-----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, LuZz7PyNZ3fYxJO+LI+0nWhehr+bI77JxNuHo6ln+XFe4tU7clUI0JCkbdUh/YzA gT8IKE6Pk60MKfi1fSMtbQ== 0000946275-97-000682.txt : 19971230 0000946275-97-000682.hdr.sgml : 19971230 ACCESSION NUMBER: 0000946275-97-000682 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 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: SEC FILE NUMBER: 000-18764 FILM NUMBER: 97745121 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 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES [X] EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1997 ------------------------------------------------------ - or - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |_| EXCHANGE ACT OF 1934 For the transition period from to ----------------------- --------------------- Commission 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: (732) 257-2400 ---------------- Securities registered pursuant to Section 12(b) of the Act: None ---------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing sales price of the Registrant's Common Stock as quoted on the National Market of The Nasdaq Stock Market on December 22, 1997 was $81.8 million. As of December 22, 1997, the Registrant had outstanding 3,087,898 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Parts II and IV -- Portions of the Registrant's Annual Report to Stockholders for fiscal year ended September 30, 1997. 2. Part III -- Portions of the Registrant's Proxy Statement for a January 1998 meeting. PART I Item 1. Business - ------------------ Pulse Bancorp, Inc. (the "Registrant" or the "Corporation") is a savings bank holding company incorporated under the laws of the State of New Jersey in November 1989, for the sole purpose of acquiring all of the issued and outstanding common stock of Pulawski Savings and Loan Association (the "Association") in connection with the reorganization of the Association into the holding company form of organization and exchange of shares of common stock of the Association for those of the Corporation (the "Reorganization"). The Association was chartered by the State of New Jersey in 1916 and following several name changes, the last of which occurred in 1993, the Association became Pulse Savings Bank (the "Bank"). In 1996, the Corporation formed three wholly owned subsidiaries named Pulse Investment, Inc., Pulse Real Estate, Inc. and Pulse Insurance Services, Inc. The subsidiaries are currently inactive. At September 30, 1997, the assets of the Corporation consisted of all of the issued and outstanding shares of the Bank's Common Stock, $2.0 million in loans receivable from the Bank and $823,000 in investment securities. References throughout this Report to the Corporation or the Bank include, unless otherwise specified or the context otherwise requires, the Corporation's and the Bank's predecessors in interest. At September 30, 1997, the Bank had total assets, deposits and stockholders' equity of approximately $526.0 million, $411.0 million, and $43.2 million, respectively. The Bank is a New Jersey-chartered savings bank in capital stock form. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The Bank conducts its business through five offices located in South River, South Amboy, Monroe Township, East Brunswick, and Lawrenceville, New Jersey. The Bank's executive offices are located at 6 Jackson Street, South River, New Jersey, and its telephone number is (732) 257-2400. The principal business of the Bank is the acceptance of savings deposits from the general public and the origination of mortgage loans obtained for the purpose of constructing, financing or refinancing one-to four-family dwellings and other improved residential and commercial real estate. In addition, the Bank purchases investment and mortgage-backed securities. Its income is derived largely from interest income on interest-earning assets such as loans, mortgage-backed securities and investments. Its principal expenses are interest paid on deposits, borrowings and operating expenses. The level of earnings (net interest income) of the Bank will vary, depending upon the difference between the amount of income that it receives from its loans, mortgage-backed securities and investment portfolios and its cost of funds. This is because the Bank's cost of funds are sensitive to changes in short-term interest rates due to shorter-term savings accounts bearing interest rates determined by current market conditions while a significant portion of the Bank's loan portfolio, consisting of long-term, fixed-rate real estate loans, do not reprice as rapidly or to the same extent as the Bank's deposits. Consequently, the Bank is vulnerable to future increases in interest rates which, if significant, may have a material adverse affect on its financial condition and results of operations. 2 The Bank originates fixed-rate and adjustable-rate mortgages and has in the past purchased primarily one to five year adjustable-rate loans on residential and multi-family dwellings for retention in its portfolio. It has adopted a strategy designed to improve and stabilize its operational results to counter the volatile cost of its funds and the mismatch between its relatively long-term, fixed-rate assets and short-term, rate sensitive liabilities. The principal objective of this strategy is to restructure assets to lessen the potential adverse effects of interest rate volatility on earnings, while maintaining high quality (low credit risk) assets and improving profits. The Bank operates in an area that is highly industrialized, extremely diverse and densely populated. No one industry or group of industries predominates in the Bank's operating area. However, the Bank is affected by the economy and real estate market in the State of New Jersey, particularly northern New Jersey, and the New York City metropolitan area. Lending Activities - ------------------- General. As of September 30, 1997, 89.1% of the Bank's gross loan and mortgage-backed securities portfolio consisted of loans and securities secured by mortgages on one- to four-family residential properties, which included conventional mortgage loans, insured loans, guaranteed loans, mortgage-backed securities, collateralized mortgage obligations, and consumer loans secured by real estate (home equity loans). Additionally, the Bank originates and purchases multi-family and commercial real estate loans, which loans represent 10.9% of the Bank's gross loan portfolio at September 30, 1997. To a lesser extent, the Bank also originates consumer loans not secured by real estate. 3 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, --------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 ------------------ ------------------ ---------------- --------------- ----------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------- ------- ------ ------- ------ ------- ------ ------- ------ ------- Type of Loan: - ------------ Conventional Real Estate Loans: Construction Loans ................ $ -- --% -- --% $ 280 0.1% $ 363 0.1% 1,037 0.3% Loans on existing property......... 160,136 44.2 124,510 38.7 119,512 3.86 117,744 34.7 110,129 32.0 Insured or guaranteed real estate loans............................ 10,393 2.9 7,975 2.5 7,080 2.3 5,838 1.7 5,043 1.5 loans Mortgage-backed securities......... 146,336 40.4 142,385 44.2 138,986 44.9 169,077 49.9 182,550 53.1 Collateralized mortgage obligations 39,969 11.1 39,581 12.3 35,941 11.6 34,934 10.3 33,148 9.7 Consumer Loans: Home equity ....................... 10,076 2.8 10,870 3.4 10,397 3.4 13,544 4.0 14,348 4.2 Student loans ..................... 57 -- 101 -- 7 -- -- -- -- -- Savings account loans ............. 514 0.1 319 0.1 288 0.1 184 0.1 229 0.1 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 367,481 101.5 325,741 101.2 312,491 101.0 341,684 100.8 346,484 100.9 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Add: Premiums on mortgage-backed securities ..................... 525 0.1 450 0.1 402 0.1 689 0.2 900 0.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Less: Loans in process .................. -- -- -- -- 187 -- 238 0.1 818 0.2 Unearned discounts on loans and mortgage-backed securities and deferred loan fees .............. 1,375 0.4 847 0.3 856 0.3 781 0.2 742 0.2 Allowance for loan losses ......... 4,487 1.2 3,369 1.0 2,604 0.8 2,459 0.7 2,357 0.7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 5,862 1.6 4,216 1.3 3,647 1.1 3,478 1.0 3,917 1.1 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total ....................... $362,144 100.0% $321,975 100.0% $309,246 100.0% $338,895 100.0% $343,467 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== ===== Type of Security: - ---------------- Residential: 1 to 4 family ................... $ 82,162 22.7% $ 60,662 18.9% $ 61,800 20.0% $ 73,578 21.7% 88,104 25.6% Other dwelling units ............ 42,341 11.7 37,286 11.6 32,923 10.6 28,190 8.3 15,088 4.4 Commercial or industrial properties 45,709 12.6 37,432 11.6 35,466 11.5 29,883 8.8 22,322 6.5 Savings accounts .................. 514 0.1 319 0.1 288 0.1 184 0.1 229 0.1 Collateralized mortgage obligations 39,969 11.1 39,581 12.3 35,941 11.6 34,934 10.3 33,148 9.7 Insured by State or Federal Agencies: FHA/VA ............................ 10,393 2.9 7,975 2.5 7,080 2.3 5,838 1.7 5,043 1.5 Mortgage-backed securities......... 146,336 40.4 142,385 44.2 138,986 44.9 169,077 49.9 182,550 53.1 Student loans ..................... 57 -- 101 -- 7 -- -- -- -- -- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 367,481 101.5 325,741 101.2 312,491 101.0 341,684 100.8 346,484 100.9 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Add: Premiums ........................ 525 0.1 450 0.1 402 0.1 689 0.2 900 0.2 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Less: Loans in process .................. -- -- -- -- 187 -- 238 0.1 818 0.2 Unearned discounts on loans and mortgage-backed securities and deferred loan fees .............. 1,375 0.4 847 0.3 856 0.3 781 0.2 742 0.2 Allowance for loan losses ......... 4,487 1.2 3,369 1.0 2,604 0.8 2,459 0.7 2,357 0.7 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- 5,862 1.6 4,216 1.3 3,647 1.1 3,478 1.0 3,917 1.1 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total ....................... $362,144 100.0% $321,975 100.0% $309,246 100.0% $338,895 100.0% $343,467 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
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, 1997, mortgage-backed securities, consisting of GNMA, FHLMC, FNMA and CMOs amounted to approximately $216.2 million or 62.4% of the net loan and mortgage-backed securities portfolio. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages can be composed of either fixed-rate mortgages or adjustable-rate mortgage loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, (i.e., fixed-rate or adjustable-rate) as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. Mortgage-backed securities issued by FHLMC, FNMA, and GNMA make up a majority of the pass-through certificates market. The CMOs (in the form of real estate mortgage investment conduits) held by the Bank at September 30, 1997 totaled $33.2 million and consisted of FNMA, FHLMC, and privately issued pools. The portfolio of CMOs held in the Bank's mortgage-backed securities portfolio at September 30, 1997 did not include any residual interests in CMOs. Further, at September 30, 1997, the Bank's mortgage-backed securities portfolio did not include any "stripped" CMOs (i.e., CMOs that pay interest only and do not repay principal or CMOs that repay principal only and do not pay interest). Residential Real Estate Loans. One of the primary lending activities of the Bank is to originate loans to enable borrowers to purchase existing homes or to construct new homes. The Bank's real estate loan portfolio also includes loans on one- to four-family dwellings, multi-family housing (over four units), and loans made for the development of unimproved real estate to be used for residential housing. At September 30, 1997, approximately 89.1% of the Bank's gross loan and mortgage-backed securities portfolio consisted of loans (including conventional mortgage loans, insured loans, guaranteed loans, collateralized mortgage obligations and guaranteed mortgage-backed securities) secured by one- to four-family dwellings. The loan-to-value ratio, maturity and other provisions of the loans made by the Bank generally have reflected the policy of making less than the maximum loan permissible under applicable regulations, consistent with lending practices, market conditions, and underwriting standards established by the Bank. The Bank's general policy currently limits the maximum loan-to-value ratio on single-family conventional 5 loans to 95% and 80% on multi-family and commercial real estate loans. Mortgage loans originated by the Bank are intended to conform to the FHLMC and the FNMA underwriting standards so that they may be eligible for sale in the secondary market. Mortgage loans, both fixed- and adjustable-rate, made by the Bank generally are long-term loans, amortized on a monthly basis, with principal and interest due each month. The initial contractual loan payment period for residential loans typically ranges from 15 to 30 years. The Bank's experience indicates that real estate loans remain outstanding for significantly shorter periods than their contractual terms. Borrowers may refinance or prepay loans at their option, subject to any prepayment penalty provisions included in the note, and any applicable state laws relating to such penalty. Due to consumer demand in the Bank's primary market area in which its offices are located, to date, the Bank has originated primarily fixed-rate loans and one, three, five, seven and ten year adjustable-rate loans. These one and three year adjustable-rate residential mortgage loans which adjust based upon the respective one and three year U.S. Treasury securities, are offered in an effort to shorten the maturity and increase the interest rate sensitivity of the Bank's total loan portfolio. Commercial Real Estate Loans. The Bank has in the past purchased both construction loans and permanent loans on multi-family and commercial properties. Loans secured by multi-family, commercial and other income-producing real estate generally are limited to 80% of appraised value and generally have an initial contractual loan payment periods from 15 to 30 years with varying call provisions. Commercial real estate loans generally are made on an adjustable-rate basis indexed to the one-year, three-year or five-year U.S. Treasury index. Commercial real estate loans, consisting primarily of office buildings, strip shopping centers, mini-storage facilities, and industrial buildings amounted to $22.3 million or 6.5% of the Bank's gross loan and mortgage-backed securities portfolio at September 30, 1997. Construction Loans. The Bank will occasionally originate a residential construction loan with an initial term of one to two years. Generally, such loans are repaid or converted to permanent loans when the property is completed or sold. Commercial real estate and construction lending is generally considered to involve a higher level of credit risk than one-to four-family residential lending due to the concentration of principal in a limited number of loans and borrowers and the effects of general economic conditions on real estate developers and managers. The Bank's risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value upon completion of the project and the estimated cost of the project. If the estimated cost of construction or development proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or prior to the maturity of the loan, with a project with value which is insufficient to assure full repayment. When loan payments become due, borrowers may experience cash flow from the project which is not adequate to service total debt. This cash flow shortage may result in the failure to make loan payments. In such cases, the Bank may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. The Bank seeks to minimize these risks by lending primarily to established customers and generally restricting such loans to its primary market area. 6 Consumer Loans. The Bank presently originates loans secured by savings accounts and home equity loans. Consumer loans, including home equity loans, amounted to $14.6 million or 4.1% of the Bank's total gross loan and mortgage-backed securities portfolio at September 30, 1997. Commercial Business Loans. The Bank generally does not offer commercial business loans. At September 30, 1997, none of the Bank's loans were classified as commercial business loans. Loan Maturity Schedule. The following table sets forth certain information at September 30, 1997, regarding the dollar amount of loans and mortgage-backed securities maturing in the Bank's portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.
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) ............ $ 14,199 $ 8,907 $ 5,742 $ 17,186 $ 70,175 $116,209 Consumer ........................... 253 191 1,095 2,971 10,067 14,577 Mortgage-backed securities(1)(2).... 5,877 2,962 3,590 27,342 175,927 215,698 -------- -------- -------- -------- -------- -------- Total ........................ $ 20,329 $ 12,060 $ 10,427 $ 47,499 $256,169 $346,484 ======== ======== ======== ======== ======== ========
- --------------------- Footnotes included in next table. The following table sets forth the dollar amount of all loans due after one year from September 30, 1997, which have predetermined interest rates and have floating or adjustable interest rates, based on contractual terms.
Floating or Predetermined Adjustable Rates Rates ------------- ----------- (Dollars in Thousands) Real estate mortgage(1)........... $ 75,960 $ 26,050 Consumer(1)....................... 7,339 6,985 Mortgage-backed securities(1)(2).. 70,138 139,683 ------- ------- Total....................... $153,437 $172,718 ======= =======
- -------------------- (1) Does not include scheduled principal amortization. Experience indicates that prepayments significantly reduce the average term of maturity. (2) Includes collateralized mortgage obligations. Loan Solicitation and Processing. The Bank actively solicits mortgage loan applications from real estate brokers, contractors, existing customers, customer referrals, and call-ins and walk-ins to its offices. An appraisal of the real estate intended to secure the proposed loan is undertaken by an independent fee appraiser. 7 In connection with the loan approval process, the Bank's loan officers analyze the loan applications and the property involved. All residential mortgage loans are processed by a loan officer and then submitted to the Bank's President for his approval. All multi-family and commercial real estate loans purchased by the Bank are reviewed by a committee of three executive officers. In addition, all multi-family and commercial loans are inspected by two directors. In connection with loans purchased by the Bank, the Bank also requires an independent appraisal, in addition to the information required for all loans originated by the Bank. All loans approved by the executive officers are then submitted to the Bank's Board of Directors for its approval. Prior to closing any long-term loan, the borrower must provide proof of fire and casualty insurance on the property serving as collateral, which insurance must be maintained during the full term of the loan. Loan Purchases and Sales. Because the Bank's savings deposits generally exceed the demand for loans from its customers in its local market area, in addition to originating loans for its portfolio, the Bank has in the past purchased a portion of its real estate loan portfolio in the secondary market. The Bank's purchases in the secondary market are dependent upon the demand for mortgage credit in the local market area and the inflow of funds from traditional sources. Purchases of loans enable the Bank to utilize available funds more quickly and to obtain a yield higher than could generally be obtained in the Bank's primary market area. The Bank purchased loans totaling $4.7 million during the 1997 fiscal year. The Bank has not sold loans, other than student loans, during the past five years. Loan Commitments. It is the policy of the Bank to generally grant commitments to fund loans for periods not to exceed 60 days at a specified term and interest rate unless a lock-in fee is paid. The total amount of the Bank's commitments to originate loans at September 30, 1997 was $16.4 million of which $3.7 million were at fixed rates. The origination of fixed-rate loans creates a potential for interest rate risk. In a rising interest rate environment, the interest-bearing liabilities used to fund loan originations will experience increasing costs while fixed-rate assets cannot reprice. Accordingly, net interest income may be negatively impacted. The reverse would occur in a declining interest rate environment. The Bank monitors this situation by regularly evaluating its interest rate risk. Although fixed-rate loans often are repaid well before the date of contractual maturity, the Bank has attempted to offset the increased interest rate risk of these assets by increasing the interest rate sensitivity of its other assets. In recent years, the Bank has substantially increased its mortgage-backed and investment securities portfolios, partly to address the greater interest rate risk of its fixed-rate assets. In addition, the Bank has a Homeowners' Equity Credit Line Program that represents undisbursed funds from approved lines of credit. These lines of credit are secured by the respective one to four family residential properties owned by the borrowers. At September 30, 1997, the Bank had outstanding commitments on approved lines of credit of $10.7 million. Loan Origination and Other Fees. In addition to interest earned on loans, the Bank may receive loan origination fees or "points" and commitment fees for originating or purchasing loans. Statement of Financial Accounting Standards No. 91 ("SFAS No. 91"), which prescribes the accounting for recording non-refundable fees and costs associated with the origination and acquisition of loans. SFAS No. 91 requires the deferral and subsequent amortization of all loan origination fees net of certain loan origination costs over the related life of the loan. 8 The Bank's loan origination fees generally are 0% - 1.0% on conventional residential mortgage loans and 0%-3% for commercial real estate loans. The Bank does not charge origination fees on fixed-rate conventional mortgage loans or on home equity loans. The total amount of deferred loan fees and discounts on loans at September 30, 1997, was $300,000. The Bank also receives other fees and charges relating to existing loans, which include prepayment penalties, late charges, and fees collected in connection with a change in borrower or other loan modifications. These fees and charges have not constituted a material source of income. Non-Performing and Restructured Loans and Asset Classification. At September 30, 1997, the Bank had classified approximately $7.6 million in assets, of which $7.5 million were loans classified as substandard and $136,000 was real estate acquired as a result of foreclosure. Of the $7.5 million in loans classified by the Bank, approximately $6.8 million included loans internally classified but which were not delinquent greater than 90 days at September 30, 1997 ("performing/non-performing loans"). Such performing/non-performing loans were classified by the Bank due to other factors (such as negative cash flow or past delinquencies) and are not included in the following table. The table below sets forth information with respect to the Bank's non-performing loans for the periods indicated. It does not include real estate acquired as a result of foreclosure. Accruing mortgage loans more than 90 days delinquent are loans that management considers adequately secured, where management believes, based upon its evaluation of each loan and its prior experience with similar loans, that such interest receivable is collectible in due course. A loan is placed on non-accrual status when, in management's judgment, further accruals of interest will be uncollectible. Loans which continue to accrue interest while contractually past due more than ninety days consist almost entirely of smaller balance mortgage loans secured by single family residential properties having fair values in excess of the Bank's recorded investment therein. 9
At September 30, ----------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- Loans Accounted For On a Non-Accrual Basis: One- to four-family real estate...... $ 443 $ 212 $ 211 $ 345 $ 68 Multi-family real estate ............ -- 779 1,253 654 654 Commercial real estate .............. 2,566 464 464 -- -- ------ ------ ------ ------ ------ Total ............................. 3,009 1,455 1,928 999 722 ------ ------ ------ ------ ------ Restructured Loans .................... 3,121 4,200 4,167 2,135 2,103 ------ ------ ------ ------ ------ Accruing Loans That Are Contractually More than 90 Days Delinquent: One- to four-family real estate...... 1,479 1,091 1,355 835 999 Other ............................... -- -- -- -- -- ------ ------ ------ ------ ------ Total ............................ 1,479 1,091 1,355 835 999 ------ ------ ------ ------ ------ Total of non-accrual, restructured, and more than 90 days delinquent and accruing loans .................. $7,609 $6,746 $7,450 $3,969 $3,824 ====== ====== ====== ====== ====== Percentage of total loan and mortgage-backed securities portfolio ........................... 2.07% 2.07% 2.38% 1.16% 1.11% ====== ====== ====== ====== ======
For the year ended September 30, 1997, gross interest income which would have been recorded had the non-accrual and restructured loans been current in accordance with their original terms would have amounted to approximately $303,000. The amount that the Bank included in interest income on such loans for the year ended September 30, 1997 was $143,000. At September 30, 1997, the Bank had loans with an aggregate principal balance of $7.5 million classified as substandard ($3.8 million of such loans were non-performing or restructured at September 30, 1997). The following is a description of the larger non-performing or restructured loans as of September 30, 1997. Hollowbrook Associates is a loan originated in 1990 to finance the acquisitions of a 2-story, 45,000 square foot office building on 2.75 acres in Wappinger Falls, New York. The loan was subject to a troubled debt restructuring in May 1994 which resulted in a reduction of the interest rate of the loan 10 to 6.75% and an extension of its maturity to May 1, 1999. During 1997, in accordance with the restructuring agreement, the interest rate was increased to 8.50%. The loan has performed in accordance with its restructured terms and had a remaining balance of $2.1 million at September 30, 1997. Brentwood Associates is a loan purchased in 1988 to finance the purchase of a 32 unit, 8 building apartment complex located in Barrington, New Jersey. This non-accrual loan, which has a $654,000 balance, is in foreclosure proceedings and is being operated by a court appointed rent receiver. The remainder of the non-performing loans consists of smaller balance loans aggregating $1.0 million which are secured by 1-to 4-family residential property. The Bank's other substandard assets at September 30, 1997, consisted of $136,000 of real estate owned. Provision for Loan Losses and Losses on Real Estate Owned. A provision for loan losses is charged to operations based on management's evaluation of the risk inherent in its loan portfolio in relation to the level of the allowance for loan losses and changes in the nature and volume of its loan activity. The Bank provides valuation reserves for anticipated losses on loans and real estate owned when management determines that a significant decline in the value of the collateral has occurred, as a result of which the value of the collateral is less than the amount of the unpaid principal of the related loan plus estimated costs of acquisition and sale. In addition, the Bank also provides reserves based on the dollar amount and type of collateral securing its loans, in order to provide for future losses inherent in Bank loans. Although management believes that it uses the best information available to make such determinations, future adjustments to reserves may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations. At September 30, 1997, non-performing and restructured loans totaled $3.8 million. Management believes the allowance for loan losses is established at a level adequate to provide for potential credit losses in accordance with generally accepted accounting principles at September 30, 1997. However, there can be no assurance that, in the future, pursuant to a request from its regulators or as a result of the Bank's ongoing review, the Bank will not significantly increase or decrease its allowance for loan losses, thereby impacting the Bank's financial condition and earnings. 11 The following table sets forth an analysis of the Bank's allowance for loan losses.
