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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 of the
Securities Exchange Act of 1934
For the fiscal year ended DECEMBER 31, 1998
Commission File No. 0-18014
PAMRAPO BANCORP, INC.
(exact name of registrant as specified in its charter)
DELAWARE 22-2984813
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
611 AVENUE C, BAYONNE, NEW JERSEY 07002
(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 339-4600
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [_____]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of the
registrant is $51,776,727 and is based upon the last sales price as quoted on
The Nasdaq Stock Market for March 11, 1999.
The Registrant had 2,842,924 shares outstanding as of March 11, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31,
1998 ARE INCORPORATED BY REFERENCE INTO PARTS I AND II OF THIS FORM 10-K.
PORTIONS OF THE PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF STOCKHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K.
2
INDEX
PAGE
----
PART I
Item 1. Business........................................... 4
Item 2. Properties......................................... 38
Item 3. Legal Proceedings.................................. 39
Item 4. Submission of Matters to a Vote of Security Holders 39
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................ 40
Item 6. Selected Financial Data............................ 40
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 40
Item 8. Financial Statements and Supplementary Data........ 40
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 40
PART III
Item 10. Directors and Executive Officers of the Registrant. 41
Item 11. Executive Compensation............................. 41
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................. 41
Item 13. Certain Relationships and Related Transactions..... 41
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................ 42
SIGNATURES
3
PART I
ITEM 1. BUSINESS.
Pamrapo Bancorp, Inc. (also referred to as the "Company" or the
"Registrant") was incorporated under Delaware law on June 26, 1989. On November
10, 1989, the Registrant acquired Pamrapo Savings Bank, S.L.A. (the "Bank" or
"Pamrapo") as a part of the Bank's conversion from a New Jersey chartered
savings association in mutual form to a New Jersey chartered stock savings
association. The Registrant is a savings and loan holding company and is
subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal
Deposit Insurance Corporation ("FDIC") and the Securities and Exchange
Commission ("SEC"). Currently, the Registrant does not transact any material
business other than through its sole subsidiary, the Bank.
Pamrapo was organized in 1887 as Pamrapo Building and Loan Association. On
October 6, 1952, it changed its name to Pamrapo Savings and Loan Association, a
New Jersey chartered savings and loan association in mutual form, and in 1988 it
changed its name to Pamrapo Savings Bank, S.L.A. The Bank's principal office is
located in Bayonne, New Jersey. Its deposits are insured up to applicable
limits by the Savings Association Insurance Fund (the "SAIF") which is
administered by the FDIC. At December 31, 1998, the Bank had total assets of
$413.2 million, deposits of $332.6 million and stockholders' equity of $42.9
million before elimination of intercompany accounts with the Company,
respectively.
As a community-oriented institution, the Bank is principally engaged in
attracting retail deposits from the general public and investing those funds in
fixed-rate one- to four-family residential mortgage loans and, to a lesser
extent, in multi-family residential mortgage loans, commercial real estate
loans, home equity and second mortgage loans, consumer loans and mortgage-backed
securities. The Bank's revenues are derived principally from interest on loans
and mortgage-backed securities, interest and dividends on investment securities
and short-term investments, and other fees and service charges. The Bank's
primary sources of funds are deposits and, to a lesser extent, Federal Home Loan
Bank of New York ("FHLB-NY") advances and other borrowings.
MARKET AREA
The Bank, which is headquartered in Bayonne, New Jersey, conducts its
business through eleven retail banking offices, six of which are located in
Bayonne, New Jersey, one in Hoboken, New Jersey, one in Fort Lee, New Jersey,
two in Brick, New Jersey and one in Jamesburg, New Jersey. The Bank's deposit
base is located primarily in Hudson County, with a large concentration in
Bayonne, an older, stable, residential community of one-family and two-family
residences and middle income families who have lived in the area for many years.
The communities in which the Bank's branches are located are strategically
located in the New York City metropolitan area and many residents of these
communities commute to Manhattan to work on a daily basis. The Bank's lending
activities have also been concentrated in Hudson County and to a lesser extent
in Bergen, Monmouth and Ocean Counties, areas which have had a high level of new
development in recent years.
4
LENDING ACTIVITIES
GENERAL. Pamrapo principally originates fixed-rate mortgage loans on one-
to four-family residential dwellings primarily for retention in its own
portfolio. The Bank also originates acquisition, development and construction
loans in addition to multi-family and commercial real estate loans. At December
31, 1998, the Bank's total gross loans outstanding amounted to $245.4 million,
of which $179.3 million consisted of loans secured by one- to four-family
residential properties, $7.3 million consisted of construction and land loans,
and $55 million consisted of loans secured by multi-family and commercial real
estate. Substantially all of the Bank's real estate loan portfolio consists of
conventional mortgage loans, of which $761,000 million are either insured by the
Federal Housing Administration ("FHA") or partially guaranteed by the Veterans
Administration ("VA").
