of $35,000 was realized on those sales. NON-INTEREST EXPENSES Non-interest expenses increased $692,000, or 7.59%, to $9.8 million during the year ended December 31, 1995 compared to $9.1 million for 1994. During the year ended December 31, 1994, the Bank signed a settlement agreement with another bank to settle a complaint filed, dealing with the responsibility for credit card losses, during the 1993 period. As a result of the loss recovery of $239,000, total non-interest expenses for the 1994 period were reduced. Non- interest expenses other than the recovery of credit card losses increased 4.84% in 1995 over the 1994 levels. Salaries and employee benefits, the major component of non-interest expenses, increased $72,000 or 1.50% during the year ended December 31, 1995, while equipment, advertising, legal, loss on foreclosed real estate and miscellaneous expenses increased by $55,000, $86,000, $200,000, $80,000 and $46,000, respectively, which increases were partially offset by decreases in occupancy and federal insurance premium of $43,000 and $42,000, respectively. INCOME TAXES Income tax expense totaled $3.0 million and $3.8 million during the years ended December 31, 1995 and 1994, respectively. The decrease in 1995 resulted primarily from a decrease in pre-tax income of $2.4 million over 1994. LIQUIDITY AND CAPITAL RESOURCES The Bank's primary sources of funds are deposits, amortization and prepayments of loan and mortgage-backed securities principal, FHLB-NY advances, maturities of investment securities and funds provided from operations. While scheduled loan and mortgage-backed securities amortization and maturities of investment securities are a relatively predictable source of funds, deposit flow and loan and mortgage-backed securities prepayments are greatly influenced by market interest rates, economic conditions and competition. The Bank is required to maintain minimum levels of liquid assets as defined by the Office of Thrift Supervision ("OTS") regulations. This requirement, which may vary from time to time, depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio currently is 5%. The Bank's liquidity averaged 9.9% during December, 1996. The Bank adjusts its liquidity levels in order to meet funding needs for deposit outflows, payments of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding commitments. The Bank also adjusts its liquidity level as appropriate to meet its asset/liability objectives. In addition, the Bank invests its excess funds in federal funds and overnight deposits with the FHLB-NY, which provides liquidity to meet lending requirements. Federal funds sold and interest-bearing deposits in other banks at December 31, 1996 and 1995 amounted to $9.1 million and $4.6 million, respectively. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONT'D The Bank's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. These activities are summarized below:
(In Thousands) YEAR ENDED DECEMBER 31, 1995 1996 - -------------------------------------------------------------- - -------------------------------------------------------------- Cash and cash equivalents-beginning $ 12,135 $ 13,894 - -------------------------------------------------------------- Operating activities: Net income 5,628 2,965 Adjustments to reconcile net income to net cash provided by operating activities 1,461 411 - -------------------------------------------------------------- Net cash provided by operating activities 7,089 3,376 Net cash provided by investing activities 13,680 15,358 Net cash (used in) financing activities (19,010) (11,485) Net increase in cash and cash equivalents 1,759 7,249 - -------------------------------------------------------------- Cash and cash equivalents-ending $ 13,894 $ 21,143 - -------------------------------------------------------------- - --------------------------------------------------------------
Cash was generated by operating activities in each of the above periods. The primary source of cash from operating activities during each period was net income. The primary sources of investing activities of the Bank are lending and investment in mortgage-backed securities. In addition to funding new loan production and the purchases of mortgage-backed securities through operations and financing activities, new loan production and the purchase of mortgage- backed securities were also funded by principal repayments on existing loans and mortgage-backed securities. The primary uses of financing activities during the 1996 period resulted from the purchase of 294,000 shares of the Company's common stock for treasury for $6.2 million and a net decrease in advances from the FHLB-NY of $4.0 million. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds and interest-earning deposits. If the Bank requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLB-NY, which provide an additional source of funds. At December 31, 1996 and 1995, advances from the FHLB-NY amounted to $3.6 million and $7.6 million, respectively. The Bank anticipates that it will have sufficient funds available to meet its current loan commitments. At December 31, 1996, the Bank has outstanding commitments to originate mortgage loans of $3.5 million and to purchase mortgage-backed securities of $1.0 million. Certificates of deposit scheduled to mature in one year or less, at December 31, 1996, totaled $112.7 million. Management believes that, based upon historical experience, a significant portion of such deposits will remain with the Bank. At December 31, 1996, the Bank exceeded each of the three OTS capital requirements. The Bank's tangible, core and risk-based capital ratios were 12.59%, 12.59% and 26.35%, respectively. The Bank qualifies as "well- capitalized" under the prompt corrective action regulations of the OTS. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and the related data presented herein have been prepared in accordance with generally accepted accounting principles, which requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Bank are monetary in nature. As a result, interest rates have a more significant impact on the Bank's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services because such prices are affected by inflation to a larger extent than interest rates. 10 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, --------------------------- NOTE(S) 1995 1996 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- ASSETS Cash and amounts due from depository institutions $ 9,293,609 $ 12,042,656 Interest-bearing deposits in other banks 4,500,000 9,000,000 Federal funds sold 100,000 100,000 - ---------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 1 and 19 13,893,609 21,142,656 Securities available for sale 1, 2, 9 and 19 28,427,064 22,232,193 Investment securities held to maturity 1, 3, 9 and 19 99,000 -- Mortgage-backed securities held to maturity 1, 4, 9 and 19 96,564,583 96,726,545 Loans receivable 1, 5, 9 and 19 218,140,313 207,405,393 Foreclosed real estate 1 1,467,396 1,995,801 Investment in real estate 1 307,375 300,080 Premises and equipment 1, 6 and 10 3,716,785 3,630,828 Federal Home Loan Bank of New York stock, at cost 9 3,072,600 2,979,400 Interest receivable 1, 7 and 19 2,954,256 2,677,043 Deferred tax asset 1 and 15 1,536,030 1,496,514 Excess of cost over assets acquired 1 545,850 424,550 Other assets 15 639,769 1,899,475 - --------------------------------------------------------------------------------------------------------------------- Total assets $371,364,630 $362,910,478 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits 8 and 19 $298,900,764 $300,785,420 Advances from Federal Home Loan Bank of New York 9 and 19 7,583,100 3,583,100 Other borrowed money 10 and 19 459,855 293,094 Advance payments by borrowers for taxes and insurance 1,632,215 1,598,104 Other liabilities 3,413,267 3,141,799 - --------------------------------------------------------------------------------------------------------------------- Total liabilities 311,989,201 309,401,517 - --------------------------------------------------------------------------------------------------------------------- Commitments and contingencies 17, 18 and 19 -- -- STOCKHOLDERS' EQUITY 1, 10, 11, 12, 13, 14 and 15 Preferred stock; authorized 3,000,000 shares; issued and outstanding - none -- -- Common stock; par value $.01; authorized 7,000,000 shares; shares issued 3,450,000 (1995 and 1996); shares outstanding 3,393,034 (1995) and 3,155,964 (1996) 34,500 34,500 Paid-in capital in excess of par value 18,906,768 18,906,768 Retained earnings - substantially restricted 41,284,431 40,944,218 Unrealized loss on securities available for sale, net (41,154) (196,935) Debt of employee stock ownership plan (148,781) -- Treasury stock, at cost; 56,966 shares (1995) and 294,036 shares (1996) (660,335) (6,179,590) - --------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 59,375,429 53,508,961 - --------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $371,364,630 $362,910,478 - --------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 11 CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ------------------------------------- NOTE(S) 1994 1995 1996 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Interest income: Loans 1 $20,367,629 $20,445,023 $19,191,106 Mortgage-backed securities 1 8,463,230 7,695,969 7,323,334 Investments 1 1,143,386 778,920 905,838 Other interest-earning assets 491,349 651,434 614,239 - -------------------------------------------------------------------------------------------------------------------------- Total interest income 30,465,594 29,571,346 28,034,517 - -------------------------------------------------------------------------------------------------------------------------- Interest expense: Deposits 8 10,009,152 10,733,652 11,174,695 Advances and other borrowed money 616,826 722,556 205,937 - -------------------------------------------------------------------------------------------------------------------------- Total interest expense 10,625,978 11,456,208 11,380,632 - -------------------------------------------------------------------------------------------------------------------------- Net interest income 19,839,616 18,115,138 16,653,885 Provision for loan losses 1 and 5 494,659 411,301 644,466 - -------------------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 19,344,957 17,703,837 16,009,419 - -------------------------------------------------------------------------------------------------------------------------- Non-interest income: Fees and service charges 427,737 457,319 431,924 Gain on sale of securities available for sale 34,625 -- -- Miscellaneous 322,929 277,262 217,881 - -------------------------------------------------------------------------------------------------------------------------- Total