SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 of the
Securities Exchange Act of 1934, as amended
For the fiscal year ended December 31, 1999
Commission File No.: 0-26681
PULASKI BANCORP, INC.
(exact name of registrant as specified in its charter)
United States 22-3652847
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
130 Mountain Avenue, Springfield, New Jersey 07081
(Address of principal executive offices)
Registrant's telephone number, including area code: (973) 564-9000
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of
the issuer, based upon the closing price of its Common Stock on March 1, 2000,
as quoted on the Nasdaq SmallCap Market, was approximately $5,909,000. Solely
for purposes of this calculation, the shares held by directors and executive
officers of the registrant are deemed to be shares held by affiliates.
The number of shares of Common Stock outstanding as of March 1, 2000
is: 1,980,588.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended
December 31, 1999 are incorporated by reference into Part II of this Form 10-K.
Portions of the Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
<PAGE>
INDEX
PART I PAGE
----
Item 1. Description of Business.................................1
Additional Item. Executive Officers of the Registrant..............34
Item 2. Properties..............................................35
Item 3. Legal Proceedings.......................................36
Item 4. Submission of Matters to a Vote of Security Holders.....36
PART II
Item 5. Market for Common Equity and Related Stockholders
Matters.................................................36
Item 6. Selected Financial Data.................................36
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................36
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.............................................36
Item 8. Financial Statements and Supplementary Data.............36
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure..................36
PART III
Item 10. Directors and Executive Officers of the Registrant......37
Item 11. Executive Compensation..................................37
Item 12. Security Ownership of Certain Beneficial Owners
and Management..........................................37
Item 13. Certain Relationships and Related Transactions..........37
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.............................................37
SIGNATURES...................................................................39
<PAGE>
PART I
Item 1. Description of Business
General
On July 12, 1999, Pulaski Savings Bank (the "Bank") reorganized into a
two-tier mutual holding company structure pursuant to an Agreement and Plan of
Reorganization which was unanimously adopted by the Board of Directors of the
Bank on January 28, 1999 ("Plan of Reorganization") and approved by the
shareholders of the Bank on April 23, 1999. Under the Plan of Reorganization
(the "Reorganization"), the Bank became a wholly owned subsidiary of Pulaski
Bancorp, Inc. (the "Company"), a federally chartered stock holding company, a
majority of the Common Stock of which is now owned by the Pulaski Bancorp,
M.H.C. (the "MHC"), the Bank's parent mutual holding company. In the
Reorganization, each outstanding share of Bank common stock was converted into
one share of Company common stock and the holders of Bank common stock became
the holders of all of the outstanding shares of Company common stock.
Accordingly, as a result of the Reorganization, the Bank's minority
stockholders, became minority stockholders of the Company and the Bank's
majority stockholder, the MHC, became the majority stockholder of the Company.
The Company, the Bank and the MHC are regulated by the Office of Thrift
Supervision (the "OTS"). The Bank is a federally chartered savings bank and is
wholly owned by the Company. The Company is a savings and loan holding company
and is subject to regulation by the OTS, the Federal Deposit Insurance
Corporation ("FDIC") and the Securities and Exchange Commission (the "SEC").
Currently, other than investing in various securities, the Company does not
directly transact any material business other than through the Bank.
Accordingly, the discussion herein addresses the operations of the Company as
they are conducted through the Bank. At December 31, 1999, the Company had total
assets of $236.6 million, total deposits of $169.0 million and total
stockholders' equity of $23.8 million.
The Bank was originally organized in 1943 as a New Jersey-chartered
savings and loan association and, in 1995, became a federally-chartered savings
bank. The Bank conducts business from its administrative/branch office located
in Springfield, New Jersey and its five other branch offices located in the
municipalities of Bayville, Irvington, Milltown, Spotswood and Toms River, New
Jersey. The Bank is a community-oriented savings institution whose business
primarily consists of accepting deposits from customers and investing those
funds primarily in mortgage loans secured by one- to four-family residences
located within its primary market area. To a significantly lesser extent, the
Bank invests in home equity, multi-family, commercial real estate, construction
and development, and consumer loans. The Bank generally retains for its
portfolio all one- to four-family mortgage loans which it originates.
The Company's and Bank's executive office is located at 130 Mountain
Avenue, Springfield, New Jersey 07081 and its telephone number is (973)
564-9000.
Market Area and Competition
The Bank has been, and intends to continue to be, a community-oriented
financial institution, offering a wide variety of financial services to meet the
needs of the communities it serves. The Bank conducts its business through its
administrative and branch office located in Springfield, New Jersey, and five
branch offices located in Bayville, Irvington, Milltown, Spotswood and Toms
River, New Jersey. The Bank's deposit gathering base is concentrated in the
communities surrounding its offices. While its lending area extends throughout
New Jersey, most of the Bank's mortgage loans are secured by properties located
1
<PAGE>
in Essex, Union, Middlesex, Monmouth and Ocean Counties and a portion of Hudson
County consisting of the municipalities of East Newark, Kearny and Harrison, New
Jersey.
The economy in the Bank's primary market area is based upon a mixture
of service and retail trade. Other employment is provided by a variety of
wholesale trade, manufacturing, federal, state and local government, hospitals
and utilities. The area is also home to commuters working in the greater New
York City metropolitan area.
The Bank faces significant competition both in making loans and in
attracting deposits. The State of New Jersey has a high density of financial
institutions, many of which are branches of significantly larger institutions
which have greater financial resources than the Bank, all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, credit unions, mortgage banking companies and insurance companies.
Its most direct competition for deposits has historically come from commercial
banks, savings banks, savings and loan associations and credit unions. The Bank
faces additional competition for deposits from short-term money market funds,
other corporate and government securities funds and from other financial service
institutions such as brokerage firms and insurance companies.
Analysis of Net Interest Income
Net interest income represents the difference between interest income
on interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rates earned or paid on
them.
2
<PAGE>
Average Balance Sheet. The following table sets forth certain
information relating to the Bank for the years ended December 31, 1999, 1998 and
1997. The average yields and costs are derived by dividing income or expense by
the average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown except where noted otherwise and reflect
annualized yields and costs. Average balances are derived from average month-end
balances. Management does not believe that the use of average monthly balances
instead of average daily balances has caused any material differences in the
information presented. The yields and costs include fees which are considered
adjustments to yields.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------- --------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable ............ $117,064 $ 9,188 7.85% $100,748 $ 8,539 8.48% $99,617 $ 8,337 8.37%
Investment securities (1).... 12,259 716 5.84 13,369 760 5.68 13,520 839 6.21
Mortgage-backed securities... 65,326 3,832 5.87 53,588 3,219 6.01 45,573 2,974 6.53
Other interest-earning assets (2) 11,657 655 5.62 14,991 908 6.06 9,766 552 5.65
-------- -------- -------- ------- ------- --------
Total interest-earning assets 206,306 14,391 6.98 182,696 13,426 7.35 168,476 12,702 7.54
Noninterest-earning assets... 7,576 6.97 7,853 6,672
-------- -------- --------
Total assets.............. $213,882 $190,549 $175,148
======== ======== ========
Liabilities and Stockholders' Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Demand deposits........... $ 23,538 $ 728 3.09 $ 16,724 496 2.97 $ 11,573 279 2.41
Savings and club accounts. 26,432 606 2.29 25,942 585 2.26 27,127 653 2.41
Certificates of deposit... 120,312 6,137 5.10 118,406 6,550 5.53 112,617 6,158 5.47
-------- -------- -------- ------- ------- --------
Total interest-bearing deposits 170,282 7,471 4.39 161,072 7,631 4.74 151,317 $ 7,090 4.69
Borrowed money............... 15,268 846 5.54 2,480 159 6.41 3,565 257 7.21
-------- -------- -------- ------- ------- --------
Total interest-bearing liabilities 185,550 8,317 4.48 163,552 7,790 4.76 154,882 7,347 4.74
Non-interest-bearing liabilities 5,125 4,726 1,625
Total liabilities......... 190,675 168,278 156,507
Stockholders' equity............ 23,207 22,271 18,641
-------- -------- --------
Total liabilities and stockholders'
equity.................... $213,882 $190,549 $175,148
======== ======== ========
Net interest income/interest
rate spread.................. $ 6,074 2.49% $ 5,636 2.59% $ 5,355 2.80%
======== ==== ======== ==== ======== ====
Net interest-earning assets/net yield
on interest-earning assets... $ 20,756 19,144 13,594 3.18%
======== ====== ====== ====
Ratio of average interest-earning
assets to average interest-
interest-bearing liabilities. 1.11x 1.12x 1.09x
==== ==== ====
</TABLE>
- ----------------------------
(1) Includes securities available for sale and investment securities held to
maturity.
(2) Includes interest-earning deposits in other banks, investments held for
sale, Federal funds sold and FHLB-NY stock.
3
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and the net change. The
changes attributable to the combined impact of volume and rate have been
allocated on a proportional basis between changes in volume and rate.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------------- --------------------------------
Increase/(Decrease) Due to Increase/(Decrease) Due to
-------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable................. $1,315 $(666) $ 649 $ 94 $108 $202
Investment securities............ (65) 21 (44) (9) (79) (79)
Mortgage-backed securities....... 690 (77) 613 495 (250) 245
Other interest-earning assets.... (191) (62) (253) 313 43 356
--------- -------- ------- ---- ------ ----
Total......................... 1,749 (784) 965 893 (178) 724
------- ------- ------ ---- ------ ----
Interest expense:
Demand deposits.................. 211 21 232 143 74 217
Savings and club accounts........ 12 9 21 (28) (40) (68)
Certificates of deposit.......... 104 (517) (413) 323 69 392
Borrowed money................... 711 (24) 687 (72) (26) (98)
-------- -------- ------ ------- ------- ------
Total......................... 1,038 (511) 527 366 77 443
------- ------- ------ ----- ------- ----
Net change in net interest income... $ 711 $(273) $ 438 $527 $(255) $281
======= ===== ===== ==== ====== ====
</TABLE>
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio consists
primarily of first mortgage loans secured by one- to four-family residences. At
December 31, 1999, the Bank had total loans receivable of $156.2 million, of
which $100.1 million were one- to four-family, residential mortgage loans,
equaling 64.1% of the Bank's total loans receivable. At such date, the remainder
of the Bank's loan portfolio consisted of: $6.6 million of second mortgage
loans, or 4.2% of total loans receivable; $3.0 million of equity lines of
credit, or 1.9% of total loans receivable; $2.5 million of multi-family
residential loans, or 1.6% of total loans receivable; $7.0 million of commercial
real estate loans, or 4.5% of total loans receivable; $36.9 million of
construction and development loans, or 23.6% of total loans receivable; and
$127,000 of consumer loans, or 0.1% of total loans receivable, consisting of
loans on deposit accounts. At December 31, 1999, 35.7% of the Bank's mortgage
loans had adjustable interest rates, most of which are indexed to the one-year
Constant Maturity Treasury ("CMT") Index.
<PAGE>
The types of loans that the Bank may originate are subject to federal
and state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans and the supply of money available for
lending purposes and the rates offered by competitors. These factors are, in
turn, affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board ("FRB"), and
legislative tax policies.
4
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- --------------------- --------------------- --------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
---------- --------- --------- ---------- ---------- --------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Residential:
One- to four-family................ $100,110 64.09% $ 78,110 67.40% $ 84,006 74.93% $87,506 85.03%
Multi-family....................... 2,501 1.60 2,903 2.51 2,726 2.43 2,510 2.44
Second mortgage.................... 6,576 4.21 4,831 4.17 3,798 3.39 3,164 3.07
Home equity lines.................. 3,028 1.94 2,168 1.87 1,275 1.14 1,865 1.81
Commercial real estate............... 6,968 4.46 3,689 3.18 3,811 3.40 991 0.96
Construction and development......... 36,901 23.62 23,898 20.62 16,408 14.63 6,757 6,57
---------- ------- --------- ------- -------- ----- --------- ------
Total mortgage loans............. 156,084 99.92 115,599 99.75 112,024 99.92 102,793 99.88
--------- ------- -------- ------- ------- ----- ------- -----
Consumer Loans:
Passbook or account................ 127 0.08 286 0.25 91 0.08 124 0.12
------------ -------- ----------- ------- ----------- ------- --------- -------
Total loans receivable............... 156,211 100.00% 115,885 100.00% 112,115 100.00% 102,917 100.00%
====== ====== ====== ======
Less:
Allowance for loan losses.......... 1,135 1,022 913 844
Loans in process................... 19,760 13,143 7,823 4,599
Deferred loan fees................. 794 826 1,167 1,216
------------ ------------ --------- ---------
Loans receivable, net................ $134,522 $100,894 $102,212 $96,258
======== ======== ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-----------------------
1995
-----------------------
Percent
Amount of Total
----------- ----------
<S> <C> <C>
Mortgage Loans:
Residential:
One- to four-family................ $ 91,469 92.16%
Multi-family....................... 772 0.78
Second mortgage.................... 1,810 1.82
Home equity lines.................. 1,741 1.75
Commercial real estate............... 1,351 1.36
Construction and development......... 1,933 1.95
-------- ------
Total mortgage loans............. 99,076 99.82
-------- ------
Consumer Loans:
Passbook or account................ 178 0.18
-------- -------
Total loans receivable............... 99,254 100.00%
======
Less:
Allowance for loan losses.......... 846
Loans in process................... 1,597
Deferred loan fees................. 1,206
--------
Loans receivable, net................ $ 95,605
========
</TABLE>
5
<PAGE>
Loan Maturity. The following table shows the remaining contractual
maturity of the Bank's loans at December 31, 1999. The table does not include
the effect of future principal prepayments.
<TABLE>
<CAPTION>
At December 31, 1999
------------------------------------------------------------------------------------
One- to Construction
Four- Multi- Second Equity Commercial and Total
Family Family Mortgages Lines Real Estate Development Consumer Loans
------ ------ --------- ----- ----------------------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less ....................... $ 70 $ -- $ 13 $ -- $ -- $ 22,146 $ 127 $ 22,356
After one year:
More than one year to three years ... 717 147 123 53 408 14,755 -- 16,203
More than three years to five years . 1,908 -- 879 148 -- -- -- 2,935
More than five years to 10 years .... 13,336 342 2,039 217 4,375 -- -- 20,309
More than 10 years to 20 years ...... 20,056 788 3,522 -- 2,185 -- -- 26,551
More than 20 years .................. 64,023 1,224 -- 2,610 -- -- -- 67,857
-------- -------- -------- -------- -------- -------- -------- --------
Total due after one year ............... 100,040 2,501 6,563 3,028 6,968 14,755 -- 133,855
-------- -------- -------- -------- -------- -------- -------- --------
Total due .............................. $100,110 $ 2,501 $ 6,576 $ 3,028 $ 6,968 $ 36,901 $ 127 156,211
======== ======== ======== ======== ======== ======== ======== ========
Less:
Loans in process.............. 19,760
Deferred loan fees............ 794
Allowance for loan losses..... 1,135
-------
Loans receivable, net.................. $134,522
========
</TABLE>
6
<PAGE>
The following table sets forth at December 31, 1999, the dollar amount
of all loans contractually due after December 31, 2000, and whether such loans
have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Due after December 31, 2000
------------------------------------
Fixed Adjustable Total
-------- -------- ---------
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One- to four-family ............... $ 87,085 $ 12,955 $100,040
Multi-family ...................... 974 1,527 2,501
Second mortgages .................. 6,563 -- 6,563
Equity lines ...................... -- 3,028 3,028
Commercial real estate ............ 4,080 2,888 6,968
Construction and development ...... -- 14,755 14,755
-------- -------- --------
Total mortgage loans ............ 98,702 35,153 133,855
Consumer loans ....................... -- -- --
-------- -------- --------
Total loans ................... $ 98,702 $ 35,153 $133,855
======== ======== ========
</TABLE>
Origination, Sale and Servicing of Loans. The Bank's mortgage lending
activities are conducted primarily by its loan personnel operating at its
administrative and branch office in Springfield, New Jersey. All loans
originated by the Bank, either through internal sources or through loan
correspondents are underwritten by the Bank pursuant to the Bank's policies and
procedures. Although the Bank is not an approved FNMA or FHLMC lender, the
Bank's internal underwriting policies, guidelines and procedures are modeled
after those of FNMA and FHLMC. The Bank originates both adjustable-rate and
fixed-rate loans. The Bank's ability to originate fixed- or adjustable-rate
loans is dependent upon the relative customer demand for such loans, which is
affected by the current and expected future level of interest rates. It is the
general policy of the Bank to retain all loans originated in its portfolio.
During the years ended December 31, 1999 and 1998, the Bank originated
$32.3 million and $10.6 million, respectively, of fixed-rate and adjustable-rate
one- to four-family loans, all of which were retained by the Bank. Based upon
the Bank's investment needs and market opportunities, the Bank has, on occasion,
purchased loans or participated in loans, primarily multi-family and commercial
real estate mortgage loans. During the year ended December 31, 1999, the Bank
purchased or acquired new participations in the amount of $12.2 million. The
Bank has purchased loans from correspondent financial institutions which were
underwritten pursuant to the Bank's policies, and closed in the name of
correspondent financial institution but assigned to the Bank for its own
portfolio.
7
<PAGE>
The following table sets forth the Bank's loan originations, purchases
and principal repayments for the periods indicated. The Bank sold no loans
during the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1999 1998 1997
-------- --------- --------
(In thousands)
<S> <C> <C> <C>
Beginning balance ....................... $115,885 $112,115 $102,917
Loans originated(1):
Mortgage loans:
One- to four-family .............. 32,332 10,647 7,998
Multi-family ..................... 373 216 248
Second mortgages ................. 2,834 2,207 1,427
Equity lines ..................... 2,835 3,300 899
Commercial real estate ........... 4,093 625 2,887
Construction and development ..... 19,328 15,078 12,900
-------- -------- --------
Total mortgage loans ......... 61,795 32,073 26,359
Consumer loans:
Passbook loans ................... 78 360 142
-------- -------- --------
Total loans originated .............. 61,873 32,433 26,501
-------- -------- --------
Total ........................ 177,758 144,548 129,418
Less:
Principal repayments and other, net . 21,514 28,535 17,236
Transfer of mortgage loans to REO ... 33 128 67
-------- -------- --------
Ending balance .......................... $156,211 $115,885 $112,115
======== ======== ========
</TABLE>
- --------
(1) Includes loan participations purchased.
One- to Four-Family Mortgage Lending. The Bank offers both fixed-rate
and adjustable-rate mortgage loans ("ARM") secured by one- to four-family
residences with maturities of up to 30 years. Substantially all of such loans
are secured by property located in the Bank's primary market area. Loan
originations are generally obtained from the Bank's in-house loan
representatives, correspondent banking relationships and wholesale brokers and
their contacts with the local real estate industry, existing or past customers,
and members of the local communities. At December 31, 1999, one- to four-family
mortgage loans totalled $109.7 million, or 70.2% of the Bank's total loans
receivable, which includes $6.6 million of fixed rate second mortgage loans and
$3.0 million of adjustable rate home equity lines of credit. Of the Bank's
mortgage loans secured by one- to four-family residences, $93.6 million, or
85.3%, were fixed-rate loans.
<PAGE>
The Bank originates all mortgage loans for its own portfolio. The
Bank's fixed-rate mortgage loans currently are made for terms from 10 to 30
years. The Bank also offers ARM loan programs with interest rates which adjust
every one or three years. The Bank's ARM loans generally provide for periodic
(not more than 2%) and overall (not more than 6%) caps on the increase or
decrease in the interest rate at any adjustment date and over the life of the
loan. The interest rate adjustment on these loans is indexed to the applicable
one- or three-year U.S. Treasury CMT Index with a repricing margin of 2.75%
above the index.
8
<PAGE>
The Bank also offers a one-year ARM program that can be converted into a
fixed-rate loan one time during the second through fifth years of the loan. The
Bank charges a fee if such conversion feature is exercised.
The Bank's policy is to originate one- to four-family residential
mortgage loans in amounts up to 80% of the lower of the appraised value or the
selling price of the property securing the loan and up to 90% of the appraised
value or selling price if private mortgage insurance is obtained, with the
exception of certain loans secured by condominium units (which require a 65%
loan-to-value ("LTV") ratio) and loans originated pursuant to the Bank's
Affordable Housing Program and first-time homebuyers program (which allow for a
95% LTV ratio). Mortgage loans originated by the Bank include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of the
property without the Bank's consent. Due-on-sale clauses are an important means
of adjusting the rates on the Bank's fixed-rate mortgage loan portfolio and the
Bank has generally exercised its rights under these clauses.
The origination of adjustable-rate residential mortgage loans, as
opposed to fixed-rate residential mortgage loans, helps reduce the Bank's
exposure to increases in interest rates. However, adjustable-rate loans
generally pose credit risks not inherent in fixed-rate loans, primarily because
as interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. Periodic and lifetime caps on interest
rate increases help to reduce the credit risk associated with the Bank's
adjustable-rate loans but also limit the interest rate sensitivity of its
adjustable-rate mortgage loans.
In an effort to provide financing for moderate income and first-time
home buyers, the Bank offers its own Affordable Housing Program and first-time
home buyers program. These programs offer single- family residential mortgage
loans to qualified individuals. These loans are offered with fixed rates of
interest and with terms of up to 30 years. Such loans must be secured by a one-
to four-family owner-occupied unit. These loans are originated using modified
underwriting guidelines with reduced interest rates and loan fees. Such loans
are originated in amounts up to 95% of the lower of the property's appraised
value or the sale price. Private mortgage insurance is normally required. With
respect to loans originated under these programs, because the Bank typically
charges a lower rate of interest, lower mortgage origination fees or a discount
on closing costs on such loan programs, the Bank expects to achieve a lower rate
of return on such loans, as compared to other residential mortgage loans.