5
LOAN PORTFOLIO COMPOSITION
The following table sets forth the composition of the Bank's loan and
mortgage-backed securities portfolios in dollar amounts and in percentages at
the dates indicated:
At December 31,
-----------------------------------------------------------------
1994 1995 1996
------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- --------- --------
Real estate mortgage loans:
Permanent:
Fixed-rate........................... $179,492 80.68% $175,034 80.24% $168,727 81.35%
Adjustable rate...................... 7,823 3.52 7,131 3.27 5,453 2.63
Construction(1)....................... 3,572 1.60 3,584 1.64 1,986 .96
Guaranteed by VA or
insured by FHA....................... 2,404 1.08 1,958 .90 1,520 .73
-------- ------ -------- ------ -------- ------
Total mortgage loans.................. $193,291 86.88 $187,707 86.05 $177,686 85.67
-------- ------ -------- ------ -------- ------
CONSUMER LOANS:
Passbook or certificate............... 481 .22 441 .20 391 .19
Home improvement...................... 535 .24 501 .23 446 .22
Equity and second mortgages........... 31,622 14.21 31,487 14.43 30,683 14.79
Education............................. 1,820 .82 1,691 .78 1,351 .65
Automobile............................ 920 .41 1,074 .49 1,107 .53
Personal.............................. 1,302 .59 1,188 .55 1,158 .56
-------- ------ -------- ------ -------- ------
Total consumer loans.................. 36,680 16.49 36,382 16.68 35,136 16.94
-------- ------ -------- ------ -------- ------
Total loans........................... 229,971 103.37 224,089 102.73 212,822 102.61
-------- ------ -------- ------ -------- ------
Less:
Allowance for loan losses............. 3,650 1.64 2,725 1.25 2,800 1.35
Loans in process...................... 1,162 .52 852 .39 466 .22
Deferred loan fees and discounts...... 2,687 1.21 2,372 1.09 2,151 1.04
-------- ------ -------- ------ -------- ------
Total................................. 7,499 3.37 5,949 2.73 5,417 2.61
-------- ------ -------- ------ -------- ------
Total net loans....................... $222,472 100.00% $218,140 100.00% $207,405 100.00%
======== ====== ======== ====== ======== ======
MORTGAGE-BACKED SECURITIES:
GNMA (2).............................. $ 950 .79% $ 849 .75% $ 707 .65%
FHLMC (3) (5)......................... 95,972 79.54 89,234 79.12 86,023 78.34
FNMA (4) (5).......................... 22,769 18.87 22,066 19.56 22,736 20.71
-------- ------ -------- ------ -------- ------
Total mortgage-backed securities...... 119,691 99.20 112,149 99.43 109,466 99.70
ADD/LESS:
Premiums (discounts), net (5)......... 1,070 .89 881 .78 749 .68
Unrealized loss on securities
available for sale................... (105) (.09) (239) (.21) (419) (.38)
-------- ------ -------- ------ -------- ------
Net mortgage-backed securities........ $120,656 100.00% $112,791 100.00% $109,796 100.00%
======== ====== ======== ====== ======== ======
At December 31,
-----------------------------------------------------------------
1997 1998
-------------------------------- --------------------------------
Amount Percent Amount Percent
--------------- --------------- --------------- ---------------
Real estate mortgage loans:
Permanent:
Fixed-rate........................... $168,225 79.67% $189,478 79.27%
Adjustable rate...................... 6,316 2.99 4,385 1.84
Construction(1)....................... 2,638 1.25 7,258 3.04
Guaranteed by VA or
insured by FHA....................... 1,086 .51 761 .32
-------- ------ -------- ------
Total mortgage loans.................. $178,265 84.42 $201,882 84.47
-------- ------ -------- ------
CONSUMER LOANS:
Passbook or certificate............... 431 .20 459 .19
Home improvement...................... 440 .21 508 .21
Equity and second mortgages........... 33,587 15.91 39,184 16.40
Education............................. 753 .36 54 .02
Automobile............................ 1,210 .57 1,273 .53
Personal.............................. 1,445 .68 2,033 .85
-------- ------ -------- ------
Total consumer loans.................. 37,866 17.93 43,511 18.20
-------- ------ -------- ------
Total loans........................... 216,131 102.35 245,393 102.67
-------- ------ -------- ------
Less:
Allowance for loan losses............. 2,475 1.17 2,300 .96
Loans in process...................... 571 .27 2,409 1.01
Deferred loan fees and discounts...... 1,929 .91 1,674 .70
-------- ------ -------- ------
Total................................. 4,975 2.35 6,383 2.67
-------- ------ -------- ------
Total net loans....................... $211,156 100.00% $239,010 100.00%
======== ====== ======== ======
MORTGAGE-BACKED SECURITIES:
GNMA (2).............................. $ 7,978 5.97% $ 5,169 4.08%
FHLMC (3) (5)......................... 97,093 72.63 95,209 75.14
FNMA (4) (5).......................... 27,960 20.91 25,676 20.26
-------- ------ -------- ------
Total mortgage-backed securities...... 133,031 99.51 126,054 99.48
ADD/LESS:
Premiums (discounts), net (5)......... 790 .59 746 .59
Unrealized loss on securities
available for sale................... (135) (.10) (93) (.07)
-------- ------ -------- ------
Net mortgage-backed securities........ $133,686 100.00% $126,707 100.00%
======== ====== ======== ======
6
- ------------------
(1) Includes acquisition and development and land loans.