Year Ended September 30, ------------------------------------------------------- 1993 1994 1995 1996 1997 ------- ------- ------- ------- ------- (Dollars in Thousands) Balance at beginning of period ................. $ 4,200 $ 4,487 $ 3,369 $ 2,604 $ 2,459 ------- ------- ------- ------- ------- Provision charged to operations ................ 2,101 2,650 -- -- -- ------- ------- ------- ------- ------- Charge-Offs: Residential real estate ........................ (1,814) (3,673) (765) (145) (102) Commercial real estate ......................... -- (95) -- -- -- ------- ------- ------- ------- ------- (1,814) (3,768) (765) (145) (102) ------- ------- ------- ------- ------- Balance at end of period ....................... $ 4,487 $ 3,369 $ 2,604 $ 2,459 $ 2,357 ======= ======= ======= ======= ======= Percentage of net charge-offs during the period to average loans outstanding during the period .92% 2.26% .05% .10% .08% ======= ======= ======= ======= ======= Percentage of allowance for loan losses to gross loans outstanding at period end .............. 2.48% 2.34% 1.90% 1.78% 1.81% ======= ======= ======= ======= ======= Percentage of allowance for loan losses to non-performing and restructured loans.......... 59.0% 49.9% 35.0% 62.3% 61.7% ======= ======= ======= ======= =======
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, --------------------------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 --------------------- ---------------------- --------------------- --------------------- --------------------- Percent of Percent of Percent of Percent of Percent of Allowance loans to Allowance loans to Allowance loans to Allowance loans to Allowance loans to Balance total loans Balance total loans Balance total loans Balance total loans Balance total loans --------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- ----------- Real estate mortgage: 1 to 4 family(1) $ 822 51.1% $ 684 47.7% $ 225 48.9% $ 394 57.6% $ 384 71.2% Multifamily..... 1,380 23.4 1,119 26.0 786 24.5 698 20.5 668 11.5 Commercial...... 2,285 25.2 1,566 26.0 1,593 26.4 1,367 21.7 1,305 17.1 Consumer.......... -- 0.3 -- 0.3 -- 0.2 -- 0.2 -- 0.2 ------ ------ ------ ----- ------ ------ ------ ------ -------- ------- $4,487 100.0% $3,369 100.0% $ 2,604 100.0% $2,459 100.0% $2,357 100.0% ===== ===== ===== ===== ====== ===== ===== ===== ===== =====
- ----------------------- (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, ---------------------------------------------------------------- 1995 1996 1997 -------------------- -------------------- -------------------- Carrying Fair Carrying Fair Carrying Fair Value Value Value Value Value Value (In Thousands) U.S. Government, including agencies............... $113,781 $112,271 $144,004 $141,625 $155,874 $155,683 Equity Securities........ -- -- -- -- 823 823 States and political subdivisions thereof... 600 614 600 622 597 623 ------- ------- ------- ------- ------- ------- $114,381 $112,885 $144,604 $142,247 $157,294 $157,129 ======= ======= ======= ======= ======= =======
The following table is a summary of scheduled investment maturities and weighted average yields at September 30, 1997.
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 . $ 7,985 5.38% $ 32,901 6.24% $ 106,988 6.95% $ 8,000 7.78% $155,874 6.76% Equity securities .... -- -- -- -- -- -- 823 9.33 823 9.33 States and political subdivisions thereof -- -- -- -- -- -- 597 6.41 597 6.41 ------- ---- -------- ---- --------- ---- ------- ---- -------- ---- $ 7,985 5.38% $ 32,901 6.24% $ 106,988 6.95% $ 9,420 7.83% $157,294 6.77% ======= ==== ======== ==== ========= ==== ======= ==== ======== ====
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, 1997, such certificates represented approximately 64.1% of the Bank's accounts. The Bank also offers IRA plans, money market deposit accounts, passbook accounts and NOW (negotiable order of withdrawal) accounts. Jumbo Certificate Accounts The following table indicates the amount of the Bank's certificate accounts of $100,000 or more by time remaining until maturity as of September 30, 1997. Certificate Maturity Period Accounts - --------------- ----------- (In Thousands) Three months................................... $ 4,654 Over three through six months.................. 5,996 Over six through twelve months................. 3,422 Over twelve months............................. 3,428 ------- $17,500 ======= Borrowings. Savings deposits are the primary source of funds of the Bank's lending and investment activities and for its general business purposes. The Bank generally has not relied upon advances from the FHLB of New York to supplement its supply of lendable funds or to meet deposit withdrawal requirements. The Bank generally has been able to finance operations through internally-generated funds. However, in 1996, the Board of Directors decided to engage in an asset growth strategy funded by borrowings. As a result, the Bank made medium and short term borrowings which were used to fund increased loan demand, purchases of investment and mortgage-backed securities and the repurchase of shares of common stock of the Corporation. The Bank had borrowings of $67.7 million outstanding at September 30, 1997. 15 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.
1995 1996 1997 ----------------------------- -------------------------- ----------------------------- Yield/ Yield/ Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate -------- --------- ----- -------- -------- ------ -------- --------- ------ (Dollars In Thousands) Loans(1)...................... $138,049 $12,404 8.98% $135,905 $11,861 8.73% $128,578 $11,013 8.57% Mortgage-backed securities(3). 181,058 11,113 6.13 190,069 12,269 6.46 216,784 14,395 6.64 Investments and other interest- earning assets(2)(3)......... 113,801 7,222 6.34 133,309 8,603 6.45 158,611 10,611 6.69 ------- ------ ------- ------- -------- ------- Total interest-earning assets 432,908 30,739 7.10 459,283 32,733 7.13 503,973 36,019 7.15 ------ ------- ------- Non-interest-earning assets..... 15,064 11,699 10,098 -------- -------- --------- Total assets................... $447,972 $470,982 $ 514,071 ======== ======== ========= Interest-Bearing Liabilities: Savings and interest-bearing demand...................... 160,146 5,349 3.34 $146,865 4,477 3.04 $ 142,309 4,302 3.02 Time.......................... 231,324 11,881 5.13 245,488 13,330 5.43 259,997 14,356 5.52 ------- ------ ------- -------- --------- ------- ------ Total interest-bearing deposits.................. 391,470 17,230 4.40 392,353 17,807 4.53 402,306 18,658 4.63 Borrowings.................... -- -- -- 22,951 1,326 5.77 63,223 3,717 5.87 ------- ------ ------- ------- -------- ------- Total interest-bearing liabilities................ 391,470 17,230 4.40 415,304 19,133 4.60 465,529 22,375 4.80 ------ ------ ------- Non-interest-bearing liabilities: Demand deposits............... 3,629 3,719 4,370 Other......................... 1,699 2,231 3,871 -------- -------- -------- Total liabilities........... 396,798 421,254 473,770 Stockholders' equity............ 51,174 49,728 40,301 -------- -------- -------- Total liabilities and stockholders' equity...... $447,972 $470,982 $514,071 ======== ======== ======== Net interest income/interest rate spread................... $13,509 2.70% $13,600 2.53% $13,644 2.35% ====== ===== ======= ==== ======= ===== Net interest-earning assets/net yield on interest-earning assets........................ $41,438 3.12% $43,979 2.96% $ 38,444 2.70% ====== ===== ====== ==== ======== ===== Ratio of average interest- earning assets to average interest-bearing liabilities... 1.11X 1.11X 1.08X ====== ====== ========
- ----------------------- (1) Includes non-accrual loans. (2) Includes tax-exempt securities. Income from such securities, which amounted to approximately $39,000, $39,000 and $38,000 during the years ended September 30, 1995, 1996 and 1997, respectively, is included without adjustment to a tax-equivalent basis. Such adjustments were not made due to their immateriality. (3) Investments classified as available for sale are included in the average at amortized cost amounts. 17 Gap Analysis - ------------ As rates on sources of funds have become deregulated and subject to competitive pressures, financial institutions have become increasingly concerned with the extent to which they are able to match maturities of interest-earning assets and interest-bearing liabilities. Such matching is facilitated by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap." An asset or liability is considered to be interest rate sensitive if it will mature or reprice within a specific time period. The interest rate sensitivity gap is defined as the excess of interest-earning assets maturing or repricing within a specific time period over interest-bearing liabilities maturing or repricing within that time period. The following table reflects the interest rate sensitivity of the Bank's interest-earning assets and interest-bearing liabilities as of September 30, 1997, the Bank's interest rate sensitivity gap at various periods and the ratio of the Bank's interest-earning assets to interest-bearing liabilities at various periods. As the table indicates, the Bank has a negative gap for assets and liabilities maturing or repricing within one year, thereby leaving the Bank vulnerable to future increases in interest rates. The Bank has assumed that its savings and interest-bearing demand deposits will be withdrawn annually at a rate of 18% on the cumulative declining balance of such accounts. This assumption is based upon prior experience and management's assessment of future trends.
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)........................ $ 34,683 $25,918 $16,456 $52,611 $129,668 Mortgage-backed securities (2).. 132,819 3,722 23,049 56,567 216,157 Investments..................... 7,985 32,901 106,985 9,423 157,294 Other interest-earning assets(1) 14,701 -- -- -- 14,701 -------- ------- ------- ------- -------- Total......................... 190,188 62,541 146,490 118,601 517,820 -------- ------- ------- ------- -------- Interest-bearing liabilities: Savings and interest-bearing demand deposits............... 25,684 64,104 33,288 19,613 142,689 Time deposits................. 213,917 49,660 -- -- 263,577 Borrowings.................... 51,875 15,800 -- -- 67,675 -------- ------- ------- ------- -------- Total..................... 291,476 129,564 33,288 19,613 473,941 -------- ------- ------- ------- -------- Interest sensitivity gap...... (101,288) (67,023) 113,202 98,988 Cumulative interest sensitivity gap............. (101,288) (168,311) (55,109) 43,879 Ratio of gap to total assets.. (19.25)% (12.74)% 21.52 % 18.81% Ratio of cumulative gap to total assets................ (19.25)% (31.99)% (10.47)% 8.34%
- ----------------- (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).
1995 vs. 1996 1996 vs. 1997 ------------------------------------- -------------------------------------- Due to Due to ------------------------------------- -------------------------------------- Rate/ Rate/ Volume Rate Volume Total Volume Rate Volume Total ------- ------ ------ ------ -------- -------- -------- --------- (In Thousands) Interest Income: Loans......................... $(196) $(352) $ 5 $ (543) $ (642) $ (218) $ 12 $ (848) Mortgage-backed securities.... 550 577 29 1,156 1,716 360 50 2,126 Investments and other interest -bearing assets............. 1,235 125 21 1,381 1,628 319 61 2,008 ------- ------ ------- ------- ------- ------- ------- ------- Total interest-earning assets................... 1,589 350 55 1,994 2,702 461 123 3,286 ------- ------ ------- ------- ------- ------- ------- ------- Interest Expense: Savings and interest-bearing demand deposits........... (438) (474) 40 (872) (145) (31) 1 (175) Time deposits............... 719 687 42 1,449 791 222 13 1,026 Borrowings.................. 1,326 -- -- 1,326 2,328 23 40 2,391 ------- ------ ------- ------- ------- ------- ------- ------- Total interest-bearings liabilities............... 1,607 213 82 1,903 2,974 214 54 3,242 ------- ------ ------- ------- ------- ------- ------- ------- Net change in net interest- income...................... $ (18) $ 137 $ (27) $ 91 $ (272) $ 247 $ 69 $ 44 ======= ====== ====== ======= ====== ======= ======= =======
19 Market Risk Market risk is the risk of loss from adverse changes in market prices and rates. The Bank's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its interest rate risk exposure. The Bank's profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact the Bank's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Bank monitors the impact of changes in interest rates on its net interest income using several tools. One measure of the Bank's exposure to differential changes in interest rates between assets and liabilities is shown in the Bank's Maturity and Rate Sensitivity Analysis is under the Asset/Liability Management caption. Another measure is the test specified by OTS Thrift Bulletin No. 13, "Interest Rate Risk Management." This test measures the impact on net interest income and on net portfolio value of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. Following are the estimated impacts of immediate changes in interest rates at the specified levels at September 30, 1997. Percentage Changes in Interest Rates: Net Interest Net Portfolio Basis Points Income(1) Value(2) - --------------- ----------------- ------------ +400 -48% -60% +300 -34 -42 +200 -21 -31 +100 -9 -12 - 100 +8 +9 - 200 +8 +22 - 300 N/A N/A - 400 N/A N/A - --------------- (1) The percentage change in this column represents net interest income for 12 months in a stable interest rate environment versus the Net Interest Income in the various rate scenarios. (2) The percentage change in this column represents net portfolio value of the Bank in a stable interest rate environment versus the net portfolio value in the various rate scenarios. The Bank's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Bank's net interest income and capital while structuring the Bank's asset-liability structure to obtain the maximum yield-cost spread on that structure. The Bank relies primarily on its asset-liability structure to control interest rate risk. The Bank continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost-effective, and therefore, has focused its efforts on increasing the Bank's yield-cost spread through wholesale and retail growth opportunities. 20 The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values at September 30, 1997. Market risk sensitive instruments are generally defined as on-and-off-balance sheet derivatives and other financial instruments. Expected Maturity/Principal Repayment at September 30,
Average Total Fair Interest Rate 1998 1999 2000 2001 2002 Thereafter Balance(1) Value(1) ------------- ---- ---- ---- ---- ---- ---------- ----------- -------- (Dollars in Thousands) Interest-Sensitive Assets: Fed funds sold and other short-term investments 6.00% $ 11,925 $ -- $ -- $ -- -- -- $ 11,925 $ 11,925 Loans Receivable: One-to-four family. 8.18% 18,846 1,147 1,147 2,521 2,521 67,429 92,464 93,019 Multifamily and Non- Residential....... 8.93% 15,389 5,194 5,194 4,097 4,097 2,785 36,756 36,976 Other.............. 10.00% 448 -- -- -- -- -- 448 451 Mortgage-Backed Securities........ 6.80% 132,819 126 -- 3,522 74 79,616 216,157 217,039 Investment Securities 6.77% 7,985 4,977 3,000 24,924 -- 116,408 157,294 157,129 FHLB stock........... 6.80% 2,776 -- -- -- -- -- 2,776 2,776 Interest-Sensitive Liabilities: Deposits Money Market Deposits 3.53% 12,825 10,516 8,623 7,071 5,798 26,415 71,248 71,041 Passbook Deposits.. 2.75% 10,003 8,203 6,726 5,515 4,523 20,603 55,573 55,412 Now and other demand deposits.......... 1.26% 2,856 2,342 1,921 1,575 1,291 5,883 15,868 15,822 Certificate Accounts 6.51% 213,917 36,809 8,769 4,082 -- -- 263,577 262,813 Borrowings........... 5.84% 51,875 15,800 -- -- -- -- 67,675 67,292 Interest-Sensitive Off balance sheet items:(2) Commitments to extend credit............ 7.50% 16,409 Commitments to purchase securities 9.00% 200 Unused lines of Credit 9.67% 10,711
- --------------- (1) Loans are reduced for nonaccrual loans but are not reduced for the allowance for loan losses. (2) Total balance equals the notional amount of off-balance sheet items and interest rates are the weighted average interest rates of the underlying loans. 21 Expected maturities are contractual matures adjusted for prepayments of principal. The Company uses certain assumptions to estimate fair values and expected maturities. For assets, expected maturities are based upon contractual maturity, projected repayments and prepayments of principal. The prepayment experience reflected herein is based on the Company's historical experience. The Company's average Constant Prepayment Rate ("CPR") on its total fixed-rate portfolio is 10%, and 6% on its adjustable-rate portfolio for interest-earning assets (excluding investment securities, which do not have prepayment features). For deposit liabilities, in accordance with standard industry practice and the Company's own historical experience, "decay factors," used to estimate deposit runoff of 12.5%, 8.8%, and between 8% and 100% for passbook, checking and money market deposit accounts, respectively. The actual maturities of these instruments could vary substantially if future prepayments differ from the Company's historical experience. Personnel - --------- As of September 30, 1997, the Bank had 52 full-time employees and 9 part-time employees. The employees are not represented by a collective bargaining unit. The Bank believes its relationship with its employees to be satisfactory. Competition - ----------- The Bank faces strong competition in its attraction of savings deposits (its primary source of funds available for lending) and in the origination of real estate loans. Its most direct competition for savings deposits and loans historically has come from other thrift institutions and commercial banks located in Middlesex County, New Jersey. The Bank faces additional significant competition for investor funds from short-term money market securities and other corporate and government securities. The Bank's competition for real estate loans comes principally from other thrift institutions, commercial banks, and mortgage banking companies. The Bank competes for loans by charging competitive interest rates and loan fees, remaining efficient and providing a wide range of services to borrowers, real estate brokers, and home builders. It competes for savings by offering depositors a wide variety of savings accounts, checking accounts, convenient office locations, drive-up facilities, extended banking hours, tax-deferred retirement programs, and other miscellaneous services. The Bank considers Middlesex County, New Jersey and, to a lesser extent, Mercer, Monmouth and Ocean Counties, its primary market area for savings. While the majority of the Bank's mortgage loans are originated in this market area, the Bank also makes loans, to a much lesser degree, throughout New Jersey. Based upon total assets, the Bank was the 21st largest thrift institution in the State of New Jersey as of September 30, 1997. The Bank competes with larger financial institutions, headquartered both inside and outside of Middlesex County, New Jersey, that maintain offices in the Bank's market area. These competitors may be able to offer better loan rates from time to time due to their size, financial resources, and competitive strategy. 22 Regulation - ---------- General. The Corporation owns all of the capital stock of the Bank and is a savings bank holding company. As a savings bank holding company, the Corporation is subject to regulation by the Office of Thrift Supervision ("OTS"). As a company whose stock is publicly-traded, the Corporation is also subject to the reporting, proxy solicitation, and other regulations of the Securities and Exchange Commission ("SEC"). The Bank is a New Jersey-chartered capital stock savings bank, the accounts of which are insured by the FDIC, and as such, is subject to the regulation, supervision and examination of the New Jersey Department of Banking and the FDIC. The New Jersey Department of Banking (the "Department") regulates the Bank's internal organization as well as its deposit, lending and investment activities. The Department must approve changes to the Bank's certificate of incorporation, the establishment or relocations of branch offices and mergers involving the Bank. In addition, the Department conducts periodic examinations of the Bank. Many of the areas regulated by the Department are subject to similar regulation by the FDIC. Bank Regulation - --------------- New Jersey law provides that no dividend may be paid by the Bank unless after the payment of such dividend, the capital stock of the Bank will not be impaired and either the Bank will have a surplus of not less than 50% of its capital stock, or the payment of such dividend will not reduce the statutory surplus of the Bank. Generally, federal law limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Insurance of Deposit Accounts. The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. As a member of the SAIF, the Bank paid an insurance premium to the FDIC equal to a minimum of 0.23% of its total deposits. The FDIC also maintains another insurance fund, The Bank Insurance Fund ("BIF"), which primarily insures commercial bank deposits. In 1996, the annual insurance premium for most BIF members was lowered to $2,000. The lower insurance premiums for BIF members placed SAIF members at a competitive disadvantage to BIF members. Effective September 30, 1996, federal law was revised to mandate a one-time special assessment on SAIF members such as the Bank of approximately .657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit insurance assessment for SAIF members was reduced to .064% of deposits on an annual basis through the end of 1999. During this same period, BIF members will be assessed approximately .013% of deposits. After 1999, assessments for BIF and SAIF members should be the same. It is expected that these continuing assessments for both SAIF and BIF members will be used to repay outstanding Financing Corporation bond obligations. As a result of these changes, 23 beginning January 1, 1997, the rate of deposit insurance assessed the Bank declined by approximately 70%. Capital Requirements. Under FDIC regulations, state-chartered banks that are not members of the Federal Reserve System ("state non-member banks") are required to maintain a minimum leverage capital requirement consisting of a ratio of Tier 1 capital to total assets of 4%. For institutions other than those most highly rated by the FDIC, an additional "cushion" of at least 100 to 200 basis points is required. Tier 1 capital is the sum of common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less certain intangible assets, deferred tax assets, certain identified losses and certain investments in securities subsidiaries. As a SAIF-insured, state-chartered bank, the Bank must currently also deduct from Tier 1 capital an amount equal to its investments in, and extensions of credit to, subsidiaries engaged in certain activities not permissible for national banks. In addition to the leverage ratio, state nonmember banks must maintain a minimum ratio of qualifying total capital to risk-weighted assets of at least 8.0%, of which at least four percentage points must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and preferred stock with a maturity of over 20 years and certain other capital instruments. The includable amount of Tier 2 capital cannot exceed the institution's Tier 1 capital. Qualifying total capital is further reduced by the amount of the bank's investments in banking and finance subsidiaries that are not consolidated for regulatory capital purposes, reciprocal cross-holdings of capital securities issued by other banks and certain other deductions. Under the FDIC risk-weighted system, all of a bank's balance sheet assets and the credit equivalent amounts of certain off-balance sheet items are assigned to risk weight categories. The aggregate dollar amount of each category is multiplied by the risk weight assigned to that category. The sum of these weighted values equals the bank's risk-weighted assets. Each federal banking agency is required to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk ("IRR"), concentration of credit risk, and the risks of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve Board have proposed procedures for measuring IRR exposure and alternative methods for determining what amount of additional capital, if any, a bank may be required to maintain for IRR. Pursuant to New Jersey banking law the minimum leverage capital for a depository institution is a ratio of Tier 1 capital to total assets of four percent. However, the Commissioner of the Department may require a higher ratio for a particular depository institution. New Jersey banking law requires that a depository institution maintain qualifying capital of at least eight percent of its risk weighted assets. At least four percent of this qualifying capital shall be in the form of Tier 1 capital. For purposes of New Jersey banking law, risk weighted assets, Tier 1 capital, and total assets are defined in the same manner as in the FDIC regulations. The Bank was in compliance with both the FDIC and New Jersey capital requirements at September 30, 1997. 