-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FkSmvWriUSnaHOAq8t7rAFMVLNS7Hv/oJmOBwhv20xUu1RQWZECwREkaTxtvcIW2 ljEse/pzyDHsfvkJfbDq3Q== 0000946275-96-000430.txt : 19961227 0000946275-96-000430.hdr.sgml : 19961227 ACCESSION NUMBER: 0000946275-96-000430 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961226 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PULSE BANCORP INC CENTRAL INDEX KEY: 0000857559 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 223016360 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18764 FILM NUMBER: 96686428 BUSINESS ADDRESS: STREET 1: 6 JACKSON ST CITY: SOUTH RIVER STATE: NJ ZIP: 08882 BUSINESS PHONE: 9082572400 MAIL ADDRESS: STREET 1: PO BOX 193 CITY: SOUTH RIVER STATE: NJ ZIP: 08882 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended September 30, 1996 ---------------------------------- - or - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |_| EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________________ to __________________ SEC File Number: 0-18764 ------- PULSE BANCORP, INC. ------------------------------------------------------ (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: (908) 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 Nasdaq National Market System on December 5, 1996 was $48,038,256. As of December 5, 1996, the Registrant had outstanding 3,050,048 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Parts II and IV -- Portions of the Registrant's 1996 Annual Report to Stockholders. 2. Part III -- Portions of the Registrant's 1997 Proxy Statement. PART I Item 1. Business - ------------------ Pulse Bancorp, Inc. (the "Registrant" or the "Corporation") is a savings and loan 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, 1996, the assets of the Corporation consisted of all of the issued and outstanding shares of the Bank's Common Stock, $1.0 million in loans receivable from the Bank and $1.6 million representing the potential recovery from litigation in connection with certain fraudulent bridge loans. See "Item 3. Legal Proceedings." 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, 1996, the Bank had total assets, deposits and stockholders' equity of approximately $501.0 million, $394.7 million, and $35.9 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 four offices located in South River, South Amboy, Monroe Township, and Lawrenceville, New Jersey. The Bank's executive offices are located at 6 Jackson Street, South River, New Jersey, and its telephone number is (908) 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 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, 1996, 83.0% 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 represented 17.0% of the Bank's gross loan portfolio at September 30, 1996. To a lesser extent, the Bank also originates consumer loans not secured by real estate. 3 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.
At September 30, ---------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 ------------------ ----------------- ----------------- ---------------- --------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Type of Loan: Conventional Real Estate Loans: Construction Loans .............. $ 197 0.1% $ -- --% $ -- --% $ 280 0.1% $ 363 0.1% Loans on existing property....... 184,281 52.9 160,136 44.2 124,510 38.7 119,512 3.86 117,744 34.7 Insured or guaranteed real estate loans ........................ 12,313 3.5 10,393 2.9 7,975 2.5 7,080 2.3 5,838 1.7 Mortgage-backed securites........ 95,088 27.4 146,336 40.4 142,385 44.2 138,986 44.9 169,077 49.9 Collateralized mortgage.......... 50,912 14.6 39,969 11.1 39,581 12.3 35,941 11.6 34,934 10.3 obligations Consumer Loans: Home equity ..................... 8,307 2.4 10,076 2.8 10,870 3.4 10,397 3.4 13,544 4.0 Student loans ................... 86 --.- 57 --.- 101 --.- 7 --.- -- --.- Savings account loans ........... 735 0.2 514 0.1 319 0.1 288 0.1 184 0.1 Commercial loans ................ 946 0.3 --.- -- -- --.- -- --.- -- -- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 352,865 101.4 367,481 101.5 325,741 101.2 312,491 101.0 341,684 100.8 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Add: Premiums on mortgage-backed securities ................... 611 0.2 525 0.1 450 0.1 402 0.1 689 0.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Less: Loans in process ................ 69 --.- -- --.- -- --.- 187 --.- 238 0.1 Unearned discounts on loans and mortgage-backed securities and deferred loan fees ............ 1,469 0.4 1,375 0.4 847 0.3 856 0.3 781 0.2 Allowance for loan losses........ 4,200 1.2 4,487 1.2 3,369 1.0 2,604 0.8 2,459 0.7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 5,738 1.6 5,862 1.6 4,216 1.3 3,647 1.1 3,478 1.0 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total ..................... $347,738 100.0% $362,144 $321,975 100.0% 100.0% $309,246 100.0% $338,895 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Type of Security: Residential: 1 to 4 family ................... $ 92,504 26.6% $ 82,162 22.7% $ 60,662 18.9% $ 61,800 20.0% $ 73,578 21.7% Other dwelling units ............ 46,205 13.3 42,341 11.7 37,286 11.6 32,923 10.6 28,190 8.3 Commercial or industrial......... 54,076 15.5 45,709 12.6 37,432 11.6 35,466 11.5 29,883 8.8 properties Savings accounts ................ 735 0.2 514 0.1 319 0.1 288 0.1 184 0.1 Commercial non-mortgage loans.... 946 0.3 -- --.- -- --.- -- --.- -- --.- ollateralized mortgage.......... 50,912 14.6 39,969 11.1 39,581 12.3 35,941 11.6 34,934 10.3 obligations Insured by State or Federal Agencies: FHA/VA .......................... 12,313 3.5 10,393 2.9 7,975 2.5 7,080 2.3 5,838 1.7 Mortgage-backed securities....... 95,088 27.4 146,336 40.4 142,385 44.2 138,986 44.9 169,077 49.9 Student loans ................... 86 --.- 57 --.- 101 --.- 7 --.- -- --.- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 352,865 101.4 367,481 101.5 325,741 101.2 312,491 101.0 341,684 100.8 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Add: Premiums ...................... 611 0.2 525 0.1 450 0.1 402 0.1 689 0.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Less: Loans in process ................ 69 --.- -- --.- -- --.- 187 --.- 238 0.1 Unearned discounts on loans and mortgage-backed securities and deferred loan fees ............ 1,469 0.4 1,375 0.4 847 0.3 856 0.3 781 0.2 Allowance for loan losses........ 4,200 1.2 4,487 1.2 3,369 1.0 2,604 0.8 2,459 0.7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 5,738 1.6 5,862 1.6 4,216 1.3 3,647 1.1 3,478 1.0 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total ..................... $347,738 100.0% $362,144 100.0% $321,975 100.0% $309,246 100.0% $338,895 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
4 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, 1996, mortgage-backed securities, consisting of GNMA, FHLMC, FNMA and CMOs amounted to approximately $204.3 million or 60.3% 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, 1996 totaled $36.4 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, 1996 did not include any residual interests in CMOs. Further, at September 30, 1996, 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, 1996, approximately 83.0% 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 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 and three 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, health care facilities, mini-storage facilities, and industrial buildings amounted to $30.0 million or 8.8% of the Bank's gross loan and mortgage-backed securities portfolio at September 30, 1996. 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 Consumer Loans. The Bank presently originates loans secured by savings accounts and home equity loans. Consumer loans, including home equity loans, amounted to 4.1% of the Bank's total gross loan and mortgage-backed securities portfolio at September 30, 1996. Commercial Business Loans. The Bank generally does not offer commercial business loans. At September 30, 1996, 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, 1996, 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.
One year One to Three to Five to Over Ten or less Three Years Five Years Ten Years Years Total -------- ----------- ---------- --------- -------- ----- (Dollars in Thousands) Real estate mortgage(1).......... $ 25,578 $ 19,865 $ 6,378 $ 11,396 $ 60,490 $123,707 Consumer......................... 198 269 951 2,383 9,927 13,728 Mortgage-backed securities(1)(2.. 1,957 11,047 3,902 12,315 174,790 204,011 -------- -------- -------- -------- -------- -------- Total...................... $ 27,733 $ 31,181 $ 11,231 $ 26,094 $245,207 $341,446 ======== ======== ======== ======== ======== ========
- --------------------- Footnotes included in next table. The following table sets forth the dollar amount of all loans due after one year from September 30, 1996, which have predetermined interest rates and have floating or adjustable interest rates, based on contractual terms. Floating or Predetermined Rates Adjustable Rates ------------------- ---------------- (Dollars in Thousands) Real estate mortgage(1)........... $75,870 $22,259 Consumer(1)....................... 5,965 7,565 Mortgage-backed securities(1)(2).. 71,283 130,771 ------ ------- Total....................... $153,118 $160,595 ======= ======= (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. 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 7 and then submitted to the Bank's President for his approval. All 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. Since 1990, the Bank has not actively purchased loans in the secondary market, rather if deposits exceed loan demand, the Bank has invested primarily in mortgage-backed securities. 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. The total amount of the Bank's commitments to originate loans at September 30, 1996 was $3.1 million of which $2.5 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, 1996, the Bank had outstanding commitments on approved lines of credit of $11.0 million. Loan Origination and Other Fees. In addition to interest earned on loans, the Bank receives loan origination fees or "points" and commitment fees for originating or purchasing loans. Statement of Financial Accounting Standards No. 91 ("SFAS No. 91"), dated December 1986, which prescribes the GAAP 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 The Bank's loan origination fees generally are 0% - 1.0% on conventional residential mortgage loans and 1%-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, 1996, was $429,000. 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, 1996, the Bank had classified approximately $12.1 million in assets, of which $9.9 million were loans ($369,000 classified as special mention and $9.5 million classified as substandard) and $2.2 million was real estate acquired as a result of foreclosure. Of the $9.9 million in loans classified by the Bank, approximately $8.9 million included loans internally classified but which were not delinquent greater than 90 days at September 30, 1996 ("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
At September 30, -------------------------------------------------------- 1992 1993 1994 1995 1996 ------ ------ ------ ------ ----- Loans Accounted For On a Non-Accrual Basis: One- to four-family real estate $ 749 $ 443 $ 212 $ 211 $ 345 Multi-family real estate... -- -- 779 1,253 654 Commercial real estate..... 5,125 2,566 464 464 -- ----- ----- ------ ------- ------- Total.................... 5,874 3,009 1,455 1,928 999 ----- ----- ------ ------- ------- Restructured Loans........... 1,121 3,121 4,200 4,167 2,135 ----- ----- ------ ------- ------- Accruing Loans That Are Contractually More than 90 Days Delinquent: One- to four-family real estate 1,950 1,479 1,091 1,355 835 Other...................... 5 -- -- -- -- ----- ----- ----- ------ ----- Total................... 1,955 1,479 1,091 1,355 835 ----- ----- ----- ------ ----- Total of non-accrual, restructured, and more than 90 days delinquent and accruing loans......... $8,950 $7,609 $6,746 $ 7,450 $3,969 ===== ===== ===== ====== ===== Percentage of total loan and mortgage-backed securities portfolio.................. 2.54% 2.07% 2.07% 2.38% 1.16% ==== ==== ===== ===== ======
For the year ended September 30, 1996, 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 $325,000. The amount that the Bank included in interest income on such loans for the year ended September 30, 1996, was $154,000. At September 30, 1996, the Bank had loans with an aggregate principal balance of $9.5 million classified as substandard ($3.95 million of such loans were non-performing or restructured at September 30, 1996). The following is a description of the larger non-performing or restructured loans as of September 30, 1996. Additional allowances for losses may be required for one or more of these loans. 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 to 6.75% and an extension of its maturity to May 1, 1999. The loan has performed in accordance with its restructured terms and had a remaining balance of $2.1 million at September 30, 1996. 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 $653,992 balance, is in foreclosure proceedings and is being operated by a court appointed rent receiver. 10 The remainder of the non-performing loans consists of smaller balance loans aggregating $1.2 million which are secured by 1-to 4-family residential property. The Bank's other substandard assets at September 30, 1996, consisted of $2.2 million of real estate owned. The major properties included in real estate owned are as follow: Bellows was a loan made in 1988 secured by a 3 story commercial/residential mixed use property located in Princeton, New Jersey which was acquired as real estate owned in 1994. The property had a carrying value of $1.1 million at September 30, 1996 and was appraised as of May 17, 1994, with a value of $1.4 million. This property was sold after the end of the 1996 fiscal year. The Bank recorded a gain on sale of $73,000. Rivco Equities was a loan purchased in 1986, secured by a three story office building located in Hackensack, New Jersey which was acquired as real estate owned in 1994. The property had a carrying value of $514,000 as of September 30, 1996 and was appraised as of August 1994, with a value of $812,000. This property is currently under contract of sale. However, there can be no assurance the sale will take place. 640 Lincoln Associates was a loan purchased in 1986 to finance the purchase of a 29 unit, 3 story apartment building located in Morrisville, Pennsylvania which was acquired as real estate owned in 1995. The property had a carrying value of $392,000 as of September 30, 1996. This property is currently under contract of sale. However, there can be no assurances the sale will take place. Four other properties with an aggregate carrying value of $312,000 are included in 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. Management believes that it is reasonable to provide for unanticipated losses. 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 protect against unanticipated losses. 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, 1996, non-performing and restructured loans totaled $3.95 million. Management believes the allowance for loan losses is established at a level adequate to provide for potential credit losses in accordance with GAAP at September 30, 1996. 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 The following table sets forth an analysis of the Bank's allowance for loan losses.