(2) Government National Mortgage Association ("GNMA").
(3) Federal Home Loan Mortgage Corporation ("FHLMC")
(4) Federal National Mortgage Association ("FNMA").
(5) Includes available for sale securities having a principal balance of
$13,145,000 and a net premium of $344,000 for 1996, a principal balance of
$7,498,000 and a net premium of $214,000 for 1997, and a principal balance
of $6,228,000 and a net premium of $172,000 for 1998.
7
The following table sets forth the composition of the Bank's gross loan
portfolio by type of security at the dates indicated.
At December 31,
---------------------------------------------------------------------------
1996 1997 1998
---------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------------ ---------- ---------- ---------- ---------- ---------
(In thousands)
One-to four-family.................... $151,175 71.04% $155,457 71.93% $179,339 73.08%
Multi-family.......................... 34,051 16.00 32,873 15.21 33,718 13.74
Commercial real estate................ 21,604 10.15 21,324 9.86 21,259 8.66
Construction and land................. 1,985 .93 2,638 1.22 7,258 2.96
Consumer-secured and unsecured........ 4,007 1.88 3,839 1.78 3,818 1.56
-------- ------ -------- ------ -------- ------
Total gross loans.................... $212,822 100.00% $216,131 100.00% $245,392 100.00%
======== ====== ======== ====== ======== ======
ORIGINATION, PURCHASE AND SALE OF LOANS AND MORTGAGE-BACKED SECURITIES.
The following table sets forth the Bank's loan originations, purchases, sales
and principal repayments for the periods indicated.
Year Ended December 31,
---------------------------------------------
1996 1997 1998
--------- ---------- ----------
(In thousands)
Mortgage Loans (gross):
At beginning of period............... $187,707 $177,686 $178,265
-------- -------- --------
Mortgage loans originated:
One- to four-family residential..... 10,462 20,250 43,982
Multi-family residential............ 4,654 6,393 9,193
Commercial.......................... 1,477 1,035 3,028
Construction(1)..................... 1,810 2,976 3,302
-------- -------- --------
Total mortgage loans originated 18,403 30,654 59,505
-------- -------- --------
Mortgage loans purchased............. 109 392 1,785
-------- -------- --------
Transfer to REO...................... 2,176 1,419 992
Charge offs.......................... 398 853 327
Repayments........................... 25,959 28,195 36,355
-------- -------- --------
Total mortgage repayments and
other reductions................... 28,533 30,467 37,674
-------- -------- --------
At end of period..................... $177,686 $178,265 $201,881
======== ======== ========
Consumer Loans (gross):
At beginning of period............... $ 36,382 $ 35,136 $ 37,866
Consumer loans originated............ 8,102 12,202 19,986
Consumer loans sold.................. 771 685 818
Charge-offs.......................... 240 75 157
Repayments........................... 8,337 8,712 13,366
-------- -------- --------
At end of period $ 35,136 $ 37,866 $ 43,511
======== ======== --------
Mortgage-backed securities (gross):
At beginning of period............... $112,149 $109,466 $133,031
Mortgage-backed securities
purchased........................... 12,699 48,959 25,997
Mortgage-backed securities sold...... -- 7,521 --
Repayments........................... 15,382 17,873 32,974
-------- -------- --------
At end of period..................... $109,466 $133,031 $126,054
======== ======== ========
(1) Includes acquisition and development and land loans.
8
LOAN MATURITY. The following table sets forth the maturity of the Bank's
gross loan portfolio at December 31, 1998. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on mortgage loans totaled $26.0 million $28.1 million, and
$34.9 million for the years ended December 31, 1996, 1997 and 1998,
respectively.
At December 31,
--------------------------------------------------------------------------------------------
One- to
four-family Multi-family and
residential commercial real Construction Consumer-secured and
mortgage loans (1) estate loans Loans (2) unsecured loans Total
-------------------------------------------------------------------------------------------
(In thousands)
Amounts due:
Within 1 year........................ $ 113 $ 191 $5,234 $ 376 $ 5,914
-------- ------- ------ ------ --------
After 1 year:
1 to 3 years......................... 2,072 717 25 757 3,571
3 to 5 years......................... 8,085 3,818 -- 1,058 12,961
5 to 10 years........................ 33,993 14,881 576 862 50,312
10 to 20 years....................... 75,311 32,754 73 765 108,903
Over 20 years........................ 59,765 2,616 1,350 -- 63,731
-------- ------- ------ ------ --------
Total due after 1 year............... 179,226 54,786 2,024 3,442 239,478
-------- ------- ------ ------ --------
Total amounts due..................... $179,339 $54,977 $7,258 $3,818 $245,392
======== ======= ====== ====== --------
Less:
Allowance for loan losses............ 2,300
Loans in process..................... 2,409
Deferred loan fees and discounts..... 1,674
--------
6,383
--------
Total................................ $239,009
========
- -------------------
(1) Includes equity and second mortgages.