Equity Lines of Credit and Second Mortgage Loans. The Bank offers
equity lines of credit and second mortgage loans in amounts of up to $300,000.
The Bank's second mortgage loans are secured by second liens on one- to
four-family residences located in the Bank's primary market area. These loans
are typically shorter term and generally have higher interest rates than one- to
four-family first mortgage loans. Generally, the maximum combined LTV ratio on
second mortgage loans is 80%; however, with respect to loans secured by
condominium units, the Bank will allow a combined LTV ratio of only 65%. Second
mortgage loans are generally offered with terms of up to 15 years and only with
fixed-rates of interest which rates will vary depending on the amortization
period chosen by the borrowers. At December 31, 1999, second mortgage loans
secured by one- to four-family residential properties totalled $6.6 million, or
4.2% of the Bank's total loans receivable. Equity lines of credit generally have
adjustable-rates of interest which adjust on a monthly basis. The
adjustable-rate of interest charged on such loans is indexed to the prime rate
<PAGE>
as published in The Wall Street Journal. These loans generally have an 18%
lifetime limit on interest rates. At December 31, 1999, the Bank had $7.1
million of equity lines of credit, of which $3.0 million was drawn upon such
loans at such date. The underwriting standards employed by the Bank for home
equity loans include a determination of the applicant's credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan and the value of the collateral securing the loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from
9
<PAGE>
primary employment and, additionally, from any verifiable secondary income.
Creditworthiness of the applicant and value of underlying collateral are of
primary considerations.
Multi-Family and Commercial Real Estate Lending. The Bank also
originates multi-family and commercial real estate loans that are generally
secured by five or more unit apartment buildings and properties used for
business purposes such as small office buildings or retail facilities located in
the Bank's primary market area. The Bank's multi-family and commercial real
estate underwriting policy provides that such real estate loans may be made in
amounts up to 75% of the appraised value of the property. The Bank's
multi-family and commercial real estate lending is limited by the regulatory
loans-to-one borrower limit which at December 31, 1999 was $3.6 million. The
Bank currently originates multi-family and commercial real estate loans,
generally with terms of up to 25 years. The Bank's multi-family and commercial
real estate loans have fixed and adjustable rates of interest that adjust
periodically and are indexed to either the prime rate as published in The Wall
Street Journal or the U.S. Treasury Bill. In reaching its decision on whether to
make a multi-family or commercial real estate loan, the Bank considers the net
operating income of the property, the borrower's expertise, credit history and
profitability and the value of the underlying property. The Bank has generally
required that the properties securing these real estate loans have debt service
coverage ratios (the ratio of earnings before debt service to debt service) of
at least 120%. In addition, environmental impact surveys are required for all
multi-family and commercial real estate loans. Generally, all multi-family and
commercial real estate loans made to corporations, partnerships and other
business entities require personal guarantees by the principals. On an exception
basis, the Bank may not require a personal guarantee on such loans depending on
the creditworthiness of the borrower and the amount of the down payment and
other mitigating circumstances. In order to meet diversification needs in its
portfolio and to take advantage of market opportunities, the Bank will, from
time to time, participate in loans originated and serviced by other financial
institutions. When determining whether to participate in such loans, the Bank
will underwrite its participation interest according to its own underwriting
standards. The Bank's multi- family real estate loan portfolio at December 31,
1999 was $2.5 million, or 1.6%, of total loans receivable and the Bank's
commercial real estate loan portfolio at such date was $7.0 million, or 4.5% of
total loans receivable. The largest multi-family or commercial real estate loan
in the Bank's portfolio at December 31, 1999 was a $1.8 million loan on an
office building located in Springfield, New Jersey.
Loans secured by multi-family and commercial real estate properties are
generally larger and involve a greater degree of risk than one- to four-family
residential mortgage loans. Because payments on loans secured by multi-family
and commercial real estate properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to the then prevailing conditions in the real estate
market or the economy. The Bank seeks to minimize these risks through its
underwriting standards.
Construction and Development Lending. The Bank originates construction
and development loans exclusively for the development of one- to four-family
residences and multi-family real estate properties. Such loans are made
principally to individuals building their primary residence and to licensed and
experienced developers known to the Bank in its primary market area for the
construction of single and multi-family developments. The Bank generally does
not originate loans secured by undeveloped land. Construction and development
<PAGE>
loans are originated in amounts up to 80% of the lesser of the appraised value
of the property, as improved, or the sales price. Such loans are offered with
one to two year terms and adjustable interest rates which adjust monthly and
float at margins which are generally 1% to 2% above the Citibank, New York prime
rate. Proceeds of construction and development loans are dispersed as phases of
the construction are completed. Generally, if the borrower is a corporation,
partnership or other business
10
<PAGE>
entity, personal guarantees by the principals are required. The Bank's largest
construction and development loan at December 31, 1999 was a performing loan
with a gross loan amount of $3.1 million with a carrying balance of $2.9 million
secured by an 18 unit residential development tract located in Chester Township,
Morris County, New Jersey. At December 31, 1999, the Bank had $36.9 million of
construction and development loans which amounted to 23.6% of the Bank's total
loans receivable.
Construction and development financing is generally considered to
involve a higher degree of credit risk than long-term financing on improved,
owner-occupied real estate. Risk of loss on a construction loan is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the Bank may be confronted with a project, when completed, having a
value which is insufficient to assure full repayment.
Consumer Lending. Consumer loans at December 31, 1999 amounted to
$127,000, or 0.08% of the Bank's total loans receivable, and consisted solely of
passbook or account loans. Such loans are generally originated in the Bank's
primary market area and generally are secured by deposit accounts.
Loan Approval Procedures and Authority. The Board of Directors
establishes the lending policies and loan approval limits of the Bank. With the
exception of equity lines of credit, second mortgage and consumer loans in
amounts which do not exceed $75,000, all loans originated by the Bank require
the approval of the Board of Directors. Equity lines of credit, second mortgage
and consumer loans in amounts up to $75,000 may be approved by the Bank's Chief
Executive Officer, Chief Lending Officer or Senior Lending Officer. Pursuant to
OTS regulations, loans to one borrower cannot exceed 15% of the Bank's
unimpaired capital and surplus. The Bank will not make loans to one borrower
that are in excess of the regulatory limits.
Delinquent Loans, Classified Assets and Real Estate Owned
Delinquencies and Classified Assets. Reports listing all delinquent
loans are generated and reviewed by management on a monthly basis and the loans
delinquent in excess of 90 days, special mention loans and all REO are reported
to the Board of Directors for their review. The procedures taken by the Bank
with respect to delinquencies vary depending on the nature of the loan, period
and cause of delinquency and whether the borrower is habitually delinquent. When
a borrower fails to make a required payment on a loan, the Bank takes a number
of steps to have the borrower cure the delinquency and restore the loan to
current status. The Bank generally sends the borrower a written notice of
non-payment after the loan is first delinquent. The Bank's guidelines provide
that telephone, written correspondence and/or face-to-face contact will be
attempted to ascertain the reasons for delinquency and the prospects of
repayment. When contact is made with the borrower at any time prior to
foreclosure, the Bank will attempt to obtain full payment, offer to work out a
repayment schedule with the borrower to avoid foreclosure or, in some instances,
accept a deed in lieu of foreclosure. In the event payment is not then received
or the loan not otherwise satisfied, additional letters and telephone calls
generally are made. If the loan is still not brought current or satisfied and it
becomes necessary for the Bank to take legal action, which typically occurs
after a loan is 90 days or more delinquent, the Bank will commence foreclosure
proceedings against any real property that secures the loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the property securing the loan generally
is sold at foreclosure and, if purchased by the Bank, becomes real estate owned.
11
<PAGE>
Federal regulations and the Bank's Asset Classification Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank has incorporated the
OTS internal asset classifications as a part of its credit monitoring system.
The Bank currently classifies problem and potential problem assets as
"Substandard," "Doubtful" or "Loss" assets. An asset is considered "Substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured institution
will sustain "some loss" if the deficiencies are not corrected. Assets
classified as "Doubtful" have all of the weaknesses inherent in those classified
"Substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "Loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. 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 required to be designated "Special
Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for loan losses in an amount deemed prudent by management.
General valuation allowances represent loss allowances which have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. When an insured institution classifies one or more assets, or
portions thereof, as "Loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge off such amount.
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 guidelines. Generally, the policy
statement recommends that institutions have effective systems and controls to
identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
Although management believes that, based on information currently available to
it at this time, its allowance for loan losses is adequate, actual losses are
dependent upon future events and, as such, further additions to the level of
allowances for loan losses may become necessary.
The Bank reviews and classifies its assets on an ongoing basis and the
Board of Directors reviews the results of the reports on a monthly basis. The
Bank classifies assets in accordance with the management guidelines described
above. At December 31, 1999, the Bank had $890,000 of assets designated as
Substandard, and no assets designated as Doubtful or Loss. At December 31, 1999,
the largest loan designated as Substandard had a carrying balance of $225,000
and was secured by a one-to-four-family property.
12
<PAGE>
At December 31, 1999, 1998 and 1997, delinquencies in the Bank's loan
portfolio were as follows:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
--------------------------------------- ----------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------- ------------------ ------------------ --------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
-------- ------- -------- -------- -------- -------- -------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
One- to four-family.......... 2 $138 8 $676 3 $199 9 $930
Construction and development. -- -- -- -- -- -- -- --
Total loans 2 $138 8 $676 3 $199 9 $930
=== ==== == ==== === ==== === ====
Delinquent loans to total
loans....................... 0.09% 0.43% .17% .80%
---- ---- --- ---
<CAPTION>
At December 31, 1997
-----------------------------------------
60-89 Days 90 Days or More
------------------- -------------------
Number Principal Number Principal
of Loans Balance of Loans Balance
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Loans:
One- to four-family.......... 9 $578 12 $891
Construction and development. -- --- --- --
Total loans 9 $578 12 $891
== ==== == ====
Delinquent loans to total
loans....................... .52% .79%
=== ===
</TABLE>
<PAGE>
Non-Performing Assets and Impaired Loans. The following table sets
forth information regarding non-accrual loans and REO. At December 31, 1999, REO
totalled $50,000 and consisted of one residential property. It is the policy of
the Bank to cease accruing interest on loans 90 days or more past due and to
fully reserve for all previously accrued interest. For the fiscal years ended
December 31, 1999, 1998 and 1997, the amount of additional interest income that
would have been recognized on non-accrual loans if such loans had continued to
perform in accordance with their contractual terms was $51,000, $54,000 and
$57,000, respectively.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
One- to four-family..................... $676 $ 930 $891 $1,169 $1,146
Construction and development............ -- -- -- 159 158
Other loans............................. -- -- -- -- --
------ -------- ------ --------- -------
Total mortgage loans.................. 676 930 891 1,328 1,304
Real estate owned, net(1)............... 50 131 69 145 77
------ -------- ------ -------- ------
Total non-performing assets............. $726 $1,061 $960 $1,473 $1,381
==== ====== ==== ====== ======
Allowance for loan losses as a
percent of total loans.................... 0.73% 0.88% 0.81% 0.82% 0.85%
Allowance for loan losses as a
percent of non-performing loans(2)........ 167.90% 109.89% 102.47% 63.55% 64.88%
Non-performing loans as a
percent of total loans(2)................. 0.43% 0.80% 0.79% 1.29% 1.31%
Non-performing assets as 0.31% 0.53% 0.53% 0.92% 0.82%
a percent of total assets(3)..............
</TABLE>
(1) REO balances are shown net of related valuation allowances.
(2) Non-performing loans consist of all 90 days or more past due and other
loans which have been identified by the Bank as presenting uncertainty
with respect to the collectibility of interest or principal.
(3) Non-performing assets consist of non-performing loans and REO.
At December 31, 1999, 1998 and 1997, total impaired loans were
$460,000, $782,000 and $566,000, respectively, and the related allowance for
loan losses amounted to $41,000, $54,000 and $45,000, respectively. All impaired
loans are real estate mortgage loans which have been measured for impairment
using the fair value of the collateral method. During the fiscal years 1999,
1998 and 1997, the average recorded value of impaired loans was $465,000,
$596,000 and $522,000, respectively. For these loans $28,000, $42,000 and
$63,000 of interest income was recognized.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio and the general economy. The allowance for
loan losses is maintained at an amount management considers adequate to cover
<PAGE>
estimated losses in loans receivable which are deemed probable and estimable
based on information currently known to management. The allowance is based upon
a number of factors, including current economic conditions, actual loss
experience and industry trends. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to make additional
provisions for estimated loan losses based upon judgments different from those
of management. As of December 31, 1999, and 1998, the Bank's allowance
14
<PAGE>
for loan losses was 0.73% and 0.88%, respectively, of total loans receivable.
The Bank had non-accrual loans of $676,000 at December 31, 1999. The Bank will
continue to monitor and modify its allowances for loan losses as conditions
dictate. While management believes the Bank's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that the Bank's level of allowance for loan losses will
be sufficient to cover future loan losses incurred by the Bank or that future
adjustments to the allowance for loan losses will not be necessary if economic
and other conditions differ substantially from the economic and other conditions
used by management to determine the current level of the allowance for loan
losses.
The following table sets forth the Bank's allowance for loan losses at
the dates indicated:
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period...... $1,022 $ 913 $844 $846 $903
Provision for loan losses........... 113 114 168 107 87
Charge-offs:
Mortgage loans:
One -to-four-family.............. -- 5 125 114 131
Other loans...................... -- -- -- -- 13
------ ------ ---- ---- ----
Total charge-offs................ -- 5 125 114 144
Recoveries.......................... -- -- 26 5 --
------ ------ ---- ---- ----
Balance at end of period............ $1,135 $1,022 $913 $844 $846
====== ====== ==== ==== ====
Ratio of net charge-offs during
the period to average loans
outstanding during the
period............................ -- 0.01% 0.13% 0.12% 0.14%
</TABLE>
15
<PAGE>
The following table sets forth the Bank's percent of allowance for
loan losses to total allowance for loan losses and the percent of loans to total
loans in each of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ----------------------------
Percent Percent Percent
of Loans of Loans of Loans
Percent of in Each Percent of in Each Percent of in Each
Allowance Category Allowance Category Allowance Category
to Total to Total to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- ----- ------ --------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential (1) $ 602 53.04% 71.84% $ 553 54.11% 75.95% $ 421 46.11% 81.89%
Commercial real
estate ........ 93 8.19 4.46 108 10.57 3.18 153 16.76 3.40
Construction and .
Development ... 440 38.77 23.62 361 35.32 20.62 339 37.13 14.63
Total ......... 1,135 100.00 99.92 1,022 100.00 99.75 913 100.00 99.92
Consumer ............. -- -- 0.08 -- -- 0.25 -- -- 0.08
Total allowance
for loan losses $1,135 100.00% 100.00% $1,022 100.00% 100.00% $ 913 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
------------------------------------------------------------
1996 1995
---------------------------- ------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------ --------- ----- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Mortgages:
Residential (1) $ 656 77.73% 92.35% $ 720 85.11% 96.51%
Commercial real
estate ........ 59 6.99 0.96 97 11.47 1.36
Construction and
Development ... 129 15.28 6.57 29 3.42 1.95
Total ......... 844 100.00 99.88 846 100.00 99.82
Consumer ............. -- -- 0.12 -- -- 0.18
Total allowance
for loan losses $ 844 100.00% 100.00% $ 846 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
- -------------
(1) Includes multi-family loans, second mortgage loans and home equity lines of
credit.
16
<PAGE>
Real Estate Owned. At December 31, 1999, the Bank had $50,000 of real
estate owned consisting of one residential real estate property. When the Bank
acquires property through foreclosure or deed in lieu of foreclosure, it is
initially recorded at the lower of the recorded investment in the corresponding
loan or the fair value of the related assets at the date of foreclosure, less
costs to sell. Thereafter, if there is a further deterioration in value, the
Bank provides for a specific valuation allowance and charges operations for the
diminution in value. It is the policy of the Bank to have obtained an appraisal
on all real estate subject to foreclosure proceedings prior to the time of
foreclosure. It is the Bank's policy to require appraisals on a periodic basis
on foreclosed properties and conducts inspections on foreclosed properties.
Investment Activities
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certificates of deposit of insured banks
and savings institutions, bankers' acceptances, repurchase agreements and
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment-grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. Additionally, the Bank must maintain minimum levels
of investments that qualify as liquid assets under OTS regulations.
Historically, the Bank has maintained liquid assets above the minimum OTS
requirements and at a level considered to be adequate to meet its normal daily
activities.
The investment policy of the Bank, as approved by the Board of
Directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and credit
risk and to complement the Bank's lending activities. The Bank primarily
utilizes investments in securities for liquidity management and as a method of
deploying excess funding not utilized for loan originations. Generally, the
Bank's investment policy is more restrictive than the OTS regulations allow. The
Bank has invested primarily in U.S. Government and agency securities, which
qualify as liquid assets under the OTS regulations, federal funds and U.S.
government sponsored agency issued mortgage-backed securities. As required by
SFAS No. 115, the Bank has established an investment portfolio of securities
that are categorized as held to maturity, available for sale or held for
trading. The substantial majority of the Bank's investment and mortgage-backed
securities are held to maturity. Such securities totalled $78.3 million, or
33.1% of assets, at December 31, 1999. At such date, the available for sale
securities portfolio totalled $5.9 million, or 2.5% of assets, and consisted
entirely of a mutual fund that invests in adjustable rate mortgage-backed
securities.
At December 31, 1999, the Bank had invested $71.4 million in
mortgage-backed securities, or 30.2% of total assets, of which $71.0 million
were guaranteed by GNMA or insured by either FNMA or FHLMC. All mortgage-backed
securities were classified as held to maturity. Of the $71.4 million, $62.4
million were adjustable-rate with generally 1.0% to 2% maximum annual interest
rate adjustments and lifetime maximum interest rate adjustments of 5% to 6%.
Investments in mortgage-backed securities involve a risk that actual prepayments
which differ from estimated prepayments over the life of the security, may
require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby changing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities. In addition, the market value of such securities may be
adversely affected by changes in interest rates.
<PAGE>
In an effort to increase assets and enhance earnings, and to supplement
loan demand in future periods, the Bank anticipates increasing its investment
and mortgage-backed securities portfolio. The Bank may utilize borrowings to
fund the purchase of such securities.
17
<PAGE>
The following table sets forth certain information regarding the
amortized cost and market value of the Bank's investment securities at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------ --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Held to maturity(1):
U.S. Government and
agency obligations................... $6,000 $5,769 $ 6,000 $5,995 $10,000 $ 9,996
Other................................. 947 927 946 945 -- --
Federal Home Loan Bank stock(2)........... 2,100 2,100 1,446 1,446 1,446 1,446
Available for sale(3):
Equity securities...................... 5,988 5,906 5,678 5,642 5,369 5,367
------- ------- ------- ------- ------- -------
Total investment securities.......... $15,035 $14,702 $14,070 $14,028 $16,815 $16,809
======= ======= ======= ======= ======= =======
</TABLE>
- --------------
(1) Held to maturity securities are carried at amortized cost.
(2) Investment in FHLB-NY stock is required by regulations. As the security is
not readily marketable, its cost approximates fair value.
(3) Available for sale securities are carried at fair value.
The following table sets forth certain information regarding the
carrying values and fair values of the Bank's mortgage-backed securities, all of
which are held to maturity, at the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------- ---------------------------- ----------------------------
Percent Percent Percent
of of of
Carrying Carrying Fair Carrying Carrying Fair Carrying Carrying Fair
Value Value Value Value Value Value Value Value Value
----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
By Issuer:
GNMA .................. $14,272 19.99% $14,022 $10,427 18.71% $10,597 $12,991 25.54% $13,364
FNMA .................. 20,034 28.06 19,646 29,874 53.61 30,013 22,546 44.33 22,633
FHLMC ................. 36,686 51.38 36,477 14,894 26.72 14,960 14,635 28.78 14,731
SBA ................... 407 0.57 402 533 0.96 531 684 1.35 684
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed
securities ....... $71,399 100.00% $70,547 $55,728 100.00% $56,101 $50,856 100.00% $51,412
======= ====== ======= ======= ====== ======= ======= ====== =======
By Coupon Type:
Adjustable-rate ....... $62,371 87.36% $62,004 $48,481 87.00% $48,804 $45,367 89.21% $45,928
Fixed-rate ............ 9,028 12.64 8,543 7,247 13.00 7,297 5,489 10.79 5,484
------- ----- ------- ------- ----- ------- ------- ----- -------
Total mortgage-backed
securities ........ $71,399 100.00% $70,547 $55,728 100.00% $56,101 $50,856 100.00% $51,412
======= ====== ======= ======= ====== ======= ======= ====== =======
</TABLE>
18
<PAGE>
The following table sets forth the Bank's mortgage-backed securities
activities for the periods indicated.
<TABLE>
<CAPTION>
For the Year
Ended December 31,
------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance ............................. $ 55,728 $ 50,856 $ 42,281
Purchases ................................. 37,149 31,676 18,718
Principal repayments ...................... (21,368) (26,666) (10,128)
Net amortization and accretion of discounts
(premiums) ............................. (110) (138) (15)
-------- -------- --------
Ending balance ................................ $ 71,399 $ 55,728 $ 50,856
======== ======== ========
</TABLE>
19
<PAGE>
The table below sets forth certain information regarding the carrying
values, weighted average yields and contractual maturities of the Bank's
investment securities held to maturity and mortgage-backed securities held to
maturity as of December 31, 1999. The Bank's investment securities available for
sale consist solely of equity securities and, as they have no contractual
maturities, are not included in this table.