Year Ended September 30, -------------------------------------------------------- 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- (Dollars in Thousands) Balance at beginning of period. $2,822 $4,200 $ 4,487 $3,369 $2,604 ----- ----- ------ ----- ----- Provision charged to operations 2,500 2,101 2,650 -- -- ----- ----- ------ ------- ------ Charge-Offs: Residential real estate........ (1,122) (1,814) (3,673)(A) (765) (145) Commercial real estate......... -- -- (95) -- -- -------- -------- -------- ------ ------ (1,122) (1,817) (3,768) (765) (145) ------ ------ ------ ------ ----- Balance at end of period....... $ 4,200 $ 4,487 $ 3,369 $ 2,604 $2,459 ====== ====== ====== ====== ===== Percentage of net charge-offs during the period to average loans outstanding during the period. .52% .92% 2.26% .05% .10% === === ==== === === Percentage of allowance for loan losses to gross loans outstanding at period end.................... 2.03% 2.48% 2.34% 1.90% 1.78% ==== ==== ==== ==== ==== Percentage of allowance for loan losses to non-performing and restructured loans............ 46.9% 59.0% 49.9% 35.0% 62.3% ==== ==== ==== ==== ====
- ------------------------ (A) Includes $3,657,000 related to fraudulent bridge loans. See further discussions related to bridge loan charge-offs in "Item 3. Legal Proceedings." 12 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.
At September 30, ------------------------------------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 --------------------- --------------------- --------------------- ---------------------- -------------------- 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: 1 to 4 family(1). $ 694 50.7% $ 822 51.1% $ 684 47.7% $ 225 48.9% $ 394 57.6% Multifamily...... 1,333 22.3 1,380 23.4 1,119 26.0 786 24.5 698 20.5 Commercial....... 2,163 26.1 2,285 25.2 1,566 26.0 1,593 26.4 1,367 21.7 Commercial......... 10 0.5 -- -- -- -- -- -- -- -- Consumer........... -- 0.4 -- 0.3 -- 0.3 -- 0.2 -- 0.2 ------ ----- ------ ----- ------ ----- ----- ------ ------ ------ $4,200 100.0% $4,487 100.0% $3,369 100.0% $2,604 100.0% $2,459 100.0% ===== ===== ===== ===== ===== ===== ====== ===== ===== =====
- ----------------------- (1) Includes home equity lines of credit. 13 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.
At September 30, ----------------------------------------------------------------- 1994 1995 1996 ------------------ ------------------ --------------------- Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value --------- ------ --------- ------- --------- ---------- (In Thousands) U.S. Government, including agencies............... $87,317 $81,160 $113,781 $112,271 $144,004 $141,625 States and political subdivisions thereof... 600 596 600 614 600 622 ------ ------ ------- ------- ------- ------- $87,917 $81,756 $114,381 $112,885 $144,604 $142,247 ====== ====== ======= ======= ======= =======
The following table is a summary of scheduled investment maturities and weighted average yields at September 30, 1996.
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) U.S. Government, including agencies.... $ -- --% $45,593 6.15% $92,411 6.93% $6,000 7.62% $144,004 6.71% States and political subdivisions thereof.. 3 5.50 -- -- -- -- 597 6.42 600 6.42 ----- ----- ------- ------ ------ ------ ------ ---- -------- ---- $ 3 5.50% $45,593 6.15% $92,411 6.93% $6,597 7.51% $144,604 6.71% ====== ====== ====== ===== ======= ====
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 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, 1996, such certificates represented approximately 62.4% 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, 1996. Certificate Maturity Period Accounts -------------- (In Thousands) Three months................................... $4,607 Over three through six months.................. 4,418 Over six through twelve months................. 3,591 Over twelve months............................. 2,706 ------- $15,322 ======= 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 837,080 shares of common stock of the Corporation. The Bank had advances or borrowings of $64.3 million outstanding at September 30, 1996. 15 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 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.
1994 1995 1996 ---------------------------- -------------------------- --------------------------- Yield/ Yield/ Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ------ ------- -------- ------ ------- -------- ------ (Dollars In Thousands) Loans(1)...................... $166,934 $14,691 8.80% $138,049 $12,404 8.98% $135,905 $11,861 8.73% Mortgage-backed securities.... 183,468 10,530 5.74 181,058 11,113 6.13 190,069 12,269 6.46 Investments and other interest- earning assets(2)............ 84,108 5,127 6.10 113,801 7,222 6.34 133,309 8,603 6.45 ------- ------ ------- ------ ------- ------- Total interest-earning assets 434,510 30,348 6.98 432,908 30,739 7.10 459,283 32,733 7.13 ------ ------ ------- Non-interest-earning assets..... 11,093 15,064 11,699 ------- ------- ------ Total assets................... $445,603 $447,972 $470,982 ======= ======= ======= Interest-Bearing Liabilities: Savings and interest-bearing demand....................... 175,334 5,082 2.90 160,146 5,349 3.34 $146,865 4,477 3.04 Time.......................... 216,988 8,698 4.01 231,324 11,881 5.13 245,488 13,330 5.43 ------- ------ ------- ------ ------- -------- Total interest-bearing deposits................... 392,322 13,780 3.51 391,470 17,230 4.40 392,353 17,807 4.53 Securities sold under repurchase agreements.................. -- -- --.- -- -- --.- 22,951 1,326 5.77 -------- ------ ------- ------ -------- ------- Total interest-bearing liabilities................ 392,322 13,780 3.51 391,470 17,230 4.40 415,304 19,133 4.60 ------ ------ ------ Non-interest-bearing liabilities: Demand deposits............... 3,020 3,629 3,719 Other......................... 1,610 1,699 2,231 ------- ------- -------- Total liabilities........... 396,952 396,798 421,254 Stockholders' equity............ 48,651 51,174 49,728 ------- ------- -------- Total liabilities and stockhoders' equity........ $445,603 $447,972 $470,982 ======= ======= ======= Net interest income/interest rate spread.................. $16,568 3.47% $13,509 2.70% $13,600 2.53% ====== ==== ====== ===== ====== ==== Net interest-earning assets/net yield on interest-earning assets........................ $ 42,188 3.81% $41,438 3.12% $ 43,979 2.96% ======= ==== ====== ===== ====== ==== Ratio of average interest-earning assets to average interest- bearing liabilities........... 1.11X 1.11X 1.11X ====== ===== ====
- ---------------------- (1) Includes non-accrual loans. (2) Includes tax-exempt securities. Income from such securities, which amounted to approximately $44,000, $39,000 and $39,000 during the years ended September 30, 1994, 1995 and 1996, respectively, is included without adjustment to a tax-equivalent basis. Such adjustments were not made due to their immateriality. 17 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, 1996, 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.
Matures or Reprices ------------------------------------------------------------------- Over One Over Five One Year Through Through Over Ten or Less Five Years Ten Years Years Total ----------- ------------- --------- --------- ----- (Dollars in Thousands) Interest-Earning Assets: Loans(2)....................... $ 48,717 $30,684 $10,491 $ 47,115 $ 137,00 Mortgage-backed securities (2). 130,799 13,840 12,337 47,371 204,347 Investments.................... 3 45,593 92,411 6,597 144,604 Other interest-earning assets(1) 3,043 -- -- -- 3,043 ------- ------ -------- ------- ------- Total........................ 182,562 90,117 115,239 101,083 489,001 ------- ------ -------- ------- ------- Interest-bearing liabilities: Savings and interest-bearing demand deposits............ 26,723 66,698 34,635 20,406 148,462 Time deposits................ 206,483 39,636 -- -- 246,119 Securities sold under repurchase agreements................ 50,475 13,800 -- -- 64,275 ------ ------ ------- ------- ------- Total.................... 283,681 120,134 34,635 20,406 458,856 ------- ------- ------ ------ ------- Interest sensitivity gap..... (101,119) (30,017) 80,604 80,677 Cumulative interest sensitivity (101,119) (131,136) (50,532) 30,145 Ratio of gap to total assets. (20.12)% (5.97)% 16.04% 16.05% Ratio of cumulative gap to total (20.12)% (26.09)% (10.05)% 6.00%
- ------------------------------- (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 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).
