SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
[X] EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
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- or -
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|_| EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-18764
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PULSE BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
New Jersey 22-3016360
- -------------------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
6 Jackson Street, South River, New Jersey 08882
- -------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (732) 257-2400
----------------
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 $1.00 per share
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing sales price of the Registrant's Common
Stock as quoted on the National Market of The Nasdaq Stock Market on December
22, 1997 was $81.8 million.
As of December 22, 1997, the Registrant had outstanding 3,087,898 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV -- Portions of the Registrant's Annual Report to
Stockholders for fiscal year ended September 30, 1997.
2. Part III -- Portions of the Registrant's Proxy Statement for a January
1998 meeting.
<PAGE>
PART I
Item 1. Business
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Pulse Bancorp, Inc. (the "Registrant" or the "Corporation") is a savings
bank holding company incorporated under the laws of the State of New Jersey in
November 1989, for the sole purpose of acquiring all of the issued and
outstanding common stock of Pulawski Savings and Loan Association (the
"Association") in connection with the reorganization of the Association into the
holding company form of organization and exchange of shares of common stock of
the Association for those of the Corporation (the "Reorganization").
The Association was chartered by the State of New Jersey in 1916 and
following several name changes, the last of which occurred in 1993, the
Association became Pulse Savings Bank (the "Bank"). In 1996, the Corporation
formed three wholly owned subsidiaries named Pulse Investment, Inc., Pulse Real
Estate, Inc. and Pulse Insurance Services, Inc. The subsidiaries are currently
inactive.
At September 30, 1997, the assets of the Corporation consisted of all of
the issued and outstanding shares of the Bank's Common Stock, $2.0 million in
loans receivable from the Bank and $823,000 in investment securities. References
throughout this Report to the Corporation or the Bank include, unless otherwise
specified or the context otherwise requires, the Corporation's and the Bank's
predecessors in interest.
At September 30, 1997, the Bank had total assets, deposits and
stockholders' equity of approximately $526.0 million, $411.0 million, and $43.2
million, respectively. The Bank is a New Jersey-chartered savings bank in
capital stock form. The Bank's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association Insurance Fund
("SAIF").
The Bank conducts its business through five offices located in South
River, South Amboy, Monroe Township, East Brunswick, and Lawrenceville, New
Jersey. The Bank's executive offices are located at 6 Jackson Street, South
River, New Jersey, and its telephone number is (732) 257-2400.
The principal business of the Bank is the acceptance of savings deposits
from the general public and the origination of mortgage loans obtained for the
purpose of constructing, financing or refinancing one-to four-family dwellings
and other improved residential and commercial real estate. In addition, the Bank
purchases investment and mortgage-backed securities. Its income is derived
largely from interest income on interest-earning assets such as loans,
mortgage-backed securities and investments. Its principal expenses are interest
paid on deposits, borrowings and operating expenses.
The level of earnings (net interest income) of the Bank will vary,
depending upon the difference between the amount of income that it receives from
its loans, mortgage-backed securities and investment portfolios and its cost of
funds. This is because the Bank's cost of funds are sensitive to changes in
short-term interest rates due to shorter-term savings accounts bearing interest
rates determined by current market conditions while a significant portion of the
Bank's loan portfolio, consisting of long-term, fixed-rate real estate loans, do
not reprice as rapidly or to the same extent as the Bank's deposits.
Consequently, the Bank is vulnerable to future increases in interest rates
which, if significant, may have a material adverse affect on its financial
condition and results of operations.
2
<PAGE>
The Bank originates fixed-rate and adjustable-rate mortgages and has in
the past purchased primarily one to five year adjustable-rate loans on
residential and multi-family dwellings for retention in its portfolio. It has
adopted a strategy designed to improve and stabilize its operational results to
counter the volatile cost of its funds and the mismatch between its relatively
long-term, fixed-rate assets and short-term, rate sensitive liabilities. The
principal objective of this strategy is to restructure assets to lessen the
potential adverse effects of interest rate volatility on earnings, while
maintaining high quality (low credit risk) assets and improving profits.
The Bank operates in an area that is highly industrialized, extremely
diverse and densely populated. No one industry or group of industries
predominates in the Bank's operating area. However, the Bank is affected by the
economy and real estate market in the State of New Jersey, particularly northern
New Jersey, and the New York City metropolitan area.
Lending Activities
- -------------------
General. As of September 30, 1997, 89.1% of the Bank's gross loan and
mortgage-backed securities portfolio consisted of loans and securities secured
by mortgages on one- to four-family residential properties, which included
conventional mortgage loans, insured loans, guaranteed loans, mortgage-backed
securities, collateralized mortgage obligations, and consumer loans secured by
real estate (home equity loans). Additionally, the Bank originates and purchases
multi-family and commercial real estate loans, which loans represent 10.9% of
the Bank's gross loan portfolio at September 30, 1997. To a lesser extent, the
Bank also originates consumer loans not secured by real estate.
3
<PAGE>
Loan Portfolio Analysis. Set forth below is selected data relating to the
composition of the Bank's loan portfolio, including mortgage-backed securities,
by type of loan and type of security on the dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------ ------------------ ---------------- --------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ ------- ------ -------
Type of Loan:
- ------------
Conventional Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction Loans ................ $ -- --% -- --% $ 280 0.1% $ 363 0.1% 1,037 0.3%
Loans on existing property......... 160,136 44.2 124,510 38.7 119,512 3.86 117,744 34.7 110,129 32.0
Insured or guaranteed real estate
loans............................ 10,393 2.9 7,975 2.5 7,080 2.3 5,838 1.7 5,043 1.5
loans
Mortgage-backed securities......... 146,336 40.4 142,385 44.2 138,986 44.9 169,077 49.9 182,550 53.1
Collateralized mortgage obligations 39,969 11.1 39,581 12.3 35,941 11.6 34,934 10.3 33,148 9.7
Consumer Loans:
Home equity ....................... 10,076 2.8 10,870 3.4 10,397 3.4 13,544 4.0 14,348 4.2
Student loans ..................... 57 -- 101 -- 7 -- -- -- -- --
Savings account loans ............. 514 0.1 319 0.1 288 0.1 184 0.1 229 0.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
367,481 101.5 325,741 101.2 312,491 101.0 341,684 100.8 346,484 100.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Add:
Premiums on mortgage-backed
securities ..................... 525 0.1 450 0.1 402 0.1 689 0.2 900 0.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Less:
Loans in process .................. -- -- -- -- 187 -- 238 0.1 818 0.2
Unearned discounts on loans and
mortgage-backed securities and
deferred loan fees .............. 1,375 0.4 847 0.3 856 0.3 781 0.2 742 0.2
Allowance for loan losses ......... 4,487 1.2 3,369 1.0 2,604 0.8 2,459 0.7 2,357 0.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
5,862 1.6 4,216 1.3 3,647 1.1 3,478 1.0 3,917 1.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total ....................... $362,144 100.0% $321,975 100.0% $309,246 100.0% $338,895 100.0% $343,467 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Type of Security:
- ----------------
Residential:
1 to 4 family ................... $ 82,162 22.7% $ 60,662 18.9% $ 61,800 20.0% $ 73,578 21.7% 88,104 25.6%
Other dwelling units ............ 42,341 11.7 37,286 11.6 32,923 10.6 28,190 8.3 15,088 4.4
Commercial or industrial properties 45,709 12.6 37,432 11.6 35,466 11.5 29,883 8.8 22,322 6.5
Savings accounts .................. 514 0.1 319 0.1 288 0.1 184 0.1 229 0.1
Collateralized mortgage obligations 39,969 11.1 39,581 12.3 35,941 11.6 34,934 10.3 33,148 9.7
Insured by State or Federal
Agencies:
FHA/VA ............................ 10,393 2.9 7,975 2.5 7,080 2.3 5,838 1.7 5,043 1.5
Mortgage-backed securities......... 146,336 40.4 142,385 44.2 138,986 44.9 169,077 49.9 182,550 53.1
Student loans ..................... 57 -- 101 -- 7 -- -- -- -- --
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
367,481 101.5 325,741 101.2 312,491 101.0 341,684 100.8 346,484 100.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Add:
Premiums ........................ 525 0.1 450 0.1 402 0.1 689 0.2 900 0.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Less:
Loans in process .................. -- -- -- -- 187 -- 238 0.1 818 0.2
Unearned discounts on loans and
mortgage-backed securities and
deferred loan fees .............. 1,375 0.4 847 0.3 856 0.3 781 0.2 742 0.2
Allowance for loan losses ......... 4,487 1.2 3,369 1.0 2,604 0.8 2,459 0.7 2,357 0.7
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
5,862 1.6 4,216 1.3 3,647 1.1 3,478 1.0 3,917 1.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total ....................... $362,144 100.0% $321,975 100.0% $309,246 100.0% $338,895 100.0% $343,467 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
4
<PAGE>
Mortgage-backed Securities. The Bank periodically purchases collateralized
mortgage obligations ("CMOs") and mortgage-backed securities guaranteed by the
Government National Mortgage Association ("GNMA") and the Federal National
Mortgage Association ("FNMA") and participation certificates issued by the
Federal Home Loan Mortgage Corporation ("FHLMC"). CMOs are aggregates of pools
of pass-through securities consisting of mortgage loans that serve as security.
Mortgage-backed securities represent a participation interest in a pool of
single-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Bank. GNMA mortgage-backed
securities are certificates issued and backed by the GNMA and are secured by
interests in pools of mortgages which are fully insured by the Federal Housing
Administration ("FHA") or partially guaranteed by the Veterans' Administration
("VA"). FNMA mortgage-backed securities are certificates issued and guaranteed
by the FNMA that are secured by conventional mortgage loans. FHLMC
mortgage-backed securities are participation certificates issued and guaranteed
by the FHLMC and secured by interests in pools of conventional mortgages. At
September 30, 1997, mortgage-backed securities, consisting of GNMA, FHLMC, FNMA
and CMOs amounted to approximately $216.2 million or 62.4% of the net loan and
mortgage-backed securities portfolio.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market.
The CMOs (in the form of real estate mortgage investment conduits) held by
the Bank at September 30, 1997 totaled $33.2 million and consisted of FNMA,
FHLMC, and privately issued pools. The portfolio of CMOs held in the Bank's
mortgage-backed securities portfolio at September 30, 1997 did not include any
residual interests in CMOs. Further, at September 30, 1997, the Bank's
mortgage-backed securities portfolio did not include any "stripped" CMOs (i.e.,
CMOs that pay interest only and do not repay principal or CMOs that repay
principal only and do not pay interest).
Residential Real Estate Loans. One of the primary lending activities of
the Bank is to originate loans to enable borrowers to purchase existing homes or
to construct new homes. The Bank's real estate loan portfolio also includes
loans on one- to four-family dwellings, multi-family housing (over four units),
and loans made for the development of unimproved real estate to be used for
residential housing. At September 30, 1997, approximately 89.1% of the Bank's
gross loan and mortgage-backed securities portfolio consisted of loans
(including conventional mortgage loans, insured loans, guaranteed loans,
collateralized mortgage obligations and guaranteed mortgage-backed securities)
secured by one- to four-family dwellings.
The loan-to-value ratio, maturity and other provisions of the loans made
by the Bank generally have reflected the policy of making less than the maximum
loan permissible under applicable regulations, consistent with lending
practices, market conditions, and underwriting standards established by the
Bank. The Bank's general policy currently limits the maximum loan-to-value ratio
on single-family conventional
5
<PAGE>
loans to 95% and 80% on multi-family and commercial real estate loans. Mortgage
loans originated by the Bank are intended to conform to the FHLMC and the FNMA
underwriting standards so that they may be eligible for sale in the secondary
market. Mortgage loans, both fixed- and adjustable-rate, made by the Bank
generally are long-term loans, amortized on a monthly basis, with principal and
interest due each month. The initial contractual loan payment period for
residential loans typically ranges from 15 to 30 years. The Bank's experience
indicates that real estate loans remain outstanding for significantly shorter
periods than their contractual terms. Borrowers may refinance or prepay loans at
their option, subject to any prepayment penalty provisions included in the note,
and any applicable state laws relating to such penalty.
Due to consumer demand in the Bank's primary market area in which its
offices are located, to date, the Bank has originated primarily fixed-rate loans
and one, three, five, seven and ten year adjustable-rate loans. These one and
three year adjustable-rate residential mortgage loans which adjust based upon
the respective one and three year U.S. Treasury securities, are offered in an
effort to shorten the maturity and increase the interest rate sensitivity of the
Bank's total loan portfolio.
Commercial Real Estate Loans. The Bank has in the past purchased both
construction loans and permanent loans on multi-family and commercial
properties. Loans secured by multi-family, commercial and other income-producing
real estate generally are limited to 80% of appraised value and generally have
an initial contractual loan payment periods from 15 to 30 years with varying
call provisions. Commercial real estate loans generally are made on an
adjustable-rate basis indexed to the one-year, three-year or five-year U.S.
Treasury index. Commercial real estate loans, consisting primarily of office
buildings, strip shopping centers, mini-storage facilities, and industrial
buildings amounted to $22.3 million or 6.5% of the Bank's gross loan and
mortgage-backed securities portfolio at September 30, 1997.
Construction Loans. The Bank will occasionally originate a residential
construction loan with an initial term of one to two years. Generally, such
loans are repaid or converted to permanent loans when the property is completed
or sold.
Commercial real estate and construction lending is generally considered to
involve a higher level of credit risk than one-to four-family residential
lending due to the concentration of principal in a limited number of loans and
borrowers and the effects of general economic conditions on real estate
developers and managers. The Bank's risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value upon completion of the project and the estimated cost of the project. If
the estimated cost of construction or development proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the project. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project with value which is insufficient to assure full repayment. When
loan payments become due, borrowers may experience cash flow from the project
which is not adequate to service total debt. This cash flow shortage may result
in the failure to make loan payments. In such cases, the Bank may be compelled
to modify the terms of the loan. In addition, the nature of these loans is such
that they are generally less predictable and more difficult to evaluate and
monitor. The Bank seeks to minimize these risks by lending primarily to
established customers and generally restricting such loans to its primary market
area.
6
<PAGE>
Consumer Loans. The Bank presently originates loans secured by savings
accounts and home equity loans. Consumer loans, including home equity loans,
amounted to $14.6 million or 4.1% of the Bank's total gross loan and
mortgage-backed securities portfolio at September 30, 1997.
Commercial Business Loans. The Bank generally does not offer commercial
business loans. At September 30, 1997, none of the Bank's loans were classified
as commercial business loans.
Loan Maturity Schedule. The following table sets forth certain information
at September 30, 1997, regarding the dollar amount of loans and mortgage-backed
securities maturing in the Bank's portfolio based on their contractual terms to
maturity. Demand loans, loans having no stated schedule of repayments and no
stated maturity, and overdrafts are reported as due in one year or less.
<TABLE>
<CAPTION>
One year One to Three to Five to Over Ten
or less Three Years Five Years Ten Years Years Total
--------- ----------- ---------- ---------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage(1) ............ $ 14,199 $ 8,907 $ 5,742 $ 17,186 $ 70,175 $116,209
Consumer ........................... 253 191 1,095 2,971 10,067 14,577
Mortgage-backed securities(1)(2).... 5,877 2,962 3,590 27,342 175,927 215,698
-------- -------- -------- -------- -------- --------
Total ........................ $ 20,329 $ 12,060 $ 10,427 $ 47,499 $256,169 $346,484
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------------
Footnotes included in next table.
The following table sets forth the dollar amount of all loans due after
one year from September 30, 1997, which have predetermined interest rates and
have floating or adjustable interest rates, based on contractual terms.
<TABLE>
<CAPTION>
Floating or
Predetermined Adjustable
Rates Rates
------------- -----------
(Dollars in Thousands)
<S> <C> <C>
Real estate mortgage(1)........... $ 75,960 $ 26,050
Consumer(1)....................... 7,339 6,985
Mortgage-backed securities(1)(2).. 70,138 139,683
------- -------
Total....................... $153,437 $172,718
======= =======
</TABLE>
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(1) Does not include scheduled principal amortization. Experience indicates
that prepayments significantly reduce the average term of maturity.
(2) Includes collateralized mortgage obligations.
Loan Solicitation and Processing. The Bank actively solicits mortgage loan
applications from real estate brokers, contractors, existing customers, customer
referrals, and call-ins and walk-ins to its offices. An appraisal of the real
estate intended to secure the proposed loan is undertaken by an independent fee
appraiser.
7
<PAGE>
In connection with the loan approval process, the Bank's loan officers
analyze the loan applications and the property involved. All residential
mortgage loans are processed by a loan officer and then submitted to the Bank's
President for his approval. All multi-family and commercial real estate loans
purchased by the Bank are reviewed by a committee of three executive officers.
In addition, all multi-family and commercial loans are inspected by two
directors. In connection with loans purchased by the Bank, the Bank also
requires an independent appraisal, in addition to the information required for
all loans originated by the Bank. All loans approved by the executive officers
are then submitted to the Bank's Board of Directors for its approval. Prior to
closing any long-term loan, the borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan.
Loan Purchases and Sales. Because the Bank's savings deposits generally
exceed the demand for loans from its customers in its local market area, in
addition to originating loans for its portfolio, the Bank has in the past
purchased a portion of its real estate loan portfolio in the secondary market.
The Bank's purchases in the secondary market are dependent upon the demand for
mortgage credit in the local market area and the inflow of funds from
traditional sources. Purchases of loans enable the Bank to utilize available
funds more quickly and to obtain a yield higher than could generally be obtained
in the Bank's primary market area. The Bank purchased loans totaling $4.7
million during the 1997 fiscal year.
The Bank has not sold loans, other than student loans, during the past
five years.
Loan Commitments. It is the policy of the Bank to generally grant
commitments to fund loans for periods not to exceed 60 days at a specified term
and interest rate unless a lock-in fee is paid. The total amount of the Bank's
commitments to originate loans at September 30, 1997 was $16.4 million of which
$3.7 million were at fixed rates.
The origination of fixed-rate loans creates a potential for interest rate
risk. In a rising interest rate environment, the interest-bearing liabilities
used to fund loan originations will experience increasing costs while fixed-rate
assets cannot reprice. Accordingly, net interest income may be negatively
impacted. The reverse would occur in a declining interest rate environment. The
Bank monitors this situation by regularly evaluating its interest rate risk.
Although fixed-rate loans often are repaid well before the date of contractual
maturity, the Bank has attempted to offset the increased interest rate risk of
these assets by increasing the interest rate sensitivity of its other assets. In
recent years, the Bank has substantially increased its mortgage-backed and
investment securities portfolios, partly to address the greater interest rate
risk of its fixed-rate assets.
In addition, the Bank has a Homeowners' Equity Credit Line Program that
represents undisbursed funds from approved lines of credit. These lines of
credit are secured by the respective one to four family residential properties
owned by the borrowers. At September 30, 1997, the Bank had outstanding
commitments on approved lines of credit of $10.7 million.
Loan Origination and Other Fees. In addition to interest earned on loans,
the Bank may receive loan origination fees or "points" and commitment fees for
originating or purchasing loans.
Statement of Financial Accounting Standards No. 91 ("SFAS No. 91"), which
prescribes the accounting for recording non-refundable fees and costs associated
with the origination and acquisition of loans. SFAS No. 91 requires the deferral
and subsequent amortization of all loan origination fees net of certain loan
origination costs over the related life of the loan.
8
<PAGE>
The Bank's loan origination fees generally are 0% - 1.0% on conventional
residential mortgage loans and 0%-3% for commercial real estate loans. The Bank
does not charge origination fees on fixed-rate conventional mortgage loans or on
home equity loans. The total amount of deferred loan fees and discounts on loans
at September 30, 1997, was $300,000.
The Bank also receives other fees and charges relating to existing loans,
which include prepayment penalties, late charges, and fees collected in
connection with a change in borrower or other loan modifications. These fees and
charges have not constituted a material source of income.
Non-Performing and Restructured Loans and Asset Classification. At
September 30, 1997, the Bank had classified approximately $7.6 million in
assets, of which $7.5 million were loans classified as substandard and $136,000
was real estate acquired as a result of foreclosure. Of the $7.5 million in
loans classified by the Bank, approximately $6.8 million included loans
internally classified but which were not delinquent greater than 90 days at
September 30, 1997 ("performing/non-performing loans"). Such
performing/non-performing loans were classified by the Bank due to other factors
(such as negative cash flow or past delinquencies) and are not included in the
following table.
The table below sets forth information with respect to the Bank's
non-performing loans for the periods indicated. It does not include real estate
acquired as a result of foreclosure. Accruing mortgage loans more than 90 days
delinquent are loans that management considers adequately secured, where
management believes, based upon its evaluation of each loan and its prior
experience with similar loans, that such interest receivable is collectible in
due course. A loan is placed on non-accrual status when, in management's
judgment, further accruals of interest will be uncollectible. Loans which
continue to accrue interest while contractually past due more than ninety days
consist almost entirely of smaller balance mortgage loans secured by single
family residential properties having fair values in excess of the Bank's
recorded investment therein.
9
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Loans Accounted For
On a Non-Accrual Basis:
One- to four-family real estate...... $ 443 $ 212 $ 211 $ 345 $ 68
Multi-family real estate ............ -- 779 1,253 654 654
Commercial real estate .............. 2,566 464 464 -- --
------ ------ ------ ------ ------
Total ............................. 3,009 1,455 1,928 999 722
------ ------ ------ ------ ------
Restructured Loans .................... 3,121 4,200 4,167 2,135 2,103
------ ------ ------ ------ ------
Accruing Loans That Are
Contractually More than 90 Days
Delinquent:
One- to four-family real estate...... 1,479 1,091 1,355 835 999
Other ............................... -- -- -- -- --
------ ------ ------ ------ ------
Total ............................ 1,479 1,091 1,355 835 999
------ ------ ------ ------ ------
Total of non-accrual,
restructured, and more
than 90 days delinquent and
accruing loans .................. $7,609 $6,746 $7,450 $3,969 $3,824
====== ====== ====== ====== ======
Percentage of total loan and
mortgage-backed securities
portfolio ........................... 2.07% 2.07% 2.38% 1.16% 1.11%
====== ====== ====== ====== ======
</TABLE>
For the year ended September 30, 1997, gross interest income which would
have been recorded had the non-accrual and restructured loans been current in
accordance with their original terms would have amounted to approximately
$303,000. The amount that the Bank included in interest income on such loans for
the year ended September 30, 1997 was $143,000.
At September 30, 1997, the Bank had loans with an aggregate principal
balance of $7.5 million classified as substandard ($3.8 million of such loans
were non-performing or restructured at September 30, 1997). The following is a
description of the larger non-performing or restructured loans as of September
30, 1997.