<TABLE>
<CAPTION>
At December 31, 1999
---------------------------------------------------------------------
More than One More than Five
One Year or Less Year to Five Years Years to Ten Years
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government agency obligations ....... $ -- --% $1,000 6.00% $5,000 6.32%
Other .................................... -- -- -- -- -- --
------ ---- ----
Total ............................ $ -- -- $1,000 6.00% $5,000 6.32
Mortgage-backed securities held to maturity:
Adjustable-rate:
GNMA ................................... $ -- -- $ -- -- $ -- --
FHLMC .................................. -- -- -- -- -- --
FNMA ................................... -- -- -- -- -- --
SBA .................................... -- -- -- -- -- --
------ ---- ----
Total ............................. -- -- -- -- -- --
------ ---- ----
Fixed-rate:
GNMA ................................... -- 54 9.50 -- --
FHLMC .................................. 34 6.00 -- -- -- --
FNMA ................................... 1,194 5.50 -- -- -- --
Total ............................. 1,228 5.51 54 9.50 -- --
------ ---- ----
Total mortgage-backed securities
held to maturity ........................ $1,228 5.51% $ 54 9.50% $ -- --%
====== ==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
More than Ten Years Total
--------------------- --------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
<S> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Government agency obligations....... $ -- --% $ 6,000 6.27%
Other.................................... 947 6.71 947 6.71
---------- ----------
Total............................. $ 947 6.71 $ 6,947 6.33
========= ========
Mortgage-backed securities held to maturity:
Adjustable-rate:
GNMA................................... $10,404 5.64 $10,404 5.64
FHLMC.................................. 36,616 6.32 36,616 6.32
FNMA................................... 14,944 6.56 14,944 6.56
SBA.................................... 407 6.38 407 6.38
---------- ----------
Total............................. 62,371 6.26 62,371 6.26
-------- --------
Fixed-rate:
GNMA................................... 3,814 6.95 3,868 6.99
FHLMC.................................. 36 10.00 70 8.06
FNMA................................... 3,896 6.25 5,090 6.07
--------- ---------
Total............................. 7,746 6.61 9,028 6.48
--------- ---------
Total mortgage-backed securities
held to maturity........................ $70,117 6.30% $71,399 6.29%
======= =======
</TABLE>
20
<PAGE>
Source of Funds
General. Deposits, loan repayments and prepayments and cash flows
generated from operations are the primary sources of the Bank's funds for use in
lending, investing and for other general purposes. The Bank also utilizes
borrowings for lending and investing activities.
Deposits. The Bank has long focused on its deposit base as its primary
source of funds and a means of growth. In this regard, management previously
employed a strategy of pricing its deposit products among the highest in the
Bank's market area in order to attract and retain deposits. In more recent
periods, the Bank has reduced its rates paid on deposits to a level that is more
competitive in the market area, and has strived to maintain its deposits by
other means. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of money market, savings,
checking and certificate accounts. For the year ended December 31, 1999, average
core deposits represented 30.6% of total average deposits. The flow of deposits
is influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and competition. The Bank's deposits are
obtained predominantly from the areas in which its branch offices are located.
The Bank has historically relied primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. Total
deposits have decreased in the year ended December 31, 1999 by $5.8 million, or
3.32%, to $169 million, primarily due to the sale of the Harrison Branch
deposits. In an effort to build its deposit base, the Bank has increased the
types of deposit products offered, such as offering new transaction accounts, as
well as expanding the terms of deposit products offered, such as certificate of
deposit accounts, which the Bank now offers with terms ranging from three months
to five years. At December 31, 1999, certificates of deposit comprised 68.01% of
the Bank's deposit base. Due to the predominance of certificate accounts within
the deposit base, the Bank's liquidity could be reduced if a significant amount
of maturing certificates of deposit are not renewed in any given period.
Management believes that, based upon its experience and the Bank's deposit flow
history, a significant portion of such deposits will remain with the Bank. The
Bank generally does not solicit deposits from outside its market area. While the
Bank does not actively solicit certificate accounts in excess of $100,000 or use
brokers to obtain deposits, it may do so from time to time, depending upon
market conditions.
21
<PAGE>
The following table sets forth the distribution of the Bank's average
interest-bearing deposit accounts for the periods indicated and the weighted
average interest rates on each category of deposits presented. Averages for the
periods presented utilize month-end balances.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------ ----------------------------------
Percent Percent Percent
of Total eighted of Total eighted of Total Weighted
Average Average Average Average Average Wverage Average Average Average
Balance Deposits W Rate Balance Deposits A Rate Balance Deposits Rate
--------- -------- --------- -------- -------- -------- --------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits........... $20,509 12.04% 3.15% $13,372 8.30% 2.47% $ 7,594 5.02% 2.26%
Money market savings...... 3,029 1.78 2.71 3,352 2.08 2.76 3,979 2.63 2.71
Regular savings........... 26,432 15.52 2.29 25,942 16.11 2.43 27,127 17.93 2.43
Certificates of deposit... 120,312 70.66 5.10 118,406 73.51 5.51 112,617 74.42 5.47
--------- ------- -------- ----- -------- ------
Total............ $170,282 100.00% 4.39% $161,072 100.00% 4.66% $151,317 100.00% 4.69%
======== ====== ======== ====== ========
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------ -------------------------------
Percent Percent Percent
of Total of Total of Total
Balance Weighted Balance Weighted Balance Weighted
of Average of Average of Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts(1):
Due within one year .... $ 97,446 84.78% 4.97% $ 99,669 79.96% 5.31% $ 92,847 81.02% 5.61%
One to three years ..... 15,236 13.25 5.45 22,161 17.78 5.49 19,121 16.69 5.95
Three years and over ... 2,265 1.97 5.44 2,812 2.26 5.71 2,627 2.29 5.93
Total certificate
accounts ........ $114,947 100.00% 5.04% $124,642 100.00% 5.35% $114,595 100.00% 5.65%
</TABLE>
- ----------------------
(1) Based on remaining maturity of certificates calculated as of the end of the
period.
The following table presents the deposit activity of the Bank for the
periods indicated:
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Beginning balance ........................ $ 174,808 $ 153,227 $ 147,209
--------- --------- ---------
Net (withdrawals) deposits ............ (7,603) 14,494 (1,074)
Sale of deposits ...................... (5,668) -- --
Interest credited to accounts ......... 7,471 7,087 7,092
--------- --------- ---------
Decrease (increase) in deposit accounts (5,800) 21,581 6,018
--------- --------- ---------
Ending balance ........................... $ 169,008 $ 174,808 $ 153,227
========= ========= =========
</TABLE>
22
<PAGE>
The following table presents by various categories, the amount of
certificate accounts outstanding at December 31, 1999, 1998, and 1997, and the
time to maturity of the certificate accounts outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Period to Maturity from December 31, 1999 At December 31,
--------------------------------------------------------------- ------------------------------
Due Within One to Two to Three to Four to
One Year Two years Three years Four years Five years 1999 1998 1997
-------- --------- ----------- ---------- ---------- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
Less than 4.00% ..... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
4.01 to 5.00% ....... 67,258 3,600 133 100 498 71,589 22,814 1,657
5.01 to 6.00% ....... 28,416 9,420 2,071 1,535 132 41,574 99,558 110,736
6.01 to 7.00% ....... 1,272 12 -- -- -- 1,284 1,584 1,561
Over 7.00% .......... -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- ------- ------- -------
$ 96,946 $ 13,032 $ 2,204 $ 1,635 $ 630 114,447 123,956 113,954
======== ======== ======== ======== ======== ======= ======= =======
Accrued interest payable...
Total................... 500 686 641
-------- ------- --------
$114,947 $124,642 $114,595
======== ======== ========
</TABLE>
23
<PAGE>
At December 31, 1999, the Bank had outstanding $13.9 million in
certificate accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Weighted
Average
Maturity Period Amount Rate
- ----------------------------------------- --------- ----------
(Dollars in thousands)
<S> <C> <C>
Three months or less..................... $ 3,255 4.88%
Over three to six months................. 3,577 4.95
Over six through 12 months............... 4,781 4.89
Over 12 months........................... 2,270 5.57
---------
$13,883 5.01%
=======
</TABLE>
Borrowings
Although the Bank has not significantly utilized FHLB borrowings in the
past, it has done so as needed to fund its operations and meet liquidity needs.
These FHLB advances are collateralized primarily by certain of the Bank's
mortgage loans and mortgage-backed securities and secondarily by the Bank's
investment in capital stock of the FHLB. FHLB advances are made pursuant to
several different credit programs, each of which has its own interest rate and
range of maturities. The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the OTS and the FHLB. At December 31, 1999, the Bank had
$42.0 million in outstanding advances from the FHLB-NY.
The Bank increased its borrowings in order to use the funds to increase
its asset base and enhance earnings through the purchase of investment and
mortgage-backed securities. By so doing, the Bank seeks to realize increased
earnings equal to the spread between the cost of the borrowed funds and the
yield on the investment and mortgage-backed securities.
The following table sets forth certain information regarding the Bank's
borrowed funds for the dates indicated:
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
---------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB advances:
Average balance outstanding .................... $15,038 $ 1,923 $ 3,077
Maximum amount outstanding at any
month-end during the period .................. 42,000 5,000 5,000
Balance outstanding at end of period ........... 42,000 -- 5,000
Weighted average interest rate during the period 5.47% 6.25% 6.25%
Weighted average interest rate at end of period 5.93% --% 6.25%
ESOP loan:
Average balance outstanding .................... $ 230 $ 557 $ 488
Maximum amount outstanding at any month-end
during the period ............................ 455 630 762
Balance outstanding at end of period ........... -- 455 636
Weighted average interest rate during the period 8.25% 8.97% 9.00%
Weighted average interest rate at end of period -- 8.25% 9.00%
</TABLE>
24
<PAGE>
Personnel
As of December 31, 1999, the Bank had 53 full-time employees and 6
part-time employees. The employees are not represented by a collective
bargaining unit, and the Bank considers its relationship with its employees to
be good.
Subsidiary Activities
The Company's sole subsidiary is the Bank. The Bank has no
subsidiaries.
REGULATION AND SUPERVISION
General
The Bank is subject to extensive regulation, examination and
supervision by the OTS, as its chartering agency, and the FDIC, as the deposit
insurer. The Bank is a member of the FHLB System. The Bank's 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 financial institutions. There are periodic
examinations by the OTS and the FDIC to test the Bank's 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 policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the MHC and the Bank and their
operations. The MHC, as a federal mutual holding company and the Company, as a
federal corporation, will also be required to file certain reports with, and
otherwise comply with the rules and regulations of the OTS.
The following summary of the regulation and supervision of savings
associations and their holding companies does not purport to be a complete
description of the applicable statutes and regulations and is qualified in its
entirety by reference to such statutes and regulations.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by the Home Owners Loan Act (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act (the "FDI Act") and the regulations issued by the
agencies to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which federal associations may engage. In
particular, many types of lending authority for federal associations, e.g.,
commercial, non-residential real property loans and consumer loans, are limited
to a specified percentage of the institution's capital or assets.
Loans-to-One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans-to-one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus, plus
<PAGE>
an additional 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, 1999, the Bank's regulatory limit on
loans-to-one borrower was $3.6 million. At December 31, 1999, the Bank's largest
aggregate disbursed amount of loans-to-one borrower was $3.2 million, consisting
of two construction loans.
25
<PAGE>
QTL Test. The HOLA requires savings institutions to meet a qualified
thrift lender ("QTL") test. Under the QTL test, a savings association is
required to qualify as a "domestic building and loan association" as that term
is defined in the Internal Revenue Code or 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 nine 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,
1999, the Bank maintained 94.7% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective through the first
quarter of 1999 established three tiers of institutions based primarily on an
institution's capital level. An institution that exceeded all capital
requirements before and after a proposed capital distribution ("Tier 1
Association") and had not been advised by the OTS that it was in need of more
than normal supervision, could, after prior notice but without obtaining
approval of the OTS, make capital distributions during the 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 the excess capital over its
capital requirements at the beginning of the calendar year or (ii) 75% of its
net income for the previous four quarters. Any additional capital distributions
required prior regulatory approval. At December 31, 1999, the Bank was a Tier 1
Association.
Effective April 1, 1999, the OTS's capital distribution regulation
changed. Under the new regulation, an application to and the prior approval of
the OTS is required prior to any capital distribution if the institution does
not meet the criteria for "expedited treatment" of applications under OTS
regulations (i.e., generally, examination ratings in the two top categories),
the total capital distributions for the calendar year exceed net income for that
year plus the amount of retained net income for the preceding two years, the
institution would be undercapitalized following the distribution or the
distribution would otherwise be contrary to a statute, regulation or agreement
with OTS. If an application is not required, the institution must still provide
prior notice to OTS of the capital distribution. 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.
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 liquidity ratio at December 31, 1999
was 28.5%, which exceeded the applicable requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
<PAGE>
Assessments. Savings institutions are required by regulation to pay
assessments to the OTS to fund the agency's operations. The general assessment,
paid on a semi-annual basis, is 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 year
ended December 31, 1999 totaled $50,000.
Branching. OTS regulations permit federally chartered savings
associations to branch nationwide under certain conditions. Generally, federal
savings associations may establish interstate networks and geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
associations.
26
<PAGE>
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 any non-savings institution subsidiaries that the Company may establish) 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 and also
limits the aggregate amount of transactions with all affiliates 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, must be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. A savings association
also is prohibited from extending credit to any affiliate engaged in activities
not permitted for a bank holding company and may not purchase the securities of
an affiliate (other than a subsidiary).
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders ("insiders"), as well as entities such persons control, is
also governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Recent legislation created an
exception for loans made pursuant to a benefit or compensation program that is
widely available to all employees of the institution and does not give
preference to insiders over other employees. The law limits both the individual
and aggregate amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain board approval procedures to be
followed.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring action
against 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 or directors, receivership,
conservatorship or termination of deposit insurance. Civil penalties cover a
wide range of violations and can amount to $25,000 per day, or $1.0 million per
day in especially egregious cases. Under the FDI Act, the FDIC has the authority
to recommend to the Director of the OTS that enforcement action 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 and state 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 Establishing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. If the appropriate federal
banking agency determines that an institution fails to meet any standard
<PAGE>
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 regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. Effective April
1, 1999, however, the minimum leverage ratio increased to 4% for all
institutions except those with the highest rating on the CAMELS financial
institution rating system. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital on the
CAMEL financial standard, a 4% leverage ratio (3% for institutions receiving the
highest rating institution rating system), and, together with the risk-based
capital standard itself, a 4% Tier 1 risk-based capital standard. The OTS
regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.
27
<PAGE>
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) 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 components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock and the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
The capital regulations 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. For the present time, the OTS has deferred
implementation of the interest rate risk component. At December 31, 1999, the
Bank met each of its capital requirements.
The following table presents the Bank's capital position at December
31, 1999.
<TABLE>
<CAPTION>
Capital
Excess --------------------------
Actual Required (Deficiency) Actual Required
Capital Capital Amount Percent Percent
------- ------- ------ ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible............ $22,880 $3,548 $19,332 9.67% 1.50%
Core (Leverage)..... 22,880 9,462 13,418 9.67 4.00
Risk-based.......... 23,948 9,146 14,802 20.95 8.00
</TABLE>
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 capitalization. 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 less than 6%, a Tier 1
risk-based capital ratio of less than 3% or a leverage ratio that is less than
3% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than 2%
is deemed to be "critically undercapitalized." Subject to a narrow exception,
the banking regulator is required to appoint a receiver or conservator for an
institution that is critically undercapitalized. The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date an association 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 may become immediately applicable to the
institution depending upon its category, including, but not limited to,
increased monitoring by regulators, restrictions on growth, and capital
distributions and limitations on expansion. The OTS could also take any one of a
28
<PAGE>
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. The Bank is a member of the 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 make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1999,
FICO payments for SAIF members approximated 5.9 basis points, while Bank
Insurance Fund ("BIF") members paid 1.2 basis points. By law, there will be
equal sharing of FICO payments between SAIF and BIF members on January 1, 2000.
The Bank's assessment rate for fiscal 1999 was 5.9 basis points.
Payments toward the FICO bonds amounted to $102,000. The FDIC has authority to
increase insurance assessments. A significant increase in SAIF insurance
premiums would likely have an adverse effect on the operating expenses and
results of operations of the Association. Management cannot predict what
insurance assessment rates will be in the future.
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.
Community Reinvestment Act. Under the Community Reinvestment Act, as
amended ("CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The FIRREA amended the CRA to require the OTS
to provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system, which replaced the five-tiered numerical
rating system. The Bank's latest CRA rating received from the OTS was
"Satisfactory."
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB of New York, is required to
acquire and hold shares of capital stock in the FHLB in an amount at least equal
to 1% of the aggregate principal amount of its unpaid residential mortgage loans
and similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater.
29
<PAGE>
The Bank was in compliance with this requirement with an investment in FHLB
stock at December 31, 1999 of $2.1 million. FHLB borrowings must be secured by
specified types of collateral and all long-term borrowings may only be obtained
for the purpose of providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. For the years ended December 31, 1999, 1998 and 1997,
dividends from the FHLB to the Bank amounted to approximately $108,000, $105,000
and $95,000, respectively. If dividends were reduced, the Bank's net interest
income would likely also be reduced. Further, there can be no assurance that the
impact of recent or future legislation on the FHLBs will not also cause a
decrease in the value of FHLB stock held by the Bank, if any.
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
$44.3 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement is 3%; and for accounts greater than $44.3 million, the
reserve requirement is $1.329 million plus 10% (subject to adjustment by the
Federal Reserve Board between 8% and 14%) against that portion of total
transaction accounts in excess of $44.3 million. The first $5.0 million of
otherwise reservable balances (subject to adjustment by the Federal Reserve
Board) are exempted from the reserve requirements. The Bank is in compliance
with the foregoing requirements. Because required reserves must be maintained in
the form of either vault cash, a non-interest-bearing account at a Federal
Reserve Bank or a pass-through account as defined by the Federal Reserve Board,
the effect of this reserve requirement is to reduce the Bank's interest-earning
assets. FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal Reserve
Bank.
Holding Company Regulation
General. The Company is a federal savings and loan holding company
within the meaning of the HOLA. As such, the Company is registered with the OTS
and is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. The Bank must notify the OTS
30 days before declaring any dividend to the Company.
Restrictions Applicable to Mutual Holding Companies. Pursuant to
Section 10(o) of the HOLA and the Regulations, a mutual holding company, such as
the MHC, may engage in the following activities: (i) investing in the stock of a
savings association; (ii) acquiring a mutual association through the merger of
such association into a savings association subsidiary of such holding company
or an interim savings association subsidiary of such holding company; (iii)
merging with or acquiring another holding company, one of whose subsidiaries is
a savings association; (iv) investing in a corporation, the capital stock of
which is available for purchase by a savings association under federal law or
under the law of any state where the subsidiary savings association or
associations share their home offices; (v) furnishing or performing
30
<PAGE>
management services for a savings association subsidiary of such company; (vi)
holding, managing or liquidating assets owned or acquired from a savings
subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act (the "BHC Act"),
unless the Director, by regulation, prohibits or limits any such activity for
savings and loan holding companies; or (B) in which multiple savings and loan
holding companies were authorized (by regulation) to directly engage on March 5,
1987; and (x) purchasing, holding, or disposing of stock acquired in connection
with a qualified stock issuance if the purchase of such stock by such savings
and loan holding company is approved by the Director.
Financial Institution Modernization Legislation. Recently enacted
federal legislation designed to modernize the regulation of the financial
services industry expands the ability of bank holding companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies. The legislation also expanded the activities
permitted for mutual savings and loan holding companies to also include any
activity permitted a "financial holding company" under the legislation,
including a broad array of insurance and securities activities.
The HOLA prohibits a savings and loan holding company, including a
federal mutual 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; from acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary holding company or savings association. The HOLA also prohibits a
savings and loan holding company from acquiring more than 5% of a company
engaged in activities other than those authorized for savings and loan holding
companies by the HOLA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, except: (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.
If the savings institution subsidiary of a savings and loan holding
company fails to meet the QTL test set forth in Section 10(m) of the HOLA and
the regulations of the OTS, the holding company must register with the Federal
Reserve Board as a Bank Holding Company within one year of the savings
institution's failure to so qualify.
Stock Holding Company Subsidiary Regulation. The OTS has adopted
regulations governing the two-tier mutual holding company form of organization
<PAGE>
and mid-tier stock holding companies that are controlled by mutual holding
companies. Under these rules, the stock holding company subsidiary holds all the
shares of the mutual holding company's savings association subsidiary and issues
the majority of its own shares to the mutual holding company parent. In
addition, the stock holding company subsidiary is permitted
31
<PAGE>
to engage in activities that are permitted for its mutual holding company parent
and to have the same indemnification and employment contract restrictions
imposed that are on the mutual holding company parent. Finally, OTS regulations
maintain that the stock holding company subsidiary must be federally chartered
for supervisory controls.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The Bank, the Company and the MHC will report their income on
a calendar year basis using the accrual method of accounting and will be 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, the Company and the MHC.
Bad Debt Reserve. Historically, savings institutions such as the Bank
which met certain definitional tests primarily related to their assets and the
nature of their business ("qualifying thrifts") were permitted to establish a
reserve for bad debts and to make annual additions thereto, which may have been
deducted in arriving at their taxable income. The Bank's deductions with respect
to "qualifying real property loans," which are generally loans secured by
certain interest in real property, were computed using an amount based on the
Bank's actual loss experience, or a percentage equal to 8% of the Bank's taxable
income, computed with certain modifications and reduced by the amount of any
permitted addition to the non-qualifying loan loss reserve. Due to the Bank's
loss experience, the Bank generally recognized a bad debt deduction equal to 8%
of taxable income.
