-----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, EajeCkSXCUg/RYVrrvQLn8dQVCZiqeMbx7ln4yM+lmQh6oTdMh8VtumnRTQxhbUY cFeBZCVSzRAjZoyWC0vUig== 0000928385-99-001030.txt : 19990331 0000928385-99-001030.hdr.sgml : 19990331 ACCESSION NUMBER: 0000928385-99-001030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: SEC FILE NUMBER: 000-18014 FILM NUMBER: 99579289 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION 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, 1998 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 $51,776,727 and is based upon the last sales price as quoted on The Nasdaq Stock Market for March 11, 1999. The Registrant had 2,842,924 shares outstanding as of March 11, 1999. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1998 ARE INCORPORATED BY REFERENCE INTO PARTS I AND II OF THIS FORM 10-K. PORTIONS OF THE PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K. 2 INDEX
PAGE ---- PART I Item 1. Business........................................... 4 Item 2. Properties......................................... 38 Item 3. Legal Proceedings.................................. 39 Item 4. Submission of Matters to a Vote of Security Holders 39 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 40 Item 6. Selected Financial Data............................ 40 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 40 Item 8. Financial Statements and Supplementary Data........ 40 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 40 PART III Item 10. Directors and Executive Officers of the Registrant. 41 Item 11. Executive Compensation............................. 41 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 41 Item 13. Certain Relationships and Related Transactions..... 41 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 42 SIGNATURES
3 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 1887 as 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, 1998, the Bank had total assets of $413.2 million, deposits of $332.6 million and stockholders' equity of $42.9 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 eleven retail banking offices, six of which are located in Bayonne, New Jersey, one in Hoboken, New Jersey, one in Fort Lee, New Jersey, two in Brick, New Jersey and one in Jamesburg, 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. 4 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, 1998, the Bank's total gross loans outstanding amounted to $245.4 million, of which $179.3 million consisted of loans secured by one- to four-family residential properties, $7.3 million consisted of construction and land loans, and $55 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 $761,000 million are either insured by the Federal Housing Administration ("FHA") or partially guaranteed by the Veterans Administration ("VA"). 5 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, ----------------------------------------------------------------- 1994 1995 1996 ------------------- ------------------- -------------------- Amount Percent Amount Percent Amount Percent --------- -------- --------- -------- --------- -------- Real estate mortgage loans: Permanent: Fixed-rate........................... $179,492 80.68% $175,034 80.24% $168,727 81.35% Adjustable rate...................... 7,823 3.52 7,131 3.27 5,453 2.63 Construction(1)....................... 3,572 1.60 3,584 1.64 1,986 .96 Guaranteed by VA or insured by FHA....................... 2,404 1.08 1,958 .90 1,520 .73 -------- ------ -------- ------ -------- ------ Total mortgage loans.................. $193,291 86.88 $187,707 86.05 $177,686 85.67 -------- ------ -------- ------ -------- ------ CONSUMER LOANS: Passbook or certificate............... 481 .22 441 .20 391 .19 Home improvement...................... 535 .24 501 .23 446 .22 Equity and second mortgages........... 31,622 14.21 31,487 14.43 30,683 14.79 Education............................. 1,820 .82 1,691 .78 1,351 .65 Automobile............................ 920 .41 1,074 .49 1,107 .53 Personal.............................. 1,302 .59 1,188 .55 1,158 .56 -------- ------ -------- ------ -------- ------ Total consumer loans.................. 36,680 16.49 36,382 16.68 35,136 16.94 -------- ------ -------- ------ -------- ------ Total loans........................... 229,971 103.37 224,089 102.73 212,822 102.61 -------- ------ -------- ------ -------- ------ Less: Allowance for loan losses............. 3,650 1.64 2,725 1.25 2,800 1.35 Loans in process...................... 1,162 .52 852 .39 466 .22 Deferred loan fees and discounts...... 2,687 1.21 2,372 1.09 2,151 1.04 -------- ------ -------- ------ -------- ------ Total................................. 7,499 3.37 5,949 2.73 5,417 2.61 -------- ------ -------- ------ -------- ------ Total net loans....................... $222,472 100.00% $218,140 100.00% $207,405 100.00% ======== ====== ======== ====== ======== ====== MORTGAGE-BACKED SECURITIES: GNMA (2).............................. $ 950 .79% $ 849 .75% $ 707 .65% FHLMC (3) (5)......................... 95,972 79.54 89,234 79.12 86,023 78.34 FNMA (4) (5).......................... 22,769 18.87 22,066 19.56 22,736 20.71 -------- ------ -------- ------ -------- ------ Total mortgage-backed securities...... 119,691 99.20 112,149 99.43 109,466 99.70 ADD/LESS: Premiums (discounts), net (5)......... 1,070 .89 881 .78 749 .68 Unrealized loss on securities available for sale................... (105) (.09) (239) (.21) (419) (.38) -------- ------ -------- ------ -------- ------ Net mortgage-backed securities........ $120,656 100.00% $112,791 100.00% $109,796 100.00% ======== ====== ======== ====== ======== ====== At December 31, ----------------------------------------------------------------- 1997 1998 -------------------------------- -------------------------------- Amount Percent Amount Percent --------------- --------------- --------------- --------------- Real estate mortgage loans: Permanent: Fixed-rate........................... $168,225 79.67% $189,478 79.27% Adjustable rate...................... 6,316 2.99 4,385 1.84 Construction(1)....................... 2,638 1.25 7,258 3.04 Guaranteed by VA or insured by FHA....................... 1,086 .51 761 .32 -------- ------ -------- ------ Total mortgage loans.................. $178,265 84.42 $201,882 84.47 -------- ------ -------- ------ CONSUMER LOANS: Passbook or certificate............... 431 .20 459 .19 Home improvement...................... 440 .21 508 .21 Equity and second mortgages........... 33,587 15.91 39,184 16.40 Education............................. 753 .36 54 .02 Automobile............................ 1,210 .57 1,273 .53 Personal.............................. 1,445 .68 2,033 .85 -------- ------ -------- ------ Total consumer loans.................. 37,866 17.93 43,511 18.20 -------- ------ -------- ------ Total loans........................... 216,131 102.35 245,393 102.67 -------- ------ -------- ------ Less: Allowance for loan losses............. 2,475 1.17 2,300 .96 Loans in process...................... 571 .27 2,409 1.01 Deferred loan fees and discounts...... 1,929 .91 1,674 .70 -------- ------ -------- ------ Total................................. 4,975 2.35 6,383 2.67 -------- ------ -------- ------ Total net loans....................... $211,156 100.00% $239,010 100.00% ======== ====== ======== ====== MORTGAGE-BACKED SECURITIES: GNMA (2).............................. $ 7,978 5.97% $ 5,169 4.08% FHLMC (3) (5)......................... 97,093 72.63 95,209 75.14 FNMA (4) (5).......................... 27,960 20.91 25,676 20.26 -------- ------ -------- ------ Total mortgage-backed securities...... 133,031 99.51 126,054 99.48 ADD/LESS: Premiums (discounts), net (5)......... 790 .59 746 .59 Unrealized loss on securities available for sale................... (135) (.10) (93) (.07) -------- ------ -------- ------ Net mortgage-backed securities........ $133,686 100.00% $126,707 100.00% ======== ====== ======== ======
6 - ------------------ (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 $13,145,000 and a net premium of $344,000 for 1996, a principal balance of $7,498,000 and a net premium of $214,000 for 1997, and a principal balance of $6,228,000 and a net premium of $172,000 for 1998. 7 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, --------------------------------------------------------------------------- 1996 1997 1998 --------------------------------------------------------------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------------ ---------- ---------- ---------- ---------- --------- (In thousands) One-to four-family.................... $151,175 71.04% $155,457 71.93% $179,339 73.08% Multi-family.......................... 34,051 16.00 32,873 15.21 33,718 13.74 Commercial real estate................ 21,604 10.15 21,324 9.86 21,259 8.66 Construction and land................. 1,985 .93 2,638 1.22 7,258 2.96 Consumer-secured and unsecured........ 4,007 1.88 3,839 1.78 3,818 1.56 -------- ------ -------- ------ -------- ------ Total gross loans.................... $212,822 100.00% $216,131 100.00% $245,392 100.00% ======== ====== ======== ====== ======== ======
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, --------------------------------------------- 1996 1997 1998 --------- ---------- ---------- (In thousands) Mortgage Loans (gross): At beginning of period............... $187,707 $177,686 $178,265 -------- -------- -------- Mortgage loans originated: One- to four-family residential..... 10,462 20,250 43,982 Multi-family residential............ 4,654 6,393 9,193 Commercial.......................... 1,477 1,035 3,028 Construction(1)..................... 1,810 2,976 3,302 -------- -------- -------- Total mortgage loans originated 18,403 30,654 59,505 -------- -------- -------- Mortgage loans purchased............. 109 392 1,785 -------- -------- -------- Transfer to REO...................... 2,176 1,419 992 Charge offs.......................... 398 853 327 Repayments........................... 25,959 28,195 36,355 -------- -------- -------- Total mortgage repayments and other reductions................... 28,533 30,467 37,674 -------- -------- -------- At end of period..................... $177,686 $178,265 $201,881 ======== ======== ======== Consumer Loans (gross): At beginning of period............... $ 36,382 $ 35,136 $ 37,866 Consumer loans originated............ 8,102 12,202 19,986 Consumer loans sold.................. 771 685 818 Charge-offs.......................... 240 75 157 Repayments........................... 8,337 8,712 13,366 -------- -------- -------- At end of period $ 35,136 $ 37,866 $ 43,511 ======== ======== -------- Mortgage-backed securities (gross): At beginning of period............... $112,149 $109,466 $133,031 Mortgage-backed securities purchased........................... 12,699 48,959 25,997 Mortgage-backed securities sold...... -- 7,521 -- Repayments........................... 15,382 17,873 32,974 -------- -------- -------- At end of period..................... $109,466 $133,031 $126,054 ======== ======== ========
(1) Includes acquisition and development and land loans. 8 LOAN MATURITY. The following table sets forth the maturity of the Bank's gross loan portfolio at December 31, 1998. The table does not include prepayments or scheduled principal repayments. Prepayments and scheduled principal repayments on mortgage loans totaled $26.0 million $28.1 million, and $34.9 million for the years ended December 31, 1996, 1997 and 1998, respectively.