Hollowbrook Associates is a loan originated in 1990 to finance the
acquisitions of a 2-story, 45,000 square foot office building on 2.75 acres in
Wappinger Falls, New York. The loan was subject to a troubled debt restructuring
in May 1994 which resulted in a reduction of the interest rate of the loan
10
<PAGE>
to 6.75% and an extension of its maturity to May 1, 1999. During 1997, in
accordance with the restructuring agreement, the interest rate was increased to
8.50%. The loan has performed in accordance with its restructured terms and had
a remaining balance of $2.1 million at September 30, 1997.
Brentwood Associates is a loan purchased in 1988 to finance the purchase
of a 32 unit, 8 building apartment complex located in Barrington, New Jersey.
This non-accrual loan, which has a $654,000 balance, is in foreclosure
proceedings and is being operated by a court appointed rent receiver.
The remainder of the non-performing loans consists of smaller balance
loans aggregating $1.0 million which are secured by 1-to 4-family residential
property.
The Bank's other substandard assets at September 30, 1997, consisted of
$136,000 of real estate owned.
Provision for Loan Losses and Losses on Real Estate Owned. A provision for
loan losses is charged to operations based on management's evaluation of the
risk inherent in its loan portfolio in relation to the level of the allowance
for loan losses and changes in the nature and volume of its loan activity.
The Bank provides valuation reserves for anticipated losses on loans and
real estate owned when management determines that a significant decline in the
value of the collateral has occurred, as a result of which the value of the
collateral is less than the amount of the unpaid principal of the related loan
plus estimated costs of acquisition and sale. In addition, the Bank also
provides reserves based on the dollar amount and type of collateral securing its
loans, in order to provide for future losses inherent in Bank loans. Although
management believes that it uses the best information available to make such
determinations, future adjustments to reserves may be necessary, and net income
could be significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations.
At September 30, 1997, non-performing and restructured loans totaled $3.8
million. Management believes the allowance for loan losses is established at a
level adequate to provide for potential credit losses in accordance with
generally accepted accounting principles at September 30, 1997. However, there
can be no assurance that, in the future, pursuant to a request from its
regulators or as a result of the Bank's ongoing review, the Bank will not
significantly increase or decrease its allowance for loan losses, thereby
impacting the Bank's financial condition and earnings.
11
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ................. $ 4,200 $ 4,487 $ 3,369 $ 2,604 $ 2,459
------- ------- ------- ------- -------
Provision charged to operations ................ 2,101 2,650 -- -- --
------- ------- ------- ------- -------
Charge-Offs:
Residential real estate ........................ (1,814) (3,673) (765) (145) (102)
Commercial real estate ......................... -- (95) -- -- --
------- ------- ------- ------- -------
(1,814) (3,768) (765) (145) (102)
------- ------- ------- ------- -------
Balance at end of period ....................... $ 4,487 $ 3,369 $ 2,604 $ 2,459 $ 2,357
======= ======= ======= ======= =======
Percentage of net charge-offs during the period
to average loans outstanding during the period .92% 2.26% .05% .10% .08%
======= ======= ======= ======= =======
Percentage of allowance for loan losses to gross
loans outstanding at period end .............. 2.48% 2.34% 1.90% 1.78% 1.81%
======= ======= ======= ======= =======
Percentage of allowance for loan losses to
non-performing and restructured loans.......... 59.0% 49.9% 35.0% 62.3% 61.7%
======= ======= ======= ======= =======
</TABLE>
12
<PAGE>
A breakdown of the allowance for loan losses by category of loan and the
relationship of each category of loan to total loans is presented below for the
periods shown.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
--------------------- ---------------------- --------------------- --------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Allowance loans to Allowance loans to Allowance loans to Allowance loans to Allowance loans to
Balance total loans Balance total loans Balance total loans Balance total loans Balance total loans
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
Real estate mortgage:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 to 4 family(1) $ 822 51.1% $ 684 47.7% $ 225 48.9% $ 394 57.6% $ 384 71.2%
Multifamily..... 1,380 23.4 1,119 26.0 786 24.5 698 20.5 668 11.5
Commercial...... 2,285 25.2 1,566 26.0 1,593 26.4 1,367 21.7 1,305 17.1
Consumer.......... -- 0.3 -- 0.3 -- 0.2 -- 0.2 -- 0.2
------ ------ ------ ----- ------ ------ ------ ------ -------- -------
$4,487 100.0% $3,369 100.0% $ 2,604 100.0% $2,459 100.0% $2,357 100.0%
===== ===== ===== ===== ====== ===== ===== ===== ===== =====
</TABLE>
- -----------------------
(1) Includes home equity lines of credit.
13
<PAGE>
Investment Activities
- ---------------------
Income from investment securities provides a significant source of income
for the Bank. Investment decisions are made within policy guidelines established
by the Board of Directors. The Bank invests in instruments such as U.S. Treasury
securities, municipal securities, corporate debt securities and overnight
federal funds. The use of short-term security investments reflects management's
response to the significantly increasing percentage of savings deposits with
short maturities. It is the intention of management to maintain shorter
maturities in the Bank's investment portfolio in order to better match the
interest rate sensitivities of its assets and liabilities. However, during
periods of rapidly declining interest rates, such investments also decline at a
faster rate than does the yield on long-term investments.
A breakdown of investment securities by type is presented below.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------
1995 1996 1997
-------------------- -------------------- --------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government, including
agencies............... $113,781 $112,271 $144,004 $141,625 $155,874 $155,683
Equity Securities........ -- -- -- -- 823 823
States and political
subdivisions thereof... 600 614 600 622 597 623
------- ------- ------- ------- ------- -------
$114,381 $112,885 $144,604 $142,247 $157,294 $157,129
======= ======= ======= ======= ======= =======
</TABLE>
The following table is a summary of scheduled investment maturities and
weighted average yields at September 30, 1997.
<TABLE>
<CAPTION>
After One Year After Five Years
But Within Five But Within Ten
Within One Year Years Years After Ten Years Total
----------------- ----------------- ------------------ ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- ---------- ------ ------- ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government,
including agencies . $ 7,985 5.38% $ 32,901 6.24% $ 106,988 6.95% $ 8,000 7.78% $155,874 6.76%
Equity securities .... -- -- -- -- -- -- 823 9.33 823 9.33
States and political
subdivisions thereof -- -- -- -- -- -- 597 6.41 597 6.41
------- ---- -------- ---- --------- ---- ------- ---- -------- ----
$ 7,985 5.38% $ 32,901 6.24% $ 106,988 6.95% $ 9,420 7.83% $157,294 6.77%
======= ==== ======== ==== ========= ==== ======= ==== ======== ====
</TABLE>
Exclusive of securities issued by the U.S. government and U.S. government
agencies and corporations, no aggregate investment with any issuer exceeds 10%
of stockholders' equity.
14
<PAGE>
Sources of Funds
- ----------------
General. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, the Bank derives funds from
loan and mortgage-backed securities principal repayments. Historically, the Bank
has not relied significantly upon the sale of loans (or loan participations) or
funds borrowed from the Federal Home Loan Bank ("FHLB") of New York or from
other outside sources. Loan repayments are a relatively stable source of funds,
while deposit inflows are significantly influenced by general interest rates and
money market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources. They
also may be used on a long-term basis for general business purposes.
Deposits. The Bank offers a wide variety of deposit accounts, although a
substantial majority of such deposits are in fixed-term, market-rate certificate
accounts. Deposit account terms vary, primarily as to the required minimum
balance amount, the amount of time that the funds must remain on deposit
(typically between three months and five years) and the applicable interest
rate.
Fixed-term, market-rate certificates have been the primary sources of new
deposits for the Bank and, at September 30, 1997, such certificates represented
approximately 64.1% of the Bank's accounts. The Bank also offers IRA plans,
money market deposit accounts, passbook accounts and NOW (negotiable order of
withdrawal) accounts.
Jumbo Certificate Accounts
The following table indicates the amount of the Bank's certificate
accounts of $100,000 or more by time remaining until maturity as of September
30, 1997.
Certificate
Maturity Period Accounts
- --------------- -----------
(In Thousands)
Three months................................... $ 4,654
Over three through six months.................. 5,996
Over six through twelve months................. 3,422
Over twelve months............................. 3,428
-------
$17,500
=======
Borrowings. Savings deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank generally has not relied upon advances from the FHLB of New York to
supplement its supply of lendable funds or to meet deposit withdrawal
requirements. The Bank generally has been able to finance operations through
internally-generated funds. However, in 1996, the Board of Directors decided to
engage in an asset growth strategy funded by borrowings. As a result, the Bank
made medium and short term borrowings which were used to fund increased loan
demand, purchases of investment and mortgage-backed securities and the
repurchase of shares of common stock of the Corporation. The Bank had borrowings
of $67.7 million outstanding at September 30, 1997.
15
<PAGE>
Yields Earned and Rates Paid
- ----------------------------
The Bank's earnings depend primarily on its net interest income. Net
interest income is affected by (i) the volume of interest-earning assets and
interest-bearing liabilities, (ii) rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities, and (iii) the difference
("interest rate spread") between rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
A portion of the Bank's real estate loans are long-term, fixed-rate loans.
Accordingly, the average yield on the Bank's loan portfolio changes slowly and
generally does not keep pace with changes in interest rates on deposit accounts
and borrowings. Accordingly, when interest rates rise, the Bank's yield on its
loan portfolio increases more slowly than the rate by which its cost of funds
increases which may adversely impact the Bank's interest rate spread.
16
<PAGE>
The following table sets forth for the periods indicated, information
regarding the total dollar amounts of interest income from interest-earning
assets and the resulting average yields, the total dollar amounts of interest
expense on interest-bearing liabilities and the resulting average costs, net
interest income, interest rate spread, net interest-earning assets, the net
yield earned on interest-earning assets, and the ratio of total interest-earning
assets to total interest-bearing liabilities. Average balances have been
calculated primarily on a daily basis.
<TABLE>
<CAPTION>
1995 1996 1997
----------------------------- -------------------------- -----------------------------
Yield/ Yield/ Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- --------- ----- -------- -------- ------ -------- --------- ------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(1)...................... $138,049 $12,404 8.98% $135,905 $11,861 8.73% $128,578 $11,013 8.57%
Mortgage-backed securities(3). 181,058 11,113 6.13 190,069 12,269 6.46 216,784 14,395 6.64
Investments and other interest-
earning assets(2)(3)......... 113,801 7,222 6.34 133,309 8,603 6.45 158,611 10,611 6.69
------- ------ ------- ------- -------- -------
Total interest-earning assets 432,908 30,739 7.10 459,283 32,733 7.13 503,973 36,019 7.15
------ ------- -------
Non-interest-earning assets..... 15,064 11,699 10,098
-------- -------- ---------
Total assets................... $447,972 $470,982 $ 514,071
======== ======== =========
Interest-Bearing Liabilities:
Savings and interest-bearing
demand...................... 160,146 5,349 3.34 $146,865 4,477 3.04 $ 142,309 4,302 3.02
Time.......................... 231,324 11,881 5.13 245,488 13,330 5.43 259,997 14,356 5.52
------- ------ ------- -------- --------- ------- ------
Total interest-bearing
deposits.................. 391,470 17,230 4.40 392,353 17,807 4.53 402,306 18,658 4.63
Borrowings.................... -- -- -- 22,951 1,326 5.77 63,223 3,717 5.87
------- ------ ------- ------- -------- -------
Total interest-bearing
liabilities................ 391,470 17,230 4.40 415,304 19,133 4.60 465,529 22,375 4.80
------ ------ -------
Non-interest-bearing liabilities:
Demand deposits............... 3,629 3,719 4,370
Other......................... 1,699 2,231 3,871
-------- -------- --------
Total liabilities........... 396,798 421,254 473,770
Stockholders' equity............ 51,174 49,728 40,301
-------- -------- --------
Total liabilities and
stockholders' equity...... $447,972 $470,982 $514,071
======== ======== ========
Net interest income/interest
rate spread................... $13,509 2.70% $13,600 2.53% $13,644 2.35%
====== ===== ======= ==== ======= =====
Net interest-earning assets/net
yield on interest-earning
assets........................ $41,438 3.12% $43,979 2.96% $ 38,444 2.70%
====== ===== ====== ==== ======== =====
Ratio of average interest-
earning assets to average
interest-bearing liabilities... 1.11X 1.11X 1.08X
====== ====== ========
</TABLE>
- -----------------------
(1) Includes non-accrual loans.
(2) Includes tax-exempt securities. Income from such securities, which
amounted to approximately $39,000, $39,000 and $38,000 during the years
ended September 30, 1995, 1996 and 1997, respectively, is included without
adjustment to a tax-equivalent basis. Such adjustments were not made due
to their immateriality.
(3) Investments classified as available for sale are included in the average
at amortized cost amounts.
17
<PAGE>
Gap Analysis
- ------------
As rates on sources of funds have become deregulated and subject to
competitive pressures, financial institutions have become increasingly concerned
with the extent to which they are able to match maturities of interest-earning
assets and interest-bearing liabilities. Such matching is facilitated by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring an institution's interest rate sensitivity "gap."
An asset or liability is considered to be interest rate sensitive if it will
mature or reprice within a specific time period. The interest rate sensitivity
gap is defined as the excess of interest-earning assets maturing or repricing
within a specific time period over interest-bearing liabilities maturing or
repricing within that time period.
The following table reflects the interest rate sensitivity of the Bank's
interest-earning assets and interest-bearing liabilities as of September 30,
1997, the Bank's interest rate sensitivity gap at various periods and the ratio
of the Bank's interest-earning assets to interest-bearing liabilities at various
periods. As the table indicates, the Bank has a negative gap for assets and
liabilities maturing or repricing within one year, thereby leaving the Bank
vulnerable to future increases in interest rates. The Bank has assumed that its
savings and interest-bearing demand deposits will be withdrawn annually at a
rate of 18% on the cumulative declining balance of such accounts. This
assumption is based upon prior experience and management's assessment of future
trends.
<TABLE>
<CAPTION>
Matures or Reprices
---------------------------------------------------------------
Over One Over Five
One Year Through Through Over Ten
or Less Five Years Ten Years Years Total
-------- ---------- --------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans(2)........................ $ 34,683 $25,918 $16,456 $52,611 $129,668
Mortgage-backed securities (2).. 132,819 3,722 23,049 56,567 216,157
Investments..................... 7,985 32,901 106,985 9,423 157,294
Other interest-earning assets(1) 14,701 -- -- -- 14,701
-------- ------- ------- ------- --------
Total......................... 190,188 62,541 146,490 118,601 517,820
-------- ------- ------- ------- --------
Interest-bearing liabilities:
Savings and interest-bearing
demand deposits............... 25,684 64,104 33,288 19,613 142,689
Time deposits................. 213,917 49,660 -- -- 263,577
Borrowings.................... 51,875 15,800 -- -- 67,675
-------- ------- ------- ------- --------
Total..................... 291,476 129,564 33,288 19,613 473,941
-------- ------- ------- ------- --------
Interest sensitivity gap...... (101,288) (67,023) 113,202 98,988
Cumulative interest
sensitivity gap............. (101,288) (168,311) (55,109) 43,879
Ratio of gap to total assets.. (19.25)% (12.74)% 21.52 % 18.81%
Ratio of cumulative gap to
total assets................ (19.25)% (31.99)% (10.47)% 8.34%
</TABLE>
- -----------------
(1) Includes FHLB of New York stock classified as repricing in one year or
less.
(2) Does not include prepayment assumptions or scheduled amortization which
could significantly reduce the terms to maturity of these assets.
18
<PAGE>
The table above indicates the time periods in which interest-earning
assets and interest-bearing liabilities will mature or may reprice in accordance
with their contractual terms. However, the table does not necessarily indicate
the impact of general interest rate movements on the Bank's net interest yield
because the repricing of various categories of assets and liabilities is
discretionary and is subject to competitive and other pressures. As a result,
various assets and liabilities indicated as repricing within the same period may
in fact reprice at different times and at different rate levels. Furthermore,
the table does not reflect either scheduled principle amortization or the Bank's
prepayment experience, both of which reduce the actual term to maturity of the
Bank's loan portfolio.
Rate/Volume Analysis
- --------------------
Changes in net interest income are attributable to three factors: a change
in volume of an interest-earning asset or interest-bearing liability, a change
in rates or a change caused by a combination of changes in volume and rate. The
table below sets forth certain information regarding changes in interest income
and interest expense of the Bank for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (1) changes in volume (changes in volume multiplied
by old rate); (2) changes in rates (changes in rate multiplied by old volume);
and (3) changes in rate-volume (changes in rate multiplied by changes in
volume).
<TABLE>
<CAPTION>
1995 vs. 1996 1996 vs. 1997
------------------------------------- --------------------------------------
Due to Due to
------------------------------------- --------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------- ------ ------ ------ -------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans......................... $(196) $(352) $ 5 $ (543) $ (642) $ (218) $ 12 $ (848)
Mortgage-backed securities.... 550 577 29 1,156 1,716 360 50 2,126
Investments and other interest
-bearing assets............. 1,235 125 21 1,381 1,628 319 61 2,008
------- ------ ------- ------- ------- ------- ------- -------
Total interest-earning
assets................... 1,589 350 55 1,994 2,702 461 123 3,286
------- ------ ------- ------- ------- ------- ------- -------
Interest Expense:
Savings and interest-bearing
demand deposits........... (438) (474) 40 (872) (145) (31) 1 (175)
Time deposits............... 719 687 42 1,449 791 222 13 1,026
Borrowings.................. 1,326 -- -- 1,326 2,328 23 40 2,391
------- ------ ------- ------- ------- ------- ------- -------
Total interest-bearings
liabilities............... 1,607 213 82 1,903 2,974 214 54 3,242
------- ------ ------- ------- ------- ------- ------- -------
Net change in net interest-
income...................... $ (18) $ 137 $ (27) $ 91 $ (272) $ 247 $ 69 $ 44
======= ====== ====== ======= ====== ======= ======= =======
</TABLE>
19
<PAGE>
Market Risk
Market risk is the risk of loss from adverse changes in market prices and
rates. The Bank's market risk arises primarily from interest rate risk inherent
in its lending and deposit taking activities. To that end, management actively
monitors and manages its interest rate risk exposure.
The Bank's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Bank's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. The Bank monitors the impact of changes in interest rates on its net
interest income using several tools. One measure of the Bank's exposure to
differential changes in interest rates between assets and liabilities is shown
in the Bank's Maturity and Rate Sensitivity Analysis is under the
Asset/Liability Management caption. Another measure is the test specified by OTS
Thrift Bulletin No. 13, "Interest Rate Risk Management." This test measures the
impact on net interest income and on net portfolio value of an immediate change
in interest rates in 100 basis point increments. Net portfolio value is defined
as the net present value of assets, liabilities, and off-balance sheet
contracts. Following are the estimated impacts of immediate changes in interest
rates at the specified levels at September 30, 1997.
Percentage Changes in Interest Rates:
Net Interest Net Portfolio
Basis Points Income(1) Value(2)
- --------------- ----------------- ------------
+400 -48% -60%
+300 -34 -42
+200 -21 -31
+100 -9 -12
- 100 +8 +9
- 200 +8 +22
- 300 N/A N/A
- 400 N/A N/A
- ---------------
(1) The percentage change in this column represents net interest income for 12
months in a stable interest rate environment versus the Net Interest
Income in the various rate scenarios.
(2) The percentage change in this column represents net portfolio value of the
Bank in a stable interest rate environment versus the net portfolio value
in the various rate scenarios.
The Bank's primary objective in managing interest rate risk is to minimize
the adverse impact of changes in interest rates on the Bank's net interest
income and capital while structuring the Bank's asset-liability structure to
obtain the maximum yield-cost spread on that structure. The Bank relies
primarily on its asset-liability structure to control interest rate risk.
The Bank continually evaluates interest rate risk management
opportunities, including the use of derivative financial instruments. Management
believes that hedging instruments currently available are not cost-effective,
and therefore, has focused its efforts on increasing the Bank's yield-cost
spread through wholesale and retail growth opportunities.
20
<PAGE>
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates, categorized by expected maturity, and
the instruments' fair values at September 30, 1997. Market risk sensitive
instruments are generally defined as on-and-off-balance sheet derivatives and
other financial instruments.
Expected Maturity/Principal Repayment at September 30,
<TABLE>
<CAPTION>
Average Total Fair
Interest Rate 1998 1999 2000 2001 2002 Thereafter Balance(1) Value(1)
------------- ---- ---- ---- ---- ---- ---------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Sensitive Assets:
Fed funds sold and other
short-term investments 6.00% $ 11,925 $ -- $ -- $ -- -- -- $ 11,925 $ 11,925
Loans Receivable:
One-to-four family. 8.18% 18,846 1,147 1,147 2,521 2,521 67,429 92,464 93,019
Multifamily and Non-
Residential....... 8.93% 15,389 5,194 5,194 4,097 4,097 2,785 36,756 36,976
Other.............. 10.00% 448 -- -- -- -- -- 448 451
Mortgage-Backed
Securities........ 6.80% 132,819 126 -- 3,522 74 79,616 216,157 217,039
Investment Securities 6.77% 7,985 4,977 3,000 24,924 -- 116,408 157,294 157,129
FHLB stock........... 6.80% 2,776 -- -- -- -- -- 2,776 2,776
Interest-Sensitive
Liabilities:
Deposits
Money Market Deposits 3.53% 12,825 10,516 8,623 7,071 5,798 26,415 71,248 71,041
Passbook Deposits.. 2.75% 10,003 8,203 6,726 5,515 4,523 20,603 55,573 55,412
Now and other demand
deposits.......... 1.26% 2,856 2,342 1,921 1,575 1,291 5,883 15,868 15,822
Certificate Accounts 6.51% 213,917 36,809 8,769 4,082 -- -- 263,577 262,813
Borrowings........... 5.84% 51,875 15,800 -- -- -- -- 67,675 67,292
Interest-Sensitive Off
balance sheet items:(2)
Commitments to extend
credit............ 7.50% 16,409
Commitments to
purchase securities 9.00% 200
Unused lines of Credit 9.67% 10,711
</TABLE>
- ---------------
(1) Loans are reduced for nonaccrual loans but are not reduced for the
allowance for loan losses.
(2) Total balance equals the notional amount of off-balance sheet items and
interest rates are the weighted average interest rates of the underlying
loans.
21
<PAGE>
Expected maturities are contractual matures adjusted for prepayments of
principal. The Company uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, projected repayments and prepayments of principal. The prepayment
experience reflected herein is based on the Company's historical experience. The
Company's average Constant Prepayment Rate ("CPR") on its total fixed-rate
portfolio is 10%, and 6% on its adjustable-rate portfolio for interest-earning
assets (excluding investment securities, which do not have prepayment features).