1994 vs. 1995 1995 vs. 1996 Due to Due to -------------------------------------- ---------------------------------------- Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total ------ ---- ------ ----- ------ ---- ------ ----- (In Thousands) Interest Income: Loans ...................................... $(2,536) $ 300 $ (52) $(2,288) $ (196) $ (352) $ 5 $ (543) Mortgage-backed securities ................. (142) 734 (9) 583 550 577 29 1,156 Investments and other interest-bearing assets .................................. 1,821 203 71 2,095 1,235 125 21 1,381 ------- ------- ------- ------- ------- ------- ------- ------- Total interest-earning assets ........... (857) 1,237 10 391 1,589 350 55 1,994 ------- ------- ------- ------- ------- ------- ------- ------- Interest Expense: Savings and interest-bearing demand deposits ............................... (444) 778 (67) 267 (438) (474) 40 (872) Time deposits ............................ 578 2,444 161 3,183 719 687 42 1,449 Securities sold under repurchase agreements* ............................. -- -- -- -- 1,326 -- -- 1,326 ------- ------- ------- ------- ------- ------- ------- ------- Total interest-bearings liabilities...... 134 3,222 94 3,450 1,607 213 82 1,903 ------- ------- ------- ------- ------- ------- ------- ------- Net change in net interest-income........... $ (991) $(1,985) $ (84) $(3,059) $ (18) $ 137 $ (27) $ 91 ======= ======= ======= ======= ======= ======= ======= =======
- -------------------------- * Change in volume and change in rate cannot be determined as the balance of securities sold under repurchase agreements at September 30, 1995 was zero and the balance at September 30, 1996 was $64,275,000. The average balance and average rate of borrowings at September 30, 1995 was zero and at September 30, 1996 was $22,951,000 and 5.77%, respectively. 19 Personnel - --------- As of September 30, 1996, the Bank had 49 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 23rd largest thrift institution in the State of New Jersey as of September 30, 1996. 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. Regulation - ---------- General. The Corporation owns all of the capital stock of the Bank and is a savings and loan holding company. As a savings and loan 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 20 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 FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. The risk-related assessment program provided a transition period between the prior flat-rate system and the final risk- related system that took effect on January 1, 1994, in accordance with the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). This risk classification is based on an institution's capital group and supervisory subgroup assignment. On September 30, 1996, H.R. 1362 was signed into law by the President. Title II of H.R. 1362 is titled the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"). Among its many provisions, the Act provides for resolving the BIF/SAIF premium disparity. Currently, most insured depository institutions holding BIF-assessable deposits pay the statutory minimum of $2,000 for deposit insurance on these deposits while most insured depository institutions with SAIF-assessable deposits pay 23 basis points per $100 of these deposits for deposit insurance. The Bank currently pays an insurance premium to the FDIC equal to 0.23% of its total deposits. The BIF/SAIF legislation provides for a one-time assessment to recapitalize the SAIF. The assessment will be based on the amount of SAIF-assessable deposits held by an institution as of March 31, 1995 (with certain exceptions). The assessment is effective on September 30, 1996 and is payable on November 27, 1996. The BIF/SAIF legislation does not specify an actual assessment but states that the total assessment will be equal to the amount necessary to recapitalize the SAIF as of October 1, 1996. A recent report of the America's Community Bankers estimated the assessment at approximately 65.7 basis points per $100 of SAIF-assessable deposits as of March 31, 1995. The BIF/SAIF legislation provides that the amount of the special assessment is deductible under section 162 of the Internal Revenue Code (the "Code") in the year in which the assessment is paid. The BIF/SAIF legislation also provides that section 172(f) of the Code will not apply to deductions taken under section 162 of the Code for the special assessment. The Bank has estimated the amount of the assessment to be approximately $2.7 million before tax benefit and such amount was accrued on September 30, 1996. 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 21 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, 1996. 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, 22 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, 1996, the Bank had $2.5 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, 1996, 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, 1996. 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 23 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. Federal Securities Law. The Corporation is subject to filing and reporting requirements by virtue of having its common stock registered under the Securities Exchange Act of 1934. Furthermore, company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Corporation may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Corporation meets specified current public information requirements, each affiliate of the Corporation is able to sell in the public market, without registration, a limited number of shares in any three-month period. Executive Officers of the Company - --------------------------------- The executive officers of the Corporation as of September 30, 1996, were as follows: Name Age Position - -------------------------------------------------------------------- Benjamin S. Konopacki...........74 Chairman of the Board George T. Hornyak, Jr...........46 President and Chief Executive Officer Ronald E. Vaughn, Jr............40 Senior Vice President-Chief Lending Officer Thomas Konopacki................39 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, 1996, 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 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. 24 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 owns the three full-service branch offices that it operates. 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. 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. During the fiscal year ended September 30, 1995, the Bank received a settlement of $2.6 million from its surety bond claim regarding the bridge loans, and $275,000 received upon the sale of a personal residence, which was part of the estate of the responsible party, and charged-off amounts totaling $202,000 to reduce the receivable to $1.7 million, which is included in other assets in the consolidated statements of financial condition. During the fiscal year ended September 30, 1996, approximately $100,000 was collected from the estate and through the settlement of a lawsuit. The receivable at September 30, 1996 was reduced to $1.6 million, its estimated realizable value. To the extent the Corporation is unable to collect on the pending litigation, the Corporation may have to charge-off additional amounts in future periods. Management believes the remaining balance is collectable through the malpractice insurance policy relevant to the attorney responsible for the fraud. The Bank has filed claims under the malpractice insurance coverage available in order to recover all unpaid amounts. A trial date of January 13, 1997 has been established for this litigation. 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, 1996. 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, 1996 (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. 25 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 - -------------------- The Corporation discontinued the engagement of Stephen P. Radics & Co. ("Radics"), its independent auditors, and notified Radics of its action on November 30, 1994. The Corporation's Board of Directors engaged KPMG Peat Marwick LLP as the Corporation's auditors for the year ended September 30, 1995. The determination to replace Radics was recommended by the audit committee and approved by the full Board of Directors of the Corporation. The report of Radics for the fiscal years ended September 30, 1993 and 1994 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During the fiscal years ended September 30, 1993 and 1994 and during the period from September 30, 1994 to November 30, 1994, there were no disagreements between the Corporation and Radics concerning accounting principles or practices, financial statement disclosure, or auditing scope or procedure. 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 1997 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 Informaton 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. 26 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 Statements, 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' Report1 2. Pulse Bancorp, Inc. (a) Consolidated Statements of Financial Condition at September 30, 1996 and 1995 (b) Consolidated Statements of Income for each of the years in the three-year period ended September 30, 1996 (c) Consolidated Statements of Changes in Stockholders' Equity fo each of the years in the three-year period ended September 30, 1996 (d) Consolidated Statements of Cash Flows for each of the years in the three-year period ended September 30, 1996 (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 Incorporation2 3(ii) Bylaws3 10.1 Employment Agreement with Benjamin S. Konopacki4 - -------------------- 1 In accordance with Rule 2-05 of Regulation S-X and Note 1 to Rule 14a-3(b)(1) of the proxy rules of the SEC, the independent auditors' report of Radics & Co., Inc. LLC is filed as Exhibit 99. 2 Incorporated by reference to the Registrant's Registration Statement on Form S-4 (33-23154) declared effective by the Commission on December 7, 1989. 3 Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. 4 Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. 27 10.2 Employment Agreement with George T. Hornyak, Jr.4 10.3 Employment Agreement with Thomas Konopacki4 10.4 1986 Stock Option and Incentive Plan5 10.5 1993 Stock Option and Incentive Plan6 13 Annual Report to Stockholders for the fiscal year ended September 30, 1996 21 Subsidiaries of the Registrant7 99 Independent Auditors' Report of Radics & Co., LLC (b) No Reports on Form 8-K were filed during the last quarter of the period covered by this report. (c) Exhibits to this Form 10-K are attached or incorporated by referenc as stated above. - ------------------------ 5 Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1989. 6 Incorporated by reference to the Registrant's Proxy Statement dated December 18, 1992 for the 1993 Annual Meeting of Stockholders. 7 Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1994. 28 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 26, 1996 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 Registrat and in the capacities indicated as of December 26, 1996. 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) EX-13 2 EXHIBIT EXHIBIT 13 Annual Report to Stockholders for the fiscal year ended September 30, 1996 - -------------------------------------------------------------------------------- Corporate Description 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 four offices located in South River, South Amboy, Monroe Township and Lawrenceville, New Jersey Table of Contents - -------------------------------------------------------------------------------- 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 Stockholder's Information 36 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Common Stock 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 price as published by the Nasdaq statistical report. HIGH LOW ---- --- First Quarter 12-31-94 14 3/4 12 1/2 Second Quarter 3-31-95 16 3/4 14 Third Quarter 6-30-95 16 14 1/2 Fourth Quarter 9-30-95 17 14 3/4 First Quarter 12-31-95 17 1/2 15 3/4 Second Quarter 3-31-96 17 15 1/2 Third Quarter 6-30-96 18 14 1/2 Fourth Quarter 9-30-96 18 16 7/8 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, 1996, was approximately 885. 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, 1996, there were 3,049,878 shares outstanding. 1 - -------------------------------------------------------------------------------- Consolidated Financial Highlights
At September 30, -------------------------------------------------- 1992 1993 1994 1995 1996 -------------------------------------------------- (In Thousands) Selected Financial Condition and Other Data Assets ............................................ $401,005 $435,177 $447,684 $445,779 $502,500 Loans Receivable, net ............................. 201,555 175,835 139,975 134,277 134,548 Mortgage-backed securities held to maturity ....... 146,183 186,309 182,000 174,969 164,092 Mortgage-backed securities available for sale ..... -- -- -- -- 40,255 Investment securities held to maturity ............ 28,966 49,277 87,917 114,381 105,549 Investment securities available for sale .......... -- -- -- -- 39,055 Real estate owned ................................. 3,375 4,091 3,281 2,628 2,233 Deposits .......................................... 357,890 387,704 396,190 391,038 394,581 Borrowings ........................................ -- -- -- -- 64,275 Stockholders' equity .............................. 40,849 45,310 49,292 52,274 38,459
Year Ended September 30, -------------------------------------------------- 1992 1993 1994 1995 1996 -------------------------------------------------- (In Thousands, Except Per Share Data) Interest income ........................................ $33,605 $31,586 $30,348 $30,739 $32,733 Interest expense ....................................... 18,649 14,492 13,780 17,230 19,133 ------- ------- ------- ------- ------- Net interest income .................................... 14,956 17,094 16,568 13,509 13,600 Provision for loan losses .............................. 2,500 2,101 2,650 -- -- Non-interest income .................................... 111 252 357 294 326 Non-interest expenses .................................. 4,925 5,148 5,003 5,643 8,474 Income taxes ........................................... 2,713 3,634 3,254 2,895 1,959 ------- ------- ------- ------- ------- Net income ........................................... $ 4,929 $ 6,463 $ 6,018 $ 5,265 $ 3,493 ======= ======= ======= ======= ======= Net income per share ................................... $ 1.32 $ 1.70 $ 1.55 $ 1.34 $ 0.94 ======= ======= ======= ======= ======= Dividends per share .................................... $ 0.50 $ 0.65 $ 0.60 $ 0.70 $ 0.70 ======= ======= ======= ======= =======