24 Capital Distributions. Earnings of the Bank appropriated to bad debt reserves and deducted for Federal income tax purposes are not available for payment of cash dividends or other distributions to stockholders without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions. Dividends payable by the Bank to the Corporation and dividends payable by the Corporation to stockholders are subject to various additional limitations imposed by federal and state laws, regulations and policies adopted by federal and state regulatory agencies. The Bank is required by federal law to obtain FDIC approval for the payment of dividends if the total of all dividends declared by the Bank in any year exceed the total of the Bank's net profits (as defined) for that year and the retained net profits (as defined) for the preceding two years, less any required transfers to surplus. Under New Jersey law, the Bank may not pay dividends unless, following payment, the capital stock of the Bank would be unimpaired and (a) the Bank will have a surplus of not less than 50% of its capital stock, or, if not, (b) the payment of such dividends will not reduce the surplus of the Bank. Under applicable regulations, the Bank would be prohibited from making any capital distributions if, after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%, unless a higher ratio is required by the Commissioner of the Department. Loans to One Borrower. Generally, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Federal Home Loan Bank System. The Bank is a member of the FHLB of New York, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of New York in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year. At September 30, 1997, the Bank had $2.8 million in FHLB stock, which was in compliance with this requirement. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the Department. At September 30, 1997, the Bank's total transaction accounts were below the minimum level for which the Federal Reserve Board requires a reserve. State-chartered savings banks have authority to borrow from the Federal Reserve Bank "discount window," but Federal Reserve policy generally requires savings banks to exhaust all reasonable alternative sources before borrowing from the Federal Reserve System. The Bank had no discount window borrowings at September 30, 1997. 25 Holding Company Regulation - -------------------------- General. The Corporation is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Corporation is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Corporation and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Corporation. Qualified Thrift Lender Test. As a unitary savings and loan holding company, the Corporation generally is not subject to activity restrictions, provided the Bank satisfies the qualified thrift lender ("QTL") test. If the Corporation acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Corporation and any of its subsidiaries (other than the Bank or any other SAIF-insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL and were acquired in a supervisory acquisition. Restrictions on Acquisitions. The Corporation must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. In addition, no company may acquire control of such an institution without prior OTS approval. Executive Officers of the Company - --------------------------------- The executive officers of the Corporation as of September 30, 1997, were as follows: Name Age Position - ---- ----- --------- Benjamin S. Konopacki 75 Chairman of the Board George T. Hornyak, Jr 47 President and Chief Executive Officer Ronald E. Vaughn, Jr 41 Senior Vice President - Chief Lending Officer Thomas Konopacki 40 Executive Vice President - Controller The following information describes the principal occupation and employment of the executive officers of the Corporation and the Bank as of September 30, 1997, during at least the past five years. Benjamin S. Konopacki has been employed by the Bank in various capacities since 1954. From 1965 to 1989, he served as President. From 1965 to 1991, he served as Chief Executive Officer. In 26 1989, Mr. Konopacki became Chairman of the Board. On January 1, 1991, Mr. Konopacki retired as Chief Executive Officer. George T. Hornyak, Jr. has been employed by the Bank since 1983. In March 1989, Mr. Hornyak was named President and Chief Operating Officer. Mr. Hornyak became Chief Executive Officer of the Bank on January 1, 1991. He is also a director of Mercer Mutual Insurance Company. Ronald E. Vaughn, Jr. has been employed by the Bank since August 1988. Since January 1990, he has served as Senior Vice President - Chief Lending Officer. From August 1985 to August 1988, Mr. Vaughn was Vice President - Residential Lending of Lincoln Federal Savings and Loan Association, Westfield, New Jersey. Thomas Konopacki has been employed by the Bank since 1976 and is currently Executive Vice President and Chief Financial Officer. Mr. Konopacki has served in that capacity since January 1990. Item 2. Properties - -------------------- The Bank owns its home office which is located at 6 Jackson Street, South River, New Jersey. The Bank also operates four full service branch offices, three of which it owns and one which it leases. Item 3. Legal Proceedings - -------------------------- From time to time the Registrant is a party to legal proceedings in the ordinary course of business wherein it enforces its security interest in mortgage loans made by it. In the opinion of management, no material loss is expected from any pending legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------- No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 1997. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------------- Matters - ------- The information contained under the section captioned "Common Stock" in the Corporation's Annual Report to Stockholders for the fiscal year ended September 30, 1997 (the "Annual Report"), is incorporated herein by reference. Item 6. Selected Financial Data - --------------------------------- The information contained in the table captioned "Consolidated Financial Highlights" in the Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk - --------------------------------------------------------------------- The information contained in the section captioned "Market Risk" under Item 1 herein is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data The Corporation's Consolidated Financial Statements listed in Item 14 herein are incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure - -------------------- None PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information contained under the section captioned "Proposal I -- Election of Directors" in the Corporation's definitive proxy statement for the Corporation's 1998 Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference. Additional information concerning executive officers is included under "Part I - Executive Officers of the Registrant." Item 11. Executive Compensation - -------------------------------- The information contained under the section captioned "Proposal I -- Election of Directors -- Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the section captioned "Voting Securities and Certain Beneficial Owners Thereof" in the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors" in the Proxy Statement. (c) Management of the Corporation knows of no arrangements, including any pledge by any person of securities of the Corporation, the operation of which may at a subsequent date result in a change in control of the Registrant. 28 Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors -- Certain Transactions With the Company" in the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a)(1) The Consolidated Financial Statements and Independent Auditors' Report included in the Annual Report, listed below, are incorporated herein by reference. 1. Independent Auditors' Report 2. Pulse Bancorp, Inc. (a) Consolidated Statements of Financial Condition at September 30, 1996 and 1997 (b) Consolidated Statements of Income for each of the years in the three-year period ended September 30, 1997 (c) Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended September 30, 1997 (d) Consolidated Statements of Cash Flows for each of the years in the three-year period ended September 30, 1997 (e) Notes to Consolidated Financial Statements (a)(2) All schedules have been omitted, because the required information is either inapplicable or included in the Notes to Consolidated Financial Statements. (a)(3) Exhibits are either filed or attached as part of this Report or incorporated herein by reference. 3(i) Certificate of Incorporation1 3(ii) Bylaws2 10.1 Employment Agreement with Benjamin S. Konopacki3 10.2 Employment Agreement with George T. Hornyak, Jr.3 10.3 Employment Agreement with Thomas Konopacki4 10.4 1986 Stock Option and Incentive Plan4 10.5 1993 Stock Option and Incentive Plan5 10.6 1997 Stock Compensation Plan 10.7 1997 Directors Stock Option Plan 29 13 Annual Report to Stockholders for the fiscal year ended September 30, 1997 21 Subsidiaries of the Registrant - ------------------------- (1) Incorporated by reference to the Registrant's Registration Statement on Form S-4 (33-23154) declared effective by the Commission on December 7, 1989. (2) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1995. (3) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1993. (4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1989. (5) Incorporated by reference to the Registrant's Proxy Statement dated December 18, 1992 for the 1993 Annual Meeting of Stockholders. (b) No Reports on Form 8-K were filed during the last quarter of the period covered by this report. 30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. PULSE BANCORP, INC. Dated: December 29, 1997 By: /s/ George T. Hornyak, Jr. -------------------------- George T. Hornyak, Jr. President, Chief Executive Officer and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated as of December 29, 1997. By: /s/ George T. Hornyak, Jr. By: /s/ Wayne A. Kronowski ------------------------------ ----------------------------- George T. Hornyak, Jr. Wayne A. Kronowski President, Chief Executive Director Office and Director (Principal Executive Officer) By: /s/ Edwin A. Kolodziej By: /s/ Joseph Chadwick ------------------------------ ----------------------------- Edwin A. Kolodziej Joseph Chadwick Director Director By: /s/ Benjamin S. Konopacki By: /s/ Edwin A. Roginski ------------------------------ ----------------------------- Benjamin S. Konopacki Edwin A. Roginski Chairman of the Board Director By: /s/ Thomas Konopacki ------------------------------- Thomas Konopacki Executive Vice President - Controller (Principal Financial and Accounting Officer) EX-10.6 2 EXHIBIT 10.6 EXHIBIT 10.6 Pulse Bancorp, Inc. 1997 Stock Compensation Plan Article I --------- ESTABLISHMENT OF THE PLAN 1.01 Pulse Bancorp, Inc., South River, New Jersey ("Parent") hereby establishes the 1997 Stock Compensation Plan (the "Plan") upon the terms and conditions hereinafter stated. Article II ---------- PURPOSE OF THE PLAN 2.01 The purpose of the Plan is to compensate and reward personnel of experience and ability in key positions of responsibility with the Parent and its subsidiaries, by providing such personnel of the Parent, and its subsidiaries with an increased equity interest in the Parent as compensation for their professional contributions and service to the Parent and its subsidiaries. Awards under the Plan shall be made in the form of the Common Stock of the Parent in lieu of other cash compensation. Article III ----------- DEFINITIONS The following words and phrases when used in this Plan with an initial capital letter, unless the context clearly indicates otherwise, shall have the meaning as set forth below. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural. 3.01 "Bank" means Pulse Savings Bank, and any successor corporation thereto. 3.02 "Board" means the Board of Directors of the Parent, or any successor corporation thereto. 3.03 "Committee" means the Board of Directors of the Parent or the Plan Committee appointed by the Board of Directors of the Parent pursuant to Article IV hereof. 3.04 "Common Stock" means shares of the common stock of the Parent or any successor corporation or Parent thereto. 3.05 "Director" means a member of the Board of the Parent or the Bank. A-1 3.06 "Director Emeritus" means a person serving as a director emeritus, advisory director, consulting director, or other similar position as may be appointed by the Board of Directors of the Bank from time to time. 3.07 "Employee" means any person who is employed by the Parent, the Bank or a Subsidiary. 3.08 "Effective Date" shall mean the date of adoption of the Plan by the Board of the Parent. 3.09 "Parent" shall mean Pulse Bancorp, Inc., the parent corporation of the Bank. 3.10 "Participant" means an Employee, Director or Director Emeritus who receives a Plan Share Award or Tandem Stock Option under the Plan. 3.11 "Plan Shares" means shares of Common Stock which are awarded or issuable to a Participant pursuant to the Plan. 3.12 "Plan Share Award" or "Award" means a right granted to a Participant under this Plan to earn or to receive Plan Shares. 3.13 "Plan Share Reserve" means the shares of Common Stock to be issued to Participants in accordance with the Plan. 3.14 "Subsidiary" means those subsidiaries of the Parent which, with the consent of the Board, agree to participate in this Plan. Article IV ---------- ADMINISTRATION OF THE PLAN 4.01 Role of the Committee. The Plan shall be administered and interpreted by the Board of Directors of the Parent or a Committee appointed by said Board, which shall consist of not less than two non-employee members of the Board, which shall have all of the powers allocated to it in this and other sections of the Plan. All persons designated as members of the Committee shall be "Non-Employee Directors" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act"). The interpretation and construction by the Committee of any provisions of the Plan shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules, regulations and procedures as it deems appropriate for the conduct of its affairs. The Committee shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. A-2 4.02 Role of the Board. The members of the Committee shall be appointed or approved by, and will serve at the pleasure of the Board. The Board may in its discretion from time to time remove members from, or add members to, the Committee. The Board shall have all of the powers allocated to it in this and other sections of the Plan, may take any action under or with respect to the Plan which the Committee is authorized to take, and may reverse or override any action taken or decision made by the Committee under or with respect to the Plan. 4.03 Limitation on Liability. No member of the Board or the Committee shall be liable for any determination made in good faith with respect to the Plan or any Plan Share Awards granted. If a member of the Board or the Committee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by any reason of anything done or not done by him in such capacity under or with respect to the Plan, the Parent and the Bank shall indemnify such member against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in the best interests of the Parent, the Bank and its Subsidiaries and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Article V --------- PLAN SHARE RESERVE 5.01 Plan Share Reserve. The Plan shall be authorized to award up to 25,000 shares of Common Stock representing the lessor of 1% of the total shares of Common Stock outstanding as of the Effective Date or 25,000 shares. Such shares shall consist of authorized but unissued shares of Common Stock of the Parent or shares purchased in the open-market or through privately negotiated transactions within the sole discretion of the Parent from time to time. Article VI ---------- ELIGIBILITY; ALLOCATIONS 6.01 Eligibility. Directors, Employees and Directors Emeritus are eligible to receive Plan Share Awards within the sole discretion of the Committee and in accordance with the terms of the Plan. 6.02 Awards to Employees. The Committee will determine which of the Employees will be granted Plan Share Awards and the number of Shares covered by each Award, provided, however, that in no event shall any Awards be made which will violate the Articles or Bylaws of the Bank or its Parent or Subsidiaries or any applicable federal or state law or regulation. 6.03 Form of Award. As promptly as practicable after a determination is made pursuant that a Plan Share Award is to be made, the Committee shall notify the Participant in writing of the grant of the Award, the number of Plan Shares covered by the Award, and the terms upon which the Plan Shares subject to the award may be earned. The date on which the A-3 Committee makes its award determination or the date the Committee so notifies the Participant shall be considered the date of grant of the Plan Share Awards as determined by the Committee. The Committee shall maintain records as to all grants of Plan Share Awards under the Plan. 6.04 Awards Not Required. Notwithstanding anything to the contrary, no Participant shall have any right or entitlement to receive a Plan Share Award hereunder, such Awards being at the sole discretion of the Committee and the Board, nor shall the Participants as a group have such a right. The Committee may, with the approval of the Board (or, if so directed by the Board), cease issuing Plan Share Awards. 6.05 Awards to Directors. Notwithstanding anything herein to the contrary, as of the date of the Annual Meeting of Stockholders of Parent ("Date of Grant"), each Director of the Parent shall be awarded a number of Plan Share Awards ("Annual Award") represented by the fraction equal to the annual Board retainer fee ("Annual Board Fee") in effect as of such date divided by the last reported sale price of the Common Stock on the business day immediately prior to the Date of Grant ("Stock Price"). Such Annual Award shall be in lieu of the Annual Board Fee for such fiscal year for the Parent. Additionally, as of such Date of Grant, each recipient of such Annual Award, shall receive an option to purchase a number of shares of Common Stock represented by the product of two (2) multiplied by such number of shares of Common Stock represented by the Annual Award ("Tandem Stock Option"). The option exercise price for each share of Common Stock under such Tandem Stock Option shall be the Stock Price. Such Annual Award and Tandem Stock Option shall be immediately earned and non-forfeitable as of the Date of Grant. Such Tandem Stock Options shall continue to be exercisable for a period of ten years following the Date of Grant without regard to the continued services of such Director as a Director or Director Emeritus. In the event of the Participant's death, such Tandem Stock Options may be exercised by the personal representative of his estate or person or persons to whom his rights under such Option shall have passed by will or by the laws of descent and distribution. 6.06 Awards to Directors Emeritus. Notwithstanding anything herein to the contrary, the Board may grant Plan Shares to any Director Emeritus of the Parent or the Bank that is not otherwise an Employee. Such Plan Share Award shall be immediately earned and non- forfeitable upon delivery of the Common Stock represented by such Plan Share Award. Article VII ----------- DISTRIBUTION OF PLAN SHARES 7.01 Distribution of Plan Shares. (a) Timing of Distributions: General Rule. Except as provided in Subsection (d) below, Plan Shares shall be distributed to the Participant as soon as practicable after they have been earned. No fractional shares shall be distributed. (b) Form of Distribution. All Plan Shares shall be distributed in the form of Common Stock. One share of Common Stock shall be given for each Plan Share earned. A-4 (c) Withholding. The Parent or the Bank may withhold from any payment or distribution made under this Plan sufficient amounts of cash or shares of Common Stock necessary to cover any applicable withholding and employment taxes, and if the amount of such payment or distribution is not sufficient, the Committee may require the Participant to pay to the Parent or the Bank the amount required to be withheld in taxes as a condition of delivering the Plan Shares. (d) Regulatory Exceptions. No Plan Shares shall be distributed, however, unless and until all of the requirements of all applicable law and regulation shall have been fully complied with as determined by the Committee. Article VIII ------------ RESTRICTIONS ON DISPOSITION 8.01 Right of Repurchase and Restrictions on Disposition. The Committee, in its sole discretion, may include, as a term of any Plan Share Award, the right, but not the obligation for the Parent, to repurchase all or any amount of the Common Stock acquired by a Participant under the Plan (the "Repurchase Right"). The Repurchase Right shall provide that for a period of one year from the date of delivery of shares of Common Stock under the Plan, the Parent shall have a first right of repurchase at the fair market value of such Common Stock at the time of such repurchase as determined by the Committee. The Repurchase Right may permit the Parent to transfer or assign such right to another party. The Parent may exercise the Repurchase Right only to the extent permitted by applicable law. Article IX ---------- MISCELLANEOUS 9.01 Adjustments for Capital Changes. The aggregate number of Plan Shares available for issuance pursuant to the Plan Share Awards and the number of Shares to which any Plan Share Award relates shall be proportionately adjusted for any increase or decrease in the total number of outstanding shares of Common Stock issued subsequent to the Effective Date of the Plan resulting from any split, subdivision or consolidation of the Common Stock or other capital adjustment, change or exchange of the Common Stock, or other increase or decrease in the number or kind of shares effected without receipt or payment of consideration by the Parent. 9.02 Amendment and Termination of the Plan. The Board may, by resolution, at any time, amend or terminate the Plan. 9.03 No Employment Rights. Neither the Plan nor any grant of a Plan Share Award or Plan Shares hereunder nor any action taken by the Committee or the Board in connection with the Plan shall create any right, either express or implied, on the part of any Participant to continue in the employ or service of the Parent, the Bank, or a Subsidiary thereof. A-5 9.04 Voting and Dividend Rights. No Participant shall have any voting or dividend rights of a stockholder with respect to any Plan Shares covered by a Plan Share Award prior to the time said Plan Shares are actually distributed to such Participant in the form of Common Stock. 9.05 Compliance with Applicable Law and Regulation. Common Stock shall not be issued to a Participant under the Plan unless the issuance and delivery of such Common Stock shall comply with all relevant provisions of applicable law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, any applicable state securities laws and the requirements of any stock exchange upon which the Common Stock may then be listed. 9.06 Governing Law. The Plan shall be governed by and construed under the laws of the State of New Jersey, except to the extent that Federal Law shall be deemed applicable. 9.07 Term of Plan. This Plan shall remain in effect until the earlier of (i) termination by the Board, or (ii) 10 years from the Effective Date. A-6 EX-10.7 3 EXHIBIT 10.7 EXHIBIT 10.7 PULSE BANCORP, INC. 1997 DIRECTORS STOCK COMPENSATION PLAN 1. Purpose of the Plan. The Plan shall be known as the Pulse Bancorp, Inc. ("Company") 1997 Directors Stock Compensation Plan (the "Plan"). The purpose of the Plan is to retain and reward qualified personnel for positions of substantial responsibility as members of the Board of Directors of the Company or any present or future parent or subsidiary of the Company to promote the success of the business. The Plan is intended to provide for the grant of Stock Options that are not "Incentive Stock Options," within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). 2. Definitions. The following words and phrases when used in this Plan with an initial capital letter, unless the context clearly indicates otherwise, shall have the meaning as set forth below. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural. (a) "Award" means the grant by the Committee or in accordance with the terms of the Plan of a Stock Option. (b) "Board" shall mean the Board of Directors of the Company, or any successor or parent corporation thereto. (c) "Change in Control" shall mean: (i) the sale of all, or a material portion, of the assets of the Company; (ii) the merger or recapitalization of the Company whereby the Company is not the surviving entity; (iii) a change in control of the Company, as otherwise defined or determined by the New Jersey Department of Banking or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Company by any person, trust, entity or group. This limitation shall not apply to the purchase of shares by underwriters in connection with a public offering of Company stock, or the purchase of shares of up to 25% of any class of securities of the Company by a tax-qualified employee stock benefit plan. The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Committee as to whether a Change in Control has occurred shall be conclusive and binding. (d) "Code" shall mean the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder. (e) "Committee" shall mean the Board or the Stock Option Committee appointed by the Board in accordance with Section 5(a) of the Plan. (f) "Common Stock" shall mean the common stock of the Company, or any successor or parent corporation thereto. A-1 (g) "Company" shall mean the Pulse Bancorp, Inc., the parent corporation of the Savings Bank, or any successor or Parent thereof. (h) "Director" shall mean a member of the Board of the Company, or any successor or parent corporation thereto. (i) "Director Emeritus" shall mean a person serving as a director emeritus, advisory director, consulting director, or other similar position as may be appointed by the Board of Directors of the Savings Bank or the Company from time to time. (j) "Disability" means any physical or mental impairment which renders the Participant incapable of continuing in the employment or service of the Savings Association or the Parent in his then current capacity as determined by the Committee. (k) "Dividend Equivalent Rights" shall mean the rights to receive a cash payment in accordance with Section 10 of the Plan. (l) "Effective Date" shall mean October 23, 1997. (m) "Employee" shall mean any person employed by the Company or any present or future Parent or Subsidiary of the Company. "Non-Employee" shall mean an individual not employed by the Company or any present or future Parent or Subsidiary of the Company. (n) "Fair Market Value" shall mean: (i) if the Common Stock is traded otherwise than on a national securities exchange, then the Fair Market Value per Share shall be equal to the mean between the last bid and ask price of such Common Stock on such date or, if there is no bid and ask price on said date, then on the immediately prior business day on which there was a bid and ask price. If no such bid and ask price is available, then the Fair Market Value shall be determined by the Committee in good faith; or (ii) if the Common Stock is listed on a national securities exchange, then the Fair Market Value per Share shall be not less than the average of the highest and lowest selling price of such Common Stock on such exchange on such date, or if there were no sales on said date, then the Fair Market Value shall be not less than the mean between the last bid and ask price on such date. (o) "Option" or "Stock Option" shall mean an Award granted pursuant to this Plan providing the holder of such Option with the right to purchase Common Stock. (p) "Optioned Stock" shall mean stock subject to an Option granted pursuant to the Plan. (q) "Optionee" shall mean any person who receives an Option or Award pursuant to the Plan. (r) "Parent" shall mean any present or future corporation which would be a "parent corporation" as defined in Sections 424(e) and (g) of the Code. (s) "Participant" means any director of the Company or any Parent or Subsidiary of the Company or any other person providing a service to the Company who is selected by the Committee to receive an Award, or who by the express terms of the Plan is granted an Award. A-2 (t) "Plan" shall mean the Pulse Bancorp, Inc. 1997 Directors Stock Compensation Plan. (u) "Savings Bank" shall mean Pulse Savings Bank, South River, New Jersey, or any successor corporation thereto. (v) "Share" shall mean one share of the Common Stock. (w) "Subsidiary" shall mean any present or future corporation which constitutes a "subsidiary corporation" as defined in Sections 424(f) and (g) of the Code. 3. Shares Subject to the Plan. Except as otherwise required by the provisions of Section 11 hereof, the aggregate number of Shares with respect to which Awards may be made pursuant to the Plan shall not exceed 25,000 Shares. Such Shares may either be from authorized but unissued shares or shares purchased in the market for Plan purposes. If an Award shall expire, become unexercisable, or be forfeited for any reason prior to its exercise, new Awards may be granted under the Plan with respect to the number of Shares as to which such expiration has occurred. 4. Six Month Holding Period. Except in the event of the death or disability of the Optionee or a Change in Control of the Company, a minimum of six months must elapse between the date of the grant of an Option and the date of the sale of the Common Stock received through the exercise of such Option. 5. Administration of the Plan. (a) Composition of the Committee. The Plan shall be administered by the Board of Directors of the Company or a Committee which shall consist of not less than two Directors of the Company appointed by the Board and serving at the pleasure of the Board. All persons designated as members of the Committee shall meet the requirements of a "Non-Employee Director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, as found at 17 CFR ss.240.16b-3. (b) Powers of the Committee. The Committee is authorized (but only to the extent not contrary to the express provisions of the Plan or to resolutions adopted by the Board) to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the form and content of Awards to be issued under the Plan and to make other determinations necessary or advisable for the administration of the Plan, and shall have and may exercise such other power and authority as may be delegated to it by the Board from time to time. A majority of the entire Committee shall constitute a quorum and the action of a majority of the members present at any meeting at which a quorum is present shall be deemed the action of the Committee. In no event may the Committee revoke outstanding Awards without the consent of the Participant. The President of the Company and such other officers as shall be designated by the Committee are hereby authorized to execute written agreements evidencing Awards on behalf of the Company and to cause them to be delivered to the Participants. Such agreements shall set forth the Option exercise price, the number of shares of Common Stock subject to such Option, the expiration date A-3 of such Options, and such other terms and restrictions applicable to such Award as are determined in accordance with the Plan or the actions of the Committee. (c) Effect of Committee's Decision. All decisions, determinations and interpretations of the Committee shall be final and conclusive on all persons affected thereby. 6. Eligibility for Awards and Limitations. (a) The Committee shall from time to time determine the Participants who shall be granted Awards under the Plan and the number of Awards to be granted to each such persons. In selecting Participants and in determining the number of Shares of Common Stock to be granted to each such Participant, the Committee may consider the nature of the prior and anticipated future services rendered by each such Participant, each such Participant's current and potential contribution to the Company and such other factors as the Committee may, in its sole discretion, deem relevant. Participants who have been granted an Award may, if otherwise eligible, be granted additional Awards. (b) In no event shall Shares subject to Options granted to any Participant exceed more than 17% of the total number of Shares authorized for delivery under the Plan. 7. Term of the Plan. The Plan shall continue in effect for a term of ten (10) years from the Effective Date, unless the Plan is terminated by the Board in accordance with the Plan. 8. Terms and Conditions of Stock Options. Stock Options may be granted or awarded only to Participants. Each Stock Option granted pursuant to the Plan shall be evidenced by an instrument in such form as the Committee shall from time to time approve. Each Stock Option granted pursuant to the Plan shall comply with, and be subject to, the following terms and conditions: (a) Option Price. The price per Share at which each Stock Option granted by the Committee under the Plan may be exercised shall not, as to any particular Stock Option, be less than the Fair Market Value of the Common Stock on the date that such Stock Option is granted. (b) Payment. Full payment for each Share of Common Stock purchased upon the exercise of any Stock Option granted under the Plan shall be made at the time of exercise of each such Stock Option and shall be paid in cash (in United States Dollars), Common Stock or a combination of cash and Common Stock. Common Stock utilized in full or partial payment of the exercise price shall be valued at the Fair Market Value at the date of exercise. The Company shall accept full or partial payment in Common Stock only to the extent permitted by applicable law. No Shares of Common Stock shall be issued until full payment has been received by the Company, and no Optionee shall have any of the rights of a stockholder of the Company until Shares of Common Stock are issued to the Optionee. (c) Term of Stock Option. The term of exercisability of each Stock Option granted pursuant to the Plan shall be not more than ten (10) years from the date each such Stock Option is granted. (d) Exercise Generally. Except as otherwise provided by the terms of the Plan or by action of the Committee at the time of the grant of the Options, the Options granted will be first exercisable as of the date of grant of such options and shall remain exercisable during such periods of service as a Director or Director Emeritus. A-4 (e) Cashless Exercise. Subject to vesting requirements, if applicable, an Optionee who has held an Stock Option for at least six months may engage in the "cashless exercise" of the Option. Upon a cashless exercise, an Optionee shall give the Company written notice of the exercise of the Option together with an order to a registered broker-dealer or equivalent third party, to sell part or all of the Optioned Stock and to deliver enough of the proceeds to the Company to pay the Option exercise price and any applicable withholding taxes. If the Optionee does not sell the Optioned Stock through a registered broker-dealer or equivalent third party, the Optionee can give the Company written notice of the exercise of the Option and the third party purchaser of the Optioned Stock shall pay the Option exercise price plus any applicable withholding taxes to the Company. (f) Transferability. An Stock Option granted pursuant to the Plan shall be exercised during an Optionee's lifetime only by the Optionee to whom it was granted and shall not be assignable or transferable otherwise than by will or by the laws of descent and distribution. 9. Awards to Directors. Stock Options to purchase 2,000 shares of Common Stock will be granted to each Director of the Company as of November 1, 1997, and an additional 2,000 shares of Common Stock will be granted to each Director of the Company then serving as of November 1, 1998. The number of options to be awarded to each Director shall be reduced pro rata in the event that the aggregate number of shares of Common Stock reserved under the Plan shall not be available to satify the Awards contemplated herein. Such Options shall be exercisable at a price equal to the Fair Market Value of the Common Stock as of the date of grant of such options. Such Options will be first exercisable as of the date of Grant. Such Options shall continue to be exercisable for a period of ten years following the date of grant without regard to the continued services of such Director as an Employee, Director or Director Emeritus. In the event of the Optionee's death, such Options may be exercised by the personal representative of his estate or person or persons to whom his rights under such Option shall have passed by will or by the laws of descent and distribution. All Options awarded in accordance with this Section 9 shall have Dividend Equivalent Rights associated with such Options, as detailed at Section 10 herein. Unless otherwise inapplicable, or inconsistent with the provisions of this paragraph, the Options to be granted to Directors hereunder shall be subject to all other provisions of this Plan. 10. Dividend Equivalent Rights. The Committee, in its sole discretion, may include as a term of any Option, the right of the Optionee to receive Dividend Equivalent Rights. Such rights shall provide that upon the payment of a dividend on the Common Stock, the holder of such Options shall receive payment of compensation in an amount equivalent to the dividend payable as if such Options had been exercised and such Common Stock held as of the dividend record date. Such rights shall expire upon the expiration or exercise of such underlying Options. Such rights are non-transferable and shall attach to Options whether or not such Options are immediately exercisable. The dividend equivalent payments associated with Options shall be paid to the Option holder at the dividend payment date of the Common Stock. All Options granted in accordance with Section 9 of the Plan as of the Effective Date shall have Dividend Equivalent Rights associated with such Options. 11. Recapitalization, Merger, Consolidation, Change in Control and Other Transactions. (a) Adjustment. Subject to any required action by the stockholders of the Company, within the sole discretion of the Committee, the aggregate number of Shares of Common Stock for which Options may be granted hereunder, the number of Shares of Common Stock covered by each outstanding A-5 Option, and the exercise price per Share of Common Stock of each such Option, shall all be proportionately adjusted for any increase or decrease in the number of issued and outstanding Shares of Common Stock resulting from a subdivision or consolidation of Shares (whether by reason of merger, consolidation, recapitalization, reclassification, split-up, combination of shares, or otherwise) or the payment of a stock dividend (but only on the Common Stock) or any other increase or decrease in the number of such Shares of Common Stock effected without the receipt or payment of consideration by the Company (other than Shares held by dissenting stockholders). (b) Change in Control. All outstanding Awards shall become immediately exercisable in the event of a Change in Control of the Company, as determined by the Committee. In the event of such a Change in Control, the Committee and the Board of Directors will take one or more of the following actions to be effective as of the date of such Change in Control: (i) provide that such Options shall be assumed, or equivalent options shall be substituted, ("Substitute Options") by the acquiring or succeeding corporation (or an affiliate thereof), provided that: the shares of stock issuable upon the exercise of such Substitute Options shall constitute securities registered in accordance with the Securities Act of 1933, as amended, ("1933 Act") or such securities shall be exempt from such registration in accordance with Sections 3(a)(2) or 3(a)(5) of the 1933 Act, (collectively, "Registered Securities"), or in the alternative, if the securities issuable upon the exercise of such Substitute Options shall not constitute Registered Securities, then the Optionee will receive upon consummation of the Change in Control transaction a cash payment for each Option surrendered equal to the difference between (1) the Fair Market Value of the consideration to be received for each share of Common Stock in the Change in Control transaction times the number of shares of Common Stock subject to such surrendered Options, and (2) the aggregate exercise price of all such surrendered Options, or (ii) in the event of a transaction under the terms of which the holders of the Common Stock of the Company will receive upon consummation thereof a cash payment (the "Merger Price") for each share of Common Stock exchanged in the Change in Control transaction, to make or to provide for a cash payment to the Optionees equal to the difference between (A) the Merger Price times the number of shares of Common Stock subject to such Options held by each Optionee (to the extent then exercisable at prices not in excess of the Merger Price) and (B) the aggregate exercise price of all such surrendered Options in exchange for such surrendered Options. (c) Extraordinary Corporate Action. Notwithstanding any provisions of the Plan to the contrary, subject to any required action by the stockholders of the Company, in the event of any Change in Control, recapitalization, merger, consolidation, exchange of Shares, spin-off, reorganization, tender offer, partial or complete liquidation or other extraordinary corporate action or event, the Committee, in its sole discretion, shall have the power, prior or subsequent to such action or event to: (i) appropriately adjust the number of Shares of Common Stock subject to each Option, the Option exercise price per Share of Common Stock, and the consideration to be given or received by the Company upon the exercise of any outstanding Option; (ii) cancel any or all previously granted Options, provided that appropriate consideration is paid to the Optionee in connection therewith; and/or A-6 (iii) make such other adjustments in connection with the Plan as the Committee, in its sole discretion, deems necessary, desirable, appropriate or advisable. (d) Acceleration. The Committee shall at all times have the power to accelerate the exercise date of Options previously granted under the Plan. (e) Non-recurring Dividends. Upon the payment of a special or non-recurring cash dividend that has the effect of a return of capital to the stockholders, the Option exercise price per share shall be adjusted proportionately, except to the extent that the Participant shall otherwise receive payments associated with Dividend Equivalent Rights attributable to such Options with regard to such special or non-recurring cash dividends. Except as expressly provided in Sections 11(a), 11(b) and 11(e) hereof, no Optionee shall have any rights by reason of the occurrence of any of the events described in this Section 11. 12. Time of Granting Options. The date of grant of an Option under the Plan shall, for all purposes, be the date specified in accordance with the Plan or the date on which the Committee makes the determination of granting such Option. Notice of the grant of an Option shall be given to each individual to whom an Option is so granted within a reasonable time after the date of such grant in a form determined by the Committee. 13. Modification of Options. At any time and from time to time, the Board may authorize the Committee to direct the execution of an instrument providing for the modification of any outstanding Option, provided no such modification, extension or renewal shall confer on the holder of said Option any right or benefit which could not be conferred on the Optionee by the grant of a new Option at such time, or shall not materially decrease the Optionee's benefits under the Option without the consent of the holder of the Option, except as otherwise permitted under Section 14 hereof. 14. Amendment and Termination of the Plan. (a) Action by the Board. The Board may alter, suspend or discontinue the Plan. (b) Change in Applicable Law. Notwithstanding any other provision contained in the Plan, in the event of a change in any federal or state law, rule or regulation which would make the exercise of all or part of any previously granted Option unlawful or subject the Company to any penalty, the Committee may restrict any such exercise without the consent of the Optionee or other holder thereof in order to comply with any such law, rule or regulation or to avoid any such penalty. 15. Conditions Upon Issuance of Shares; Limitations on Option Exercise; Cancellation of Option Rights. (a) Shares shall not be issued with respect to any Option granted under the Plan unless the issuance and delivery of such Shares shall comply with all relevant provisions of applicable law, including, without limitation, the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, any applicable state securities laws and the requirements of any stock exchange upon which the Shares may then be listed. A-7 (b) The inability of the Company to obtain any necessary authorizations, approvals or letters of non-objection from any regulatory body or authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares issuable hereunder shall relieve the Company of any liability with respect to the non-issuance or sale of such Shares. (c) As a condition to the exercise of an Option, the Company may require the person exercising the Option to make such representations and warranties as may be necessary to assure the availability of an exemption from the registration requirements of federal or state securities law. (d) Notwithstanding anything herein to the contrary, upon the termination of employment or service of an Optionee by the Company or its Subsidiaries for "cause" withijn the sole discretion of the Board, all Options held by such Participant shall cease to be exercisable as of the date of such termination of employment or service. (e) Upon the exercise of an Option by an Optionee (or the Optionee's personal representative), the Committee, in its sole and absolute discretion, may make a cash payment to the Optionee, in whole or in part, in lieu of the delivery of shares of Common Stock. Such cash payment to be paid in lieu of delivery of Common Stock shall be equal to the difference between the Fair Market Value of the Common Stock on the date of the Option exercise and the exercise price per share of the Option. Such cash payment shall be in exchange for the cancellation of such Option. Such cash payment shall not be made in the event that such transaction would result in liability to the Optionee or the Company under Section 16(b) of the Securities Exchange Act of 1934, as amended, and regulations promulgated thereunder. 16. Reservation of Shares. During the term of the Plan, the Company will reserve and keep available a number of Shares sufficient to satisfy the requirements of the Plan. 17. Unsecured Obligation. No Participant under the Plan shall have any interest in any fund or special asset of the Company by reason of the Plan or the grant of any Option under the Plan. No trust fund shall be created in connection with the Plan or any grant of any Option hereunder and there shall be no required funding of amounts which may become payable to any Participant. 18. Withholding Tax. The Company shall have the right to deduct from all amounts paid in cash with respect to the cashless exercise of Options and Dividend Equivalent Rights under the Plan any taxes required by law to be withheld with respect to such cash payments. Where a Participant or other person is entitled to receive Shares pursuant to the exercise of an Option, the Company shall have the right to require the Participant or such other person to pay the Company the amount of any taxes which the Company is required to withhold with respect to such Shares, or, in lieu thereof, to retain, or to sell without notice, a number of such Shares sufficient to cover the amount required to be withheld. 19. No Employment Rights. No Director, Employee or other person shall have a right to be selected as a Participant under the Plan. Neither the Plan nor any action taken by the Committee in administration of the Plan shall be construed as giving any person any rights of employment or retention as an Employee, Director or in any other capacity with the Company, the Savings Association or other Subsidiaries. 20. Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of New Jersey, except to the extent that federal law shall be deemed to apply. A-8 EX-13 4 EXHIBIT 13 EXHIBIT 13 Annual Report to Stockholders for the fiscal year ended September 30, 1997 PULSE Bancorp, Inc. 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- Corporate Description Common Stock Pulse Bancorp, Inc. (the "Corporation") is the holding company for Pulse Savings Bank which was chartered by the State of New Jersey in 1916. The Corporation is also the holding company for Pulse Insurance Services, Inc., Pulse Investment, Inc., and Pulse Real Estate, Inc. All three subsidiaries were formed in 1996 and are currently inactive. The principal business of Pulse Savings Bank is the acceptance of deposits from the general public and the origination of mortgage loans for the purpose of constructing, financing or refinancing one to four-family dwellings and other improved residential and commercial real estate. In addition, the Bank purchases mortgage-backed securities collateralized by one to four-family dwellings and investment securities. Its income is derived largely from interest on loans, mortgage-backed securities and investment securities. Its principal expenses are interest paid on deposits and borrowings and operating expenses. The business of the Bank is conducted through five offices located in South River, South Amboy, Monroe Township, East Brunswick and Lawrenceville, New Jersey. - -------------------------------------------------------------------------------- Table of Contents - -------------------------------------------------------------------------------- Consolidated Financial Highlights 2 - -------------------------------------------------------------------------------- Report to Stockholders 3 - -------------------------------------------------------------------------------- Management's Discussion and Analysis 4 - -------------------------------------------------------------------------------- Consolidated Financial Statements 10 - -------------------------------------------------------------------------------- Notes to Consolidated Financial Statements 14 - -------------------------------------------------------------------------------- Independent Auditors' Report 34 - -------------------------------------------------------------------------------- Officers and Directors 35 - -------------------------------------------------------------------------------- Corporate and Stockholders' Information 36 - -------------------------------------------------------------------------------- The Corporation's common stock is traded over-the-counter on the Nasdaq National Market System appearing under the symbol "PULS". The following table reflects the stock sales prices as published by the Nasdaq statistical report. DIV./SHARE HIGH LOW PAID ---- --- ---- First Quarter 12-31-95 17 1/2 15 3/4 $ 0.175 Second Quarter 3-31-96 17 15 1/2 $ 0.175 Third Quarter 6-30-96 18 14 1/2 $ 0.175 Fourth Quarter 9-30-96 18 16 7/8 $ 0.175 First Quarter 12-31-96 17 3/4 15 1/2 $ 0.175 Second Quarter 3-31-97 18 7/8 15 3/4 $ 0.175 Third Quarter 6-30-97 20 1/2 17 7/8 $ 0.175 Fourth Quarter 9-30-97 26 19 1/2 $ 0.175 While the Corporation is not subject to dividend restrictions under regulations of the New Jersey Department of Banking, the Corporation depends on dividends paid to it by the Bank in order to declare and pay dividends to stockholders of the Corporation. Under New Jersey banking law, the Bank may not pay a dividend to the Corporation unless, following payment, the capital stock of the Bank will be unimpaired and (a) the Bank will have a surplus of not less than 50% of its capital stock, or, if not, (b) the payment of such dividend will not reduce the surplus of the Bank. Under New Jersey corporate law, the Corporation may pay dividends in cash or shares but may not pay a dividend that would render it insolvent or cause its liabilities to exceed its assets. The number of stockholders of record of common stock as of the record date of December 3, 1997, was approximately 800. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. At September 30, 1997, there were 3,080,548 shares outstanding. 1 - -------------------------------------------------------------------------------- Consolidated Financial Highlights