For deposit liabilities, in accordance with standard industry practice and the
Company's own historical experience, "decay factors," used to estimate deposit
runoff of 12.5%, 8.8%, and between 8% and 100% for passbook, checking and money
market deposit accounts, respectively. The actual maturities of these
instruments could vary substantially if future prepayments differ from the
Company's historical experience.
Personnel
- ---------
As of September 30, 1997, the Bank had 52 full-time employees and 9
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
satisfactory.
Competition
- -----------
The Bank faces strong competition in its attraction of savings deposits
(its primary source of funds available for lending) and in the origination of
real estate loans. Its most direct competition for savings deposits and loans
historically has come from other thrift institutions and commercial banks
located in Middlesex County, New Jersey. The Bank faces additional significant
competition for investor funds from short-term money market securities and other
corporate and government securities.
The Bank's competition for real estate loans comes principally from other
thrift institutions, commercial banks, and mortgage banking companies.
The Bank competes for loans by charging competitive interest rates and
loan fees, remaining efficient and providing a wide range of services to
borrowers, real estate brokers, and home builders. It competes for savings by
offering depositors a wide variety of savings accounts, checking accounts,
convenient office locations, drive-up facilities, extended banking hours,
tax-deferred retirement programs, and other miscellaneous services.
The Bank considers Middlesex County, New Jersey and, to a lesser extent,
Mercer, Monmouth and Ocean Counties, its primary market area for savings. While
the majority of the Bank's mortgage loans are originated in this market area,
the Bank also makes loans, to a much lesser degree, throughout New Jersey.
Based upon total assets, the Bank was the 21st largest thrift institution
in the State of New Jersey as of September 30, 1997. The Bank competes with
larger financial institutions, headquartered both inside and outside of
Middlesex County, New Jersey, that maintain offices in the Bank's market area.
These competitors may be able to offer better loan rates from time to time due
to their size, financial resources, and competitive strategy.
22
<PAGE>
Regulation
- ----------
General. The Corporation owns all of the capital stock of the Bank and is
a savings bank holding company. As a savings bank holding company, the
Corporation is subject to regulation by the Office of Thrift Supervision
("OTS"). As a company whose stock is publicly-traded, the Corporation is also
subject to the reporting, proxy solicitation, and other regulations of the
Securities and Exchange Commission ("SEC").
The Bank is a New Jersey-chartered capital stock savings bank, the
accounts of which are insured by the FDIC, and as such, is subject to the
regulation, supervision and examination of the New Jersey Department of Banking
and the FDIC. The New Jersey Department of Banking (the "Department") regulates
the Bank's internal organization as well as its deposit, lending and investment
activities. The Department must approve changes to the Bank's certificate of
incorporation, the establishment or relocations of branch offices and mergers
involving the Bank. In addition, the Department conducts periodic examinations
of the Bank. Many of the areas regulated by the Department are subject to
similar regulation by the FDIC.
Bank Regulation
- ---------------
New Jersey law provides that no dividend may be paid by the Bank unless
after the payment of such dividend, the capital stock of the Bank will not be
impaired and either the Bank will have a surplus of not less than 50% of its
capital stock, or the payment of such dividend will not reduce the statutory
surplus of the Bank.
Generally, federal law limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). 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 institution's
primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, The Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. In 1996, the annual insurance premium for most BIF
members was lowered to $2,000. The lower insurance premiums for BIF members
placed SAIF members at a competitive disadvantage to BIF members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance assessment for SAIF members was reduced to .064% of deposits on an
annual basis through the end of 1999. During this same period, BIF members will
be assessed approximately .013% of deposits. After 1999, assessments for BIF and
SAIF members should be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes,
23
<PAGE>
beginning January 1, 1997, the rate of deposit insurance assessed the Bank
declined by approximately 70%.
Capital Requirements. Under FDIC regulations, state-chartered banks that
are not members of the Federal Reserve System ("state non-member banks") are
required to maintain a minimum leverage capital requirement consisting of a
ratio of Tier 1 capital to total assets of 4%. For institutions other than those
most highly rated by the FDIC, an additional "cushion" of at least 100 to 200
basis points is required. Tier 1 capital is the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority investments in certain subsidiaries, less certain intangible
assets, deferred tax assets, certain identified losses and certain investments
in securities subsidiaries. As a SAIF-insured, state-chartered bank, the Bank
must currently also deduct from Tier 1 capital an amount equal to its
investments in, and extensions of credit to, subsidiaries engaged in certain
activities not permissible for national banks.
In addition to the leverage ratio, state nonmember banks must maintain a
minimum ratio of qualifying total capital to risk-weighted assets of at least
8.0%, of which at least four percentage points must be Tier 1 capital.
Qualifying total capital consists of Tier 1 capital plus Tier 2 or supplementary
capital items which include allowances for loan losses in an amount of up to
1.25% of risk-weighted assets, cumulative preferred stock and preferred stock
with a maturity of over 20 years and certain other capital instruments. The
includable amount of Tier 2 capital cannot exceed the institution's Tier 1
capital. Qualifying total capital is further reduced by the amount of the bank's
investments in banking and finance subsidiaries that are not consolidated for
regulatory capital purposes, reciprocal cross-holdings of capital securities
issued by other banks and certain other deductions. Under the FDIC risk-weighted
system, all of a bank's balance sheet assets and the credit equivalent amounts
of certain off-balance sheet items are assigned to risk weight categories. The
aggregate dollar amount of each category is multiplied by the risk weight
assigned to that category. The sum of these weighted values equals the bank's
risk-weighted assets.
Each federal banking agency is required to revise its risk-based capital
standards for insured institutions to ensure that those standards take adequate
account of interest-rate risk ("IRR"), concentration of credit risk, and the
risks of nontraditional activities, as well as to reflect the actual performance
and expected risk of loss on multi-family residential loans. The FDIC, the
Office of the Comptroller of the Currency, and the Federal Reserve Board have
proposed procedures for measuring IRR exposure and alternative methods for
determining what amount of additional capital, if any, a bank may be required to
maintain for IRR.
Pursuant to New Jersey banking law the minimum leverage capital for a
depository institution is a ratio of Tier 1 capital to total assets of four
percent. However, the Commissioner of the Department may require a higher ratio
for a particular depository institution.
New Jersey banking law requires that a depository institution maintain
qualifying capital of at least eight percent of its risk weighted assets. At
least four percent of this qualifying capital shall be in the form of Tier 1
capital. For purposes of New Jersey banking law, risk weighted assets, Tier 1
capital, and total assets are defined in the same manner as in the FDIC
regulations.
The Bank was in compliance with both the FDIC and New Jersey capital
requirements at September 30, 1997.
24
<PAGE>
Capital Distributions. Earnings of the Bank appropriated to bad debt
reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions.
Dividends payable by the Bank to the Corporation and dividends payable by
the Corporation to stockholders are subject to various additional limitations
imposed by federal and state laws, regulations and policies adopted by federal
and state regulatory agencies. The Bank is required by federal law to obtain
FDIC approval for the payment of dividends if the total of all dividends
declared by the Bank in any year exceed the total of the Bank's net profits (as
defined) for that year and the retained net profits (as defined) for the
preceding two years, less any required transfers to surplus. Under New Jersey
law, the Bank may not pay dividends unless, following payment, the capital stock
of the Bank would be unimpaired and (a) the Bank will have a surplus of not less
than 50% of its capital stock, or, if not, (b) the payment of such dividends
will not reduce the surplus of the Bank.
Under applicable regulations, the Bank would be prohibited from making any
capital distributions if, after making the distribution, the Bank would have:
(i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%,
unless a higher ratio is required by the Commissioner of the Department.
Loans to One Borrower. Generally, the Bank may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year. At September 30, 1997, the Bank had $2.8 million in
FHLB stock, which was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the Department. At
September 30, 1997, the Bank's total transaction accounts were below the minimum
level for which the Federal Reserve Board requires a reserve.
State-chartered savings banks have authority to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve policy generally requires
savings banks to exhaust all reasonable alternative sources before borrowing
from the Federal Reserve System. The Bank had no discount window borrowings at
September 30, 1997.
25
<PAGE>
Holding Company Regulation
- --------------------------
General. The Corporation is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Corporation is required
to register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Corporation and its non-savings association subsidiaries, should such
subsidiaries be formed, which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association. This regulation and oversight is intended primarily for the
protection of the depositors of the Bank and not for the benefit of stockholders
of the Corporation.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Corporation generally is not subject to activity restrictions,
provided the Bank satisfies the qualified thrift lender ("QTL") test. If the
Corporation acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Corporation and any of its subsidiaries (other than the Bank
or any other SAIF-insured savings association) would become subject to
restrictions applicable to bank holding companies unless such other associations
each also qualify as a QTL and were acquired in a supervisory acquisition.
Restrictions on Acquisitions. The Corporation must obtain approval from
the OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval.
Executive Officers of the Company
- ---------------------------------
The executive officers of the Corporation as of September 30, 1997, were
as follows:
Name Age Position
- ---- ----- ---------
Benjamin S. Konopacki 75 Chairman of the Board
George T. Hornyak, Jr 47 President and Chief Executive Officer
Ronald E. Vaughn, Jr 41 Senior Vice President - Chief Lending Officer
Thomas Konopacki 40 Executive Vice President - Controller
The following information describes the principal occupation and
employment of the executive officers of the Corporation and the Bank as of
September 30, 1997, during at least the past five years.
Benjamin S. Konopacki has been employed by the Bank in various capacities
since 1954. From 1965 to 1989, he served as President. From 1965 to 1991, he
served as Chief Executive Officer. In
26
<PAGE>
1989, Mr. Konopacki became Chairman of the Board. On January 1, 1991, Mr.
Konopacki retired as Chief Executive Officer.
George T. Hornyak, Jr. has been employed by the Bank since 1983. In March
1989, Mr. Hornyak was named President and Chief Operating Officer. Mr. Hornyak
became Chief Executive Officer of the Bank on January 1, 1991. He is also a
director of Mercer Mutual Insurance Company.
Ronald E. Vaughn, Jr. has been employed by the Bank since August 1988.
Since January 1990, he has served as Senior Vice President - Chief Lending
Officer. From August 1985 to August 1988, Mr. Vaughn was Vice President -
Residential Lending of Lincoln Federal Savings and Loan Association, Westfield,
New Jersey.
Thomas Konopacki has been employed by the Bank since 1976 and is currently
Executive Vice President and Chief Financial Officer. Mr. Konopacki has served
in that capacity since January 1990.
Item 2. Properties
- --------------------
The Bank owns its home office which is located at 6 Jackson Street, South
River, New Jersey. The Bank also operates four full service branch offices,
three of which it owns and one which it leases.
Item 3. Legal Proceedings
- --------------------------
From time to time the Registrant is a party to legal proceedings in the
ordinary course of business wherein it enforces its security interest in
mortgage loans made by it. In the opinion of management, no material loss is
expected from any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended September 30, 1997.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------------
Matters
- -------
The information contained under the section captioned "Common Stock" in
the Corporation's Annual Report to Stockholders for the fiscal year ended
September 30, 1997 (the "Annual Report"), is incorporated herein by reference.
Item 6. Selected Financial Data
- ---------------------------------
The information contained in the table captioned "Consolidated Financial
Highlights" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
27
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- ---------------------------------------------------------------------
The information contained in the section captioned "Market Risk" under
Item 1 herein is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Corporation's Consolidated Financial Statements listed in Item 14
herein are incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Corporation's definitive proxy statement for the
Corporation's 1998 Annual Meeting of Stockholders (the "Proxy Statement") is
incorporated herein by reference.
Additional information concerning executive officers is included under
"Part I - Executive Officers of the Registrant."
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Certain
Beneficial Owners Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of
Directors" in the Proxy Statement.
(c) Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the Registrant.
28
<PAGE>
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors -- Certain
Transactions With the Company" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a)(1) The Consolidated Financial Statements and Independent Auditors'
Report included in the Annual Report, listed below, are incorporated
herein by reference.
1. Independent Auditors' Report
2. Pulse Bancorp, Inc.
(a) Consolidated Statements of Financial Condition at September
30, 1996 and 1997
(b) Consolidated Statements of Income for each of the years in the
three-year period ended September 30, 1997
(c) Consolidated Statements of Changes in Stockholders' Equity for
each of the years in the three-year period ended September 30,
1997
(d) Consolidated Statements of Cash Flows for each of the years in
the three-year period ended September 30, 1997
(e) Notes to Consolidated Financial Statements
(a)(2) All schedules have been omitted, because the required information is
either inapplicable or included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits are either filed or attached as part of this Report or
incorporated herein by reference.
3(i) Certificate of Incorporation1
3(ii) Bylaws2
10.1 Employment Agreement with Benjamin S. Konopacki3
10.2 Employment Agreement with George T. Hornyak, Jr.3
10.3 Employment Agreement with Thomas Konopacki4
10.4 1986 Stock Option and Incentive Plan4
10.5 1993 Stock Option and Incentive Plan5
10.6 1997 Stock Compensation Plan
10.7 1997 Directors Stock Option Plan
29
<PAGE>
13 Annual Report to Stockholders for the fiscal year ended
September 30, 1997
21 Subsidiaries of the Registrant
- -------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-4 (33-23154) declared effective by the Commission on December 7,
1989.
(2) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1995.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended September 30, 1989.
(5) Incorporated by reference to the Registrant's Proxy Statement dated
December 18, 1992 for the 1993 Annual Meeting of Stockholders.
(b) No Reports on Form 8-K were filed during the last quarter of the period
covered by this report.
30
<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.
PULSE BANCORP, INC.
Dated: December 29, 1997 By: /s/ George T. Hornyak, Jr.
--------------------------
George T. Hornyak, Jr.
President, Chief Executive
Officer and Director (Duly
Authorized Representative)
Pursuant to the requirement 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 as of December 29, 1997.
By: /s/ George T. Hornyak, Jr. By: /s/ Wayne A. Kronowski
------------------------------ -----------------------------
George T. Hornyak, Jr. Wayne A. Kronowski
President, Chief Executive Director
Office and Director (Principal
Executive Officer)
By: /s/ Edwin A. Kolodziej By: /s/ Joseph Chadwick
------------------------------ -----------------------------
Edwin A. Kolodziej Joseph Chadwick
Director Director
By: /s/ Benjamin S. Konopacki By: /s/ Edwin A. Roginski
------------------------------ -----------------------------
Benjamin S. Konopacki Edwin A. Roginski
Chairman of the Board Director
By: /s/ Thomas Konopacki
-------------------------------
Thomas Konopacki
Executive Vice President - Controller
(Principal Financial and Accounting
Officer)
EXHIBIT 10.6
<PAGE>
Pulse Bancorp, Inc.
1997 Stock Compensation Plan
Article I
---------
ESTABLISHMENT OF THE PLAN
1.01 Pulse Bancorp, Inc., South River, New Jersey ("Parent") hereby
establishes the 1997 Stock Compensation Plan (the "Plan") upon the terms and
conditions hereinafter stated.
Article II
----------
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to compensate and reward personnel of
experience and ability in key positions of responsibility with the Parent and
its subsidiaries, by providing such personnel of the Parent, and its
subsidiaries with an increased equity interest in the Parent as compensation for
their professional contributions and service to the Parent and its subsidiaries.
Awards under the Plan shall be made in the form of the Common Stock of the
Parent in lieu of other cash compensation.
Article III
-----------
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meaning as set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Bank" means Pulse Savings Bank, and any successor corporation
thereto.
3.02 "Board" means the Board of Directors of the Parent, or any
successor corporation thereto.
3.03 "Committee" means the Board of Directors of the Parent or the Plan
Committee appointed by the Board of Directors of the Parent pursuant to Article
IV hereof.
3.04 "Common Stock" means shares of the common stock of the Parent or
any successor corporation or Parent thereto.
3.05 "Director" means a member of the Board of the Parent or the Bank.
A-1
<PAGE>
3.06 "Director Emeritus" means a person serving as a director emeritus,
advisory director, consulting director, or other similar position as may be
appointed by the Board of Directors of the Bank from time to time.
3.07 "Employee" means any person who is employed by the Parent, the
Bank or a Subsidiary.
3.08 "Effective Date" shall mean the date of adoption of the Plan by
the Board of the Parent.
3.09 "Parent" shall mean Pulse Bancorp, Inc., the parent corporation of
the Bank.
3.10 "Participant" means an Employee, Director or Director Emeritus who
receives a Plan Share Award or Tandem Stock Option under the Plan.
3.11 "Plan Shares" means shares of Common Stock which are awarded or
issuable to a Participant pursuant to the Plan.
3.12 "Plan Share Award" or "Award" means a right granted to a
Participant under this Plan to earn or to receive Plan Shares.
3.13 "Plan Share Reserve" means the shares of Common Stock to be issued
to Participants in accordance with the Plan.
3.14 "Subsidiary" means those subsidiaries of the Parent which, with
the consent of the Board, agree to participate in this Plan.
Article IV
----------
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and
interpreted by the Board of Directors of the Parent or a Committee appointed by
said Board, which shall consist of not less than two non-employee members of the
Board, which shall have all of the powers allocated to it in this and other
sections of the Plan. All persons designated as members of the Committee shall
be "Non-Employee Directors" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended ("1934 Act"). The interpretation and
construction by the Committee of any provisions of the Plan shall be final and
binding. The Committee shall act by vote or written consent of a majority of its
members. Subject to the express provisions and limitations of the Plan, the
Committee may adopt such rules, regulations and procedures as it deems
appropriate for the conduct of its affairs. The Committee shall report its
actions and decisions with respect to the Plan to the Board at appropriate
times, but in no event less than one time per calendar year.
A-2
<PAGE>
4.02 Role of the Board. The members of the Committee shall be appointed
or approved by, and will serve at the pleasure of the Board. The Board may in
its discretion from time to time remove members from, or add members to, the
Committee. The Board shall have all of the powers allocated to it in this and
other sections of the Plan, may take any action under or with respect to the
Plan which the Committee is authorized to take, and may reverse or override any
action taken or decision made by the Committee under or with respect to the
Plan.
4.03 Limitation on Liability. No member of the Board or the Committee
shall be liable for any determination made in good faith with respect to the
Plan or any Plan Share Awards granted. If a member of the Board or the Committee
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by any reason of anything done or not done by him in such
capacity under or with respect to the Plan, the Parent and the Bank shall
indemnify such member against expenses (including attorney's fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him or
her in connection with such action, suit or proceeding if he or she acted in
good faith and in a manner he or she reasonably believed to be in the best
interests of the Parent, the Bank and its Subsidiaries and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful.
Article V
---------
PLAN SHARE RESERVE
5.01 Plan Share Reserve. The Plan shall be authorized to award up to
25,000 shares of Common Stock representing the lessor of 1% of the total shares
of Common Stock outstanding as of the Effective Date or 25,000 shares. Such
shares shall consist of authorized but unissued shares of Common Stock of the
Parent or shares purchased in the open-market or through privately negotiated
transactions within the sole discretion of the Parent from time to time.
Article VI
----------
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Directors, Employees and Directors Emeritus are
eligible to receive Plan Share Awards within the sole discretion of the
Committee and in accordance with the terms of the Plan.
6.02 Awards to Employees. The Committee will determine which of the
Employees will be granted Plan Share Awards and the number of Shares covered by
each Award, provided, however, that in no event shall any Awards be made which
will violate the Articles or Bylaws of the Bank or its Parent or Subsidiaries or
any applicable federal or state law or regulation.
6.03 Form of Award. As promptly as practicable after a determination is
made pursuant that a Plan Share Award is to be made, the Committee shall notify
the Participant in writing of the grant of the Award, the number of Plan Shares
covered by the Award, and the terms upon which the Plan Shares subject to the
award may be earned. The date on which the
A-3
<PAGE>
Committee makes its award determination or the date the Committee so notifies
the Participant shall be considered the date of grant of the Plan Share Awards
as determined by the Committee. The Committee shall maintain records as to all
grants of Plan Share Awards under the Plan.
6.04 Awards Not Required. Notwithstanding anything to the contrary, no
Participant shall have any right or entitlement to receive a Plan Share Award
hereunder, such Awards being at the sole discretion of the Committee and the
Board, nor shall the Participants as a group have such a right. The Committee
may, with the approval of the Board (or, if so directed by the Board), cease
issuing Plan Share Awards.
6.05 Awards to Directors. Notwithstanding anything herein to the
contrary, as of the date of the Annual Meeting of Stockholders of Parent ("Date
of Grant"), each Director of the Parent shall be awarded a number of Plan Share
Awards ("Annual Award") represented by the fraction equal to the annual Board
retainer fee ("Annual Board Fee") in effect as of such date divided by the last
reported sale price of the Common Stock on the business day immediately prior to
the Date of Grant ("Stock Price"). Such Annual Award shall be in lieu of the
Annual Board Fee for such fiscal year for the Parent. Additionally, as of such
Date of Grant, each recipient of such Annual Award, shall receive an option to
purchase a number of shares of Common Stock represented by the product of two
(2) multiplied by such number of shares of Common Stock represented by the
Annual Award ("Tandem Stock Option"). The option exercise price for each share
of Common Stock under such Tandem Stock Option shall be the Stock Price. Such
Annual Award and Tandem Stock Option shall be immediately earned and
non-forfeitable as of the Date of Grant. Such Tandem Stock Options shall
continue to be exercisable for a period of ten years following the Date of Grant
without regard to the continued services of such Director as a Director or
Director Emeritus. In the event of the Participant's death, such Tandem Stock
Options may be exercised by the personal representative of his estate or person
or persons to whom his rights under such Option shall have passed by will or by
the laws of descent and distribution.
6.06 Awards to Directors Emeritus. Notwithstanding anything herein to
the contrary, the Board may grant Plan Shares to any Director Emeritus of the
Parent or the Bank that is not otherwise an Employee. Such Plan Share Award
shall be immediately earned and non- forfeitable upon delivery of the Common
Stock represented by such Plan Share Award.
Article VII
-----------
DISTRIBUTION OF PLAN SHARES
7.01 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Except as provided in
Subsection (d) below, Plan Shares shall be distributed to the Participant as
soon as practicable after they have been earned. No fractional shares shall be
distributed.
(b) Form of Distribution. All Plan Shares shall be distributed in the
form of Common Stock. One share of Common Stock shall be given for each Plan
Share earned.
A-4
<PAGE>
(c) Withholding. The Parent or the Bank may withhold from any payment
or distribution made under this Plan sufficient amounts of cash or shares of
Common Stock necessary to cover any applicable withholding and employment taxes,
and if the amount of such payment or distribution is not sufficient, the
Committee may require the Participant to pay to the Parent or the Bank the
amount required to be withheld in taxes as a condition of delivering the Plan
Shares.