(2) Includes acquisition and development and land loans.
9
The following table sets forth at December 31, 1998, the dollar amount of
all mortgage,consumer and construction loans, due after December 31, 1999, which
have fixed interest rates or adjustable interest rates:
Due after December 31, 1999
-------------------------------------------------------------------
Fixed Floating or Adjustable Total Due
Rates Rates After One Year
------------ ------------------------- ----------------
(In thousands)
One- to four-family residential (1)... $172,857 $6,369 $179,226
Construction loans.................... 2,024 -- 2,024
Multi-family and commercial real
estate............................... 54,132 654 54,786
Consumer-secured and unsecured
loans................................ 3,442 -- 3,442
-------- ------ --------
Totals $232,455 $7,023 $239,478
======== ====== ========
- ------------------
(1) Includes equity and second mortgages.
RESIDENTIAL MORTGAGE LENDING. Pamrapo presently originates first mortgage
loans, equity loans, second mortgage loans and improvement loans secured by one-
to four-family residences, multi-family residences and commercial real estate.
As of December 31, 1998, 94.2% of gross mortgage loans were fixed-rate loans and
5.8% were ARMs or shorter term construction loans, and were principally
originated for the Bank's portfolio. Residential loan originations are
generally obtained from existing or past customers and members of the local
community. As of December 31, 1998, $213.1 million or 86.8% of the Bank's total
gross loan portfolio consisted of one- to four-family and multi-family
residential mortgage loans, home improvement loans, second mortgage loans and
home equity loans. Of this amount $179.3 million were one- to four-family and
$33.7 million were multi-family.
The one- to four-family residential loans originated by the Bank are
primarily fixed-rate mortgages, generally with terms of 15 or 25 years.
Typically, such homes in the Bayonne area are one- or two-family owner-occupied
dwellings. The Bank generally makes one- to four-family residential mortgage
loans in amounts up to 80% of the appraised value of the secured property. The
Bank will originate loans with loan-to-value ratios up to 90% within the local
community, provided that private mortgage insurance on the amount in excess of
such 80% ratio is obtained. Mortgage loans in the Bank's portfolio generally
include due-on-sale clauses, which provide the Bank with the contractual right
to demand the loan immediately due and payable in the event that the borrower
transfers ownership of the property that is subject to the mortgage. It is the
Bank's policy to enforce due-on-sale provisions. As of December 31, 1998, the
interest rate for one- to four-family residential fixed-rate mortgages offered
by the Bank was 6.625% on 15-year loans and 6.875% on 25-year loans.
The Bank also originates loans on multi-family residences. Such residences
generally consist of 6 to 24 units. Such loans are generally fixed-rate loans
with interest rates 2.0% higher than those offered on one- to four-family
residences. The Bank generally makes multi family residential loans in amounts
up to 75% of the appraised value of the secured property. Such appraisals are
based primarily on the income producing ability of the property. The terms of
multi-family residential loans range from 10 to 15 years. As of December 31,
1998, $33.7 million or 13.7% of the Bank's total gross loan portfolio consisted
of multi-family residential loans.
10
Upon receipt of an application for a mortgage loan from a prospective
borrower, a credit report is ordered to verify information relating to the
applicant's employment, income and credit standing. A preliminary inspection of
the subject premises is made by at least one member of the Executive Committee.
The report of that inspection is brought before the Executive Committee or the
full Board of Directors to approve the amount of the loan and the terms.
Approval is given subject to a report of value from an independent appraiser and
credit approval. Approval of credit is given by the Bank's president or loan
officer. It is the Bank's policy to obtain title insurance on all real estate
loans. Borrowers also must obtain hazard insurance and flood insurance, if
required, prior to closing. The Bank generally requires borrowers to advance
funds on a monthly basis together with each payment of principal and interest to
a tax escrow account from which the Bank can make disbursements for items such
as real estate taxes and certain insurance premiums, if any, as they become due.
ACQUISITION, DEVELOPMENT, CONSTRUCTION AND LAND LENDING. The Bank
originates loans to finance the construction of one- to four-family dwellings,
multi-family dwellings and, to a lesser extent, commercial real estate. It also
originates loans for the acquisition and development of unimproved property to
be used principally for residential purposes in cases where the Bank is to
provide the construction funds to improve the properties.
The interest rates and terms of the construction and land development loans
vary, depending upon market conditions, the size of the construction or
development project and negotiations with the borrower. Advances are generally
made to the borrower to cover actual construction costs incurred. On larger
constructions loans, the Bank requires the project to be built out in phases.
Advancement of funds is dependent upon completion of the project stages. The
Bank generally limits its exposure to 75% of the projected market value of the
completed project. The amount of the loans are generally determined as follows:
(i) land acquisition loans with no immediate plans for construction are limited
to 65% of the appraised value of the land; (ii) acquisition and development
loans are limited to 65% of appraised value of the improved lot not to exceed
150% of the original acquisition cost; (iii) in addition to the disbursement for
acquisition and development, in an acquisition, development and construction
loan, the Bank will not advance more than 90% of the construction costs; and
(iv) loans secured by previously owned vacant land are limited to 65%. Prior to
making any disbursements, the Bank requires that the projects securing the
construction and development loans be inspected. The Bank will finance the
construction of properties without a prospective buyer or without permanent
take-out financing in place at the time of origination.