At or For Year Ended September 30, ------------------------------------------ 1992 1993 1994 1995 1996 ------------------------------------------ Selected financial ratios: Return on average assets ................. 1.23% 1.53% 1.35% 1.18% 0.74% Return on average equity ................. 12.55% 14.87% 12.37% 10.29% 7.02% Dividend payout ratio .................... 36.90% 37.29% 37.68% 51.20% 69.38% Stockholders' equity/total assets ........ 10.19% 10.41% 11.01% 11.72% 7.65% Non-performing loans/total assets ........ 1.95% 1.03% 0.57% 0.73% 0.36% Real estate owned/total assets ........... 0.84% 0.94% 0.73% 0.58% 0.44% Allowance for loan losses/loans receivable 2.08% 2.55% 2.40% 1.93% 1.82%
_____________________ (1) Includes a pre-tax charge of approximately $2.7 million as a result of the FDIC's one-time special insurance assessment. See Note 15. 2 - -------------------------------------------------------------------------------- REPORT TO STOCKHOLDERS We are pleased to report that two extremely important pieces of Federal legislation were adopted by Congress during our fiscal year. This legislation is obviously of great importance to thrift institutions and it could significantly impact the franchise value of Pulse Bancorp, Inc. (the "Corporation"). First, as a result of the enactment of the Small Business Act, Pulse Savings Bank (the "Bank") would be able to change to a commercial bank charter and diversify its lending without having to recapture any of the pre- 1988 bad debt reserve accumulations. Essentially, the bad debt reserve was a tax incentive that allowed thrift institutions to set up reserves with tax free dollars to offset future loan losses. All reserves set aside since 1988 must be recaptured, however, these amounts are insignificant to the Bank. Secondly, President Clinton signed into law the Deposit Insurance Funds Act of 1996 (DIFA) on September 30, 1996. This act included provisions which would fully capitalize the Savings Association Insurance Fund (SAIF), reallocate payment of the annual Financing Corporation (FICO) bond obligation and provide for the eventual merger of the SAIF with the Bank Insurance Fund (BIF). As a result of DIFA, the Bank was required to pay a one-time special assessment on deposits held as of March 31, 1995 which equaled 65.7 basis points per $100 of deposits. Effective January 1, 1997, the FDIC insurance premium for the Bank will be reduced significantly. The financial results for the fiscal year ended September 30, 1996 were impacted by the one-time SAIF assessment. Net income for the fiscal year ended September 30, 1996 was reported at $3,493,000 or $.94 per share compared with $5,265,000 or $1.34 per share for the fiscal year ended September 30, 1995. The 1996 fiscal year reflects an after tax charge of approximately $1,750,000 for the special assessment by the Savings Association Insurance Fund. A major accomplishment during the 1996 fiscal year was the successful completion of the "Modified Dutch Auction". In June 1996, the stockholders of the Corporation tendered approximately 837,000 shares of common stock in the auction. This reduced the stockholders' equity to approximately $38.5 million at September 30, 1996. The main purpose of the auction was to improve the Corporation's return on average equity by reducing its overcapitalized condition. This auction was very well received by our stockholders and the investment community. In conjunction with the Modified Dutch Auction, another accomplishment of the Corporation was the development and adoption of a plan to leverage its existing capital by increasing its lending and investment activity. The development of this growth strategy, through the use of borrowed funds, has afforded the Corporation the potential for increased earnings per share. This strategy has also contributed to the growth of the assets during the 1996 fiscal year. The Bank's focus during the 1996 fiscal year was the development of core deposit relationships. This strategy involved increasing the retail and commercial checking accounts. In order to attract these accounts, the Bank was successful in implementing the "MAC" card program and offering phone banking services to customers. Additionally, the Bank also instituted a credit card program for new and existing customers. The development of these new services has assisted the Bank in its retention and solicitation of core deposits. On the loan side, the Bank accelerated its first mortgage and home equity loan production by offering highly competitive rates. The Bank will continue to undertake aggressive strategies to attract quality loan business. In conjunction with lending, management of the Bank has worked diligently to decrease non-performing loans and real estate owned. At the end of the 1996 fiscal year, the non-performing loans were $1,834,000 compared with $3,283,000 at the previous fiscal year. The real estate owned was reported at $2,233,000 at the end of the fiscal year compared with $2,628,000 the previous year. We will continue to work diligently to keep these non-performing loans and real estate owned balances at low levels. Additionally, the allowance for loan losses at the end of the fiscal year was $2,459,000. In assessing the accomplishments and strategies the Corporation has employed, we would like to portray to our stockholders and customers that we will continue to operate this Corporation as a small community bank with the goal of safeguarding your best interest. Amid the changes taking place in the banking industry throughout the state and the country, the Board of Directors and management are committed to the enhancement of shareholder value. As we approach a new era in the financial services industry, we would like to express our gratitude to our loyal stockholders who have supported us throughout the years. As a result of the invaluable contributions of the Board of Directors and the dedication of the employees, we are able to look at the future with optimism. 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 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 (formerly Pulawski Savings Bank prior to a change in name effective January 14, 1994), 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, 1996 totaled $502.5 million, which represents an increase of $56.7 million or 12.7% when compared with $445.8 million at September 30, 1995. Investment securities held to maturity totaled $105.5 million and $114.4 million at September 30, 1996 and 1995, respectively, which represents a decrease of $8.9 million or 7.7%. The decrease in investment securities is primarily due to the transfer of $29.8 million to investments available for sale in December 1995, pursuant to 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" (Special Report), along with calls and maturities of $55.0 million, which more than offset the purchase of investment securities issued by the U.S. Government or its agencies totaling $75.9 million. Mortgage-backed securities held to maturity totaled $164.1 million and $175.0 million at September 30, 1996 and 1995, respectively, which represents a decrease of $10.9 million or 6.2%. The decrease in mortgage-backed securities was primarily due to the transfer of $29.0 million to investments available for sale in December 1995, pursuant to the Special Report, along with principal repayments of $22.6 million, which more than offset purchases totaling $40.6 million. Loans receivable amounted to $134.6 million and $134.3 million at September 30, 1996 and 1995 respectively, which represents an increase of $0.3 million or 0.2%. The increase during the 1996 period in loans receivable is due primarily to loan originations exceeding principal collections of loans by $1.1 million, which offset the transfer of $0.8 million of loans to other real estate owned during the fiscal 1996 period. Other assets increased $0.8 million or 26.1% to $3.7 million at September 30, 1996 compared to $2.9 million at September 30, 1995. The increase was largely due to an increase in the deferred taxes as a result of the FDIC's Special Assessment enacted into law on September 30, 1996, along with the tax effect of the unrealized loss on the Bank's securities available for sale portfolio. During the 1996 period, the Bank did not make a provision for loan losses and transferred loans totaling $0.8 million to real estate owned for properties acquired in settlement of loans. Loan losses charged to the allowance decreased from $765,000 in fiscal 1995 to $145,000 in fiscal 1996. 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, 1996. 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, 1996 increased $3.5 million or 0.9% to $394.6 million when compared with $391.0 million at September 30, 1995. 4 - -------------------------------------------------------------------------------- During the 1996 period the Bank instituted a plan to leverage its capital by increasing its lending and investment activity. This increased activity, along with the Modified Dutch Auction, was financed by increased borrowings obtained from various brokers through securities sold under repurchase agreements. As a result, securities sold under repurchase agreements was $64.3 million at September 30, 1996, compared to $-0- at September 30, 1995. 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 $38.5 million and $52.3 million at September 30, 1996 and 1995, respectively. The decrease of $13.8 million during the 1996 period was a direct result of a Modified Dutch Auction issuer tender offer the Corporation conducted whereby the Corporation was seeking to buy back up to 1,000,000 shares of its common stock. Shareholders were able to specify the price they were willing to tender their shares within a range not less than $16.00 nor greater than $17.75 per share. The Modified Dutch Auction concluded on June 21, 1996 with the Corporation buying back 837,080 shares at $17.75 per share for a total of $15.0 million. The repurchased shares are treated as treasury stock and as a reduction of stockholders'equity. During the years ended September 30, 1996 and 1995, cash dividends of $2.4 million and $2.7 million, respectively, were paid on the Corporation's common stock. At September 30, 1996 and 1995, treasury stock totaled $ 16.7 and $1.7 million, respectively. Results of Operations for the three years ended September 30, 1996 Net Income 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 an increase of $2.7 million in Federal insurance premium expense as a result of the SAIF Special Assessment enacted into law on September 30, 1996. This increase was somewhat offset by a reduction in income tax expense of $0.9 million . Net income decreased to $5.3 million for the year ended September 30, 1995 when compared with $6.0 million for the year ended September 30, 1994, a decrease of $752,000 or 12.5%. The decrease in net income during the 1995 period resulted from increases in interest and non-interest expenses, along with a decrease in non-interest income, which more than offset an increase in interest income and decreases in income tax expense and the provision for loan losses. Interest Income Interest income on loans during the year ended September 30, 1996 decreased $0.5 million 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. Interest income on loans during the year ended September 30, 1995 decreased $2.3 million or 15.6% to $12.4 million when compared to $14.7 million during the same 1994 period. The decrease during the 1995 period resulted from a decrease of $29.0 million in the average balance of loans outstanding which more than offset an increase from 8.80% to 8.98% in the yield earned on the Bank's loan portfolio. The decrease in the average balance of loans receivable during the 1995 period resulted primarily from loan principal collections exceeding loan originations by $9.3 million. During the 1996 period, the Bank took advantage of the limited window of opportunity provided by the Special Report 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 and 1994 periods. Income on securities held to maturity decreased $0.9 million 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 5 - -------------------------------------------------------------------------------- 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 on securities held to maturity increased $2.4 million or 16.1% to $17.6 million during 1995 compared to $15.2 million during the 1994 period. The increase was due to an increase in the average balance of securities held to maturity as a result of purchases of $48.1 million exceeding calls and repayments of $28.7 million. Income from other interest-earning assets 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 modified dutch auction. Interest Expense Interest on deposits increased by $0.6 million 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. During the 1996 period deposit growth and interest credited exceeded deposits withdrawn by $3.5 million. Interest on deposits increased by $3.4 million or 25.0% to $17.2 million during the year ended September 30, 1995 when compared to $13.8 million during the same 1994 period. The increase during the 1995 period was primarily attributable to an increase of .89% in the Bank's cost of deposits from 3.51% to 4.40%, resulting from a shift to higher costing certificates of deposit. The increase in the Bank's cost of deposits reflects an increase in general market interest rates paid on deposits. During the 1995 period, deposits withdrawn exceeded deposit growth and interest credited by $5.2 million. Interest expense on securities sold under repurchase agreements 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 and lending activity. Provision For Loan Losses During the years ended September 30, 1996 and 1995, the Bank did not record any provisions for loan losses. The provisions charged to operations totaled $2.7 million during the year ended September 30, 1994. The allowance for loan losses amounted to $2.5 million and $2.6 million at September 30, 1996 and 1995, respectively. A majority of the provision during the 1994 