non-interest income 785,291 734,581 649,805 - -------------------------------------------------------------------------------------------------------------------------- Non-interest expenses: Salaries and employee benefits 13 and 14 4,789,871 4,861,549 5,082,192 Net occupancy expense of premises 716,623 673,809 778,225 Equipment 719,371 773,991 775,360 Advertising 78,480 164,073 114,580 Legal 250,017 450,483 516,292 Federal insurance premium 16 760,602 718,276 2,684,879 Loss on foreclosed real estate 1 123,485 203,399 283,187 (Recovery of) credit card losses (239,256) -- -- Amortization of intangibles 1 121,300 121,300 121,300 Miscellaneous 1,795,278 1,840,520 2,179,858 - -------------------------------------------------------------------------------------------------------------------------- Total non-interest expenses 9,115,771 9,807,400 12,535,873 - -------------------------------------------------------------------------------------------------------------------------- Income before income taxes 11,014,477 8,631,018 4,123,351 Income taxes 1 and 15 3,836,403 3,003,220 1,158,483 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 7,178,074 $ 5,627,798 $ 2,964,868 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Net income per common share and common stock equivalents 1 $ 2.12 $ 1.65 $ 0.90 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Dividends per common share 1 $ .485 $ .800 $ .900 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares and common stock equivalents outstanding 1 3,379,293 3,417,475 3,308,540 - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 12 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COST OF STOCK CONTRIBUTED UNREALIZED UNREALIZED TO RETAINED LOSS ON LOSS ON DEBT OF MANAGEMENT PAID-IN EARNINGS - MARKETABLE SECURITIES EMPLOYEES RECOGNITION CAPITAL IN SUBSTAN- EQUITY AVAILABLE STOCK AND COMMON EXCESS OF TIALLY SECURITIES, FOR SALE OWNERSHIP RETENTION TREASURY STOCK PAR VALUE RESTRICTED NET NET PLAN TRUST STOCK TOTAL ------- ----------- ----------- ----------- ----------- ---------- ------------- ----------- ----------- Balance -- December 31, 1993 $17,250 $18,975,913 $33,218,514 $(3,267) $ -- $(545,531) $(55,369) $(2,072,737) $49,534,773 Net income for the year ended December 31, 1994 -- -- 7,178,074 -- -- -- -- -- 7,178,074 Reduction in debt of Employee Stock Owner- ship Plan -- -- -- -- -- 198,375 -- -- 198,375 Stock split 17,250 (17,250) -- -- -- -- -- -- -- Sales of treasury Stock -- 87,874 -- -- -- -- -- 108,538 196,412 Decrease in unrealized loss on marketable securities, net -- -- -- 3,267 -- -- -- -- 3,267 (Increase) in unrealized loss on securities available for sale, net of taxes -- -- -- -- (196,756) -- -- -- (196,756) Amortization of cost of stock contributed to the Management Recognition and Reten- tion Trust -- -- -- -- -- -- 34,515 -- 34,515 Cash dividends -- -- (1,577,118) -- -- -- -- -- (1,577,118) - ------------------------------------------------------------------------------------------------------------------------------------ Balance -- December 31, 1994 34,500 19,046,537 38,819,470) -- (196,756) (347,156) (20,854) (1,964,199) 55,371,542 Net income for the year ended December 31, 1995 -- -- 5,627,798 -- -- -- -- -- 5,627,798 Reduction in debt of Employees Stock Ownership Plan -- -- -- -- -- 198,375 -- -- 198,375 Sale of treasury stock -- (139,769) (442,713) -- -- -- -- 1,303,864 721,382 Decrease in unrealized loss on securities available for sale, net of taxes -- -- -- -- 155,602 -- -- -- 155,602 Amortization of cost of stock contributed to the Management Recognition and Reten- tion Trust -- -- -- -- -- -- 20,854 -- 20,854 Cash dividends -- -- (2,720,124) -- -- -- -- -- (2,720,124) - ------------------------------------------------------------------------------------------------------------------------------------ Balance -- December 31, 1995 34,500 18,906,768 41,284,431 -- (41,154) (148,781) -- (660,335) 59,375,429 Net income for the year ended December 31, 1996 -- -- 2,964,868 -- -- -- -- -- 2,964,868 Reduction in debt of Employees Stock Owner- ship Plan -- -- -- -- -- 148,781 -- -- 148,781 Purchase of treasury stock -- -- -- -- -- -- -- (6,179,188) (6,179,188) Sale of treasury stock -- -- (331,960) -- -- -- -- 659,933 327,973 (Increase) in unrealized loss on securities available for sale, net of taxes -- -- -- -- (155,781) -- -- -- (155,781) Cash dividends -- -- (2,973,121) -- -- -- -- -- (2,973,121) - ------------------------------------------------------------------------------------------------------------------------------------ Balance -- December 31, 1996 $34,500 $18,906,768 $40,944,218 $ -- $(196,935) $ -- $ -- $(6,179,590) $53,508,961 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 13 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1994 1995 1997 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 7,178,074 $ 5,627,798 $ 2,964,868 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment and investment in real estate 319,577 313,669 324,807 Amortization of deferred fees, premiums and discounts, net (435,266) (248,824) (217,913) Provision for loan losses 494,659 411,301 644,466 Provision for loss on foreclosed real estate 145,349 142,000 166,003 (Recovery of) credit card losses (239,256) -- -- (Gain) on sale of securities available for sale (34,625) -- -- (Gain) on sale of foreclosed real estate (122,549) (24,888) (1,810) Deferred income taxes 389,722 205,290 131,066 Decrease in interest receivable 232,715 200,186 277,213 Decrease (increase) in other assets (75,763) 159,109 (1,259,706) Amortization of intangibles 121,300 121,300 121,300 Amortization of cost of stock contributed to Management Recognition and Retention Trust 34,515 20,854 -- Reduction in debt of Employee Stock Ownership Plan 198,375 198,375 148,781 (Decrease) increase in other liabilities (303,548) (37,471) 73,532 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 7,903,279 7,088,699 3,376,227 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from sales of securities available for sale 1,482,625 -- -- Proceeds of maturities and calls of and repayments on securities available for sale 7,171,160 8,305,558 8,827,985 Purchases of securities available for sale -- (2,000,000) (3,049,198) Proceeds from maturities of investment securities held to maturity -- -- 99,000 Purchases of investment securities held to maturity -- (1,998,750) -- Principal repayments on mortgage-backed securities held to maturity 24,493,475 14,260,873 12,504,961 Purchases of mortgage-backed securities held to maturity (26,277,076) (8,030,921) (12,679,914) Proceeds from sales of student loans -- 764,745 770,672 Purchase of mortgage loans (627,000) (62,000) (108,500) Net (increase) decrease in loans receivable 7,074,219 2,835,707 8,729,960 Proceeds from sales of foreclosed real estate 366,316 616,297 401,761 Capitalized costs on foreclosed real estate -- (237,993) -- Additions to premises and equipment (286,538) (725,107) (224,655) Additions to investment real estate -- -- (6,900) Redemption (purchase) of Federal Home Loan Bank of New York stock 15,200 (48,000) 93,200 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (736,057) 13,680,409 15,358,372 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 14
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1994 1995 1996 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net (decrease) increase in deposits $ (21,643,800) $ (7,008,887) $ 1,844,656 Advances from Federal Home Loan Bank of New York 17,000,000 3,000,000 7,000,000 Repayment of advances from Federal Home Loan Bank of New York (10,000,000) (13,000,000) (11,000,000) Repayment of other borrowings (198,375) (212,301) (166,761) (Decrease) in advance payments by borrowers for taxes and insurance (534,427) (135,201) (34,111) Cash dividends paid (1,577,118) (2,375,124) (3,318,121) Purchase of treasury stock -- -- (6,179,188) Proceeds from sales of treasury stock 196,412 721,382 327,973 - -------------------------------------------------------------------------------------------------------------------- Net cash (used in) financing activities (16,757,308) (19,010,131) (11,485,552) - -------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (9,590,086) 1,758,977 7,249,047 Cash and cash equivalents - beginning 21,724,718 12,134,632 13,893,609 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - ending $ 12,134,362 $ 13,893,609 $ 21,142,656 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Supplemental information: (Decrease) in unrealized loss on marketable equity securities, net $ (3,267) $ -- $ -- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Tranfer to securities available for sale from: Marketable equity securities $ 1,455,020 $ -- $ -- Investment securities 16,088,172 3,996,434 -- Mortgage-backed securities 10,914,920 11,050,443 -- - -------------------------------------------------------------------------------------------------------------------- $ 28,458,112 $ 15,046,877 $ -- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Dividend payable $ -- $ 345,000 $ (345,000) - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Unrealized gain (loss) on securities available for sale, net: Application of Statement of Financial Accounting Standards No. 115 $ 291,931 $ -- $ -- Subsequent change (488,687) 155,602 (155,781) - -------------------------------------------------------------------------------------------------------------------- $ (196,756) $ 155,602 $ (155,781) - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Transfer from loans receivable to foreclosed real estate $ 1,438,557 $ 1,189,576 $ 2,175,779 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Loans to facilitate sales of foreclosed real estate $ 762,500 $ 345,000 $ 1,077,800 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Mortgage loan incurred in connection with purchase of premises $ -- $ 325,000 $ -- - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Cash paid during the period for: Income taxes $ 3,387,647 $ 2,705,465 $ 1,941,053 - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Interest on deposits and borrowings $ 10,627,478 $ 11,434,737 $ 11,421,978 - -------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATED FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, Pamrapo Savings Bank, S.L.A., (the "Savings Bank") and the Savings Bank's wholly owned subsidiary, Pamrapo Service Corp., Inc. (the "Service Corp."). The Corporation's business is conducted principally through the Savings Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, the assessment of prepayment risks associated with mortgage-backed securities and the determination of the amount of deferred tax assets which are more likely than not to be realized. Management believes that the allowance for loan losses is adequate, foreclosed real estate is appropriately valued, prepayment risks associated with mortgage- backed securities are properly recognized and all deferred tax assets are more likely than not to be recognized. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowance for loan losses or further writedowns of foreclosed real estate may be necessary based on changes in economic conditions in the market area. Additionally, assessments of prepayment risks related to mortgage-backed securities are based upon current market conditions, which are subject to frequent change. Finally, the determination of the amount of deferred tax assets more likely than not to be realized is dependent on projections of future earnings, which are subject to frequent change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Savings Bank's allowance for loan losses and foreclosed real estate valuations. Such agencies may require the Savings Bank to recognize additions to the allowance for loan losses or additional writedowns on foreclosed real estate based on their judgments about information available to them at the time of their examination. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and amounts due from depository institutions, federal funds sold and interest-bearing deposits in other banks having original maturities of three months or less. Generally, federal funds sold are sold for one-day periods. INVESTMENT AND MORTGAGE-BACKED SECURITIES Pursuant to Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("Statement") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," investments in debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the 16 near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as trading securities nor as held-to-maturity securities are classified as available for sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, reported in a separate component of stockholders' equity. The initial application of Statement No. 115, effective January 1, 1994, resulted in the reclassification of securities totalling $28,458,000 to the available for sale category and the recognition of an unrealized gain, net of deferred income taxes, of $292,000 as a component of stockholders' equity. As permitted by the FASB's "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities," the Savings Bank reassessed the classification of its held-to-maturity portfolios. As a result of such reassessment, the Savings Bank transferred securities with a book value of $15,047,000 and a fair value of $14,837,000, from held-to-maturity to available for sale during the year ended December 31, 1995. In connection with such transfer, an unrecognized loss, net of deferred income taxes, of $134,000 was recognized and classified as a separate component of stockholders' equity. Premiums and discounts on all securities are amortized/accreted using the interest method. Interest and dividend income on securities, which includes amortization of premiums and accretion of discounts, is recognized in the consolidated financial statements when earned. The adjusted cost basis of an identified security sold or called is used for determining security gains and losses recognized in the consolidated statements of income. LOANS RECEIVABLE Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees and discounts. The Savings Bank defers loan origination fees and certain direct loan origination costs and accretes such amounts as an adjustment of yield over the contractual lives of the related loans. Discounts on loans purchased are recognized as income by use of a method which approximates the level-yield method over the terms of the respective loans. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's evaluation. An allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, 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 an accrual status. ALLOWANCE FOR LOAN LOSSES An allowance for loan losses is maintained at a level considered adequate to absorb future loan losses. Management of the Savings Bank, in determining the allowance for loan losses, considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. The Savings Bank utilizes a two tier approach: (1) identification of problem loans and the establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Savings Bank maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such system takes into consideration, among other things, delinquency status, size of loans, type of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified loans based on a review of such information and/or appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including, but not limited to, actual loan loss experience, composition of loan portfolio, current economic conditions and management's judgment. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D Although management believes that adequate specific and general loan loss allowances are established, actual losses are dependent upon future events and, as such, further additions to the allowance for loan losses may be necessary. Effective January 1, 1995, the Savings Bank adopted FASB Statements No. 114, "Accounting by Creditors for Impairment of a Loan," and No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." The provisions of these statements are applicable to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment and loans that are measured at fair value or at the lower of cost or fair value. Loans classified as impaired are to be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan evaluated for impairment is deemed to be impaired when based on current information and events, it is probable that the Savings Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. The Savings Bank does not aggregate such loans for evaluation purposes. Payments received on impaired loans are applied first to accrued interest receivable and then to principal. FORECLOSED REAL ESTATE AND INVESTMENT IN REAL ESTATE Real estate acquired by foreclosure or deed in lieu of foreclosure is initially recorded at the lower of cost or estimated fair value at date of acquisition and subsequently carried at the lower of such initially recorded amount or estimated fair value less estimated costs to sell. Costs incurred in developing or preparing properties for sale are capitalized. Expenses of holding properties and income from operating properties are recorded in operations as incurred or earned. Gains and losses from sales of such properties are recognized as incurred. Real estate held for investment is carried at cost less accumulated depreciation. Income and expense of operating the property is recorded in operations. PREMISES AND EQUIPMENT Premises and equipment are comprised of land, at cost, and buildings, building improvements and furnishings and equipment, at cost, less accumulated depreciation. Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are expensed in the year incurred. Rental income is netted against occupancy expense. INCOME TAXES The Corporation, Savings Bank and Service Corp. file a consolidated federal income tax return. Income taxes are allocated to the Corporation, Savings Bank and Service Corp. based on their respective income or loss included in the consolidated income tax return. Separate state income tax returns are filed by the Corporation, Savings Bank and Service Corp. Federal and state income taxes have been provided on the basis of reported income. The amounts reflected on the Corporation's and subsidiaries' tax returns differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and income tax reporting purposes. INTEREST-RATE RISK The Savings Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to invest in securities, make loans secured by real estate and, to a lesser extent, make consumer loans. The potential for interest-rate risk exists as a result of the 18 generally shorter duration of the Savings Bank's interest-sensitive liabilities compared to the generally longer duration of its interest-sensitive assets. In a rising interest rate environment, liabilities will reprice faster than assets, thereby reducing net interest income. For this reason, management regularly monitors the maturity structure of the Savings Bank's assets and liabilities in order to measure its level of interest-rate risk and to plan for future volatility. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Savings Bank in estimating the fair value of its financial instruments: Cash and cash equivalents and interest receivable: The carrying amounts reported in the consolidated financial statements for cash and cash equivalents and interest receivable approximate their fair values. Securities: The fair value of securities, as well as commitments to purchase securities, is determined by reference to quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: For certain homogeneous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. For other types of loans, fair value is estimated by discounting the future cash flows, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities, of such loans. Deposits: The carrying amounts reported in the consolidated financial statements for non-interest-bearing demand, NOW, Money Market, savings and club accounts approximates their fair values. For fixed-maturity certificates of deposit, fair value is estimated using the rates currently offered for deposits of similar remaining maturities. Advances from Federal Home Loan Bank of New York and other borrowed money: Fair value is estimated using rates currently offered for liabilities of similar remaining maturities, or when available, quoted market prices. Commitments to extend credit: The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. EXCESS OF COST OVER ASSETS ACQUIRED The cost in excess of the fair value of net assets (goodwill) acquired through the acquisition of certain assets and assumption of certain liabilities of branch offices is being amortized to expense over a ten year period by use of the straight-line method. NET INCOME PER COMMON SHARE Net income per common share is based on the weighted average number of common shares actually outstanding plus shares that would be outstanding assuming the exercise of dilutive stock options, all of which are considered to be common stock equivalents. The number of common shares that would be issued from the exercise of stock options has been reduced by the number of common shares that could have been purchased from the proceeds at the average market price of the Corporation's common stock. RECLASSIFICATION Certain amounts for prior periods have been reclassified to conform to the current period's presentation. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D 2. SECURITIES AVAILABLE FOR SALE