At December 31, -------------------------------------------------------------------------------------------- One- to four-family Multi-family and residential commercial real Construction Consumer-secured and mortgage loans (1) estate loans Loans (2) unsecured loans Total ------------------------------------------------------------------------------------------- (In thousands) Amounts due: Within 1 year........................ $ 113 $ 191 $5,234 $ 376 $ 5,914 -------- ------- ------ ------ -------- After 1 year: 1 to 3 years......................... 2,072 717 25 757 3,571 3 to 5 years......................... 8,085 3,818 -- 1,058 12,961 5 to 10 years........................ 33,993 14,881 576 862 50,312 10 to 20 years....................... 75,311 32,754 73 765 108,903 Over 20 years........................ 59,765 2,616 1,350 -- 63,731 -------- ------- ------ ------ -------- Total due after 1 year............... 179,226 54,786 2,024 3,442 239,478 -------- ------- ------ ------ -------- Total amounts due..................... $179,339 $54,977 $7,258 $3,818 $245,392 ======== ======= ====== ====== -------- Less: Allowance for loan losses............ 2,300 Loans in process..................... 2,409 Deferred loan fees and discounts..... 1,674 -------- 6,383 -------- Total................................ $239,009 ========
- ------------------- (1) Includes equity and second mortgages. (2) Includes acquisition and development and land loans. 9 The following table sets forth at December 31, 1998, the dollar amount of all mortgage,consumer and construction loans, due after December 31, 1999, which have fixed interest rates or adjustable interest rates:
Due after December 31, 1999 ------------------------------------------------------------------- Fixed Floating or Adjustable Total Due Rates Rates After One Year ------------ ------------------------- ---------------- (In thousands) One- to four-family residential (1)... $172,857 $6,369 $179,226 Construction loans.................... 2,024 -- 2,024 Multi-family and commercial real estate............................... 54,132 654 54,786 Consumer-secured and unsecured loans................................ 3,442 -- 3,442 -------- ------ -------- Totals $232,455 $7,023 $239,478 ======== ====== ========
- ------------------ (1) Includes equity and second mortgages. RESIDENTIAL MORTGAGE LENDING. Pamrapo presently originates first mortgage loans, equity loans, second mortgage loans and improvement loans secured by one- to four-family residences, multi-family residences and commercial real estate. As of December 31, 1998, 94.2% of gross mortgage loans were fixed-rate loans and 5.8% 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, 1998, $213.1 million or 86.8% 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 $179.3 million were one- to four-family and $33.7 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, 1998, the interest rate for one- to four-family residential fixed-rate mortgages offered by the Bank was 6.625% on 15-year loans and 6.875% on 25-year loans. 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 2.0% higher than those offered on one- to four-family residences. 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, 1998, $33.7 million or 13.7% of the Bank's total gross loan portfolio consisted of multi-family residential loans. 10 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. 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, CONSTRUCTION AND LAND 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; (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; and (iv) loans secured by previously owned vacant land are limited to 65%. 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. 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. 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, 1998, the Bank's acquisition, development, construction and land loans varied in size from $15,000 to $1.3 million, net of loans in process, and represented 2.96% of total gross loans. 11 COMMERCIAL REAL ESTATE LENDING. Loans secured by commercial real estate totaled $21.3 million, or 8.7% of the Bank's total gross loan portfolio, at December 31, 1998. 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 collectibility 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 automobile loans, personal loans, passbook loans and educational loans. At December 31, 1998, the balance of such loans was $3.8 million, or 1.55% of the Bank's total gross loan portfolio. 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 $500,000, with the stipulation that loans approved in excess of $350,000 must be reported at the next Board of Directors meeting. The Bank's Vice President and Loan Officer has the authority to approve consumer and equity loans of up to $150,000. 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, 1998 the Bank was servicing $3.8 million of loans for others. There were no new loans sold in 1998 that 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 $1.7 million in deferred origination fees and discounts at December 31, 1998. 12 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. 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, ------------------------------------------------------- 1994 1995 1996 1997 1998 ------- ----------- --------- --------- -------- (In thousands) One- to four-family residential real estate loans: Non-accrual loans.............................. $ 5,122 $ 5,099 $ 4,532 $3,254 $2,064 Accruing loans 90 days overdue................. 2,928 2,326 2,993 1,645 764 ------- ------- ------- ------ ------ Total......................................... 8,050 7,425 7,525 4,899 2,828 ------- ------- ------- ------ ------ Multi-family residential and commercial real estate loans: Non-accrual loans.............................. 2,905 2,014 1,881 1,280 863 Accruing loans 90 days overdue................. 642 890 542 255 335 ------- ------- ------- ------ ------ Total......................................... 3,547 2,904 2,423 1,535 1,198 ------- ------- ------- ------ ------ Construction loans: Non-accrual loans.............................. 686 237 237 185 185 Accruing loans 90 days overdue................. - - - - - ------- ------- ------- ------ ------ Total......................................... 686 237 237 185 185 ------- ------- ------- ------ ------ Consumer loans: Non-accrual loans.............................. 512 274 277 323 334 Accruing loans 90 days overdue................. 33 23 30 7 9 ------- ------- ------- ------ ------ Total......................................... 545 297 307 330 343 ------- ------- ------- ------ ------ Total non-performing loans: Non-accrual loans.............................. 9,225 7,624 6,927 5,042 3,446 Accruing loans 90 days overdue................. 3,603 3,239 3,565 1,907 1,108 ------- ------- ------- ------ ------ Total......................................... $12,828 $10,863 $10,492 $6,949 $4,554 ======= ======= ======= ====== ====== Total foreclosed real estate, net of related ======= ======= ======= ======= ======= Reserves..................................... $ 1,118 $ 1,467 $ 1,996 $1,354 $1,237 ======= ======= ======= ====== ====== Total non-performing loans and foreclosed Real estate to total assets.................. 3.63% 3.32% 3.44% 2.20% 1.40% ======= ======= ======= ====== ======
- ---------------- (1) Includes acquisition and development loans. At December 31, 1996, 1997, and 1998 nonaccrual loans for which interest has been discontinued totaled approximately $6.9 million, $5.0 million, and, $3.4 million, respectively. During the years ended 13 December 31, 1996, 1997 and 1998, the Bank recognized interest income of approximately $172,000, $144,000, and $97,000, respectively, on these loans. Interest income that would have been recorded, had the loans been on the accrual status, would have amounted to approximately $665,000, $491,000, and $333,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The Bank is not committed to lend additional funds to the borrowers whose loans have been placed on nonaccrual status. 14 DELINQUENT LOANS. At December 31, 1996, 1997 and 1998, respectively, delinquencies in the Bank's portfolio were as follows:
At December 31, 1996 At December 31, 1997 ----------------------------------------------- ----------------------------------------------- 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 of Balance of of Balance of of Balance of Loans Loans Loans Loans Loans Loans Loans Loans --------- ------------- -------- ----------- ------- ------------ --------- ------------- Delinquent loans............. 52 $3,660 146 $10,492 42 $2,162 105 $6,949 As a percent of total gross loans....................... 1.72% 4.93% 1.00% 3.22% At December 31, 1998 -------------------------------------------------------- 60 - 89 Days 90 Days or more --------------------------- --------------------------- Number Principal Number Principal of Balance of of Balance of Loans Loans Loans Loans ----------- -------------- ------------ ------------- Delinquent loans............. 28 $1,457 79 $4,554 As a percent of total gross loans....................... .59% 1.86%
15 As of December 31, 1998, the Bank had 79 loans which were 90 days or more past due totaling $4.6 million. The average balance of such loans was approximately $58,000. 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; three of the loans have loan balances greater than $200,000, the largest of which is $241,000. All loans are within the Bank's lending areas. The Bank's level of non-performing loans 90 days or more delinquent decreased from $6.9 million at December 31, 1997 to $4.6 million at December 31, 1998. The total of such loans in the lower risk one- to four-family residential category decreased to $2.8 million or 62.1% of non-performing loans 90 days or more delinquent at December 31, 1998, when compared with $4.9 million, or 70.5% at December 31, 1997. Non-performing multi-family residential, commercial real estate and construction loans, loans normally having greater elements of risk, decreased from $1.7 million at December 31, 1997, to $1.4 million at December 31, 1998, which represents a decrease of 17.6%. The decrease in non-performing loans can be attributed to the Bank's continued 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, has 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 collectibility 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 $5.5 million of its assets as substandard and approximately $691,000 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, 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, 1998, the allowance for loan losses totaled $2.3 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 16 changes in the nature and volume of its loan activity. Such evaluation, which includes a review of all loans of which full collectibility 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, 1996, 1997 and 1998, gross charge-offs totaled $638,000, $928,000, and $484,000, 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, ---------------------------------------------------- 1994 1995 1996 1997 1998 ------ ------ ------ ------ ------ (In thousands) Balance at beginning of period.............. $4,000 $3,650 $2,725 $2,800 $2,475 Provision for loan losses................... 495 411 644 586 292 Charge-offs: Real estate mortgage loans................. 879 1,008 404 853 327 Consumer loans............................. 32 333 234 75 157 Recoveries................................. 66 5 69 17 17 ------ ------ ------ ------ ------ Net charge-offs............................. 845 1,336 569 911 467 ------ ------ ------ ------ ------ Balance at end of period.................... $3,650 $2,725 $2,800 $2,475 $2,300 ====== ====== ====== ====== ====== Ratio of net charge offs during the period to average loans receivable during the period.......................... .38% .61% .27% .44% .21% Ratio of allowance for loan losses to total outstanding loans (gross) at the end of period.......................... 1.59% 1.22% 1.32% 1.14% .94% Ratio of allowance for loan losses to non-performing loans.................... 28.45% 25.09% 26.69% 35.62% 50.51%
17 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, 1994 1995 1996 1997 1998 ------------------------------------------------ Amount Amount Amount Amount Amount ------------------------------------------------ (Dollars in thousands) Real estate mortgage loans (1)........ $3,050 $2,325 $2,450 $2,075 $1,900 Consumer loans........................ 600 400 350 400 400 ------ ------ ------ ------ ------ Total allowance...................... $3,650 $2,725 $2,800 $2,475 $2,300 ====== ====== ====== ====== ======
- ----------------- (1) Includes equity and second mortgages. 18 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 GNMA, FNMA or FHLMC and have coupon rates as of December 31, 1998 ranging from 5.10% to 10.00%. At December 31, 1998 the unamortized principal balance of mortgage-backed securities, both held to maturity and available for sale, totaled $126.1 million or 30.5% of total assets. The carrying value of such securities amounted to $109.8 million, $133.7 million and $126.7 million at December 31, 1996, 1997 and 1998, respectively, and the fair market value of such securities totaled approximately $109.2 million, $135.4 million, and $128.2 million at December 31, 1996, 1997 and 1998, 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, 1998.
Contractual Maturities Due in Year (s) Ended December 31, -------------------------------------------------------------------------------- 1999- 2001- 2003- 2008- 2018 and 2000 2002 2007 2017 Thereafter Total ------- ------- ------- ------- ------------ -------- (In thousands) Mortgage-backed securities: Held to maturity..................... $ - $359 $4,366 $100,123 $14,978 $119,826 Available for sale................... - - - 258 5,970 6,228 --- ---- ------ -------- ------- -------- Total............................... $ - $359 $4,366 $100,381 $20,948 $126,054 === ==== ====== ======== ======= ========
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 $10.0 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. 19 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 1998 was 10.54%, which exceeded the minimum level of 4.0% prescribed by the OTS. 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, ----------------------------------------------------------------------------- 1996 1997 1998 ----------------------- ------------------------ --------------------- Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value ---------- --------- ---------- --------- -------- ------- (In thousands) Investments: U.S. Government (including federal agencies) available for sale and held to maturity.................... $8,000 $8,023 $2,999 $3,018 $3,998 $ 4,015 Mutual Funds available for sale...... 1,049 1,049 1,114 1,119 1,182 1,176 Equity securities available for sale. 7 91 7 136 7 151 FHLB-NY stock........................ 2,979 2,979 2,979 2,979 3,097 3,097 Net unrealized (loss) gain on available for sale securities....... 107 -- 153 -- 155 -- ------- ------- ------- ------- ------- ------- Total investment securities......... $12,142 $12,142 $ 7,252 $ 7,252 $ 8,439 $ 8,439 ======= ======= ======= ======= ======= ======= Other interest-earning assets: Overnight deposits................... $ 9,000 $ 9,000 $ 2,900 $ 2,900 $15,500 $15,500 Federal funds sold................... 100 100 -- -- -- -- ------- ------- ------- ------- ------- ------- Total other interest-earning assets. $ 9,100 $ 9,100 $ 2,900 $ 2,900 $15,500 $15,500 ======= ======= ======= ======= ======= ======= Total investment portfolio.......... $21,242 $21,242 $10,152 $10,152 $23,939 $23,939 ======= ======= ======= ======= ======= =======
As of December 31, 1998, the Bank's investment securities issued by the U.S. Government agencies have a carrying value of $4 million, a weighted average yield of 6.53% and maturities of $2 million within 1 year and $2 million after 10 years. The Bank has no investments with any one issuer which exceeds ten percent of stockholders' equity. 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 $3.4 million, at December 31, 20 1998, as compared to $4.2 million at December 31, 1997. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain deposits. Deposits increased by $18.5 million or 6% from $307.5 million at December 31, 1997 to $326.0 million at December 31, 1998. The flow of deposits is influenced significantly by general economic conditions, changes in the money market and prevailing interest rates and competition. 21 Deposit Portfolio. The following table sets forth the distribution and wieghted average nominal interest rate of the Bank's deposit accounts at the dates indicated:
At December 31, --------------------------------------------------------------------------------------------- 1996 1997 1998 --------------------------- ---------------------------- ------------------------------ Weighted Weighted Weighted % of Average % of Average % of Average Total Nominal Total Nominal Total Nominal Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate ------ -------- -------- ------ -------- -------- ------ -------- -------- Passbook and club Accounts.................... $111,706 38.80% 2.75% $109,476 35.61% 2.75% $111,715 34.27% 2.25% 0.00% demand................. 11,869 2.76 0.00 14,856 4.83 0.00 17,379 5.33 0.00 NOW.......................... 18,676 5.72 2.50 19,679 6.40 2.00 22,127 6.79 2.00 Super NOW.................... 179 .06 2.50 238 .07 2.00 247 .08 2.00 Money market demand.......... 22,140 7.37 2.87 22,214 7.23 2.75 22,854 7.01 3.00 -------- ------ -------- ------ -------- ------ Total passbook, club, NOW, and money market accounts............ 164,570 54.71 2.54 166,463 54.14 2.42 174,322 53.48 2.09 -------- ------ -------- ------ -------- ------ Certificate accounts: 91-day money market......... 1,297 .43 4.51 979 .32 4.81 1,253 .38 4.26 26-week money market........ 36,161 12.02 4.69 30,395 9.88 4.77 30,251 9.28 4.59 12- to 30-month money market..................... 55,071 18.31 5.04 70,406 22.90 5.22 79,955 24.53 5.09 30- to 48-month money market..................... 8,551 2.84 5.65 4,133 1.34 5.53 9,170 2.81 5.69 IRA and KEOGH............... 28,829 9.59 4.92 29,482 9.59 4.90 26,741 8.20 4.97 Negotiated rate............. 6,306 2.10 6.00 5,614 1.83 6.02 4,293 1.32 6.02 -------- ------ -------- ------ -------- ------ Total certificates......... 136,215 45.29 5.02 141,009 45.86 5.09 151,663 46.52 5.02 -------- ------ -------- ------ -------- ------ Total deposits............. $300,785 100.00% 3.68% $307,472 100.00% 3.61% $325,985 100.00% 3.46% ======== ====== ==== ======== ====== ==== ======== ====== ====
22 The following table sets forth the deposit activity of the Bank for the periods indicated:
Year Ended December 31, --------------------------------- 1996 1997 1998 ------- ------- ------- (In thousands) Deposits (less than) withdrawals...... $(9,291) $(4,375) $ 7,209 Interest credited..................... 11,175 11,062 11,304 ------- ------- ------- Net (decrease) increase in deposits... $ 1,884 $ 6,687 $18,513 ======= ======= =======
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, 1997.
At December 31, 1998, At December 31, Maturing in ------------------------------------ ------------------------------------------------------ One Year Two Three Greater than 1996 1997 1998 or Less Years Years Three Years -------- -------- -------- -------- ------ ------ ------------- (In thousands) Certificate Accounts: 2.99% or less........... $ 60 $ 209 $ 375 $ 375 $ -- $ -- $ -- 3.00% to 4.99%.......... 82,499 61,740 61,357 60,689 448 45 175 5.00% to 5.99%.......... 45,518 61,059 82,954 77,516 1,973 1,166 2,299 6.00% to 6.99%.......... 7,302 13,411 5,701 5,192 377 126 6 7.00% to 7.99%.......... 815 4,566 1,257 757 500 -- -- 8.00% to 8.99%.......... 6 7 -- -- -- -- -- 9.00% to 9.99%.......... 15 17 19 19 -- -- -- -------- -------- -------- -------- ------ ------ ------ Total.................. $136,215 $141,009 $151,663 $144,548 $3,298 $1,337 $2,480 ======== ======== ======== ======== ====== ====== ======
At December 31, 1998, the Bank had outstanding $29.6 million in certificate accounts in amounts of $100,000 or more maturing as follows:
Amount (In thousands) Three months or less........................................... $ 9,094 Over three through six months.................................. 6,110 Over six through twelve months................................. 10,387 Over twelve months............................................. 3,991 ------- Total........................................................ $29,582 =======
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 a blanket assignment of the Bank's unpledged qualifying mortgage loans, mortgage-backed 23 securities and investment 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, 1998, outstanding advances from the FHLB-NY amounted to $28.6 million. The following table sets forth certain information regarding FHLB-NY advances at the dates indicated:
At December 31, ------------------------------------------------------------------- 1996 1997 1998 ---------------------- ------------------------ ----------------- (In thousands) Fixed-rate advances from the FHLB-NY...................... 6.47% due 1999.......................................... $3,000 $ 3,000 $ 3,000 6.27% due 2000.......................................... -- 5,000 5,000 5.10% due 2001.......................................... 243 243 243 6.51% due 2002.......................................... -- 5,000 5,000 5.36% due 2003.......................................... 340 340 15,340 ------ ------- ------- Total advances from the FHLB-NY...................... $3,583 $13,583 $28,583 ====== ======= =======
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, 1998 amounted to $253,000. 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 and Insurance (the "Commissioner") to invest an amount equal to 24 3% of its assets in subsidiary service corporations. As of December 31, 1998, Pamrapo had $1.3 million, or .3%, 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. 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, 1998, approximately 97.8% 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. 25 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.