period resulted from the discovery of fradulent bridge loans. During the years ended September 30, 1996 and 1995, charged-off loans decreased significantly to $145,000 and $765,000, respectively, from $3.8 million in 1994. The decrease was mostly attributable to the $3.7 million in bridge loans the Company charged off in 1994. At September 30, 1996 and 1995, allowance for loan losses as a percentage of loans receivable were 1.82% and 1.93%, 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, 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, 1996 and 1995, the Bank's non-performing loans totaled $1.8 million and $3.3 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 $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 primarily from an 6 - -------------------------------------------------------------------------------- increase in mortgage prepayment charges. Non-interest income decreased to $294,000 during the year ended September 30, 1995 from $357,000 for the same 1994 period. The decrease of $63,000 during the 1995 period resulted primarily from a decrease in fees and service charges of $73,000 resulting primarily from a decrease in mortgage prepayment charges, which more than offset an increase in miscellaneous income of $10,000. Non-Interest Expenses 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 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. Non-interest expenses increased $640,000 or 12.8% during the year ended September 30, 1995 when compared with the same 1994 period. During the year ended September 30, 1995, salaries and employee benefits, equipment, federal insurance premium, loss on foreclosed real estate, and miscellaneous expenses increased by $182,000, $39,000, $15,000, $319,000, and $220,000, respectively, which more than offset decreases in occupancy expense and advertising of $29,000 and $106,000, respectively. The increase in loss on foreclosed real estate in the 1995 period was due to reduced gains on sales of foreclosed real estate of $572,000, which more than offset a decrease in the loss provision of $176,000 and an increase in operational expenses of $77,000. The increase in miscellaneous expense was primarily due to further writedowns regarding the fraudulent bridge loans. 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. Income Taxes Income tax expense totaled $2.0 million, $2.9 million and $3.3 million during the years ended September 30, 1996, 1995 and 1994, respectively. The decrease during the 1996 and 1995 periods was primarily due to a decrease in pre-tax income. 7 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 a 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 FHLB-NY, which provides liquidity to meet lending requirements. Federal funds sold and interest-bearing deposits at September 30, 1996 and 1995 amounted to $0.5 million and $3.9 million, respectively. The Bank's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. These activities are summarized as follows:
Year Ended September 30, --------------------- 1995 1996 ---- ---- (In Thousands) Cash and cash equivalents at beginning of period ............... $ 16,126 $ 8,762 -------- -------- Operating activities: Net income ................................................... 5,265 3,493 Adjustments to reconcile net income to net cash provided by operating activities ....................................... 4,090 1,555 -------- -------- Net cash provided by operating activities ...................... 9,355 5,048 Net cash used in investing activities .......................... (9,208) Net cash provided by (used in)financing activities.............. (7,511) 50,909 -------- -------- Net increase (decrease) in cash and cash equivalents ........... (7,364) (4,012) -------- -------- Cash and cash equivalents at end of period ..................... $ 8,762 $ 4,750 ======== ========
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 purchases of investment and mortgage-backed securities. Net loans amounted to $134.5 million, $134.3 million and $140.0 million at September 30, 1996, 1995 and 1994, respectively. Purchases of investments and mortgage-backed securities held to maturity totaled $116.6 million, 48.1 million, and $91.2 million during the years ended September 30, 1996, 1995, and 1994, respectively. Purchases of investments and mortgage-backed securities available for sale totaled $25.1 million during the year ended September 30, 1996. There were no available for sale purchases during 1995 and 1994. 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 1996 period was from increased borrowings of $64.3 million along with an increase in deposits of $3.5 million. Net cash used in financing activities during the 1995 period resulted from a decrease in deposits outstanding of $5.1 million. During the 1996 period, as previously discussed, the Corporation purchased 837,080 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 8 - -------------------------------------------------------------------------------- to buyback 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, 1996, such outstanding commitments amounted to $3.1 million. Additionally, unused lines of credit, at September 30, 1996 amounted to $11.0 million. Certificates of deposit scheduled to mature in one year or less, at September 30, 1996, totaled $206.5 million. Management believes, based upon its experience and Bank's deposit flow histories, that a significant portion of such deposits will remain with the Bank. The Bank is subject to regulatory capital requirements mandated by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is required to meet minimum regulatory capital requirements, defined by the FDIC as risk-based capital (Tier 1 and Total) and leverage capital. The following table presents the minimum capital requirement ratios, the actual ratios and the excess of actual ratios over the minimum requirements as of September 30, 1996: Requirement Actual Excess ----------- ------ ------ Risk-based capital: Tier 1 ............... 4.00% 23.24% 19.24% Total ................ 8.00% 24.49% 16.49% Leverage capital ....... 4.00% 7.22% 3.22% 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 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Financial Condition
September 30, ------------------------------ ASSETS Note(s) 1995 1996 ------- ----- ---- Cash and due from depository institutions ................................ $ 4,836,510 $ 4,249,883 Federal funds sold ....................................................... 3,925,000 500,000 ------------- ------------- Total cash and cash equivalents ...................................... 8,761,510 4,749,883 Investment securities available for sale ................................. 2 -- 39,054,697 Mortgage-backed securities available for sale ............................ 3 -- 40,255,064 Investment securities held to maturity; estimated fair value of $112,886,000(1995) and $103,192,000(1996) ........................... 2 114,380,553 105,549,457 Mortgage-backed securities held to maturity; estimated fair value of $174,629,000 (1995) and $162,617,000 (1996) ............................ 3 174,969,291 164,091,984 Loans receivable, net .................................................... 4 134,276,842 134,547,804 Real estate owned ........................................................ 2,627,864 2,232,624 Premises and equipment, net .............................................. 5 1,207,162 1,235,135 Federal Home Loan Bank of New York stock, at cost ........................ 2,540,200 2,543,100 Interest receivable ...................................................... 6 4,071,079 4,527,354 Other assets ............................................................. 11 and 14 2,944,797 3,712,747 ------------- ------------- Total assets ......................................................... $ 445,779,298 $ 502,499,849 ============= ============= - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits ................................................................. 7 $ 391,037,843 $ 394,580,611 Securities sold under repurchase agreements............................... 8 -- 64,275,000 Advance payments by borrowers for taxes and insurance .................... 458,356 628,243 Other liabilities ........................................................ 2,009,508 4,557,461 ------------- ------------- Total liabilities .................................................... 393,505,707 464,041,315 ------------- ------------- Commitments and contingencies ............................................ 13 -- -- Stockholders' equity ..................................................... 9, 10, 11 and 12 Common stock; par value $1.00; authorized 10,000,000 shares; 4,077,828 (1995) and 4,111,958 (1996) shares issued and 3,852,828 (1995) and 3,049,878 (1996) shares outstanding ......................... 4,077,828 4,111,958 Paid-in capital in excess of par value ................................... 11,819,769 12,105,541 Retained earnings -- substantially restricted ............................ 38,078,494 39,147,609 Unrealized loss on securities available for sale, net of tax ............. -- (229,074) Treasury stock at cost; 225,000 (1995) and 1,062,080 (1996) common shares, respectively .......................................... (1,702,500) (16,677,500) ------------- ------------- Total stockholders' equity .......................................... 52,273,591 38,458,534 ------------- ------------- Total liabilities and stockholders' equity ........................... $ 445,779,298 $ 502,499,849 ============= =============
See accompanying notes to consolidated financial statements. 10 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Income
Year Ended September 30, ---------------------------------------------- Note(s) 1994 1995 1996 ------- ---- ---- ---- Interest income: Loans ....................................................... $ 14,690,933 $ 12,403,877 $ 11,861,002 Securities available for sale ............................... -- -- 3,277,058 Securities held to maturity ................................. 15,178,018 17,614,211 16,734,714 Other interest-earning assets .............................. 479,422 720,927 860,031 ------------ ------------ ------------ Total interest income .................................... 30,348,373 30,739,015 32,732,805 ------------ ------------ ------------ Interest expense: Deposits ................................................... 7 13,780,250 17,229,807 17,806,866 Securities sold under repurchase agreements ................ -- -- 1,325,972 ------------ ------------ ------------ Total interest expense .................................. 13,780,250 17,229,807 19,132,838 ------------ ------------ ------------ Net interest income .......................................... 16,568,123 13,509,208 13,599,967 Provision for loan losses .................................... 4 2,650,000 -- -- ------------ ------------ ------------ Net interest income after provision for loan losses .......... 13,918,123 13,509,208 13,599,967 ------------ ------------ ------------ Non-interest income: Fees and service charges ................................... 296,391 223,495 257,523 Miscellaneous .............................................. 60,737 70,670 68,199 ------------ ------------ ------------ Total non-interest income ................................ 357,128 294,165 325,722 ------------ ------------ ------------ Non-interest expenses: Salaries and employee benefits ............................. 10 2,247,000 2,429,369 2,465,912 Occupancy expense .......................................... 293,009 263,788 285,267 Equipment .................................................. 497,277 536,064 538,308 Advertising ................................................ 336,265 230,237 283,769 Federal insurance premium .................................. 15 887,630 902,993 3,600,986 Loss (income) from foreclosed real estate, net ............. (287,514) 31,342 300,379 Miscellaneous .............................................. 1,029,982 1,249,597 998,993 ------------ ------------ ------------ Total non-interest expenses .............................. 5,003,649 5,643,390 8,473,614 ------------ ------------ ------------ Income before income taxes ................................... 9,271,602 8,159,983 5,452,075 Income taxes ................................................. 11 3,254,000 2,894,770 1,959,466 ------------ ------------ ------------ Net income ................................................... $ 6,017,602 $ 5,265,213 $ 3,492,609 ============ ============ ============ Net income per common share .................................. 9 and 10 and common stock equivalents ............................... $ 1.55 $ 1.34 $ 0.94 ============ ============ ============ Dividends per common share................................... 9 and 10 $ 0.60 $ 0.70 $ 0.70 ============ ============ ============ Weighted average number of common shares and common stock equivalents outstanding .................................... 9 and 10 3,871,227 3,928,205 3,728,116 ============ ============ ============
See accompanying notes to consolidated financial statements. 11 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Changes in Stockholders' Equity
Paid-in Retained Net Unrealized Capital in Earnings- Loss on Securities Common Excess of Substantially Treasury Available For Sale; Stock Par Value Restricted Stock Net of Tax Total ----- --------- ---------- ----- ---------- ----- Balance -- September 30, 1993 ... $ 1,959,164 $ 12,925,145 $ 31,759,057 $ (1,333,750) $ -- $ 45,309,616 Net income for the year ended September 30, 1994 ............ -- -- 6,017,602 -- -- 6,017,602 Issuance of common stock ........ 74,600 526,425 -- -- -- 601,002 Purchase of treasury stock ...... -- -- -- (368,750) -- (368,750) Stock split ..................... 1,982,364 (1,982,364) -- -- -- -- Cash dividends .................. -- -- (2,267,267) -- -- (2,267,267) ------------ ------------ ------------ ------------ ------------- ------------ 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 .................. -- -- (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 .................. -- -- (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 ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 12 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows
Year Ended September 30, -------------------------------------------- 1994 1995 1996 ---- ---- ---- Cash flows from operating activities: Net income .................................................................... $ 6,017,602 $ 5,265,213 $ 3,492,609 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ................................................................ 161,559 157,945 142,007 Amortization of premiums, discounts and fees, net ........................... (577,172) (149,083) (189,083) Provision for loan losses ................................................... 2,650,000 -- -- Provision for losses on real estate owned ................................... 227,500 52,200 341,500 Gain on sale of real estate owned ........................................... (624,345) (52,208) (62,462) Originations of mortgage loans held for sale ................................ (1,439,114) -- -- Principal repayments on mortgage loans held for sale ........................ 1,543,385 -- -- Increase in interest receivable ............................................. (43,877) (694,447) (456,275) Deferred income tax expense (benefit) ....................................... 816,454 95,258 (805,042) (Increase) decrease in other assets ......................................... (714,400) 4,338,383 37,092 Increase in other liabilities ............................................... 78,055 341,922 2,547,953 ------------ ------------ ------------ Net cash provided by operating activities ................................. 8,095,647 9,355,183 5,048,299 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from calls and maturities of investment securities held to maturity .. 10,188,388 12,560,000 55,000,000 Purchase of investment securities held to maturity ............................ (48,788,125) (39,000,000) (75,932,187) Proceeds from principal repayments of investment securities available for sale. -- -- 4,197,200 Purchase of investment securities available for sale .......................... -- -- (10,000,000) Purchase of mortgage-backed securities held to maturity ....................... (42,401,625) (9,120,219) (40,624,537) Purchase of mortgage-backed securities available for sale ..................... -- -- (15,081,456) Principal repayments on mortgage-backed securities held to maturity ........... 46,737,815 16,139,416 18,198,392 Principal repayments on mortgage-backed securities available for sale ......... -- -- 4,318,741 Proceeds from sale of student loans ........................................... 186,792 90,093 4,454 Net decrease (increase) in loans receivable ................................... 29,186,335 7,907,163 (790,568) Proceeds from sales of and repayments on real estate owned .................... 1,009,664 2,077,524 913,852 Additions to premises and equipment ........................................... (52,909) (31,864) (169,980) Net decrease (increase) in Federal Home Loan Bank of New York stock ........... 357,100 170,100 (2,900) ------------ ------------ ------------ Net cash used in investing activities ..................................... (3,576,565) (9,207,787) (59,968,989) ------------ ------------ ------------ Cash flows from financing activities: Net increase (decrease) in deposits ........................................... 8,486,168 (5,152,525) 3,542,768 Net increase in securities sold under repurchase agreements .................. -- -- 64,275,000 (Decrease) increase in advance payments by borrowers for taxes and insurance.... (40,574) (75,177) 169,887 Issuance of common stock ...................................................... 601,025 412,263 319,902 Purchase of treasury stock .................................................... (368,750) -- (14,975,000) Cash dividends paid ........................................................... (2,267,267) (2,696,111) (2,423,494) ------------ ------------ ------------ Net cash provided by (used in) financing activities ....................... 6,410,602 (7,511,550) 50,909,063 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents ............................ 10,929,684 (7,364,154) (4,011,627) Cash and cash equivalents -- beginning .......................................... 5,195,980 16,125,664 8,761,510 ------------ ------------ ------------ Cash and cash equivalents -- ending ............................................. $16,125,664 $ 8,761,510 $ 4,749,883 =========== ============ =========== Supplemental schedule of noncash investing activities: Transfer of loans held for sale to loans receivable ........................... $ 211,942 $ 3,586,035 $ -- =========== ============ =========== Transfer of fraudulent bridge loans to other assets ........................... $ 4,750,000 $ -- $ -- =========== ============ =========== Transfer of loans receivable to real estate owned ............................. $ 2,431,662 $ 1,424,125 $ 797,650 =========== ============ =========== Loans to facilitate sales of real estate owned ................................ $ 2,628,440 $ -- $ -- =========== ============ =========== 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 .................................................................. $ 3,260,000 $ 1,200,000 $ 2,495,000 =========== ============ =========== Interest ...................................................................... $13,783,902 $ 17,466,043 $18,835,293 =========== ============ ===========
See accompanying notes to consolidated financial statements. 13 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 the Corporation, a savings bank holding company, and its wholly owned subsidiaries, Pulse Savings Bank, Pulse Insurance Services, Pulse Real Estate, 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, the valuation of real estate owned and the carrying amount of the fraud loss receivable (see Note 14). Management believes that the allowance for loan losses is adequate, real estate owned is appropriately valued and the carrying amount of the fraud loss receivable is appropriate. 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. Additionally, while management uses the most currently available information to evaluate the carrying amount of the fraud loss receivable, the collection process is ongoing. Accordingly, the carrying amount of the fraud loss receivable could be reduced as more definitive information becomes available as to the extent of the recovery expected. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses, real estate owned valuations and fraud loss receivable valuation. 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 Bank accounts for its investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities". SFAS 115 addresses the accounting and reporting requirements for investments in equity securities that have readily determinable values and all investments in debt securities. SFAS 115 requires the classification of 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, 1996, 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 Company's ability to hold them to maturity. Such securities are stated at cost, adjusted for unamortized purchase 14 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 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 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 15 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements flows. Income recognition and charge-off policies were not changed as a result of SFAS 114 and SFAS 118. 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. 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. 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 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 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 16 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 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. 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:
September 30, 1995 --------------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value ----- ----- ------ ----- Investment Securities Held To Maturity U.S. Government (including agencies): Within one year .................................... $ 2,000,000 $ 8,125 $ -- $ 2,008,125 After one year but within five years ............... 57,000,000 180,117 352,829 56,827,288 After five years but within ten years .............. 54,780,605 28,073 1,372,711 53,435,967 ------------ ------------ ------------ ------------ 113,780,605 216,315 1,725,540 112,271,380 ------------ ------------ ------------ ------------ Obligations of states and political subdivisions: After one year but within five years ............... 2,500 -- -- 2,500 After ten years .................................... 597,448 17,484 3,040 611,892 ------------ ------------ ------------ ------------ 599,948 17,484 3,040 614,392 ------------ ------------ ------------ ------------ $114,380,553 $ 233,799 $1,728,580 $112,885,772 ============ ============ ============ ============
September 30, 1996 ------------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value ----- ----- ------ ----- 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 ============ ============ ============ ============
There were no sales of investment securities held to maturity and available for sale during the years ended September 30, 1994, 1995 and 1996. 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 17 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 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 at September 30, 1996 and 1995, is as follows (in thousands):
September 30, 1995 --------------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value ----- ----- ------ ----- Mortgage-Backed Securities Held To Maturity Government National Mortgage Association ........ $ 92,090,521 $ 1,311,106 $ 60,891 $ 93,340,736 Federal Home Loan Mortgage Corporation .......... 31,374,816 301,287 275,237 31,400,866 Federal National Mortgage Association ........... 13,559,930 172,909 249,221 13,483,618 Collateralized mortgage obligations ............. 37,944,024 52,535 1,592,850 36,403,709 ------------ ------------ ------------ ------------ $174,969,291 $ 1,837,837 $ 2,178,199 $174,628,929 ============ ============ ============ ============
September 30, 1996 --------------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value ----- ----- ------ ----- 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 ------------ ------------ ------------ ------------ $ 39,848,435 $ 406,629 $ -- $ 40,255,064 ============ ============ ============ ============
There were no sales of mortgage-backed securities held to maturity and available for sale during the years ended September 30, 1994, 1995 and 1996. 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. 18 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 4. LOANS RECEIVABLE, NET A summary of loans receivable is as follows:
September 30, 1995 1996 ---- ---- Real estate mortgage: One-to-four family ........................................................... $ 58,203,379 $ 65,509,636 Multi-family ................................................................. 32,922,376 28,190,149 Commercial ................................................................... 35,466,355 29,882,549 ------------ ------------ 126,592,110 123,582,334 ------------ ------------ Real estate construction ....................................................... 93,334 125,000 ------------ ------------ Consumer: Passbook or certificate ...................................................... 287,604 184,185 Student education guaranteed by the State of New Jersey ...................... 6,864 -- Home equity .................................................................. 10,397,056 13,543,650 ------------ ------------ 10,691,524 13,727,835 ------------ ------------ Total loans .................................................................... 137,376,968 137,435,169 ------------ ------------ Less: Allowance for loan losses ................................................ 2,603,852 2,458,777 Deferred loan fees and discounts ...................................... 496,274 428,588 ------------ ------------ 3,100,126 2,887,365 ------------ ------------ $134,276,842 $134,547,804 ============ ============
Non-accrual and restructured loans were as follows (in thousands):
September 30, --------------------------------------------- 1994 1995 1996 ------------ ------------ ------------ Non-accrual ................................................................. $ 1,455 $ 1,928 $ 999 Restructured ................................................................ 4,200 4,167 2,135 ------------ ------------ ------------ $ 5,655 $ 6,095 $ 3,134 ============ ============ ============
The impact of non-accrual and restructured loans on interest income is as follows (in thousands):
Year Ended September 30, 1994 1995 1996 ---- ---- ---- Interest income if performing in accordance with original terms $655 $622 $325 Interest income actually recorded ............................. 427 349 154 ---- ---- ---- Interest income lost .......................................... $228 $273 $171 ==== ==== ====
SFAS 114 and SFAS 118 were adopted prospectively on October 1, 1995. These statements address the accounting for impaired loans and specify how the allowance for loan losses related to these impaired loans should be determined. The adoption of these statements did not affect the level of the overall allowance or the Bank's operating results. Income recognition and charge-off policies were not changed as a result of these statements. At September 30, 1996, 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 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 was $-0- . An analysis of the allowance for loan losses is as follows: Year Ended September 30, ----------------------------------------- 1994 1995 1996 ---- ---- ---- Balance-beginning .............. $ 4,486,713 $ 3,368,816 $ 2,603,852 Provisions charged to operations 2,650,000 -- -- Losses charged to allowance .... (3,767,897) (764,964) (145,075) ----------- ----------- ----------- Balance-ending ................. $ 3,368,816 $ 2,603,852 $ 2,458,777 =========== =========== =========== 19 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements The activity during the years ended September 30, 1995 and 1996, with respect to loans to directors, officers and associates of such persons is as follows: Balance -- September 30, 1994... 562,200 Loans originated ............... -- Loan principal repayments ...... (15,385) --------- Balance -- September 30, 1995... 546,815 Loans originated ............... -- Loan principal repayments ...... (38,903) --------- Balance -- September 30, 1996... $ 507,912 ========= 5. PREMISES AND EQUIPMENT, NET A summary of premises and equipment is as follows: September 30, ----------------------- 1995 1996 ---- ---- Land ............................ $ 247,037 $ 247,037 Buildings and improvements ...... 1,477,229 1,477,229 Less accumulated depreciation.... 667,186 719,893 ---------- ---------- 810,043 757,336 ---------- ---------- Furnishings and equipment ....... 1,049,242 1,219,222 Less accumulated depreciation.... 899,160 988,460 ---------- ---------- 150,082 230,762 ---------- ---------- $1,207,162 $1,235,135 ========== ========== 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: September 30, ----------------------- 1995 1996 ---- ---- Loans ................................................ $1,115,043 $ 968,493 Mortgage-backed securities held to maturity .......... 1,040,945 968,245 Mortgage-backed securities available for sale ........ -- 216,679 Investment securities held to maturity ............... 1,915,091 1,697,054 Investment securities available for sale ............. -- 676,883 ---------- ---------- $4,071,079 $4,527,354 ========== ========== 20 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 7. DEPOSITS A summary of deposits by type is as follows:
September 30, ----------------------------------------------------- 1995 1996 --------------------- ----------------------- Weighted Weighted Average Average Interest Interest Rate Amount Rate Amount ---- ------ ---- ------ Demand: Non-interest-bearing.... 0.00% $ 3,602,493 0.00% $ 3,941,492 Interest-bearing ....... 3.21% 90,972,960 3.15% 87,091,543 ------------ ------------ 3.09% 94,575,453 3.01% 91,033,035 Savings and club ......... 2.74% 59,629,453 2.73% 57,429,028 Certificates of deposit... 5.45% 236,832,937 5.32% 246,118,548 ------------ ------------ 4.47% $391,037,843 4.41% $394,580,611 ============ ============
Certificates of deposit with balances of $100,000 or more totalled approximately $11,417,000 and $15,322,000 at September 30, 1995 and 1996, respectively. The scheduled maturities of certificates of deposit are as follows: September 30, -------------------- 1995 1996 ---- ---- (In Thousands) One year or less ........... $184,966 $206,483 After one to two years ..... 30,334 28,380 After two to three years.... 15,416 6,925 After three years .......... 6,117 4,331 -------- -------- $236,833 $246,119 ======== ======== A summary of interest expense on deposits is as follows:
Year Ended September 30, --------------------------------------- 1994 1995 1996 ---- ---- ---- Interest-bearing demand ....................... $ 3,341,983 $ 3,499,629 $ 2,854,521 Savings and club .............................. 1,740,418 1,897,746 1,622,457 Certificates of deposit less than $100,000 .... 8,329,060 11,288,140 12,604,742 Certificates of deposit $100,000 or more ...... 368,789 544,292 725,146 ----------- ----------- ----------- $13,780,250 $17,229,807 $17,806,866 =========== =========== ===========
- -------------------------------------------------------------------------------- 8. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements at September 30, 1996 is $64,275,000. Securities underlying these repurchase agreements consisted of agencies and mortgage-backed securities which had a book value of $68,454,000 and a market value of $68,006,000 at September 30, 1996. The obligations to repurchase securities sold are reflected as a liability in the balance sheet. The dollar amount of securities underlying the agreements remains in the asset accounts, although the securities underlying the agreements are delivered to the brokers who arranged the transactions. 21 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements The following table summarizes information regarding securities sold under repurchase agreements: At September 30, 1996 ------------- Weighted average interest rate ....................... 5.79% Maximum amount outstanding at any month-end during the period ................................ $ 64,550 Average amount outstanding during the period ......... $ 22,951 Weighted average interest rate during the period...... 5.77% The scheduled maturities of securities sold under repurchase agreements are as follows:
Carrying Value Estimated (Including Fair accrued interest) Value ----------------- ------------ Agencies: 30 to 90 days $19,019,881 $18,261,558 Over 90 days 20,600,180 20,000,000 ----------- ----------- 39,620,061 38,261,558 ----------- ----------- Mortgage-Backed Securities: 30 to 90 days 19,552,928 19,509,749 Over 90 days 10,255,511 10,234,489 ----------- ----------- 29,808,439 29,744,238 ----------- ----------- Total $69,428,500 $68,005,796 =========== ===========
- -------------------------------------------------------------------------------- 9. STOCKHOLDERS' EQUITY On November 23, 1993, the Board of Directors adopted a stock repurchase program authorizing the repurchase of up to 376,472 shares, approximately 10% of the Corporation's outstanding common stock over a two year period, at a market price prevailing at the time of repurchase. The repurchase program concluded on November 23, 1995 with a total of 25,000 shares repurchased at a price of $14.75 per share. 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 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. 22 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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, 1994, 1995 and 1996 amounted to $163,000, $144,000 and $160,000, respectively. Stock option plan The Bank maintains a stock option plan (the "Plan") for its directors, officers and certain other employees. Options granted under the Plan are exercisable over a period not to exceed ten years. Changes in the number of shares outstanding under the Plan are as follows:
Number Price of Shares Per Share Aggregate --------- --------- --------- Balance, September 30, 1993.... 267,352 $4.000-8.8125 $1,822,861 Granted ..................... 154,000 13.000-13.500 2,026,000 Exercised ................... 97,800 4.000-13.500 601,025 Expired ..................... 5,000 13.000 65,000 ------- --------- Balance, September 30, 1994 318,552 4.000-13.500 3,182,836 Granted ..................... 48,000 14.00 672,000 Exercised ................... 61,700 4.000- 8.625 412,263 ------- --------- Balance, September 30, 1995.... 304,852 6.625-14.000 3,442,573 Granted ..................... 3,136 17.00 53,312 Exercised ................... 34,130 6.625-14.000 319,902 ------- --------- Balance, September 30, 1996.... 273,858 $6.625-17.000 $3,175,983 ======= =========
- -------------------------------------------------------------------------------- 11. INCOME TAXES The bad debt reserve method currently available to thrift institutions is repealed for tax years beginning after 1995. Upon repeal, the Bank is required generally to recapture into income for tax purposes the portion of its bad debt reserve (other than supplemental reserve) that exceeds its base year reserves, approximately $1,950,000. As a result, the Bank may no longer use the percentage of taxable income reserve method. A small thrift (one with $500 million or less in assets) is allowed to use either the specific charge-off method or the "bank" experience method of section 585 to compute its bad debt deduction. The recapture amount resulting from the change in a thrift's method of accounting for its bad debt reserves generally will be taken into income for tax purposes 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 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. 23 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Income tax expense for the years ended September 30, 1994, 1995, and 1996 is made up of the following components: Year Ended September 30, ---------------------------------------- 1994 1995 1996 ---- ---- ---- Current tax expense: Federal ........ $ 2,240,813 $ 2,578,063 $ 2,537,250 State .......... 196,733 221,449 227,258 ----------- ----------- ----------- 2,437,546 2,799,512 2,764,508 Deferred tax expense: Federal ........ 742,887 82,846 (760,740) State .......... 73,567 12,412 (44,302) 816,454 95,258 (805,042) ----------- ----------- ----------- $ 3,254,000 $ 2,894,770 $ 1,959,466 =========== =========== =========== 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, 1994, 1995 and 1996 is as follows:
Year Ended September 30, ----------------------------------------- 1994 1995 1996 ---- ---- ---- Computed "expected" Federal tax expense .... $ 3,152,345 $ 2,774,394 $ 1,853,706 State income tax, net of Federal tax benefit 178,398 154,348 120,751 Tax-exempt interest ........................ (15,113) (13,135) (13,145) Exercise of non-statutory stock options .... (67,108) -- -- Other ...................................... 5,478 (20,837) (1,846) ----------- ----------- ----------- $ 3,254,000 $ 2,894,770 $ 1,959,466 =========== =========== ===========
24 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1995 and 1996 are as follows:
September 30, 1995 1996 ---- ---- From operations: Deferred tax assets Allowance for loan and real estate losses $ 936,855 $ 884,668 Deferred fees ........................... 170,296 133,726 Pension ................................. 51,955 -- Core deposit amortization ............... 82,154 74,358 Organization costs ...................... 3,251 651 Non-accrued interest .................... -- 36,700 BIF/SAIF Special assessment ............. -- 971,460 ---------- ---------- Total gross deferred assets ......... 1,244,511 2,101,563 ---------- ---------- Deferred tax liabilities Depreciation ....................................... 43,809 35,417 Discount accretion on bonds ........................ 19,693 19,340 Bad debt tax reserve in excess of base year ........ 204,497 265,252 ---------- ---------- Total gross deferred tax liabilities 267,999 320,009 ---------- ---------- Net deferred tax asset from operations .... 976,512 1,781,554 Shareholders' equity - unrealized losses on securities available for sale ............. -- 123,348 ---------- ---------- Total net deferred tax assets ........... $ 976,512 $1,904,902 ========== ==========
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. 25 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 12. REGULATORY MATTERS FDIC regulations require banks to maintain minimum levels of regulatory capital. Under regulations in effect at September 30, 1996, the Bank was required to maintain (i) a minimum leverage ratio of Tier I capital to total adjusted assets of 4.0%, and (ii) minimum ratios of Tier I and total capital to risk-weighted assets of 4.0% and 8.0%, respectively. Under its prompt corrective action regulations, the FDIC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the institutions's financial statements. The regulations establish a framework for the classification of savings institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally, an institution is considered well capitalized if it has a leverage (Tier 1) capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgements by the FDIC about capital components, risk weightings and other factors. Management believes that, as of September 30, 1996, the Bank meets all capital adequacy requirements to which it is subject. Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. The following is a summary of the Bank's actual capital amounts and ratios as of September 30, 1996 and 1995: As of September 30, 1995 Total capital (to risk-weighted assets)........... 34.43% Tier 1 capital (to risk-weighted assets).......... 32.71% Tier 1 capital (to total assets).................. 11.17% As of September 30, 1996 Total capital (to risk-weighted assets)........... 24.49% Tier 1 capital (to risk-weighted assets).......... 23.24% Tier 1 capital (to total assets).................. 7.22% 26 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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, -------------------------- 1995 1996 ---- ---- To originate loans ....................... $ 4,681,000 $ 3,094,000 =========== =========== Homeowners' Equity Credit Line Program.... $11,528,000 $11,002,000 =========== =========== At September 30, 1996, of the $3,094,000 in outstanding commitments to originate loans, $2,512,000 are for loans at fixed interest rates within a range of 7.625% to8.625% and $582,000 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 re 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 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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. During the fiscal year ended September 30, 1995, the Bank received a settlement of $2.6 million from its surety bond claim regarding the bridge loans, and $275,000 received upon the sale of a personal residence, which was part of the estate of the responsible party, and charged-off amounts totaling $202,000 to reduce the receivable in other assets to $1.7 million. During the fiscal year ended September 30, 1996, approximately $100,000 was collected from the estate and through the settlement of a lawsuit. The receivable at September 30, 1996 was reduced to $1.6 million, it's estimated realizable value. To the extent the Corporation is unable to collect on the pending litigation, the Corporation may have to charge-off additional amounts in future periods. Management believes the remaining balance is collectable through the malpractice insurance policy relevant to the attorney responsible for the fraud. The Bank has filed claims under the malpractice insurance coverage available in order to recover all unpaid amounts. A trial date of January 13, 1997 has been established for this litigation. - -------------------------------------------------------------------------------- 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 and is tax deductible. The Bank took a charge of $2,700,000 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 will pay 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 recently proposed to lower 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 28 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 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. 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 Consoidated 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. 29 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements Securities sold under repurchase agreements The fair values for securities sold under repurchase agreements 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 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.