The underwriting criteria used by the Bank are designed to evaluate and
minimize the risks of each construction loan. Among other things, the Bank
generally considers an appraisal of the project, the reputation of the borrower
and the contractor, the amount of the borrower's equity in the project,
independent valuations and review of cost estimates, plans and specifications,
preconstruction sale and leasing information, current and expected economic
conditions in the area of the project, cash flow projections of the borrower,
and, to the extent available, guarantees by the borrower and/or third parties.
All of the Bank's acquisition, development and construction loan portfolio is
secured by real estate properties located in northern and central New Jersey.
Acquisition, development and construction lending is generally considered
to involve a higher level of risk than one- to four-family permanent residential
lending due to the concentration of principal in a limited number of loans and
borrowers and the effects of general economic conditions on development
projects, real estate developers and managers. In addition, the nature of these
loans is such that they are generally less predictable and more difficult to
evaluate and monitor. As of December 31, 1998, the Bank's acquisition,
development, construction and land loans varied in size from $15,000 to $1.3
million, net of loans in process, and represented 2.96% of total gross loans.
11
COMMERCIAL REAL ESTATE LENDING. Loans secured by commercial real estate
totaled $21.3 million, or 8.7% of the Bank's total gross loan portfolio, at
December 31, 1998. Commercial real estate loans are generally originated in
amounts up to 70% of the appraised value of the property. Such appraised value
is determined by an independent appraiser previously approved by the Bank. The
Bank's commercial real estate loans are secured by improved property such as
office buildings, retail stores, warehouses and other non-residential buildings.
Once the loan has been determined to be creditworthy and of sufficient property
value, in the case of corporate borrowers, the Bank obtains a personal guaranty
from third party principals of the corporate borrower as supplemental security
on the loan. This enables the Bank to proceed against the guarantor in the
event of default without first exhausting remedies against the borrower.
Inquiry as to collectibility pursuant to such third party guarantees may be made
by means of review of other properties secured by the Bank, personal interviews
with the applicants, review of the applicant's personal financial statements and
income tax returns and review of credit bureau reports. Borrowers must
personally guarantee loans made for commercial real estate. Commercial real
estate loans have terms ranging from 5 to 15 years and are generally fixed-rate
loans.
Loans secured by commercial real estate properties are generally larger and
involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by commercial real estate properties are often
dependent on successful operation or management of the properties, repayment of
such loans may be subject to adverse conditions in the real estate market or the
economy. Emphasis is placed on the income producing capability of the
collateral rather than on management-intensive projects.
CONSUMER LENDING. The Bank offers various other secured and unsecured
consumer loan products such as automobile loans, personal loans, passbook loans
and educational loans. At December 31, 1998, the balance of such loans was $3.8
million, or 1.55% of the Bank's total gross loan portfolio.
LOAN REVIEW. The Bank has a formalized loan review policy, providing for
detailed post-closing reviews for all loans over $150,000 and a random sampling
of loans under $150,000. After review, reports are made to the mortgage and
loan officers and the Board of Directors. Classification determination is
presently the responsibility of the Asset Classification Committee. See "-
Classification of Assets." The purpose of these procedures is to enhance the
Bank's ability to properly document the loans it originates and to improve the
performance of such loans.
LENDING AUTHORITY. The Bank's Executive Committee has the authority to
approve loans up to $500,000, with the stipulation that loans approved in excess
of $350,000 must be reported at the next Board of Directors meeting. The Bank's
Vice President and Loan Officer has the authority to approve consumer and equity
loans of up to $150,000.
LOAN SERVICING. The Bank originates all of the loans that it has sold and
services for other investors. Pamrapo receives fees for these servicing
activities, which include collecting and remitting loan payments, inspecting the
properties and making certain insurance and tax payments on behalf of the
borrowers. At December 31, 1998 the Bank was servicing $3.8 million of loans
for others. There were no new loans sold in 1998 that required servicing.
LOAN ORIGINATION FEES AND OTHER FEES. Loan origination fees and certain
related direct loan origination costs are deferred and the resulting net amount
is amortized over the life of the related loan as an adjustment to the yield of
such loans. In addition, commitment fees are required to be offset against
related direct costs and the resulting net amount generally recognized over the
life of the related loans as an adjustment of yield or if the commitment expires
unexercised, recognized upon expiration of the commitment. The Bank had $1.7
million in deferred origination fees and discounts at December 31, 1998.
12
NON-PERFORMING ASSETS
When a borrower fails to make a required payment by the fifteenth day of
the month in which the payment is due, the Bank sends a late notice advising the
borrower that the payment has not been received. In most cases delinquencies
are cured promptly; however, if a loan has been delinquent for more than 60
days, the Bank reviews the loan status more closely and, where appropriate,
appraises the condition of the property and the financial circumstances of the
borrower. Based upon the results of any such investigation, the Bank (1) may
accept a repayment program for the arrearage from the borrower; (2) may seek
evidence, in the form of a listing contract, of efforts by the borrower to sell
the property if the borrower has stated that he is attempting to sell; (3) may
request a deed in lieu of foreclosure or (4) generally will initiate foreclosure
proceedings when a loan payment is delinquent for more than three monthly
installments.