Year Ended December 31, ------------------------------------------------------------------- 1996 1997 -------------------------------- ------------------------------ Average Interest Yield/ Average Interest Yield/ Balance Cost Balance Cost ---------- -------- ------ -------- -------- ------ Interest-earning assets: Loans (1)...................................... $213,122 $19,191 9.00% $205,594 $18,700 9.10% Mortgage-backed securities..................... 108,500 7,324 6.75 127,004 8,572 6.75 Investments.................................... 11,725 906 7.73 6,541 508 7.77 Other interest-earning assets.................. 12,599 614 4.87 11,079 616 5.56 -------- ------- -------- ------- Total interest-earning assets................. $345,946 28,035 8.10% $350,218 $28,396 8.11% -------- ------- -------- ------- Non-interest-earning assets..................... 21,301 19,018 -------- -------- Total assets (1).............................. $367,247 $369,236 ======== ======== Interest-bearing liabilities: Passbook and club account...................... 112,489 3,166 2.81% $108,105 $ 3,078 2.85% NOW and money market accounts.................. 41,289 1,079 2.61 41,603 994 2.39 Certificates of Deposits....................... 137,193 6,930 5.05 139,242 6,990 5.02 Advances and other borrowings.................. 3,369 206 6.11 11,743 800 6.81 -------- ------- -------- ------- Total interest-bearing liabilities............ 294,340 11,381 3.87% $300,693 $11,862 3.94% -------- ------- -------- ------- Non-interest-bearing liabilities: Non-interest-bearing demand accounts........... 11,004 $ 13,046 Other.......................................... 5,606 6,461 -------- -------- Total non-interest-bearing demand liabilities.................................. 16,610 19,507 -------- -------- Total liabilities............................. 310,950 320,200 Stockholders' equity............................ 56,297 49,036 -------- -------- Total liabilities and stockholders' equity.... $367,247 $369,236 ======== ======== Net interest income/interest rate spread........ $16,654 4.23% $16,534 4.17% ======= ==== ======= ==== Net interest-earning assets/net yield on Interest- earning assets....................... $ 51,606 4.81% $ 49,525 4.72% ======== ==== ======== ==== Ratio of average interest-earning assets to Average interest-bearing liabilities........... 1.17x 1.16x ======== ======== Year Ended December 31, ----------------------------------------------- 1998 ----------------------------------------------- Average Interest Yield/ Balance Cost ------------- ----------- --------- Interest-earning assets: Loans (1)...................................... 222,154 $ 19,380 8.72% Mortgage-backed securities..................... 127,086 8,389 6.60 Investments.................................... 3,588 223 6.22 Other interest-earning assets.................. 15,671 979 6.25 -------- -------- Total interest-earning assets................. 368,499 28,971 7.86% -------- -------- Non-interest-earning assets..................... 19,505 -------- Total assets (1).............................. $388,004 ======== Interest-bearing liabilities: Passbook and club account...................... $110,930 2,834 2.55% NOW and money market accounts.................. 42,299 1,045 2.47 Certificates of Deposits....................... 143,430 7,425 5.18 Advances and other borrowings.................. 17,636 1,124 6.37 -------- -------- Total interest-bearing liabilities............ 314,295 12,428 3.95% -------- -------- Non-interest-bearing liabilities: Non-interest-bearing demand accounts........... 15,966 Other.......................................... 8,695 -------- Total non-interest-bearing demand liabilities.................................. 24,661 -------- Total liabilities............................. 338,956 Stockholders' equity............................ 49,048 -------- Total liabilities and stockholders' equity.... $338,004 ======== Net interest income/interest rate spread........ $ 16,543 3.91% ======== ==== Net interest-earning assets/net yield on Interest- earning assets....................... $ 54,204 4.49% ======== ==== Ratio of average interest-earning assets to Average interest-bearing liabilities........... 1.17x =====
- ---------------- (1) Non-accruing loans are part of the average balances of loans outstanding. 26 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, 1998, 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 $111.7 million at December 31, 1998, 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 $22.9 million at December 31, 1998, 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 non-interest bearing demand, NOW and Super NOW accounts which totaled $39.8 million at December 31, 1998, 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. 27
More than More than More than More than 10 Years 1 Year 1 Year to 3 Years to 5 Years to to More than or Less 3 Years 5 Years 10 Years 20 Years 20 Years Total --------- ------------ ----------- ----------- --------- --------- --------- (In thousands) Interest-earning Assets: Loans............................. $ 5,914 $ 3,571 $ 12,961 $ 50,312 $108,903 $63,731 $245,392 Mortgage-backed securities (1).... - 77 1,842 5,149 98,039 20,947 126,054 Investments (1) (2)............... 3,189 - - - 2,000 - 5,189 Other interest-earning assets (3). 18,597 - - - - - 18,597 --------- --------- --------- --------- -------- ------- -------- Total interest-earning assets.... 27,700 3,648 14,803 55,461 208,942 84,678 395,232 --------- --------- --------- --------- -------- ------- -------- Interest-bearing Liabilities: NOW and Super NOW accounts (4)..................... 14,708 13,464 3,603 4,836 2,654 488 39,753 Money market accounts............. 18,055 2,514 1,197 918 166 4 22,854 Passbook and club accounts........ 18,992 28,846 18,806 23,870 16,510 4,692 111,716 Certificate accounts 144,548 4,635 2,012 402 66 - 151,663 Advances and other borrowings...... - 8,243 20,340 - 253 - 28,836 --------- --------- --------- --------- -------- ------- -------- Total interest-bearing liabilities...................... 196,303 57,702 45,958 30,026 19,649 5,184 354,822 --------- --------- --------- --------- -------- ------- -------- Interest sensitivity gap per period $(168,603) $ (54,054) $ (31,155) $ 25,435 $189,293 $79,494 $ 40,410 ========= ========= ========= ========= ======== ======= ======== Cumulative interest sensitivity gap $(168,603) $(222,657) $(253,812) $(228,377) $(39,084) $40,410 ========= ========= ========= ========= ======== ======= Cumulative gap as a percent of Total assets...................... (40.78)% (53.85)% (61.39)% (55.23)% (9.45)% 9.76% ========= ========= ========= ========= ======== ======= Cumulative interest-sensitive assets as a percent of interest- sensitive liabilities....... ....... 14.11% 12.34% 15.38% 30.79% 88.82% 111.39% ========= ========= ========= ========= ======== =======
- ------------- (1) Includes available for sale securities. (2) Includes marketable equity securities which have no stated maturity. (3) Includes FHLB-NY stock. (4) Includes non-interest bearing demand accounts. 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 28 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, ---------------------------------------------------------------- 1997 v. 1996 1998 v. 1997 ------------------------------- ---------------------------- Increase (decrease) Increase (decrease) due to due to ------------------------------- --------------------------- Volume Rate Net Volume Rate Net ----------- ------- ------ ------- --------- ----- Interest income: Loans......................................... $ (698) $207 $ (491) $1,484 $(804) $ 680 Mortgaged-backed securities................... 1,248 - 1,248 6 (189) (183) Investments................................... (403) 5 (398) (206) (79) (285) Other interest-earning assets................. (79) 81 2 271 92 363 ------ ---- ------ ------ ----- ----- Total interest income....................... 68 293 361 1,555 (980) 575 ------ ---- ------ ------ ----- ----- Interest expense: Passbook and club accounts.................... (130) 42 (88) 81 (325) (244) NOW and money market accounts................. 9 (94) (85) 18 33 51 Certificates of deposit....................... 102 (42) 60 212 223 435 Advance and other borrowings.................. 567 27 594 389 (65) 324 ------ ---- ------ ------ ----- ----- Total interest expense...................... 548 (67) 481 700 (134) 566 ------ ---- ------ ------ ----- ----- Net change in net interest..................... $ (480) $360 $ (120) $ 855 $(846) $ 9 ====== ==== ====== ====== ===== =====
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 Office of Thrift Supervision ("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 Federal Deposit Insurance Corporation ("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 29 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"). 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) of the Bank Holding Company Act ("BHC Act"), subject to the prior approval of the OTS, and certain activities authorized by OTS regulation, and no multiple savings and loan holding company may acquire more than 5% the voting stock of a company engaged in impermissible activities. 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 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. 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 mortgage servicing rights and credit card relationships. The OTS regulations require that, in meeting the tangible, leverage (core) 30 and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities that are not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 8%. In determining the amount of risk- weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS believes are inherent in the type of asset. The components of core capital are equivalent to those discussed earlier under the 3% leverage standard. 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, within specified limits, the allowance for loan and lease losses. 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, as calculated in accordance with guidelines set forth by the OTS. 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. That dollar amount is deducted from an institution's total capital in calculating compliance with its risk-based capital requirement. Under the rule, there is a two quarter lag between the reporting date of an institution's financial data and the effective date for the new capital requirement based on that data. 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. The Director of the OTS may waive or defer a savings institution's interest rate risk component on a case-by-case basis. For the present time, the OTS has deferred implementation of the interest rate risk component. At December 31, 1998, the Bank met each of its capital requirements. The following table presents the Bank's capital position at December 31, 1998.
(Dollars in thousands) Actual Amount Required Amount Excess Amount Actual Percent Required Percent Tangible $41,411 $ 6,181 $35,230 10.05% 1.50% Core (Leverage) $41,411 $ 16,481 $24,930 10.05% 4.00% Risk-based $43,020 $ 16,214 $26,806 21.23% 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. Generally, a savings institution that has a total risk-based capital of less than 8% or a leverage ratio or a Tier 1 capital ratio that is less than 4% 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 31 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 the institution depending upon its category, 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 SAIF. The FDIC maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution's assessment rate depends upon the categories to which it is assigned. Assessment rates for SAIF member institutions are determined semiannually by the FDIC and currently range from zero basis points for the healthiest institutions to 27 basis points for the riskiest. In addition to the assessment for deposit insurance, institutions are required to pay on bonds issued in the late 1980s by the Financing Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998, FICO payments for SAIF members approximated 6.10 basis points, while Bank Insurance Fund ("BIF" -- the deposit insurance fund that covers most commercial bank deposits) members paid 1.22 basis points. By law, there will be equal sharing of FICO payments between the members of both insurance funds on the earlier of January 1, 2000 or the date the two insurance funds are merged. The Bank's assessment rate for the year ended December 31, 1998 was 6.4 basis points and the premium paid for this period was $190,000, including payments toward FICO bonds. A significant increase in SAIF insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. 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. Legislation enacted in 1996 provided that BIF and SAIF would merge by January 1, 1999, if there were no savings associations in existence on that date. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter and abolish the OTS have been introduced in Congress. The Bank is unable to predict whether such legislation would be enacted or the extent to which the legislation would restrict or disrupt its operations. 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, 1998, the Bank's limit on loans to one borrower was $6.78 million. At December 31, 1998, the Bank's largest aggregate outstanding balance of loans to one borrower was $3.0 million. 32 QTL TEST. The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings 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 and related securities) in at least 9 months out of each 12 month period. A savings association that fails the QTL test must either convert to a bank charter or operate under certain restrictions. As of December 31, 1998, the Bank maintained 89.03% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered "qualified thrift investments." 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 earnings 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 determines that such distribution would constitute an unsafe or unsound practice. At December 31, 1998, the Bank was classified as a Tier 1 Bank. The OTS has adopted new capital distribution regulations which will become effective on April 1, 1999. Under the new regulations, an application to and the prior approval of the Office of Thrift supervision will be required before an institution makes a capital distribution if (1) the institution does not meet certain criteria for "expedited treatment" for applications under the regulations, (2) the total capital distributions by the institution for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, (3) the institution would be undercapitalized following the distribution or (4) the distribution would otherwise be contrary to a statute, regulation or agreement with the OTS. If an application is not required, the institution may still need to give advance notice to the OTS of the capital distribution. 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 (currently 4%) of its net withdrawable deposit accounts plus short- term borrowings. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's average liquidity ratio for the year ended December 31, 1998 was 10.54%, 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 based 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, 1998 totaled $97,500. 33 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" (i.e., 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 restricts 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 requires that certain transactions with affiliates, including loans and asset purchases, 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. 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 FDI Act requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, and compensation, fees and benefits and such other operational and managerial standards as the agency deems appropriate. The federal banking agencies have adopted final regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement these safety and soundness standards. 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. 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. FEDERAL RESERVE SYSTEM The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts. The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $46.5 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement was 3%; and for accounts aggregating greater than $46.5 million, the reserve requirement 34 was $1.395 million plus 10% (subject to adjustment by the Federal Reserve Board) against that portion of total transaction accounts in excess of $46.5 million. The first $4.9 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) were exempted from the reserve requirements. The Bank maintained 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 Commissioner regulates, among other things, 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, establishment or relocation of branch offices, mergers and the issuance of additional stock. In addition, the Commissioner conducts periodic examinations of First Savings. Certain of the areas regulated by the Commissioner are not subject to similar regulation by the FDIC. Recent federal and state legislative developments have reduced distinctions between commercial banks and SAIF-insured savings institutions in New Jersey with respect to lending and investment authority, as well as interest rate limitations. As federal law has expanded the authority of federally chartered savings institutions to engage in activities previously reserved for commercial banks, New Jersey legislation and regulations ("parity legislation") have given New Jersey chartered savings institutions, such as the Bank, the powers of federally chartered savings institutions. New Jersey law 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 under New Jersey law may acquire, or be acquired by New Jersey insured institutions or holding companies on either a regional or national basis. New Jersey law explicitly prohibits interstate branching. 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 Company. The Bank has not been audited by the IRS in the past eight years. For its 1998 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 Bank's reserve for nonqualifying loans was computed using the Experience Method. 35 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, if any, over the balance of such reserves as of December 31, 1987. As a result of such recapture, the Bank incurred an additional tax payment of approximately $150,000 which is being 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 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 Banks does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves. 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 36 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, 1998, the Bank had 83 full-time employees and 60 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. 37 Item 2. Properties. - -------------------- The Bank conducts its business through eleven branch offices and one administrative office. Five offices have drive-up facilities. The Bank has automatic teller machines at nine of its eleven branch facilities. The following table sets forth information relating to each of the Bank's offices as of December 31, 1998. The total net book value of the Bank's premises and equipment at December 31, 1998 was $4.7 million.