DECEMBER 31, 1995 ------------------------------------------------- GROSS UNREALIZED AMORTIZED CARRYING VALUE GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- U.S. Government (including agencies): Due in one year or less $ 6,024,869 $ 39,645 $ 36,374 $ 6,028,140 Due after one year 5,995,366 112,938 - 6,108,304 - ---------------------------------------------------------------------------------------------------- 12,020,235 152,583 36,374 12,136,444 Mortgage-backed securities 16,465,113 24,558 263,401 16,226,270 Equity security 7,020 57,330 - 64,350 - ---------------------------------------------------------------------------------------------------- $28,492,368 $ 234,471 $ 299,775 $28,427,064 - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 ------------------------------------------------- GROSS UNREALIZED AMORTIZED CARRYING VALUE GAINS LOSSES VALUE - ---------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------- U.S. Government (including agencies): Due in one year or less $ 4,002,062 $ 7,572 $ 4,014 $ 4,005,620 Due after one year through five years 2,998,369 18,521 - 3,016,890 Due after ten years 1,000,000 - - 1,000,000 - ---------------------------------------------------------------------------------------------------- 8,000,431 26,093 4,014 8,022,510 Mortgage-backed securities 13,488,179 30,764 449,255 13,069,688 Mutual funds 1,049,198 - - 1,049,198 Equity security 7,020 83,777 - 90,797 - ---------------------------------------------------------------------------------------------------- $22,544,828 $ 140,634 $ 453,269 $22,232,193 - ---------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------
Proceeds from sales of securities available for sale during the year ended December 31, 1994 totalled $1,482,625. Gross gains of $34,625 were realized on those sales. There were no sales of securities available for sale during the years ended December 31, 1995 and 1996. 3. INVESTMENT SECURITIES HELD TO MATURITY
DECEMBER 31, 1995 ------------------------------------------------- GROSS UNREALIZED CARRYING ESTIMATED VALUE GAINS LOSSES FAIR VALUE - ----------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------- Certificate of deposit: Due within one year $ 99,000 $- $- $ 99,000 - ----------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------
There were no sales of securities held to maturity during the years ended December 31, 1994, 1995 and 1996. 20 4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
DECEMBER 31, 1995 -------------------------------------------------- CARRYING GROSS UNREALIZED ESTIMATED VALUE GAINS LOSSES FAIR VALUE - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corporation $77,543,282 $1,130,300 $ 310,790 $78,362,792 Federal National Mortgage Association 18,163,943 154,141 203,429 18,114,655 Government National Mortgage Association 857,358 - 5,316 852,042 - ------------------------------------------------------------------------------------------------------------------ $96,564,583 $1,284,441 $ 519,535 $97,329,489 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1996 -------------------------------------------------- CARRYING GROSS UNREALIZED ESTIMATED VALUE GAINS LOSSES FAIR VALUE - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corporation $76,678,673 $ 579,720 $ 886,400 $76,371,993 Federal National Mortgage Association 19,335,458 73,911 377,430 19,031,939 Government National Mortgage Association 712,414 - 17,061 695,353 - ------------------------------------------------------------------------------------------------------------------ $96,726,545 $ 653,631 $1,280,891 $96,099,285 - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
There were no sales of mortgage-backed securities held to maturity during the years ended December 31, 1994, 1995 and 1996. 5. LOANS RECEIVABLE
DECEMBER 31, 1995 1996 - ------------------------------------------------------------- - ------------------------------------------------------------- Real estate mortgage: One-to-four family $125,988,169 $118,524,480 Multi-family 33,657,539 34,051,393 Commercial 22,519,058 21,604,331 FHA insured and VA guaranteed 1,957,781 1,520,105 - ------------------------------------------------------------- 184,122,547 175,700,309 - ------------------------------------------------------------- Real estate construction 2,859,082 1,590,500 - ------------------------------------------------------------- Land 725,276 395,276 - ------------------------------------------------------------- Consumer: Passbook or certificate 441,229 391,074 Home improvement 501,153 445,890 Equity and second mortgage 31,486,803 30,683,482 Student education 1,690,583 1,350,655 Automobile 1,074,174 1,106,921 Personal 1,188,123 1,157,891 - ------------------------------------------------------------- 36,382,065 35,135,913 - ------------------------------------------------------------- Total 224,088,970 212,821,998 - ------------------------------------------------------------- Less: Loans in process 851,500 465,700 Allowance for loan losses 2,725,000 2,800,000 Deferred loan fees and discounts 2,372,157 2,150,905 - ------------------------------------------------------------- 5,948,657 5,416,605 - ------------------------------------------------------------- $218,140,313 $207,405,393 - ------------------------------------------------------------- - -------------------------------------------------------------
At December 31, 1994, 1995 and 1996, loans serviced by the Savings Bank for the benefit of others totalled approximately $9,032,000, $7,593,000 and $6,240,000, respectively. At December 31, 1994, 1995 and 1996, nonaccrual loans for which interest has been discontinued totalled approximately $9,225,000, $7,624,000 and $6,928,000, respectively. During the years ended December 31, 1994, 1995 and 1996, the Savings Bank recognized interest income of approximately $451,000, $260,000 and $172,000, respectively, on these loans. Interest income that would have been recorded, had the loans been on the accrual status, would have amounted to approximately $934,000, $745,000 and $665,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The Savings Bank is not committed to lend additional funds to the borrowers whose loans have been placed on nonaccrual status. The following is an analysis of the allowance for loan losses:
YEAR ENDED DECEMBER 31, 1994 1995 1996 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Balance, beginning $4,000,000 $ 3,650,000 $2,725,000 Provisions charged to operations 494,659 411,301 644,466 Recoveries credited to allowance 66,039 5,174 68,906 Loan losses charged to allowance (910,698) (1,341,475) (638,372) - ------------------------------------------------------------------------- Balance, ending $3,650,000 $ 2,725,000 $2,800,000 - ------------------------------------------------------------------------- - -------------------------------------------------------------------------
Impaired loans and related amounts recorded in the allowance for loan losses are summarized as follows: DECEMBER 31, 1995 1996 - ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- Recorded investment in impaired loans: With recorded allowances $ 1,679,109 $2,363,504 Without recorded allowances 5,895,521 4,569,944 - ----------------------------------------------------------------------------- Total impaired loans 7,574,630 6,933,448 Related allowance for loan losses 520,109 839,504 - ----------------------------------------------------------------------------- Net impaired loans $ 7,054,521 $6,093,944 - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D The activity with respect to loans to directors, officers and associates of such persons, is as follows:
YEAR ENDED DECEMBER 31, 1994 1995 1996 - ------------------------------------------------------------------- - ------------------------------------------------------------------- Balance, beginning $ 3,037,599 $ 3,347,813 $ 2,939,661 Loans originated 774,500 65,000 1,034,065 Collection of principal (604,716) (135,622) (631,865) Persons newly associated 648,074 - - Persons no longer associated (507,644) (337,530) - - ------------------------------------------------------------------- Balance, ending $ 3,347,813 $ 2,939,661 $ 3,341,861 - ------------------------------------------------------------------- - -------------------------------------------------------------------
6. PREMISES AND EQUIPMENT
DECEMBER 31, 1995 1996 - ---------------------------------------------------------------- - ---------------------------------------------------------------- Land $ 929,768 $ 987,649 - ---------------------------------------------------------------- Buildings and improvements 3,239,428 3,248,967 Less accumulated depreciation 1,093,123 1,201,684 - ---------------------------------------------------------------- 2,146,305 2,047,283 - ---------------------------------------------------------------- Furnishings and equipment 3,752,519 3,909,753 Less accumulated depreciation 3,111,807 3,313,857 - ---------------------------------------------------------------- 640,712 595,896 - ---------------------------------------------------------------- $ 3,716,785 $3,630,828 - ---------------------------------------------------------------- - ----------------------------------------------------------------
Depreciation expense for the years ended December 31, 1994, 1995 and 1996 totalled approximately $304,000, $300,000 and $311,000, respectively. Depreciation charges are computed on the straight-line method over the following estimated useful lives:
- ------------------------------------------------------ - ------------------------------------------------------ Buildings and improvements 10 to 50 years Furnishings and equipment 3 to 10 years - ------------------------------------------------------ - ------------------------------------------------------
7. INTEREST RECEIVABLE
DECEMBER 31, 1995 1996 - ------------------------------------------------------------ - ------------------------------------------------------------ Loans, net of allowance for uncollected interest of approximately $204,000 and $263,000, respectively $ 1,966,020 $ 1,728,159 Mortgage-backed securities 785,485 747,692 Investments and other interest-earning assets 202,751 201,192 - ------------------------------------------------------------ $ 2,954,256 $ 2,677,043 - ------------------------------------------------------------ - ------------------------------------------------------------
8. DEPOSITS