The following table sets forth information regarding non-accrual loans,
loans which are 90 days or more delinquent, but on which the Bank is accruing
interest and other real estate owned held by the Bank at the dates indicated:
At December 31,
-------------------------------------------------------
1994 1995 1996 1997 1998
------- ----------- --------- --------- --------
(In thousands)
One- to four-family residential real
estate loans:
Non-accrual loans.............................. $ 5,122 $ 5,099 $ 4,532 $3,254 $2,064
Accruing loans 90 days overdue................. 2,928 2,326 2,993 1,645 764
------- ------- ------- ------ ------
Total......................................... 8,050 7,425 7,525 4,899 2,828
------- ------- ------- ------ ------
Multi-family residential and commercial real
estate loans:
Non-accrual loans.............................. 2,905 2,014 1,881 1,280 863
Accruing loans 90 days overdue................. 642 890 542 255 335
------- ------- ------- ------ ------
Total......................................... 3,547 2,904 2,423 1,535 1,198
------- ------- ------- ------ ------
Construction loans:
Non-accrual loans.............................. 686 237 237 185 185
Accruing loans 90 days overdue................. - - - - -
------- ------- ------- ------ ------
Total......................................... 686 237 237 185 185
------- ------- ------- ------ ------
Consumer loans:
Non-accrual loans.............................. 512 274 277 323 334
Accruing loans 90 days overdue................. 33 23 30 7 9
------- ------- ------- ------ ------
Total......................................... 545 297 307 330 343
------- ------- ------- ------ ------
Total non-performing loans:
Non-accrual loans.............................. 9,225 7,624 6,927 5,042 3,446
Accruing loans 90 days overdue................. 3,603 3,239 3,565 1,907 1,108
------- ------- ------- ------ ------
Total......................................... $12,828 $10,863 $10,492 $6,949 $4,554
======= ======= ======= ====== ======
Total foreclosed real estate, net of related
======= ======= ======= ======= =======
Reserves..................................... $ 1,118 $ 1,467 $ 1,996 $1,354 $1,237
======= ======= ======= ====== ======
Total non-performing loans and foreclosed
Real estate to total assets.................. 3.63% 3.32% 3.44% 2.20% 1.40%
======= ======= ======= ====== ======
- ----------------
(1) Includes acquisition and development loans.
At December 31, 1996, 1997, and 1998 nonaccrual loans for which interest
has been discontinued totaled approximately $6.9 million, $5.0 million, and,
$3.4 million, respectively. During the years ended
13
December 31, 1996, 1997 and 1998, the Bank recognized interest income of
approximately $172,000, $144,000, and $97,000, respectively, on these loans.
Interest income that would have been recorded, had the loans been on the accrual
status, would have amounted to approximately $665,000, $491,000, and $333,000
for the years ended December 31, 1996, 1997 and 1998, respectively. The Bank is
not committed to lend additional funds to the borrowers whose loans have been
placed on nonaccrual status.
14
DELINQUENT LOANS. At December 31, 1996, 1997 and 1998, respectively,
delinquencies in the Bank's portfolio were as follows:
At December 31, 1996 At December 31, 1997
----------------------------------------------- -----------------------------------------------
60 - 89 Days 90 Days or more 60 - 89 Days 90 Days or more
------------------------ --------------------- --------------------- ------------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of of Balance of of Balance of of Balance of
Loans Loans Loans Loans Loans Loans Loans Loans
--------- ------------- -------- ----------- ------- ------------ --------- -------------
Delinquent loans............. 52 $3,660 146 $10,492 42 $2,162 105 $6,949
As a percent of total gross
loans....................... 1.72% 4.93% 1.00% 3.22%
At December 31, 1998
--------------------------------------------------------
60 - 89 Days 90 Days or more
--------------------------- ---------------------------
Number Principal Number Principal
of Balance of of Balance of
Loans Loans Loans Loans
----------- -------------- ------------ -------------
Delinquent loans............. 28 $1,457 79 $4,554
As a percent of total gross
loans....................... .59% 1.86%
15
As of December 31, 1998, the Bank had 79 loans which were 90 days or more
past due totaling $4.6 million. The average balance of such loans was
approximately $58,000. Management is of the opinion that the Bank will not
incur any additional substantial losses on such loans, giving consideration to
existing loan loss reserves. Most of the loans are of moderate size; three of
the loans have loan balances greater than $200,000, the largest of which is
$241,000. All loans are within the Bank's lending areas.
The Bank's level of non-performing loans 90 days or more delinquent
decreased from $6.9 million at December 31, 1997 to $4.6 million at December 31,
1998. The total of such loans in the lower risk one- to four-family residential
category decreased to $2.8 million or 62.1% of non-performing loans 90 days or
more delinquent at December 31, 1998, when compared with $4.9 million, or 70.5%
at December 31, 1997. Non-performing multi-family residential, commercial real
estate and construction loans, loans normally having greater elements of risk,
decreased from $1.7 million at December 31, 1997, to $1.4 million at December
31, 1998, which represents a decrease of 17.6%. The decrease in non-performing
loans can be attributed to the Bank's continued emphasis on collection efforts.