Year Net Location Office Opened Book Value - --------------------------------------------------------- -------------- ------------------ (In thousands) Executive Office 591 Avenue C Bayonne, New Jersey..................................... 1985 $ 566 Branch Offices 611 Avenue C Bayonne, New Jersey..................................... 1984 769 155 Broadway Bayonne, New Jersey..................................... 1973 140 175 Broadway Bayonne, New Jersey..................................... 1985 (1) 861 Broadway Bayonne, New Jersey..................................... 1962 167 987 Broadway Bayonne, New Jersey..................................... 1977 292 1475 Bergen Boulevard Fort Lee, New Jersey.................................... 1990 (2) 544 Broadway Bayonne, New Jersey..................................... 1995 (2) 1930 Route 88 Brick, New Jersey....................................... 1996 370 (2) 401 Washington Street Hoboken, New Jersey..................................... 1990 424 (2) 2518 Old Hooper Avenue Brick, New Jersey....................................... 1998 (2) 473 Spotswood-Englishtown Road Jamesburg, New Jersey................................... 1998 687 (2) 595-597 Avenue C Bayonne, New Jersey..................................... (3) 417 ------- Net book value of properties............................ 3,832 Furnishings and equipment............................... 863 ------- Total premises and equipment.......................... $ 4,695 =======
- ------------------ (1) The net book value of the property is included in investment in real estate. (2) Leased Property. (3) To be renovated. 38 Item 3. Legal Proceedings. - --------------------------- The Bank is from time to time a party to litigation which arises primarily in the ordinary course of business. In the opinion of management, the ultimate disposition of any such existing 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. 39 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 1998 Annual Report to Stockholders on page 39 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 1998 Annual Report to Stockholders on page 38and 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 1998 Annual Report to Stockholders on pages 7 through 13 and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. - ----------------------------------------------------- The Consolidated Statements of Financial Condition, 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 1998 Annual Report to Stockholders on pages 14 through 36 and are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure. - --------------------- Not Applicable. 40 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 28, 1999 at pages 6 through 17. 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 28, 1999 at pages 9 through 17, 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 28, 1999 at pages 5 through 8. 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 28, 1999 at page 17. 41 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Page ---- (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 1998 Annual Report to Stockholders. Consolidated Statements of Financial Condition as of December 31, 1997 and 1998............................................ 14 Consolidated Statements of Income for the Years Ended December 31, 1996, 1997 and 1998...................................... 15 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1996, 1997 and 1998...................... 16 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1997 and 1998.................. 17 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998................................ 18-19 Notes to Consolidated Financial Statements................................. 20-35 Independent Auditors' Report............................................... 36
The remaining information appearing in the 1998 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. 42 EX-11 2 EXHIBIT 11 Exhibit No. 11 Statement re Computation of Earnings Per Share
Year Ended December 31, 1998 ------------------ Income available to common stockholders $4,394,703 ---------- Weighted average shares outstanding 2,842,924 ---------- Basic earnings per share $ 1.55 ---------- Income for diluted earnings per share $4,394,703 ---------- Total weighted average common shares and equivalents outstanding for diluted computation 2,842,924 ---------- Diluted earnings per share $ 1.55 ----------
EX-13 3 EXHIBIT 13 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, 1998 totaled $413.5 million, which represents an increase of $36.8 million or 9.77% when compared to $376.7 million at December 31, 1997, primarily due to an increase in the loans receivable. Securities available for sale decreased $2.2 million or 18.49% to $9.7 million at December 31, 1998 when compared with $11.9 million at December 31, 1997. The decrease during the year ended December 31, 1998, resulted primarily from proceeds from maturities and calls of and repayments on securities available for sale amounting to $2.3 million along with the increase in unrealized gain on securities available for sale of $46,000 which offset purchases of securities available for sale of $68,000. Investment securities held to maturity amounted to $2.0 million at December 31, 1998 as a result of purchases of such securities. Mortgage-backed securities held to maturity decreased $5.7 million or 4.52% from $126.1 million at December 31, 1997 to $120.4 million at December 31, 1998. The decrease during the year ended December 31, 1998 resulted from principal repayments of $32.2 million on mortgage-backed securities which were sufficient to offset purchases of mortgage-backed securities of $26.7 million. Net loans amounted to $239.0 million and $211.2 million at December 31, 1998 and 1997, respectively, which represents an increase of $27.8 million or 13.16%. During the year ended December 31, 1998, loan originations exceeded loan principal repayments by $28.3 million. During the year ended December 31, 1998, the Bank transferred mortgage loans totaling $1.0 million to foreclosed real estate. Additionally, the Bank provided $292,000 as a provision for loan losses during the year ended December 31, 1998. At December 31, 1998 and 1997, loans delinquent ninety days or more totaled $4.6 million or 1.92% of loans receivable and $6.9 million or 3.27% of loans receivable, respectively. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Foreclosed real estate amounted to $1.2 million and $1.4 million at December 31, 1998 and 1997, respectively. At December 31, 1998, foreclosed real estate consisted of thirteen properties, of which ten were residential, two were land and one was a commercial property. During the year ended December 31, 1998, thirteen properties with a combined book value of $1.0 million were sold and another three properties with a combined book value of $256,000 remain under contract for sale. At December 31, 1997, foreclosed real estate consisted of nineteen properties, of which fifteen were residential, three were land and one was a commercial property. At December 31, 1998 and 1997, non-performing assets totaled $5.8 million or 1.40% of total assets and $8.3 million or 2.20% of total assets, respectively. Total deposits at December 31, 1998 increased $18.5 million or 6.02% to $326.0 million compared to $307.5 million at December 31, 1997. Advances from the Federal Home Loan Bank of New York ("FHLB-NY") totaled $28.6 million and $13.6 million at December 31, 1998 and 1997, respectively. The increase of $15.0 million during the year ended December 31, 1998, resulted from new advances from the FHLB-NY, which were used for general corporate purposes. Stockholders' equity amounted to $49.8 million and $48.5 million at December 31, 1998 and 1997, respectively. During the years ended December 31, 1998 and 1997, net income of $4.4 million and $5.1 million, respectively, was recorded and cash dividends of $3.2 million and $2.9 million, respectively, were paid on the Company's common stock. During the year ended December 31, 1997, the Company repurchased 318,900 shares of its common stock, at prices ranging from $19.50 to $23.50 per share, for $7.4 million under a stock repurchase program and reissued 5,860 shares of its common stock from treasury stock for $34,000 as a result of the exercise of stock options by officers and employees. The Company did not repurchase any shares during the year ended December 31, 1998. Results of Operations For The Years Ended December 31, 1998 and 1997 Net Income Net income decreased by $676,000 or 13.33% to $4.4 million during the year ended December 31, 1998 compared with $5.1 million for the year ended December 31, 1997. The decrease in net income during the 1998 period was due to increases in total interest expense of $566,000 and non-interest expenses of $1.02 million, along with a decrease in non-interest income of $275,000, which more than offset an increase in total interest income of $575,000 along with decreases in provision for loan losses of $294,000 and income taxes of $316,000. Interest Income Interest income on loans during the year ended December 31, 1998 increased by $682,000 or 3.65% to $19.4 million when compared to $18.7 million during 1997. During the years ended December 31, 1998 and 1997, the yield earned on the loan portfolio was 8.72% and 9.10%, respectively. The average balance of loans outstanding during the years ended December 31, 1998 and 1997, totaled $222.2 million and $205.6 million, respectively. Interest on mortgage-backed securities decreased $184,000 or 2.15%, during the year ended December 31, 1998 to $8.4 million compared to $8.6 million for 1997. During the years ended December 31, 1998 and 1997, the average balance of mortgage-backed securities outstanding was $127.1 million and $127.0 million, respectively. The yield earned on the mortgage-backed securities portfolio was 6.60% and 6.75% during 1998 and 1997, respectively. Interest earned on investment securities decreased by $285,000 or 56.10% to $223,000 for the year ended December 31, 1998, when compared to $508,000 for 1997. The decrease resulted from a decrease of $3.0 million or 45.15% in the average balance of the investment securities portfolio along with a decrease of 155 basis points in the yield earned on the investment securities portfolio from 7.77% in 1997 to 6.22% in 1998. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Interest on other interest-earning assets increased by $363,000 or 58.93% to $979,000 during the year ended December 31, 1998 when compared to $616,000 in 1997. During the year ended December 31, 1998, the increase in interest on other interest-earning assets resulted from an increase in the yield earned to 6.25% in 1998 from 5.56% in 1997, along with an increase of $4.6 million or 41.45% in the average balance of other interest-earning assets outstanding. Interest Expense Interest on deposits increased $242,000 or 2.19% to $11.3 million during the year ended December 31, 1998 compared to $11.1 million for 1997. The increase during 1998 was attributable to an increase of $7.7 million or 2.67% in the average balance of interest-bearing deposits outstanding which was sufficient to offset a decrease of two basis points in the Bank's average cost of interest- bearing deposits to 3.81% for 1998 from 3.83% for 1997. Interest on advances and other borrowed money increased $324,000 or 40.50% to $1.1 million during the year ended December 31, 1998 compared to $800,000 for 1997. The increase during 1998 was attributable to an increase of $5.9 million in the average balance of advances and other borrowings outstanding which was sufficient to offset a decrease of 44 basis points in the Bank's cost of borrowings to 6.37% for 1998 from 6.81% for 1997. Net Interest Income Net interest income for the years ended December 31, 1998 and 1997 remained the same at $16.5 million. The Bank's net interest rate spread decreased from 4.17% in 1977 to 3.91% in 1998 and its interest rate margin decreased from 4.72% in 1997 to 4.49% in 1998. These decreases primarily resulted from a one basis point increase in the cost of average interest-bearing liabilities from 3.94% in 1997 to 3.95% in 1998, along with 25 basis point decrease in the yield on interest- earning assets to 7.86% in 1998 from 8.11% in 1997. The level of net interest income was maintained despite the decreases in the interest rate spread and margin as a result of an increased level of net interest earning assets. Provision for Loan Losses During the years ended December 31, 1998 and 1997, the Bank provided $292,000 and $586,000, respectively, for loan losses. At December 31, 1998 and 1997, the Bank's loan portfolio included loans totaling $4.6 million and $6.9 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 $2.3 million at December 31, 1998, representing .94% of total loans and 50.00% of loans delinquent ninety days or more compared to an allowance of $2.5 million at December 31, 1997, representing 1.15% of total loans and 36.23% of loans delinquent ninety days or more. During the years ended December 31, 1998 and 1997, the bank charged off loans aggregating $484,000 and $928,000, 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 by $275,000 or 16.43% to $1.4 million during the year ended December 31, 1998 as compared to $1.7 million for 1997. The decrease in non-interest income during 1998 resulted primarily from gains in 1997 on sales of mortgage-backed securities and fixed assets of $112,000 and $247,000, respectively. No such activity took place in 1998. Partially offsetting the aforementioned decreases were increases in fees and service charges of $79,000 and miscellaneous income of $4,000. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Non-Interest Expenses Non-interest expenses increased $1.0 million or 10.42% to $10.8 million during the year ended December 31, 1998 compared to $9.8 million for 1997. Salaries and employee benefits, occupancy, equipment and advertising expenses increased $674,000, $243,000, $165,000 and $168,000, respectively, during the year ended December 31, 1998, which were partially offset of decreases in legal expenses, federal insurance premium, loss on foreclosed real estate and miscellaneous expenses by $32,000, $3,000, $85,000 and $110,000, respectively. The 1998 non- interest expenses include increased operating costs resulting from two Brick, New Jersey branch offices opened after September 30, 1997 and a branch in Jamesburg, New Jersey opened in October, 1998. Income Taxes Income tax expense totaled $2.4 million and $2.8 million during the years ended December 31, 1998 and 1997, respectively. The decrease in 1998 resulted primarily from a decrease in pre-tax income of $1.0 million. Results of Operations For The Years Ended December 31, 1997 and 1996 Net Income Net income increased by $2.1 million or 70.00% to $5.1 million during the year ended December 31, 1997 compared with $3.0 million for the year ended December 31, 1996. The increase in net income during the 1997 period was primarily due to a decrease in federal insurance premium of $2.5 million. The 1996 results include 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 increases in total interest income of $361,000 and in non-interest income of $1.0 million, along with decreases in provision for loan losses of $59,000 and non-interest expenses of $721,000, excluding the aforementioned special assessment, which more than offset increases in total interest expense of $481,000 and income taxes of $1.6 million. Interest Income Interest income on loans during the year ended December 31, 1997 decreased by $492,000 or 2.56% to $18.7 million when compared to $19.2 million during 1996. During the years ended December 31, 1997 and 1996, the yield earned on the loan portfolio was 9.10% and 9.00%, respectively. The average balance of loans outstanding during the years ended December 31, 1997 and 1996, totaled $205.6 million and $213.1 million, respectively. Interest on mortgage-backed securities increased $1.3 million or 17.81% during the year ended December 31, 1997 to $8.6 million compared to $7.3 million for 1996. During the year ended December 31, 1997, the average balance of mortgage-backed securities outstanding increased $18.5 million or 17.05% to $127.0 million when compared to $108.5 million for 1996. The yield earned on the mortgage-backed securities portfolio remained the same at 6.75% during 1997 and 1996. The increase in the average balance of mortgage-backed securities during 1997 resulted primarily from purchases of mortgage-backed securities which more than offset principal repayments. Interest earned on investment securities decreased by $398,000 or 43.93% to $508,000 for the year ended December 31, 1997, when compared to $906,000 for 1996. The decrease resulted from a decrease of $5.2 million or 44.21% in the average balance of the investment securities portfolio, which more than offset an increase of four basis points in the yield earned on the investment securities portfolio from 7.73% in 1996 to 7.77% in 1997. Interest on other interest-earning assets amounted to $616,000 and $614,000 during the years ended December 31, 1997 and 1996, respectively. The yield earned on other interest-earning assets increased from 4.87% in 1996 to 5.56% in 1997, which more than offset a decrease of $1.5 million or 12.06% in the average balance of other interest-earning assets outstanding. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued Interest Expense Interest on deposits decreased $113,000 or 1.01% to $11.1 million during the year ended December 31, 1997 compared to $11.2 million for 1996. The decrease during 1997 was attributable to a decrease of one basis point in the Bank's average cost of interest-bearing deposits to 3.83% for 1997 from 3.84% for 1996, along with a decrease of $2.0 million or .69%, in the average balance of interest-bearing deposits outstanding. Interest on advances and other borrowed money increased $594,000 or 288.35% to $800,000 during the year ended December 31, 1997 compared to $206,000 for 1996. The increase during 1997 was attributable to an increase of $8.4 million in the average balance of advances and other borrowings outstanding, along with an increase of 70 basis points in the Bank's cost of borrowings to 6.81% for 1997 from 6.11% for 1996. Net Interest Income Net interest income for the year ended December 31, 1997, decreased $120,000 or .72% from $16.7 million for 1996 to $16.5 million for 1997. The Bank's net interest rate spread decreased from 4.23% in 1996 to 4.17% in 1997 and its interest rate margin decreased from 4.81% in 1996 to 4.72% in 1997. These decreases primarily resulted from a seven basis point increase in the cost of average interest-bearing liabilities from 3.87% in 1996 to 3.94% in 1997, which was sufficient to offset a one basis point increase in the yield on interest- earning assets to 8.11% in 1997 from 8.10% in 1996. Provision for Loan Losses During the years ended December 31, 1997 and 1996, the Bank provided $586,000 and $644,000, respectively, for loan losses. At December 31, 1997 and 1996, the Bank's loan portfolio included loans totaling $6.9 million and $10.5 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 $2.5 million at December 31, 1997, representing 1.15% of total loans and 36.23% of loans delinquent ninety days or more compared to an allowance of $2.8 million at December 31, 1996, representing 1.32% of total loans and 26.69% of loans delinquent ninety days or more. During the years ended December 31, 1997 and 1996, the Bank charged off loans aggregating $928,000 and $638,000, 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 increased by $1.0 million or 157.54% to $1.7 million during the year ended December 31, 1997 as compared to $650,000 for 1996. The increase in non-interest income during 1997 resulted primarily from increases in fees and service charges of $409,000, gain on sales of mortgage-backed securities of $112,000, gain on sale of fixed assets of $247,000 and miscellaneous income of $257,000. The increase during the 1997 period in the fees and service charges resulted from a revised service fees schedule on various depository services. During the year ended December 31, 1997, the proceeds from sales of mortgage- backed securities totaled $7.6 million at a net gain of $112,000. During the year ended December 31, 1997, the Bank sold its office building in Hoboken, New Jersey for $815,000 at a gain of $247,000. During the 1997 period, the increase in the miscellaneous income resulted primarily from commissions earned on the sales of annuities and mutual funds by Pamrapo Service Corp., Inc., a subsidiary of the Bank. Non-Interest Expense Non-interest expenses decreased $2.7 million or 21.89% to $9.8 million during the year ended December 31, 1997 compared to $12.5 million for 1996. On September 30, 1996, legislation was enacted which, among other things, imposed a one-time special assessment on SAIF member institutions, including the Bank. The special assessment levied amounted to 65.7 basis points on SAIF assessable deposits held as of March 31, 1995. The Bank, during the 1996 period, took a charge of $2.0 million as a result of such assessment. Non-interest expenses, excluding the above-mentioned one-time SAIF assessment of $2.0, decreased $721,000 or 6.86% to $9.8 million during the year ended December 31, 1997 compared to $10.5 million for the year ended Management's Discussion and Analysis of Financial Condition and Results of Operations, continued December 31, 1996. Salaries and employee benefits, legal expenses, federal insurance premium and loss on foreclosed real estate decreased $188,000, $387,000, $469,000 and $76,000, respectively, during the year ended December 31, 1997, which were partially offset by increases in occupancy, equipment, advertising and miscellaneous expenses of $82,000, $91,000, $75,000, and $152,000, 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 $2.8 million and $1.2 million during the years ended December 31, 1997 and 1996, respectively. The increase in 1997 resulted primarily from an increase in pre-tax income of $3.7 million from 1996 and a reduction, during the 1996 period, of income tax expense of $250,000 resulting from the exercise of non-statutory stock options. 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 by operations. While scheduled loan and mortgage-backed securities amortization and maturities of investment securities are a relatively predictable source of funds, deposit flows 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 4.00%. The Bank's liquidity averaged 10.54% during December, 1998. 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 it 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. Interest-bearing deposits in other banks at December 31, 1998 and 1997 amounted to $15.5 million and $2.9 million, respectively. 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:
Year Ended December 31, ----------------------- (In Thousands) 1997 1998 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents-- beginning $ 21,143 $ 13,307 - -------------------------------------------------------------------------------------------------------- Operating activities: Net income 5,071 4,395 Adjustments to reconcile net income to net cash provided by operating activities 1,547 3,728 - -------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 6,618 8,123 Net cash (used in) investing activities (22,106) (23,764) Net cash provided by financing activities 7,652 30,381 - -------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (7,836) 14,740 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents-- ending $ 13,307 $ 28,047 - --------------------------------------------------------------------------------------------------------
The primary source of cash from operating activities during each period was net income. Management's Discussion and Analysis of Financial Condition and Results of Operations, continued 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 sources of financing activities during the 1998 period were net increases in deposits of $18.5 million and advances from the FHLB-NY of $15.0 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, 1998 and 1997, advances from the FHLB-NY amounted to $28.6 million and $13.6 million, respectively. The Bank anticipates that it will have sufficient funds available to meet its current loan commitments. At December 31, 1998, the Bank has outstanding commitments to originate loans of $11.6 million. Certificates of deposit scheduled to mature in one year or less, at December 31, 1998, totaled $127.6 million. Management believes that, based upon historical experience, a significant portion of such deposits will remain with the Bank. At December 31, 1998, the Bank exceeded each of the three OTS capital requirements. The Bank's tangible, core and risk-based capital ratios were 10.05%, 10.05% and 21.23%, 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 require 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. Impact of the Year 2000 Issue The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Bank's computer programs that would have date sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, or engage in similar normal business activities. Based on a recent assessment, the Bank has determined that it will be required to modify or replace portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Bank presently believes that with modifications to existing software and conversion to new software, the Year 2000 Issue can be mitigated. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue may have a material adverse impact on the operations of the Bank. The Bank has initiated formal communications with all of its significant suppliers and vendors to determine the extent to which the Bank is vulnerable to those third parties failure to remediate their own Year 2000 Issues. The Bank will utilize both internal and external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Bank expects to complete the Year 2000 project no later than March 31, 1999. The Bank is in the process of determining the costs and time associated with the Year 2000 project. The Bank does not expect that the total cost of the Year 2000 project will have a material adverse impact on the financial condition or operations of the Bank. To date, the Bank has not incurred or expensed any material amount related to the assessment of, and preliminary efforts in connection with, its Year 2000 project and the development of a remediation plan. Pamrapo Bancorp, Inc. and Subsidiaries Consolidated Statements of Financial Condition
December 31, ----------------------------------------- Note(s) 1997 1998 - --------------------------------------------------------------------------------------------------------------------------------- Assets Cash and amounts due from depository institutions $ 10,406,794 $ 12,547,045 Interest-bearing deposits in other banks 2,900,000 15,500,000 - --------------------------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents 1 and 17 13,306,794 28,047,045 Securities available for sale 1,2,9 and 17 11,849,202 9,651,512 Investment securities held to maturity 1,3,9 and 17 - 1,998,142 Mortgage-backed securities held to maturity 1,4,9 and 17 126,108,914 120,400,191 Loans receivable 1,5,9 and 17 211,156,095 239,009,990 Foreclosed real estate 1 1,354,347 1,237,097 Investment in real estate 1 285,310 270,539 Premises and equipment 1,6 and 10 3,482,178 4,695,440 Federal Home Loan Bank of New York stock 9 2,979,400 3,097,200 Interest receivable 1,7 and 17 2,495,200 2,364,340 Deferred tax asset 1 and 14 1,369,891 1,237,626 Excess of cost over assets acquired 1 303,250 181,949 Other assets 14 2,023,581 1,283,086 - --------------------------------------------------------------------------------------------------------------------------------- Total assets $376,714,162 $413,474,157 - --------------------------------------------------------------------------------------------------------------------------------- Liabilities and stockholders' equity Liabilities Deposits 8 and 17 $307,472,000 $325,985,283 Advances from Federal Home Loan Bank of New York 9 and 17 13,583,100 28,583,100 Other borrowed money 10 and 17 273,623 252,535 Advance payments by borrowers for taxes and insurance 2,837,836 2,911,061 Other liabilities 13 4,014,488 5,969,273 - --------------------------------------------------------------------------------------------------------------------------------- Total liabilities 328,181,047 363,701,252 - --------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies 16 and 17 - - Stockholders' equity 1,11,12,13 and 14 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; shares outstanding 2,842,924 34,500 34,500 Paid-in capital in excess of par value 18,906,768 18,906,768 Retained earnings - substantially restricted 43,007,228 44,217,856 Accumulated other comprehensive income - unrealized gain on securities available for sale, net 10,553 39,715 Treasury stock, at cost; 607,076 shares (13,425,934) (13,425,934) - ---------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 48,533,115 49,772,905 - ---------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $376,714,162 $413,474,157 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Pamrapo Bancorp, Inc. and Subsidiaries Consolidated Statements of Income
Year Ended December 31, ----------------------------------------- Note(s) 1996 1997 1998 - --------------------------------------------------------------------------------------------------------------- Interest income: Loans 1 and 5 $19,191,106 $18,699,348 $19,380,581 Mortgage-backed securities 1 7,323,334 8,572,270 8,388,483 Investments 1 905,838 507,895 223,459 Other interest-earning assets 614,239 616,023 978,661 - --------------------------------------------------------------------------------------------------------------- Total interest income 28,034,517 28,395,536 28,971,184 - --------------------------------------------------------------------------------------------------------------- Interest expense: Deposits 8 11,174,695 11,062,108 11,303,534 Advances and other borrowed money 205,937 799,585 1,124,396 - --------------------------------------------------------------------------------------------------------------- Total interest expense 11,380,632 11,861,693 12,427,930 - --------------------------------------------------------------------------------------------------------------- Net interest income 16,653,885 16,533,843 16,543,254 Provision for loan losses 1 and 5 644,466 585,555 291,856 - --------------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 16,009,419 15,948,288 16,251,398 - --------------------------------------------------------------------------------------------------------------- Non-interest income: Fees and service charges 431,924 841,389 920,465 Gain on sale of mortgage-backed securities 2 and 4 - 111,583 - Gain on sale of fixed assets - 246,652 - Miscellaneous 217,881 474,674 478,693 - --------------------------------------------------------------------------------------------------------------- Total non-interest income 649,805 1,674,298 1,399,158 - --------------------------------------------------------------------------------------------------------------- Non-interest expenses: Salaries and employee benefits 13 5,082,192 4,893,655 5,567,768 Net occupancy expense of premises 6 and 16 778,225 859,895 1,102,791 Equipment 6 775,360 866,005 1,031,297 Advertising 114,580 189,779 358,144 Legal 516,292 128,607 96,681 Federal insurance premium 15 2,684,879 193,368 189,879 Loss on foreclosed real estate 1 283,187 207,389 122,736 Amortization of intangibles 1 121,300 121,300 121,301 Miscellaneous 2,179,858 2,332,215 2,221,779 - --------------------------------------------------------------------------------------------------------------- Total non-interest expenses 12,535,873 9,792,213 10,812,376 - --------------------------------------------------------------------------------------------------------------- Income before income taxes 4,123,351 7,830,373 6,838,180 Income taxes 1 and 14 1,158,483 2,759,170 2,443,477 - --------------------------------------------------------------------------------------------------------------- Net income $ 2,964,868 $ 5,071,203 $ 4,394,703 - --------------------------------------------------------------------------------------------------------------- Basic earnings per common share 1 $ 0.90 $ 1.74 $ 1.55 - --------------------------------------------------------------------------------------------------------------- Diluted earnings per common stock 1 $ 0.90 $ 1.74 $ 1.55 - --------------------------------------------------------------------------------------------------------------- Dividends per common share 1 $ 0.90 $ 1.00 $ 1.12 - ---------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Pamrapo Bancorp, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income
Year Ended December 31, -------------------------------------------- 1996 1997 1998 - ---------------------------------------------------------------------------------------------------------- Net income $2,964,868 $5,071,203 $4,394,703 Other comprehensive income, net of income taxes: Unrealized holdings gain (loss) on securities available for sale, net of income tax expense (benefit) of ($91,550), $123,638 and $16,500, respectively (155,781) 210,965 29,162 Less reconciliation adjustment for realized gains, net of income tax expense (benefit) of ($2,038) - (3,477) - - ---------------------------------------------------------------------------------------------------------- Other comprehensive income (155,781) 207,488 29,162 - ---------------------------------------------------------------------------------------------------------- Comprehensive income $2,809,087 $5,278,691 $4,423,865 - ----------------------------------------------------------------------------------------------------------
Pamrapo Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity
Accumulated Other Comprehensive Income - Unrealized Debt of Paid-in Retained (Loss) Gain Employee Capital in Earnings - on Securities Stock Common Excess of Substantially Available Ownership Treasury Stock Par Value Restricted For Sale, Net Plan Stock Total - ---------------------------------------------------------------------------------------------------------------------------------- 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 Employee Stock Ownership 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 income taxes - - - (155,781) - - (155,781) Cash dividends - - (2,973,121) - - - (2,973,121) - ---------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1996 34,500 40,944,218 (196,935) - (6,179,590) 53,508,961 18,906,768 Net income for the year ended December 31, 1997 - - 5,071,203 - - - 5,071,203 Purchase of treasury stock - - - - - (7,369,153) (7,369,153) Sale of treasury stock - - (88,470) - - 122,809 34,339 Decrease in unrealized loss on securities available for sale, net of income taxes - - - 207,488 - - 207,488 Cash dividends - - (2,919,723) - - - (2,919,723) - ---------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1997 34,500 18,906,768 43,007,228 10,553 - (13,425,934) 48,533,115 Net income for the year ended December 31, 1998 - - 4,394,703 - - - 4,394,703 Increase in unrealized gain on securities available for sale, net of income taxes - - - 29,162 - - 29,162 Cash dividends - - (3,184,075) - - - (3,184,075) - ---------------------------------------------------------------------------------------------------------------------------------- Balance - December 31, 1998 $ 34,500 $18,906,768 $44,217,856 $ 39,715 - $(13,425,934) $49,772,905 - ----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Pamrapo Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Year Ended December 31, ---------------------------------------------------------- 1996 1997 1998 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 2,964,868 $ 5,071,203 $ 4,394,703 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment and investment in real estate 324,807 350,147 508,690 Amortization of deferred fees, premiums and discounts, net (217,913) (185,294) (151,141) Provision for loan losses 644,466 585,555 291,856 Provision for losses on foreclosed real estate 166,003 144,747 73,206 (Gain) loss on sale of foreclosed real estate 1,810 (46,433) (57,254) Gain on sales of fixed assets - (246,652) - Gain on sales of securities available for sale - (5,519) - Gain on sales of mortgage-backed securities held to maturity - (106,064) - Deferred income taxes 131,066 5,023 115,765 Decrease in interest receivable 277,213 181,843 130,860 (Increase) decrease in other assets (1,259,706) (124,106) 740,495 Amortization of intangibles 121,300 121,300 121,301 Reduction in debt of Employee Stock Ownership Plan 148,781 - - Increase in other liabilities 73,532 872,689 1,954,785 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 3,376,227 6,618,439 8,123,266 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities and calls of securities available for sale 7,000,000 5,000,000 1,000,000 Proceeds from repayments of securities available for sale 1,827,985 1,718,879 1,270,255 Purchases of securities available for sale (3,049,198) (65,220) (67,833) Proceeds from sale of securities available for sale - 3,992,226 - Proceeds from maturities of investment securities held to maturity 99,000 - - Purchases of investment securities held to maturity - - (1,998,125) Principal repayments on mortgage-backed securities held to maturity 12,504,961 16,228,312 32,197,982 Purchases of mortgage-backed securities held to maturity (12,679,914) (49,297,672) (26,725,908) Proceeds from sales of mortgage-backed securities held to maturity - 3,640,635 - Proceeds from sales of student loans 770,672 685,386 817,555 Purchase of mortgage loans (108,500) (391,550) (1,785,275) Net change in loans receivable 8,729,960 (3,976,415) (27,236,899) Proceeds from sales of foreclosed real estate 401,761 798,889 588,869 Additions to premises and equipment (224,655) (755,387) (1,707,181) Proceeds from sales of fixed assets - 315,312 - Additions to investment in real estate (6,900) - - Redemption (purchase) of Federal Home Loan Bank of New York stock 93,200 - (117,800) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities $ 15,358,372 $(22,106,605) $(23,764,360) - ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Pamrapo Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows, continued
Year Ended December 31, ------------------------------------------------------ 1996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits $ 1,884,656 $ 6,686,580 $18,513,283 Advances from Federal Home Loan Bank of New York 7,000,000 14,000,000 15,000,000 Repayment of advances from Federal Home Loan Bank of New York (11,000,000) (4,000,000) - Repayment of other borrowings (166,761) (19,471) (21,088) (decrease) increase in advance payments by borrowers for taxes and insurance (34,111) 1,239,732 73,225 Cash dividends paid (3,318,121) (2,919,723) (3,184,075) Purchase of treasury stock (6,179,188) (7,369,153) - Proceeds from sales of treasury stock 327,973 34,339 - - ----------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (11,485,552) 7,652,304 30,381,345 - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 7,249,047 (7,835,862) 14,740,251 Cash and cash equivalents - beginning 13,893,609 21,142,656 13,306,794 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents - ending $21,142,656 $13,306,794 $28,047,045 - ----------------------------------------------------------------------------------------------------------------------------- Supplemental information: Dividend payable $ (345,000) $ - $ - - ----------------------------------------------------------------------------------------------------------------------------- Unrealized gain (loss) on securities available for sale, net $ (155,781) $ 207,488 $ 29,162 - ----------------------------------------------------------------------------------------------------------------------------- Transfer from loans receivable to foreclosed real estate $ 2,175,779 $ 1,419,449 $ 992,471 - ----------------------------------------------------------------------------------------------------------------------------- Loans to facilitate sales of foreclosed real estate $ 1,077,800 $ 1,163,700 $ 504,900 - ----------------------------------------------------------------------------------------------------------------------------- Mortgage loan in connection with sale of building $ - $ 500,000 $ - - ----------------------------------------------------------------------------------------------------------------------------- Cash paid during the period for: Income taxes, net of refunds $ 1,941,053 $ 2,034,382 $ 2,434,309 - ----------------------------------------------------------------------------------------------------------------------------- Interest on deposits and borrowings $11,421,978 $11,781,550 $12,245,397 - -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Pamrapo Bancorp, Inc. and Subsidiaries 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 statement of financial condition and revenues and expenses for the period then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes 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 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 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. 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 the level-yield method over the terms of the respective loans. Uncollectible interest on loans 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. Notes to Consolidated Financial Statements, continued Allowance for loan losses An allowance for loan losses is maintained at a level considered adequate to absorb 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 impaired 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 impaired 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. 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. An impaired loan is evaluated 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. An insignificant payment delay, which is defined as up to ninety days by the Savings Bank, will not cause a loan to be classified as impaired. A loan is not impaired during a period of delay in payment if the Savings Bank expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. Thus, a demand loan or other loan with no stated maturity is not impaired if the Savings Bank expects to collect all amounts due, including interest accrued at the contractual interest rate, during the period the loan is outstanding. 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 are recorded in operations. Premises and equipment Premises and equipment are comprised of land, at cost, and buildings, building improvements, leaseholds and furnishings and equipment, at cost, less accumulated depreciation and amortization. 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 in the consolidated statements of income. 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. Deferred income tax expense or benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences Notes to Consolidated Financial Statements, continued are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which is not likely to be realized. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize the deferred tax assets. 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, to 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 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 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 Basic net income per common share is based on the weighted average number of common shares actually outstanding. Diluted net income per share is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of stock options, if dilutive, using the treasury stock method. Comprehensive income Effective January 1, 1998, the Corporation adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. As required, the provisions of SFAS No. 130 have been retroactively applied to previously reported periods. The application of SFAS No. 130 had no material effect on the Corporation's consolidated financial condition or operations. Notes to Consolidated Financial Statements, continued Impact of recent accounting standards In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which addresses the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. SFAS No. 133 supersedes SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance- Sheet Risk and Financial Instruments with Concentrations of Credit Risk", and SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". It amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" to include in SFAS No. 107 the disclosure provisions about concentrations of credit risk from SFAS No. 105. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. As the Corporation does not have any derivative instruments or similar contracts, the adoption of SFAS No. 133 will have no impact on the Corporation's financial condition or results of operations. Reclassification Certain amounts for periods have been reclassified to conform to the current period's presentation. 2. Securities Available for Sale
December 31, 1997 ------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------------- Carrying Value Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Government (including agencies): Due after one year through five years $ 1,999,000 $ 16,620 $ - $ 2,015,620 After ten years 1,000,000 1,920 - 1,001,920 - ----------------------------------------------------------------------------------------------------------------------------------- 2,999,000 18,540 - 3,017,540 Mortgage-backed securities 7,712,311 18,925 153,928 7,577,308 Mutual funds 1,114,418 4,289 - 1,118,707 Equity security 7,020 128,627 - 135,647 - ----------------------------------------------------------------------------------------------------------------------------------- $ 11,832,749 $ 170,381 $ 153,928 $11,849,202 - ----------------------------------------------------------------------------------------------------------------------------------- December 31, 1998 ------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------------- Carrying Value Gains Losses Value - ----------------------------------------------------------------------------------------------------------------------------------- U.S. Government (including agencies): Due in one year or less $ 1,999,632 $ 17,248 $ - $ 2,016,880 Mortgage-backed securities 6,400,494 8,767 102,056 6,307,205 Mutual funds 1,182,251 6,024 1,176,227 Equity security 7,020 144,180 - 151,200 - ----------------------------------------------------------------------------------------------------------------------------------- $ 9,589,397 $ 170,195 $ 108,080 $ 9,651,512 - -----------------------------------------------------------------------------------------------------------------------------------
There were no sales of securities available for sale during the years ended December 31, 1996 and 1998. Proceeds from the sales of securities available for sale during the year ended December 31, 1997 totalled $3,992,226. Gross gains of $32,399 and gross losses of $26,880 were realized on those sales. Notes to Consolidated Financial Statements, continued 3. Investment Securities Held To Maturity
December 31, 1998 -------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------------- Estimated Fair Value Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Government (including agencies): Due after ten years $ 1,998,142 $ - $ 17 $ 1,998,125 - ------------------------------------------------------------------------------------------------------------------------------------
There were no sales of investment securities held to maturity during the years ended December 31, 1996, 1997 and 1998. 4. Mortgage-Backed Securities Held To Maturity
December 31, 1997 -------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------------- Estimated Fair Value Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corporation $ 91,984,480 $ 1,184,211 $ 91,719 $ 93,076,972 Federal National Mortgage Association 25,991,878 511,087 32,940 26,470,025 Government National Mortgage Association 8,132,556 98,617 1,378 8,229,795 - ------------------------------------------------------------------------------------------------------------------------------------ $126,108,914 $ 1,793,915 $ 126,037 $127,776,792 - ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1998 -------------------------------------------------------------------------- Gross Unrealized Amortized --------------------------------- Estimated Fair Value Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corporation $ 91,292,670 $ 1,223,045 $ 66,695 $ 92,449,020 Federal National Mortgage Association 23,856,520 311,870 31,897 24,136,493 Government National Mortgage Association 5,251,001 83,732 - 5,334,733 - ------------------------------------------------------------------------------------------------------------------------------------ $120,400,191 $ 1,618,647 $ 98,592 $121,920,246 - ------------------------------------------------------------------------------------------------------------------------------------
There were no sales of mortgage-backed securities during the years ended December 31, 1996 and 1998. During the year ended December 31, 1997, proceeds from the sales of mortgage-backed securities held to maturity totalled $3,640,635 and resulted in gross gains and losses of $115,069 and $9,005, respectively. The securities sold had an outstanding principal balance of less than fifteen percent of their original principal balances and, as provided for in SFAS No. 115, were permitted to be sold out of the held to maturity portfolio. Notes to Consolidated Financial Statements, continued 5. Loans Receivable
December 31, ------------------------------------- 1997 1998 - ----------------------------------------------------------------------------------------------- Real estate mortgage: One-to-four family $120,344,198 $138,885,292 Multi-family 32,872,720 33,717,925 Commercial 21,323,826 21,259,215 FHA insured and VA guaranteed 1,085,808 761,245 - ----------------------------------------------------------------------------------------------- 175,626,552 194,623,677 - ----------------------------------------------------------------------------------------------- Real estate construction 2,031,948 5,073,807 - ----------------------------------------------------------------------------------------------- Land 605,862 2,184,263 - ----------------------------------------------------------------------------------------------- Consumer: Passbook or certificate 431,303 458,476 Home improvement 440,314 508,026 Equity and second mortgage 33,586,539 39,184,421 Student education 752,973 53,604 Automobile 1,210,292 1,273,202 Personal 1,444,871 2,033,009 - ----------------------------------------------------------------------------------------------- 37,866,292 43,510,738 - ----------------------------------------------------------------------------------------------- Total 216,130,654 245,392,485 - ----------------------------------------------------------------------------------------------- Less: Loans in process 570,700 2,408,762 Allowance for loan losses 2,475,000 2,300,000 Deferred loan fee and discounts 1,928,859 1,673,733 - ----------------------------------------------------------------------------------------------- 4,974,559 6,382,495 - ----------------------------------------------------------------------------------------------- $211,156,095 $239,009,990 - -----------------------------------------------------------------------------------------------