DECEMBER 31, ------------------------------------------------------------------- 1995 1996 ------------------------------------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE RATE AMOUNT PERCENT RATE AMOUNT PERCENT - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Non-interest-bearing demand 0.00% $ 9,789,138 3.28 0.00% $ 8,319,593 2.77 NOW 2.50% 17,968,941 6.01 2.50% 17,387,150 5.78 Money Market 2.69% 22,772,677 7.62 2.98% 22,151,982 7.36 Savings and club 2.74% 113,071,625 37.83 2.74% 116,711,907 38.80 Certificates of deposit 5.03% 135,298,383 45.26 5.02% 136,214,788 45.29 - ------------------------------------------------------------------------------------------------------------------- 3.67% $ 298,900,764 100.00 3.69% $ 300,785,420 100.00 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
The scheduled maturities of certificates of deposit are as follows:
(IN THOUSANDS) DECEMBER 31, ---------------------------- MATURITY PERIOD 1995 1996 - -------------------------------------------------------- - -------------------------------------------------------- One year or less $ 109,721 $ 112,663 After one to three years 21,311 18,850 After three years 4,266 4,702 - -------------------------------------------------------- $ 135,298 $ 136,215 - -------------------------------------------------------- - --------------------------------------------------------
Certificates of deposit of $100,000 or more by the time remaining until maturity are as follows:
(IN THOUSANDS) DECEMBER 31, ----------------------------- MATURITY PERIOD 1995 1996 - --------------------------------------------------------- - --------------------------------------------------------- Three months or less $ 5,655 $ 5,237 After three through six months 5,533 5,753 After six through twelve months 3,360 5,807 After twelve months 4,541 3,237 - --------------------------------------------------------- $ 19,089 $ 20,034 - --------------------------------------------------------- - ---------------------------------------------------------
22 A summary of interest on deposits follows:
YEAR ENDED DECEMBER 31, 1994 1995 1996 - ----------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------- Demand $ 1,198,423 $ 1,076,669 $ 1,078,983 Savings and club 3,835,214 3,316,174 3,166,105 Certificates of deposit 4,996,572 6,357,405 6,939,953 - ----------------------------------------------------------------------------------------- 10,030,209 10,750,248 11,185,041 - ----------------------------------------------------------------------------------------- Less penalties for early withdrawal of certificates of deposit (21,057) (16,596) (10,346) - ----------------------------------------------------------------------------------------- $ 10,009,152 $ 10,733,652 $ 11,174,695 - ----------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------
9. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
DECEMBER 31, ------------------------------------------------------------- 1995 1996 ------------------------------------------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE INTEREST INTEREST DECEMBER 31, RATE AMOUNT RATE AMOUNT - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- 1996 6.55% $ 7,000,000 - % $ - 1999 - % - 6.47% 3,000,000 2001 5.10% 243,100 5.10% 243,100 2003 4.62% 340,000 4.62% 340,000 - ----------------------------------------------------------------------------------------------------------- 6.42% $ 7,583,100 6.20% $ 3,583,100 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
At December 31, 1995 and 1996, the advances were secured by pledges of the Savings Bank's investment in the capital stock of the Federal Home Loan Bank of New York totalling $3,072,600 and $2,979,400, respectively, and a blanket assignment of the Savings Bank's unpledged qualifying mortgage loans, mortgage- backed securities and securities portfolios. 10. OTHER BORROWED MONEY
DECEMBER 31, ------------------------------------------------------------- 1995 1996 ------------------------------------------------------------- INTEREST INTEREST RATE AMOUNT RATE AMOUNT - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------- Employee Stock Ownership Plan debt 6.80% $148,781 - % $ - Mortgage loan 8.00% 311,074 8.00% 293,094 - ----------------------------------------------------------------------------------------------------------- 7.61% $459,855 8.00% $293,094 - ----------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------
The Employee Stock Ownership Plan debt bore an interest rate equal to 80% of the lender's prime rate, required equal quarterly principal installments over a seven year period and matured during 1996. The mortgage loan is payable in 144 equal monthly installments of $3,518 through February 1, 2007 and is secured by premises with a carrying value of $395,000 and $405,000 at December 31, 1995 and 1996, respectively. 11. STOCK REPURCHASE PROGRAM During the year ended December 31, 1996, the Corporation repurchased 294,000 shares of its own common stock, at prices ranging from $18.75 to $23.00 per common share, at a total cost of $6,179,188 under stock repurchase programs approved by the Corporation's Board of Directors. 12. REGULATORY CAPITAL For the purpose of granting to eligible account holders a priority in the event of future liquidation, the Savings Bank, at the time of conversion, established a special account in an amount equal to its total retained earnings of $18.4 million at June 30, 1989. In the event of a future liquidation of the converted Savings Bank (and only in such event), an eligible account holder who continues to maintain his deposit account shall be entitled to receive a distribution from the special account. The total amount of the special account is decreased (but never increased) in an amount proportionately corresponding to decreases in the deposit account balances of eligible account holders as of each subsequent year end. After conversion, no dividends may be paid to stockholders if such dividends would reduce the retained earnings of the converted Savings Bank below the amount required by the special account. The Savings Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material adverse effect on the Savings Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Savings Bank must meet specific capital guidelines that involve quantitative measures of the Savings Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Savings Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Office of Thrift Supervision ("OTS") has prescribed capital requirements which include three separate measurements of capital adequacy: a leverage-ratio capital standard ("Core"), a tangible capital 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D standard and a risk-based capital standard (collectively known as the "Capital Rule"). The Capital Rule requires each savings institution to maintain tangible capital equal to at least 1.5% of its tangible assets and core capital equal to at least 3.0 % of its adjusted total assets. The Capital Rule further requires each savings institution to maintain total capital equal to at least 8.0% of its risk-weighted assets. The following table sets forth the capital position of the Savings Bank as calculated as of December 31, 1996:
TANGIBLE CORE RISK-BASED AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- Capital as calculated under GAAP $46,954 13.01 $46,954 13.01 $46,954 26.10 Deduct investment in nonincludable subsidiary and goodwill (1,711) (0.47) (1,711) (0.47) (1,711) (0.95) Add: Unrealized loss on securities available for sale 197 0.05 197 0.05 197 0.11 Add qualifying general loan loss allowance, as limited by regulation - - - - 1,960 1.09 - ---------------------------------------------------------------------------------------------------------- Capital, as calculated 45,440 12.59 45,440 12.59 47,400 26.35 Capital, as required 5,412 1.50 10,824 3.00 14,389 8.00 - ---------------------------------------------------------------------------------------------------------- Excess $40,028 11.09 $34,616 9.59 $33,011 18.35 - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") imposes increased requirements on the operations of financial institutions and mandated the development of regulations designed to empower regulators to take prompt corrective action with respect to institutions that fall below certain capital standards. FDICIA stipulates that an institution with less than 4% core capital is deemed to be undercapitalized. Quantitative measures established by FDICIA to ensure capital adequacy require the Savings Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 1996, that the Savings Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1995, the most recent notification from the OTS, the Savings Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Savings Bank must maintain minimum total, risk-based and Tier I leverage ratios of 10%, 6% and 5%, respectively. There are no conditions existing or events which have occurred since notification that management believes have changed the institution's category. 13. BENEFIT PLANS PENSION PLAN The Savings Bank has a non-contributory defined benefit pension plan covering all eligible employees. The benefits are based on years of service and employees' compensation. The Savings Bank's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. The Plan's assets consist primarily of mutual funds and bank deposits. The following tables set forth the plan's funded status and components of net periodic pension cost:
DECEMBER 31, ------------------------- 1995 1996 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Actuarial present value of benefit obligation including vested benefits of $2,007,656 (1995) and $2,315,961 (1996) $ 2,093,489 $ 2,364,277 - ---------------------------------------------------------------------------- - ---------------------------------------------------------------------------- Projected benefit obligation $(2,854,159) $(3,132,480) Plan assets at fair value 2,254,688 2,535,533 - ---------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets (599,471) (596,947) Unrecognized net loss 476,763 477,948 Unrecognized transition obligation as of January 1, 1990, being amortized over 7.7 years 87,478 36,391 - ---------------------------------------------------------------------------- Accrued pension cost $ (35,230) $ (82,608) - ---------------------------------------------------------------------------- - ----------------------------------------------------------------------------
24
YEAR ENDED DECEMBER 31, --------------------------------------- 1994 1995 1996 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------ Net periodic pension cost included the following components: Service cost $ 133,870 $ 155,522 $ 173,312 Interest cost 167,172 195,253 208,321 Actual return on plan assets (25,051) (295,446) (116,162) Net amortization and deferral (44,520) 231,160 6,504 - ------------------------------------------------------------------------------------------ Net periodic pension cost $ 231,471 $ 286,489 $ 271,975 - ------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------