At September 30, ------------------------------------------------------ 1993 1994 1995 1996 1997 --------- -------- -------- -------- --------- (In Thousands) Selected Financial Condition and Other Data Assets ............................................ $435,177 $447,684 $445,779 $502,500 $526,016 Loans receivable, net ............................. 175,835 139,975 134,277 134,548 127,311 Mortgage-backed securities held to maturity........ 186,309 182,000 174,969 164,092 162,764 Mortgage-backed securities available for sale ..... -- -- -- 40,255 53,393 Investment securities held to maturity ............ 49,277 87,917 114,381 105,549 96,552 Investment securities available for sale .......... -- -- -- 39,055 60,742 Real estate owned ................................. 4,091 3,281 2,628 2,233 136 Deposits .......................................... 387,704 396,190 391,038 394,581 411,021 Borrowings ........................................ -- -- -- 64,275 67,675 Stockholders' equity .............................. 45,310 49,292 52,274 38,459 43,207
Year Ended September 30, ------------------------------------------------------ 1993 1994 1995 1996 1997 --------- -------- -------- -------- --------- (In Thousands, Except Per Share Data) Interest income ...................................... $31,586 $30,348 $30,739 $32,733 $36,019 Interest expense ..................................... 14,492 13,780 17,230 19,133 22,375 ------- ------- ------- ------- ------- Net interest income .................................. 17,094 16,568 13,509 13,600 13,644 Provision for loan losses ............................ 2,101 2,650 -- -- -- Non-interest income .................................. 252 357 294 326 510 Non-interest expense ................................. 5,148 5,003 5,643 8,474(1) 5,275 Income taxes ......................................... 3,634 3,254 2,895 1,959 3,204 ------- ------- ------- ------- ------- Net income ......................................... $ 6,463 $ 6,018 $ 5,265 $ 3,493 $ 5,675 ======= ======= ======= ======= ======= Net income per share ................................. $ 1.70 $ 1.55 $ 1.34 $ 0.94 $ 1.80 ======= ======= ======= ======= ======= Dividends per share .................................. $ 0.65 $ 0.60 $ 0.70 $ 0.70 $ 0.70 ======= ======= ======= ======= =======
At or For Year Ended September 30, ------------------------------------------------------ 1993 1994 1995 1996 1997 --------- -------- -------- -------- --------- (In Thousands, Except Per Share Data) Selected financial ratios: Return on average assets ........................... 1.53% 1.35% 1.18% 0.74% 1.10% Return on average equity ........................... 14.87% 12.37% 10.29% 7.02% 14.08% Dividend payout ratio .............................. 37.29% 37.68% 51.20% 69.38% 37.81% Stockholders' equity/total assets .................. 10.41% 11.01% 11.72% 7.65% 8.21% Non-performing loans/total assets .................. 1.03% 0.57% 0.73% 0.36% 0.33% Real estate owned/total assets ..................... 0.94% 0.73% 0.58% 0.44% 0.03% Allowance for loan losses/loans receivable.......... 2.55% 2.40% 1.93% 1.82% 1.85%
- --------------- (1) Includes a pre-tax charge of approximately $2.7 million as a result of the FDIC's one-time special insurance assessment on thrift institutions to recapitalize the Savings Association Insurance Fund (SAIF). See Note 15. 2 - ------------------------------------------------------------------------------- REPORT TO STOCKHOLDERS At Pulse Bancorp, Inc. (the "Corporation") and Pulse Savings Bank (the "Bank"), we are dedicated to enhancing shareholder value. This was demonstrated by the strong returns reported for the fiscal year ended 1997. The return on average equity was a robust 14% while the earnings per share for fiscal 1997 increased significantly due to the massive stock buyback that was conducted during the 1996 fiscal year. For the fiscal year ended September 30, 1997, net income was reported at $5,675,000 or $1.80 per share compared with $3,493,000 or $.94 per share for the previous year. The Corporation has continued to grow the balance sheet successfully utilizing a risk-averse profile. Loans receivable continued to be static due to significant pay-offs of large commercial real estate loans. The Bank is now concentrating on increasing the origination of one to four-family residential loan. Various mortgage company correspondents have been providing residential loans to the Bank. Additionally, the Bank has increased its emphasis on consumer loans by offering highly competitive priced products. The investment and mortgage backed securities portfolio increased during the fiscal year and maintained its high quality with minimal interest rate risk. The real estate owned and non-performing loans are also at favorable levels thus affording optimum earning assets. On the liability side, the Bank has emphasized increasing the demand deposits, money market accounts and passbook savings. Additionally, the effective use of borrowed money through repurchase agreements has allowed the Corporation to maximize earnings and growth. Although growth is important, the Corporation has focused on operating as a community bank. The Bank recently opened a "de novo" branch in East Brunswick. Additionally, another branch office in Monroe Township is scheduled to be opened in the summer of 1998. Emphasizing core deposits and customer service are the main themes of these new offices. The Bank will not expand geographically at the expense of our present customer service. Due to the consolidation of the banking industry, Pulse Savings Bank remains one of the few community banks headquartered in Middlesex County, New Jersey. We are able to offer personalized attention to our customer base and attract new customers who desire this attention. To better serve our customers, the Bank has made additional investments in the area of technology. The Bank recently installed ATM's in two of its branch offices. Other ATM's will be installed in other offices for the convenience of our customers. Additionally, the telephone banking system is now in full operational use. This system provides customers with 24 hour access to account and product information. As we embark into the future, we are constantly evaluating the Bank's savings and lending products. This evaluation is consistent with maintaining our profile as a community bank. To remain competitive and profitable, we will continue to operate the Corporation with products that are designated to meet the needs of our customers. Furthermore, the Bank will continue to be a generous supporter and neighbor to our local towns. Our goal is to continue our role as a community bank. In assessing the future, our commitment to the shareholders is to provide optimal value. We appreciate the loyalty you have shown us throughout the years. On behalf of the directors, officers and employees, we thank you for your continued interest and support. Sincerely, /s/George T. Hornyak, Jr. George T. Hornyak, Jr. President Chief Executive Officer /s/Benjamin S. Konopacki Benjamin S. Konopacki Chairman of the Board 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- General Pulse Bancorp, Inc. (the "Corporation") owns 100% of the issued and outstanding common stock of Pulse Savings Bank, hereafter referred to as the "Bank", which is the primary asset of the Corporation. The Corporation is also 100% owner of Pulse Insurance Services, Inc., Pulse Real Estate, Inc., and Pulse Investment, Inc., all of which were formed during the 1996 period, but which are currently inactive. The Corporation's business is conducted principally through the Bank. The earnings of the Bank depend primarily upon the level of net interest income, which is the difference between the interest earned on assets such as loans, mortgage-backed securities, investments and other interest-earning assets and the interest paid on its liabilities such as deposits and borrowings. Net interest income is affected by many factors, including regulatory, economic and competitive forces that influence interest rates, loan demand and deposit flow. Net interest income is also affected by the composition of the Bank's interest-earning assets and interest-bearing liabilities and by the repricing of such assets and liabilities. Operating results are also affected to a lesser extent by the types of lending such as fixed rates versus adjustable rates, each of which has a different fee structure. The Bank is vulnerable to interest rate fluctuations to the extent that its interest-bearing liabilities mature or reprice more rapidly than its interest-earning assets. Such asset/liability structure may result in lower net interest income during the periods of rising interest rates and may be beneficial in times of declining interest rates. The Bank's net income is also affected by provisions for loan losses, non-interest income, non-interest expenses and income taxes. Financial Condition The Corporation's assets at September 30, 1997 totaled $526.0 million, which represents an increase of $23.5 million or 4.7% when compared with $502.5 million at September 30, 1996. Investment securities held to maturity totaled $96.6 million and $105.5 million at September 30, 1997 and 1996, respectively, which represents a decrease of $9.0 million or 8.5%. The decrease in investment securities is primarily due to calls and maturities of $19.0 million, which more than offset the purchase of investment securities issued by the U.S. Government or its agencies totaling $10.0 million. Investment securities available for sale totaled $60.7 million and $39.1 million at September 30, 1997 and 1996, respectively, which represents an increase of $21.7 million or 55.5%. The increase in 1997 resulted from purchases of $20.8 million, along with an appreciation in the market values. Mortgage-backed securities held to maturity totaled $162.8 million and $164.1 million at September 30, 1997 and 1996, respectively, which represents a decrease of $1.3 million or 0.8%. The decrease in mortgage-backed securities was primarily due to principal repayments of $25.1 million, which more than offset purchases totaling $23.8 million. Mortgage-backed securities available for sale totaled $53.4 million and $40.3 million at September 30, 1997 and 1996, respectively, which represents an increase of $13.1 million or 32.6%. The increase in 1997 was due to purchases of $20.0 million, along with an increase in the market values, which more than offset principal repayments of $7.5 million. Loans receivable amounted to $127.3 million and $134.5 million at September 30, 1997 and 1996 respectively, which represents a decrease of $7.2 million or 5.4%. The decrease during the 1997 period in loans receivable is due primarily to principal collections and payoffs of loans exceeding loan originations by $7.0 million, along with the transfer of $287,000 of loans to other real estate owned during the fiscal 1997 period. Other assets decreased $2.8 million or 74.2% to $1.0 million at September 30, 1997 compared to $3.7 million at September 30, 1996. The decrease was primarily due to the application of funds the Bank received during the period in final settlement of the Corporation's bridge loan litigation, along with a decrease in the deferred tax asset. During the 1997 period, the Bank did not make a provision for loan losses and transferred loans totaling $287,000 to real estate owned for properties acquired in settlement of loans. Loan losses charged to the allowance decreased from $145,000 in fiscal 1996 to $101,000 in fiscal 1997. Due to the reduction in loan delinquencies and the apparent stabilization of real estate values, management feels that increases to the allowance for loan losses were not warranted during the fiscal year ending September 30, 1997. However, there can be no assurances that further additions to the allowance for loan losses will not become necessary in future periods. Total deposits at September 30, 1997 increased $16.4 million or 4.2% to $411.0 million when compared with $394.6 million at September 30, 1996. 4 - -------------------------------------------------------------------------------- During the 1996 period, the Bank instituted a plan to leverage its capital by increasing its lending and investment activity. As a result of the continued use in 1997, borrowings were $67.7 million at September 30, 1997, compared to $64.3 million at September 30, 1996. This strategy has contributed to the growth of the Bank's assets and has afforded the Corporation the potential for increased earnings per share. The Bank is aware of the interest rate risk associated with this strategy. Furthermore, it has the ability to either sell certain securities available for sale or to utilize future cash flows to minimize the exposure to fluctuations in market interest rates. Stockholders' equity amounted to $43.2 million and $38.5 million at September 30, 1997 and 1996, respectively. The increase of $4.7 million during the 1997 period was primarily the result of net income of $5.7 million. During the years ended September 30, 1997 and 1996, cash dividends of $2.1 million and $2.4 million, respectively, were paid on the Corporation's common stock. At both September 30, 1997 and 1996, treasury stock totaled $ 16.7 million. Results of Operations for the three years ended ended September 30, 1997 Net Income Net income increased to $5.7 million for the year ended September 30, 1997 when compared with $3.5 million for the year ended September 30, 1996, an increase of $2.2 million or 62.5%. The increase in net income during the 1997 period resulted primarily from the after tax impact of $1.7 million for a special assessment by the Savings Association Insurance Fund (SAIF) during the 1996 period. Net income decreased to $3.5 million for the year ended September 30, 1996 when compared with $5.3 million for the year ended September 30, 1995, a decrease of $1.8 million or 33.7%. The decrease in net income during the 1996 period resulted primarily from the SAIF Special Assessment enacted into law on September 30, 1996, discussed above. Interest Income Interest income on loans during the year ended September 30, 1997 decreased $848,000 or 7.2% to $11.0 million when compared to $11.9 million during the same 1996 period. The decrease during the 1997 period resulted from a decrease of $9.7 million in the average balance of loans outstanding. Interest income on loans during the year ended September 30, 1996 decreased $543,000 or 4.4% to $11.9 million when compared to $12.4 million during the same 1995 period. The decrease during the 1996 period resulted from a decrease of $5.8 million in the average balance of loans outstanding. Income on securities available for sale increased by $2.5 million or 75.7% to $5.8 million during the 1997 period compared to $3.3 million during 1996. The increase during 1997 was a direct result of an increase of $35.0 million in the average balance of securities outstanding. During the 1996 period, the Bank took advantage of the limited window of opportunity provided by "Special Report- Guide to Implementation of Statement 115 on Accounting for Certain Investments on Debt and Equity Securities," and transferred approximately $29.0 million of mortgage-backed securities and $29.8 million of investments from the held to maturity classification to available for sale. As a result of the reclassification, the Bank recorded interest income on securities available for sale of $3.3 million during the 1996 period compared to $-0- during the 1995 period. Income on securities held to maturity increased $1.8 million or 10.6% to $18.5 million during 1997 compared to $16.7 million during the comparable 1996 period. The increase was primarily due to an increase of $19.2 million in the average balance of securities held to maturity. Income on securities held to maturity decreased $879,000 or 5.0% to $16.7 million during 1996 compared to $17.6 million during the comparable 1995 period. The decrease was primarily due to a decrease in the average balance of securities held to maturity, which was a direct result of the transfer of $58.8 million to the available for sale classification and calls and repayments of $73.2 million, which more than offset purchases of securities held to maturity of $116.6 million. Income from other interest-earning assets decreased $126,000 or 14.7% to $734,000 for the 1997 period from $860,000 for the 1996 period. The decrease in income was due to a decrease in the average balance maintained in federal funds sold. Income from other interest-earning assets 5 increased $139,000 or 19.3% to $860,000 for the 1996 period from $721,000 for the 1995 period. The increase was due to an increase in the average balance maintained in federal funds sold, which was a direct result of the excess cash which was needed to complete the 1996 stock repurchase. Interest Expense Interest on deposits increased by $851,000 or 4.8% to $18.7 million during the year ended September 30, 1997 when compared to $17.8 million during the same 1996 period. The increase during the 1997 period was primarily attributable to an increase in the average balance of deposits held and an increase in rates from 4.53% in 1996 to 4.63% in 1997. During the 1997 period, deposit growth and interest credited exceeded deposits withdrawn by $16.4 million. Interest on deposits increased by $577,000 or 3.4% to $17.8 million during the year ended September 30, 1996 when compared to $17.2 million during the same 1995 period. The increase during the 1996 period was primarily attributable to an increase in the average balance of deposits held and an increase in rates from 4.40% in 1995 to 4.53% in 1996. During the 1996 period, deposit growth and interest credited exceeded deposits withdrawn by $3.5 million. Interest expense on borrowings increased $2.4 million or 180.0% to $3.7 million for the year ending September 30, 1997, compared to $1.3 million during 1996. The large increase is due to the fact that the Bank's leverage strategy was not implemented until the latter part of the 1996 fiscal year. As a result, the 1996 expense only represents the 5 month period borrowings were outstanding. Interest expense on borrowings was $1.3 million for the year ending 1996 compared to $-0- during the same 1995 period. The increase during the 1996 period was a result of borrowing agreements the Bank entered into in order to finance increased investment activity. Provision For Loan Losses During the years ended September 30, 1997, 1996 and 1995, the Bank did not record any provisions for loan losses. The allowance for loan losses amounted to $2.4 million, $2.5 million and $2.6 million at September 30, 1997, 1996 and 1995, respectively. Charged-off loans during the years ending September 30, 1997, 1996 and 1995, were $101,000, $145,000, and $765,000, respectively. At September 30, 1997 and 1996, allowance for loan losses as a percentage of loans receivable were 1.85% and 1.82%, respectively. The allowance for loan losses is based on management's evaluation of the risk inherent in its loan portfolio and gives due consideration to changes in general market conditions and in the nature and volume of loan activity. Due to the stabilization of the real estate market in New Jersey and continued reduction in non-performing loans, management feels that increases to the loan loss provision were not warranted during the fiscal years ending September 30, 1997, 1996 and 1995. However, there can be no assurances that further additions to the loan loss allowance will not become necessary in future periods. At September 30, 1997 and 1996, the Bank's non-performing loans totaled $1.7 million and $1.8 million, respectively. Although the Bank maintains its allowance for loan losses at a level which it considers adequate to provide for potential losses, there can be no assurance that such losses will not exceed estimated amounts. Non-Interest Income Non-interest income increased to $511,000 or 56.8% during the year ended September 30, 1997 from $326,000 for the same 1996 period. The increase of $185,000 during the 1997 period resulted primarily from the settlement of $100,000 the Bank received in exchange for the release of its first mortgage lien on a residential property which was deemed to be an environmental hazard. Non-interest income increased to $326,000 or 10.9% during the year ended September 30, 1996 from $294,000 for the same 1995 period. The increase of $32,000 during the 1996 period resulted primarily from an increase in fees and service charges of $34,000 resulting mainly from an increase in mortgage prepayment charges. 6 - -------------------------------------------------------------------------------- Non-Interest Expense Non-interest expenses decreased $3.2 million or 37.8% during the year ended September 30, 1997 when compared with the same 1996 period. The large decrease in the 1997 period was a result of decreases in federal deposit insurance premium, net gain from foreclosed real estate, and occupancy of $3.3 million, $373,000 and $14,000, respectively, which more than offset increases in salary, miscellaneous, advertising, and equipment expenses of $232,000, $101,000, $98,000 and $15,000, respectively. Federal deposit insurance expense in 1996 reflected the FDIC's one-time special SAIF assessment for deposit insurance which totaled approximately $2.7 million. Furthermore, beginning January 1, 1997, the premium the Bank pays for deposit insurance was reduced by approximately 70%. The increase in salary expense was due to an increase in the number of full-time equivalent staff required, along with a general increase in compensation levels. Non-interest expenses increased $2.8 milion or 50.2% during the year ended September 30, 1996 when compared with the same 1995 period. The large increase in the 1996 period was primarily due to the FDIC's one-time special SAIF assessment for deposit insurance totaling $2.7 million, enacted into law on September 30, 1996. Also increasing during the 1996 period were losses from foreclosed real estate, advertising, salaries and employee benefits and occupancy expense of $269,000, $54,000, $36,000, and $21,000 These increases were somewhat offset by a decrease in miscellaneous expense of $251,000. The decrease in miscellaneous expense was primarily due to the writedowns taken during the 1995 period regarding the bridge loan receivables which were not required during 1996. Although increased prices and higher volume continue to be reflected in the increases in non-interest expenses, management continues to limit discretionary expense items, where practical. A great deal of information has been disseminated about the global computer year 2000. Many computer programs that can only distinguish the final two digits of the year entered (a common programming practice in earlier years) are expected to read entries for the year 2000 as the year 1900 and compute payment, interest or delinquency based on the wrong date or are expected to be unable to compute payment, interest or delinquency. Rapid and accurate data processing is essential to the operation of the Savings Bank. Data processing is also essential to most other financial institutions and many other companies. All of the material data processing of the Savings Bank that could be affected by this problem is provided by a third party service bureau. The service bureau of the Savings Bank has advised the Savings Bank that it expects to be year 2000 compliant prior to December 31, 1999. However, if the service bureau is unable to resolve this potential problem in time, the Savings Bank could possibly experience significant data processing delays, mistakes or failures. These delays, mistakes or failures could have a significant adverse impact on the financial condition and results of operation of the Savings Bank. Income Taxes Income tax expense totaled $3.2 million, $2.0 million and $2.9 million during the years ended September 30, 1997, 1996 and 1995, respectively. The increase during the 1997 and 1995 periods was primarily due to an increase in pre-tax income. The decrease in 1996 was a direct result of the tax benefit of $971,000 recorded as a result of the one-time special SAIF assessment to the FDIC for deposit insurance recorded during the period. 7 - -------------------------------------------------------------------------------- Liquidity and Capital Resources Liquidity is a measurement of the Bank's ability to generate sufficient cash flow, in order to meet all current and future financial obligations and commitments as they arise. The Bank adjusts its liquidity levels in order to meet funding needs for deposit outflows, payment of real estate taxes from escrow accounts on mortgage loans, repayment of borrowings, when applicable, and loan funding commitments. The Bank also adjusts its liquidity level as appropriate to meet its asset/liability objectives. The Bank's primary sources of funds are deposits, amortization and prepayments of loan and mortgage-backed securities principal, borrowings, maturities of investment securities and funds provided by operations. While scheduled loan and mortgage-backed securities amortization and maturing investment securities are relatively predictable sources of funds, deposit flow and loan and mortgage-backed securities prepayments are greatly influenced by market interest rates, economic conditions and competition. The Bank manages the pricing of its deposits to maintain a steady deposit balance. In addition, the Bank invests its excess funds in Federal Funds and overnight deposits with the Federal Home Loan Bank of New York (FHLB-NY), which provides liquidity to meet lending requirements. Federal Funds sold and interest-bearing deposits at September 30, 1997 and 1996 amounted to $11.9 million and $500,000, respectively. The Bank's liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. These activities are summarized as follows:
Year Ended September 30, ----------------------------- 1996 1997 --------- --------- (In Thousands) Cash and cash equivalents at beginning of period ............ $ 8,762 $ 4,750 -------- -------- Operating activities: Net income ................................................ 3,493 5,675 Adjustments to reconcile net income to net cash provided by operating activities .................................... 1,555 896 -------- -------- Net cash provided by operating activities ................... 5,048 6,571 Net cash used in investing activities ....................... (59,969) Net cash provided by financing activities ................... 50,909 18,090 -------- -------- Net (decrease) increase in cash and cash equivalents ........ (4,012) 10,726 -------- -------- Cash and cash equivalents at end of period .................. $ 4,750 $ 15,476 ======== ========
Cash was generated by operating activities in each of the above periods. The primary source of cash from operating activities during each of the periods was net income. The primary uses of cash for investing activity are for lending and the purchase of investment and mortgage-backed securities. Net loans amounted to $127.3 million, $134.5 million and $134.3 million at September 30, 1997, 1996 and 1995, respectively. Purchases of investments and mortgage-backed securities held to maturity totaled $33.8 million, $116.6 million, and $48.1 million during the years ended September 30, 1997, 1996, and 1995, respectively. Purchases of investments and mortgage-backed securities available for sale totaled $40.7 million and $25.1 million during the years ended September 30, 1997 and 1996. There were no available for sale purchases during 1995. In addition to funding new loan production and the purchases of investment and mortgage-backed securities through operations and financing activities, principal repayments on existing loans, investments and mortgage-backed securities and borrowings provided funds. . The primary source of financing activities during the 1997 period was from an increase in deposits of $16.4 million, along with increased borrowings of $3.4 million. The primary source of financing activities during the 1996 period was from increased borrowings of $64.3 million along with an increase in deposits of $3.5 million. During the 1996 period, the Corporation purchased 837,080 shares of its common stock at $17.75 per share under the method of a modified dutch auction for a total of $14,975,000. The main purpose of the buyback was to improve the Corporation's return on average equity by reducing its overcapitalized condition. The Corporation has no current plans to buyback 8 - -------------------------------------------------------------------------------- additional stock, however, this does not preclude the Corporation from buying back additional shares in future periods. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments, such as federal funds and interest-bearing deposits. If the Bank requires funds beyond its ability to generate them internally, the Bank utilizes repurchase agreements with certain brokers that will advance short term funds in exchange for pledged securities held in the portfolio. Furthermore, borrowing agreements exist with the FHLB-NY, which provide an additional source of funds. The Bank anticipates that it will have sufficient funds available to meet its current commitments to originate loans and to purchase mortgage-backed securities and investment securities. At September 30, 1997, such outstanding commitments amounted to $16.4 million. Additionally, unused lines of credit, at September 30, 1997 amounted to $10.7 million. Certificates of deposit scheduled to mature in one year or less, at September 30, 1997, totaled $213.9 million. Management believes, based upon its experience and deposit flow histories, that a significant portion of such deposits will remain with the Bank. Impact of Inflation and Changing Prices The consolidated financial statements and the related data presented herein have been prepared in accordance with generally accepted accounting principles, which require a measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of the Corporation are monetary in nature. As a result, interest rates have a more significant impact on the Corporation's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services, because such prices are affected by inflation to a larger extent than interest rates are affected by inflation. 9 - -------------------------------------------------------------------------------- PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Financial Condition
September 30, ------------------------------ 1996 1997 ------------- ------------- ASSETS Cash and due from depository institutions ........................... $ 4,249,883 $ 3,550,908 Federal funds sold .................................................. 500,000 11,925,000 ------------- ------------- Total cash and cash equivalents ................................. 4,749,883 15,475,908 Investment securities available for sale (Note 2) ................... 39,054,697 60,741,955 Mortgage-backed securities available for sale (Note 3) .............. 40,255,064 53,393,335 Investment securities held to maturity; estimated fair value of $103,192,317 in 1996 and $96,386,850 in1997 (Note 2) ........... 105,549,457 96,551,885 Mortgage-backed securities held to maturity; estimated fair value of $162,616,663 in 1996 and $163,645,986 in 1997 (Note 3).............. 164,091,98497 162,763,525 Loans receivable, net (Note 4) ...................................... 134,547,804 127,310,525 Real estate owned ................................................... 2,232,624 136,491 Premises and equipment, net (Note 5) ................................ 1,235,135 1,322,718 Federal Home Loan Bank of New York stock, at cost ................... 2,543,100 2,775,500 Interest receivable (Note 6) ........................................ 4,527,354 4,584,337 Other assets (Notes 11 and 14) ...................................... 3,712,747 959,530 ------------- ------------- Total assets .................................................... $ 502,499,849 $ 526,015,709 ============= ============= - -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits (Note 7) ................................................... $ 394,580,611 $ 411,020,719 Borrowings (Note 8) ................................................. 64,275,000 67,675,000 Advance payments by borrowers for taxes and insurance ............... 628,243 805,394 Other liabilities ................................................... 4,557,461 3,308,037 ------------- ------------- Total liabilities ............................................... 464,041,315 482,809,150 ------------- ------------- Commitments and contingencies (Note 13) ............................. -- -- Stockholders' equity (Notes 9, 10, 11 and 12) Common stock; par value $1.00; authorized 10,000,000 shares; 4,111,958 in 1996 and 4,142,628 in 1997 shares issued and 3,049,878 in 1996 and 3,080,548 in 1997 shares outstanding ................... 4,111,958 4,142,628 Paid-in capital in excess of par value .............................. 12,105,541 12,293,206 Retained earnings -- substantially restricted ....................... 39,147,609 42,676,884 Unrealized (loss) gain on securities available for sale, net of tax . (229,074) 771,341 Treasury stock at cost; 1,062,080 common shares ..................... (16,677,500) (16,677,500) ------------- ------------- Total stockholders' equity ................................... 38,458,534 43,206,559 ------------- ------------- Total liabilities and stockholders' equity ...................... $ 502,499,849 $ 526,015,709 ============= =============
See accompanying notes to consolidated financial statements. 10 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Income
Year Ended September 30, ------------------------------------------ 1995 1996 1997 ------------ ------------ ------------ Interest income: Loans ................................................... $ 12,403,877 $ 11,861,002 $ 11,012,919 Securities available for sale .......................... -- 3,277,058 5,757,544 Securities held to maturity ............................ 17,614,211 16,734,714 18,514,811 Other interest-earning assets ......................... 720,927 860,031 733,708 ------------ ------------ ------------ Total interest income ............................... 30,739,015 32,732,805 36,018,982 ------------ ------------ ------------ Interest expense: Deposits (Note 7) ..................................... 17,229,807 17,806,866 18,658,276 Borrowings ............................................. -- 1,325,972 3,717,034 ------------ ------------ ------------ Total interest expense ............................. 17,229,807 19,132,838 22,375,310 ------------ ------------ ------------ Net interest income ..................................... 13,509,208 13,599,967 13,643,672 Provision for loan losses ............................... -- -- -- ------------ ------------ ------------ Net interest income after provision for loan losses ..... 13,509,208 13,599,967 13,643,672 ------------ ------------ ------------ Non-interest income: Fees and service charges .............................. 223,495 257,523 301,557 Miscellaneous ......................................... 70,670 68,199 208,967 ------------ ------------ ------------ Total non-interest income ........................... 294,165 325,722 510,524 ------------ ------------ ------------ Non-interest expense: Salaries and employee benefits (Note 10) .............. 2,429,369 2,465,912 2,698,133 Occupancy expense ..................................... 263,788 285,267 271,765 Equipment ............................................. 536,064 538,308 553,480 Advertising ........................................... 230,237 283,769 381,441 Federal insurance premium (Note 15) ................... 902,993 3,600,986 341,712 Loss (income) from foreclosed real estate, net ........ 31,342 300,379 (72,208) Miscellaneous ......................................... 1,249,597 998,993 1,100,459 ------------ ------------ ------------ Total non-interest expense .......................... 5,643,390 8,473,614 5,274,782 ------------ ------------ ------------ Income before income taxes .............................. 8,159,983 5,452,075 8,879,414 Income taxes (Note 11) .................................. 2,894,770 1,959,466 3,204,255 ------------ ------------ ------------ Net income .............................................. $ 5,265,213 $ 3,492,609 $ 5,675,159 ============ ============ ============ Net income per common share and common stock equivalents (Notes 9 and 10) ......... $ 1.34 $ 0.94 $ 1.80 ============ ============ ============ Dividends per common share (Notes 9 and 10) ............. $ 0.70 $ 0.70 $ 0.70 ============ ============ ============ Weighted average number of common shares and common stock equivalents outstanding (Notes 9 and 10) .............. 3,928,205 3,728,116 3,156,741 ============ ============ ============
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 (Loss) Capital in Earnings- Gain on Securities Common Excess of Substantially Treasury Available For Sale; Stock Par Value Restricted Stock Net of Tax Total ------------ -------------- ------------- ------------- ----------------- ------------ Balance -- September 30, 1994 ... $ 4,016,128 $ 11,469,206 $ 35,509,392 $ (1,702,500) $ -- $ 49,292,226 Net income for the year ended September 30, 1995 ............ -- -- 5,265,213 -- -- 5,265,213 Issuance of common stock ........ 61,700 350,563 -- -- -- 412,263 Cash dividends, $0.70 per share . -- -- (2,696,111) -- -- (2,696,111) ------------ ------------ ------------ ------------ ------------ Balance -- September 30, 1995 ... 4,077,828 11,819,769 38,078,494 (1,702,500) -- 52,273,591 Net income for the year ended September 30, 1996 ............ -- -- 3,492,609 -- -- 3,492,609 Issuance of common stock ........ 34,130 285,772 -- -- -- 319,902 Purchase of treasury stock ...... -- -- -- (14,975,000) -- (14,975,000) Cash dividends, $0.70 per share . -- -- (2,423,494) -- -- (2,423,494) Change in unrealized loss on securities available for sale, net of tax .............. -- -- -- -- (229,074) (229,074) ------------ ------------ ------------ ------------ ------------ ------------ Balance -- September 30, 1996 ... 4,111,958 12,105,541 39,147,609 (16,677,500) (229,074) 38,458,534 Net income for the year ended September 30, 1997 ............ -- -- 5,675,159 -- -- 5,675,159 Issuance of common stock ........ 30,670 187,665 -- -- -- 218,335 Cash dividends, $0.70 per share . -- -- (2,145,884) -- -- (2,145,884) Change in unrealized (loss) gain on securities available for sale, net of tax .......... -- -- -- -- 1,000,415 1,000,415 ------------ ------------ ------------ ------------ ------------ Balance -- September 30, 1997 ... $ 4,142,628 $ 12,293,206 $ 42,676,884 $(16,677,500) $ 771,341 $ 43,206,559 ============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 12 PULSE BANCORP, INC. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows
Year Ended September 30, --------------------------------------------- 1995 1996 1997 ------------- ------------- ------------- Cash flows from operating activities: Net income .................................................................. $ 5,265,213 $ 3,492,609 $ 5,675,159 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation .............................................................. 157,945 142,007 147,749 Amortization of premiums, discounts and fees, net ......................... (149,083) (189,083) (101,573) Provision for losses on real estate owned ................................. 52,200 341,500 32,850 Gain on sale of real estate owned ......................................... (52,208) (62,462) (72,208) Increase in interest receivable ........................................... (694,447) (456,275) (56,983) Deferred income tax expense (benefit) ..................................... 95,258 (805,042) 1,072,313 Decrease in other assets .................................................. 4,338,383 37,092 1,680,904 Increase (decrease) in other liabilities .................................. 341,922 2,547,953 (1,806,617) ------------ ------------ ------------ Net cash provided by operating activities ............................... 9,355,183 5,048,299 6,571,594 ------------ ------------ ------------ Cash flows from investing activities: Proceeds from calls and maturities of investment securities held to maturity 12,560,000 55,000,000 19,002,500 Purchase of investment securities held to maturity .......................... (39,000,000) (75,932,187) (10,000,000) Proceeds from principal repayments of investment securities available for sale -- 4,197,200 -- Purchase of investment securities available for sale ........................ -- (10,000,000) (20,787,500) Purchase of mortgage-backed securities held to maturity ..................... (9,120,219) (40,624,537) (23,838,620) Purchase of mortgage-backed securities available for sale ................... -- (15,081,456) (19,960,841) Principal repayments on mortgage-backed securities held to maturity ......... 16,139,416 18,198,392 25,140,550 Principal repayments on mortgage-backed securities available for sale ....... -- 4,318,741 7,503,277 Proceeds from sale of student loans ......................................... 90,093 4,454 -- Net (increase) decrease in loans receivable ................................. 7,907,163 (790,568) 6,984,919 Proceeds from sales of and repayments on real estate owned .................. 2,077,524 913,852 2,488,168 Additions to premises and equipment ......................................... (31,864) (169,980) (235,332) Net decrease (increase) in Federal Home Loan Bank of New York stock ......... 170,100 (2,900) (232,400) ------------ ------------ ------------ Net cash used in investing activities ................................... (9,207,787) (59,968,989) (13,935,279) ------------ ------------ ------------ Cash flows from financing activities: Net (decrease) increase in deposits ......................................... (5,152,525) 3,542,768 16,440,108 Net increase in borrowings ................................................. -- 64,275,000 3,400,000 (Decrease) increase in advance payments by borrowers for taxes and insurance (75,177) 169,887 177,151 Issuance of common stock .................................................... 412,263 319,902 218,335 Purchase of treasury stock .................................................. -- (14,975,000) -- Cash dividends paid ......................................................... (2,696,111) (2,423,494) (2,145,884) ------------ ------------ ------------ Net cash (used in) provided by financing activities ..................... (7,511,550) 50,909,063 18,089,710 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents .......................... (7,364,154) (4,011,627) 10,726,025 Cash and cash equivalents -- beginning ........................................ 16,125,664 8,761,510 4,749,883 ------------ ------------ ------------ Cash and cash equivalents -- ending ........................................... $ 8,761,510 $ 4,749,883 $ 15,475,908 ============ ============ ============ Supplemental schedule of noncash investing activities: Transfer of loans held for sale to loans receivable .......................... $ 3,586,035 $ -- $ -- ============ ============ ============ Transfer of loans receivable to real estate owned ............................ $ 1,424,125 $ 797,650 $ 286,491 ============ ============ ============ Transfer of mortgage-backed securities and investments held to maturity to available for sale ........................................... $ -- $ 58,764,618 $ -- ============ ============ ============ Cash paid during the period for: Income taxes ................................................................ $ 1,200,000 $ 2,495,000 $ 1,881,014 ============ ============ ============ Interest .................................................................... $ 17,466,043 $ 18,835,293 $ 22,295,412 ============ ============ ============
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 Pulse Bancorp, Inc. (the "Corporation"), a savings bank holding company, and its wholly owned subsidiaries, Pulse Savings Bank (the "Bank"), Pulse Insurance Services, Inc., Pulse Real Estate, Inc., and Pulse Investment, Inc. The Corporation's business is conducted principally through the Bank. The other three subsidiaries were formed during the 1996 period to afford possible economic opportunities in future periods. All three, however, are currently inactive. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements of the Corporation have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition and income for the period then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses and the valuation of real estate owned. Management believes that the allowance for loan losses is adequate and real estate owned is appropriately valued. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance for loan losses or further writedowns of real estate owned may be necessary based on changes in economic conditions in the market area. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and real estate owned valuations. Such agencies may require the Bank to recognize additions to the allowance or additional writedowns based on their judgments about information available to them at the time of their examination. Cash and cash equivalents Cash and cash equivalents include cash and amounts due from depository institutions, interest-bearing deposits in other banks having original maturities of three months or less and federal funds sold. Generally, federal funds sold are sold for one-day periods. Investment and mortgage-backed securities The Company classifies its securities among three categories: held-to-maturity, trading, and available for sale. Management determines the appropriate classification of the securities at the time of purchase. As of September 30, 1997, the Bank has classified its investments and mortgage-backed securities between held to maturity and available for sale. Investment and mortgage-backed securities are classified as securities held to maturity based on management's intent and the Corporation's ability to hold them to maturity. Such securities are stated at cost, adjusted for unamortized purchase premiums and discounts. Purchase premiums and discounts are amortized over the life of the related security using the level yield method. Investment and mortgage-backed securities not classified as securities held to maturity or trading account securities are classified as securities available for sale, and are stated at fair value. Unrealized gains and losses are excluded from earnings, and are reported as a separate component of stockholders' equity, net of taxes. Such securities include those that may be sold in response to changes in interest rates, changes in prepayment risk or other factors. Loans receivable Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees and discounts. The Bank defers 14 loan origination fees and certain direct loan origination costs and amortizes such amounts as an adjustment of yield over the estimated lives of the related loans. An allowance for loan losses is maintained at a level considered adequate to provide for potential loan losses. Management of the Bank, in determining the allowance for loan losses, considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. The Bank utilizes a two tier approach: (1) identification of problem loans and the establishment of loss allowances on such loans; and (2) establishment of valuation allowances on the remainder of its loan portfolio. The Bank maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential problem loans. Such system takes into consideration, among other things, delinquency status, size of loans, types of collateral and financial condition of the borrowers. Loan loss allowances are established for identified loans based on a review of such information and/or appraisals of the underlying collateral. On the remainder of the loan portfolio, loan loss allowances are established based upon a combination of factors including, but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment. Although management believes that adequate allowances for loan losses are established, actual losses are dependent upon future events and, as such, further additions to the level of the loan loss allowance may be necessary. Non-accrual loans include loans for which reasonable doubt exists as to timely collectibility. At the time a loan is placed on non-accrual status, previously accrued and uncollected interest is reversed against interest income in the current period. Interest collections on non-accrual loans are generally credited to interest income when received. After principal and interest payments have been brought current and future collectibility is reasonably assured, loans are returned to accrual status. Restructured loans are loans whose contractual interest rates have been reduced to below market rates or where other significant concessions have been made due to a borrower's financial difficulties. Interest income on restructured loans is generally accrued. On October 1, 1995, the Bank adopted prospectively SFAS No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure". SFAS 114 defines an impaired loan as a loan for which it is probable based upon current information that the lender will not collect amounts due under the contractual terms of the loan agreement. The Bank has defined the population of impaired loans to be all commercial and construction real estate loans as well as residential real estate loans greater than $500,000. Impaired loans are individually assessed to determine that each loan's carrying value is not in excess of the fair value of the related collateral or the present value of the expected future cash flows. Real estate owned Real estate owned consists of real estate acquired by foreclosure or deed in lieu of foreclosure and is initially recorded at the lower of cost or fair value at the date of acquisition. Fair value is defined as the amount reasonably expected to be received in a current sale between a willing seller (the Bank) and a willing buyer. Real estate owned is subsequently carried at the lower of cost or fair value less estimated selling costs. Costs incurred in developing or preparing properties for sale are capitalized. Income and expenses of operating and holding properties are recorded in operations as incurred. Gains and losses from sales of such properties are recognized as incurred. 15 Concentration of risk The Bank's real estate and lending activities are concentrated in real estate and loans secured by real estate located primarily in the State of New Jersey. Premises and equipment Land is stated at cost. Buildings, building improvements, furnishings and equipment are stated at cost, less accumulated depreciation computed on the straight-line method over the estimated lives of each type of asset. Significant renewals and betterments are charged to the property and equipment account. Maintenance and repairs are charged to operations in the year incurred. Stock-based compensation In October 1995 the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation". SFAS 123 encourages recording in current period earnings compensation expense related to the fair value of certain stock-based compensation. Companies may choose to follow the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), where compensation expense is not recorded for certain stock-based compensation plans. However, companies will be required to disclose pro forma net income and earnings per share as if they adopted the fair value based method of accounting. The disclosure requirements for SFAS 123 are effective for the Bank's fiscal year beginning October 1, 1996. The Bank has elected to continue to account for stock-based compensation under APB 25 and the pro forma disclosures required by SFAS 123 have been included in Note 10 to the consolidated financial statements. The adoption of SFAS 123 had no impact on the Bank's consolidated financial statements. Interest-rate risk The Bank is principally engaged in the business of attracting deposits from the general public and using these deposits, together with borrowings and other funds, to reinvest in investment and mortgage-backed securities and to make loans secured by real estate and, to a lesser extent, consumer loans. The potential for interest-rate risk exists as a result of the shorter duration of the Bank's interest-sensitive liabilities compared to the generally longer duration of interest-sensitive assets. In a rising rate environment, liabilities will reprice faster than assets, thereby reducing the market value of long-term assets and net interest income. For this reason, management regularly monitors the maturity structure of the Bank's assets and liabilities in order to measure its level of interest rate risk and plan for future volatility. Income taxes Federal and state income taxes are provided for utilizing the asset and liability method. Under the asset and liability method, temporary differences between the basis of assets and liabilities for financial reporting and tax purposes are measured as of the statement of financial condition date. Deferred tax liabilities or recognizable deferred tax assets are calculated on such differences, using current statutory rates which result in future taxable or deductible amounts. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. The Corporation and the subsidiaries file a consolidated federal income tax return. Income taxes are allocated to the Corporation and the sudsidiaries based on the contribution of their income to the consolidated return. Separate state income tax returns are filed by the Corporation and the subsidiaries. Net income per common share and common stock equivalents Net income per common share and common stock equivalents is based on the weighted average number of common shares actually outstanding during the 16 period plus the shares that would be outstanding assuming the exercise of dilutive stock options, all of which are considered to be common stock equivalents. The number of shares that would be issued from the exercise of stock options has been reduced by the number of shares that could have been purchased from the proceeds at the average price of the Corporation's common stock. See Note 18. Reclassification Certain amounts for the prior years have been reclassified to conform with the current year's presentation. - -------------------------------------------------------------------------------- 2. INVESTMENT SECURITIES A summary of investment securities held to maturity and available for sale is as follows:
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 ============ ============ ============ ============
17
September 30, 1997 ----------------------------------------------------- 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 ........... $22,991,739 $ 6,875 $ 27,239 $22,971,375 After five years but within ten years .......... 64,962,649 281,619 454,993 64,789,275 After ten years ................................ 8,000,000 25,000 21,300 8,003,700 ----------- ----------- ----------- ----------- 95,954,388 313,494 503,532 95,764,350 ----------- ----------- ----------- ----------- Obligations of states and political subdivisions: After ten years ............................... 597,497 25,003 -- 622,500 ----------- ----------- ----------- ----------- $96,551,885 $ 338,497 $ 503,532 $ 96,386,850 =========== =========== =========== =========== Investment Securities Available For Sale U.S. Government (including agencies): Within one year ................................ $ 8,000,000 $ -- $ 15,600 $ 7,984,400 After one year but within five years .......... 10,000,000 -- 90,100 9,909,900 After five years but within ten years ......... 41,822,275 333,264 131,384 42,024,155 ----------- ----------- ----------- ----------- 59,822,275 333,264 237,084 59,918,455 ----------- ----------- ----------- ----------- Equity Securities ............................... 800,000 23,500 -- 823,500 ----------- ----------- ----------- ----------- $60,622,275 $ 356,764 $ 237,084 $60,741,955 =========== =========== =========== ===========
There were no sales of investment securities held to maturity and available for sale during the years ended September 30, 1995, 1996 and 1997. In November 1995 the Financial Accounting Standards Board issued guidance on the implementation of "Special Report-A Guide To Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" (Special Report). This Special Report provided an opportunity for a one-time reassessment of the classification of securities as of a single measurement date between November 15, 1995, and December 31, 1995. As a result, securities held to maturity with an amortized cost of $58,765,000 and a net unrealized gain of $529,000 were transferred to securities available for sale on December 31, 1995. These securities were transferred to increase the overall level of liquidity and improve the ability to manage interest rate risk. 3. MORTGAGE-BACKED SECURITIES A summary mortgage-backed securities is as follows:
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 ============ ============ ============ ============
September 30, 1997 --------------------------------------------------------- Gross Gross Estimated Carrying Unrealized Unrealized Fair Value Gains Losses Value ------------ ------------ ------------ ------------ Mortgage-Backed Securities Held To Maturity Government National Mortgage Association ....................... $ 62,595,447 $ 1,404,217 $ -- $ 63,999,664 Federal Home Loan Mortgage Corporation ......................... 35,726,553 409,980 265,291 35,871,242 Federal National Mortgage Association .......................... 30,556,079 182,409 155,962 30,582,526 Collateralized Mortgage Obligations ............................ 33,885,446 1,836 694,728 33,192,554 ------------ ------------ ------------ ------------ $162,763,525 $ 1,998,442 $ 1,115,981 $163,645,986 ============ ============ ============ ============ Mortgage-Backed Securities Available For Sale Government National Mortgage Association ....................... $ 33,217,483 $ 774,300 $ -- $ 33,991,783 Federal Home Loan Mortgage Corporation ......................... 9,473,817 189,614 -- 9,663,431 Federal National Mortgage Association .......................... 9,616,497 121,624 -- 9,738,121 ------------ ------------ ------------ ------------ $ 52,307,797 $ 1,085,538 $ -- $ 53,393,335 ============ ============ ============ ============
There were no sales of mortgage-backed securities held to maturity and available for sale during the years ended September 30, 1995, 1996 and 1997. The contractual maturities of the mortgage-backed securities generally exceed 20 years; however, the effective average life is expected to be significantly less, due to anticipated prepayments. 19 - -------------------------------------------------------------------------------- 4. LOANS RECEIVABLE, NET A summary of loans receivable is as follows:
September 30, --------------------------- 1996 1997 ------------ ------------ Real estate mortgage: One-to-four family ........................................................... $ 65,509,636 $ 77,761,695 Multi-family ................................................................. 28,190,149 15,088,127 Commercial ................................................................... 29,882,549 22,321,707 ------------ ------------ 123,582,334 115,171,529 Real estate construction ....................................................... 125,000 219,256 ------------ ------------ Consumer: Passbook or certificate ...................................................... 184,185 229,172 Home equity .................................................................. 13,543,650 14,348,020 ------------ ------------ 13,727,835 14,577,192 Total loans .................................................................... 137,435,169 129,967,978 ------------ ------------ Less: Allowance for loan losses ................................................ 2,458,777 2,357,396 Deferred loan fees and discounts ...................................... 428,588 300,057 ------------ ------------ 2,887,365 2,657,453 $134,547,804 $127,310,525
Non-accrual and restructured loans were as follows (in thousands):
September 30, ------------------------------------------ 1995 1996 1997 ------------ ------------ ------------ Non-accrual ................................................................. $ 1,928 $ 999 $ 722 Restructured ................................................................ 4,167 2,135 2,103 ------------ ------------ ------------ $ 6,095 $ 3,134 $ 2,825 ============ ============ ============
The impact of non-accrual and restructured loans on interest income is as follows (in thousands):
Year Ended September 30, ------------------------------------------ 1995 1996 1997 ------------ ------------ ------------ Interest income if performing in accordance with original terms ................ $ 622 $ 325 $ 303 Interest income actually recorded .............................................. 349 154 143 ------------ ------------ ------------ Interest income lost ........................................................... $ 273 $ 171 $ 160 ============ ============ ============
At September 30, 1996 and 1997, the impaired loan portfolio was primarily collateral dependent as defined under SFAS 114 and totaled $654,000 for which general and specific allocations to the allowance for loan losses of $262,000 were identified. The average balance of impaired loans during the 1996 and 1997 fiscal year was $654,000. The amount of cash basis interest income that was recognized on impaired loans during the year ended September 30, 1996 and 1997 was $-0- . An analysis of the allowance for loan losses is as follows: Year Ended September 30, ---------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Balance-beginning .................... $ 3,368,816 $ 2,603,852 $ 2,458,777 Losses charged to allowance........... (764,964) (145,075) (101,381) ----------- ----------- ----------- Balance-ending ....................... $ 2,603,852 $ 2,458,777 $ 2,357,396 =========== =========== =========== 20 The activity during the years ended September 30, 1996 and 1997, with respect to loans to directors, officers and associates of such persons is as follows: Balance -- September 30, 1995 .................................. $ 546,815 Loan principal repayments ...................................... (38,903) ----------- Balance -- September 30, 1996 .................................. 507,912 Loans originated ............................................... 118,000 Loan principal repayments ...................................... (123,173) ----------- Balance -- September 30, 1997 .................................. $ 502,739 =========== - -------------------------------------------------------------------------------- 5. PREMISES AND EQUIPMENT, NET A summary of premises and equipment is as follows: September 30, -------------------------- 1996 1997 ----------- ----------- Land .............................................. $ 247,037 $ 247,037 ----------- ----------- Buildings and improvements ........................ 1,477,229 1,477,229 Less accumulated depreciation ..................... 719,893 771,640 ----------- ----------- 757,336 705,589 Furnishings and equipment ......................... 1,219,222 1,454,554 Less accumulated depreciation ..................... 988,460 1,084,462 ----------- ----------- 230,762 370,092 ----------- ----------- $ 1,235,135 $ 1,322,718 =========== =========== Depreciation charges are computed on the straight-line method over the assets' estimated useful lives, which range from 10 to 40 years for buildings and improvements and 3 to 10 years for furnishings and equipment - -------------------------------------------------------------------------------- 6. INTEREST RECEIVABLE A summary of interest receivable is as follows:
September 30, -------------------------- 1996 1997 ----------- ----------- Loans ........................................................... $ 968,493 $ 864,939 Mortgage-backed securities held to maturity ..................... 968,245 971,265 Mortgage-backed securities available for sale ................... 216,679 305,044 Investment securities held to maturity .......................... 1,697,054 1,646,319 Investment securities available for sale ........................ 676,883 796,770 ----------- ----------- $ 4,527,354 $ 4,584,337 =========== ===========
- -------------------------------------------------------------------------------- 7. DEPOSITS A summary of deposits by type is as follows: September 30, ------------------------------------------------ 1996 1997 --------------------- ------------------------ Weighted Weighted Average Average Interest Interest Rate Amount Rate Amount ----- ------------ ----- ------------ Demand: Non-interest-bearing ........ 0.00% $ 3,941,492 0.00% $ 4,754,356 Interest-bearing ............ 3.15% 87,091,543 3.11% 87,026,200 ------------ ------------ 3.01% 91,033,035 2.97% 91,780,556 Savings and club .............. 2.73% 57,429,028 2.74% 55,662,965 Certificates of deposit ....... 5.32% 246,118,548 5.51% 263,577,198 ------------ ------------ 4.41% $394,580,611 4.57% 411,020,719 ============ =========== 21 Certificates of deposit with balances of $100,000 or more totalled approximately $15,322,000 and $17,500,000 at September 30, 1996 and 1997, respectively. The scheduled maturities of certificates of deposit are as follows: September 30, ------------------- 1996 1997 -------- -------- (In Thousands) One year or less ......................................... $206,483 $213,917 After one to two years ................................... 28,380 36,809 After two to three years.................................. 6,925 8,769 After three years ........................................ 4,331 4,082 -------- -------- $246,119 $263,577 ======== ======== A summary of interest expense on deposits is as follows:
Year Ended September 30, 1995 1996 1997 ----------- ----------- ----------- Interest-bearing demand .................. $ 3,499,629 $ 2,854,521 $ 2,735,882 Savings and club ......................... 1,897,746 1,622,457 1,566,213 Certificates of deposit less than $100,000 11,288,140 12,604,742 13,466,098 Certificates of deposit $100,000 or more . 544,292 725,146 890,083 ----------- ----------- ----------- $17,229,807 $17,806,866 $18,658,276 =========== =========== ===========
- -------------------------------------------------------------------------------- 8. BORROWINGS The following is a summary of borrowings:
At September 30 ----------- ----------- 1996 1997 ----------- ----------- Contractual Maturity 1997 ................................. $50,475,000 $ -- 1998 ................................. 4,500,000 51,875,000 1999 ................................. 9,300,000 15,800,000 ----------- ----------- $64,275,000 $67,675,000 =========== =========== Weighted average interest rate at the end of the period ......... 5.79% 5.84% Weighted average interest rate during the period ................ 5.77% 5.87% Average amount outstanding during the period .................... $22,951,000 $63,223,000 Maximum amount outstanding at any month-end during the period.... $64,550,000 $68,775,000
Securities collateralizing the borrowings included agencies and mortgage-backed securities, which had an amortized cost of $68.0 million and $74.3 million and a fair value of $68.5 million and $74.4 million at September 30, 1996 and 1997, respectively. The securities underlying the borrowings are under the Bank's control. - -------------------------------------------------------------------------------- 9. STOCKHOLDERS' EQUITY On June 21, 1996, the Corporation completed a buyback of 837,080 shares of its common stock under a stock repurchase plan utilizing the Modified Dutch Auction method of repurchase. The transaction resulted recording of treasury stock of $14,975,000. Dividends payable by the Bank to the Corporation and dividends payable by the Corporation to stockholders are subject to various limitations imposed by federal and state laws, regulations and policies adopted by federal and state regulatory agencies. The Bank is required by federal law to obtain FDIC approval for the 22 payment of dividends if the total of all dividends declared by the Bank in any year exceed the total of the Bank's net profits (as defined) for that year and the retained net profits (as defined) for the preceding two years, less any required transfers to surplus. Under New Jersey law, the Bank may not pay dividends unless, following payment, the capital stock of the Bank would be unimpaired and (a) the Bank will have a surplus of not less than 50% of its capital stock, or, if not, (b) the payments of such dividends will not reduce the surplus of the Bank. - -------------------------------------------------------------------------------- 10. BENEFIT PLANS Retirement plan The Bank has a non-contributory defined contribution plan covering all eligible employees. Pension plan costs are determined by a money purchase type formula. Total pension plan expense for the years ended September 30, 1995, 1996 and 1997 amounted to $144,000, $160,000 and $181,000, respectively. Stock option plan The Bank maintains a stock option plan (Plan) for its directors, officers and certain other employees. Options granted under the Plan are vested at grant date and are exercisable over a period not to exceed ten years. Changes in the number of shares outstanding under the Plan and the weighted average exercise price of those shares are as follows:
1995 1996 1997 ------------------------ ------------------------ ------------------------- Weighted Weighted Weighted Number Average Number Average Number Average of Shares Exercise Price of Shares Exercise Price of Shares Exercise Price --------- -------------- --------- -------------- --------- -------------- Outstanding at beginning of period ................ 318,552 $ 9.99 304,852 $11.29 273,858 $11.597 Granted ........................................... 48,000 14.00 3,136 17.00 82,000 16.000 Exercised ......................................... 61,700 6.68 34,130 9.37 30,670 7.119 Outstanding at end of period ...................... 304,852 $11.29 273,858 $11.59 325,188 $13.095
For options that were granted in 1995, 1996, and 1997, the exercise price of the options equaled the market value of the stock at grant date. The following table summarizes information about the stock options outstanding at September 30, 1997: Options Outstanding and Exercisable ----------------------------------- Range Weighted Average Weighted of Number of Remaining Average Exercise Shares Contractual Exercise Prices Outstanding Life in Years Price ---------------- ------------ ---------------- --------- $ 6.625-$ 8.8125 63,152 5.0 $ 8.506 13.000- 17.000 262,036 7.3 14.201 $ 6.625-$17.000 325,188 6.8 $13.095 The Bank applies APB 25 in accounting for the Plan. Consistent with SFAS 123, if compensation cost for the Plan was included as compensation expense, the Bank's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 1996 1997 ---------- ---------- Net income: As reported ... $3,492,609 $5,675,159 Pro forma ..... 3,476,713 5,274,212 Earnings per share: As reported ... $ 0.94 $ 1.80 Pro forma ..... $ 0.93 $ 1.67 23 The fair value of stock options granted by the Bank was estimated through the use of the Black-Scholes option-pricing model that takes into account the following factors as of the grant date: the exercise price and expected life of the option, the market price of the underlying stock at the grant date and its expected volatility, and the risk-free interest rate for the expected term of the option. In deriving the fair value of the stock options, the stock price at the grant date is reduced by the value of the dividends to be paid during the life of the option. The following assumptions were used for grants in 1996 and 1997: dividend yield of 3.00% and an expected volatility of 50% and the risk free interest rate of 5.79% and 6.59% for 1996 and 1997, respectively. The effects of applying SFAS 123 on the pro forma net income may not be representative of the effect on pro forma net income for future years. - -------------------------------------------------------------------------------- 11. INCOME TAXES The bad debt reserve method which was available to thrift institutions has been repealed for tax years beginning after December 1995. As a result, the Bank may no longer use the percentage of taxable income reserve method. A large thrift (one with more than $500 million in assets) must use the specific charge-off method to compute its bad debt deduction. Upon repeal, the Bank is required generally to recapture into income the portion of its bad debt reserve (other than supplemental reserve) that exceeds its base year reserves, approximately $808,000. The recapture amount generally will be taken into income ratably (on a straight-line basis) over a six year period. If the Bank meets the "residential loan requirement" for a tax year beginning in 1996 or 1997, the recapture of the reserves will be suspended for such tax year. Thus, the recapture can potentially be deferred for up to two years. The residential loan requirement is met if the principal amount of housing loans made by the Bank during the year at issue (1996 or 1997) is at least as much as the average principal amount of loans made during the six most recent years prior to 1996. Refinancing and home equity loans are excluded. As of September 30, 1997, the Bank has met the "residential loan requirement". The Bank has not recognized a deferred tax liability of approximately $1,950,000 for "bad debt reserves" for tax purposes which arose in tax years beginning before December 31, 1987 (i.e., base year). A deferred tax liability will be recognized if the Bank expects that charges to the bad debt reserves, other than losses on loans or recomputations of bad debt deductions resulting from operating loss carrybacks to prior years, would result in taxable income. Total income tax expense for each of the years in the three-year period ended September 30, 1997 was allocated as follows (in thousands):
1995 1996 1997 ------- -------- ------- Income from operations .................................... $ 2,895 $ 1,959 $ 3,204 Stockholders' equity: Net unrealized (depreciation) appreciation on securities available for sale , net of taxes ...................... -- (82) 360 ------- ------- ------- $ 2,895 $ 1,877 $ 3,564 ====== ====== ======
24 Income tax expense for the years ended September 30, 1995, 1996, and 1997 is made up of the following components: Year Ended September 30, ----------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Current tax expense: Federal ....................... $ 2,578,063 $ 2,537,250 $ 1,925,478 State ......................... 221,449 227,258 206,464 ----------- ----------- ----------- 2,799,512 2,764,508 2,131,942 Deferred tax expense: Federal ....................... 82,846 (760,740) 1,013,303 State ......................... 12,412 (44,302) 59,010 ----------- ----------- ----------- 95,258 (805,042) 1,072,313 ----------- ----------- ----------- $ 2,894,770 $ 1,959,466 $ 3,204,255 =========== =========== =========== A reconciliation between the effective income tax expense and the amount calculated by multiplying the applicable statutory Federal income tax rate of 34% for the years ended September 30, 1995, 1996 and 1997 is as follows:
Year Ended September 30, 1995 1996 1997 ----------- ----------- ----------- Computed "expected" Federal tax expense .... $ 2,774,394 $ 1,853,706 $ 3,019,001 State income tax, net of Federal tax benefit 154,348 120,751 175,213 Tax-exempt interest ........................ (13,135) (13,145) (13,046) Other ...................................... (20,837) (1,846) 23,087 ----------- ----------- ----------- $ 2,894,770 $ 1,959,466 $ 3,204,255 =========== =========== ===========
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1996 and 1997 are as follows: September 30, ------------------------- 1996 1997 ----------- ----------- From operations: Deferred tax assets Allowance for loan and real estate losses ...... $ 884,668 $ 848,191 Deferred fees .................................. 133,726 111,278 Core deposit amortization ...................... 74,358 66,562 Organization costs ............................. 651 -- Non-accrued interest ........................... 36,700 36,700 BIF/SAIF Special assessment .................... 971,460 -- ----------- ----------- Total gross deferred assets ............. 2,101,563 1,062,731 ----------- ----------- Deferred tax liabilities Depreciation ................................... 35,417 35,011 Discount accretion on bonds .................... 19,340 27,739 Bad debt tax reserve in excess of base year .... 265,252 290,740 ----------- ----------- Total gross deferred tax liabilities .... 320,009 353,490 ----------- ----------- Net deferred tax asset from operations ......... 1,781,554 709,241 Shareholders' equity - unrealized (gains) losses on securities available for sale ............. 123,348 (433,638) ----------- ----------- Total net deferred tax assets ............... $ 1,904,902 $ 275,603 =========== =========== 25 Management believes, based upon current facts, that more likely than not there will be sufficient taxable income in future years to realize the net deferred tax asset. However, there can be no assurance about the levels of future earnings. - -------------------------------------------------------------------------------- 12. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios. Total Tier 1 capital (as defined in the regulations) to risk- weighted assets (as defined), and of Tier 1 capital, (as defined), to total assets (as defined). Management believes, as of September 30, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of September 30, 1997, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are also presented in the table.