At December 31, 1996, 1997 and 1998, loans serviced by the Savings Bank for the benefit of others totalled approximately $7,593,000, $4,943,000 and $3,772,000, respectively. At December 31, 1996, 1997 and 1998, nonaccrual loans for which interest has been discontinued totalled approximately $6,928,000, $5,041,000 and $3,446,000, respectively. During the years ended December 31, 1996, 1997 and 1998, the Savings Bank recognized interest income of approximately $172,000, $144,000 and $97,000, respectively, on these loans. Interest income that would have been recorded, had the loans been on accrual status, would have amounted to approximately $665,000, $491,000 and $333,000 for the years ended December 31, 1996, 1997 and 1998, 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:
December 31, ---------------------------------------- 1996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------- Balance, beginning $2,725,000 $2,800,000 $ 2,475,000 Provisions charged to operations 644,466 585,555 291,856 Recoveries credited to allowance 68,906 17,144 16,773 Loan losses charged to allowance (638,372) (927,699) (483,629) - ----------------------------------------------------------------------------------------------------------------------------- $2,800,000 $2,475,000 $ 2,300,000 - -----------------------------------------------------------------------------------------------------------------------------
Impaired loans and related amounts recorded in the allowance for loan losses are summarized as follows:
December 31, ------------------------ 1997 1998 - ------------------------------------------------------------------------------------------------- Recorded investment in impaired loans: With recorded allowances $1,490,362 $1,172,293 Without recorded allowances 3,361,451 2,277,547 - ------------------------------------------------------------------------------------------------- Total impaired loans 4,851,813 3,449,840 - ------------------------------------------------------------------------------------------------- Related allowance for loan losses 616,349 671,110 - ------------------------------------------------------------------------------------------------- Net impaired loans $4,235,464 $2,778,730 - -------------------------------------------------------------------------------------------------
The activity with respect to loans to directors, officers and associates of such persons, is as follows:
Year Ended December 31, ---------------------------------------- 1996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------- Balance, beginning $2,939,661 $3,341,861 $ 3,121,209 Loans originated 1,034,065 522,580 1,314,400 Collection of principal (631,865) (743,232) (1,376,837) - ----------------------------------------------------------------------------------------------------------------------------- Balance, ending $3,341,861 $3,121,209 $ 3,058,772 - -----------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued 6. Premises and Equipment
December 31, ------------------------ 1997 1998 - --------------------------------------------------------------------------------------------------------------------------- Land $ 701,625 $ 701,625 - --------------------------------------------------------------------------------------------------------------------------- Buildings and improvements 2,988,834 2,996,805 Less accumulated depreciation 1,242,349 1,348,149 - --------------------------------------------------------------------------------------------------------------------------- 1,746,485 1,648,656 - --------------------------------------------------------------------------------------------------------------------------- Leasehold improvements 413,741 1,578,184 Less accumulated depreciation 8,382 96,807 - --------------------------------------------------------------------------------------------------------------------------- 405,359 1,481,377 - --------------------------------------------------------------------------------------------------------------------------- Furnishings and equipment 4,100,874 4,635,642 Less accumulated amortization 3,472,165 3,771,860 - --------------------------------------------------------------------------------------------------------------------------- 628,709 863,782 - --------------------------------------------------------------------------------------------------------------------------- $3,482,178 $4,695,440 - ---------------------------------------------------------------------------------------------------------------------------
Depreciation expense for the years ended December 31, 1996, 1997 and 1998 totalled approximately $311,000, $335,000 and $509,000, respectively. Depreciation charges are computed on the straight-line method over the following estimated useful lives: Buildings and improvements 10 to 50 years Leasehold improvements 10 years Furnishings and equipment 3 to 10 years 7. Interest Receivable
December 31, --------------------------- 1997 1998 - ------------------------------------------------------------------------------ Loans, net of allowance for uncollected interest of approximately $281,000 and $204,000, respectively $1,580,275 $1,506,519 Mortgage-backed securities 829,217 789,271 Investments and other interest-earning assets 85,708 68,550 - ------------------------------------------------------------------------------ $2,495,200 $2,364,340 - ------------------------------------------------------------------------------
8. Deposits
December 31, ---------------------------------------------------------------------------------- 1997 1998 ---------------------------------------------------------------------------------- Weighted Weighted Average Rate Amount Percent Average Rate Amount Percent - ------------------------------------------------------------------------------------------------------------------------ Demand: Non-interest-bearing demand 0.00% $ 14,855,660 4.83 0.00% $ 17,379,472 5.33 NOW 2.00% 19,917,411 6.48 2.00% 22,373,617 6.86 - ------------------------------------------------------------------------------------------------------------------------ 34,773,071 11.31 39,753,089 12.19 Money Market 2.75% 22,213,618 7.22 3.00% 22,853,641 7.01 Savings and club 2.84% 109,475,872 35.61 2.25% 111,715,515 34.27 Certificates of deposit 4.96% 141,009,439 45.86 5.02% 151,663,038 46.53 - ------------------------------------------------------------------------------------------------------------------------ 3.61% $307,472,000 100.00 3.46% $325,985,283 100.00 - ------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued The scheduled maturities of certificates of deposit are as follows:
December 31, (In Thousands) ----------------------------- Maturity Period 1997 1998 - ----------------------------------------------------------------------------------------------------- One year or less $ 117,901 $ 127,627 After one to three years 20,183 20,219 After three years 2,925 3,817 - ----------------------------------------------------------------------------------------------------- $ 141,009 $ 151,663 - ----------------------------------------------------------------------------------------------------- Certificates of deposit of $100,000 or more by the time remaining until maturity are as follows: December 31, (In Thousands) ----------------------------- Maturity Period 1997 1998 - ----------------------------------------------------------------------------------------------------- Three months or less $ 7,160 $ 9,094 After three through six months 8,096 6,110 After six through twelve months 6,611 10,387 After twelve months 4,551 3,991 - ----------------------------------------------------------------------------------------------------- $ 26,418 $ 29,582 - ----------------------------------------------------------------------------------------------------- A summary of interest on deposits follows: Year Ended December 31, -------------------------------------------- 1996 1997 1998 - ------------------------------------------------------------------------------------------------ Demand $ 1,078,983 $ 993,986 $ 1,045,139 Savings and club 3,166,105 3,077,839 2,834,378 Certificates of deposit 6,939,953 7,002,181 7,437,359 - ------------------------------------------------------------------------------------------------ 11,185,041 11,074,006 11,316,876 Less penalties for early withdrawal of certificates of deposit (10,346) (11,898) (13,342) - ------------------------------------------------------------------------------------------------ $11,174,695 $ 11,062,108 $11,303,534 - ------------------------------------------------------------------------------------------------
9. Advances From Federal Home Loan Bank of New York
December 31, ------------------------------------------------ 1997 1998 ------------------------------------------------ Weighted Weighted Maturing Average Average by Interest Interest - ------------------------------------------------------------------------ December 31, Rate Amount Rate Amount 1999 6.47% $ 3,000,000 6.47% $ 3,000,000 2000 6.27% 5,000,000 6.27% 5,000,000 2001 5.10% 243,100 5.10% 243,100 2002 6.51% 5,000,000 6.51% 5,000,000 2003 4.62% 340,000 5.36% 15,340,000 6.34% $13,583,100 5.83% $28,583,100
At December 31, 1997 and 1998, the advances were secured by pledges of the Savings Bank's investments in the capital stock of the Federal Home Loan Bank of New York totalling $2,979,400 and $3,097,200, respectively, mortgage-backed securities with carrying values of $12,876,000 and $9,784,000, respectively, and a blanket assignment of the Savings Bank's unpledged qualifying mortgage loans, mortgage-backed securities and investment securities portfolios. 10. Other Borrowed Money December 31, --------------------------------------------------------- 1997 1998 --------------------------------------------------------- Interest Interest Rate Amount Rate Amount - ----------------------------------------------------------------------- Mortgage loan 8.00% $ 273,623 8.00% $ 252,535 - ----------------------------------------------------------------------- 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 $399,000 and $393,000 at December 31, 1997 and 1998, respectively. 11. Stock Repurchase Program During the years ended December 31, 1996 and 1997, the Corpo-ration repurchased 294,036 and 318,900 shares, respectively, of its own common stock, at prices ranging from $18.75 to $23.50 per common share, at a total cost of $6,179,188 and $7,369,153, respectively, under stock repurchase programs approved by the Corporation's Board of Directors. Notes to Consolidated Financial Statements, continued 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 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. Quantitative measures established by regulation to ensure capital adequacy require the Savings Bank to maintain minimum amounts and ratios of Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to assets (as defined). The following tables levels at the dates presented:
December 31, ----------------------- (In thousands) 1997 1998 - ------------------------------------------------------------------------------------ GAAP capital $45,395 $42,948 Less: Investment in and advances to non-includable subsidiary (1,305) (1,315) Excess of cost over assets acquired (303) (182) Unrealized gain on securities available for sale (10) (40) - ------------------------------------------------------------------------------------ Core and tangible capital 43,777 41,411 Add: general valuation allowance, as limited 1,856 1,609 - ------------------------------------------------------------------------------------ Total regulatory capital $45,633 $43,020 - ------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
December 31, 1997 ----------------------------------------------------------------------- To Be Well Capitalized Under Prompt Minimum Capital Corrective Actual Requirements Actions Provisions ----------------------------------------------------------------------- (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------- Total Capital (to risk-weighted assets) $ 45,633 25.15% $ 14,513 8.00% $ 18,142 10.00% Tier 1 Capital (to risk-weighted assets) 43,777 24.13% - - 10,885 6.00% Core (Tier 1) Capital (to adjusted total assets) 43,777 11.67% 15,005 4.00% 18,756 5.00% Tangible Capital (to adjusted total assets) 43,777 11.67% 5,627 1.50% - - - --------------------------------------------------------------------------------------------------------------------------- December 31, 1997 ----------------------------------------------------------------------- To Be Well Capitalized Under Prompt Minimum Capital Corrective Actual Requirements Actions Provisions ----------------------------------------------------------------------- (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------------- Total Capital (to risk-weighted assets) $ 43,020 21.23% $ 16,214 8.00% $ 20,267 10.00% Tier 1 Capital (to risk-weighted assets) 41,411 20.43% - - 12,160 6.00% Core (Tier 1) Capital (to adjusted total assets) 41,411 10.05% 16,481 4.00% 20,601 5.00% Tangible Capital (to adjusted total assets) 41,411 10.05% 6,181 1.50% - - - ---------------------------------------------------------------------------------------------------------------------------
As of August 7, 1998, the most recent notification from the New Jersey Department of Banking and Insurance, the Savings Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. 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 ("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. Notes to Consolidated Financial Statements, continued The following tables set forth the Plan's funded status and components of net periodic pension cost:
December 31, ------------------------------------- 1997 1998 - ---------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligation including vested benefits of $2,522,509 (1997) and $2,508,543 (1998) $ 2,581,863 $ 2,567,569 - ---------------------------------------------------------------------------------------------------------- Projected benefit obligation $ (3,275,432) $ (3,257,298) Plan assets at fair value 3,120,434 3,211,549 - ---------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets (154,998) (45,749) Unrecognized net loss 129,314 27,815 - ---------------------------------------------------------------------------------------------------------- Accrued pension cost included in other liabilities $ (25,684) $ (17,934) - ----------------------------------------------------------------------------------------------------------
Net periodic pension cost included the following components:
Year Ended December 31, ------------------------------------------------- 1996 1997 1998 - -------------------------------------------------------------------------------------------------- Service cost $ 165,174 $ 175,878 $ 198,522 Interest cost 202,020 225,244 243,409 Actual return on plan assets (116,162) (201,209) (255,023) Net amortization and deferral (8,606) 36,391 - - -------------------------------------------------------------------------------------------------- Net periodic pension cost $ 242,426 $ 236,304 $ 186,908 - --------------------------------------------------------------------------------------------------
Assumptions used in the accounting for the Plan are as follows:
Year Ended December 31, ------------------------------------------------ 1996 1997 1998 - ----------------------------------------------------------------------------------------------------- Discount rate 7.50% 7.50% 7.50% Rate of increase in compensation 4.00% 4.00% 4.00% Long-term rate of return on plan assets 8.00% 8.00% 8.00% - -----------------------------------------------------------------------------------------------------
Savings and Investment Plan ("SIP") The Savings Bank sponsors a SIP 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 SIP expense amounted to approximately, $109,000, $103,000 and $113,000 for the years ended December 31, 1996, 1997 and 1998, respectively. 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 his compensation reduced by his 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 $76,000, $174,000 and $174,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Stock option plan ("SOP") The following table summarizes the transactions in the SOP:
Number Price of Shares Per Share - ------------------------------------------------------------------------------------------- Balance - December 31, 1995 62,790 $5.75 - $6.375 Exercised 56,930 5.75 - 6.375 Balance - December 31, 1996 5,860 5.75 - 6.375 Exercised 5,860 5.75 - 6.375 Balance - December 31, 1997 and 1998 - - - -------------------------------------------------------------------------------------------