Assumptions used in the accounting for the plan are as follows: YEAR ENDED DECEMBER 31, --------------------------------------- 1994 1995 1996 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Discount rate 7.50% 7.50% 7.50% Rate of increase in compensation 4.50% 4.50% 4.50% Long-term rate of return on plan assets 7.50% 7.50% 7.50% - ------------------------------------------------------------------------ - ------------------------------------------------------------------------
SAVINGS AND iNVESTMENT PLAN (THE "PLAN") The Savings Bank sponsors a Plan pursuant to Section 401(k) of the Internal Revenue Code, for all eligible employees. Employees may elect to save up to 10% of their compensation of which the Savings Bank will match 50% of the employee's contribution. The Plan expense amounted to approximately, $85,000, $92,000 and $109,000 for the years ended December 31, 1994, 1995 and 1996, respectively. MANAGEMENT RECOGNITION AND RETENTION PLAN AND TRUST ("MRP") In connection with the stock conversion, the Savings Bank established the MRP in a manner to encourage key employees to remain with the Savings Bank. During the year ended December 31, 1990, the Savings Bank contributed funds to the MRP to subscribe for 45,000 shares of common stock at market prices prevailing at the time of purchase. Amounts contributed were reflected in the consolidated statements of financial condition as a reduction of stockholders' equity and were amortized over a five year period ending December 31, 1995. EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") The Corporation adopted a tax qualified ESOP for all eligible employees. The ESOP purchased 120,750 shares (241,500 shares after two-for-one stock split adjustment) of the Corporation's common stock at the time of conversion. The funds used to purchase the shares were borrowed from a third party lender (see Note 10). The Corporation, at its discretion, will contribute to the ESOP sufficient funds, as may be necessary, to pay interest and principal on the loan. At December 31, 1995 and 1996, 208,866 and 241,500 shares, respectively, of the Corporation's common stock were available for allocation to employees. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ("SERP") The Savings Bank has an unfunded non-qualified deferred retirement plan for certain employees. A participant who retires at age 65 (the "Normal Retirement Age") is entitled to an annual retirement benefit equal to 75% of the participant's compensation reduced by the participant's retirement plan annual benefits. Participants retiring before the Normal Retirement Age receive the same benefits reduced by a percentage based on years of service to the Savings Bank and the number of years prior to the Normal Retirement Age that participant retires. The SERP expense amounted to approximately $35,000, $35,000 and $76,000 for the years ended December 31, 1994, 1995 and 1996, respectively. 14. STOCK OPTION PLAN In connection with the Savings Bank's conversion from mutual to stock form in November 1989, the Board of Directors adopted a stock option plan which granted options to directors, officers and certain other employees, exercisable over a period not to exceed ten years. Following is a summary of transactions:
NUMBER PRICE OF SHARES PER SHARE - ---------------------------------------------------------- - ---------------------------------------------------------- Balance - December 31, 1993 222,102 $5.75 $6.375 Granted - - Exercised 34,050 5.75 6.375 Cancelled - - - ---------------------------------------------------------- Balance - December 31, 1994 188,052 5.75 6.375 Granted - - Exercised 125,262 5.75 6.375 Cancelled - - - ---------------------------------------------------------- Balance - December 31, 1995 62,790 5.75 6.375 Granted - - Exercised 56,930 5.75 6.375 Cancelled - - - ---------------------------------------------------------- Balance - December 31, 1996 5,860 $5.75 $6.375 - ---------------------------------------------------------- - ----------------------------------------------------------
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D 15. INCOME TAXES The Savings Bank qualifies as a savings institution under the provisions of the Internal Revenue Code and was therefore, prior to January 1, 1996, permitted to deduct from taxable income an allowance for bad debts based upon eight percent of taxable income before such deduction, less certain adjustments. Retained earnings at December 31, 1996, include approximately $6,900,000 of such bad debt, which, in accordance with FASB Statement No. 109, "Accounting for Income Taxes," is considered a permanent difference between the book and income tax basis of loans receivable, and for which income taxes have not been provided. If such amount is used for purposes other than for bad debt losses, including distributions in liquidation, it will be subject to income tax at the then current rate. Refundable income taxes of approximately $130,000 and $1,026,000 at December 31, 1995 and 1996, respectively, are reflected in the consolidated statements of financial condition under the caption "Other Assets." Income taxes payable of approximately $11,000 at December 31, 1995 are reflected in the consolidated statements of financial condition under the caption "Other Liabilities." The tax effects of existing temporary differences which give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows:
DECEMBER 31, ---------------------- 1995 1996 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ DEFERRED TAX ASSETS Allowance for loan losses $ 625,961 $ 595,875 Deferred loan fees 754,328 635,947 Depreciation 41,318 36,375 Reserve for uncollected interest 73,140 94,398 Unrealized loss on securities available for sale 24,150 115,700 Other 17,133 18,219 - ------------------------------------------------------------------------ 1,536,030 1,496,514 Deferred tax liabilities - - - ------------------------------------------------------------------------ Net deferred tax assets $1,536,030 $1,496,514 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------
The components of income taxes are summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------ Current $3,446,681 $2,797,930 $1,027,417 Deferred 389,722 205,290 131,066 - ------------------------------------------------------------------------ $3,836,403 $3,003,220 $1,158,483 - ------------------------------------------------------------------------ - ------------------------------------------------------------------------
The following table presents a reconciliation between the reported income taxes and the income taxes which would be computed by applying the normal federal income tax rate of 34% to income before income taxes:
YEAR ENDED DECEMBER 31, ------------------------------------ 1994 1995 1996 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- Federal income tax $3,744,922 $2,934,516 $1,401,939 Increases (reductions) in income taxes resulting from: Exercise of non-statutory stock options (71,464) (66,060) (315,680) New Jersey savings institution tax, net of federal income tax effect 228,331 173,043 83,714 Other items, net (65,386) (38,279) (11,490) - -------------------------------------------------------------------------- Effective income tax $3,836,403 $3,003,220 $1,158,483 - -------------------------------------------------------------------------- - --------------------------------------------------------------------------
16. LEGISLATIVE MATTERS On September 30, 1996, legislation was enacted which, among other things, imposed a special one-time assessment on Savings Association Insurance Fund ("SAIF") member institutions, including the Savings Bank, to recapitalize the SAIF and spread the obligation for payment of Financial Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF") members. The special assessment levied amounted to 65.7 basis points on SAIF assessable deposits held as of March 31, 1995. The special assessment was recognized in the third quarter of 1996 and is tax deductible. The Savings Bank took a charge of $2,023,000 as a result of the special assessment. This legislation will eliminate the substantial disparity between the amount that BIF and SAIF members had been paying for deposit insurance premiums. 26 Beginning on January 1, 1997, the FDIC has estimated that, in addition to normal deposit insurance premiums, BIF members will pay a portion of the FICO payment equal to 1.3 basis points on BIF-insured deposits compared to 6.4 basis points by SAIF members on SAIF-insured deposits. All institutions will pay a pro-rata share of the FICO payment on the earlier of January 1, 2000 or the date upon which the last savings association ceases to exist. The legislation also requires BIF and SAIF to be merged by January 1, 1999 provided that subsequent legislation is adopted to eliminate the saving association charter and no savings associations remain as of that time. The FDIC has recently lowered SAIF assessments to a range comparable to that of BIF members, although SAIF members must also make the FICO payments described above. Management cannot predict the precise level of FDIC insurance assessments on an ongoing basis or whether the BIF and SAIF will eventually be merged. The Deposit Insurance Funds Act provides that the BIF and SAIF will merge on January 1, 1999 if there are no more savings associations as of that date. That legislation also requires that the Department of Treasury submit a report to Congress by March 31, 1997 that makes recommendations regarding a common financial institutions charter, including whether the separate charters for thrifts and banks should be abolished. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter and abolish the OTS have been introduced in Congress. The bills would require federal savings institutions to convert to a national bank or some type of state charter by a specified date (January, 1998 in one bill, June 30, 1998 in the other) or they would automatically become national banks. Converted federal thrifts would generally be required to conform their activities to those permitted for the charter selected and divestiture of nonconforming assets would be required over a two year period, subject to two possible one year extensions. State chartered thrifts would become subject to the same federal regulation as applies to state commercial banks. Holding companies for savings institutions would become subject to the same regulation as holding companies that control commercial banks, with a limited grandfather provision for unitary savings and loan holding company activities. The Savings Bank is unable to predict whether such legislation would be enacted, the extent to which the legislation would restrict or disrupt its operations or whether the BIF and SAIF funds will eventually merge. 17. COMMITMENTS The Savings Bank is party to financial instruments with off-balance sheet risk in the normal course of business primarily to meet the financing needs of its customers. These financial instruments include commitments to originate loans and purchase securities. The commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statement of financial condition. The Savings Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notational amount of those instruments. The Savings Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn upon, the 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D total commitment amounts do not necessarily represent future cash requirements. The Savings Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Savings Bank, upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held varies but primarily includes residential real estate and income-producing commercial properties. Commitments to purchase securities are contracts for delayed delivery of securities in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates The Savings Bank had loan commitments outstanding as follows:
DECEMBER 31, 1995 1996 - -------------------------------------------------- - -------------------------------------------------- To originate loans $5,413,000 $3,499,000 - -------------------------------------------------- - --------------------------------------------------
At December 31, 1996, all outstanding commitments to originate loans are at fixed interest rates which range from 6.75% to 9.25%. All commitments are due to expire within ninety days. At December 31, 1996, the Savings Bank had a commitment to purchase a mortgage- backed security for $1,011,000. This security carries a fixed interest rate of 7.00% and matures on January 1, 2012. Rental expenses related to the occupancy of premises totalled $87,000, $60,000 and $70,000 for the years ended December 31, 1994, 1995 and 1996, respectively. At December 31, 1996, minimum non-cancellable obligations under lease agreements with original terms of more than one year are as follows:
DECEMBER 31, AMOUNT - --------------------------- - --------------------------- 1997 $ 70,000 1998 70,000 1999 70,000 2000 70,000 2001 70,000 Thereafter 537,000 - --------------------------- $887,000 - --------------------------- - ---------------------------
18. CONTINGENCIES On February 15, 1994, Bank Polska Kasa Opieki, S.A. ("Pekao") filed an action against the Savings Bank and Chemical Bank ("Chemical") in the United States District Court for the District of New Jersey. The suit arises out of a $2 million check drawn by Pekao, certified by Chemical, and accepted for deposit at the Savings Bank. In accepting the check for deposit, the Savings Bank relied both upon representations made by a local attorney, Donald J. Meliado, Esq. ("Meliado"), and upon Chemical's certification of the check. Pekao alleges that the endorsement on the check was fraudulent and resulted in its losing $2 million, plus interest and costs, and that the losses are the responsibility of Chemical and the Savings Bank. Chemical filed a cross-claim against the Savings Bank on or about May 5, 1994. On May 11, 1994, the Savings Bank filed an Answer to the Complaint as well as a counterclaim against Pekao, cross-claim against Chemical and Third-Party Complaint against Meliado that deny that the Savings Bank is responsible for any of the losses sustained by Pekao. In the counterclaim, the Savings Bank alleges that Pekao's own conduct resulted in the loss and requests that Pekao indemnify the Savings Bank for any losses sustained by the Savings Bank in the suit. Against Chemical, the cross-claim alleges that Chemical is responsible to the Savings Bank for any losses sustained as a result of the certification. The Third-Party Complaint alleges that the Savings Bank relied upon Meliado's representations concerning the check and requests indemnification and contribution to the Savings Bank for any losses. On December 11, 1995, the Court granted the Savings Bank's motion for partial summary judgment dismissing Pekao's claims against the Savings Bank. On the same date, the Court also denied Meliado's motion for summary judgment against the Savings Bank. The Savings Bank's cross-claim 28 against Chemical was dismissed by the Court on February 2, 1995. As a result of these rulings, the only claims remaining are (i) Pekao's direct claims against Chemical; (ii) Chemical's cross-claim against the Savings Bank for indemnification and counsel fees; and (iii) the Savings Bank's claim for indemnification against Meliado. Pretrial discovery is ongoing. The Savings Bank is contesting liability, which at this point could only arise if Pekao succeeds on its claims against Chemical. In that connection, Chemical has substantial defenses which, if successful, would result in a judgment in its favor dismissing Pekao's claim against it. The Savings Bank has also made a demand upon its insurance carrier for reimbursement of any losses, including all counsel fees, ultimately sustained by the Savings Bank. The insurance carrier has preliminarily denied coverage, but has indicated a willingness to settle. There is currently pending before the Court cross-motions for summary judgment both by Chemical and by Pekao. It is anticipated that the motions will be argued in late March 1997. In the interim, all parties are exploring settlement as to the litigation. In addition, the Savings Bank is also exploring settlement of the insurance coverage issues. Although the Savings Bank believes it will ultimately obtain a favorable resolution both as to the litigation and the insurance coverage issue, both the outcome of the litigation and the Savings Bank's demand for insurance coverage cannot be predicted at this time. The Savings Bank is also a party to litigation which arises primarily in the ordinary course of business. In the opinion of management, the ultimate disposition of such litigation should not have a material effect on the consolidated financial position of the Savings Bank or the Corporation. 19. FAIR VALUES OF FINANCIAL INSTRUMENTS The carrying amounts and fair value of the Corporation's financial instruments are as follows:
DECEMBER 31, -------------------------------------------- 1995 1996 -------------------------------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE - ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- FINANCIAL ASSETS Cash and cash equivalents $ 13,894 $ 13,894 $ 21,143 $ 21,143 Securities available for sale 28,427 28,427 22,232 22,232 Investment securities held to maturity 99 99 - - Mortgage-backed securities held to maturity 96,565 97,329 96,727 96,099 Loans receivable 218,140 223,488 207,405 212,285 Interest receivable 2,954 2,954 2,677 2,677 FINANCIAL LIABILITIES Deposits $298,901 $299,613 $300,785 $301,550 Advances and other borrowed money 8,043 8,027 3,876 3,881 COMMITMENTS To originate loans 5,413 5,413 3,499 3,499 To purchase mortgage-backed securities - - 1,011 1,011 - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONT'D The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, the foregoing estimates may not reflect the actual amount that could be realized if all or substantially all of the financial instruments were offered for sale. In addition, the fair value estimates were based on existing on-and-off balance sheet financial instruments without attempting to value anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include mortgage servicing rights, premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values. 20. PARENT CORPORATION FINANCIAL INFORMATION The following condensed financial statements of the Corporation should be read in conjunction with the Notes to Consolidated Financial Statements. STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, -------------------------- 1995 1996 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Assets Cash and cash equivalents $ 1,166,462 $ 3,007,318 Investment in subsidiary 52,445,992 46,953,894 Loan receivable 6,000,000 3,000,000 Refundable income taxes 116,831 525,050 Other assets 53,195 84,844 - ------------------------------------------------------------------------- Total assets $59,782,480 $53,571,106 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Liabilities and stockholders' equity - ------------------------------------------------------------------------- Liabilities - ------------------------------------------------------------------------- Dividend payable $ 345,000 $ - Other liabilities 62,051 62,145 - ------------------------------------------------------------------------- Total liabilities 407,051 62,145 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Stockholders' equity Common stock 34,500 34,500 Paid-in-capital in excess of par value 18,906,768 18,906,768 Retained earnings - substantially restricted 41,243,277 40,747,283 Debt of Employee Stock Ownership Plan (148,781) - Treasury stock, at cost (660,335) (6,179,590) - ------------------------------------------------------------------------- Total stockholders' equity 59,375,429 53,508,961 - ------------------------------------------------------------------------- Total liabilities and stockholders' equity $59,782,480 $53,571,106 - ------------------------------------------------------------------------- - -------------------------------------------------------------------------
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, --------------------------------------- 1994 1995 1996 - ------------------------------------------------------------------------- - ------------------------------------------------------------------------- Dividends from subsidiary $ 6,000,000 $ - $ 8,400,000 Interest income 5,441 5,578 305,752 - ------------------------------------------------------------------------- Total income 6,005,441 5,578 8,705,752 Expenses 232,306 368,249 663,855 - ------------------------------------------------------------------------- 5,773,135 (362,671) 8,041,897 Equity in undistributed earnings of subsidiary 1,259,211 5,875,821 (5,485,098) - ------------------------------------------------------------------------- Income before income taxes (benefit) 7,032,346 5,513,150 2,556,799 Income taxes (benefit) (145,728) (114,648) (408,069) - ------------------------------------------------------------------------- Net income $ 7,178,074 $ 5,627,798 $ 2,964,868 - ------------------------------------------------------------------------- - -------------------------------------------------------------------------