CLASSIFIED ASSETS. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. Assets which do
not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" by management.
A classification of either substandard or doubtful requires the
establishment of general allowances for loan losses in an amount deemed prudent
by management. Assets classified as "loss" require either a specific allowance
for losses equal to 100% of the amount of the asset so classified or a charge
off of such amount.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies,
has adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement requires that institutions have effective systems and controls to
identify, monitor and address asset quality problems; have analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and have established acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement.
Management of the Bank has classified $5.5 million of its assets as
substandard and approximately $691,000 as loss based upon its review of the
Bank's loan and foreclosed real estate portfolios. Such review, among other
things, takes into consideration the appraised value of underlying collateral,
economic conditions and paying capacity of the borrowers. However, the Bank's
Asset Classification Committee carefully monitors all of the Bank's delinquent
loans to determine whether or not they should be classified. At a minimum, the
Bank classifies all foreclosed real estate and non-performing loans 90 days or
more delinquent as substandard assets. At December 31, 1998, the allowance for
loan losses totaled $2.3 million.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and
16
changes in the nature and volume of its loan activity. Such evaluation,
which includes a review of all loans of which full collectibility may not be
reasonably assured, considers among other matters, the estimated net realizable
value of the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an
adequate loan loss allowance.
During the years ended December 31, 1996, 1997 and 1998, gross charge-offs
totaled $638,000, $928,000, and $484,000, respectively. A majority of the
charge-offs in all three years resulted from the transferring of loans to
foreclosed real estate and charging-off the difference between the carrying
value of the loans and the fair values of the properties securing such loans to
the loan loss allowance.
The following table sets forth the activity of the Bank's allowance for
loan losses at the dates indicated:
At or for the year ended December 31,
----------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(In thousands)
Balance at beginning of period.............. $4,000 $3,650 $2,725 $2,800 $2,475
Provision for loan losses................... 495 411 644 586 292
Charge-offs:
Real estate mortgage loans................. 879 1,008 404 853 327
Consumer loans............................. 32 333 234 75 157
Recoveries................................. 66 5 69 17 17
------ ------ ------ ------ ------
Net charge-offs............................. 845 1,336 569 911 467
------ ------ ------ ------ ------
Balance at end of period.................... $3,650 $2,725 $2,800 $2,475 $2,300
====== ====== ====== ====== ======
Ratio of net charge offs during the
period to average loans receivable
during the period.......................... .38% .61% .27% .44% .21%
Ratio of allowance for loan losses to
total outstanding loans (gross) at
the end of period.......................... 1.59% 1.22% 1.32% 1.14% .94%
Ratio of allowance for loan losses
to non-performing loans.................... 28.45% 25.09% 26.69% 35.62% 50.51%
17
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation to the allowance by category is not necessarily indicative of further
losses and does not restrict the use of the allowance to absorb losses in any
category.
At December 31,
1994 1995 1996 1997 1998
------------------------------------------------
Amount Amount Amount Amount Amount
------------------------------------------------
(Dollars in thousands)
Real estate mortgage loans (1)........ $3,050 $2,325 $2,450 $2,075 $1,900
Consumer loans........................ 600 400 350 400 400
------ ------ ------ ------ ------
Total allowance...................... $3,650 $2,725 $2,800 $2,475 $2,300
====== ====== ====== ====== ======
- -----------------
(1) Includes equity and second mortgages.
18
MORTGAGE-BACKED SECURITIES. The Bank has significant investments in
mortgage-backed securities and has, during periods when loan demand was low and
the interest yields on alternative investments was minimal, utilized such
investments as an alternative to mortgage lending. All of the securities in the
portfolio were insured or guaranteed by GNMA, FNMA or FHLMC and have coupon
rates as of December 31, 1998 ranging from 5.10% to 10.00%. At December 31,
1998 the unamortized principal balance of mortgage-backed securities, both held
to maturity and available for sale, totaled $126.1 million or 30.5% of total
assets. The carrying value of such securities amounted to $109.8 million,
$133.7 million and $126.7 million at December 31, 1996, 1997 and 1998,
respectively, and the fair market value of such securities totaled approximately
$109.2 million, $135.4 million, and $128.2 million at December 31, 1996, 1997
and 1998, respectively.
The following table sets forth the contractual maturities of the Bank's
gross mortgage-backed securities portfolio which includes available for sale and
held to maturity at December 31, 1998.