In August 1996, the provisions repealing the above thrift bad debt
rules were passed by Congress as part of "The Small Business Job Protection Act
of 1996." The new rules eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts for tax years beginning
after December 31, 1995. These rules also require that all thrift institutions
recapture all or a portion of their bad debt reserves added since the base year
(last taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such,
the new rules will have no effect on net income or federal income tax expense.
For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction will be equal to net charge-offs. The new rules allow an institution
to suspend the bad debt reserve recapture for the 1996 and 1997 tax years if the
institution's lending activity for those years is equal to or greater than the
institution's average mortgage lending activity for the six taxable years
preceding 1996. For this purpose, only home purchase and home improvement loans
are included and the institution can elect to have the tax years with the
highest and lowest lending activity removed from the average calculation. If an
institution is permitted to postpone the reserve recapture, it must begin its
six year recapture no later than the 1998 tax year. The unrecaptured base year
reserves will not be subject to recapture as long as the institution continues
to carry on the business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to a provision of present law referred
to below that require recapture in the case of certain excess distributions to
shareholders.
<PAGE>
Distributions. To the extent that the Bank makes "non-dividend
distributions" to the Company that are considered as made (i) from the reserve
for losses on qualifying real property loans, to the extent the reserve for such
losses exceeds the amount that would have been allowed under the experience
method, or
32
<PAGE>
(ii) from the supplemental reserve for losses on loans ("Excess Distributions"),
then an amount based on the amount distributed will be included in the Bank's
taxable income. Non-dividend distributions include distributions in excess of
the Bank's current and accumulated earnings and profits, distributions in
redemption of stock, and distributions in partial or complete liquidation.
However, dividends paid out of the Bank's current or accumulated earnings and
profits, as calculated for federal income tax purposes, will not be considered
to result in a distribution from the Bank's bad debt reserve. Thus, any
dividends to the Company that would reduce amounts appropriated to the Bank's
bad debt reserve and deducted for federal income tax purposes would create a tax
liability for the Bank. The amount of additional taxable income created from an
Excess Distribution is an amount that, when reduced by the tax attributable to
the income, is equal to the amount of the distribution.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers. AMTI is increased by an amount equal to 75% of the amount by
which the Bank's adjusted current earnings exceeds its AMTI (determined without
regard to this preference and prior to reduction for net operating losses).
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank. The MHC may exclude
from its income 80% of dividends received from the Company as long as it
maintains ownership in the Company of at least 20%. In addition, the MHC waived
dividends from both the Company and the Bank during the year ended December 31,
1999.
Audits. The Bank was last audited by the IRS in 1994. The Bank was not
audited by the New Jersey Department of Revenue ("DOR") in the past five years.
State and Local Taxation
State of New Jersey. The Bank, the Company and the MHC file New Jersey
income tax returns. For New Jersey income tax purposes, savings institutions are
presently taxed at a rate equal to 3% of taxable income. For this purpose,
"taxable income" generally means federal taxable income, subject to certain
adjustments (including addition of interest income on state and municipal
obligations). For New Jersey tax purposes, regular corporations are presently
taxed at a rate equal to 9% of taxable income (7.5% is the rate if taxable
income is less than $100,000).
33
<PAGE>
Additional Item. Executive Officers of the Registrant.
The following table sets forth certain information regarding the
executive officers of the Company and the Bank who are not also directors.
<TABLE>
<CAPTION>
Age at
Name 12/31/99 Position
- ------------------------------- ---------- ---------------------------------------------------------
<S> <C> <C>
Lee Wagstaff................... 59 Vice President, Chief Financial Officer and Treasurer of
the Company and the Bank
Valerie Kaminski............... 61 Vice President, Chief Operating Officer and Secretary of
the Company and the Bank
Kevin Aylward.................. 45 Vice President of the Company and Vice President and
Mortgage Lending Officer of the Bank
Patrick Paolella............... 56 Vice President of the Company and Vice President
and Human Resource Officer of the Bank
</TABLE>
Lee Wagstaff, a certified public accountant, has been Vice President,
Treasurer and Chief Financial Officer of the Company and the Bank since 1999 and
1984, respectively. Mr. Wagstaff is a member of the Bank's Asset/Liability
Committee. Prior to joining the Bank, Mr. Wagstaff was a senior staff accountant
for Stephen P. Radics & Co., in Haledon, New Jersey.
Valerie Kaminski has been Vice President, Secretary and Chief Operating
Officer of the Company and the Bank since 1999 and 1984, respectively. Ms.
Kaminski has been employed by the Bank since 1956. From 1956 to 1984, Ms.
Kaminski held various positions with the Bank.
Kevin Aylward joined the Bank in 1990 and is the Bank's Vice President
and Mortgage Lending Officer. Mr. Aylward has served as Vice President of the
Company since 1999. Mr. Aylward is the Bank's CRA Officer and a member of the
Bank's Asset/Liability Committee. Prior to joining the Bank, Mr. Aylward was a
lending officer for Nassau Savings and Loan Association, Princeton, New Jersey.
Patrick Paolella has been Vice President of the Company since July 1999
and Vice President and Human Resource Officer of the Bank since 1997. Prior to
becoming Vice President and Human Resource Officer, Mr. Paolella served as a
Consultant to the Banking Industry and prior served as President of a financial
savings institution.
34
<PAGE>
Item 2. Properties
- -------------------
The Bank currently conducts its business through an administrative and
full service branch office located in Springfield, New Jersey and five other
full service branch offices located in Bayville, Irvington, Milltown, Spotswood
and Toms River, New Jersey. Management believes that the Bank's facilities are
adequate to meet the present and immediately foreseeable needs of the Bank and
the Holding Company.
<TABLE>
<CAPTION>
Original Net Book Value
Year of Property or
Leased Leased Date of Leasehold
or or Lease Improvements at
Location Owned Acquired Expiration December 31, 1999
-------- ----- -------- ---------- -----------------
(In thousands)
<S> <C> <C> <C> <C>
Administrative/Corporate/
Branch Office:
130 Mountain Avenue Owned 1990 -- 2,039
Springfield, NJ 07081
Branch Offices:
860 18th Avenue Owned 1951 -- 76
Irvington, NJ 07111
520 Main Street Owned 1979 -- 349
Spotswood, NJ 08884
827 Fischer Boulevard Owned 1980 -- 891
Toms River, NJ 08753
Route 9 and Leased 1999 07/31/11 56
Oceangate Drive
Bayville, NJ 08721
270 Ryders Lane Leased 1999 05/31/11 22
Milltown, NJ 08850
</TABLE>
The Bank plans to open a branch office in Old Bridge, New Jersey during
the fourth quarter of 2000.
35
<PAGE>
Item 3. Legal Proceedings
- --------------------------
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the Company's or the Bank's financial condition or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Market For
Common Stock and Related Matters" in the 1999 Annual Report to Stockholders on
page 54 is incorporated herein by reference. At December 31, 1999, 2,080,488
shares of the Company's outstanding common stock was held of record by
approximately 301 persons or entities, not including the number of persons or
entities holding stock in nominee or stock name through various brokers or
banks.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears in the Company's 1999 Annual
Report to Stockholders on the inside cover page and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------
The above-captioned information appears under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
1999 Annual Report to Stockholders on pages 1 through 12 and is incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The above-captioned information appears under "Management of Interest
Rate Risk and Market Risk Analysis" in the Company's 1999 Annual Report to
Stockholders on pages 10 through 12 and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Company's financial statements listed in Item 14 herein, together
with the report thereon by Radics & Co., LLC, are found in the 1999 Annual
Report to Stockholders on pages 13 through 52 and are incorporated herein by
reference.
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- -------------------------------------------------------------------------
None.
36
<PAGE>
PART III
Item 10. Directors and Executive Officers
- ------------------------------------------
The information relating to Directors and Executive Officers of the
Company is incorporated herein by reference to the Company's Proxy Statement for
the Annual Meeting of Stockholders to be held on April 28, 2000, at pages 4
through 6 and 14.
Item 11. Executive Compensation
- --------------------------------
The information relating to directors' compensation and executives'
compensation is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 2000 at
pages 6 through 14 (excluding the Executive Compensation Committee Report and
Stock Performance Graph).
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 Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 2000,
at pages 3 and 4.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 28, 2000, at page 14.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
(1) Financial statements.
The Financial Statements and Independent Auditors' Report for
the year ended December 31, 1999, included in the Annual
Report, listed below, are incorporated herein by reference.
Report of Independent Auditors (Annual Report - page 15)
Consolidated Statements of Financial Condition for the years
ended December 31, 1999 and 1998 (Annual Report - Page 17).
<PAGE>
Consolidated Statements of Income for the Years Ended December
31, 1999, 1998 and 1997 (Annual Report - Page 18).
Consolidated Statements of Comprehensive Income for the Years
Ended December 31, 1999, 1998 and 1997 (Annual Report - Page
19).
Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1999, 1998 and 1997 (Annual
Report - Page 20).
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997 (Annual Report - pages 21 and
22.
Notes to Financial Statements (Annual Report - Pages 23
through 52).
37
<PAGE>
The remaining information appearing in the 1999 Annual Report
to Stockholders is not deemed to be filed as part of this
report, except as provided herein.
(2) Financial Statement Schedules.
All schedules have been omitted because they are not the
required information or applicable, or the required
information is shown in the consolidated financial statements
or the notes thereto.
(3) Exhibits.
(a) The following exhibits are filed as part of this report.
<TABLE>
<CAPTION>
Exhibit
Number Description Reference
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C<
3.1 Charter of Pulaski Bancorp, Inc.*
3.2 Bylaws of Pulaski Bancorp, Inc.*
4.0 Form of Common Stock Certificate*
10.1 Employment Agreement by and between Pulaski Bancorp, M.H.C., Pulaski Savings
Bank and Thomas Bentkowski*
10.2 Employment Agreement by and between Pulaski Bancorp, M.H.C., Pulaski Savings
Bank and Lee Wagstaff*
10.3 Change in Control Agreement by and between Pulaski Bancorp, M.H.C., Pulaski
Savings Bank and Kevin Aylward*
10.4 Change in Control Agreement by and between Pulaski Bancorp, M.H.C., Pulaski
Savings Bank and Valerie Kaminski*
10.5 Amended and Restated Pulaski Savings Bank 1997 Stock-Based Incentive Plan*
10.6 Pulaski Savings Bank Employee Stock Ownership Plan Trust Agreement*
11.0 Computation of Earnings Per Share
13.0 Portions of the 1999 Annual Report to Shareholders
21.0 Subsidiary information is incorporated herein by reference to "Part I - Business -
Subsidiary Activities"
23.0 Consent of Radics & Co., LLC
27.0 Financial Data Schedule
</TABLE>
--------------------------
* Incorporated herein by reference into this document from the
Exhibits to the Current Report on Form 8-K, filed July 12,
1999.
(b) Reports on Form 8-K.
None.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 2000 PULASKI SAVINGS BANK
/s/ Thomas Bentkowski
---------------------
Thomas Bentkowski
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated.
Signature Title Date
- --------- ----- ----
/s/ Thomas Bentkowski President, Chief Executive
- ---------------------- Officer and Director March 29, 2000
Thomas Bentkowski (principal executive officer)
/s/ Edward J. Mizerski Chairman of the Board and
- ----------------------- Director March 29, 2000
Edward J. Mizerski
/s/ Peter C. Pietrucha Vice Chairman of the Board March 29, 2000
- ---------------------- and Director
Peter C. Pietrucha
/s/ Eugene J. Bogucki, M.D. Director March 29, 2000
- --------------------------
Eugene J. Bogucki, M.D.
/s/ Anthony C. Majeski Director March 29, 2000
- ----------------------
Anthony C. Majeski
/s/ Walter F. Rusak Director March 29, 2000
- -------------------
Walter F. Rusak
/s/ Lee Wagstaff Vice President, Chief Financial March 29, 2000
- ---------------- Officer and Treasurer
Lee Wagstaff (principal financial and
accounting officer)
39
EXHIBIT 11.0 - COMPUTATION OF EARNINGS PER SHARE
1999 1998
---------- ----------
Net income ..................................... $1,185,245 $1,031,312
Basic and diluted weighted average number of
shares outstanding ............................. 2,043,181 2,018,095
Basic and diluted earnings per share ........... $ 0.58 $ 0.51
<TABLE>
<CAPTION>
PULASKI BANCORP, INC. AND SUBSIDIARY
SELECTED FINANCIAL CONDITION AND OTHER DATA OF THE COMPANY
At December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition data:
Total amount of:
Assets $236,550 $199,792 $181,732 $160,722 $168,102
Loans receivable, net 134,522 100,894 102,212 96,258 95,605
Securities available for sale 5,906 5,642 5,367 5,034 4,842
Mortgage-backed securities 71,399 55,728 50,856 42,281 49,473
Investment securities 6,947 6,946 10,000 5,000 6,001
Deposits 169,008 174,808 153,227 147,209 154,911
Advances and other borrowings 42,000 455 5,636 -- --
Stockholders' equity 23,783 22,806 21,689 12,445 12,134
<CAPTION>
For the Year Ended December 31,
------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Operating data:
Interest income $14,391 $13,426 $12,702 $11,614 $11,463
Interest expense 8,317 7,790 7,347 6,872 7,106
------- ------- ------- ------- -------
Net interest income 6,074 5,636 5,355 4,742 4,357
Provision for loan losses 113 114 168 107 87
Non-interest income 562 295 178 145 104
Non-interest expenses 4,600 4,160 3,571 4,243 3,204
Income taxes 738 626 673 195 416
------- ------- ------- ------- -------
Net income $ 1,185 $ 1,031 $ 1,121 $ 342 $ 754
======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PULASKI BANCORP, INC. AND SUBSIDIARY
SELECTED FINANCIAL CONDITION AND OTHER DATA OF THE COMPANY
At or For the Year Ended December 31,
---------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios:
Return on average assets (1) 0.55% 0.54% 0.64% 0.59% 0.46%
Return on average equity (1) 5.11% 4.63% 6.01% 7.72% 6.42%
Average equity/average assets 10.85% 11.69% 10.64% 7.60% 7.15%
Interest rate spread 2.49% 2.59% 2.80% 2.76% 2.50%
Net yield on average
interest-earning assets 2.94% 3.08% 3.18% 3.01% 2.74%
Non-interest expenses to
average assets (1) 2.15% 2.18% 2.04% 2.01% 1.95%
Efficiency ratios (1) 69.32% 70.14% 64.55% 67.14% 71.82%
Equity/total assets 10.05% 11.41% 11.93% 7.74% 7.22%
Capital ratios:
Tangible 9.67% 11.41% 11.93% 7.75% 7.21%
Core 9.67% 11.41% 11.93% 7.75% 7.21%
Risk-based 20.95% 25.86% 28.28% 19.27% 19.36%
Non-performing loans
to total assets 0.29% 0.47% 0.49% 0.83% 0.78%
Non-performing loans
to total loans receivable 0.43% 0.80% 0.79% 1.29% 1.31%
Non-performing assets
to total assets 0.31% 0.53% 0.53% 0.92% 0.82%
Allowance for loan losses
to non-performing loans 167.95% 109.89% 102.47% 63.55% 64.88%
Average interest-earning
assets/average
interest-bearing liabilities 1.11x 1.12x 1.09x 1.06x 1.06x
Net interest income after
provision for loan losses to
non-interest expenses (1) 1.30x 1.33x 1.45x 1.41x 1.33x
</TABLE>
(1) Excludes for the year ended December 31, 1996, one-time SAIF special
assessment of $962,000 and the related income tax benefit of $346,000.
<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Formation of Stock Holding Company
On July 12, 1999, Pulaski Savings Bank (the "Bank") reorganized into a two-tier
mutual holding company structure pursuant to an Agreement and Plan of
Reorganization which was unanimously adopted by the Board of Directors on
January 28, 1999 and approved by the shareholders of the Bank on April 23, 1999.
Under the Plan of Reorganization, the Bank became a wholly owned subsidiary of
Pulaski Bancorp, Inc. (the "Company"), a federally-chartered stock holding
company, a majority of the Common Stock of which is now owned by the Pulaski
Bancorp, M.H.C., the Bank's parent mutual holding company. In the
Reorganization, each outstanding share of Bank common stock was converted into
one share of Company common stock and the holders of Bank common stock became
the holders of all of the outstanding shares of Company common stock.
Accordingly, as a result of the reorganization, the Bank's minority stockholders
became minority stockholders of the Company and the Bank's majority stockholder,
the Mutual Holding Company, became the majority stockholder of the Company.
After the reorganization, the Bank has continued its business and operations as
a wholly owned subsidiary of the Company and the consolidated capitalization,
assets, liabilities, income and financial statements, and management of the
Company immediately following the reorganization is substantially the same as
those of the Bank immediately prior to consummation of the reorganization. The
Charter and Bylaws of the Bank continue in effect, and have not been affected in
any manner by the Reorganization. The name "Pulaski Savings Bank" continues to
be utilized by the Bank. The corporate existence of the Bank has continued
unaffected and unimpaired by the Reorganization except that all of its
outstanding stock is now owned by the Company.
Discussion of Forward-Looking Statements
When used or incorporated by reference in disclosure documents, the words
"anticipate", "estimate", "expect", "project", "target", "goal" and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, expected or projected. These
forward-looking statements speak only as of the date of the document. The
Company expressly disclaims any obligation or undertaking to publicly release
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectation with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
<PAGE>
General
The Company's principal business is the ownership and operation of the Bank. 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 and construction 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.
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<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, investment securities 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.
Comparison of Financial Condition at December 31, 1999 and 1998
The Company's assets at December 31, 1999 totalled $236.6 million, which
represents an increase of $36.8 million or 18.4% as compared to $199.8 million
at December 31, 1998 due to increases in mortgage-backed securities and loans
receivable portfolios of $15.7 million and $33.6 million, respectively,
partially offset by a decrease in cash and cash equivalents of $16.6 million.
Cash and cash equivalents decreased $16.6 million or 70.9% to $6.8 million at
December 31, 1999 from $23.4 million at December 31, 1998, primarily reflecting
a $16.3 million decrease in federal funds sold. The decrease was primarily used
to fund loan originations and purchases.
Trading account securities at December 31, 1999 amounted to $2.8 million. The
Bank did not have trading account securities at December 31, 1998.
Securities available for sale increased $264,000 or 4.7% to $5.9 million at
December 31, 1999 compared with $5.6 million at December 31, 1998. The increase
during the year ended December 31, 1999, resulted primarily from purchases of
securities available for sale of $310,000, which were sufficient to offset an
increase of unrealized loss on such portfolio of $46,000. Investment securities
held to maturity at December 31, 1999 and 1998 amounted to $6.9 million. During
the year ended December 31, 1999, proceeds from calls and maturities of such
securities totalled $3.0 million and were offset by purchases of $3.0 million.
Mortgage-backed securities held to maturity increased $15.7 million or 28.2% to
$71.4 million at December 31, 1999 as compared with $55.7 million at December
31, 1998. The increase during the year ended December 31, 1999 resulted
primarily from purchases of such securities of $37.1 million, which were
sufficient to offset principal repayments of $21.4 million.
Net loans amounted to $134.5 million and $100.9 million at December 31, 1999 and
1998, respectively, which represents an increase of $33.6 million or 33.3%. The
increase during the year ended December 31, 1999 resulted primarily from loan
originations and purchases exceeding loan principal repayments.
Real estate owned amounted to $50,000 and $131,000 at December 31, 1999 and
1998, respectively.
<PAGE>
Deposits at December 31, 1999 decreased $5.8 million to $169.0 million when
compared with $174.8 million at December 31, 1998. During the third quarter of
1999, the Bank sold its deposits held at its Harrison, New Jersey branch office
in the amount of $5.7 million, resulting in a gain of $423,000.
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<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At December 31, 1999, borrowed money amounted to $42.0 million, representing
advances from Federal Home Loan Bank of New York ("FHLB"). The Bank adopted a
strategy where such advances were primarily used for the purchase of
mortgage-backed securities held to maturity and the funding of loan originations
and purchases to seek higher rate of return. The Bank did not have any
outstanding advances from FHLB at December 31, 1998. At December 31, 1998, other
borrowed money amounted to $455,000, which was paid-off during 1999.
Stockholders' equity amounted to $23.8 million and $22.8 million at December 31,
1999 and 1998, respectively. During the years ended December 31, 1999 and 1998,
cash dividends of $309,000 and $283,000, respectively, were paid on the Bank's
and Company's common stock. During the year ended December 31, 1999, the Company
repurchased 27,600 shares of its common stock, at prices ranging from $8.00 to
$8.31, for $224,000 under a stock repurchase program.
Comparison of Operating Results for The Years Ended December 31, 1999 and 1998
GENERAL
Net income increased by $154,000, or 14.9%, to $1.2 million during the year
ended December 31, 1999 compared with $1.0 million for the year ended December
31, 1998. The increase in net income during the 1999 period resulted from
increases in total interest income of $965,000 and non-interest income of
$267,000, along with a decrease in provision for loan losses of $1,000, which
more than offset increases in total interest expense, non-interest expenses and
income taxes of $527,000, $439,000 and $113,000, respectively.
INTEREST INCOME
Interest income on loans during the year ended December 31, 1999 increased by
$649,000, or 7.6%, to $9.2 million when compared to $8.5 million during 1998.
The increase during the 1999 period resulted from an increase of $16.4 million
or 16.3% in the average balance of loans outstanding to $117.1 million in 1999
from $100.7 million in 1998, sufficient to offset a decrease of 63 basis point
in the yield earned on the loan portfolio to 7.85% in 1999 from 8.48% in 1998.