(d) Regulatory Exceptions. No Plan Shares shall be distributed,
however, unless and until all of the requirements of all applicable law and
regulation shall have been fully complied with as determined by the Committee.
Article VIII
------------
RESTRICTIONS ON DISPOSITION
8.01 Right of Repurchase and Restrictions on Disposition. The
Committee, in its sole discretion, may include, as a term of any Plan Share
Award, the right, but not the obligation for the Parent, to repurchase all or
any amount of the Common Stock acquired by a Participant under the Plan (the
"Repurchase Right"). The Repurchase Right shall provide that for a period of one
year from the date of delivery of shares of Common Stock under the Plan, the
Parent shall have a first right of repurchase at the fair market value of such
Common Stock at the time of such repurchase as determined by the Committee. The
Repurchase Right may permit the Parent to transfer or assign such right to
another party. The Parent may exercise the Repurchase Right only to the extent
permitted by applicable law.
Article IX
----------
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number of Plan
Shares available for issuance pursuant to the Plan Share Awards and the number
of Shares to which any Plan Share Award relates shall be proportionately
adjusted for any increase or decrease in the total number of outstanding shares
of Common Stock issued subsequent to the Effective Date of the Plan resulting
from any split, subdivision or consolidation of the Common Stock or other
capital adjustment, change or exchange of the Common Stock, or other increase or
decrease in the number or kind of shares effected without receipt or payment of
consideration by the Parent.
9.02 Amendment and Termination of the Plan. The Board may, by
resolution, at any time, amend or terminate the Plan.
9.03 No Employment Rights. Neither the Plan nor any grant of a Plan
Share Award or Plan Shares hereunder nor any action taken by the Committee or
the Board in connection with the Plan shall create any right, either express or
implied, on the part of any Participant to continue in the employ or service of
the Parent, the Bank, or a Subsidiary thereof.
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<PAGE>
9.04 Voting and Dividend Rights. No Participant shall have any voting
or dividend rights of a stockholder with respect to any Plan Shares covered by a
Plan Share Award prior to the time said Plan Shares are actually distributed to
such Participant in the form of Common Stock.
9.05 Compliance with Applicable Law and Regulation. Common Stock shall
not be issued to a Participant under the Plan unless the issuance and delivery
of such Common Stock shall comply with all relevant provisions of applicable
law, including, without limitation, the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, any applicable state securities
laws and the requirements of any stock exchange upon which the Common Stock may
then be listed.
9.06 Governing Law. The Plan shall be governed by and construed under
the laws of the State of New Jersey, except to the extent that Federal Law shall
be deemed applicable.
9.07 Term of Plan. This Plan shall remain in effect until the earlier
of (i) termination by the Board, or (ii) 10 years from the Effective Date.
A-6
EXHIBIT 10.7
<PAGE>
PULSE BANCORP, INC.
1997 DIRECTORS STOCK COMPENSATION PLAN
1. Purpose of the Plan. The Plan shall be known as the Pulse Bancorp,
Inc. ("Company") 1997 Directors Stock Compensation Plan (the "Plan"). The
purpose of the Plan is to retain and reward qualified personnel for positions of
substantial responsibility as members of the Board of Directors of the Company
or any present or future parent or subsidiary of the Company to promote the
success of the business. The Plan is intended to provide for the grant of Stock
Options that are not "Incentive Stock Options," within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code").
2. Definitions. The following words and phrases when used in this Plan
with an initial capital letter, unless the context clearly indicates otherwise,
shall have the meaning as set forth below. Wherever appropriate, the masculine
pronoun shall include the feminine pronoun and the singular shall include the
plural.
(a) "Award" means the grant by the Committee or in accordance
with the terms of the Plan of a Stock Option.
(b) "Board" shall mean the Board of Directors of the Company,
or any successor or parent corporation thereto.
(c) "Change in Control" shall mean: (i) the sale of all, or a
material portion, of the assets of the Company; (ii) the merger or
recapitalization of the Company whereby the Company is not the surviving entity;
(iii) a change in control of the Company, as otherwise defined or determined by
the New Jersey Department of Banking or regulations promulgated by it; or (iv)
the acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Company by any
person, trust, entity or group. This limitation shall not apply to the purchase
of shares by underwriters in connection with a public offering of Company stock,
or the purchase of shares of up to 25% of any class of securities of the Company
by a tax-qualified employee stock benefit plan. The term "person" refers to an
individual or a corporation, partnership, trust, association, joint venture,
pool, syndicate, sole proprietorship, unincorporated organization or any other
form of entity not specifically listed herein. The decision of the Committee as
to whether a Change in Control has occurred shall be conclusive and binding.
(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended, and regulations promulgated thereunder.
(e) "Committee" shall mean the Board or the Stock Option
Committee appointed by the Board in accordance with Section 5(a) of the Plan.
(f) "Common Stock" shall mean the common stock of the Company,
or any successor or parent corporation thereto.
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<PAGE>
(g) "Company" shall mean the Pulse Bancorp, Inc., the parent
corporation of the Savings Bank, or any successor or Parent thereof.
(h) "Director" shall mean a member of the Board of the
Company, or any successor or parent corporation thereto.
(i) "Director Emeritus" shall mean a person serving as a
director emeritus, advisory director, consulting director, or other similar
position as may be appointed by the Board of Directors of the Savings Bank or
the Company from time to time.
(j) "Disability" means any physical or mental impairment which
renders the Participant incapable of continuing in the employment or service of
the Savings Association or the Parent in his then current capacity as determined
by the Committee.
(k) "Dividend Equivalent Rights" shall mean the rights to
receive a cash payment in accordance with Section 10 of the Plan.
(l) "Effective Date" shall mean October 23, 1997.
(m) "Employee" shall mean any person employed by the Company
or any present or future Parent or Subsidiary of the Company. "Non-Employee"
shall mean an individual not employed by the Company or any present or future
Parent or Subsidiary of the Company.
(n) "Fair Market Value" shall mean: (i) if the Common Stock is
traded otherwise than on a national securities exchange, then the Fair Market
Value per Share shall be equal to the mean between the last bid and ask price of
such Common Stock on such date or, if there is no bid and ask price on said
date, then on the immediately prior business day on which there was a bid and
ask price. If no such bid and ask price is available, then the Fair Market Value
shall be determined by the Committee in good faith; or (ii) if the Common Stock
is listed on a national securities exchange, then the Fair Market Value per
Share shall be not less than the average of the highest and lowest selling price
of such Common Stock on such exchange on such date, or if there were no sales on
said date, then the Fair Market Value shall be not less than the mean between
the last bid and ask price on such date.
(o) "Option" or "Stock Option" shall mean an Award granted
pursuant to this Plan providing the holder of such Option with the right to
purchase Common Stock.
(p) "Optioned Stock" shall mean stock subject to an Option
granted pursuant to the Plan.
(q) "Optionee" shall mean any person who receives an Option or
Award pursuant to the Plan.
(r) "Parent" shall mean any present or future corporation
which would be a "parent corporation" as defined in Sections 424(e) and (g) of
the Code.
(s) "Participant" means any director of the Company or any
Parent or Subsidiary of the Company or any other person providing a service to
the Company who is selected by the Committee to receive an Award, or who by the
express terms of the Plan is granted an Award.
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<PAGE>
(t) "Plan" shall mean the Pulse Bancorp, Inc. 1997 Directors
Stock Compensation
Plan.
(u) "Savings Bank" shall mean Pulse Savings Bank, South River,
New Jersey, or any successor corporation thereto.
(v) "Share" shall mean one share of the Common Stock.
(w) "Subsidiary" shall mean any present or future corporation
which constitutes a "subsidiary corporation" as defined in Sections 424(f) and
(g) of the Code.
3. Shares Subject to the Plan. Except as otherwise required by the
provisions of Section 11 hereof, the aggregate number of Shares with respect to
which Awards may be made pursuant to the Plan shall not exceed 25,000 Shares.
Such Shares may either be from authorized but unissued shares or shares
purchased in the market for Plan purposes. If an Award shall expire, become
unexercisable, or be forfeited for any reason prior to its exercise, new Awards
may be granted under the Plan with respect to the number of Shares as to which
such expiration has occurred.
4. Six Month Holding Period.
Except in the event of the death or disability of the Optionee
or a Change in Control of the Company, a minimum of six months must elapse
between the date of the grant of an Option and the date of the sale of the
Common Stock received through the exercise of such Option.
5. Administration of the Plan.
(a) Composition of the Committee. The Plan shall be
administered by the Board of Directors of the Company or a Committee which shall
consist of not less than two Directors of the Company appointed by the Board and
serving at the pleasure of the Board. All persons designated as members of the
Committee shall meet the requirements of a "Non-Employee Director" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, as
found at 17 CFR ss.240.16b-3.
(b) Powers of the Committee. The Committee is authorized (but
only to the extent not contrary to the express provisions of the Plan or to
resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the form and
content of Awards to be issued under the Plan and to make other determinations
necessary or advisable for the administration of the Plan, and shall have and
may exercise such other power and authority as may be delegated to it by the
Board from time to time. A majority of the entire Committee shall constitute a
quorum and the action of a majority of the members present at any meeting at
which a quorum is present shall be deemed the action of the Committee. In no
event may the Committee revoke outstanding Awards without the consent of the
Participant.
The President of the Company and such other officers as shall
be designated by the Committee are hereby authorized to execute written
agreements evidencing Awards on behalf of the Company and to cause them to be
delivered to the Participants. Such agreements shall set forth the Option
exercise price, the number of shares of Common Stock subject to such Option, the
expiration date
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<PAGE>
of such Options, and such other terms and restrictions applicable to such Award
as are determined in accordance with the Plan or the actions of the Committee.
(c) Effect of Committee's Decision. All decisions,
determinations and interpretations of the Committee shall be final and
conclusive on all persons affected thereby.
6. Eligibility for Awards and Limitations.
(a) The Committee shall from time to time determine the
Participants who shall be granted Awards under the Plan and the number of Awards
to be granted to each such persons. In selecting Participants and in determining
the number of Shares of Common Stock to be granted to each such Participant, the
Committee may consider the nature of the prior and anticipated future services
rendered by each such Participant, each such Participant's current and potential
contribution to the Company and such other factors as the Committee may, in its
sole discretion, deem relevant. Participants who have been granted an Award may,
if otherwise eligible, be granted additional Awards.
(b) In no event shall Shares subject to Options granted to any
Participant exceed more than 17% of the total number of Shares authorized for
delivery under the Plan.
7. Term of the Plan. The Plan shall continue in effect for a term of
ten (10) years from the Effective Date, unless the Plan is terminated by the
Board in accordance with the Plan.
8. Terms and Conditions of Stock Options. Stock Options may be granted
or awarded only to Participants. Each Stock Option granted pursuant to the Plan
shall be evidenced by an instrument in such form as the Committee shall from
time to time approve. Each Stock Option granted pursuant to the Plan shall
comply with, and be subject to, the following terms and conditions:
(a) Option Price. The price per Share at which each Stock
Option granted by the Committee under the Plan may be exercised shall not, as to
any particular Stock Option, be less than the Fair Market Value of the Common
Stock on the date that such Stock Option is granted.
(b) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Stock Option granted under the Plan shall be
made at the time of exercise of each such Stock Option and shall be paid in cash
(in United States Dollars), Common Stock or a combination of cash and Common
Stock. Common Stock utilized in full or partial payment of the exercise price
shall be valued at the Fair Market Value at the date of exercise. The Company
shall accept full or partial payment in Common Stock only to the extent
permitted by applicable law. No Shares of Common Stock shall be issued until
full payment has been received by the Company, and no Optionee shall have any of
the rights of a stockholder of the Company until Shares of Common Stock are
issued to the Optionee.
(c) Term of Stock Option. The term of exercisability of each
Stock Option granted pursuant to the Plan shall be not more than ten (10) years
from the date each such Stock Option is granted.
(d) Exercise Generally. Except as otherwise provided by the
terms of the Plan or by action of the Committee at the time of the grant of the
Options, the Options granted will be first exercisable as of the date of grant
of such options and shall remain exercisable during such periods of service as a
Director or Director Emeritus.
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<PAGE>
(e) Cashless Exercise. Subject to vesting requirements, if
applicable, an Optionee who has held an Stock Option for at least six months may
engage in the "cashless exercise" of the Option. Upon a cashless exercise, an
Optionee shall give the Company written notice of the exercise of the Option
together with an order to a registered broker-dealer or equivalent third party,
to sell part or all of the Optioned Stock and to deliver enough of the proceeds
to the Company to pay the Option exercise price and any applicable withholding
taxes. If the Optionee does not sell the Optioned Stock through a registered
broker-dealer or equivalent third party, the Optionee can give the Company
written notice of the exercise of the Option and the third party purchaser of
the Optioned Stock shall pay the Option exercise price plus any applicable
withholding taxes to the Company.
(f) Transferability. An Stock Option granted pursuant to the
Plan shall be exercised during an Optionee's lifetime only by the Optionee to
whom it was granted and shall not be assignable or transferable otherwise than
by will or by the laws of descent and distribution.
9. Awards to Directors.
Stock Options to purchase 2,000 shares of Common Stock will be
granted to each Director of the Company as of November 1, 1997, and an
additional 2,000 shares of Common Stock will be granted to each Director of the
Company then serving as of November 1, 1998. The number of options to be awarded
to each Director shall be reduced pro rata in the event that the aggregate
number of shares of Common Stock reserved under the Plan shall not be available
to satify the Awards contemplated herein. Such Options shall be exercisable at a
price equal to the Fair Market Value of the Common Stock as of the date of grant
of such options. Such Options will be first exercisable as of the date of Grant.
Such Options shall continue to be exercisable for a period of ten years
following the date of grant without regard to the continued services of such
Director as an Employee, Director or Director Emeritus. In the event of the
Optionee's death, such Options may be exercised by the personal representative
of his estate or person or persons to whom his rights under such Option shall
have passed by will or by the laws of descent and distribution. All Options
awarded in accordance with this Section 9 shall have Dividend Equivalent Rights
associated with such Options, as detailed at Section 10 herein. Unless otherwise
inapplicable, or inconsistent with the provisions of this paragraph, the Options
to be granted to Directors hereunder shall be subject to all other provisions of
this Plan.
10. Dividend Equivalent Rights. The Committee, in its sole discretion,
may include as a term of any Option, the right of the Optionee to receive
Dividend Equivalent Rights. Such rights shall provide that upon the payment of a
dividend on the Common Stock, the holder of such Options shall receive payment
of compensation in an amount equivalent to the dividend payable as if such
Options had been exercised and such Common Stock held as of the dividend record
date. Such rights shall expire upon the expiration or exercise of such
underlying Options. Such rights are non-transferable and shall attach to Options
whether or not such Options are immediately exercisable. The dividend equivalent
payments associated with Options shall be paid to the Option holder at the
dividend payment date of the Common Stock. All Options granted in accordance
with Section 9 of the Plan as of the Effective Date shall have Dividend
Equivalent Rights associated with such Options.
11. Recapitalization, Merger, Consolidation, Change in Control and
Other Transactions.
(a) Adjustment. Subject to any required action by the
stockholders of the Company, within the sole discretion of the Committee, the
aggregate number of Shares of Common Stock for which Options may be granted
hereunder, the number of Shares of Common Stock covered by each outstanding
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<PAGE>
Option, and the exercise price per Share of Common Stock of each such Option,
shall all be proportionately adjusted for any increase or decrease in the number
of issued and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt or payment of consideration by the Company (other
than Shares held by dissenting stockholders).
(b) Change in Control. All outstanding Awards shall become
immediately exercisable in the event of a Change in Control of the Company, as
determined by the Committee. In the event of such a Change in Control, the
Committee and the Board of Directors will take one or more of the following
actions to be effective as of the date of such Change in Control:
(i) provide that such Options shall be assumed, or equivalent
options shall be substituted, ("Substitute Options") by the acquiring or
succeeding corporation (or an affiliate thereof), provided that: the shares of
stock issuable upon the exercise of such Substitute Options shall constitute
securities registered in accordance with the Securities Act of 1933, as amended,
("1933 Act") or such securities shall be exempt from such registration in
accordance with Sections 3(a)(2) or 3(a)(5) of the 1933 Act, (collectively,
"Registered Securities"), or in the alternative, if the securities issuable upon
the exercise of such Substitute Options shall not constitute Registered
Securities, then the Optionee will receive upon consummation of the Change in
Control transaction a cash payment for each Option surrendered equal to the
difference between (1) the Fair Market Value of the consideration to be received
for each share of Common Stock in the Change in Control transaction times the
number of shares of Common Stock subject to such surrendered Options, and (2)
the aggregate exercise price of all such surrendered Options, or
(ii) in the event of a transaction under the terms of which
the holders of the Common Stock of the Company will receive upon consummation
thereof a cash payment (the "Merger Price") for each share of Common Stock
exchanged in the Change in Control transaction, to make or to provide for a cash
payment to the Optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such Options held by each
Optionee (to the extent then exercisable at prices not in excess of the Merger
Price) and (B) the aggregate exercise price of all such surrendered Options in
exchange for such surrendered Options.
(c) Extraordinary Corporate Action. Notwithstanding any
provisions of the Plan to the contrary, subject to any required action by the
stockholders of the Company, in the event of any Change in Control,
recapitalization, merger, consolidation, exchange of Shares, spin-off,
reorganization, tender offer, partial or complete liquidation or other
extraordinary corporate action or event, the Committee, in its sole discretion,
shall have the power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of
Common Stock subject to each Option, the Option exercise price per Share of
Common Stock, and the consideration to be given or received by the Company upon
the exercise of any outstanding Option;
(ii) cancel any or all previously granted Options,
provided that appropriate consideration is paid to the Optionee in connection
therewith; and/or
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<PAGE>
(iii) make such other adjustments in connection with
the Plan as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable.
(d) Acceleration. The Committee shall at all times have the
power to accelerate the exercise date of Options previously granted under the
Plan.
(e) Non-recurring Dividends. Upon the payment of a special or
non-recurring cash dividend that has the effect of a return of capital to the
stockholders, the Option exercise price per share shall be adjusted
proportionately, except to the extent that the Participant shall otherwise
receive payments associated with Dividend Equivalent Rights attributable to such
Options with regard to such special or non-recurring cash dividends.
Except as expressly provided in Sections 11(a), 11(b) and 11(e) hereof,
no Optionee shall have any rights by reason of the occurrence of any of the
events described in this Section 11.
12. Time of Granting Options. The date of grant of an Option under the
Plan shall, for all purposes, be the date specified in accordance with the Plan
or the date on which the Committee makes the determination of granting such
Option. Notice of the grant of an Option shall be given to each individual to
whom an Option is so granted within a reasonable time after the date of such
grant in a form determined by the Committee.
13. Modification of Options. At any time and from time to time, the
Board may authorize the Committee to direct the execution of an instrument
providing for the modification of any outstanding Option, provided no such
modification, extension or renewal shall confer on the holder of said Option any
right or benefit which could not be conferred on the Optionee by the grant of a
new Option at such time, or shall not materially decrease the Optionee's
benefits under the Option without the consent of the holder of the Option,
except as otherwise permitted under Section 14 hereof.
14. Amendment and Termination of the Plan.
(a) Action by the Board. The Board may alter, suspend or
discontinue the Plan.
(b) Change in Applicable Law. Notwithstanding any other
provision contained in the Plan, in the event of a change in any federal or
state law, rule or regulation which would make the exercise of all or part of
any previously granted Option unlawful or subject the Company to any penalty,
the Committee may restrict any such exercise without the consent of the Optionee
or other holder thereof in order to comply with any such law, rule or regulation
or to avoid any such penalty.
15. Conditions Upon Issuance of Shares; Limitations on Option Exercise;
Cancellation of Option Rights.
(a) Shares shall not be issued with respect to any Option granted under
the Plan unless the issuance and delivery of such Shares shall comply with all
relevant provisions of applicable law, including, without limitation, the
Securities Act of 1933, as amended, the rules and regulations promulgated
thereunder, any applicable state securities laws and the requirements of any
stock exchange upon which the Shares may then be listed.
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<PAGE>
(b) The inability of the Company to obtain any necessary
authorizations, approvals or letters of non-objection from any regulatory body
or authority deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares issuable hereunder shall relieve the Company of
any liability with respect to the non-issuance or sale of such Shares.
(c) As a condition to the exercise of an Option, the Company may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(d) Notwithstanding anything herein to the contrary, upon the
termination of employment or service of an Optionee by the Company or its
Subsidiaries for "cause" withijn the sole discretion of the Board, all Options
held by such Participant shall cease to be exercisable as of the date of such
termination of employment or service.
(e) Upon the exercise of an Option by an Optionee (or the Optionee's
personal representative), the Committee, in its sole and absolute discretion,
may make a cash payment to the Optionee, in whole or in part, in lieu of the
delivery of shares of Common Stock. Such cash payment to be paid in lieu of
delivery of Common Stock shall be equal to the difference between the Fair
Market Value of the Common Stock on the date of the Option exercise and the
exercise price per share of the Option. Such cash payment shall be in exchange
for the cancellation of such Option. Such cash payment shall not be made in the
event that such transaction would result in liability to the Optionee or the
Company under Section 16(b) of the Securities Exchange Act of 1934, as amended,
and regulations promulgated thereunder.
16. Reservation of Shares. During the term of the Plan, the Company
will reserve and keep available a number of Shares sufficient to satisfy the
requirements of the Plan.
17. Unsecured Obligation. No Participant under the Plan shall have any
interest in any fund or special asset of the Company by reason of the Plan or
the grant of any Option under the Plan. No trust fund shall be created in
connection with the Plan or any grant of any Option hereunder and there shall be
no required funding of amounts which may become payable to any Participant.
18. Withholding Tax. The Company shall have the right to deduct from
all amounts paid in cash with respect to the cashless exercise of Options and
Dividend Equivalent Rights under the Plan any taxes required by law to be
withheld with respect to such cash payments. Where a Participant or other person
is entitled to receive Shares pursuant to the exercise of an Option, the Company
shall have the right to require the Participant or such other person to pay the
Company the amount of any taxes which the Company is required to withhold with
respect to such Shares, or, in lieu thereof, to retain, or to sell without
notice, a number of such Shares sufficient to cover the amount required to be
withheld.
19. No Employment Rights. No Director, Employee or other person shall
have a right to be selected as a Participant under the Plan. Neither the Plan
nor any action taken by the Committee in administration of the Plan shall be
construed as giving any person any rights of employment or retention as an
Employee, Director or in any other capacity with the Company, the Savings
Association or other Subsidiaries.
20. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of New Jersey, except to the extent that
federal law shall be deemed to apply.
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EXHIBIT 13
Annual Report to Stockholders
for the fiscal year ended September 30, 1997
<PAGE>
PULSE Bancorp, Inc.
1997
ANNUAL REPORT
<PAGE>
- --------------------------------------------------------------------------------
Corporate Description Common Stock
Pulse Bancorp, Inc. (the "Corporation") is the holding company for Pulse
Savings Bank which was chartered by the State of New Jersey in 1916. The
Corporation is also the holding company for Pulse Insurance Services, Inc.,
Pulse Investment, Inc., and Pulse Real Estate, Inc. All three subsidiaries were
formed in 1996 and are currently inactive.
The principal business of Pulse Savings Bank is the acceptance of deposits
from the general public and the origination of mortgage loans for the purpose of
constructing, financing or refinancing one to four-family dwellings and other
improved residential and commercial real estate. In addition, the Bank purchases
mortgage-backed securities collateralized by one to four-family dwellings and
investment securities. Its income is derived largely from interest on loans,
mortgage-backed securities and investment securities. Its principal expenses are
interest paid on deposits and borrowings and operating expenses.
The business of the Bank is conducted through five offices located in South
River, South Amboy, Monroe Township, East Brunswick and Lawrenceville, New
Jersey.
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Consolidated Financial Highlights 2
- --------------------------------------------------------------------------------
Report to Stockholders 3
- --------------------------------------------------------------------------------
Management's Discussion and Analysis 4
- --------------------------------------------------------------------------------
Consolidated Financial Statements 10
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 14
- --------------------------------------------------------------------------------
Independent Auditors' Report 34
- --------------------------------------------------------------------------------
Officers and Directors 35
- --------------------------------------------------------------------------------
Corporate and Stockholders' Information 36
- --------------------------------------------------------------------------------
The Corporation's common stock is traded over-the-counter on the Nasdaq
National Market System appearing under the symbol "PULS". The following table
reflects the stock sales prices as published by the Nasdaq statistical report.
DIV./SHARE
HIGH LOW PAID
---- --- ----
First Quarter
12-31-95 17 1/2 15 3/4 $ 0.175
Second Quarter
3-31-96 17 15 1/2 $ 0.175
Third Quarter
6-30-96 18 14 1/2 $ 0.175
Fourth Quarter
9-30-96 18 16 7/8 $ 0.175
First Quarter
12-31-96 17 3/4 15 1/2 $ 0.175
Second Quarter
3-31-97 18 7/8 15 3/4 $ 0.175
Third Quarter
6-30-97 20 1/2 17 7/8 $ 0.175
Fourth Quarter
9-30-97 26 19 1/2 $ 0.175
While the Corporation is not subject to dividend restrictions under
regulations of the New Jersey Department of Banking, the Corporation depends on
dividends paid to it by the Bank in order to declare and pay dividends to
stockholders of the Corporation. Under New Jersey banking law, the Bank may not
pay a dividend to the Corporation unless, following payment, the capital stock
of the Bank will be unimpaired and (a) the Bank will have a surplus of not less
than 50% of its capital stock, or, if not, (b) the payment of such dividend will
not reduce the surplus of the Bank. Under New Jersey corporate law, the
Corporation may pay dividends in cash or shares but may not pay a dividend that
would render it insolvent or cause its liabilities to exceed its assets.
The number of stockholders of record of common stock as of the record date
of December 3, 1997, was approximately 800. This does not reflect the number of
persons or entities who held stock in nominee or "street" name through various
brokerage firms. At September 30, 1997, there were 3,080,548 shares outstanding.
1
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Financial Highlights
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------
1993 1994 1995 1996 1997
--------- -------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition and Other Data
Assets ............................................ $435,177 $447,684 $445,779 $502,500 $526,016
Loans receivable, net ............................. 175,835 139,975 134,277 134,548 127,311
Mortgage-backed securities held to maturity........ 186,309 182,000 174,969 164,092 162,764
Mortgage-backed securities available for sale ..... -- -- -- 40,255 53,393
Investment securities held to maturity ............ 49,277 87,917 114,381 105,549 96,552
Investment securities available for sale .......... -- -- -- 39,055 60,742
Real estate owned ................................. 4,091 3,281 2,628 2,233 136
Deposits .......................................... 387,704 396,190 391,038 394,581 411,021
Borrowings ........................................ -- -- -- 64,275 67,675
Stockholders' equity .............................. 45,310 49,292 52,274 38,459 43,207
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1993 1994 1995 1996 1997
--------- -------- -------- -------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Interest income ...................................... $31,586 $30,348 $30,739 $32,733 $36,019
Interest expense ..................................... 14,492 13,780 17,230 19,133 22,375
------- ------- ------- ------- -------
Net interest income .................................. 17,094 16,568 13,509 13,600 13,644
Provision for loan losses ............................ 2,101 2,650 -- -- --
Non-interest income .................................. 252 357 294 326 510
Non-interest expense ................................. 5,148 5,003 5,643 8,474(1) 5,275
Income taxes ......................................... 3,634 3,254 2,895 1,959 3,204
------- ------- ------- ------- -------
Net income ......................................... $ 6,463 $ 6,018 $ 5,265 $ 3,493 $ 5,675
======= ======= ======= ======= =======
Net income per share ................................. $ 1.70 $ 1.55 $ 1.34 $ 0.94 $ 1.80
======= ======= ======= ======= =======
Dividends per share .................................. $ 0.65 $ 0.60 $ 0.70 $ 0.70 $ 0.70
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At or For Year Ended September 30,
------------------------------------------------------
1993 1994 1995 1996 1997
--------- -------- -------- -------- ---------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Selected financial ratios:
Return on average assets ........................... 1.53% 1.35% 1.18% 0.74% 1.10%
Return on average equity ........................... 14.87% 12.37% 10.29% 7.02% 14.08%
Dividend payout ratio .............................. 37.29% 37.68% 51.20% 69.38% 37.81%
Stockholders' equity/total assets .................. 10.41% 11.01% 11.72% 7.65% 8.21%
Non-performing loans/total assets .................. 1.03% 0.57% 0.73% 0.36% 0.33%
Real estate owned/total assets ..................... 0.94% 0.73% 0.58% 0.44% 0.03%
Allowance for loan losses/loans receivable.......... 2.55% 2.40% 1.93% 1.82% 1.85%
</TABLE>
- ---------------
(1) Includes a pre-tax charge of approximately $2.7 million as a result of
the FDIC's one-time special insurance assessment on thrift institutions
to recapitalize the Savings Association Insurance Fund (SAIF). See Note
15.
2
<PAGE>
- -------------------------------------------------------------------------------
REPORT TO STOCKHOLDERS
At Pulse Bancorp, Inc. (the "Corporation") and Pulse Savings Bank (the
"Bank"), we are dedicated to enhancing shareholder value. This was demonstrated
by the strong returns reported for the fiscal year ended 1997. The return on
average equity was a robust 14% while the earnings per share for fiscal 1997
increased significantly due to the massive stock buyback that was conducted
during the 1996 fiscal year.
For the fiscal year ended September 30, 1997, net income was reported
at $5,675,000 or $1.80 per share compared with $3,493,000 or $.94 per share for
the previous year.
The Corporation has continued to grow the balance sheet successfully
utilizing a risk-averse profile. Loans receivable continued to be static due to
significant pay-offs of large commercial real estate loans. The Bank is now
concentrating on increasing the origination of one to four-family residential
loan. Various mortgage company correspondents have been providing residential
loans to the Bank. Additionally, the Bank has increased its emphasis on consumer
loans by offering highly competitive priced products.
The investment and mortgage backed securities portfolio increased
during the fiscal year and maintained its high quality with minimal interest
rate risk. The real estate owned and non-performing loans are also at favorable
levels thus affording optimum earning assets.
On the liability side, the Bank has emphasized increasing the demand
deposits, money market accounts and passbook savings. Additionally, the
effective use of borrowed money through repurchase agreements has allowed the
Corporation to maximize earnings and growth.
Although growth is important, the Corporation has focused on operating
as a community bank. The Bank recently opened a "de novo" branch in East
Brunswick. Additionally, another branch office in Monroe Township is scheduled
to be opened in the summer of 1998. Emphasizing core deposits and customer
service are the main themes of these new offices. The Bank will not expand
geographically at the expense of our present customer service.
Due to the consolidation of the banking industry, Pulse Savings Bank
remains one of the few community banks headquartered in Middlesex County, New
Jersey. We are able to offer personalized attention to our customer base and
attract new customers who desire this attention. To better serve our customers,
the Bank has made additional investments in the area of technology. The Bank
recently installed ATM's in two of its branch offices. Other ATM's will be
installed in other offices for the convenience of our customers. Additionally,
the telephone banking system is now in full operational use. This system
provides customers with 24 hour access to account and product information.
As we embark into the future, we are constantly evaluating the Bank's
savings and lending products. This evaluation is consistent with maintaining our
profile as a community bank. To remain competitive and profitable, we will
continue to operate the Corporation with products that are designated to meet
the needs of our customers. Furthermore, the Bank will continue to be a generous
supporter and neighbor to our local towns. Our goal is to continue our role as a
community bank.
In assessing the future, our commitment to the shareholders is to
provide optimal value. We appreciate the loyalty you have shown us throughout
the years. On behalf of the directors, officers and employees, we thank you for
your continued interest and support.
Sincerely,
/s/George T. Hornyak, Jr.
George T. Hornyak, Jr.
President
Chief Executive Officer
/s/Benjamin S. Konopacki
Benjamin S. Konopacki
Chairman of the Board
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
General Pulse Bancorp, Inc. (the "Corporation") owns 100% of the
issued and outstanding common stock of Pulse Savings Bank,
hereafter referred to as the "Bank", which is the primary
asset of the Corporation. The Corporation is also 100% owner
of Pulse Insurance Services, Inc., Pulse Real Estate, Inc.,
and Pulse Investment, Inc., all of which were formed during
the 1996 period, but which are currently inactive. The
Corporation's business is conducted principally through the
Bank. The earnings of the Bank depend primarily upon the
level of net interest income, which is the difference
between the interest earned on assets such as loans,
mortgage-backed securities, investments and other
interest-earning assets and the interest paid on its
liabilities such as deposits and borrowings. Net interest
income is affected by many factors, including regulatory,
economic and competitive forces that influence interest
rates, loan demand and deposit flow. Net interest income is
also affected by the composition of the Bank's
interest-earning assets and interest-bearing liabilities and
by the repricing of such assets and liabilities. Operating
results are also affected to a lesser extent by the types of
lending such as fixed rates versus adjustable rates, each of
which has a different fee structure. 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 the
periods of rising interest rates and may be beneficial in
times of declining interest rates. The Bank's net income is
also affected by provisions for loan losses, non-interest
income, non-interest expenses and income taxes.
Financial Condition The Corporation's assets at September 30, 1997 totaled
$526.0 million, which represents an increase of $23.5
million or 4.7% when compared with $502.5 million at
September 30, 1996. Investment securities held to maturity
totaled $96.6 million and $105.5 million at September 30,
1997 and 1996, respectively, which represents a decrease of
$9.0 million or 8.5%. The decrease in investment securities
is primarily due to calls and maturities of $19.0 million,
which more than offset the purchase of investment securities
issued by the U.S. Government or its agencies totaling $10.0
million. Investment securities available for sale totaled
$60.7 million and $39.1 million at September 30, 1997 and
1996, respectively, which represents an increase of $21.7
million or 55.5%. The increase in 1997 resulted from
purchases of $20.8 million, along with an appreciation in
the market values. Mortgage-backed securities held to
maturity totaled $162.8 million and $164.1 million at
September 30, 1997 and 1996, respectively, which represents
a decrease of $1.3 million or 0.8%. The decrease in
mortgage-backed securities was primarily due to principal
repayments of $25.1 million, which more than offset
purchases totaling $23.8 million. Mortgage-backed securities
available for sale totaled $53.4 million and $40.3 million
at September 30, 1997 and 1996, respectively, which
represents an increase of $13.1 million or 32.6%. The
increase in 1997 was due to purchases of $20.0 million,
along with an increase in the market values, which more than
offset principal repayments of $7.5 million. Loans
receivable amounted to $127.3 million and $134.5 million at
September 30, 1997 and 1996 respectively, which represents a
decrease of $7.2 million or 5.4%. The decrease during the
1997 period in loans receivable is due primarily to
principal collections and payoffs of loans exceeding loan
originations by $7.0 million, along with the transfer of
$287,000 of loans to other real estate owned during the
fiscal 1997 period. Other assets decreased $2.8 million or
74.2% to $1.0 million at September 30, 1997 compared to $3.7
million at September 30, 1996. The decrease was primarily
due to the application of funds the Bank received during the
period in final settlement of the Corporation's bridge loan
litigation, along with a decrease in the deferred tax asset.
During the 1997 period, the Bank did not make a provision
for loan losses and transferred loans totaling $287,000 to
real estate owned for properties acquired in settlement of
loans. Loan losses charged to the allowance decreased from
$145,000 in fiscal 1996 to $101,000 in fiscal 1997. Due to
the reduction in loan delinquencies and the apparent
stabilization of real estate values, management feels that
increases to the allowance for loan losses were not
warranted during the fiscal year ending September 30, 1997.
However, there can be no assurances that further additions
to the allowance for loan losses will not become necessary
in future periods. Total deposits at September 30, 1997
increased $16.4 million or 4.2% to $411.0 million when
compared with $394.6 million at September 30, 1996.
4
<PAGE>
- --------------------------------------------------------------------------------
During the 1996 period, the Bank instituted a plan to
leverage its capital by increasing its lending and
investment activity. As a result of the continued use in
1997, borrowings were $67.7 million at September 30, 1997,
compared to $64.3 million at September 30, 1996. This
strategy has contributed to the growth of the Bank's assets
and has afforded the Corporation the potential for increased
earnings per share. The Bank is aware of the interest rate
risk associated with this strategy. Furthermore, it has the
ability to either sell certain securities available for sale
or to utilize future cash flows to minimize the exposure to
fluctuations in market interest rates.
Stockholders' equity amounted to $43.2 million and $38.5
million at September 30, 1997 and 1996, respectively. The
increase of $4.7 million during the 1997 period was
primarily the result of net income of $5.7 million. During
the years ended September 30, 1997 and 1996, cash dividends
of $2.1 million and $2.4 million, respectively, were paid on
the Corporation's common stock. At both September 30, 1997
and 1996, treasury stock totaled $ 16.7 million.
Results of Operations
for the three years ended
ended September 30, 1997
Net Income
Net income increased to $5.7 million for the year ended
September 30, 1997 when compared with $3.5 million for the
year ended September 30, 1996, an increase of $2.2 million
or 62.5%. The increase in net income during the 1997 period
resulted primarily from the after tax impact of $1.7 million
for a special assessment by the Savings Association
Insurance Fund (SAIF) during the 1996 period. Net income
decreased to $3.5 million for the year ended September 30,
1996 when compared with $5.3 million for the year ended
September 30, 1995, a decrease of $1.8 million or 33.7%. The
decrease in net income during the 1996 period resulted
primarily from the SAIF Special Assessment enacted into law
on September 30, 1996, discussed above.
Interest Income
Interest income on loans during the year ended September 30,
1997 decreased $848,000 or 7.2% to $11.0 million when
compared to $11.9 million during the same 1996 period. The
decrease during the 1997 period resulted from a decrease of
$9.7 million in the average balance of loans outstanding.
Interest income on loans during the year ended September 30,
1996 decreased $543,000 or 4.4% to $11.9 million when
compared to $12.4 million during the same 1995 period. The
decrease during the 1996 period resulted from a decrease of
$5.8 million in the average balance of loans outstanding.
Income on securities available for sale increased by $2.5
million or 75.7% to $5.8 million during the 1997 period
compared to $3.3 million during 1996. The increase during
1997 was a direct result of an increase of $35.0 million in
the average balance of securities outstanding. During the
1996 period, the Bank took advantage of the limited window
of opportunity provided by "Special Report- Guide to
Implementation of Statement 115 on Accounting for Certain
Investments on Debt and Equity Securities," and transferred
approximately $29.0 million of mortgage-backed securities
and $29.8 million of investments from the held to maturity
classification to available for sale. As a result of the
reclassification, the Bank recorded interest income on
securities available for sale of $3.3 million during the
1996 period compared to $-0- during the 1995 period.
Income on securities held to maturity increased $1.8 million
or 10.6% to $18.5 million during 1997 compared to $16.7
million during the comparable 1996 period. The increase was
primarily due to an increase of $19.2 million in the average
balance of securities held to maturity. Income on securities
held to maturity decreased $879,000 or 5.0% to $16.7 million
during 1996 compared to $17.6 million during the comparable
1995 period. The decrease was primarily due to a decrease in
the average balance of securities held to maturity, which
was a direct result of the transfer of $58.8 million to the
available for sale classification and calls and repayments
of $73.2 million, which more than offset purchases of
securities held to maturity of $116.6 million.
Income from other interest-earning assets decreased $126,000
or 14.7% to $734,000 for the 1997 period from $860,000 for
the 1996 period. The decrease in income was due to a
decrease in the average balance maintained in federal funds
sold. Income from other interest-earning assets
5
<PAGE>
increased $139,000 or 19.3% to $860,000 for the 1996 period
from $721,000 for the 1995 period. The increase was due to
an increase in the average balance maintained in federal
funds sold, which was a direct result of the excess cash
which was needed to complete the 1996 stock repurchase.
Interest Expense
Interest on deposits increased by $851,000 or 4.8% to $18.7
million during the year ended September 30, 1997 when
compared to $17.8 million during the same 1996 period. The
increase during the 1997 period was primarily attributable
to an increase in the average balance of deposits held and
an increase in rates from 4.53% in 1996 to 4.63% in 1997.
During the 1997 period, deposit growth and interest credited
exceeded deposits withdrawn by $16.4 million. Interest on
deposits increased by $577,000 or 3.4% to $17.8 million
during the year ended September 30, 1996 when compared to
$17.2 million during the same 1995 period. The increase
during the 1996 period was primarily attributable to an
increase in the average balance of deposits held and an
increase in rates from 4.40% in 1995 to 4.53% in 1996.
During the 1996 period, deposit growth and interest credited
exceeded deposits withdrawn by $3.5 million. Interest
expense on borrowings increased $2.4 million or 180.0% to
$3.7 million for the year ending September 30, 1997,
compared to $1.3 million during 1996. The large increase is
due to the fact that the Bank's leverage strategy was not
implemented until the latter part of the 1996 fiscal year.
As a result, the 1996 expense only represents the 5 month
period borrowings were outstanding. Interest expense on
borrowings was $1.3 million for the year ending 1996
compared to $-0- during the same 1995 period. The increase
during the 1996 period was a result of borrowing agreements
the Bank entered into in order to finance increased
investment activity.
Provision For Loan Losses
During the years ended September 30, 1997, 1996 and 1995,
the Bank did not record any provisions for loan losses. The
allowance for loan losses amounted to $2.4 million, $2.5
million and $2.6 million at September 30, 1997, 1996 and
1995, respectively. Charged-off loans during the years
ending September 30, 1997, 1996 and 1995, were $101,000,
$145,000, and $765,000, respectively. At September 30, 1997
and 1996, allowance for loan losses as a percentage of loans
receivable were 1.85% and 1.82%, respectively. The allowance
for loan losses is based on management's evaluation of the
risk inherent in its loan portfolio and gives due
consideration to changes in general market conditions and in
the nature and volume of loan activity. Due to the
stabilization of the real estate market in New Jersey and
continued reduction in non-performing loans, management
feels that increases to the loan loss provision were not
warranted during the fiscal years ending September 30, 1997,
1996 and 1995. However, there can be no assurances that
further additions to the loan loss allowance will not become
necessary in future periods. At September 30, 1997 and 1996,
the Bank's non-performing loans totaled $1.7 million and
$1.8 million, respectively. Although the Bank maintains its
allowance for loan losses at a level which it considers
adequate to provide for potential losses, there can be no
assurance that such losses will not exceed estimated
amounts.
Non-Interest Income
Non-interest income increased to $511,000 or 56.8% during
the year ended September 30, 1997 from $326,000 for the same
1996 period. The increase of $185,000 during the 1997 period
resulted primarily from the settlement of $100,000 the Bank
received in exchange for the release of its first mortgage
lien on a residential property which was deemed to be an
environmental hazard. Non-interest income increased to
$326,000 or 10.9% during the year ended September 30, 1996
from $294,000 for the same 1995 period. The increase of
$32,000 during the 1996 period resulted primarily from an
increase in fees and service charges of $34,000 resulting
mainly from an increase in mortgage prepayment charges.
6
<PAGE>
- --------------------------------------------------------------------------------
Non-Interest Expense
Non-interest expenses decreased $3.2 million or 37.8% during
the year ended September 30, 1997 when compared with the
same 1996 period. The large decrease in the 1997 period was
a result of decreases in federal deposit insurance premium,
net gain from foreclosed real estate, and occupancy of $3.3
million, $373,000 and $14,000, respectively, which more than
offset increases in salary, miscellaneous, advertising, and
equipment expenses of $232,000, $101,000, $98,000 and
$15,000, respectively. Federal deposit insurance expense in
1996 reflected the FDIC's one-time special SAIF assessment
for deposit insurance which totaled approximately $2.7
million. Furthermore, beginning January 1, 1997, the premium
the Bank pays for deposit insurance was reduced by
approximately 70%. The increase in salary expense was due to
an increase in the number of full-time equivalent staff
required, along with a general increase in compensation
levels. Non-interest expenses increased $2.8 milion or 50.2%
during the year ended September 30, 1996 when compared with
the same 1995 period. The large increase in the 1996 period
was primarily due to the FDIC's one-time special SAIF
assessment for deposit insurance totaling $2.7 million,
enacted into law on September 30, 1996. Also increasing
during the 1996 period were losses from foreclosed real
estate, advertising, salaries and employee benefits and
occupancy expense of $269,000, $54,000, $36,000, and $21,000
These increases were somewhat offset by a decrease in
miscellaneous expense of $251,000. The decrease in
miscellaneous expense was primarily due to the writedowns
taken during the 1995 period regarding the bridge loan
receivables which were not required during 1996. Although
increased prices and higher volume continue to be reflected
in the increases in non-interest expenses, management
continues to limit discretionary expense items, where
practical.
A great deal of information has been disseminated about the
global computer year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a
common programming practice in earlier years) are expected
to read entries for the year 2000 as the year 1900 and
compute payment, interest or delinquency based on the wrong
date or are expected to be unable to compute payment,
interest or delinquency. Rapid and accurate data processing
is essential to the operation of the Savings Bank. Data
processing is also essential to most other financial
institutions and many other companies. All of the material
data processing of the Savings Bank that could be affected
by this problem is provided by a third party service bureau.