September 30, ------------------------------------------ 1995 1996 -------------------- -------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (In Thousands) Financial assets Cash and cash equivalents .......................... $ 8,762 $ 8,762 $ 4,750 $ 4,750 Investment securities available for sale ........... -- -- 39,055 39,055 Mortgage-backed securities available for sale....... -- -- 40,255 40,255 Investment securities held to maturity ............. 114,381 112,886 105,549 103,192 Mortgage-backed securities held to maturity......... 174,969 174,629 164,092 162,617 Loans receivable ................................... 134,277 138,646 134,548 134,270 Financial liabilities............................... Deposits ........................................... 391,038 389,850 394,581 393,419 Securities sold under repurchase agreements ........ -- -- 64,275 64,275 Commitments ........................................ 16,209 16,209 14,096 14,096
30 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 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, ----------------------------- 1995 1996 ---- ---- Assets Cash ........................................ $ 40,044 $ 74,730 Loans receivable from subsidiary ............ 1,000,000 950,000 Investment in subsidiaries .................. 49,671,053 35,941,076 Fraud loss receivable ....................... 1,600,000 1,565,000 Due from subsidiary ......................... 567,866 498,766 ------------ ------------ Total assets .............................. $ 52,878,963 $ 39,029,572 ============ ============ Liabilities and stockholders' equity Liabilities Dividends payable ........................... $ 577,924 $ 533,729 Other liabilities ........................... 27,448 37,309 ------------ ------------ Total liabilities ......................... 605,372 571,038 ------------ ------------ Stockholders' equity Common stock ................................ 4,077,828 4,111,958 Paid-in-capital in excess of par value ...... 11,819,769 12,105,541 Retained earnings-substantially restricted... 38,078,494 39,147,609 Unrealized loss on securities available for sale, net of tax .......................... -- (229,074) Treasury stock, at cost ..................... (1,702,500) (16,677,500) ------------ ------------ Total stockholders' equity ................ 52,273,591 38,458,534 ------------ ------------ Total liabilities and stockholders' equity $ 52,878,963 $ 39,029,572 ============ ============
STATEMENTS OF INCOME
Year Ended September 30, ----------------------------------------- 1994 1995 1996 ---- ---- ---- Income: Dividends from subsidiary .......... $ 2,267,267 $ 2,696,110 $ 2,423,495 Undistributed earnings of subsidiary 3,770,758 2,567,491 996,097 Interest income .................... 79,554 90,524 170,732 ----------- ----------- ----------- Total income ..................... 6,117,579 5,354,125 3,590,324 ----------- ----------- ----------- Expenses: Miscellaneous ...................... 112,590 83,550 58,422 ----------- ----------- ----------- Total expense .................... 112,590 83,550 58,422 ----------- ----------- ----------- Income before income taxes ........... 6,004,989 5,270,575 3,531,902 Income tax (benefit) expense ......... (12,613) 5,362 39,293 ----------- ----------- ----------- Net income ........................... $ 6,017,602 $ 5,265,213 $ 3,492,609 =========== =========== =========== 31 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements
STATEMENTS OF CASH FLOWS
Year Ended September 30, -------------------------------------------- 1994 1995 1996 ---- ---- ---- Cash flows from operating activities: Net income ..................................... $ 6,017,602 $ 5,265,213 $ 3,492,609 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in due from subsidiary ... (194,955) 23,212 69,100 (Increase) decrease in fraud loss receivable . -- (1,600,000) 35,000 Decrease in other assets ..................... 33,132 18,731 -- Increase (decrease) in dividends payable .................................... 103,878 9,255 (44,195) Increase in other liabilities ................................ 27,000 448 9,861 (Increase) decrease in undistributed earnings of subsidiary ..................... (3,770,758) (2,567,491) 13,729,977 ------------ ------------ ------------ Net cash provided by operating activities... 2,215,899 1,149,368 17,292,352 ------------ ------------ ------------ Cash flows provided by investing activities: (Increase) decrease in loans receivable from subsidiary ................................ (150,000) 1,100,000 50,000 ------------ ------------ --------- Net cash provided by (used in) investing activities ..................... (150,000) 1,100,000 50,000 ------------ ------------ ------------ Cash flows from financing activities: Issuance of common stock ....................... 601,025 412,263 319,902 Cash dividends paid ............................ (2,267,267) (2,696,111) (2,423,494) Purchase of treasury stock ..................... (368,750) -- (14,975,000) Decrease in fair value of securities held for sale, net of tax ............................ -- -- (229,074) ------------ ------------ ------------ Net cash (used in) investing activities ................................. (2,034,992) (2,283,848) (17,307,666) ------------ ------------ ------------ Net increase (decrease) in cash .................. 30,907 (34,480) 34,686 Cash -- beginning ................................ 43,617 74,524 40,044 ------------ ------------ ------------ Cash -- ending ................................... $ 74,524 $ 40,044 $ 74,730 ============ ============ ============
- -------------------------------------------------------------------------------- 18. IMPACT OF NEW ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation". This statement establishes financial accounting and reporting standards for stock-based employees compensation plans. SFAS 123 encourages all entities to adopt the "fair value base method" of accounting for employee stock compensation plans. However, SFAS 123 also allows an entity to continue to measure compensation cost under such plans using the "intrinsic value based method." Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, usually the vesting period. Fair value is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk-free interest rate over the expected life of the option. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Most stock plans have no intrinsic value at date of grant, and under previous accounting guidance, no compensation cost was to be recognized. The account requirements of this statement are effective for transactions entered into in fiscal years that begin after December 15, 1995. The Bank intends to continue accounting for compensation cost under the intrinsic value based method and will provide pro forma disclosures for all awards granted after September 30, 1996. Such disclosures include net income and earnings per share as if the fair value based method of accounting has been applied. In June 1996, the Financial Accounting Standards Board issued SFAS No. 125 "Account for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 125 amends portions of SFAS 115, amends and extends to 32 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements all servicing assets and liabilities the accounting standards for mortgages servicing rights now in SFAS 65, and supersedes SFAS 122. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Those standards are based upon consistent application of a financial components approach that focuses on control. The Statement also defines accounting treatment for servicing assets and other retained interest in the assets that are transferred. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. The adoption of the statement is not expected to have a material effect on the Bank's financial condition or results of operation. - -------------------------------------------------------------------------------- 19. QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of the quarterly consolidated financial data is as follows:
First Second Third Fourth Year Ended September 30, 1995 Quarter Quarter Quarter Quarter - ----------------------------- ----------------------------- (In Thousands, Except Per Share Data) Interest income ............................................. $7,424 $7,603 $7,802 $7,910 Interest expense ............................................ 3,885 4,287 4,583 4,475 ------ ------ ------ ------ Net interest income ....................................... 3,539 3,316 3,219 3,435 Non-interest income ......................................... 74 77 77 66 Non-interest expenses ....................................... 1,371 1,543 1,319 1,360 ------ ------ ------ ------ Income before income taxes .................................. 2,242 1,850 1,927 2,141 Income taxes ................................................ 800 639 691 765 ------ ------ ------ ------ Net income .................................................. $1,442 $1,211 $1,236 $1,376 ====== ====== ====== ====== Net income per common share and common stock equivalents .... $ .37 $ .31 $ .31 $ .35 ====== ====== ====== ====== Dividends per common share .................................. $ .15 $ .15 $ .15 $ .25 ====== ====== ====== ======
First Second Third Fourth Year Ended September 30, 1996 Quarter Quarter Quarter Quarter - ----------------------------- ------- ------- ------- ------- (In Thousands, Except Per Share Data) 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 expenses .................................. 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 ............................................. $ 1,323 $ 1,345 $ 1,389 $ ( 565) ======= ======= ======= ======= Net income per common share and common stock equivalents $ .33 $ .34 $ .36 $ (.18) ======= ======= ======= ======= Dividends per common share ............................. $ .175 $ .175 $ .175 $ .175 ======= ======= ======= =======
(1) Includes a pre-tax charge of approximately $2.7 million as a result of the FDIC's one-time special insurance assessment. See Note 15. 33 - -------------------------------------------------------------------------------- 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, 1995 and 1996 and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years then ended. 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. The accompanying consolidated statement of income, changes in stockholders' equity, and cash flow of the Corporation as of September 30, 1994 were audited by other auditors, whose report thereon dated October 25, 1994 expressed an unqualified opinion on those statements. 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, 1995 and 1996 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP Short Hills, New Jersey October 24, 1996 34 PULSE BANCORP, INC. AND PULSE SAVINGS BANK - -------------------------------------------------------------------------------- Officers and Directors of the Corporation and the Bank OFFICERS DIRECTORS BENJAMIN S. KONOPACKI BENJAMIN S. KONOPACKI Chairman of the Board Chairman GEORGE T. HORNYAK, JR. JOSEPH CHADWICK President and Chief Executive GEORGE T. HORNYAK, JR. Officer EDWIN A. KOLODZIEJ WAYNE A. KRONOWSKI THOMAS KONOPACKI EDWIN A. ROGINSKI Executive Vice President and ADAM RZEPKA Chief Financial Officer Director Emeritus RONALD E. VAUGHN, JR. FRANK L. CHADWICK Senior Vice President-Chief Chairman Emeritus Lending Officer JEFFREY GOSTKOWSKI ASSOCIATE BOARD Vice President South Amboy PATRICIA M. BARSZCZ Vice President-Asst. Secretary WALTER FABISZEWSKI CATHERINE D. FRANZONI EDWARD GLEASON Vice President-Treasurer JOHN JANKOWSKI STANLEY KNAST NANCY M. JANOSKO Secretary 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. V.P. 35 - -------------------------------------------------------------------------------- CORPORATE & STOCKHOLDER'S INFORMATION
MAIN OFFICE STOCK LISTING Pulse Bancorp, Inc. The Corporation's Common Stock is traded over-the- 6 Jackson Street counter on the Nasdaq National Market System P.O. Box 193 appearing under the symbol "PULS". South River, New Jersey 08882 (908) 257-2400 MARKET MAKERS (908) 257-2400 - Mortgage Department Sandler O'Neill & Partners, L.P. PULSE SAVINGS BANK OFFICES Ryan, Beck & Co., Inc. Herzog, Heine, Geduld, Inc. MAIN OFFICE F.J. Morrissey & Co., Inc. 6 Jackson Street South River, New Jersey 08882 ANNUAL MEETING (908) 257-2400 January 23, 1997, 10:00 A.M. Washington Avenue & Davis Lane Forsgate Country Club South Amboy, New Jersey 08879 Forsgate Drive (908) 721-1300 Jamesburg, New Jersey 08831 Prospect Plains and Applegarth Roads 10-K INFORMATION: Monroe Township, New Jersey 08512 (609) 655-1900 -- Branch Office A COPY OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEP- 1225 Brunswick Avenue TEMBER 30, 1996, AS FILED WITH THE SECURITIES Lawrenceville, New Jersey 08648 AND EXCHANGE COMMISSION WILL BE FURNISHED (609) 394-1500 WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE UPON WRITTEN REQUEST TO THE CORPORATE INFORMATION SECRETARY, PULSE BANCORP, INC., 6 JACKSON STREET, SOUTH RIVER, NEW JERSEY 08882. Nancy M. Janosko Secretary Pulse Bancorp, Inc. 6 Jackson Street P.O. Box 193 South River, New Jersey 08882 (908) 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, DC 20005
36 EX-27 3 ARTICLE 9 FDS FOR 10K405
9 1000 YEAR SEP-30-1996 SEP-30-1996 4,249,883 0 500,000 0 79,309,761 269,641,441 265,809,000 134,547,804 2,458,777 502,499,849 394,580,611 64,275,000 5,185,704 0 0 0 4,111,958 34,346,576 502,499,849 11,861,002 20,011,772 860,031 32,732,805 17,806,866 19,132,838 13,599,967 0 0 8,473,614 5,452,075 5,452,075 0 0 3,492,609 0.94 0.94 0.74 998,570 835,168 2,135,000 9,914,000 2,603,852 145,075 0 2,458,777 2,458,777 0 0
EX-99 4 EXHIBIT EXHIBIT 99 Independent Auditors' Report [STEPHEN P. RADICS & CO. LETTERHEAD] 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. (the "Corporation") and Subsidiary as of September 30, 1993 and 1994 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, 1994. 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing 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 Pulse Bancorp, Inc. and Subsidiary as of September 30, 1993 and 1994 and the results of their operations and cash flows for each of the years in the three-year period ended September 30, 1994, in conformity with generally accepted accounting principles. /s/ Stephen P. Radics October 25, 1994 -----END PRIVACY-ENHANCED MESSAGE-----