30 SATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------------------------- 1994 1995 1996 - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 7,178,074 $ 5,627,798 $ 2,964,868 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed earnings of subsidiary (1,259,211) (5,875,821) 5,485,098 (Increase) decrease in refundable income taxes 111,440 31,808 (408,219) (Increase) in other assets (19,778) (33,417) (31,649) Increase in other liabilities 13,168 14,083 94 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 6,023,693 (235,549) 8,010,192 - --------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: (Increase) decrease in loans receivable - (6,000,000) 3,000,000 - --------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities - (6,000,000) 3,000,000 - --------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Cash dividends paid (1,577,118) (2,375,124) (3,318,121) Purchase of treasury stock - - (6,179,188) Sale of treasury stock 196,412 721,382 327,973 - --------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (1,380,706) (1,653,742) (9,169,336) - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 4,642,987 (7,889,291) 1,840,856 Cash and cash equivalents - beginning 4,412,766 9,055,753 1,166,462 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - ending $ 9,055,753 $ 1,166,462 $ 3,007,318 - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA) FIRST SECOND THIRD FOURTH YEAR ENDED DECEMBER 31, 1995 QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Interest income $ 7,422 $ 7,349 $ 7,430 $ 7,370 Interest expense 2,780 2,869 2,892 2,915 - -------------------------------------------------------------------------------------------------------- Net interest income 4,642 4,480 4,538 4,455 Provision for loan losses 100 100 100 111 Non-interest income 186 159 153 237 Non-interest expenses 2,372 2,438 2,350 2,648 Income taxes 814 731 781 677 - -------------------------------------------------------------------------------------------------------- Net income $ 1,542 $ 1,370 $ 1,460 $ 1,256 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Net income per common share and common stock equivalents $ 0.46 $ 0.40 $ 0.42 $ 0.37 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Dividends per common share $ 0.175 $ 0.175 $ 0.175 $ 0.275 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
(IN tHOUSANDS, EXCEPT FOR PER SHARE DATA) FIRST SECOND THIRD FOURTH YEAR ENDED DECEMBER 31, 1995 QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Interest income $ 7,175 $ 6,990 $ 6,997 $ 6,873 Interest expense 2,903 2,816 2,819 2,843 - -------------------------------------------------------------------------------------------------------- Net interest income 4,272 4,174 4,178 4,030 Provision for loan losses 150 150 150 194 Non-interest income 159 157 148 186 Non-interest expenses 2,865 2,551 4,755 2,365 Income taxes 212 588 (206) 565 - -------------------------------------------------------------------------------------------------------- Net income (loss) $ 1,204 $ 1,042 $ (373) $ 1,092 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Net income (loss) per common share and common stock equivalents $ 0.35 $ 0.32 $ (0.11) $ 0.34 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- Dividends per common share $ 0.225 $ 0.225 $ 0.225 $ 0.225 - -------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------
31 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF PAMRAPO BANCORP, INC. We have audited the consolidated statements of financial condition of Pamrapo Bancorp, Inc. (the "Corporation") and Subsidiaries as of December 31, 1995 and 1996 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the above mentioned consolidated financial statements present fairly, in all material respects, the financial position of Pamrapo Bancorp, Inc. and Subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Radics & Co., LLC February 7, 1997 Pine Brook, New Jersey 32 SELECTED CONSOLIDATED FINANCIAL CONDITION AND OTHER DATA OF THE CORPORATION
AT DECEMBER 31, ---------------------------------------------------------- (DOLLARS IN THOUSANDS) 1992 1993 1994 1995 1996 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION DATA: Total amount of: Assets $ 399,761 $ 394,167 $384,085 $371,365 $362,910 Loans receivable 215,887 215,396 222,472 218,140 207,405 Securities available for sale -- -- 19,471 28,427 22,232 Mortgage-backed securities 120,394 123,213 114,032 96,565 96,727 Investment securities 18,834(1) 19,635(1) 2,096(1) 99 -- Deposits 332,235 327,553 305,910 298,901 300,785 Advances and other borrowed money 12,987 11,129 17,930 8,043 3,876 Stockholders' equity 44,651 49,535 55,372 59,375 53,509 ---------------------------------------------------------- YEAR ENDED DECEMBER 31, (DOLLARS IN THOUSANDS) 1992 1993 1994 1995 1996 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- OPERATING DATA: Interest income $ 33,619 $ 32,070 $ 30,466 $ 29,571 $ 28,035 Interest expense 16,764 11,967 10,626 11,456 11,381 - --------------------------------------------------------------------------------------------------------------- Net interest income 16,855 20,103 19,840 18,115 16,654 Provision for loan losses 1,933 1,224 495 411 644 Non-interest income 768 749 785 735 649 Non-interest expenses 9,098 9,485 9,116 9,808 12,536 Income taxes 2,368 3,496 3,836 3,003 1,158 - --------------------------------------------------------------------------------------------------------------- Net income $ 4,224 $ 6,647 $ 7,178 $ 5,628 $ 2,965 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Net income per share(2) $ 1.26 $ 1.98 $ 2.12 $ 1.65 $ 0.90 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Dividends per share (2) $ .200 $ .311 $ .485 $ .800 $ .900 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Dividend payout ratio 15.57% 15.12% 21.97% 48.33% 100.28% - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- AT OR FOR THE YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS: Return on average assets 1.06% 1.69% 1.82% 1.49% 0.81% Return on average equity 9.93 14.22 13.43 9.71 5.27 Average equity/average assets 10.72 11.87 13.55 15.40 15.33 Interest rate spread 4.07 5.00 4.86 4.51 4.23 Net yield on average interest-earning assets 4.49 5.39 5.30 5.10 4.81 Non-interest expenses to average assets 2.29 2.41 2.31 2.61 3.41 Equity/total assets 11.17 12.57 14.42 15.99 14.74 Capital ratios: Tangible 10.15 10.98 11.56 13.69 12.59 Core 10.15 10.98 11.56 13.69 12.59 Risk-based 23.08 24.41 24.59 28.53 26.35 Non-perfoming loans to total assets 3.47 3.63 3.34 2.93 2.89 Non-performing loans to loans recievable 6.42 6.62 5.77 4.98 5.06 Non-performing assets to total assets 3.76 3.83 3.63 3.32 3.44 Allowance for loan losses to non-performing loans 22.38 28.04 28.45 25.09 26.69 Average interest-earning assets/average interest-bearing liabilities 1.09x 1.12x 1.16x 1.18x 1.18x Net interest income after provision for loan losses to non-interest expense 1.64x 1.99x 2.12x 1.81x 1.28x (1) Includes marketable equity securities (2) Net income and dividends per share have retroactively been adjusted to reflect a two-to-one stock split paid in the form of a stock dividend on the Corporation's common stock on May 12, 1994. - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
34 STOCKHOLDER INFORMATION MARKET FOR COMMON STOCK AND RELATED MATTERS Pamrapo Bancorp, Inc.'s common stock is presently quoted on the National Association of Securities Dealers Automated Quotation's National Market System under the symbol "PBCI." At February 28, 1997, 3,155,964 shares of the Corporation's outstanding common stock were held by approximately 2,100 persons or entities. The following table sets forth the high and low closing sales prices per common shares for the periods indicated. Such prices do not necessarily reflect retail markups, markdowns or commissions.
CLOSING PRICES QUARTER ENDED HIGH LOW - ------------------------------------------------------ - ------------------------------------------------------ March 31, 1995 $22.25 $15.75 June 30, 1995 24.75 20.25 September 30, 1995 26.25 22.25 December 31, 1995 24.25 20.25 March 31, 1996 23.00 20.50 June 30, 1996 21.00 18.25 September 30, 1996 20.00 18.25 December 31, 1996 20.00 18.88 - ------------------------------------------------------ - ------------------------------------------------------ Dividends were paid as follows: - ------------------------------------------------------ - ------------------------------------------------------ March, 1995 $ .175 June, 1995 .175 September, 1995 .175 December, 1995(1) .175 March, 1996 .225 June, 1996 .225 September, 1996 .225 December, 1996 .225 - ------------------------------------------------------ - ------------------------------------------------------
(1) Does not include $.100 special cash dividend declared on December 19, 1995 payable on January 19, 1996. Future dividend policy will be determined by the Board of Directors after giving consideration to the Corporation's financial condition, results of operations, tax status, industry standards, economic conditions and other factors. Dividends will also depend upon dividend payments by the Bank to the Corporation, which is its primary source of income. The Board may also consider the payment of stock dividends from time to time, in addition to, or in lieu of cash dividends. Under federal regulations, the Bank may not declare or pay a cash dividend on any of its common stock if the effect thereof would cause the Bank's regulatory capital to be reduced below the amount required for the liquidation account or the regulatory capital requirements imposed by the Office of Thrift Supervision ("OTS"). The Bank must provide at least 30 days advance notice to the OTS before declaring a dividend. MARKET MAKERS The following companies were making a market in the Corporation's common stock at December 31, 1996: Herzog, Heine, Geduld, Inc. Prudential Securities, Inc. Ryan Beck & Co. Inc. Sandler O'Neill & Partners 35 EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF AUDITORS CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference into the Registration Statement on Form S-8 of Pamrapo Bancorp, Inc. (the "Company") of our report dated February 7, 1997, included in the 1996 Annual Report to stockholders of the Company, which is incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. /s/ Radics & Co., LLC --------------------- Radics & Co., LLC March 26, 1997 Pine Brook, New Jersey EX-27 5 EXHIBIT 27
9 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 12,042,656 9,000,000 100,000 0 22,232,193 96,726,545 96,099,285 210,205,393 2,800,000 362,910,478 300,785,420 3,876,194 4,739,903 0 0 0 34,500 53,474,461 362,910,478 19,191,106 8,229,172 614,239 28,034,517 11,174,695 11,380,632 16,653,885 644,466 0 12,535,873 4,123,351 4,123,351 0 0 2,964,868 .90 .90 8.10 6,927,000 3,565,000 0 1,450,737 2,725,000 638,372 68,906 2,800,000 840,000 0 1,960,000
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