The service bureau of the Savings Bank has advised the
Savings Bank that it expects to be year 2000 compliant prior
to December 31, 1999. However, if the service bureau is
unable to resolve this potential problem in time, the
Savings Bank could possibly experience significant data
processing delays, mistakes or failures. These delays,
mistakes or failures could have a significant adverse impact
on the financial condition and results of operation of the
Savings Bank.
Income Taxes
Income tax expense totaled $3.2 million, $2.0 million and
$2.9 million during the years ended September 30, 1997, 1996
and 1995, respectively. The increase during the 1997 and
1995 periods was primarily due to an increase in pre-tax
income. The decrease in 1996 was a direct result of the tax
benefit of $971,000 recorded as a result of the one-time
special SAIF assessment to the FDIC for deposit insurance
recorded during the period.
7
<PAGE>
- --------------------------------------------------------------------------------
Liquidity and
Capital Resources
Liquidity is a measurement of the Bank's ability to generate
sufficient cash flow, in order to meet all current and
future financial obligations and commitments as they arise.
The Bank adjusts its liquidity levels in order to meet
funding needs for deposit outflows, payment 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. The Bank's primary
sources of funds are deposits, amortization and prepayments
of loan and mortgage-backed securities principal,
borrowings, maturities of investment securities and funds
provided by operations. While scheduled loan and
mortgage-backed securities amortization and maturing
investment securities are relatively predictable sources of
funds, deposit flow and loan and mortgage-backed securities
prepayments are greatly influenced by market interest rates,
economic conditions and competition. The Bank manages the
pricing of its deposits to maintain a steady deposit
balance. In addition, the Bank invests its excess funds in
Federal Funds and overnight deposits with the Federal Home
Loan Bank of New York (FHLB-NY), which provides liquidity to
meet lending requirements. Federal Funds sold and
interest-bearing deposits at September 30, 1997 and 1996
amounted to $11.9 million and $500,000, respectively. The
Bank's liquidity, represented by cash and cash equivalents,
is a product of its operating, investing and financing
activities.
These activities are summarized as follows:
<TABLE>
<CAPTION>
Year Ended
September 30,
-----------------------------
1996 1997
--------- ---------
(In Thousands)
<S> <C> <C>
Cash and cash equivalents at beginning of period ............ $ 8,762 $ 4,750
-------- --------
Operating activities:
Net income ................................................ 3,493 5,675
Adjustments to reconcile net income to net cash provided by
operating activities .................................... 1,555 896
-------- --------
Net cash provided by operating activities ................... 5,048 6,571
Net cash used in investing activities ....................... (59,969)
Net cash provided by financing activities ................... 50,909 18,090
-------- --------
Net (decrease) increase in cash and cash equivalents ........ (4,012) 10,726
-------- --------
Cash and cash equivalents at end of period .................. $ 4,750 $ 15,476
======== ========
</TABLE>
Cash was generated by operating activities in each of the
above periods. The primary source of cash from operating
activities during each of the periods was net income. The
primary uses of cash for investing activity are for lending
and the purchase of investment and mortgage-backed
securities. Net loans amounted to $127.3 million, $134.5
million and $134.3 million at September 30, 1997, 1996 and
1995, respectively. Purchases of investments and
mortgage-backed securities held to maturity totaled $33.8
million, $116.6 million, and $48.1 million during the years
ended September 30, 1997, 1996, and 1995, respectively.
Purchases of investments and mortgage-backed securities
available for sale totaled $40.7 million and $25.1 million
during the years ended September 30, 1997 and 1996. There
were no available for sale purchases during 1995. In
addition to funding new loan production and the purchases of
investment and mortgage-backed securities through operations
and financing activities, principal repayments on existing
loans, investments and mortgage-backed securities and
borrowings provided funds. .
The primary source of financing activities during the 1997
period was from an increase in deposits of $16.4 million,
along with increased borrowings of $3.4 million. The primary
source of financing activities during the 1996 period was
from increased borrowings of $64.3 million along with an
increase in deposits of $3.5 million.
During the 1996 period, the Corporation purchased 837,080
shares of its common stock at $17.75 per share under the
method of a modified dutch auction for a total of
$14,975,000. The main purpose of the buyback was to improve
the Corporation's return on average equity by reducing its
overcapitalized condition. The Corporation has no current
plans to buyback
8
<PAGE>
- --------------------------------------------------------------------------------
additional stock, however, this does not preclude the
Corporation from buying back additional shares in future
periods.
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-bearing deposits. If the Bank requires funds
beyond its ability to generate them internally, the Bank
utilizes repurchase agreements with certain brokers that
will advance short term funds in exchange for pledged
securities held in the portfolio. Furthermore, borrowing
agreements exist with the FHLB-NY, which provide an
additional source of funds.
The Bank anticipates that it will have sufficient funds
available to meet its current commitments to originate loans
and to purchase mortgage-backed securities and investment
securities. At September 30, 1997, such outstanding
commitments amounted to $16.4 million. Additionally, unused
lines of credit, at September 30, 1997 amounted to $10.7
million. Certificates of deposit scheduled to mature in one
year or less, at September 30, 1997, totaled $213.9 million.
Management believes, based upon its experience and deposit
flow histories, that a significant portion of such deposits
will remain with the Bank.
Impact of Inflation
and Changing Prices
The consolidated financial statements and the related data
presented herein have been prepared in accordance with
generally accepted accounting principles, which require a
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 Corporation are monetary in
nature. As a result, interest rates have a more significant
impact on the Corporation's performance than the effects of
general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same
magnitude as the prices of goods and services, because such
prices are affected by inflation to a larger extent than
interest rates are affected by inflation.
9
<PAGE>
- --------------------------------------------------------------------------------
PULSE BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
September 30,
------------------------------
1996 1997
------------- -------------
ASSETS
<S> <C> <C>
Cash and due from depository institutions ........................... $ 4,249,883 $ 3,550,908
Federal funds sold .................................................. 500,000 11,925,000
------------- -------------
Total cash and cash equivalents ................................. 4,749,883 15,475,908
Investment securities available for sale (Note 2) ................... 39,054,697 60,741,955
Mortgage-backed securities available for sale (Note 3) .............. 40,255,064 53,393,335
Investment securities held to maturity; estimated fair value
of $103,192,317 in 1996 and $96,386,850 in1997 (Note 2) ........... 105,549,457 96,551,885
Mortgage-backed securities held to maturity; estimated fair value of
$162,616,663 in 1996 and $163,645,986 in 1997 (Note 3).............. 164,091,98497 162,763,525
Loans receivable, net (Note 4) ...................................... 134,547,804 127,310,525
Real estate owned ................................................... 2,232,624 136,491
Premises and equipment, net (Note 5) ................................ 1,235,135 1,322,718
Federal Home Loan Bank of New York stock, at cost ................... 2,543,100 2,775,500
Interest receivable (Note 6) ........................................ 4,527,354 4,584,337
Other assets (Notes 11 and 14) ...................................... 3,712,747 959,530
------------- -------------
Total assets .................................................... $ 502,499,849 $ 526,015,709
============= =============
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 7) ................................................... $ 394,580,611 $ 411,020,719
Borrowings (Note 8) ................................................. 64,275,000 67,675,000
Advance payments by borrowers for taxes and insurance ............... 628,243 805,394
Other liabilities ................................................... 4,557,461 3,308,037
------------- -------------
Total liabilities ............................................... 464,041,315 482,809,150
------------- -------------
Commitments and contingencies (Note 13) ............................. -- --
Stockholders' equity (Notes 9, 10, 11 and 12)
Common stock; par value $1.00; authorized 10,000,000 shares;
4,111,958 in 1996 and 4,142,628 in 1997 shares issued and 3,049,878
in 1996 and 3,080,548 in 1997 shares outstanding ................... 4,111,958 4,142,628
Paid-in capital in excess of par value .............................. 12,105,541 12,293,206
Retained earnings -- substantially restricted ....................... 39,147,609 42,676,884
Unrealized (loss) gain on securities available for sale, net of tax . (229,074) 771,341
Treasury stock at cost; 1,062,080 common shares ..................... (16,677,500) (16,677,500)
------------- -------------
Total stockholders' equity ................................... 38,458,534 43,206,559
------------- -------------
Total liabilities and stockholders' equity ...................... $ 502,499,849 $ 526,015,709
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans ................................................... $ 12,403,877 $ 11,861,002 $ 11,012,919
Securities available for sale .......................... -- 3,277,058 5,757,544
Securities held to maturity ............................ 17,614,211 16,734,714 18,514,811
Other interest-earning assets ......................... 720,927 860,031 733,708
------------ ------------ ------------
Total interest income ............................... 30,739,015 32,732,805 36,018,982
------------ ------------ ------------
Interest expense:
Deposits (Note 7) ..................................... 17,229,807 17,806,866 18,658,276
Borrowings ............................................. -- 1,325,972 3,717,034
------------ ------------ ------------
Total interest expense ............................. 17,229,807 19,132,838 22,375,310
------------ ------------ ------------
Net interest income ..................................... 13,509,208 13,599,967 13,643,672
Provision for loan losses ............................... -- -- --
------------ ------------ ------------
Net interest income after provision for loan losses ..... 13,509,208 13,599,967 13,643,672
------------ ------------ ------------
Non-interest income:
Fees and service charges .............................. 223,495 257,523 301,557
Miscellaneous ......................................... 70,670 68,199 208,967
------------ ------------ ------------
Total non-interest income ........................... 294,165 325,722 510,524
------------ ------------ ------------
Non-interest expense:
Salaries and employee benefits (Note 10) .............. 2,429,369 2,465,912 2,698,133
Occupancy expense ..................................... 263,788 285,267 271,765
Equipment ............................................. 536,064 538,308 553,480
Advertising ........................................... 230,237 283,769 381,441
Federal insurance premium (Note 15) ................... 902,993 3,600,986 341,712
Loss (income) from foreclosed real estate, net ........ 31,342 300,379 (72,208)
Miscellaneous ......................................... 1,249,597 998,993 1,100,459
------------ ------------ ------------
Total non-interest expense .......................... 5,643,390 8,473,614 5,274,782
------------ ------------ ------------
Income before income taxes .............................. 8,159,983 5,452,075 8,879,414
Income taxes (Note 11) .................................. 2,894,770 1,959,466 3,204,255
------------ ------------ ------------
Net income .............................................. $ 5,265,213 $ 3,492,609 $ 5,675,159
============ ============ ============
Net income per common share
and common stock equivalents (Notes 9 and 10) ......... $ 1.34 $ 0.94 $ 1.80
============ ============ ============
Dividends per common share (Notes 9 and 10) ............. $ 0.70 $ 0.70 $ 0.70
============ ============ ============
Weighted average number of common shares and common stock
equivalents outstanding (Notes 9 and 10) .............. 3,928,205 3,728,116 3,156,741
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Paid-in Retained Net Unrealized (Loss)
Capital in Earnings- Gain on Securities
Common Excess of Substantially Treasury Available For Sale;
Stock Par Value Restricted Stock Net of Tax Total
------------ -------------- ------------- ------------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance -- September 30, 1994 ... $ 4,016,128 $ 11,469,206 $ 35,509,392 $ (1,702,500) $ -- $ 49,292,226
Net income for the year ended
September 30, 1995 ............ -- -- 5,265,213 -- -- 5,265,213
Issuance of common stock ........ 61,700 350,563 -- -- -- 412,263
Cash dividends, $0.70 per share . -- -- (2,696,111) -- -- (2,696,111)
------------ ------------ ------------ ------------ ------------
Balance -- September 30, 1995 ... 4,077,828 11,819,769 38,078,494 (1,702,500) -- 52,273,591
Net income for the year ended
September 30, 1996 ............ -- -- 3,492,609 -- -- 3,492,609
Issuance of common stock ........ 34,130 285,772 -- -- -- 319,902
Purchase of treasury stock ...... -- -- -- (14,975,000) -- (14,975,000)
Cash dividends, $0.70 per share . -- -- (2,423,494) -- -- (2,423,494)
Change in unrealized loss on
securities available for
sale, net of tax .............. -- -- -- -- (229,074) (229,074)
------------ ------------ ------------ ------------ ------------ ------------
Balance -- September 30, 1996 ... 4,111,958 12,105,541 39,147,609 (16,677,500) (229,074) 38,458,534
Net income for the year ended
September 30, 1997 ............ -- -- 5,675,159 -- -- 5,675,159
Issuance of common stock ........ 30,670 187,665 -- -- -- 218,335
Cash dividends, $0.70 per share . -- -- (2,145,884) -- -- (2,145,884)
Change in unrealized (loss)
gain on securities available
for sale, net of tax .......... -- -- -- -- 1,000,415 1,000,415
------------ ------------ ------------ ------------ ------------
Balance -- September 30, 1997 ... $ 4,142,628 $ 12,293,206 $ 42,676,884 $(16,677,500) $ 771,341 $ 43,206,559
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 5,265,213 $ 3,492,609 $ 5,675,159
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation .............................................................. 157,945 142,007 147,749
Amortization of premiums, discounts and fees, net ......................... (149,083) (189,083) (101,573)
Provision for losses on real estate owned ................................. 52,200 341,500 32,850
Gain on sale of real estate owned ......................................... (52,208) (62,462) (72,208)
Increase in interest receivable ........................................... (694,447) (456,275) (56,983)
Deferred income tax expense (benefit) ..................................... 95,258 (805,042) 1,072,313
Decrease in other assets .................................................. 4,338,383 37,092 1,680,904
Increase (decrease) in other liabilities .................................. 341,922 2,547,953 (1,806,617)
------------ ------------ ------------
Net cash provided by operating activities ............................... 9,355,183 5,048,299 6,571,594
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from calls and maturities of investment securities held to maturity 12,560,000 55,000,000 19,002,500
Purchase of investment securities held to maturity .......................... (39,000,000) (75,932,187) (10,000,000)
Proceeds from principal repayments of investment securities available for sale -- 4,197,200 --
Purchase of investment securities available for sale ........................ -- (10,000,000) (20,787,500)
Purchase of mortgage-backed securities held to maturity ..................... (9,120,219) (40,624,537) (23,838,620)
Purchase of mortgage-backed securities available for sale ................... -- (15,081,456) (19,960,841)
Principal repayments on mortgage-backed securities held to maturity ......... 16,139,416 18,198,392 25,140,550
Principal repayments on mortgage-backed securities available for sale ....... -- 4,318,741 7,503,277
Proceeds from sale of student loans ......................................... 90,093 4,454 --
Net (increase) decrease in loans receivable ................................. 7,907,163 (790,568) 6,984,919
Proceeds from sales of and repayments on real estate owned .................. 2,077,524 913,852 2,488,168
Additions to premises and equipment ......................................... (31,864) (169,980) (235,332)
Net decrease (increase) in Federal Home Loan Bank of New York stock ......... 170,100 (2,900) (232,400)
------------ ------------ ------------
Net cash used in investing activities ................................... (9,207,787) (59,968,989) (13,935,279)
------------ ------------ ------------
Cash flows from financing activities:
Net (decrease) increase in deposits ......................................... (5,152,525) 3,542,768 16,440,108
Net increase in borrowings ................................................. -- 64,275,000 3,400,000
(Decrease) increase in advance payments by borrowers for taxes and insurance (75,177) 169,887 177,151
Issuance of common stock .................................................... 412,263 319,902 218,335
Purchase of treasury stock .................................................. -- (14,975,000) --
Cash dividends paid ......................................................... (2,696,111) (2,423,494) (2,145,884)
------------ ------------ ------------
Net cash (used in) provided by financing activities ..................... (7,511,550) 50,909,063 18,089,710
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents .......................... (7,364,154) (4,011,627) 10,726,025
Cash and cash equivalents -- beginning ........................................ 16,125,664 8,761,510 4,749,883
------------ ------------ ------------
Cash and cash equivalents -- ending ........................................... $ 8,761,510 $ 4,749,883 $ 15,475,908
============ ============ ============
Supplemental schedule of noncash investing activities:
Transfer of loans held for sale to loans receivable .......................... $ 3,586,035 $ -- $ --
============ ============ ============
Transfer of loans receivable to real estate owned ............................ $ 1,424,125 $ 797,650 $ 286,491
============ ============ ============
Transfer of mortgage-backed securities and investments held to
maturity to available for sale ........................................... $ -- $ 58,764,618 $ --
============ ============ ============
Cash paid during the period for:
Income taxes ................................................................ $ 1,200,000 $ 2,495,000 $ 1,881,014
============ ============ ============
Interest .................................................................... $ 17,466,043 $ 18,835,293 $ 22,295,412
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
PULSE BANCORP, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of consolidated financial statement presentation
The consolidated financial statements include the accounts
of Pulse Bancorp, Inc. (the "Corporation"), a savings bank
holding company, and its wholly owned subsidiaries, Pulse
Savings Bank (the "Bank"), Pulse Insurance Services, Inc.,
Pulse Real Estate, Inc., and Pulse Investment, Inc. The
Corporation's business is conducted principally through the
Bank. The other three subsidiaries were formed during the
1996 period to afford possible economic opportunities in
future periods. All three, however, are currently inactive.
All significant intercompany accounts and transactions have
been eliminated in consolidation. The consolidated financial
statements of the Corporation have been prepared in
conformity with generally accepted accounting principles. In
preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the
date of the consolidated statements of financial condition
and income for the period then ended. Actual results could
differ significantly from those estimates. Material
estimates that are particularly susceptible to significant
changes relate to the determination of the allowance for
loan losses and the valuation of real estate owned.
Management believes that the allowance for loan losses is
adequate and real estate owned is appropriately valued.
While management uses available information to recognize
losses on loans and real estate owned, future additions to
the allowance for loan losses or further writedowns of real
estate owned may be necessary based on changes in economic
conditions in the market area. In addition, various
regulatory agencies, as an integral part of their
examination process, periodically review the Bank's
allowance for loan losses and real estate owned valuations.
Such agencies may require the Bank to recognize additions to
the allowance or additional writedowns based on their
judgments about information available to them at the time of
their examination.
Cash and cash equivalents
Cash and cash equivalents include cash and amounts due from
depository institutions, interest-bearing deposits in other
banks having original maturities of three months or less and
federal funds sold. Generally, federal funds sold are sold
for one-day periods.
Investment and mortgage-backed securities
The Company classifies its securities among three
categories: held-to-maturity, trading, and available for
sale. Management determines the appropriate classification
of the securities at the time of purchase. As of September
30, 1997, the Bank has classified its investments and
mortgage-backed securities between held to maturity and
available for sale.
Investment and mortgage-backed securities are classified as
securities held to maturity based on management's intent and
the Corporation's ability to hold them to maturity. Such
securities are stated at cost, adjusted for unamortized
purchase premiums and discounts. Purchase premiums and
discounts are amortized over the life of the related
security using the level yield method.
Investment and mortgage-backed securities not classified as
securities held to maturity or trading account securities
are classified as securities available for sale, and are
stated at fair value. Unrealized gains and losses are
excluded from earnings, and are reported as a separate
component of stockholders' equity, net of taxes. Such
securities include those that may be sold in response to
changes in interest rates, changes in prepayment risk or
other factors.
Loans receivable
Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses and net deferred loan
origination fees and discounts. The Bank defers
14
<PAGE>
loan origination fees and certain direct loan origination
costs and amortizes such amounts as an adjustment of yield
over the estimated lives of the related loans.
An allowance for loan losses is maintained at a level
considered adequate to provide for potential 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 the general economic and real estate
market conditions. The Bank utilizes a two tier approach:
(1) identification of problem loans and the establishment of
loss allowances on such loans; and (2) establishment of
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 problem loans. Such system takes
into consideration, among other things, delinquency status,
size of loans, types of collateral and financial condition
of the borrowers. Loan loss allowances are established for
identified loans based on a review of such information
and/or appraisals of the underlying collateral. On the
remainder of the loan portfolio, loan loss allowances are
established 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 allowances for loan losses are established, actual
losses are dependent upon future events and, as such,
further additions to the level of the loan loss allowance
may be necessary.
Non-accrual loans include loans for which reasonable doubt
exists as to timely collectibility. At the time a loan is
placed on non-accrual status, previously accrued and
uncollected interest is reversed against interest income in
the current period. Interest collections on non-accrual
loans are generally credited to interest income when
received. After principal and interest payments have been
brought current and future collectibility is reasonably
assured, loans are returned to accrual status.
Restructured loans are loans whose contractual interest
rates have been reduced to below market rates or where other
significant concessions have been made due to a borrower's
financial difficulties. Interest income on restructured
loans is generally accrued.
On October 1, 1995, the Bank adopted prospectively SFAS No.
114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure".
SFAS 114 defines an impaired loan as a loan for which it is
probable based upon current information that the lender will
not collect amounts due under the contractual terms of the
loan agreement. The Bank has defined the population of
impaired loans to be all commercial and construction real
estate loans as well as residential real estate loans
greater than $500,000. Impaired loans are individually
assessed to determine that each loan's carrying value is not
in excess of the fair value of the related collateral or the
present value of the expected future cash flows.
Real estate owned
Real estate owned consists of real estate acquired by
foreclosure or deed in lieu of foreclosure and is initially
recorded at the lower of cost or fair value at the date of
acquisition. Fair value is defined as the amount reasonably
expected to be received in a current sale between a willing
seller (the Bank) and a willing buyer. Real estate owned is
subsequently carried at the lower of cost or fair value less
estimated selling costs. Costs incurred in developing or
preparing properties for sale are capitalized. Income and
expenses of operating and holding properties are recorded in
operations as incurred. Gains and losses from sales of such
properties are recognized as incurred.
15
<PAGE>
Concentration of risk
The Bank's real estate and lending activities are
concentrated in real estate and loans secured by real estate
located primarily in the State of New Jersey.
Premises and equipment
Land is stated at cost. Buildings, building improvements,
furnishings and equipment are stated at cost, less
accumulated depreciation computed on the straight-line
method over the estimated lives of each type of asset.
Significant renewals and betterments are charged to the
property and equipment account. Maintenance and repairs are
charged to operations in the year incurred.