Interest on mortgage-backed securities held to maturity increased $613,000, or
19.0%, during the year ended December 31, 1999 to $3.8 million compared to $3.2
million for 1998. During the year ended December 31, 1999, the average balance
of mortgage-backed securities outstanding increased $11.7 million or 21.8% to
$65.3 million in 1999 from $53.6 million in 1998, sufficient to offset a
decrease of 14 basis point from 6.01% in 1998 to 5.87% in 1999 in the yield
earned on the mortgage-backed securities portfolio. Interest earned on
investment securities held to maturity decreased by $45,000, or 10.0%, to
$406,000 for the year ended December 31, 1999, when compared to $451,000 for
1998. The decrease during 1999 resulted from a decrease of $1.4 million, or
17.3%, in the average balance of the investment securities portfolio, sufficient
to offset an increase of 51 basis points in the yield earned on the investment
securities portfolio from 5.75% in 1998 to 6.26% in 1999. Interest earned on
<PAGE>
securities available for sale amounted to $310,000 and $309,000 for the years
ended December 31, 1999 and 1998, respectively. Interest on other
interest-earning assets decreased $253,000, or 27.9%, to $655,000 during the
year ended December 31, 1999, compared to $908,000 for 1998. Such decrease was
attributable to a decrease of 44 basis points in the yield earned on other
interest-earning assets from 6.06% in 1998 to 5.62% in 1999, along with a
decrease of $3.3 million, or 22.0%, in the average balance of other
interest-earning assets outstanding to $11.7 million in 1999 compared with $15.0
million in 1998. The decrease in other interest-earning assets was primarily the
result of a decrease in federal funds sold.
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<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTEREST EXPENSE
Interest on deposits decreased $160,000, or 2.1%, to $7.5 million during the
year ended December 31, 1999 compared to $7.6 million for 1998. The decrease
during 1999 was attributable to a decrease of 35 basis points in the Bank's
average cost of interest-bearing deposits to 4.39% for 1999 from 4.74% for 1998,
sufficient to offset an increase of $9.2 million, or 5.7%, to $170.3 million in
1999 from $161.1 million in 1998 in the average balance of interest-bearing
deposits outstanding. Interest on borrowed money amounted to $846,000 and
$159,000 during the years ended December 31, 1999 and 1998, respectively. The
increase during 1999 was attributable to an increase of $12.8 million in the
average borrowings outstanding, sufficient to offset a decrease of 87 basis
points in the Bank's cost of borrowings to 5.54% for 1999 from 6.41% for 1998.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1999, increased $438,000 or
7.8%, to $6.1 million for 1999 from $5.6 million for 1998. The net interest rate
spread decreased from 2.59% in 1998 to 2.49% in 1999 and the interest rate
margin decreased from 3.08% in 1998 to 2.94% in 1999. The decrease primarily
resulted from a 37 basis points decrease in the yield on interest-earning assets
to 6.98% in 1999 from 7.35% in 1998 which more than offset a decrease of 28
basis points in the cost of average interest-bearing liabilities from 4.76% in
1998 to 4.48% in 1999. The Company was able to increase net interest income
despite shrinking margins by increasing net interest-earning assets, such as
loans and mortgage-backed securities.
PROVISION FOR LOAN LOSSES
During the years ended December 31, 1999 and 1998, the Bank provided $113,000
and $114,000, respectively, for loan losses. 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 $1.14 million at December 31, 1999, representing .73% of
total loans and 167.9% of non-performing loans as compared to an allowance of
$1.02 million at December 31, 1998, representing .88% of total loans and 109.9%
of non-performing loans. 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 $267,000 or 90.5% to $562,000 during the year
ended December 31, 1999 as compared to $295,000 for the year ended December 31,
1998. The increase in non-interest income during 1999 resulted from increases in
fees and service charges of $63,000, a gain on sale of deposits of the Harrison
branch of $423,000 and miscellaneous income of $2,000, which was sufficient to
offset an increase in trading account losses of $221,000.
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<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the years ended December 31, 1999 and 1998, the Bank purchased trading
account securities of $7.1 million and $17.2 million, respectively, and proceeds
from sales of such securities amounted $4.3 million and $17.3 million,
respectively, resulting in realized gains on such sales of $41,000 and $123,000,
respectively. Unrealized losses on trading account securities totalled $139,000
for the year ended December 31, 1999. During the year ended December 31, 1999
the Bank sold its deposits of $5.7 million held at its Harrison, New Jersey
branch office at a gain of $423,000.
NON-INTEREST EXPENSES
Non-interest expenses increased $440,000, or 10.6%, to $4.6 million during the
year ended December 31, 1999 compared to $4.2 million for the year ended
December 31, 1998. Salaries and employee benefits, the major component of
non-interest expenses, increased $158,000 or 6.4% during the year ended December
31, 1999, while occupancy, advertising, federal insurance premiums and
miscellaneous expenses increased by $132,000, $100,000, $7,000 and $123,000,
respectively, which increases were partially offset by decreases in equipment
and loss on foreclosed real estate of $74,000 and $6,000, respectively. The
increase in occupancy expense, advertising and miscellaneous expenses is largely
the result of a new branch located at Bayville, New Jersey, which was opened
during the second quarter of 1999 and a new branch located at Milltown, New
Jersey, which was opened during the fourth quarter of 1999. Equipment expenses
during the 1998 period included the cost incurred in connection with the change
of the Bank's outside computer center.
INCOME TAXES
Income tax expense totaled $738,000 and $625,000 during the years ended December
31, 1999 and 1998, respectively. The increase in 1999 resulted primarily from an
increase in pre-tax income of $267,000. The Bank's effective income tax rates
were 38.4% and 37.7% during the year ended December 31, 1999 and 1998,
respectively.
Comparison of Operating Results for The Years Ended December 31, 1998 and 1997
GENERAL
Net income decreased by $90,000 or 8.0%, to $1.0 million during the year ended
December 31, 1998 compared with $1.1 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 and non-interest expenses of $443,000 and $588,000,
respectively, which more than offset increases in total interest income of
$724,000 and non-interest income of $117,000 along with decreases in provision
for loan losses and income taxes of $54,000 and $47,000, respectively.
INTEREST INCOME
Interest income on loans during the year ended December 31, 1998 increased by
$202,000 or 2.4%, to $8.5 million when compared to $8.3 million during 1997. The
<PAGE>
increase during the year ended December 31, 1998 resulted from an increase of 11
basis points in the yield earned on the loan portfolio to 8.48% in 1998 from
8.37% in 1997 along with an increase of $1.1 million or 1.1% in the average
balance of loans outstanding to $100.7 million in 1998 from $99.6 million in
1997.
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<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest on mortgage-backed securities held to maturity increased $245,000, or
8.2%, during the year ended December 31, 1998 to $3.2 million compared to $3.0
million for the year ended December 31, 1997. During the year ended December 31,
1998, the average balance of mortgage-backed securities outstanding increased
$8.0 million or 17.6% to $53.6 million in 1998 from $45.6 million in 1997 and
more than offset the decrease of 52 basis points in the yield earned on the
mortgage-backed securities portfolio from 6.53% in 1997 to 6.01% in 1998.
Interest earned on investment securities held to maturity decreased by $75,000,
or 14.3%, to $451,000 for the year ended December 31, 1998, when compared to
$526,000 for 1997. The decrease during 1998 resulted from a decrease of
$462,000, or 5.6%, in the average balance of the investment securities
portfolio, along with a decrease of 58 basis points in the yield earned on the
investment securities portfolio from 6.33% in 1997 to 5.75% in 1998. Interest
earned on securities available for sale decreased by $4,000, or 1.3%, to
$309,000 for the year ended December 31, 1998, when compared to $313,000 for
1997. The decrease during 1998 resulted from a decrease of 42 basis points in
the yield earned on the securities available for sale portfolio from 6.01% in
1997 to 5.59% in 1998 sufficient to offset an increase of $311,000 or 6.0%, in
the average balance of such portfolio. Interest on other interest-earning assets
increased $356,000, or 64.5%, to $908,000 during the year ended December 31,
1998, compared to $552,000 for the year ended December 31, 1997. Such increase
was attributable to an increase of 41 basis points in the yield earned on other
interest-earning assets from 5.65% in 1997 to 6.06% in 1998, along with an
increase of $5.2 million, or 53.5%, in the average balance of other
interest-earning assets outstanding.
INTEREST EXPENSE
Interest on deposits increased $541,000, or 7.6%, to $7.6 million during the
year ended December 31, 1998 compared to $7.1 million for 1997. The increase
during 1998 was attributable to an increase of five basis points in the Bank's
average cost of interest-bearing deposits to 4.74% for 1998 from 4.69% for 1997,
along with an increase of $9.8 million, or 6.4%, to $161.1 million in 1998 from
$151.3 million in 1997, in the average balance of interest-bearing deposits
outstanding. Interest on borrowed money amounted to $159,000 and $257,000 during
the years ended December 31, 1998 and 1997, respectively. Such decrease during
1998 was attributable to a decrease of $1.1 million, or 30.4% in the average
borrowings outstanding, along with a decrease of 80 basis points in the Bank's
cost of borrowings from 7.21% for 1997 to 6.41% for 1998.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1998, increased $281,000, or
5.2%, to $5.6 million for 1998 from $5.4 million for 1997. The net interest rate
spread decreased to 2.59% in 1998 from 2.80% in 1997 and the interest rate
margin decreased to 3.08% in 1998 from 3.18% in 1997. These decreases primarily
resulted from a 19 basis points decrease in the yield on interest-earning assets
to 7.35% in 1998 from 7.54% in 1997 along with an increase of two basis points
in the cost of average interest-bearing liabilities to 4.76% in 1998 from 4.74%
in 1997. The Bank was able to increase net interest income despite shrinking
margins by increasing net interest-earning assets.
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<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
During the years ended December 31, 1998 and 1997, the Bank provided $114,000
and $168,000, respectively, for loan losses. 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 $1.02 million at December 31, 1998, representing .88% of
total loans and 109.9% of non-performing loans compared to an allowance of
$913,000 at December 31, 1997, representing .81% of total loans and 102.5% of
non-performing loans. During the years ended December 31, 1998 and 1997, the
Bank charged off loans aggregating $5,000 and $125,000, respectively. The Bank
continually monitors the 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 $117,000 or 65.7% to $295,000 during the year
ended December 31, 1998 as compared to $178,000 for the year ended December 31,
1997. The increase in non-interest income during 1998 resulted from increases in
fees and service charges of $43,000 and trading account income of $74,000.
During 1998, and 1997, proceeds from sales of trading account securities
totalled $17.3 million and $3.0 million, respectively, while the purchases of
such securities totalled $17.2 million and $2.9 million, respectively, resulting
in trading account income of $123,000 and $49,000, respectively.
NON-INTEREST EXPENSES
Non-interest expenses increased $588,000 or 16.5%, to $4.2 million during the
year ended December 31, 1998 compared to $3.6 million for 1997. Salaries and
employee benefits, the major component of non-interest expenses, increased
$341,000 or 15.9% during the year ended December 31, 1998 while occupancy,
equipment and miscellaneous expenses increased by $5,000, $250,000 and $23,000,
respectively, which increases were partially offset by decreases in loss on
foreclosed real estate, advertising and federal insurance premium of $11,000,
$17,000 and $2,000, respectively. The increase in salaries and employee benefits
during the 1998 period resulted primarily from the increase in Employee Stock
Ownership Plan ("ESOP") expense of $58,000 recorded in accordance with Statement
of Position ("SOP") 93-6, which was implemented in April 1997 and $124,000
related to the Recognition and Retention Plan ("RRP"), which was also
implemented during the year ended December 31, 1997. Excluding the effects of
the ESOP and RRP, salaries and employee benefits increased $159,000 or 7.4%. The
increase during the 1998 period in the equipment expense resulted primarily from
the cost incurred in connection with the change of the Bank's outside computer
service center.
<PAGE>
INCOME TAXES
Income tax expense totalled $625,000 and $673,000 during the years ended
December 31, 1998 and 1997, respectively. The decrease in 1998 resulted
primarily from a decrease in pre-tax income of $137,000. The effective income
tax rates were 37.7% and 37.5% during the years ended December 31, 1998 and
1997, respectively.
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PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, amortization and
prepayments of loan and mortgage-backed securities principal, FHLB advances,
maturities of investment securities and funds provided from operations. While
scheduled loan and mortgage-backed securities amortization and maturities of
investment securities are a relatively predictable source of funds, deposit flow
and loan and mortgage-backed securities prepayments are greatly influenced by
market interest rates, economic conditions and competition.
The Bank is required to maintain minimum levels of liquid assets as defined by
the Office of Thrift Supervision ("OTS") regulations. This requirement, which
may vary from time to time, depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowings. The
required ratio currently is 4.0%. The Bank's liquidity averaged 28.6% during
December, 1999. The Bank adjusts its liquidity levels in order to meet funding
needs for deposit outflows, payments of real estate taxes from escrow accounts
on mortgage loans, repayment of borrowings, when applicable, and loan funding
commitments. The Bank also adjusts its liquidity level as appropriate to meet
its asset/liability objectives. In addition, the Bank invests its excess funds
in federal funds and overnight deposits with the FHLB, which provides liquidity
to meet lending requirements. Federal funds sold and interest-bearing deposits
in other banks at December 31, 1999 and 1998 amounted to $2.8 million and $21.0
million, respectively.
During the years ended December 31, 1999 and 1998, cash was generated by
operating activities. The primary source of cash from operating activities
during each period was net income.
The primary sources of investing activities 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.
During the years ended December 31, 1999 and 1998, cash dividends paid on the
Company's and the Bank's common stock amounted to $309,000 and $283,000,
respectively. The mutual holding company waived its right to receive dividends.
If the mutual holding company had not waived its right to receive dividends, the
amount of such dividends, during the years ended December 31, 1999 and 1998,
would have been $358,000 and $341,000, respectively.
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, which provide an additional source of funds. At December 31, 1999,
borrowed money amounted to $42.0 million. The Bank had no outstanding advances
from the FHLB at December 31, 1998.
<PAGE>
The Bank anticipates that it will have sufficient funds available to meet its
current loan commitments. At December 31, 1999, the Bank has outstanding
commitments to originate, fund or purchase loans of $15.8 million. Certificates
of deposit scheduled to mature in one year or less, at December 31, 1999,
totaled $97.4 million. Management believes that, based upon historical
experience, a significant portion of such deposits will remain with the Bank.
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<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
At December 31, 1999, the Bank exceeded each of the three OTS capital
requirements. The Bank's tangible, core and risk-based capital ratios were
9.67%, 9.67% and 20.95%, respectively, which is above the required levels of
1.5% for tangible capital, 4.0% for core capital and 8.0% for risk-based
capital. The Bank qualifies as "well-capitalized" under the prompt corrective
action regulations of the OTS.
Impact of Inflation and Changing Prices
The consolidated financial statements and the related data presented herein have
been prepared in accordance with generally accepted accounting principles, which
requires the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
the Bank and Company are monetary in nature. As a result, interest rates have a
more significant impact on the 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 or
Company's computer programs that would have date sensitive software may
recognize a date during "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.
As of March 1, 2000, a mission critical hardware and software has proved to be
year 2000 compliant. We are presently contemplating modifications to update or
replace some non-critical, non-compliant software; however, if such
modifications or conversions are not completed, there would be no material
impact on the operations of the Bank or Company. The cost of these improvements
should not exceed $5,000.
The Bank and Company are not aware of any year 2000 issues existing with any of
its significant suppliers and vendors. The third party data processing vendor of
the Bank has been and will continue to be closely monitored for its year 2000
compliance.
At this time the Bank and Company are not aware of any problems that have led or
will lead to a material loss of revenue related to year 2000 issue. To date, the
Bank has incurred approximately $15,200 related to efforts in connection with
its year 2000 project. This amount nor the projected amount of $5,000 as stated
above do not include internal year 2000 related costs which are primarily
payroll costs which are not separately tracked.
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<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management of Interest Rate Risk and Market Risk Analysis
The ability to maximize net interest income is largely dependent upon the
achievement of a positive interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Interest rate sensitivity is a
measure of the difference between amounts of interest-earning assets and
interest-bearing liabilities which either reprice or mature within a given
period of time. The difference, or the interest rate repricing "gap", provides
an indication of the extent to which an institution's interest rate spread will
be affected by changes in interest rates. A gap is considered positive when the
amount of interest-rate sensitive assets exceeds the amount of interest-rate
sensitive liabilities, and is considered negative when the amount of
interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest rates,
a negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would result in a
decrease in net interest income.
Because the Bank's interest-bearing liabilities which mature or reprice within
shorter periods exceed its interest-earning assets with similar characteristics,
material and prolonged increases in interest rates generally would adversely
affect net interest income, while material and prolonged decreases in interest
rates generally would have a positive effect on net interest income.
The Bank's current investment strategy is to maintain an overall securities
portfolio that provides a source of liquidity and that contributes to the Bank's
overall profitability and asset mix within given quality and maturity
considerations. The securities portfolio is concentrated in U.S. Treasury and
federal government agency securities providing high asset quality to the overall
balance sheet mix. Securities classified as available for sale provide
management with the flexibility to make adjustments to the portfolio given
changes in the economic or interest rate environment, to fulfill unanticipated
liquidity needs, or to take advantage of alternative investment opportunities.
Gap 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 a bank's interest rate sensitivity "gap". An asset
and 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
same time period. At December 31, 1999, the Bank's cumulative one year interest
rate gap (which is the difference between the amount of interest-earning assets
maturing or repricing within one year and interest-bearing liabilities maturing
or repricing within one year) as a percentage of total assets, was a negative
20.93%.
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
expected to mature or reprice in each of the future time periods shown. Except
as stated below, the amount of assets and liabilities shown which mature or
reprice during a particular period were determined in accordance with the
contractual terms of the related assets or liabilities. The Bank has assumed
that its savings accounts, which totaled $25.8 million at December 31, 1999, 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 interest-bearing demand accounts,
which totaled $25.6 million at December 31, 1999, are withdrawn at the following
rates, 37.00%, 53.76%, 31.11%, 60.63%, 84.50% and 100.00% on the cumulative
declining balance of such accounts during the periods shown.
- 10 -
<PAGE>
PULASKI BANCORP, INC.
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
More Than More Than More Than More Than
1 Year 1 Year to 3 Years 5 Years to 10 Years to More Than
or Less 3 Years to 5 Years 10 Years 20 Years 20 Years
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 32,421 $ 5,096 $ 2,996 $ 19,626 $ 18,109 $ 58,203
--------- --------- --------- --------- --------- ---------
Mortgage-backed securities 59,441 2,530 1,682 -- 4,087 3,659
Investments held to maturity 947 -- 1,000 5,000 -- --
Other interest-earning assets (2) 11,008 -- -- -- 1,220 1,570
--------- --------- --------- --------- --------- ---------
Total interest-earning assets 103,817 7,626 5,678 24,626 23,416 63,432
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Demand deposits 9,487 8,684 2,324 3,119 1,712 314
Savings account 4,390 6,668 4,347 5,518 3,817 1,085
Certificates of deposits 97,446 15,236 2,265 -- -- --
Borrowed money 42,000 -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities 153,323 30,588 8,936 8,637 5,529 1,399
--------- --------- --------- --------- --------- ---------
Interest sensitivity gap per period $ (49,506) $ (22,962) $ (3,258) $ 15,989 $ 17,887 $ 62,033
========= ========= ========= ========= ========= =========
Cumulative gap as a percent of total assets (20.93)% (30.64)% (32.01)% (25.25)% (17.69)% 8.53%
Cumulative interest-sensitive assets as a
percent of interest-sensitive liabilities 67.71% 60.60% 60.73% 70.35% 79.78% 109.68%
</TABLE>
(1) Excludes loans in process.
(2) Includes securities available for sale, trading account securities, federal
funds sold and interest-bearing deposits with other institutions.
<PAGE>
<TABLE>
<CAPTION>
Total Fair Value
--------- ----------
<S> <C> <C>
Interest-earning assets:
Loans (1) $ 136,451 $ 134,145
Mortgage-backed securities 71,399 70,547
Investments held to maturity 6,947 6,697
Other interest-earning assets (2) 13,798 13,798
Total interest-earning assets 228,595 225,187
--------- ---------
Interest-bearing liabilities:
Demand deposits 25,640 25,640
Savings account 25,825 25,825
Certificates of deposits 114,947 115,070
Borrowed money 42,000 42,019
--------- ---------
Total interest-bearing liabilities 208,412 208,554
--------- ---------
Interest sensitivity gap per period $ 20,183 $ 16,633
========= =========
Cumulative gap as a percent of total assets
Cumulative interest-sensitive assets as a
percent of interest-sensitive liabilities
</TABLE>
(1) Excludes loans in process.
(2) Includes securities available for sale, trading account securities, federal
funds sold and interest-bearing deposits with other institutions.
- 11 -
<PAGE>
PULASKI BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Portfolio Value. The Bank's interest rate sensitivity is monitored
by management through the use of the OTS model which estimates the change in the
Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the market value of assets in the
same scenario. The OTS produces its analysis based upon data submitted on the
Bank's quarterly Thrift Financial Reports. The following table sets forth the
Bank's NPV as of December 31, 1999, as calculated by the OTS.
<TABLE>
<CAPTION>
NPV as % of Portfolio
Change in Net Portfolio Value Value of Assets
Interest Rates -------------------------------------------- ----------------------------
In Basis Points $ % NPV %
(Rate Shock) Amount Change Change Ratio Change (1)
------------ ------ ------ ------ ----- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
300 $ 3,440 $ (17,690) (83.72)% 1.60 % (82.24)%
200 9,528 (11,602) (54.91) 4.30 (52.28)
100 15,467 (5,662) (26.80) 6.78 (24.75)
0 21,129 - - 9.01 -
(100) 25,780 4,651 22.01 10.75 19.31
(200) 28,229 7,099 33.60 11.62 28.97
(300) 30,631 9,502 44.97 12.45 38.18
</TABLE>
(1) Based on the portfolio value of the Bank's assets assuming no change in
interest rates.