Required To be well capitalized for capital under prompt corrective Actual adequacy purposes action provision --------------------- ---------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 1996 Total capital (to risk-weighted assets) $38,112 24.49% $12,448 8.00% $15,560 10.00% Tier 1 capital (to risk-weighted assets) 36,167 23.24% 6,224 4.00% 9,336 6.00% Tier 1 capital (to total assets) ....... 36,167 7.20% 20,100 4.00% 25,112 5.00% - ------------------------------------------------------------------------------------------------------------- As of September 30, 1997 Total capital (to risk-weighted assets) $41,550 27.74% $11,982 8.00% $14,977 10.00% Tier 1 capital (to risk-weighted assets) 39,678 26.49% 5,991 4.00% 8,986 6.00% Tier 1 capital (to total assets) ....... 39,678 7.54% 21,041 4.00% 26,301 5.00% - -------------------------------------------------------------------------------------------------------------
26 - -------------------------------------------------------------------------------- 13. COMMITMENTS AND CONTINGENCIES The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and purchase securities. The commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but primarily includes residential real estate and commercial real estate properties. Commitments to purchase securities are contracts for delayed delivery of securities in which the seller agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in securities values and interest rates. The Bank has the following outstanding commitments: September 30, ------------------------- 1996 1997 ----------- ----------- To originate loans .......................... $ 3,094,000 $16,409,000 =========== =========== Homeowners' Equity Credit Line Program....... $11,002,000 $10,711,000 =========== =========== Commitments to purchase securities .......... $ -- $ 200,000 =========== =========== At September 30, 1997, of the $16,409,000 in outstanding commitments to originate loans, $3,668,000 are for loans at fixed interest rates within a range of 7.125% to 8.625% and $12,741,000 are for adjustable rate loans. The Homeowners' Equity Credit Line Program represents undisbursed funds from approved lines of credit. Unless specifically cancelled by notice from the Bank, these are firm commitments to the respective borrowers on demand. The lines of credit are secured by the respective one to four-family residential properties owned by the borrowers. The interest rate charged for any month on funds disbursed under the program ranges from 1.00% to 1.50% above the prime rate as most recently published in The Wall Street Journal prior to the last business day of the month immediately preceding the month in which the billing cycle begins. The Corporation also has, in the normal course of business, commitments for services and supplies. Management does not anticipate losses on any of the above-mentioned commitments. The Corporation is also a party to litigation which arises primarily in the ordinary course of business. In the opinion of management, the ultimate disposition of such litigation should not have a material effect on the consolidated financial statements of the Corporation. 27 - -------------------------------------------------------------------------------- 14. FRAUD LOSS On July 6, 1994, the Bank discovered that a portfolio of approximately $8.4 million of bridge loans believed to be secured by residential real estate were in fact made to fictitious borrowers and collateralized by fictitious properties. The loans had been extended based upon fraudulent mortgage applications and related documentation submitted to the Bank by its then general counsel. Through September 30, 1996, the Bank received approximately $3.0 million from the settlement of its surety bond claim and the liquidation of other assets and charged-off amounts approximating $3.7 million. As of September 30, 1996, the receivable in other assets was $1.7 million. The Bank then filed claims under the malpractice insurance coverage available in order to recover all unpaid amounts. During the 1997 fiscal period, the Bank was able to reach a settlement for its claim against the malpractice insurance carriers and the matter was concluded with no additional loss charged to operations. - -------------------------------------------------------------------------------- 15. RECAPITALIZATION OF SAVINGS INSTITUTION INSURANCE FUND ("SAIF") On September 30, 1996, legislation was enacted, which among other things, imposed a special one-time assessment on SAIF member institutions, including the Bank, to recapitalized the SAIF and spreads the obligations for payment of Financing Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF") members. The Federal Deposit Insurance Corporation ("FDIC") special assessment being levied amounts to 65.7 basis points on SAIF assessable deposits held as of March 31, 1995. The special assessment was recognized in the fourth quarter of fiscal 1996 and was tax deductible. The Bank took a charge of $2.7 million before tax-effect, as a result of the FDIC special assessment. This legislation will eliminate the substantial disparity between the amount that BIF and SAIF had been paying for deposit insurance premiums. Beginning on January 1, 1997, BIF members began paying a portion of the FICO payment equal to 1.3 basis points on BIF-insured deposits compared to 6.4 basis points on SAIF-insured deposits, and will pay a pro rata share of the FICO payment on the earlier of January 1, 2000, or the date upon which the last savings association ceases to exist. The legislation also requires BIF and SAIF to be merged by January 1, 1999, provided that subsequent legislation is adopted to eliminate the savings association charter and no savings associations remain as of that time. The FDIC has lowered SAIF assessments to a range comparable to that of BIF members, although SAIF members must also make the FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an on-going basis or whether the BIF and SAIF will eventually be merged. - -------------------------------------------------------------------------------- 16. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" requires disclosure of estimated fair values for financial instruments. Limitations The fair value estimates are made at a discrete point in time based on relevant market information and information about the financial instruments. Fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Further, the foregoing estimates may not reflect the actual amount that could be realized if all or substantially all of the financial instruments were offered for sale at one time. In addition, the fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to value the anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets and liabilities include mortgage servicing rights, premises and equipment and advances from borrowers for taxes and insurance. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies introduces a greater degree of subjectivity to these estimated fair values. The estimation methodologies used and the estimated fair values and carrying values of financial instruments are set forth below: Cash and cash equivalents and interest receivable The carrying amounts for cash and cash equivalents approximate fair value. Investment and mortgage-backed securities Available for sale securities are reported at their respective fair values in the Consolidated Statements of Financial Condition. These values were based on quoted market prices. The fair values of securities held to maturity were also based upon quoted market prices. Loans receivable The fair value of fixed rate loans receivable is estimated by discounting the future cash flows, using the current rates at which similar loans with similar remaining maturities would be made to borrowers with similar credit ratings. For those loans with floating interest rates, it is presumed that estimated fair values generally approximate their recorded book balances. Deposits The fair value of demand, savings and club accounts is equal to the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting future cash flows using rates currently offered for deposits of ar remaining maturities. For those deposits with floating interest rates, it is presumed that estimated fair values generally approximate their recorded book balances. Borrowings The fair values for borrowings are calculated by discounting estimated future cash flows using current rates offered for similar remaining maturities. Commitments The fair values of commitments related to loans approximate their fair value and are estimated using fees currently charged to enter into similar agreements taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest and the committed rates. The fair value of commitments to purchase mortgage-backed securities is based upon quoted market prices of similar securities. 29
September 30, --------------------------------------- 1996 1997 ------------------- ------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (In Thousands) Financial assets Cash and cash equivalents ........................... $ 4,750 $ 4,750 $ 15,476 $ 15,476 Investment securities available for sale .......... 39,055 39,055 60,742 60,742 Mortgage-backed securities available for sale ..... 40,255 40,255 53,393 53,393 Investment securities held to maturity .............. 105,549 103,192 96,552 96,387 Mortgage-backed securities held to maturity.......... 164,092 162,617 162,764 163,646 Loans receivable ................................... 134,548 134,270 127,311 128,035 Financial liabilities Deposits ............................................ 394,581 393,419 411,021 409,844 Borrowings .......................................... 64,275 64,219 67,675 67,292
- -------------------------------------------------------------------------------- 17. PARENT CORPORATION FINANCIAL DATA The following condensed financial statements of the Corporation should be read in conjunction with the notes to consolidated financial statements. STATEMENTS OF FINANCIAL CONDITION September 30, ---------------------------- 1996 1997 ------------ ------------ Assets Cash ........................................ $ 74,730 $ 26,956 Loans receivable from subsidiary ............ 950,000 1,950,000 Investment in subsidiaries .................. 35,941,076 40,436,444 Investment securities available for sale .... -- (823,500) Fraud loss receivable ....................... 1,565,000 -- Due from subsidiary ......................... 498,766 530,061 Other assets ................................ -- 9,980 ------------ ------------ Total assets .............................. $ 39,029,572 $ 43,776,941 ============ ============ Liabilities and stockholders' equity Liabilities Dividends payable ........................... $ 533,729 $ 539,096 Other liabilities ........................... 37,309 31,286 ------------ ------------ Total liabilities ......................... 571,038 570,382 ------------ ------------ Stockholders' equity Common stock ................................ 4,111,958 4,142,628 Paid-in-capital in excess of par value ...... 12,105,541 12,293,206 Retained earnings-- substantially restricted 39,147,609 42,676,884 Unrealized loss on securities available for sale, net of tax .......................... (229,074) 771,341 Treasury stock, at cost ..................... (16,677,500) (16,677,500) ------------ ------------ Total stockholders' equity ................ 38,458,534 43,206,559 ------------ ------------ Total liabilities and stockholders' equity $ 39,029,572 $ 43,776,941 ============ ============ 30 STATEMENTS OF INCOME
Year Ended September 30, ------------------------------------ 1995 1996 1997 ---------- ---------- ---------- Income: Dividends from subsidiary .................. $2,696,110 $2,423,495 $2,145,884 Interest ................................... 90,524 170,732 81,887 Miscellaneous .............................. -- -- 12,595 ---------- ---------- ---------- Total Income ........................... 2,786,634 2,594,227 2,240,366 ---------- ---------- ---------- Expenses: Miscellaneous ......................... 83,550 58,422 64,438 ---------- ---------- ---------- Total Expenses ......................... 83,550 58,422 64,438 ---------- ---------- ---------- Income before income taxes and equity in undistributed earnings of subsidiary .... 2,703,084 2,535,805 2,175,928 Income taxes ................................ 5,362 39,293 10,760 ---------- ---------- ---------- Income before equity in undistributed earnings . 2,697,722 2,496,512 2,165,168 Undistributed earnings of subsidiary ...... 2,567,491 996,097 3,509,991 ---------- ---------- ---------- Net income ..................................... $5,265,213 $3,492,609 $5,675,159 ========== ========== ==========
STATEMENTS OF CASH FLOWS
Year Ended September 30, ---------------------------------------------- 1995 1996 1997 ------------- ------------ ------------- Cash flows from operating activities: Net income .................................... $ 5,265,213 $ 3,492,609 $ 5,675,159 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in undistributed earnings of subsidiary ................... (2,567,491) 767,023 (3,494,953) Decrease (increase) in due from subsidiary .. 23,212 69,100 (31,295) (Increase) decrease in fraud loss receivable (1,600,000) 35,000 1,565,000 Decrease (increase) in other assets ......... 18,731 -- (9,980) Increase (decrease) in dividends payable ................................... 9,255 (44,195) 5,367 Increase (decrease) in other liabilities .... 448 9,861 (6,023) ------------ ------------ ------------ Net cash provided by operating activities ............................ 1,149,368 4,329,398 3,703,275 ------------ ------------ ------------ Cash flows provided by investing activities: Purchase of investment securities ........... -- -- 823,500 Distribution from Bank subsidiary ........... -- 12,733,880 -- Decrease (increase) in loans receivable from subsidiary ........................... 1,100,000 50,000 (1,000,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities ................. 1,100,000 12,783,880 (1,823,500) ------------ ------------ ------------ Cash flows from financing activities: Issuance of common stock .................... 412,263 319,902 218,335 Cash dividends paid ......................... (2,696,111) (2,423,494) (2,145,884) Purchase of treasury stock .................. -- (14,975,000) -- ------------ ------------ ------------ Net cash used in financing activities .. (2,283,848) (17,078,592) (1,927,549) ------------ ------------ ------------ Net (decrease) increase in cash ............... (34,480) 34,686 (47,774) Cash -- beginning ............................. 74,524 40,044 74,730 ------------ ------------ ------------ Cash -- ending ................................ $ 40,044 $ 74,730 $ 26,956 ============ ============ ============
31 - -------------------------------------------------------------------------------- 18. IMPACT OF NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted and requires restatement of all prior-period EPS data presented. If the Bank had adopted SFAS 128, basic EPS would have been $1.37, $0.96, and $1.85 for 1995, 1996, and 1997, respectively. Diluted EPS would have been the same as the earnings per share reported. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid in capital in the equity section of a statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management has not yet determined the impact of the adoption on its reporting of operations. 32 - -------------------------------------------------------------------------------- 19. QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of the quarterly consolidated financial data is as follows:
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 expense .......................................... 1,341 1,388 1,363 4,382(1) ------- ------- ------- ------- Income before income taxes .................................... 2,075 2,100 2,162 (885) Income taxes .................................................. 752 755 773 (320) ------- ------- ------- ------- Net income (loss) ............................................. $ 1,323 $ 1,345 $ 1,389 $ (565) ======= ======= ======= ======= Net income (loss) per common share and common stock equivalents $ 0.33 $ 0.34 $ 0.36 $ (0.18) ======= ======= ======= ======= Dividends per common share .................................... $ 0.175 $ 0.175 $ 0.175 $ 0.175 ======= ======= ======= =======
(1) Includes a pre-tax charge of approximately $2.7 million as a result of the FDIC's one-time special SAIF insurance assessment. See Note 15.
First Second Third Fourth Year Ended September 30, 1997 Quarter Quarter Quarter Quarter - ----------------------------- ------- ------- ------- ------- (In Thousands, Except Per Share Data) Interest income ........................................ $8,843 $9,015 $9,086 $9,075 Interest expense ....................................... 5,487 5,506 5,647 5,735 ------ ------ ------ ------ Net interest income .................................. 3,356 3,509 3,439 3,340 Non-interest income .................................... 111 76 192 131 Non-interest expense ................................... 1,366 1,357 1,328 1,224 ------ ------ ------ ------ Income before income taxes ............................. 2,101 2,228 2,303 2,247 Income taxes ........................................... 769 798 825 812 ------ ------ ------ ------ Net income ............................................. $1,332 $1,431 $1,478 $1,435 ====== ====== ====== ====== Net income per common share and common stock equivalents $ 0.43 $ 0.45 $ 0.47 $ 0.45 ====== ====== ====== ====== Dividends per common share ............................. $0.175 $0.175 $0.175 $0.175 ====== ====== ====== ======
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, 1996 and 1997 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended September 30, 1997. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of September 30, 1996 and 1997 and the results of their operations and their cash flows for the each of the years in the three-year period ended September 30, 1997 in conformity with generally accepted accounting principles. /s/KPMG Peat Marwick LLP Short Hills, New Jersey October 24, 1997 34 Executive Officers of the Corporation and the Bank BENJAMIN S. KONOPACKI Chairman of the Board, former President, Pulse Savings Bank GEORGE T. HORNYAK, JR. President and CEO and Director, Pulse Bancorp, Inc. and Pulse Savings Bank THOMAS B. KONOPACKI Executive Vice President and CFO, Pulse Bancorp, Inc. and Pulse Savings Bank RONALD E. VAUGHN, JR. Senior Vice President and Chief Lending Officer, Pulse Bancorp, Inc. and Pulse Savings Bank JEFFREY M. GOSTKOWSKI Vice President of Operations, Pulse Bancorp, Inc. and Pulse Savings Bank PATRICIA M. BARSZCZ Vice President and Asst. Secretary, Pulse Bancorp, Inc. and Pulse Savings Bank CATHERINE D. FRANZONI Vice President and Treasurer, Pulse Bancorp, Inc. and Pulse Savings Bank NANCY M. JANOSKO Secretary, Pulse Bancorp, Inc. and Pulse Savings Bank Other Officers of the Bank GLENN BROOKS Asst. V.P./Internal Auditor FLORENCE PAWLOWSKI Branch Manager-Asst. Vice President SYLVIA GAN Asst. Vice President GAIL WOLYNEC Asst. V.P./Asst. Secretary RENEE PARSONS Asst. Secretary NADYA CUPRYK Asst. Vice President ARLEEN FERRO Asst. Vice President Directors of the Corporation and the Bank BENJAMIN S. KONOPACKI Chairman, former President, Pulse Savings Bank JOSEPH CHADWICK President of Thomas and Chadwick/Riverside Supply Company GEORGE T. HORNYAK, JR. President and CEO, Pulse Bancorp, Inc. and Pulse Savings Bank EDWIN A. KOLODZIEJ Counsellor at Law WAYNE A. KRONOWSKI Treasurer and Chief Financial Officer of the Borough of Sayreville EDWIN A. ROGINSKI Former Vice President and Chief Compliance Officer of Chase Manhattan Investment Services, Inc. ADAM RZEPKA Director Emeritus FRANK L. CHADWICK Chairman Emeritus ASSOCIATE BOARD South Amboy WALTER FABISZEWSKI EDWARD GLEASON JOHN JANKOWSKI STANLEY KNAST 35 MAIN OFFICE Pulse Bancorp, Inc. 6 Jackson Street P.O. Box 193 South River, New Jersey 08882 (732) 257-2400 (732) 257-2400 - Mortgage Department PULSE SAVINGS BANK OFFICES MAIN OFFICE 6 Jackson Street South River, New Jersey 08882 (732) 257-2400 Washington Avenue & Davis Lane South Amboy, New Jersey 08879 (732) 721-1300 Prospect Plains and Applegarth Roads Monroe Township, New Jersey 08512 (609) 655-1900 213 Summerhill Road East Brunswick, N.J. 08816 (732) 651-6655 1225 Brunswick Avenue Lawrenceville, New Jersey 08648 (609) 394-1500 CORPORATE INFORMATION Nancy M. Janosko Secretary Pulse Bancorp, Inc. 6 Jackson Street P.O. Box 193 South River, New Jersey 08882 (732) 257-2400 TRANSFER AGENT AND REGISTRAR American Stock Transfer and Trust Company 40 Wall Street, 46th Floor New York, New York 10005 (212) 936-5100 SPECIAL COUNSEL Malizia, Spidi, Sloane & Fisch, P.C. One Franklin Square 1301 K Street, N.W. Suite 700 East Washington, D.C. 20005 STOCK LISTING The Corporation's Common Stock is traded over-the-counter on the Nasdaq National Market appearing under the symbol "PULS". MARKET MAKERS Sandler O'Neill & Partners, L.P. Ryan, Beck & Co., Inc. F.J. Morrissey & Co., Inc. ANNUAL MEETING January 22, 1998, 10:00 A.M. Forsgate Country Club Forsgate Drive Jamesburg, New Jersey 08831 10-K INFORMATION: A COPY OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF THE RECORD DATE UPON WRITTEN REQUEST TO THE SECRETARY, PULSE BANCORP, INC., 6 JACKSON STREET, SOUTH RIVER, NEW JERSEY 08882. 36 EX-21 5 EXHIBIT 21 EXHIBIT 21 Subsidiaries of the Registrant Subsidiaries of the Registrant Name Jurisdiction of Incorporation Pulse Savings Bank New Jersey Pulse Investment, Inc. * New Jersey Pulse Real Estate, Inc. * New Jersey Pulse Insurance Services, Inc. * New Jersey * Inactive EX-27 6 ARTICLE 9 FDS FOR FORM 10-K405
9 This schedule contains summary financial information extracted from the annual report on Form 10-K and is qualified in its entirety by reference to such financial information. 1 YEAR SEP-30-1997 SEP-30-1997 3,550,908 0 11,925,000 0 114,135,290 259,315,410 260,032,836 127,310,525 2,357,396 526,015,709 411,020,719 67,675,000 4,113,431 0 0 0 4,142,628 39,063,931 526,015,709 11,012,919 24,272,355 733,708 36,018,982 18,658,276 22,375,034 13,643,672 0 0 5,274,782 8,879,414 8,879,414 0 0 5,675,159 1.80 1.80 1.10 721,536 999,000 2,103,000 7,572,000 2,458,777 101,381 0 2,357,396 2,357,396 0 0
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