Stock-based compensation
In October 1995 the FASB issued Statement No. 123,
"Accounting for Stock-Based Compensation". SFAS 123
encourages recording in current period earnings compensation
expense related to the fair value of certain stock-based
compensation. Companies may choose to follow the provisions
of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), where
compensation expense is not recorded for certain stock-based
compensation plans. However, companies will be required to
disclose pro forma net income and earnings per share as if
they adopted the fair value based method of accounting. The
disclosure requirements for SFAS 123 are effective for the
Bank's fiscal year beginning October 1, 1996. The Bank has
elected to continue to account for stock-based compensation
under APB 25 and the pro forma disclosures required by SFAS
123 have been included in Note 10 to the consolidated
financial statements. The adoption of SFAS 123 had no impact
on the Bank's 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
reinvest in investment and mortgage-backed 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 shorter duration of the Bank's
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 the market value of long-term
assets and net interest income. For this reason, management
regularly monitors the maturity structure of the Bank's
assets and liabilities in order to measure its level of
interest rate risk and plan for future volatility.
Income taxes
Federal and state income taxes are provided for utilizing
the asset and liability method. Under the asset and
liability method, temporary differences between the basis of
assets and liabilities for financial reporting and tax
purposes are measured as of the statement of financial
condition date. Deferred tax liabilities or recognizable
deferred tax assets are calculated on such differences,
using current statutory rates which result in future taxable
or deductible amounts. The effect on deferred taxes of a
change in tax rates is recognized in income in the period
that includes the enactment date.
The Corporation and the subsidiaries file a consolidated
federal income tax return. Income taxes are allocated to the
Corporation and the sudsidiaries based on the contribution
of their income to the consolidated return. Separate state
income tax returns are filed by the Corporation and the
subsidiaries.
Net income per common share and common stock equivalents
Net income per common share and common stock equivalents is
based on the weighted average number of common shares
actually outstanding during the
16
<PAGE>
period plus the shares that would be outstanding assuming
the exercise of dilutive stock options, all of which are
considered to be common stock equivalents. The number of
shares that would be issued from the exercise of stock
options has been reduced by the number of shares that could
have been purchased from the proceeds at the average price
of the Corporation's common stock. See Note 18.
Reclassification
Certain amounts for the prior years have been reclassified
to conform with the current year's presentation.
- --------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
A summary of investment securities held to maturity and available for sale is as
follows:
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment Securities Held To Maturity
U.S. Government (including agencies):
After one year but within five years .......... $ 27,989,889 $ 52,500 $ 410,234 $ 27,632,155
After five years but within ten years ......... 70,959,597 51,920 1,911,438 69,100,079
After ten years ................................ 6,000,000 -- 161,677 5,838,323
------------ ------------ ------------ ------------
104,949,486 104,420 2,483,349 102,570,557
------------ ------------ ------------ ------------
Obligations of states and political subdivisions:
Within one year ................................ 2,500 -- -- 2,500
After ten years ................................. 597,471 21,789 -- 619,260
------------ ------------ ------------ ------------
599,971 21,789 -- 621,760
------------ ------------ ------------ ------------
$105,549,457 $ 126,209 $ 2,483,349 $103,192,317
============ ============ ============ ============
Investment Securities Available For Sale
U.S. Government (including agencies):
After one year but within five years ............ $ 18,000,000 $ -- $ 397,566 $ 17,602,434
After five years but within ten years ........... 21,813,748 12,500 373,985 21,452,263
------------ ------------ ------------ ------------
$ 39,813,748 $ 12,500 $ 771,551 $ 39,054,697
============ ============ ============ ============
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Securities Held To Maturity
U.S. Government (including agencies):
After one year but within five years ........... $22,991,739 $ 6,875 $ 27,239 $22,971,375
After five years but within ten years .......... 64,962,649 281,619 454,993 64,789,275
After ten years ................................ 8,000,000 25,000 21,300 8,003,700
----------- ----------- ----------- -----------
95,954,388 313,494 503,532 95,764,350
----------- ----------- ----------- -----------
Obligations of states and political subdivisions:
After ten years ............................... 597,497 25,003 -- 622,500
----------- ----------- ----------- -----------
$96,551,885 $ 338,497 $ 503,532 $ 96,386,850
=========== =========== =========== ===========
Investment Securities Available For Sale
U.S. Government (including agencies):
Within one year ................................ $ 8,000,000 $ -- $ 15,600 $ 7,984,400
After one year but within five years .......... 10,000,000 -- 90,100 9,909,900
After five years but within ten years ......... 41,822,275 333,264 131,384 42,024,155
----------- ----------- ----------- -----------
59,822,275 333,264 237,084 59,918,455
----------- ----------- ----------- -----------
Equity Securities ............................... 800,000 23,500 -- 823,500
----------- ----------- ----------- -----------
$60,622,275 $ 356,764 $ 237,084 $60,741,955
=========== =========== =========== ===========
</TABLE>
There were no sales of investment securities held to maturity and available for
sale during the years ended September 30, 1995, 1996 and 1997.
In November 1995 the Financial Accounting Standards Board issued guidance on the
implementation of "Special Report-A Guide To Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (Special
Report). This Special Report provided an opportunity for a one-time reassessment
of the classification of securities as of a single measurement date between
November 15, 1995, and December 31, 1995. As a result, securities held to
maturity with an amortized cost of $58,765,000 and a net unrealized gain of
$529,000 were transferred to securities available for sale on December 31, 1995.
These securities were transferred to increase the overall level of liquidity and
improve the ability to manage interest rate risk.
3. MORTGAGE-BACKED SECURITIES
A summary mortgage-backed securities is as follows:
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities Held To Maturity
Government National Mortgage Association ....................... $ 67,075,905 $ 743,542 $ 194,683 $ 67,624,764
Federal Home Loan Mortgage Corporation ......................... 39,159,809 174,932 402,384 38,932,357
Federal National Mortgage Association .......................... 21,470,218 95,144 603,746 20,961,616
Collateralized Mortgage Obligations ............................ 36,386,052 10,191 1,298,317 35,097,926
------------ ------------ ------------ ------------
$164,091,984 $ 1,023,809 $ 2,499,130 $162,616,663
============ ============ ============ ============
Mortgage-Backed Securities Available For Sale
Government National Mortgage Association ....................... $ 39,848,435 $ 406,629 $ -- $ 40,255,064
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1997
---------------------------------------------------------
Gross Gross Estimated
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Mortgage-Backed Securities Held To Maturity
Government National Mortgage Association ....................... $ 62,595,447 $ 1,404,217 $ -- $ 63,999,664
Federal Home Loan Mortgage Corporation ......................... 35,726,553 409,980 265,291 35,871,242
Federal National Mortgage Association .......................... 30,556,079 182,409 155,962 30,582,526
Collateralized Mortgage Obligations ............................ 33,885,446 1,836 694,728 33,192,554
------------ ------------ ------------ ------------
$162,763,525 $ 1,998,442 $ 1,115,981 $163,645,986
============ ============ ============ ============
Mortgage-Backed Securities Available For Sale
Government National Mortgage Association ....................... $ 33,217,483 $ 774,300 $ -- $ 33,991,783
Federal Home Loan Mortgage Corporation ......................... 9,473,817 189,614 -- 9,663,431
Federal National Mortgage Association .......................... 9,616,497 121,624 -- 9,738,121
------------ ------------ ------------ ------------
$ 52,307,797 $ 1,085,538 $ -- $ 53,393,335
============ ============ ============ ============
</TABLE>
There were no sales of mortgage-backed securities held to maturity and available
for sale during the years ended September 30, 1995, 1996 and 1997. The
contractual maturities of the mortgage-backed securities generally exceed 20
years; however, the effective average life is expected to be significantly less,
due to anticipated prepayments.
19
<PAGE>
- --------------------------------------------------------------------------------
4. LOANS RECEIVABLE, NET
A summary of loans receivable is as follows:
<TABLE>
<CAPTION>
September 30,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Real estate mortgage:
One-to-four family ........................................................... $ 65,509,636 $ 77,761,695
Multi-family ................................................................. 28,190,149 15,088,127
Commercial ................................................................... 29,882,549 22,321,707
------------ ------------
123,582,334 115,171,529
Real estate construction ....................................................... 125,000 219,256
------------ ------------
Consumer:
Passbook or certificate ...................................................... 184,185 229,172
Home equity .................................................................. 13,543,650 14,348,020
------------ ------------
13,727,835 14,577,192
Total loans .................................................................... 137,435,169 129,967,978
------------ ------------
Less: Allowance for loan losses ................................................ 2,458,777 2,357,396
Deferred loan fees and discounts ...................................... 428,588 300,057
------------ ------------
2,887,365 2,657,453
$134,547,804 $127,310,525
</TABLE>
Non-accrual and restructured loans were as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Non-accrual ................................................................. $ 1,928 $ 999 $ 722
Restructured ................................................................ 4,167 2,135 2,103
------------ ------------ ------------
$ 6,095 $ 3,134 $ 2,825
============ ============ ============
</TABLE>
The impact of non-accrual and restructured loans on interest income is as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest income if performing in accordance with original terms ................ $ 622 $ 325 $ 303
Interest income actually recorded .............................................. 349 154 143
------------ ------------ ------------
Interest income lost ........................................................... $ 273 $ 171 $ 160
============ ============ ============
</TABLE>
At September 30, 1996 and 1997, the impaired loan portfolio was primarily
collateral dependent as defined under SFAS 114 and totaled $654,000 for which
general and specific allocations to the allowance for loan losses of $262,000
were identified. The average balance of impaired loans during the 1996 and 1997
fiscal year was $654,000. The amount of cash basis interest income that was
recognized on impaired loans during the year ended September 30, 1996 and 1997
was $-0- .
An analysis of the allowance for loan losses is as follows:
Year Ended September 30,
----------------------------------------
1995 1996 1997
----------- ----------- -----------
Balance-beginning .................... $ 3,368,816 $ 2,603,852 $ 2,458,777
Losses charged to allowance........... (764,964) (145,075) (101,381)
----------- ----------- -----------
Balance-ending ....................... $ 2,603,852 $ 2,458,777 $ 2,357,396
=========== =========== ===========
20
<PAGE>
The activity during the years ended September 30, 1996 and 1997, with respect to
loans to directors, officers and associates of such persons is as follows:
Balance -- September 30, 1995 .................................. $ 546,815
Loan principal repayments ...................................... (38,903)
-----------
Balance -- September 30, 1996 .................................. 507,912
Loans originated ............................................... 118,000
Loan principal repayments ...................................... (123,173)
-----------
Balance -- September 30, 1997 .................................. $ 502,739
===========
- --------------------------------------------------------------------------------
5. PREMISES AND EQUIPMENT, NET
A summary of premises and equipment is as follows:
September 30,
--------------------------
1996 1997
----------- -----------
Land .............................................. $ 247,037 $ 247,037
----------- -----------
Buildings and improvements ........................ 1,477,229 1,477,229
Less accumulated depreciation ..................... 719,893 771,640
----------- -----------
757,336 705,589
Furnishings and equipment ......................... 1,219,222 1,454,554
Less accumulated depreciation ..................... 988,460 1,084,462
----------- -----------
230,762 370,092
----------- -----------
$ 1,235,135 $ 1,322,718
=========== ===========
Depreciation charges are computed on the straight-line method over the assets'
estimated useful lives, which range from 10 to 40 years for buildings and
improvements and 3 to 10 years for furnishings and equipment
- --------------------------------------------------------------------------------
6. INTEREST RECEIVABLE
A summary of interest receivable is as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Loans ........................................................... $ 968,493 $ 864,939
Mortgage-backed securities held to maturity ..................... 968,245 971,265
Mortgage-backed securities available for sale ................... 216,679 305,044
Investment securities held to maturity .......................... 1,697,054 1,646,319
Investment securities available for sale ........................ 676,883 796,770
----------- -----------
$ 4,527,354 $ 4,584,337
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
7. DEPOSITS
A summary of deposits by type is as follows:
September 30,
------------------------------------------------
1996 1997
--------------------- ------------------------
Weighted Weighted
Average Average
Interest Interest
Rate Amount Rate Amount
----- ------------ ----- ------------
Demand:
Non-interest-bearing ........ 0.00% $ 3,941,492 0.00% $ 4,754,356
Interest-bearing ............ 3.15% 87,091,543 3.11% 87,026,200
------------ ------------
3.01% 91,033,035 2.97% 91,780,556
Savings and club .............. 2.73% 57,429,028 2.74% 55,662,965
Certificates of deposit ....... 5.32% 246,118,548 5.51% 263,577,198
------------ ------------
4.41% $394,580,611 4.57% 411,020,719
============ ===========
21
<PAGE>
Certificates of deposit with balances of $100,000 or more totalled approximately
$15,322,000 and $17,500,000 at September 30, 1996 and 1997, respectively.
The scheduled maturities of certificates of deposit are as follows:
September 30,
-------------------
1996 1997
-------- --------
(In Thousands)
One year or less ......................................... $206,483 $213,917
After one to two years ................................... 28,380 36,809
After two to three years.................................. 6,925 8,769
After three years ........................................ 4,331 4,082
-------- --------
$246,119 $263,577
======== ========
A summary of interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Interest-bearing demand .................. $ 3,499,629 $ 2,854,521 $ 2,735,882
Savings and club ......................... 1,897,746 1,622,457 1,566,213
Certificates of deposit less than $100,000 11,288,140 12,604,742 13,466,098
Certificates of deposit $100,000 or more . 544,292 725,146 890,083
----------- ----------- -----------
$17,229,807 $17,806,866 $18,658,276
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
8. BORROWINGS
The following is a summary of borrowings:
<TABLE>
<CAPTION>
At September 30
----------- -----------
1996 1997
----------- -----------
<S> <C> <C> <C> <C>
Contractual Maturity
1997 ................................. $50,475,000 $ --
1998 ................................. 4,500,000 51,875,000
1999 ................................. 9,300,000 15,800,000
----------- -----------
$64,275,000 $67,675,000
=========== ===========
Weighted average interest rate at the end of the period ......... 5.79% 5.84%
Weighted average interest rate during the period ................ 5.77% 5.87%
Average amount outstanding during the period .................... $22,951,000 $63,223,000
Maximum amount outstanding at any month-end during the period.... $64,550,000 $68,775,000
</TABLE>
Securities collateralizing the borrowings included agencies and mortgage-backed
securities, which had an amortized cost of $68.0 million and $74.3 million and a
fair value of $68.5 million and $74.4 million at September 30, 1996 and 1997,
respectively. The securities underlying the borrowings are under the Bank's
control.
- --------------------------------------------------------------------------------
9. STOCKHOLDERS' EQUITY
On June 21, 1996, the Corporation completed a buyback of
837,080 shares of its common stock under a stock repurchase
plan utilizing the Modified Dutch Auction method of
repurchase. The transaction resulted recording of treasury
stock of $14,975,000.
Dividends payable by the Bank to the Corporation and
dividends payable by the Corporation to stockholders are
subject to various limitations imposed by federal and state
laws, regulations and policies adopted by federal and state
regulatory agencies. The Bank is required by federal law to
obtain FDIC approval for the
22
<PAGE>
payment of dividends if the total of all dividends declared
by the Bank in any year exceed the total of the Bank's net
profits (as defined) for that year and the retained net
profits (as defined) for the preceding two years, less any
required transfers to surplus. Under New Jersey law, the
Bank may not pay dividends unless, following payment, the
capital stock of the Bank would be unimpaired and (a) the
Bank will have a surplus of not less than 50% of its capital
stock, or, if not, (b) the payments of such dividends will
not reduce the surplus of the Bank.
- --------------------------------------------------------------------------------
10. BENEFIT PLANS
Retirement plan
The Bank has a non-contributory defined contribution plan covering all eligible
employees. Pension plan costs are determined by a money purchase type formula.
Total pension plan expense for the years ended September 30, 1995, 1996 and 1997
amounted to $144,000, $160,000 and $181,000, respectively.
Stock option plan
The Bank maintains a stock option plan (Plan) for its directors, officers and
certain other employees. Options granted under the Plan are vested at grant date
and are exercisable over a period not to exceed ten years. Changes in the number
of shares outstanding under the Plan and the weighted average exercise price of
those shares are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period ................ 318,552 $ 9.99 304,852 $11.29 273,858 $11.597
Granted ........................................... 48,000 14.00 3,136 17.00 82,000 16.000
Exercised ......................................... 61,700 6.68 34,130 9.37 30,670 7.119
Outstanding at end of period ...................... 304,852 $11.29 273,858 $11.59 325,188 $13.095
</TABLE>
For options that were granted in 1995, 1996, and 1997, the exercise price of the
options equaled the market value of the stock at grant date.
The following table summarizes information about the stock options outstanding
at September 30, 1997:
Options Outstanding and Exercisable
-----------------------------------
Range Weighted Average Weighted
of Number of Remaining Average
Exercise Shares Contractual Exercise
Prices Outstanding Life in Years Price
---------------- ------------ ---------------- ---------
$ 6.625-$ 8.8125 63,152 5.0 $ 8.506
13.000- 17.000 262,036 7.3 14.201
$ 6.625-$17.000 325,188 6.8 $13.095
The Bank applies APB 25 in accounting for the Plan. Consistent with SFAS 123, if
compensation cost for the Plan was included as compensation expense, the Bank's
net income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1996 1997
---------- ----------
Net income:
As reported ... $3,492,609 $5,675,159
Pro forma ..... 3,476,713 5,274,212
Earnings per share:
As reported ... $ 0.94 $ 1.80
Pro forma ..... $ 0.93 $ 1.67
23
<PAGE>
The fair value of stock options granted by the Bank was estimated through the
use of the Black-Scholes option-pricing model that takes into account the
following factors as of the grant date: the exercise price and expected life of
the option, the market price of the underlying stock at the grant date and its
expected volatility, and the risk-free interest rate for the expected term of
the option. In deriving the fair value of the stock options, the stock price at
the grant date is reduced by the value of the dividends to be paid during the
life of the option. The following assumptions were used for grants in 1996 and
1997: dividend yield of 3.00% and an expected volatility of 50% and the risk
free interest rate of 5.79% and 6.59% for 1996 and 1997, respectively. The
effects of applying SFAS 123 on the pro forma net income may not be
representative of the effect on pro forma net income for future years.
- --------------------------------------------------------------------------------
11. INCOME TAXES
The bad debt reserve method which was available to thrift
institutions has been repealed for tax years beginning after
December 1995. As a result, the Bank may no longer use the
percentage of taxable income reserve method. A large thrift
(one with more than $500 million in assets) must use the
specific charge-off method to compute its bad debt
deduction.
Upon repeal, the Bank is required generally to recapture
into income the portion of its bad debt reserve (other than
supplemental reserve) that exceeds its base year reserves,
approximately $808,000.
The recapture amount generally will be taken into income
ratably (on a straight-line basis) over a six year period.
If the Bank meets the "residential loan requirement" for a
tax year beginning in 1996 or 1997, the recapture of the
reserves will be suspended for such tax year. Thus, the
recapture can potentially be deferred for up to two years.
The residential loan requirement is met if the principal
amount of housing loans made by the Bank during the year at
issue (1996 or 1997) is at least as much as the average
principal amount of loans made during the six most recent
years prior to 1996. Refinancing and home equity loans are
excluded. As of September 30, 1997, the Bank has met the
"residential loan requirement".
The Bank has not recognized a deferred tax liability of
approximately $1,950,000 for "bad debt reserves" for tax
purposes which arose in tax years beginning before December
31, 1987 (i.e., base year). A deferred tax liability will be
recognized if the Bank expects that charges to the bad debt
reserves, other than losses on loans or recomputations of
bad debt deductions resulting from operating loss carrybacks
to prior years, would result in taxable income.
Total income tax expense for each of the years in the
three-year period ended September 30, 1997 was allocated as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Income from operations .................................... $ 2,895 $ 1,959 $ 3,204
Stockholders' equity:
Net unrealized (depreciation) appreciation on securities
available for sale , net of taxes ...................... -- (82) 360
------- ------- -------
$ 2,895 $ 1,877 $ 3,564
====== ====== ======
</TABLE>
24
<PAGE>
Income tax expense for the years ended September 30, 1995, 1996, and 1997 is
made up of the following components:
Year Ended September 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
Current tax expense:
Federal ....................... $ 2,578,063 $ 2,537,250 $ 1,925,478
State ......................... 221,449 227,258 206,464
----------- ----------- -----------
2,799,512 2,764,508 2,131,942
Deferred tax expense:
Federal ....................... 82,846 (760,740) 1,013,303
State ......................... 12,412 (44,302) 59,010
----------- ----------- -----------
95,258 (805,042) 1,072,313
----------- ----------- -----------
$ 2,894,770 $ 1,959,466 $ 3,204,255
=========== =========== ===========
A reconciliation between the effective income tax expense and the amount
calculated by multiplying the applicable statutory Federal income tax rate of
34% for the years ended September 30, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" Federal tax expense .... $ 2,774,394 $ 1,853,706 $ 3,019,001
State income tax, net of Federal tax benefit 154,348 120,751 175,213
Tax-exempt interest ........................ (13,135) (13,145) (13,046)
Other ...................................... (20,837) (1,846) 23,087
----------- ----------- -----------
$ 2,894,770 $ 1,959,466 $ 3,204,255
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at September 30, 1996
and 1997 are as follows:
September 30,
-------------------------
1996 1997
----------- -----------
From operations:
Deferred tax assets
Allowance for loan and real estate losses ...... $ 884,668 $ 848,191
Deferred fees .................................. 133,726 111,278
Core deposit amortization ...................... 74,358 66,562
Organization costs ............................. 651 --
Non-accrued interest ........................... 36,700 36,700
BIF/SAIF Special assessment .................... 971,460 --
----------- -----------
Total gross deferred assets ............. 2,101,563 1,062,731
----------- -----------
Deferred tax liabilities
Depreciation ................................... 35,417 35,011
Discount accretion on bonds .................... 19,340 27,739
Bad debt tax reserve in excess of base year .... 265,252 290,740
----------- -----------
Total gross deferred tax liabilities .... 320,009 353,490
----------- -----------
Net deferred tax asset from operations ......... 1,781,554 709,241
Shareholders' equity - unrealized (gains) losses
on securities available for sale ............. 123,348 (433,638)
----------- -----------
Total net deferred tax assets ............... $ 1,904,902 $ 275,603
=========== ===========
25
<PAGE>
Management believes, based upon current facts, that more
likely than not there will be sufficient taxable income in
future years to realize the net deferred tax asset. However,
there can be no assurance about the levels of future
earnings.
- --------------------------------------------------------------------------------
12. REGULATORY MATTERS
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's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements 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. Total Tier 1 capital
(as defined in the regulations) to risk- weighted assets (as defined), and of
Tier 1 capital, (as defined), to total assets (as defined). Management believes,
as of September 30, 1997, that the Bank meets all capital adequacy requirements
to which it is subject.