Certain shortcomings are inherent in the methodology used in the above interest
rate risk measurements. Modeling changes in NPV require the making of certain
assumptions which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV model
presented assumes that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV measurements and net interest income models provide an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
- 12 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors
Pulaski Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of Pulaski Bancorp, Inc. (the "Company") and Subsidiary as of December 31, 1999
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, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These 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 Pulaski Bancorp,
Inc. and Subsidiary as of December 31, 1999 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, 1999, in conformity with generally accepted accounting
principles.
/s/Radics & Co., LLC
--------------------
Radics & Co., LLC
February 11, 2000
15
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
December 31,
--------------------------------
<S> <C> <C> <C>
Assets Note(s) 1999 1998
- ------ ------- ----------- -----------
Cash and amounts due from depository institutions $ 3,966,072 $ 2,336,949
Interest-bearing deposits 454,547 2,377,613
Federal funds sold 2,350,000 18,650,000
Cash and cash equivalents 1 and 16 6,770,619 23,364,562
Term deposits 3 and 16 197,000 197,000
Trading account securities 1 2,790,500 --
Securities available for sale 1, 4 and 16 5,906,451 5,642,498
Investment securities held to maturity 1, 5 and 16 6,947,017 6,946,353
Mortgage-backed securities held to maturity 1, 6 and 16 71,399,443 55,728,490
Loans receivable 1, 7 and 16 134,522,001 100,894,180
Real estate owned 1 49,822 130,626
Premises and equipment 1 and 8 4,037,888 3,862,532
Federal Home Loan Bank of New York stock 11 2,100,000 1,446,200
Accrued interest receivable 1, 9 and 16 1,218,056 971,566
Other assets 1, 13 and 14 611,493 607,896
------------- -------------
Total assets $ 236,550,290 $ 199,791,903
============= =============
Liabilities and stockholders' equity
- ------------------------------------
Liabilities
- -----------
Deposits 10 and 16 $ 169,007,650 $ 174,808,024
Borrowed money 11 and 16 42,000,000 454,805
Advance payments by borrowers for taxes 919,231 773,361
Other liabilities 13 840,521 950,124
------------- -------------
Total liabilities 212,767,402 176,986,314
------------- -------------
Commitments and contingencies 15 - -
Stockholders' equity 1,2,12,13, 14
- -------------------- and 17
Preferred stock; $.01 par value, 2,000,000 (1999) and
5,000,000 (1998) shares authorized; issued and -
outstanding - none
Common stock; $.01 par value, 13,000,000 (1999) and
10,000,000 (1998) shares authorized, 2,108,088 shares issued;
2,080,488 shares (1999) and 2,108,088 (1998) outstanding 21,081 21,081
Paid-in capital 9,833,349 9,854,730
Retained earnings - substantially restricted 14,912,410 14,029,016
Unearned Recongnition Retention Plan ("RRP") shares (428,702) (581,054)
Unearned Employee Stock Ownership Plan ("ESOP") (278,439) (495,144)
Accumulated other comprehensive income (loss) (52,480) (23,040)
Treasury stock, at cost; 27,600 shares (1999) (224,331) -
------------- -------------
Total stockholders' equity 23,782,888 22,805,589
------------- -------------
Total liabilities and stockholders' equity $ 236,550,290 $ 199,791,903
============= =============
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
<TABLE>
<CAPTION>
PULASKI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Year Ended December 31,
----------------------------------------------
Note(s) 1999 1998 1997
--------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Loans 1 and 7 $ 9,187,993 $ 8,538,663 $ 8,337,426
Mortgage-backed securities held to maturity 1 3,832,019 3,219,434 2,974,111
Investment securities held to maturity 1 406,383 450,467 526,176
Securities available for sale 1 309,953 309,032 312,910
Other interest-earning assets 654,679 908,408 551,742
----------- ----------- -----------
Total interest income 14,391,027 13,426,004 12,702,365
Interest expense:
Deposits 10 7,471,264 7,630,618 7,089,813
Borrowed money 11 845,478 159,380 257,507
----------- ----------- -----------
Total interest expense 8,316,742 7,789,998 7,347,320
----------- ----------- -----------
Net interest income 6,074,285 5,636,006 5,355,045
Provision for loan losses 1 and 7 113,000 114,000 167,789
----------- ----------- -----------
Net interest income after provision for loan losses 5,961,285 5,522,006 5,187,256
----------- ----------- -----------
Non-interest income:
Fees and service charges 216,510 153,454 110,679
Trading account (loss) income 1 (97,894) 122,716 49,040
Gain on sale of deposits 422,554 - -
Miscellaneous 20,949 18,719 18,533
----------- ----------- -----------
Total non-interest income 562,119 294,889 178,252
----------- ----------- -----------
Non-interest expenses:
Salaries and employee benefits 13 2,639,764 2,481,510 2,140,316
Occupancy expense of premises 1 431,907 300,416 295,589
Equipment 1 397,220 470,648 220,998
Loss on real estate owned 1 631 7,344 17,798
Advertising 107,906 8,192 25,325
Federal insurance premium 101,835 95,347 97,526
Miscellaneous 13 920,465 796,786 774,208
----------- ----------- -----------
Total non-interest expenses 4,599,728 4,160,243 3,571,760
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Income before income taxes 1,923,676 1,656,652 1,793,748
Income taxes 1 and 14 738,431 625,340 672,670
----------- ----------- -----------
Net income $ 1,185,245 $ 1,031,312 $ 1,121,078
=========== =========== ===========
Net income per common share: 1 and 13
Basic/diluted $ 0.58 $ 0.51 $ 0.56
=========== =========== ===========
Weighted average number of common shares
outstanding: 1 and 13
Basic/diluted 2,043,181 2,018,095 1,999,537
=========== =========== ===========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PULASKI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 1,185,245 $ 1,031,312 $ 1,121,078
Other comprehensive income (loss):
Unrealized (loss) gain on securities available
for sale, net of income taxes (benefit) of
$(16,560), $(12,960) and $8,276, respectively (29,440) (21,040) 12,724
----------- ----------- -----------
Comprehensive income $ 1,155,805 $ 1,010,272 $ 1,133,802
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
PULASKI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Unearned Unearned
Common Paid-in Retained RRP ESOP
stock Capital Earnings Shares Shares
----- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1996 $ -- $ -- $ 12,459,228 $ -- $ --
Net income for the year ending
December 31, 1997 -- -- 1,121,078 -- --
Unrealized gain on securities
available for sale, net of income taxes -- -- -- -- --
Net proceeds from initial public
offering of common stock 20,700 8,946,026 -- -- (761,760)
Common stock issued to RRP 381 761,379 -- (761,760) --
Cash dividend -- -- (199,963) -- --
Initial capitalization of
Mutual Holding Company -- -- (100,000) -- --
ESOP shares committed to
be released -- 63,531 -- -- 114,264
Amortization of unearned
RRP shares -- -- -- 28,354 --
---------- ---------- ------------ ----------- -----------
Balance - December 31, 1997 21,081 9,770,936 13,280,343 (733,406) (647,496)
Net income for the year ending
December 31, 1998 -- -- 1,031,312 -- --
Unrealized (loss) on securities
available for sale, net of income taxes -- -- -- -- --
Cash dividend -- -- (282,639) -- --
ESOP shares committed to
to be released -- 83,794 -- -- 152,352
Amortization of unearned
RRP shares -- -- -- 152,352 --
---------- ---------- ------------ ----------- -----------
Balance - December 31, 1998 21,081 9,854,730 14,029,016 (581,054) (495,144)
Net income for the year ending
December 31, 1999 -- -- 1,185,245 -- --
Unrealized (loss) on securities
available for sale, net of income taxes -- -- -- -- (29,440)
Cash dividend -- -- (309,127) -- --
ESOP shares committed to
to be released -- (21,381) 7,276 -- 216,705
Amortization of unearned
RRP shares -- -- -- 152,352 --
Treasury stock, at cost -- -- -- -- --
---------- ---------- ------------ ----------- -----------
Balance - December 31, 1999 $ 21,081 $ 9,833,349 $ 14,912,410 $ (428,702) $ (278,439)
=== ==== ========== =========== ============ =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Treasury Stockholders'
Income (Loss) Stock Equity
------------- ----- ------
<S> <C> <C> <C>
Balance - December 31, 1996 $ (14,724) $ -- $ 12,444,504
Net income for the year ending
December 31, 1997 -- -- 1,121,078
Unrealized gain on securities
available for sale, net of income taxes 12,724 -- 12,724
Net proceeds from initial public
offering of common stock -- -- 8,204,966
Common stock issued to RRP --
Cash dividend -- -- (199,963)
Initial capitalization of
Mutual Holding Company -- -- (100,000)
ESOP shares committed to
be released -- -- 177,795
Amortization of unearned
RRP shares -- -- 28,354
------------ ----------- ------------
Balance - December 31, 1997 (2,000) -- 21,689,458
Net income for the year ending
December 31, 1998 -- -- 1,031,312
Unrealized (loss) on securities
available for sale, net of income taxes (21,040) -- (21,040)
Cash dividend -- -- (282,639)
ESOP shares committed to
to be released -- -- 236,146
Amortization of unearned
RRP shares -- -- 152,352
------------ ----------- ------------
Balance - December 31, 1998 (23,040) -- 22,805,589
Net income for the year ending
December 31, 1999 -- -- 1,185,245
Unrealized (loss) on securities
available for sale, net of income taxes (29,440) -- (29,440)
Cash dividend -- -- (309,127)
ESOP shares committed to
to be released -- -- 202,600
Amortization of unearned
RRP shares -- -- 152,352
Treasury stock, at cost -- (224,331) (224,331)
------------ ----------- ------------
Balance - December 31, 1999 $ (52,480) $ (224,331) $ 23,782,888
============ ============ ============
</TABLE>
<PAGE>
See notes to consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
PULASKI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,185,245 $ 1,031,312 $ 1,121,078
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization of premises
and equipment 270,239 217,028 174,399
Amortization of premiums and accretion of
discounts, net 5,929 137,705 14,440
Accretion of deferred loan fees (247,540) (571,215) (329,059)
Provision for loan losses 113,000 114,000 167,789
Purchases of trading account securities (7,074,557) (17,215,974) (2,930,441)
Proceeds from sales of trading account securities 4,289,672 17,338,690 2,979,481
Realized gain on sale of trading account securities (41,011) (122,716) (49,040)
Unrealized loss on trading account securities 138,905 - -
Gain on sale of deposits (422,554) - -
(Gain) loss on sale of real estate owned (3,225) 2,382 14,029
(Increase) decrease in accrued interest receivable (246,490) 62,862 (179,495)
Deferred income taxes (benefit) (93,270) 8,934 (12,660)
Decrease (increase) in other assets 12,963 (129,543) 312,607
(Decrease) increase in accrued interest payable
on deposits (210,538) 42,903 24,937
(Decrease) increase in other liabilities (16,333) 613,594 109,078
Amortization of cost of stock contributed to RRP 152,352 152,352 28,354
Shares committed to be released ESOP 202,600 236,146 177,795
----------- ----------- -----------
Net cash (used in) provided by opreating activities (1,984,613) 1,918,460 1,623,292
----------- ----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from maturities of term deposits - 197,000 395,965
Purchases of term deposits - (197,000) -
Purchases of securities available for sale (309,953) (309,032) (312,911)
Proceeds from calls of investment securities
held to maturity 2,000,000 6,000,000 1,000,000
Proceeds from maturities of investment securities
held to maturity 1,000,000 4,000,000 -
Purchases of investment securities held to maturity (3,000,000) (6,946,250) (6,000,000)
Principal repayments on mortgage-backed securities
held to maturity 21,367,610 26,665,711 10,128,329
Purchases of mortgage-backed securities held
to maturity (37,148,665) (31,676,403) (18,717,561)
Purchases of loans (12,278,685) (216,000) (498,000)
Net change in loan receivable (21,254,415) 1,862,363 (5,361,608)
Proceeds from sales of real estate owned 133,851 66,647 130,560
Capitalized costs on real estate owned (10,003) (2,184) (1,493)
Additions to premises and equipment (445,595) (432,921) (128,082)
Purchase of Federal Home Loan Bank of New
York stock (653,800) - -
----------- ----------- -----------
Net cash (used in) investing activities (50,599,655) (988,069) (19,364,801)
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
PULASKI BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from initial public offering of
common stock $ -- $ -- $ 8,966,726
Net increase in deposits 78,585 21,538,617 5,992,497
Cash paid for sale of deposits (5,245,867) -- --
Proceeds from borrowed money 42,000,000 -- 5,000,000
Repayments of borrowed money (454,805) (5,181,265) (125,690)
Net increase (decrease) in advance payments
by borrowers for taxes 145,870 (70,251) 2,664
Capitalization of Mutual Holding Company -- -- (100,000)
Cash dividend paid (309,127) (282,639) (199,963)
Purchase of treasury stock (224,331) -- --
------------ ------------ ------------
Net cash provided by financing activities 35,990,325 16,004,462 19,536,234
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents (16,593,943) 16,934,853 1,794,725
Cash and cash equivalents - beginning 23,364,562 6,429,709 4,634,984
------------ ------------ ------------
Cash and cash equivalents - ending $ 6,770,619 $ 23,364,562 $ 6,429,709
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 635,588 $ 711,740 $ 530,383
Interest 8,488,175 7,747,095 7,273,772
Supplemental schedule of noncash investing activities:
Unrealized (loss) gain on securities available
for sale, net of deferred income taxes (29,440) (21,040) 12,724
Transfer of loans receivable to real estate owned 39,819 128,538 67,440
Funds borrowed to finance common stock
purchased by the ESOP -- -- 761,760
Contributions of common stock to the RRP -- -- 761,760
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------
Basis of financial statement presentation
-----------------------------------------
The consolidated financial statements, which have been prepared in
conformity with generally accepted accounting principles, include the
accounts of Pulaski Bancorp, Inc. (the "Company") and its wholly owned
subsidiary, Pulaski Savings Bank (the "Bank"), a federally chartered
stock institution. All significant intercompany accounts and
transactions have been eliminated in the consolidation.
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 statement of
consolidated financial condition and revenues and expenses for the
period then ended. Actual results could differ significantly from those
estimates. A material estimate that is particularly susceptible to
significant change relates to the determination of the allowance for
loan losses. Management believes that the allowance for loan losses is
adequate. While management uses available information to recognize
losses on loans, future additions to the allowance for loan losses may
be necessary based on changes in economic conditions in the Bank's
market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses.
Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them
at the time of their examinations.
Business
--------
The Company's primary business is the operation of the Bank. The Bank
provides the usual products and services of banking such as deposits
and mortgage, consumer and commercial loans. Approximately 53% of the
issued and outstanding stock of the Company is owned by Pulaski
Bancorp, M.H.C., a mutual holding company. (See Note 2 to consolidated
financial statements.)
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash and amounts due from depository
institutions, interest-bearing deposits with original maturities of
three months or less, and federal funds sold. Generally, federal funds
sold are sold for one-day periods.
<PAGE>
Investment and mortgage-backed securities
-----------------------------------------
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 the accumulated other
comprehensive income (loss) component of stockholders' equity.
23
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------------------
Investment and mortgage-backed securities (Cont'd.)
---------------------------------------------------
Interest and dividend income on securities, which includes amortization
of premiums and accretion of discounts, is recognized when earned. The
adjusted cost basis of an identified security sold or called is used
for determining security gains and losses recognized in the statements
of income.
Loans receivable
----------------
Loans receivable is stated at unpaid principal balances less an
allowance for loan losses and deferred loan fees and costs. Interest is
calculated by use of the actuarial method. An allowance is established
for the loss of uncollected interest on loans, other than passbook or
certificate loans, which are more than ninety days delinquent as to
principal or interest. Such interest ultimately collected is credited
to income in the period of recovery.
Loan origination fees and certain direct loan origination costs are
deferred and accreted, by use of the level-yield method, as an
adjustment of yield over the contractual lives of the related loans.
Allowance for loan losses
-------------------------
An allowance for loan losses is maintained at a level considered
adequate to absorb loan losses. Management of the 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 general economic and real estate market conditions. The 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 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 and estimated fair value of collateral and financial condition of
the borrowers. Specific loan loss allowances are established for
identified loans based on a review of such information. General loan
loss allowances are based upon a combination of factors including, but
not limited to, actual loan loss experience, composition of the 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 level of the
allowance for loan losses may be necessary.
<PAGE>
Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. A
loan is deemed to be impaired when, based on current information and
events, it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
24
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ------------------------------------------------
Allowance for loan losses (Cont'd.)
-----------------------------------
All loans identified as impaired are evaluated independently. The Bank
does not aggregate such loans for evaluation purposes. Payments
received on impaired loans are applied first to interest receivable and
then to principal.
Concentration of risk
---------------------
The lending activities are concentrated in loans secured by real estate
located in the State of New Jersey.
Real estate owned
-----------------
Real estate owned consists of real estate acquired by foreclosure or
deed in lieu of foreclosure. Real estate owned is initially recorded at
the lower of cost or fair value at the date of acquisition and,
thereafter, carried at the lower of such initially recorded amount or
fair value less estimated selling costs. Costs incurred in developing
or preparing properties for sale are capitalized. Expenses of holding
properties are charged to operations as incurred. Gains or losses from
sales of such properties are recognized as incurred.
Premises and equipment
----------------------
Premises and equipment are comprised of land, at cost, and buildings,
building improvements, leasehold improvements and furnishings and
equipment, at cost less accumulated depreciation and amortization.
Depreciation and amortization charges are computed on the straight-line
method over the following estimated useful lives:
Buildings and improvement 10 to 40 years
Furnishings and equipment 5 to 10 years
Leasehold improvements Shorter of useful
life or term of lease
Significant renewals and betterments are charged to the premises and
equipment account. Maintenance and repairs are charged to operations in
the period incurred.
<PAGE>
Income taxes
------------
The Company and its subsidiary file a consolidated federal income tax
return. Income taxes are allocated based on the contribution of income
to the consolidated income tax return. Separate state income tax
returns are filed.
Federal and state income taxes have been provided on the basis of
reported income. The amounts reflected on the Company's 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.
25
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ------------------------------------------------
Income taxes (Cont'd.)
----------------------
Deferred income tax expense or benefit is determined by recognizing
deferred tax assets and liabilities for the estimated future tax
consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The realization of deferred tax assets is
assessed and a valuation allowance provided, when necessary, for that
portion of the asset which more likely than not will not 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 all deferred tax assets. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in earnings in
the period that includes the enactment date.
Accounting for stock based compensation
---------------------------------------
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("Statement") No.
123 "Accounting for Stock-Based Compensation". Statement No. 123
establishes financial accounting and reporting standards for
stock-based employees compensation plans. While all entities are
encouraged to adopt the "fair value based method" of accounting for
employee stock compensation plans, Statement No. 123 also allows an
entity to continue to measure compensation cost under such plans using
the "intrinsic value based method" specified in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
25").
Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period, usually the vesting period. Fair value is determined
using an option pricing model that takes into account the stock price
at the grant date, the exercise price, the expected life of the option,
the volatility of the underlying stock and the expected dividends on
it, and the risk free interest rate over the expected life of the
option. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the
grant date or other measurement date over the amount an employee must
pay to acquire the stock.
The Company has elected to account for stock-based compensation under
APB 25 and the pro forma disclosures of net income and earnings per
share required by Statement No. 123 have been included in Note 13 to
consolidated financial statements.
<PAGE>
Net income per common share
---------------------------
Basic net income per common share is calculated by dividing net income
by the weighted average number of shares of common stock outstanding,
adjusted for unearned shares of the ESOP and the RRP. Diluted net
income per share is calculated by adjusting the weighted average number
of shares of common stock outstanding to include the effect of
potential common shares, if dilutive, calculated using the treasury
stock method.
26
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ----------------------------------------------
Net income per share (Cont'd.)
------------------------------
Basic and diluted net income per common share were computed in 1997 by
dividing net income for the year ended December 31, 1997 by the
weighted average number of shares of common stock outstanding, although
the Bank converted to Stock form on April 2, 1997.
During the years ended December 31, 1999, 1998 and 1997, diluted net
income per share did not differ from basic net income per share as
there were no contracts or securities excercisable or which could be
converted into common stock which had a dilutive effect. Stock options,
unearned RRP shares and ESOP shares not committed to be released
existed at December 31, 1999, 1998 and 1997 (see Note 13 to
consolidated financial statements).
Interest rate risk
------------------
The 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 purchase securities and to make loans
secured by real estate and, to a lesser extent, consumer loans. The
potential for interest-rate risk exists as a result of the generally
shorter duration of interest-sensitive liabilities compared to the
generally longer duration of interest-sensitive assets. In a rising
rate environment, liabilities will reprice faster than assets, thereby
reducing net interest income. For this reason, management regularly
monitors the maturity structure of the Bank's interest sensitive assets
and liabilities in order to measure its level of interest-rate risk and
to plan for future volatility.
Impact of new accounting standards
----------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statements of financial position
and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the
exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) a
<PAGE>
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. The
accounting for changes in the fair value of a derivative (that is,
gains and losses) depends on the intended use of the derivative and the
resulting designation.
27
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- --------------------------------------------------------
Impact of new accounting standards (Cont'd.)
--------------------------------------------
At the date of initial application of SFAS No. 133, an entity may
transfer any held-to-maturity security into the available-for-sale
category or the trading category. An entity will then be able in the
future to designate a security transferred into the available-for-sale
category as the hedged item, or its variable interest payments as the
cash flow hedged transactions, in a hedge of the exposure to changes in
market interest rates, changes in foreign currency exchange rates, or
changes in the overall fair value. (SFAS No. 133 precludes a
held-to-maturity security from being designated as the hedged item in a
fair value hedge of market interest rate risk or the risk of changes in
its overall fair value and precludes the variable cash flows of a
held-to-maturity security from being designated as the hedged
transaction in a cash flow hedge of market interest rate risk). SFAS
No. 133 provides that such transfers from the held-to-maturity category
at the date of initial adoption shall not call into question an
entity's intent to hold other debt securities to maturity in the
future.
SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, the quarter ended March 31, 2001 for the
Company and subsidiary. Initial application shall be as of the
beginning of an entity's fiscal quarter. Earlier application of all of
the provisions of SFAS No. 133 is permitted only as of the beginning of
a fiscal quarter. Earlier application of selected provisions or
retroactive application of provisions of SFAS No. 133 are not
permitted.
Management of the Company and subsidiary has not yet determined when
SFAS No. 133 will be implemented, but does not believe the ultimate
implementation of SFAS No. 133 will have a material impact on their
consolidated financial position or results of operations.
Reclassification
----------------
Certain amounts for prior periods have been reclassified to conform to
the current period's presentation.
2. REORGANIZATION AND STOCKHOLDERS' EQUITY
- --------------------------------------------
On December 11, 1996, the Board of Directors of the Bank unanimously adopted the
Plan of Reorganization from a Federal Mutual Savings Bank to a Federal Mutual
Holding Company (the "Plan"). Pursuant to the Plan, the Bank reorganized from a
<PAGE>
federally-chartered mutual Savings Bank into a Federal Mutual Holding Company
and concurrently converted to a federally-chartered capital stock Savings Bank.
The Plan was approved by both the Office of Thrift Supervision (the "OTS") and
by the Bank's depositors and borrowers with outstanding loans as of November 16,
1995, which remained outstanding as of the voting record date (the "Members").
28
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. REORGANIZATION AND STOCKHOLDERS' EQUITY (Cont'd.)
- ------------------------------------------------------
As part of the Plan, Pulaski Bancorp, M.H.C. (the "Holding Company") was formed
and a minority stock offering was completed on April 2, 1997, whereby 952,200
shares were sold to the public at a price of $10 per share, for net proceeds of
$9.0 million, which represented a minority ownership of 46% of the Bank. At
December 31, 1999 and 1998, the total minority ownership was 46% and 47%,
respectively.
On January 28, 1999, the Board of Directors of the Bank adopted a Plan of
Reorganization whereby the Bank would become a wholly-owned subsidiary of the
Company. On April 23, 1999, the stockholders of the Bank approved the Plan of
Reorganization and the formation of Pulaski Bancorp, Inc. The Company issued
2,108,088 shares of common stock to the existing stockholders of the Bank in
exchange for the common stock of the Bank on a one for one share basis and
became the owner of 100% of the common stock of the Bank. The Holding Company
maintained 46% of the Company's common stock. Such reorganization does not
materially impact the financial condition or operations of the Bank and/or the
Company.
During the year ended December 31, 1999, the Company repurchased, in the open
market, 27,600 shares of its common stock at an aggregate cost of $224,000.
These repurchases are reflected as treasury stock in the consolidated statements
of financial condition. The Company has received regulatory approval to
repurchase, and intends to repurchase, subject to market conditions and other
factors, an additional 120,943 shares of its outstanding common stock.
3. TERM DEPOSITS
- ------------------
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998
------------------------ -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Due within one year $ 197,000 5.82% $ -- --
Due after one through two years -- -- 197,000 5.82%
----------- -----------
$ 197,000 5.82% $ 197,000 5.82%
=========== ===========
</TABLE>
<PAGE>
4. SECURITIES AVAILABLE FOR SALE
- ----------------------------------
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------
Gross Unrealized
-------------------------- Carrying
Cost Gains Losses Value
----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Equity securities:
Mutual Fund $ 5,988,451 $ - $ 82,000 $ 5,906,451
=========== =========== ======== ===========
<CAPTION>
December 31, 1998
-----------------------------------------------------------
Gross Unrealized
----------------------------- Carrying
Cost Gains Losses Value
---------- --------- --------- -----------
<S> <C> <C> <C> <C>
Equity securities:
Mutual Fund $ 5,678,498 $ - $ 36,000 $ 5,642,498
=========== =========== ======== ===========
</TABLE>
There were no sales of securities available for sale during the years ended
December 31, 1999, 1998 and 1997.
29
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT SECURITIES HELD TO MATURITY
- -------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------------
Gross Unrealized
Carrying -------------------------- Estimated
Value Gain Losses Fair Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government Agencies securities:
Maturing after one year through five years $1,000,000 $ -- $ 38,594 $ 961,406
Maturing after five years through ten years 5,000,000 -- 192,034 4,807,966
Trust preferred 947,017 -- 19,607 927,410
---------- --------- ---------- ----------
$6,947,017 $ -- $ 250,235 $6,696,782
========== ========= ========== ==========
<CAPTION>
December 31, 1998
---------------------------------------------------------------
Carrying Gross Unrealized Estimated
-----------------------------
Value Gains Losses Fair Value
--------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
U.S. Government Agencies securities:
Maturing within one year $ 1,000,000 $ - $ - $ 1,000,000
Maturing after five years through ten years 5,000,000 2,500 7,750 4,994,750
Trust preferred 946,353 - 1,283 945,070
$ 6,946,353 $ 2,500 $ 9,033 $ 6,939,820
=========== ======= ======== ===========
</TABLE>
There were no sales of investment securities held to maturity during the years
ended December 31, 1999, 1998 and 1997.
<PAGE>
6. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
- -------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------
Gross Unrealized
Carrying ---------------------------- Estimated
Value Gains Losses Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Government National Mortgage Association $14,272,475 $ 106,640 $ 357,326 $14,021,789
Federal National Mortgage Association 20,033,644 29,588 417,371 19,645,861
Federal Home Loan Mortgage Corporation 36,686,065 11,370 220,446 36,476,989
Small Business Administration 407,259 -- 4,636 402,623
----------- ----------- ----------- -----------
$71,399,443 $ 147,598 $ 999,779 $70,547,262
=========== =========== =========== ===========
<CAPTION>
December 31, 1998
----------------------------------------------------------
Gross Unrealized
Carrying ---------------------------- Estimated
Value Gains Losses Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Government National Mortgage Association $10,426,823 $ 169,974 $ -- $10,596,797
Federal National Mortgage Association 29,874,277 165,343 26,922 30,012,698
Federal Home Loan Mortgage Corporation 14,894,840 77,822 12,206 14,960,456
Small Business Administration 532,550 -- 1,723 530,827
----------- ----------- ----------- -----------
$55,728,490 $ 413,139 $ 40,851 $56,100,778
=========== =========== =========== ===========
</TABLE>
30
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. MORTGAGE-BACKED SECURITIES HELD TO MATURITY (Cont'd.)
- -----------------------------------------------------------
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 1999, 1998 and 1997. At December 31, 1999 and 1998,
mortgage-backed securities held to maturity with carrying values of
approximately $366,000 and $454,000, respectively, were pledged to secure public
funds on deposit.
7. LOANS RECEIVABLE
- ----------------------
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------ -------------
<S> <C> <C>
Real estate mortgage:
One-to-four family $ 99,743,852 $ 77,555,405
Multi-family dwellings 2,500,609 2,903,116
Non-residential 6,967,956 3,689,413
VA guaranteed 292,531 414,360
FHA insured 75,072 140,276
------------ ------------
109,580,020 84,702,570
------------ ------------
Real estate construction and land acquisition 36,900,620 23,897,946
------------ ------------
Consumer:
Second mortgages 6,575,574 4,830,822
Equity lines of credit 3,027,747 2,168,478
Passbook or certificate 126,669 285,663
------------ ------------
9,729,990 7,284,963
------------ ------------
Total loans 156,210,630 115,885,479
------------ ------------
Less: Loans in process 19,759,682 13,142,922
Deferred loan fees 793,947 826,377
Allowance for loan losses 1,135,000 1,022,000
------------ ------------
21,688,629 14,991,299
------------ ------------
$134,522,001 $100,894,180
============ ============
</TABLE>
31
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LOANS RECEIVABLE (Cont'd.)
- --------------------------------
The Bank has entered into lending transactions, in the ordinary course of
business, with executive officers and directors of the Company and Bank and to
their associates on the same terms as those prevailing for comparable
transactions with other borrowers. A summary of activity related to such loans
is as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
1999 1998
------ ------
(In Thousands)
<S> <C> <C>
Balance - beginning $ 352 $ 466
New loans -- --
Repayments (10) (114)
----- -----
Balance - ending $ 342 $ 352
===== =====
</TABLE>
The following is an analysis of the allowance for loan losses:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance - beginning $ 1,022,000 $ 913,000 $ 844,000
Provision charged to operations 113,000 114,000 167,789
Recoveries of loans previously charged off -- -- 25,884
Loans charged off -- (5,000) (124,673)
----------- ----------- -----------
Balance - ending $ 1,135,000 $ 1,022,000 $ 913,000
=========== =========== ===========
</TABLE>
Nonaccrual loans totalled $676,000, $930,000 and $891,000 at December 31, 1999,
1998 and 1997, respectively. Nonaccrual loans are those on which income under
the accrual method has been discontinued with subsequent interest payments
credited to interest income when received or, if the ultimate collectibility of
principal is in doubt, applied as principal reductions. The amount of additional
interest income that would have been recognized on non-accrual loans if such
loans had continued to perform in accordance with their contractual terms was
$51,000, $54,000 and $7,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
<PAGE>
Impaired loans and related amounts recorded in the allowance for loan losses are
as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Recorded investment in impaired loans:
With recorded allowances $277,179 $184,258
Without recorded allowances 183,248 598,183
Total impaired loans 460,427 782,441
Related allowance for loan losses 41,000 54,000
-------- --------
Net impaired loans $419,427 $728,441
======== ========
</TABLE>
32
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LOANS RECEIVABLE (Cont'd.)
- ---------------------------------
The average recorded investment in impaired loans was $465,000, $596,000 and
$522,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Interest income recognized on such loans totalled approximately $28,000, $42,000
and $63,000 during the years ended December 31, 1999, 1998 and 1997,
respectively. Interest income recognized on impaired loans, except for
approximately $20,000 and $1,400 in 1998 and 1997, respectively, was recorded on
the cash basis.
8. PREMISES AND EQUIPMENT
- ----------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Land $ 613,561 $ 613,561
---------- ----------
Buildings and improvements 3,769,185 3,613,000
Less accumulated depreciation 1,028,028 901,650
---------- ----------
2,741,157 2,711,350
---------- ----------
Future office site 63,698 21,950
---------- ----------
Leashold improvements 82,305 --
Less accumulated amortization 3,914 --
---------- ----------
78,391 --
---------- ----------
Furnishings and equipment 1,225,184 1,059,827
Less accumulated depreciation 684,103 544,156
---------- ----------
541,081 515,671
---------- ----------
$4,037,888 $3,862,532
========== ==========
</TABLE>
<PAGE>
9. ACCRUED INTEREST RECEIVABLE
- ---------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Loans $ 673,166 $ 519,206
Mortgage-backed securities held to maturity 459,024 374,771
Other interest-earning assets 85,866 77,589
---------- ----------
$1,218,056 $ 971,566
========== ==========
</TABLE>
33
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DEPOSITS
- -----------------
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1999 1998
-------------------------- ---------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
<S> <C> <C> <C> <C>
Demand accounts:
Non-interest-bearing --% $ 2,596,191 --% $ 4,227,532
Interest-bearing 3.17% 25,639,560 3.08% 19,980,915
------------ ------------
2.88% 28,235,751 2.54% 24,208,447
Savings and club accounts 2.34% 25,825,091 2.32% 25,957,626
Certificates of deposit 5.04% 114,946,808 5.35% 124,641,951
------------ ------------
4.27% $169,007,650 4.51% $174,808,024
============ ============
</TABLE>
The scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
------------ -----------
<S> <C> <C>
One year or less $ 97,446,008 $ 99,668,551
After one to two years 13,027,900 20,072,700
After two to three years 2,208,100 2,088,600
After three years 2,264,800 2,812,100
------------ ------------
$114,946,808 $124,641,951
============ ============
</TABLE>
<PAGE>
At December 31, 1999 and 1998, certificates of deposits with a denomination of
more than $100,000 amounted to approximately $11,383,000 and $9,692,000,
respectively.
Interest expense on deposits consists of:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Demand accounts $ 727,804 $ 496,013 $ 279,032
Savings and club accounts 606,401 584,858 652,958
Certificates of deposit 6,137,059 6,549,747 6,157,823
---------- ----------- -----------
$7,471,264 $ 7,630,618 $ 7,089,813
========== =========== ===========
</TABLE>
34
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BORROWED MONEY
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1999 1998
--------------------------- -----------------------------
Weighted Weighted
Average Rate Amount Average Rate Amount
------------ ------ ------------ ------
<S> <C> <C> <C> <C>
ESOP loan payable -- $ -- 8.25% $ 454,805
Overnight line of credit advance due January 3, 2000 5.10% 10,000,000 -- --
Advances from Federal Home Loan Bank
maturing on February 28, 2000 6.37% 18,000,000 -- --
Securities sold under agreement to repurchase
maturing February 1, 2000 5.96% 14,000,000 -- --
----------- -----------
5.93% $42,000,000 8.25% $ 454,805
=========== ===========
</TABLE>
The Bank has an overnight line of credit with FHLB subject to the terms and
conditions of the lenders overnight advance program under which $10,224,000 and
$18,785,000 was unused at December 31, 1999 and 1998, respectively. Advances
under this line of credit, which expires on October 30, 2000, are made for one
day periods. The advances are secured by stock of the FHLB in the amount of
$2,100,000 and $1,446,200 at December 31, 1999 and 1998, respectively.
Information concerning securities sold under agreement to repurchase at December
31, 1999 (in thousands) is summarized as follows:
Investment and mortgage-backed securities held to maturity
underlying the agreement at year end:
Carrying value $ 24,138
Estimated fair value $ 24,125
35
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REGULATORY CAPITAL
- ------------------------
The 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 Bank.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to adjusted total assets (as defined). The following
tables present a reconciliation of capital per generally accepted accounting
principles ("GAAP") and regulatory capital and information as to the Bank's
capital levels at the dates presented:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
------- -------
(In Thousands)
<S> <C> <C>
GAAP, core and tangible capital $22,880 $22,806
Add: general valuation allowance 1,068 968
------- -------
Total regulatory capital $23,948 $23,774
======= =======
</TABLE>
36
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. REGULATORY CAPITAL (Cont'd.)
- ---------------------------
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirements Actions Provisions
--------------------- ----------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
- -----------------
Total Capital
(to risk-weighted assets) $23,948 20.95% $ 9,146 8.00% $ 11,433 10.00%
Tier 1 Capital
(to risk-weighted assets) 22,880 20.01% - - 6,860 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 22,880 9.67% 9,462 4.00% 11,828 5.00%
Tangible Capital
(to adjusted total assets) 22,880 9.67% 3,548 1.50% - -
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
- -----------------
Total Capital
(to risk-weighted assets) $23,774 25.86% $ 7,356 8.00% $9,195 10.00%
Tier 1 Capital
(to risk-weighted assets) 22,806 24.80% - - 5,517 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 22,806 11.41% 7,992 4.00% 9,990 5.00%
Tangible Capital
(to adjusted total assets) 22,806 11.41% 2,997 1.50% - -
</TABLE>
As of June 30, 1999, the most recent notification from the OTS, the 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.
37
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS
- ------------------
Retirement Plan
- ---------------
The Bank has a non-contributory pension plan covering all eligible employees.
The plan is a defined benefit plan which provides benefits based on a
participant's years of service and compensation. The Bank's funding policy is to
contribute annually the maximum amount that can be deducted for income tax
purposes. The following table sets forth the plan's funded status:
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $1,861,302 (1999) and $1,539,658 (1998) $ 1,867,160 $ 1,792,835
=========== ===========
Projected benefit obligation - beginning $ 2,333,977 $ 2,003,055
Service cost 114,067 107,144
Interest cost 159,532 136,102
Actuarial loss 120,367 92,265
Settlements (165,716) (4,589)
----------- -----------
Projected benefit obligation - ending 2,562,227 2,333,977
----------- -----------
Plan assets at fair value - beginning 2,135,192 1,854,668
Actual return on plan assets 119,023 114,908
Contributions 200,597 170,205
Settlements (165,716) (4,589)
----------- -----------
Plan assets at fair value - ending 2,289,096 2,135,192
----------- -----------
Projected benefit obligation in excess of fair value (273,131) (198,785)
Unrealized net loss 380,790 243,260
Unrecognized transition obligation 11,642 14,554
----------- -----------
Prepaid pension cost included in other assets $ 119,301 $ 59,029
=========== ===========
</TABLE>
38
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
- ----------------------------
The following table sets forth the components of net periodic pension cost:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net periodic pension cost include the following:
Service cost $ 114,067 $ 107,144 $ 96,960
Interest cost 159,532 136,102 122,989
Expected return on plan assets (145,307) (126,885) (116,771)
Amortization of unrecognized net loss 9,121 1,771 --
Amortization of transition obligation 2,912 2,912 2,912
--------- --------- ---------
$ 140,325 $ 121,044 $ 106,090
========= ========= =========
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate 6.5% 6.5% 6.5%
Expected long-term rate of return 6.5% 6.5% 6.5%
Rate of increase in compensation levels 4.0% 4.0% 4.0%
</TABLE>
Directors' Consultation and Retirement Plan ("DCRP")
- ----------------------------------------------------
The Bank has an unfunded retirement plan for non-employee directors. The
benefits are payable based on term of service as a director. The discount rate
and expected long-term rate of return used in computing the actuarial present
value of the projected benefit obligation was 6.5%. The increase in future
compensation levels used was 5.0%.
39
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
- --------------------------------
The following table sets forth the DCRP's status and components of net periodic
cost:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
-------- --------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $327,382 $290,146
Non-vested 42,852 81,194
-------- --------
$370,234 $371,340
======== ========
<CAPTION>
December 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Projected benefit obligation - beginning $ 380,737 $ 331,625
Service cost 49,542 24,915
Interest cost 20,021 21,717
Actuarial (gain) loss (72,724) 2,480
--------- ---------
Projected benefit obligation - ending 377,576 380,737
--------- ---------
Plan assets at fair value -- --
--------- ---------
Projected benefit obligation in excess of fair value (377,576) (380,737)
Unrealized net (gain) loss (50,807) 2,480
Unrecognized transition obligation 207,355 224,634
--------- ---------
Accrued liability included in other liabilities $ (221,028) $(153,623)
========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net periodic pension cost include the following:
Service cost $49,542 $24,915 $55,586
Interest cost 20,021 21,717 16,847
Amortization of transition cost 17,279 17,279 17,279
Amortization of unrealized gain (19,437) -- --
-------- -------- -------
$ 67,405 $ 63,911 $89,712
======== ======== =======
</TABLE>
40
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
- --------------------------------
Savings Plan
- ------------
The Bank sponsors a Savings and Investment Plan (the "Savings Plan"), pursuant
to Section 401(k) of the Internal Revenue Code, for all eligible employees.
Employees may elect to save up to 10% of their compensation. The Bank will match
25% of the first 6% of each employee's contribution. The Savings Plan expense
amounted to approximately $17,000, $15,000 and $16,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
ESOP
- ----
Effective upon the consummation of the reorganization, an ESOP was established
for all eligible employees who had completed a twelve-month period of employment
with the Bank and at least 1,000 hours of service and had attained the age of
21. The ESOP used $761,760 in proceeds from a term loan obtained from a
third-party financial institution to purchase 76,176 shares of Bank common stock
in the initial public offering. The term loan principal is payable over twenty
equal quarterly installments through March 31, 2002. Concurrent with the
re-organization on July 12, 1999, the ESOP exchanged all the stock of the Bank
with the common stock of the Company and refinanced the outstanding loan from
the third party financial institution with the Company on substantially the same
terms and conditions. Interest on the term loan is payable quarterly, at a
floating rate of 0.5% over the prime rate. Each year, the Bank intends to make
discretionary contributions to the ESOP which will be equal to principal and
interest payments required on the term loan. The loan is further paid down by
the amount of dividends paid on the common stock owned by the ESOP.
Shares purchased with the loan proceeds were initially pledged as collateral for
the term loan and are held in a suspense account for future allocation among
participants. Contributions to the ESOP and shares released from the suspense
account will be allocated among the participants on the basis of compensation,
as described by the ESOP, in the year of allocation.
The ESOP is accounted for in accordance with Statement of Position 93-6
"Accounting for Employee Stock Ownership Plans", which was issued by the
American Institute of Certified Public Accountants in November 1993.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP
shares in the statements of financial condition. As shares are committed to be
released from collateral, compensation expense equal to the current market price
of the shares is recorded, and the shares become outstanding for basic net
income per common share computations. ESOP compensation expense was $203,000,
$236,000 and $178,000 for the year ended December 31, 1999, 1998 and 1997,
respectively.
41
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
- --------------------------------
ESOP (Cont'd.)
- --------------
The ESOP shares were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Allocated shares 48,332 30,695
Unreleased shares 27,844 45,481
Total ESOP shares 76,176 76,176
-------- --------
Fair value of unreleased shares $229,713 $454,810
======== ========
</TABLE>
Stock-based Incentive Plan
- --------------------------
In October 1997, the Bank adopted the 1997 Stock-based Incentive Plan (the
"Incentive Plan"). Under the Incentive Plan, stock awards are granted for the
benefit of directors, officers and key employees in the form of the RRP. These
awards are exercisable at the rate of 20% per year over 5 years. In October
1997, 38,088 shares of Bank's common stock, having a market value of $761,760,
were contributed to the Incentive Plan by the Bank from its authorized but
unissued common stock. $150,000, $152,000 and $28,000 of expense related to the
Incentive Plan was recorded during the years ended December 31, 1999, 1998 and
1997, respectively. Concurrent with the reorganization in 1999, the Company
adopted the Incentive Plan and the RRP exchanged all its shares of common stock
of the Bank for shares of common stock of the Company.