14. 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, 1998, include approximately $6,900,000 of such bad debt, which, in accordance with SFAS 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 $323,000 and $413,000 at December 31, 1997 and 1998, respectively, are reflected in the consolidated statements of financial condition under the caption "Other Assets". Notes to Consolidated Financial Statements, continued 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, ------------------------ Deferred tax assets 1997 1998 - ---------------------------------------------------------------------------------- Allowance for loan losses $ 638,125 $ 647,743 Deferred loan fees 512,087 388,234 Depreciation 13,631 22,224 Reserve for uncollected interest 100,634 73,232 Benefit plans 110,670 128,593 Other 644 - - ---------------------------------------------------------------------------------- 1,375,791 1,260,026 - ---------------------------------------------------------------------------------- Deferred tax liabilities - ---------------------------------------------------------------------------------- Unrealized gain on securities available for sale 5,900 22,400 - ---------------------------------------------------------------------------------- Net deferred tax assets $1,369,891 $1,237,626 - ---------------------------------------------------------------------------------- The components of income taxes are summarized as follows: Year Ended December 31, --------------------------------------- 1996 1997 1998 - ---------------------------------------------------------------------------------- Current $1,027,417 $2,754,147 $2,327,712 Deferred 131,066 5,023 115,765 - ---------------------------------------------------------------------------------- $1,158,483 $2,759,170 $2,443,477 - ---------------------------------------------------------------------------------- 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, ----------------------------------------- 1996 1997 1998 - -------------------------------------------------------------------------------------- Federal income tax $1,401,939 $2,662,327 $2,324,981 Increases (reductions) in income taxes resulting from: Exercise of non- statutory stock options (315,680) (86,391) - New Jersey savings institution tax, net of federal income tax effect 83,714 158,661 137,242 Other items, net (11,490) 24,573 (18,746) - -------------------------------------------------------------------------------------- Effective income tax $1,158,483 $2,759,170 $2,443,477 - --------------------------------------------------------------------------------------
15. Legislative Matter 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. Currently, 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. The FDIC has 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. 16. Commitments and Contingencies 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 are commitments to originate loans. 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 notional 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 Notes to Consolidated Financial Statements, continued payment of a fee. Since commitments may expire without being drawn upon, the 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. The Savings Bank had loan commitments outstanding as follows:
December 31, ------------------------------ 1997 1998 - -------------------------------------------------------------------------------- To originate loans $ 9,674,000 $ 11,583,000 - --------------------------------------------------------------------------------
At December 31, 1998, all the outstanding commitments to originate loans are at fixed interest rates which range from 6.125% to 10.0%. All commitments are due to expire within ninety days. At December 31, 1998, undisbursed funds from approved lines of credit under a homeowners' equity lending program amounted to approximately $1,523,000. Unless they are specifically cancelled by notice from the Savings Bank, these funds represent firm commitments available to the respective borrowers on demand. The interest rate charged for any month on funds disbursed under this program is 1.75% above the prime rate. Rental expenses related to the occupancy of premises totalled $70,000, $98,000 and $280,000 for the years ended December 31, 1996, 1997 and 1998, respectively. At December 31, 1998, minimum non-cancellable obligations under lease agreements with original terms of more than one year are as follows:
December 31, Amount - -------------------------------------------------------------------------------- 1999 $ 257,000 2000 260,000 2001 263,000 2002 284,000 2003 230,000 Thereafter 1,196,000 - -------------------------------------------------------------------------------- $ 2,490,000 - --------------------------------------------------------------------------------
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. 17. Fair Values of Financial Instruments The carrying amounts and fair value of the Corporation's financial instruments are as follows:
December 31, ---------------------------------------------------------------- 1997 1998 ---------------------------------------------------------------- (In Thousands) Carrying Value Fair Value Carrying Value Fair Value - --------------------------------------------------------------------------------------------------------------------- Financial Assets Cash and cash equivalents $ 13,307 $ 13,307 $ 28,047 $ 28,047 Securities available for sale 11,849 11,849 9,652 9,652 Investment securities held to maturity - - 1,998 1,998 Mortgage-backed securities held to maturity 126,109 127,777 120,400 121,920 Loans receivable 211,156 216,349 239,010 246,848 Interest receivable 2,495 2,495 2,364 2,364 Financial Liabilities Deposits 307,472 308,345 325,985 326,826 Advances and other borrowed money 13,857 13,980 28,836 28,372 Commitments To originate loans 9,674 9,674 11,583 11,583 Unused lines of credit 761 761 1,523 1,523 - ---------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued 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. 18. 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, --------------------------- 1997 1998 - ----------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 2,933,564 $ 6,667,981 Investment in subsidiary 45,394,268 42,947,572 Refundable income taxes 184,216 72,878 Other assets 108,622 169,972 - ----------------------------------------------------------------------------------- Total assets $ 48,620,670 $ 49,858,403 - ----------------------------------------------------------------------------------- Liabilities and stockholders' equity Liabilities Other liabilities $ 87,555 $ 85,498 - ----------------------------------------------------------------------------------- Total liabilities 87,555 85,498 - ----------------------------------------------------------------------------------- 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 43,017,781 44,257,571 Treasury stock, at cost (13,425,934) (13,425,934) - ----------------------------------------------------------------------------------- Total stockholders' equity 48,533,115 49,772,905 - ----------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 48,620,670 $ 49,858,403 - -----------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued
Statements of Income Year Ended December 31, ----------------------------------------- 1996 1997 1998 - ------------------------------------------------------------------------------------------------- Dividends from subsidiary $ 8,400,000 $ 7,000,000 $ 7,000,000 Interest income 305,752 65,885 5,587 - ------------------------------------------------------------------------------------------------- Total income 8,705,752 7,065,885 7,005,587 Expenses 663,855 411,584 207,704 - ------------------------------------------------------------------------------------------------- 8,041,897 6,654,301 6,797,883 Equity in undistributed earnings of subsidiary (5,485,098) (1,767,114) (2,475,858) - ------------------------------------------------------------------------------------------------- Income before income taxes (benefit) 2,556,799 4,887,187 4,322,025 Income taxes (benefit) (408,069) (184,016) (72,678) - ------------------------------------------------------------------------------------------------- Net income $ 2,964,868 $ 5,071,203 $ 4,394,703 - ------------------------------------------------------------------------------------------------- Statements of Cash Flows Year Ended December 31, ----------------------------------------- 1996 1997 1998 - ------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 2,964,868 $ 5,071,203 $ 4,394,703 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary 5,485,098 1,767,114 2,475,858 (increase) decrease in refundable income taxes (408,219) 340,834 111,338 (Increase) in other assets (31,649) (23,778) (61,350) Increase (decrease) in other liabilities 94 25,410 (2,057) - ------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,010,192 7,180,783 6,918,492 - ------------------------------------------------------------------------------------------------- Cash flows from investing activities: Decrease in loans receivable 3,000,000 3,000,000 - - ------------------------------------------------------------------------------------------------- Net cash provided by investing activities 3,000,000 3,000,000 - - ------------------------------------------------------------------------------------------------- Cash flows from financing activities: Cash dividends paid (3,318,121) (2,919,723) (3,184,075) Purchase of treasury stock (6,179,188) (7,369,153) - Sale of treasury stock 327,973 34,339 - - ------------------------------------------------------------------------------------------------- Net cash (used in) financing activities (9,169,336) (10,254,537) (3,184,075) - ------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 1,840,856 (73,754) 3,734,417 Cash and cash equivalents - beginning 1,166,462 3,007,318 2,933,564 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents - ending $ 3,007,318 $ 2,933,564 $ 6,667,981 - -------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements, continued 19. Quarterly Financial Data (Unaudited)
(In Thousands, except for per share amounts) First Second Third Fourth Year Ended December 31, 1997 Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------- Interest income $6,937 $7,134 $7,134 $7,191 Interest expense 2,796 2,976 3,026 3,064 - ----------------------------------------------------------------------------------- Net interest income 4,141 4,158 4,108 4,127 Provision for loan losses 150 150 150 136 Non-interest income 397 284 373 620 Non-interest expenses 2,313 2,281 2,401 2,797 Income taxes 762 751 665 581 - ----------------------------------------------------------------------------------- Net income $1,313 $1,260 $1,265 $1,233 - ----------------------------------------------------------------------------------- Basic earnings per common share $ 0.42 $ 0.44 $ 0.44 $ 0.44 - ----------------------------------------------------------------------------------- Diluted earnings per common share $ 0.42 $ 0.44 $ 0.44 $ 0.44 - ----------------------------------------------------------------------------------- Dividends per common share $ 0.25 $ 0.25 $ 0.25 $ 0.25 - ----------------------------------------------------------------------------------- (In Thousands, except for per share amounts) First Second Third Fourth Year Ended December 31, 1998 Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------------- Interest income $7,207 $7,105 $7,248 $7,411 Interest expense 3,034 3,037 3,090 3,267 - ----------------------------------------------------------------------------------- Net interest income 4,173 4,068 4,158 4,144 Provision for loan losses 75 75 75 67 Non-interest income 339 303 362 395 Non-interest expenses 2,616 2,671 2,730 2,795 Income taxes 666 585 623 569 - ----------------------------------------------------------------------------------- Net income $1,155 $1,040 $1,092 $1,108 - ----------------------------------------------------------------------------------- Basic earnings per common share $ 0.41 $ 0.36 $ 0.38 $ 0.40 - ----------------------------------------------------------------------------------- Diluted earnings per common share $ 0.41 $ 0.36 $ 0.38 $ 0.40 - ----------------------------------------------------------------------------------- Dividends per common share $ 0.28 $ 0.28 $ 0.28 $ 0.28 - -----------------------------------------------------------------------------------
Independent Auditors' Report To The Board of Directors and Stockholders Pamrapo Bancorp, Inc. We have audited the consolidated statements of financial condition of Pamrapo Bancorp, Inc. (the "Corporation") and Subsidiaries as of December 31, 1997 and 1998 and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Radice & Co., LLC February 8, 1999 Pamrapo Bancorp, Inc. and Subsidiaries Selected Consolidated Financial Condition and Other Data of the Corporation
At December 31, ---------------------------------------------------------------------------------- (Dollars in thousands) 1994 1995 1996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Financial Condition data: Total amount of: Assets $384,085 $371,365 $362,910 $376,714 $413,474 Loans receivable 222,472 218,140 207,405 211,156 239,010 Securities available for sale 19,471 28,427 22,232 11,849 9,652 Mortgage-backed securities 114,032 96,565 96,727 126,109 120,400 Investment securities 2,096 99 - - 1,998 Deposits 305,910 298,901 300,785 307,472 325,985 Advances and other borrowed money 17,930 8,043 3,876 13,857 28,836 Stockholders' equity 55,372 59,375 53,509 48,533 49,773 Year Ended December 31, ---------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Operating data: Interest income $ 30,466 $ 29,571 $ 28,035 $ 28,396 $ 28,971 Interest expense 10,626 11,456 11,381 11,862 12,428 - ----------------------------------------------------------------------------------------------------------------------------------- Net interest income 19,840 18,115 16,654 16,534 16,543 Provision for loan losses 495 411 644 586 292 Non-interest income 785 735 649 1,674 1,399 Non-interest expenses 9,116 9,808 12,536 9,792 10,812 Income taxes 3,836 3,003 1,158 2,759 2,443 - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 7,178 $ 5,628 $ 2,965 $ 5,071 $ 4,395 - ----------------------------------------------------------------------------------------------------------------------------------- Net income per share Basic $ 2.21 $ 1.67 $ 0.90 $ 1.74 $ 1.55 Diluted 2.12 1.65 0.90 1.74 1.55 - ----------------------------------------------------------------------------------------------------------------------------------- Dividends per share $ .485 $ .80 $ .90 $ 1.00 $ 1.12 - ----------------------------------------------------------------------------------------------------------------------------------- Dividend payout ratio 21.97% 48.33% 100.28% 57.58% 72.45% - ----------------------------------------------------------------------------------------------------------------------------------- At December 31, ---------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Selected Financial Ratios: Return on average assets 1.82% 1.49% 0.81% 1.37% 1.13% Return on average equity 13.43% 9.71% 5.27% 10.34% 8.96% Average equity/average assets 13.55% 15.40% 15.33% 13.28% 12.64% Interest rate spread 4.86% 4.51% 4.23% 4.17% 3.91% Net yield on average interest-earning assets 5.30% 5.10% 4.81% 4.72% 4.49% Non-interest expenses to average assets 2.31% 2.61% 3.41% 2.65% 2.79% Equity/total assets 14.42% 15.99% 14.74% 12.88% 12.04% Capital ratios: Tangible 11.56% 13.69% 12.59% 11.67% 10.05% Core 11.56% 13.69% 12.59% 11.67% 10.05% Risk-based 24.59% 28.53% 26.35% 25.15% 21.23% Non-performing loans to total assets 3.34% 2.93% 2.89% 1.84% 1.11% Non-performing loans to loans receivable 5.77% 4.98% 5.06% 3.27% 1.92% Non-performing assets to total assets 3.63% 3.32% 3.44% 2.20% 1.40% Allowance for loan losses to non-performing loans 28.45% 25.09% 26.69% 36.23% 50.00% Average interest-earning assets/average interest-bearing liabilities 1.16x 1.18x 1.17x 1.16x 1.17x Net interest income after provision for loan losses to non-interest expenses 2.12x 1.81x 1.28x 1.63x 1.50x - -----------------------------------------------------------------------------------------------------------------------------------
Pamrapo Bancorp, Inc. and Subsidiaries 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 March 11, 1999, 2,842,924 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 price per common share for the periods indicated. Such prices do not necessarily reflect retail markups, markdowns or commissions. - --------------------------------------------------- Closing Prices Quarter Ended High Low - --------------------------------------------------- March 31,1997 $23.75 $19.00 June 30,1997 21.00 18.50 September 30, 1997 25.50 19.75 December 31,1997 27.25 21.00 March 31, 1998 28.75 22.75 June 30, 1998 30.00 26.75 September 30, 1998 33.63 22.75 December 31, 1998 26.75 22.13 - --------------------------------------------------- Dividends were paid as follows: - --------------------------------------------------- March, 1997 $ .25 June, 1997 .25 September, 1997 .25 December, 1997 .25 March, 1998 .28 June, 1998 .28 September, 1998 .28 December, 1998 .28 - --------------------------------------------------- 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. EX-23 4 EXHIBIT 23 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 8, 1999, included in the 1998 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, 1998. /s/ RADICS & CO., LLC ------------------------ RADICS & CO., LLC March 29, 1999 Pine Brook, New Jersey EX-27 5 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 12,547,045 15,500,000 0 0 9,651,512 120,400,191 121,920,246 241,309,990 2,300,000 413,474,157 325,985,283 28,835,635 8,880,334 0 0 0 34,500 49,738,405 413,474,157 19,380,581 8,611,942 978,661 28,971,184 11,303,534 12,427,930 16,543,254 291,856 0 10,812,376 6,838,180 6,838,180 0 0 4,394,703 1.55 1.55 7.86 3,446,000 1,108,000 0 1,244,000 2,475,000 483,629 16,773 2,300,000 691,000 0 1,609,000
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