As of September 30, 1997, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
Required To be well capitalized
for capital under prompt corrective
Actual adequacy purposes action provision
--------------------- ---------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1996
Total capital (to risk-weighted assets) $38,112 24.49% $12,448 8.00% $15,560 10.00%
Tier 1 capital (to risk-weighted assets) 36,167 23.24% 6,224 4.00% 9,336 6.00%
Tier 1 capital (to total assets) ....... 36,167 7.20% 20,100 4.00% 25,112 5.00%
- -------------------------------------------------------------------------------------------------------------
As of September 30, 1997
Total capital (to risk-weighted assets) $41,550 27.74% $11,982 8.00% $14,977 10.00%
Tier 1 capital (to risk-weighted assets) 39,678 26.49% 5,991 4.00% 8,986 6.00%
Tier 1 capital (to total assets) ....... 39,678 7.54% 21,041 4.00% 26,301 5.00%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
- --------------------------------------------------------------------------------
13. 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 and to reduce its
own exposure to fluctuations in interest rates. 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 amount recognized in the consolidated 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. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and
may require payment of a fee. Since commitments may expire
without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty.
Collateral held varies but primarily includes residential
real estate and commercial real estate properties.
Commitments to purchase securities are contracts for delayed
delivery of securities in which the seller agrees to make
delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks arise from
the possible inability of counterparties to meet the terms
of their contracts and from movements in securities values
and interest rates. The Bank has the following outstanding
commitments:
September 30,
-------------------------
1996 1997
----------- -----------
To originate loans .......................... $ 3,094,000 $16,409,000
=========== ===========
Homeowners' Equity Credit Line Program....... $11,002,000 $10,711,000
=========== ===========
Commitments to purchase securities .......... $ -- $ 200,000
=========== ===========
At September 30, 1997, of the $16,409,000 in outstanding
commitments to originate loans, $3,668,000 are for loans at
fixed interest rates within a range of 7.125% to 8.625% and
$12,741,000 are for adjustable rate loans. The Homeowners'
Equity Credit Line Program represents undisbursed funds from
approved lines of credit. Unless specifically cancelled by
notice from the Bank, these are firm commitments to the
respective borrowers on demand. The lines of credit are
secured by the respective one to four-family residential
properties owned by the borrowers. The interest rate charged
for any month on funds disbursed under the program ranges
from 1.00% to 1.50% above the prime rate as most recently
published in The Wall Street Journal prior to the last
business day of the month immediately preceding the month in
which the billing cycle begins.
The Corporation also has, in the normal course of business,
commitments for services and supplies. Management does not
anticipate losses on any of the above-mentioned commitments.
The Corporation is also a party to litigation which arises
primarily in the ordinary course of business. In the opinion
of management, the ultimate disposition of such litigation
should not have a material effect on the consolidated
financial statements of the Corporation.
27
<PAGE>
- --------------------------------------------------------------------------------
14. FRAUD LOSS On July 6, 1994, the Bank discovered that a portfolio of
approximately $8.4 million of bridge loans believed to be
secured by residential real estate were in fact made to
fictitious borrowers and collateralized by fictitious
properties. The loans had been extended based upon
fraudulent mortgage applications and related documentation
submitted to the Bank by its then general counsel.
Through September 30, 1996, the Bank received approximately
$3.0 million from the settlement of its surety bond claim
and the liquidation of other assets and charged-off amounts
approximating $3.7 million. As of September 30, 1996, the
receivable in other assets was $1.7 million. The Bank then
filed claims under the malpractice insurance coverage
available in order to recover all unpaid amounts.
During the 1997 fiscal period, the Bank was able to reach a
settlement for its claim against the malpractice insurance
carriers and the matter was concluded with no additional
loss charged to operations.
- --------------------------------------------------------------------------------
15. RECAPITALIZATION OF SAVINGS
INSTITUTION INSURANCE FUND
("SAIF")
On September 30, 1996, legislation was enacted, which among
other things, imposed a special one-time assessment on SAIF
member institutions, including the Bank, to recapitalized
the SAIF and spreads the obligations for payment of
Financing Corporation ("FICO") bonds across all SAIF and
Bank Insurance Fund ("BIF") members. The Federal Deposit
Insurance Corporation ("FDIC") special assessment being
levied amounts to 65.7 basis points on SAIF assessable
deposits held as of March 31, 1995. The special assessment
was recognized in the fourth quarter of fiscal 1996 and was
tax deductible. The Bank took a charge of $2.7 million
before tax-effect, as a result of the FDIC special
assessment. This legislation will eliminate the substantial
disparity between the amount that BIF and SAIF had been
paying for deposit insurance premiums.
Beginning on January 1, 1997, BIF members began paying a
portion of the FICO payment equal to 1.3 basis points on
BIF-insured deposits compared to 6.4 basis points on
SAIF-insured deposits, and will pay a pro rata share of the
FICO payment on the earlier of January 1, 2000, or the date
upon which the last savings association ceases to exist. The
legislation also requires BIF and SAIF to be merged by
January 1, 1999, provided that subsequent legislation is
adopted to eliminate the savings association charter and no
savings associations remain as of that time.
The FDIC has lowered SAIF assessments to a range comparable
to that of BIF members, although SAIF members must also make
the FICO payments described above. Management cannot predict
the level of FDIC insurance assessments on an on-going basis
or whether the BIF and SAIF will eventually be merged.
- --------------------------------------------------------------------------------
16. FAIR VALUE OF FINANCIAL
INSTRUMENTS
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments"
requires disclosure of estimated fair values for financial
instruments.
Limitations
The fair value estimates are made at a discrete point in
time based on relevant market information and information
about the financial instruments. Fair value estimates are
based on judgments regarding future expected loss
experience, current economic conditions, risk
characteristics of various financial instruments and other
factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Further, the foregoing estimates may not reflect the actual
amount that could be realized if all or substantially all of
the financial instruments were offered for sale at one time.
<PAGE>
In addition, the fair value estimates are based on existing
on-and-off balance sheet financial instruments without
attempting to value the anticipated future business and the
value of assets and liabilities that are not considered
financial instruments. Other significant assets and
liabilities that are not considered financial assets and
liabilities include mortgage servicing rights, premises and
equipment and advances from borrowers for taxes and
insurance. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been
considered in any of the estimates. Finally, reasonable
comparability between financial institutions may not be
likely due to the wide range of permitted valuation
techniques and numerous estimates which must be made given
the absence of active secondary markets for many of the
financial instruments. This lack of uniform valuation
methodologies introduces a greater degree of subjectivity to
these estimated fair values. The estimation methodologies
used and the estimated fair values and carrying values of
financial instruments are set forth below:
Cash and cash equivalents and interest receivable
The carrying amounts for cash and cash equivalents
approximate fair value.
Investment and mortgage-backed securities
Available for sale securities are reported at their
respective fair values in the Consolidated Statements of
Financial Condition. These values were based on quoted
market prices. The fair values of securities held to
maturity were also based upon quoted market prices.
Loans receivable
The fair value of fixed rate loans receivable is estimated
by discounting the future cash flows, using the current
rates at which similar loans with similar remaining
maturities would be made to borrowers with similar credit
ratings. For those loans with floating interest rates, it is
presumed that estimated fair values generally approximate
their recorded book balances.
Deposits
The fair value of demand, savings and club accounts is equal
to the amount payable on demand at the reporting date. The
fair value of certificates of deposit is estimated by
discounting future cash flows using rates currently offered
for deposits of ar remaining maturities. For those deposits
with floating interest rates, it is presumed that estimated
fair values generally approximate their recorded book
balances.
Borrowings
The fair values for borrowings are calculated by discounting
estimated future cash flows using current rates offered for
similar remaining maturities.
Commitments
The fair values of commitments related to loans approximate
their fair value and are estimated using 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 and the committed rates.
The fair value of commitments to purchase mortgage-backed
securities is based upon quoted market prices of similar
securities.
29
<PAGE>
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1996 1997
------------------- -------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents ........................... $ 4,750 $ 4,750 $ 15,476 $ 15,476
Investment securities available for sale .......... 39,055 39,055 60,742 60,742
Mortgage-backed securities available for sale ..... 40,255 40,255 53,393 53,393
Investment securities held to maturity .............. 105,549 103,192 96,552 96,387
Mortgage-backed securities held to maturity.......... 164,092 162,617 162,764 163,646
Loans receivable ................................... 134,548 134,270 127,311 128,035
Financial liabilities
Deposits ............................................ 394,581 393,419 411,021 409,844
Borrowings .......................................... 64,275 64,219 67,675 67,292
</TABLE>
- --------------------------------------------------------------------------------
17. PARENT CORPORATION
FINANCIAL DATA
The following condensed financial statements of the
Corporation should be read in conjunction with the notes to
consolidated financial statements.
STATEMENTS OF FINANCIAL CONDITION
September 30,
----------------------------
1996 1997
------------ ------------
Assets
Cash ........................................ $ 74,730 $ 26,956
Loans receivable from subsidiary ............ 950,000 1,950,000
Investment in subsidiaries .................. 35,941,076 40,436,444
Investment securities available for sale .... -- (823,500)
Fraud loss receivable ....................... 1,565,000 --
Due from subsidiary ......................... 498,766 530,061
Other assets ................................ -- 9,980
------------ ------------
Total assets .............................. $ 39,029,572 $ 43,776,941
============ ============
Liabilities and stockholders' equity
Liabilities
Dividends payable ........................... $ 533,729 $ 539,096
Other liabilities ........................... 37,309 31,286
------------ ------------
Total liabilities ......................... 571,038 570,382
------------ ------------
Stockholders' equity
Common stock ................................ 4,111,958 4,142,628
Paid-in-capital in excess of par value ...... 12,105,541 12,293,206
Retained earnings-- substantially restricted 39,147,609 42,676,884
Unrealized loss on securities available for
sale, net of tax .......................... (229,074) 771,341
Treasury stock, at cost ..................... (16,677,500) (16,677,500)
------------ ------------
Total stockholders' equity ................ 38,458,534 43,206,559
------------ ------------
Total liabilities and stockholders' equity $ 39,029,572 $ 43,776,941
============ ============
30
<PAGE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
Income:
<S> <C> <C> <C>
Dividends from subsidiary .................. $2,696,110 $2,423,495 $2,145,884
Interest ................................... 90,524 170,732 81,887
Miscellaneous .............................. -- -- 12,595
---------- ---------- ----------
Total Income ........................... 2,786,634 2,594,227 2,240,366
---------- ---------- ----------
Expenses:
Miscellaneous ......................... 83,550 58,422 64,438
---------- ---------- ----------
Total Expenses ......................... 83,550 58,422 64,438
---------- ---------- ----------
Income before income taxes and equity
in undistributed earnings of subsidiary .... 2,703,084 2,535,805 2,175,928
Income taxes ................................ 5,362 39,293 10,760
---------- ---------- ----------
Income before equity in undistributed earnings . 2,697,722 2,496,512 2,165,168
Undistributed earnings of subsidiary ...... 2,567,491 996,097 3,509,991
---------- ---------- ----------
Net income ..................................... $5,265,213 $3,492,609 $5,675,159
========== ========== ==========
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------
1995 1996 1997
------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................... $ 5,265,213 $ 3,492,609 $ 5,675,159
Adjustments to reconcile net income to net
cash provided by operating activities:
(Increase) decrease in undistributed
earnings of subsidiary ................... (2,567,491) 767,023 (3,494,953)
Decrease (increase) in due from subsidiary .. 23,212 69,100 (31,295)
(Increase) decrease in fraud loss receivable (1,600,000) 35,000 1,565,000
Decrease (increase) in other assets ......... 18,731 -- (9,980)
Increase (decrease) in dividends
payable ................................... 9,255 (44,195) 5,367
Increase (decrease) in other liabilities .... 448 9,861 (6,023)
------------ ------------ ------------
Net cash provided by operating
activities ............................ 1,149,368 4,329,398 3,703,275
------------ ------------ ------------
Cash flows provided by investing activities:
Purchase of investment securities ........... -- -- 823,500
Distribution from Bank subsidiary ........... -- 12,733,880 --
Decrease (increase) in loans receivable
from subsidiary ........................... 1,100,000 50,000 (1,000,000)
------------ ------------ ------------
Net cash provided by (used in)
investing activities ................. 1,100,000 12,783,880 (1,823,500)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of common stock .................... 412,263 319,902 218,335
Cash dividends paid ......................... (2,696,111) (2,423,494) (2,145,884)
Purchase of treasury stock .................. -- (14,975,000) --
------------ ------------ ------------
Net cash used in financing activities .. (2,283,848) (17,078,592) (1,927,549)
------------ ------------ ------------
Net (decrease) increase in cash ............... (34,480) 34,686 (47,774)
Cash -- beginning ............................. 74,524 40,044 74,730
------------ ------------ ------------
Cash -- ending ................................ $ 40,044 $ 74,730 $ 26,956
============ ============ ============
</TABLE>
31
<PAGE>
- --------------------------------------------------------------------------------
18. IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") establishes standards for
computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or
potential common stock. SFAS 128 replaces the presentation
of primary EPS with a presentation of basic EPS and requires
dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim
periods; earlier application is not permitted and requires
restatement of all prior-period EPS data presented. If the
Bank had adopted SFAS 128, basic EPS would have been $1.37,
$0.96, and $1.85 for 1995, 1996, and 1997, respectively.
Diluted EPS would have been the same as the earnings per
share reported.
Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130") establishes
standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS
130 requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial statement
that is displayed with the same prominence as other
financial statements. SFAS 130 does not require a specific
format for that financial statement but requires that an
enterprise display an amount representing total
comprehensive income for the period in that financial
statement. SFAS 130 requires that an enterprise (a) classify
items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance
of other comprehensive income separately from retained
earnings and additional paid in capital in the equity
section of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15,
1997.
Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management
has not yet determined the impact of the adoption on its
reporting of operations.
32
<PAGE>
- --------------------------------------------------------------------------------
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the quarterly consolidated financial data is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1996 Quarter Quarter Quarter Quarter
- ----------------------------- ------- ------- ------- -------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income ............................................... $ 7,845 $ 7,857 $ 8,254 $ 8,777
Interest expense .............................................. 4,523 4,451 4,794 5,365
------- ------- ------- -------
Net interest income ......................................... 3,322 3,406 3,460 3,412
Non-interest income ........................................... 94 82 65 85
Non-interest expense .......................................... 1,341 1,388 1,363 4,382(1)
------- ------- ------- -------
Income before income taxes .................................... 2,075 2,100 2,162 (885)
Income taxes .................................................. 752 755 773 (320)
------- ------- ------- -------
Net income (loss) ............................................. $ 1,323 $ 1,345 $ 1,389 $ (565)
======= ======= ======= =======
Net income (loss) per common share and common stock equivalents $ 0.33 $ 0.34 $ 0.36 $ (0.18)
======= ======= ======= =======
Dividends per common share .................................... $ 0.175 $ 0.175 $ 0.175 $ 0.175
======= ======= ======= =======
</TABLE>
(1) Includes a pre-tax charge of approximately $2.7 million as a result of the
FDIC's one-time special SAIF insurance assessment. See Note 15.
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1997 Quarter Quarter Quarter Quarter
- ----------------------------- ------- ------- ------- -------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income ........................................ $8,843 $9,015 $9,086 $9,075
Interest expense ....................................... 5,487 5,506 5,647 5,735
------ ------ ------ ------
Net interest income .................................. 3,356 3,509 3,439 3,340
Non-interest income .................................... 111 76 192 131
Non-interest expense ................................... 1,366 1,357 1,328 1,224
------ ------ ------ ------
Income before income taxes ............................. 2,101 2,228 2,303 2,247
Income taxes ........................................... 769 798 825 812
------ ------ ------ ------
Net income ............................................. $1,332 $1,431 $1,478 $1,435
====== ====== ====== ======
Net income per common share and common stock equivalents $ 0.43 $ 0.45 $ 0.47 $ 0.45
====== ====== ====== ======
Dividends per common share ............................. $0.175 $0.175 $0.175 $0.175
====== ====== ====== ======
</TABLE>
33
<PAGE>
Independent Auditors' Report
To the Board of Directors
And Stockholders
Pulse Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Pulse Bancorp, Inc. and Subsidiaries (the "Corporation") as of September 30,
1996 and 1997 and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1997. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Corporation as
of September 30, 1996 and 1997 and the results of their operations and their
cash flows for the each of the years in the three-year period ended September
30, 1997 in conformity with generally accepted accounting principles.
/s/KPMG Peat Marwick LLP
Short Hills, New Jersey
October 24, 1997
34
<PAGE>
Executive Officers of the Corporation and the Bank
BENJAMIN S. KONOPACKI
Chairman of the Board, former
President, Pulse Savings Bank
GEORGE T. HORNYAK, JR.
President and CEO and Director,
Pulse Bancorp, Inc. and Pulse
Savings Bank
THOMAS B. KONOPACKI
Executive Vice President and CFO,
Pulse Bancorp, Inc. and Pulse
Savings Bank
RONALD E. VAUGHN, JR.
Senior Vice President and
Chief Lending Officer,
Pulse Bancorp, Inc. and Pulse
Savings Bank
JEFFREY M. GOSTKOWSKI
Vice President of Operations,
Pulse Bancorp, Inc. and Pulse
Savings Bank
PATRICIA M. BARSZCZ
Vice President and Asst. Secretary,
Pulse Bancorp, Inc. and Pulse
Savings Bank
CATHERINE D. FRANZONI
Vice President and Treasurer,
Pulse Bancorp, Inc. and Pulse
Savings Bank
NANCY M. JANOSKO
Secretary, Pulse Bancorp, Inc. and
Pulse Savings Bank
Other Officers of the Bank
GLENN BROOKS
Asst. V.P./Internal Auditor
FLORENCE PAWLOWSKI
Branch Manager-Asst. Vice
President
SYLVIA GAN
Asst. Vice President
GAIL WOLYNEC
Asst. V.P./Asst. Secretary
RENEE PARSONS
Asst. Secretary
NADYA CUPRYK
Asst. Vice President
ARLEEN FERRO
Asst. Vice President
Directors of the Corporation and the Bank
BENJAMIN S. KONOPACKI
Chairman, former President,
Pulse Savings Bank
JOSEPH CHADWICK
President of Thomas and
Chadwick/Riverside Supply
Company
GEORGE T. HORNYAK, JR.
President and CEO, Pulse Bancorp,
Inc. and Pulse Savings Bank
EDWIN A. KOLODZIEJ
Counsellor at Law
WAYNE A. KRONOWSKI
Treasurer and Chief Financial
Officer of the Borough of Sayreville
EDWIN A. ROGINSKI
Former Vice President and
Chief Compliance Officer of
Chase Manhattan
Investment Services, Inc.
ADAM RZEPKA
Director Emeritus
FRANK L. CHADWICK
Chairman Emeritus
ASSOCIATE BOARD
South Amboy
WALTER FABISZEWSKI
EDWARD GLEASON
JOHN JANKOWSKI
STANLEY KNAST
35
<PAGE>
MAIN OFFICE
Pulse Bancorp, Inc.
6 Jackson Street
P.O. Box 193
South River, New Jersey 08882
(732) 257-2400
(732) 257-2400 - Mortgage Department
PULSE SAVINGS BANK OFFICES
MAIN OFFICE
6 Jackson Street
South River, New Jersey 08882
(732) 257-2400
Washington Avenue & Davis Lane
South Amboy, New Jersey 08879
(732) 721-1300
Prospect Plains and Applegarth Roads
Monroe Township, New Jersey 08512
(609) 655-1900
213 Summerhill Road
East Brunswick, N.J. 08816
(732) 651-6655
1225 Brunswick Avenue
Lawrenceville, New Jersey 08648
(609) 394-1500
CORPORATE INFORMATION
Nancy M. Janosko
Secretary
Pulse Bancorp, Inc.
6 Jackson Street
P.O. Box 193
South River, New Jersey 08882
(732) 257-2400
TRANSFER AGENT AND REGISTRAR
American Stock Transfer and Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
(212) 936-5100
SPECIAL COUNSEL
Malizia, Spidi, Sloane & Fisch, P.C.
One Franklin Square
1301 K Street, N.W.
Suite 700 East
Washington, D.C. 20005
STOCK LISTING
The Corporation's Common Stock is traded over-the-counter on the Nasdaq National
Market appearing under the symbol "PULS".
MARKET MAKERS
Sandler O'Neill & Partners, L.P.
Ryan, Beck & Co., Inc.
F.J. Morrissey & Co., Inc.
ANNUAL MEETING
January 22, 1998, 10:00 A.M.
Forsgate Country Club
Forsgate Drive
Jamesburg, New Jersey 08831
10-K INFORMATION:
A COPY OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
SEPTEMBER 30, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL
BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE UPON WRITTEN
REQUEST TO THE SECRETARY, PULSE BANCORP, INC., 6 JACKSON STREET, SOUTH RIVER,
NEW JERSEY 08882.
36
EXHIBIT 21
Subsidiaries of the Registrant
<PAGE>
Subsidiaries of the Registrant
Name Jurisdiction of Incorporation
Pulse Savings Bank New Jersey
Pulse Investment, Inc. * New Jersey
Pulse Real Estate, Inc. * New Jersey
Pulse Insurance Services, Inc. * New Jersey
* Inactive
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
annual report on Form 10-K and is qualified in its entirety by reference to such
financial information.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,550,908
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,925,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 114,135,290
<INVESTMENTS-CARRYING> 259,315,410
<INVESTMENTS-MARKET> 260,032,836
<LOANS> 127,310,525
<ALLOWANCE> 2,357,396
<TOTAL-ASSETS> 526,015,709
<DEPOSITS> 411,020,719
<SHORT-TERM> 67,675,000
<LIABILITIES-OTHER> 4,113,431
<LONG-TERM> 0
0
0
<COMMON> 4,142,628
<OTHER-SE> 39,063,931
<TOTAL-LIABILITIES-AND-EQUITY> 526,015,709
<INTEREST-LOAN> 11,012,919
<INTEREST-INVEST> 24,272,355
<INTEREST-OTHER> 733,708
<INTEREST-TOTAL> 36,018,982
<INTEREST-DEPOSIT> 18,658,276
<INTEREST-EXPENSE> 22,375,034
<INTEREST-INCOME-NET> 13,643,672
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,274,782
<INCOME-PRETAX> 8,879,414
<INCOME-PRE-EXTRAORDINARY> 8,879,414
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,675,159
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.80
<YIELD-ACTUAL> 1.10
<LOANS-NON> 721,536
<LOANS-PAST> 999,000
<LOANS-TROUBLED> 2,103,000
<LOANS-PROBLEM> 7,572,000
<ALLOWANCE-OPEN> 2,458,777
<CHARGE-OFFS> 101,381
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,357,396
<ALLOWANCE-DOMESTIC> 2,357,396
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