Pursuant to the Incentive Plan, the Bank adopted, during 1997, a stock option
plan (the "Option Plan") for the benefit of directors, officers, and other key
employees. Options granted under the Option Plan are exercisable over a period
not to exceed ten years from the date of grant. Under the Option Plan, the
exercise price of each option equals the market price of the common stock on the
date of grant. The Company adopted the Incentive Plan and it was amended to
substitute shares of common stock of the Company for shares of common stock of
the Bank. The following table summarizes the options granted and exercised under
the Option Plan:
<PAGE>
<TABLE>
<CAPTION>
Number Exercise Price
of Shares Per Share
--------- ---------
<S> <C> <C>
Balance at December 31, 1996 -- $ --
Granted in 1997 95,220 20.00
Exercised -- --
------
Balance at December 31, 1997, 1998 and 1999 95,220 $ 20.00
====== =========
</TABLE>
42
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. BENEFIT PLANS (Cont'd.)
- ----------------------------
Stock-based Incentive Plan (Cont'd.)
- ------------------------------------
As permitted by Statement No. 123, compensation cost for stock option's granted
has been recognized based on the intrinsic value method instead of the fair
value based method. The weighted average fair value of options granted during
1997, all of which have exercise prices equal to the market price of the common
stock as of the grant date, is estimated using the Black-Sholes option-pricing
model. Such fair value and the assumptions used for estimating fair value are as
follows:
Weighted average grant - date fair value per share $7.70
Expected common stock dividend yield 1.50%
Expected volatility 30.71%
Expected option life 7 years
Risk-free interest rate 6.11%
Had the fair value based method been used, net income for the years ended
December 31, 1999, 1998 and 1997 would have decreased to approximately
$1,091,000, $937,000 and $1,103,000, respectively, and net income per share,
both basic and diluted, would have been reduced to $0.53, $0.46 and $0.55,
respectively.
14. INCOME TAXES
- -----------------
The Bank qualifies as a thrift institution under the provisions of the Internal
Revenue Code and, therefore, the tax bad debt deduction must be either based on
direct charge offs and/or calculated under the experience method. Retained
earnings at December 31, 1999, includes approximately $2.0 million of such bad
debt, for which income taxes have not been provided. If such amount is used for
purposes other than to absorb bad debts, including distributions in liquidation,
it will be subject to income tax at the then current rate.
<PAGE>
The components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Current tax expense:
Federal income $ 768,059 $ 571,150 $ 633,882
State income 63,642 45,256 51,448
--------- --------- ---------
831,701 616,406 685,330
--------- --------- ---------
Deferred tax (benefit) expense:
Federal income (85,493) 8,190 (11,606)
State income (7,777) 744 (1,054)
--------- --------- ---------
(93,270) 8,934 (12,660)
--------- --------- ---------
$ 738,431 $ 625,340 $ 672,670
========= ========= =========
</TABLE>
43
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INCOME TAXES (Cont'd.)
- ---------------------------
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.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Federal income tax $654,050 $563,262 $609,874
Increases in taxes resulting from:
New Jersey savings institution tax,
net of federal income tax effect 36,871 30,360 33,260
Other items, net 47,510 31,718 29,536
-------- -------- --------
Effective income tax $738,431 $625,340 $672,670
======== ======== ========
</TABLE>
Income taxes payable of $104,874 at December 31, 1999, is included in the
consolidated statements of financial condition under the caption "Other
liabilities". Income tax refundable of $91,240 at December 31, 1998 is included
in the consolidated statement of financial condition under the caption "Other
assets". The income tax effects of existing temporary differences that give rise
to significant portions of net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
-------- ---------
<S> <C> <C>
Deferred income tax assets:
Deferred loan fees $164,795 $176,463
Deferred compensation 59,485 44,632
Reserve for uncollected interest 21,843 31,057
Benefit plans 46,855 29,777
Allowance for loan losses in excess of bad debt
reserves 216,523 136,448
Unrealized loss on available for sale securities 29,520 12,960
-------- --------
539,021 431,337
Deferred income tax liabilities:
Depreciation 77,312 79,458
-------- --------
Deferred income tax assets, net, included in other assets $461,709 $351,879
======== ========
</TABLE>
44
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES
- -----------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and purchase
securities. The commitments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the statements of
financial condition. The 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 Bank uses the same credit policies in making commitments as it
does for on-balance-sheet instruments. The Bank had the following outstanding
commitments:
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Loan origination commitments expiring in three months or less $10,186,000 $10,311,000
=========== ===========
Loan participation purchase commitments $ 1,513,000 $ 3,366,000
=========== ===========
Unused home equity lines of credit $ 4,096,000 $ 3,255,000
=========== ===========
To purchase mortgage-backed securities $ -- $ 1,009,000
=========== ===========
</TABLE>
At December 31, 1999, of the $10,186,000 in outstanding loan origination
commitments, $7,310,000 were for one through two year construction loans with
interest rates which will float at either 1.00% or 1.50% above the prime rate,
$1,547,000 were for fixed rate mortgage loans with interest rates ranging from
6.50% to 7.875%, $1,000,000 were for adjustable rate mortgage loans with initial
rates ranging from 5.125% to 6.50 and $329,000 were for second mortgages with
fixed interest rates ranging from 7.09% to 7.75%.
At December 31, 1999, the loan participation purchase commitments represent
commitments to purchase participation interests in loans where the interest rate
will be set at the funding date based upon the Federal Home Loan Bank of New
York C.I.P. advance rate plus a margin.
The undisbursed funds from approved lines of credit under a homeowners equity
lending program, unless they are specifically cancelled by notice from the Bank,
represent firm commitments available to the respective borrowers on demand. The
interest rate charged for any month on funds disbursed under this program is
from .25% below the prime rate to 1.75% above the prime rate.
<PAGE>
Commitments to originate loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained by the Bank upon
extension of credit is based on management's credit evaluation of the
counterparty. Collateral held may vary but primarily includes one-to-four family
residential properties.
45
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES (Cont'd.)
- ---------------------------------------------
Rentals under long-term operating leases for certain branch offices amounted to
approximately $87,000, $11,000 and $11,000 for the years ended December 31,
1999, 1998 and 1997, respectively. At December 31, 1999, the minimum rental
commitments under all non-cancellable leases with initial or remaining terms of
more than one year are as follows:
Year Ending Minimum
December 31, Rate
------------ ----
2000 $ 137,000
2001 142,000
2002 147,000
2003 151,000
2004 155,000
Thereafter 1,165,000
----------
$1,897,000
==========
The Company and Bank also have, in the normal course of business, commitments
for services and supplies. Management does not anticipate losses on any of these
transactions.
The Company and Bank are parties to various 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 consolidated
financial position or operations.
16. ESTIMATED FAIR VALUES OF CONSOLIDATED FINANCIAL INSTRUMENTS
- ---------------------------------------------------------------
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. Significant estimations were used for
the purposes of this disclosure. Estimated fair values have been determined
using the best available data and estimation methodology suitable for each
category of financial instruments.
Cash and cash equivalents and accrued interest receivable
---------------------------------------------------------
The carrying amounts for cash and cash equivalents and accrued interest
receivable approximate fair value.
Term deposits
-------------
The fair value of term deposits is estimated by discounting future cash
flows, using rates which are currently available for term deposits of
similar remaining maturities.
46
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. ESTIMATED FAIR VALUES OF CONSOLIDATED FINANCIAL INSTRUMENTS (Cont'd.)
- -------------------------------------------------------------------------
Securities
----------
The fair values for trading account securities and for investment and
mortgage-backed securities available for sale and held to maturity, as
well as commitments to purchase such securities, are based on quoted
market prices or dealer prices, if available. If quoted market prices
or dealer prices are not available, fair value is estimated using
quoted market prices or dealer prices for similar securities.
Loans receivable
----------------
The fair value of loans receivable is estimated by discounting future
cash flows, using the current rates at which similar loans with similar
remaining maturities would be made to borrowers with similar credit
ratings.
Deposits
--------
For demand, savings and club accounts, fair value approximates the
carrying amount reported in the financial statements. For
fixed-maturity certificates of deposit, fair value is estimated by
discounting future cash flows, using rates currently offered for
deposits of similar remaining maturities.
Borrowed money
--------------
The fair value of borrowed money is estimated by discounting future
cash flows, using the current rates available for borrowings with
similar remaining maturities.
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.
47
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. ESTIMATED FAIR VALUES OF CONSOLIDATED FINANCIAL INSTRUMENTS (Cont'd.)
- -------------------------------------------------------------------------
The carrying amounts and estimated fair values of financial instruments are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998
----------------------- ----------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets
- ----------------
Cash and cash equivalents $ 6,771 $ 6,771 $ 23,365 $ 23,365
Term deposits 197 197 197 197
Trading account securities 2,791 2,791 -- --
Securities available for sale 5,906 5,906 5,642 5,642
Investment securities held to maturity 6,947 6,697 6,946 6,940
Mortgage-backed securities held to maturity 71,399 70,547 55,728 56,101
Loans receivable 134,522 133,137 100,894 103,526
Accrued interest receivable 1,218 1,218 972 972
Financial liabilities
- ---------------------
Deposits 169,008 169,131 174,808 175,413
Borrowed money 42,000 42,019 455 455
Commitments
- -----------
To originate or purchase loans 11,699 11,699 13,677 13,677
Unused lines of credit 4,096 4,096 3,255 3,255
To purchase mortgage-backed securities -- -- 1,009 1,009
</TABLE>
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings of a particular financial instrument.
Because no market exists for a significant portion of 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, involve uncertainties and matters of judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
<PAGE>
In addition, fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business, and exclude 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 premises and
equipment and advance payments by borrowers for taxes and insurance. In
addition, the tax ramifications related to the realization of 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.
48
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. DIVIDENDS AND RESTRICTIONS THEREON
- ----------------------------------------
The Holding Company waived its right to receive dividends declared by the Bank
and the Company during the years ended December 31, 1999, 1998 and 1997. The OTS
requires that retained earnings be restricted by the amount of such waived
dividends. Such restricted amounts aggregated $950,000, $593,000 and $252,000 at
December 31, 1999, 1998 and 1997, respectively.
OTS regulations impose limitations upon all capital distributions by a savings
institution including cash dividends, payments to repurchase its shares and
payments to shareholders of another institution in a cash-out merger. The rule
effective through the first quarter of 1999 established three tiers of
institutions based primarily on an institution's capital level. An institution
that exceeded all capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and had not been advised by the OTS that it
was in need of more than normal supervision, could, after prior notice but
without obtaining approval of the OTS, make capital distributions during the
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 the
excess capital over its capital requirements at the beginning of the calendar
year or (ii) 75% of its net income for the previous four quarters. Any
additional capital distributions required prior regulatory approval.
Effective April 1, 1999, the OTS's capital distribution regulation changed.
Under the new regulation, an application to and the prior approval of the OTS is
required prior to any capital distribution if the institution does not meet the
criteria for "expedited treatment" of applications under OTS regulations (i.e.,
generally, examination ratings in the two top categories), the total capital
distributions for the calendar year exceed net income for that year plus the
amount of retained net income for the preceding two years, the institution would
be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with OTS. If an
application is not required, the institution must still provide prior notice to
OTS of the capital distribution. 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.
18. PARENT ONLY FINANCIAL INFORMATION
- --------------------------------------
The Company operates its wholly owned subsidiary, the Bank. The earnings of the
Bank are recognized under the equity method of accounting. The following are the
condensed financial statements for the company (Parent company only) as of and
for the period ended December 31, 1999. The Company had no earnings prior to
July 12, 1999.
49
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. PARENT ONLY FINANCIAL INFORMATION (Con't.)
- ------------------------------------------------
<TABLE>
<CAPTION>
Condensed statement of financial condition
- ------------------------------------------
December 31, 1999
-----------------
<S> <C>
Assets
- ------
Cash and amounts due from financial institution $ 786,507
Investment in Pulaski Savings Bank 22,880,438
Loan receivable 278,439
Other assets 13,255
-----------
Total assets $23,958,639
===========
Liabilities and stockholders' equity
- ------------------------------------
Other liabilities $ 175,751
Stockholders' equity 23,782,888
-----------
Total liabilities and stockholders' equity $23,958,639
===========
<CAPTION>
Condensed statement of income
- -----------------------------
From Inception
(July 12, 1999) to
December 31,
1999
---------
<S> <C>
Interest income $ 18,537
Equity earnings in subsidiary 829,122
---------
847,659
---------
Expenses 41,660
---------
Net income before income tax (benefit) 805,999
Income tax (benefit) (7,862)
---------
Net income $ 813,861
=========
</TABLE>
50
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. PARENT ONLY FINANCIAL INFORMATION (Con't.)
- ------------------------------------------------
<TABLE>
<CAPTION>
Condensed statement of cash flows
- ---------------------------------
From Inception
(July 12, 1999) to
December 31,
1999
------------
<S> <C>
Cash flows from operating activities
- ------------------------------------
Net income $ 813,861
Equity earnings in the subsidiary (829,122)
(Increase) in other assets (13,255)
Increase in other liabilities 175,751
-----------
Net cash provided by operating activities 147,235
-----------
Cash flows from investing activities
- ------------------------------------
Net increase in loans receivable (278,439)
Dividends from subsidiary 1,300,000
-----------
Net cash provided by investing activities 1,021,561
-----------
Cash flows from financing activities
- ------------------------------------
Dividend paid (157,958)
Purchase of treasury stock (224,331)
-----------
Net cash used on financing activities (382,289)
-----------
Net increase in cash and cash equivalents 786,507
Cash and cash equivalents - beginning --
-----------
Cash and cash equivalents - ending $ 786,507
===========
</TABLE>
51
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-------------------------------------------
First Second Third Fourth
Quarter(1) Quarter(1) Quarter Quarter
------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $3,320 $3,354 $3,685 $4,032
Interest expense 1,920 1,906 2,129 2,362
------ ------ ------ ------
Net interest income 1,400 1,448 1,556 1,670
Provision for loan losses 25 36 25 27
Non-interest income 68 18 450 26
Non-interest expenses 1,082 1,152 1,148 1,218
Income taxes 163 105 305 165
------ ------ ------ ------
Net income $ 198 $ 173 $ 528 $ 286
====== ====== ====== ======
Basic and diluted net income per
common share $ 0.10 $ 0.08 $ 0.26 $ 0.14
====== ====== ====== ======
<CAPTION>
Year Ended December 31, 1998
-------------------------------------------
First Second Third Fourth
Quarter(1) Quarter(1) Quarter Quarter
------ ------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $3,337 $3,388 $3,382 $3,319
Interest expense 1,923 1,945 1,923 1,999
------ ------ ------ ------
Net interest income 1,414 1,443 1,459 1,320
Provision for loan losses 34 29 26 25
Non-interest income 66 74 55 100
Non-interest expense 971 1,217 1,053 919
Income taxes 185 109 159 173
------ ------ ------ ------
Net income $ 290 $ 162 $ 276 $ 303
====== ====== ====== ======
Basic and diluted net income per
common share $ 0.14 $ 0.08 $ 0.14 $ 0.15
====== ====== ====== ======
</TABLE>
(1) Quarterly financial data (unaudited) for Pulaski Savings Bank prior to
re-organization.
52
<PAGE>
PULASKI BANCORP, INC. AND SUBSIDIARY
Board of Directors
- --------------------------------------------------------------------------------
Edward J. Mizerski
Chairman of the Board and retired banker
Peter C. Pietrucha
Vice Chairman of the Board and attorney at law
Thomas Bentkowski
President and Chief Executive Officer
Eugene J. Bogucki, M.D.
Retired physician and surgeon
Anthony C. Majeski
Certified Public Accountant and retired banker
Walter F. Rusak
Principal of Grove Street School, K-5, Irvington,
New Jersey
Officers
- --------------------------------------------------------------------------------
Thomas Bentkowski................................... President & CEO
Lee Wagstaff.........................Vice President, Treasurer & CFO
Valerie Kaminski.................... Vice President, Secretary & COO
Kevin Aylward..................... Vice President & Mortgage Officer
Patrick Paolella................................Vice President & HRO
Lynn Carnevale............................. Assistant Vice President
Rose Ricciardi..............................Assistant Vice President
Angela Turi.................................Assistant Vice President
Valerie Nabb.................................... Assistant Secretary
Kristen Bourgeau.................................Assistant Treasurer
Marion Cottrell..................................Assistant Treasurer
Anna Fairfax.....................................Assistant Treasurer
Rana Hanclich....................................Assistant Treasurer
Kimberly Weichhan................................Assistant Treasurer
Ruth Wozniewicz..................................Assistant Treasurer
E. Cynthia Wyres.................................Assistant Treasurer
Stockholder Inquiries
- --------------------------------------------------------------------------------
Patrick Paolella, Vice President
Pulaski Bancorp, Inc.
130 Mountain Avenue
Springfield, New Jersey 07081
(973) 564-9000
<PAGE>
Annual Report on Form 10-K
- --------------------------------------------------------------------------------
A copy of the Company's report on Form 10-K,
is available without charge by
written request addressed as set forth under
Stockholder Inquiries.
Counsel
--------------------------------------------------
Alfred R. Kinney
2040 Millburn Avenue - Suite 101
Maplewood, New Jersey 07040
Special Counsel
--------------------------------------------------
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
Independent Auditors
--------------------------------------------------
Radics & Co., LLC
55 U.S. Highway 46 East
Pine Brook, New Jersey 07058
Stock Transfer Agent
--------------------------------------------------
Registrar and Transfer Co.
10 Commerce Drive
Cranford, New Jersey 07016
(908) 497-2300
Market Makers
--------------------------------------------------
Friedman, Billings, Ramsey & Co., Inc.
Sandler O'Neill & Partners
Ryan, Beck & Co., Inc.
Herzog, Heine, Geduld, Inc.
53
<PAGE>
PULASKI BANCORP, INC.
Market For Common Stock and Related Matters
-------------------------------------------------------------
Pulaski Bancorp, Inc.'s common stock is presently
quoted on the National Association of Securities
Dealers automated quotations small cap market system
under the symbol "PLSK". At March 1, 2000, 1,980,588
shares of the Company's outstanding common stock were
held by approximately 412 persons or entities.
The following table sets forth the high and low
closing sales prices per common shares for the
periods indicted. Such prices do not necessarily
reflect retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Closing Prices
---------------------------
Quarter Ended High Low
----------- -----------
Pulaski Savings Bank:
<S> <C> <C>
March 31, 1998 20 1/2 18 1/4
June 30, 1998 19 3/4 15 7/8
September 30, 1998 16 10 7/8
December 31, 1998 12 9 3/4
March 31, 1999 11 1/4 9 3/8
June 30, 1999 9 13/16 8 1/32
Pulaski Bancorp, Inc.:
September 30, 1999 8 3/4 8 3/16
December 31, 1999 8 1/2 6 3/4
<CAPTION>
Dividends
Paid
----
<S> <C>
Pulaski Savings Bank:
March 31, 1998 $0.075
June 30, 1998 0.075
September 1998 0.075
December 1998 0.080
March 31, 1999 0.080
June 30, 1999 0.080
Pulaski Bancorp, Inc.:
September 30, 1999 0.080
December 31, 1999 0.080
</TABLE>
Future dividend policy will be determined by the
Board of Directors after giving consideration to the
Company's financial condition, results of operations,
tax status, economic conditions and other factors.
The Board may also consider the payment of stock
dividends from time to time, in addition to, or in
lieu of cash dividends.
54
EXHIBIT 23.0 - CONSENT OF RADICS & CO., LLC
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the previously
filed Registration Statements on Form S-8 (Nos. 333-85153 and 333-85157) of
Pulaski Bancorp, Inc. (the "Company") of our report dated February 11, 2000,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
/s/ Radics & Co., LLC
---------------------
Radics & Co., LLC
March 27, 2000
Pine Brook, New Jersey
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,966,072
<INT-BEARING-DEPOSITS> 651,547
<FED-FUNDS-SOLD> 2,350,000
<TRADING-ASSETS> 2,790,500
<INVESTMENTS-HELD-FOR-SALE> 5,906,451
<INVESTMENTS-CARRYING> 78,346,460
<INVESTMENTS-MARKET> 77,244,044
<LOANS> 135,657,001
<ALLOWANCE> 1,135,000
<TOTAL-ASSETS> 236,550,290
<DEPOSITS> 169,007,650
<SHORT-TERM> 42,000,000
<LIABILITIES-OTHER> 1,759,752
<LONG-TERM> 0
21,081
0
<COMMON> 0
<OTHER-SE> 23,761,807
<TOTAL-LIABILITIES-AND-EQUITY> 236,550,290
<INTEREST-LOAN> 9,187,993
<INTEREST-INVEST> 4,548,355
<INTEREST-OTHER> 654,679
<INTEREST-TOTAL> 14,391,027
<INTEREST-DEPOSIT> 7,471,264
<INTEREST-EXPENSE> 8,316,742
<INTEREST-INCOME-NET> 6,074,285
<LOAN-LOSSES> 113,000
<SECURITIES-GAINS> (97,894)
<EXPENSE-OTHER> 4,599,728
<INCOME-PRETAX> 1,923,676
<INCOME-PRE-EXTRAORDINARY> 1,923,676
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,185,245
<EPS-BASIC> 0.58
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 2.94
<LOANS-NON> 676,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 460,000
<ALLOWANCE-OPEN> 1,022,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,135,000
<ALLOWANCE-DOMESTIC> 1,135,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