Contractual Maturities Due in Year (s) Ended
December 31,
--------------------------------------------------------------------------------
1999- 2001- 2003- 2008- 2018 and
2000 2002 2007 2017 Thereafter Total
------- ------- ------- ------- ------------ --------
(In thousands)
Mortgage-backed securities:
Held to maturity..................... $ - $359 $4,366 $100,123 $14,978 $119,826
Available for sale................... - - - 258 5,970 6,228
--- ---- ------ -------- ------- --------
Total............................... $ - $359 $4,366 $100,381 $20,948 $126,054
=== ==== ====== ======== ======= ========
Mortgage-backed securities are a low risk investment for the Bank. The
Bank's substantial investment in mortgage-backed securities will significantly
enhance the Bank's ability to meet risk based capital requirements as mortgage-
backed securities are assigned a risk rating, generally from 0% to 20%. Based
on historical experience, the Bank believes that the mortgage-backed securities
will be repaid significantly in advance of the stated maturities reflected in
the above table.
INVESTMENT ACTIVITIES
SAIF-insured savings institutions have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, SAIF-insured savings
institutions may also invest their assets in commercial paper, corporate debt
securities and mutual funds whose assets conform to the investments that a SAIF-
insured savings institution is otherwise authorized to make directly.
The Board of Directors sets the investment policy of the Bank. This policy
dictates that investments will be made based on the safety of the principal,
liquidity requirements of the Bank and the return on the investment and capital
appreciation. The Bank's Chief Executive Officer may make investments up to
$10.0 million, subject to ratification by the Bank's Board of Directors.
The Bank's conservative policy does not permit investment in junk bonds or
speculative strategies based upon the rise and fall of interest rates.
Pamrapo's goal, however, has always been to realize the greatest possible return
commensurate with its interest rate risk. Pamrapo has emphasized shorter term
securities for their liquidity to increase sensitivity of its investment
securities to changes in interest rates.
19
As a member of the FHLB-NY, the Bank is required to maintain liquid assets
at minimum levels which vary from time to time. See "Regulation Federal Home
Loan Bank System." The Bank's liquid investments primarily include federal
agency securities, overnight deposits and federal funds. The average liquidity
for the month of December 1998 was 10.54%, which exceeded the minimum level of
4.0% prescribed by the OTS.
INVESTMENT PORTFOLIO
The following table sets forth certain information regarding the Bank's
investment portfolio, which includes available for sale securities carried at
fair value and held to maturity, at the dates indicated:
At December 31,
-----------------------------------------------------------------------------
1996 1997 1998
----------------------- ------------------------ ---------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
---------- --------- ---------- --------- -------- -------
(In thousands)
Investments:
U.S. Government (including federal
agencies) available for sale and
held to maturity.................... $8,000 $8,023 $2,999 $3,018 $3,998 $ 4,015
Mutual Funds available for sale...... 1,049 1,049 1,114 1,119 1,182 1,176
Equity securities available for sale. 7 91 7 136 7 151
FHLB-NY stock........................ 2,979 2,979 2,979 2,979 3,097 3,097
Net unrealized (loss) gain on
available for sale securities....... 107 -- 153 -- 155 --
------- ------- ------- ------- ------- -------
Total investment securities......... $12,142 $12,142 $ 7,252 $ 7,252 $ 8,439 $ 8,439
======= ======= ======= ======= ======= =======
Other interest-earning assets:
Overnight deposits................... $ 9,000 $ 9,000 $ 2,900 $ 2,900 $15,500 $15,500
Federal funds sold................... 100 100 -- -- -- --
------- ------- ------- ------- ------- -------
Total other interest-earning assets. $ 9,100 $ 9,100 $ 2,900 $ 2,900 $15,500 $15,500
======= ======= ======= ======= ======= =======
Total investment portfolio.......... $21,242 $21,242 $10,152 $10,152 $23,939 $23,939
======= ======= ======= ======= ======= =======
As of December 31, 1998, the Bank's investment securities issued by the
U.S. Government agencies have a carrying value of $4 million, a weighted average
yield of 6.53% and maturities of $2 million within 1 year and $2 million after
10 years.
The Bank has no investments with any one issuer which exceeds ten percent
of stockholders' equity.
SOURCES OF FUNDS
General. Deposits are the primary source of the Bank's funds for use in
lending and for other general business purposes. In addition to deposits, the
Bank obtains funds from advances from the FHLB-NY and other borrowings.
Deposits. Pamrapo offers a variety of deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of regular savings,
non-interest bearing demand, NOW and Super NOW, money market and certificate
accounts. Pamrapo's deposits are obtained primarily from the Hudson County
area. Pamrapo had acquired brokered deposits totaling $3.4 million, at
December 31,
20
1998, as compared to $4.2 million at December 31, 1997. The Bank relies
primarily on customer service and long-standing relationships with customers to
attract and retain deposits. Deposits increased by $18.5 million or 6% from
$307.5 million at December 31, 1997 to $326.0 million at December 31, 1998.
The flow of deposits is influenced significantly by general economic
conditions, changes in the money market and prevailing interest rates and
competition.
21
Deposit Portfolio. The following table sets forth the distribution and
wieghted average nominal interest rate of the Bank's deposit accounts at the
dates indicated:
At December 31,
---------------------------------------------------------------------------------------------
1996 1997 1998
--------------------------- ---------------------------- ------------------------------
Weighted Weighted Weighted
% of Average % of Average % of Average
Total Nominal Total Nominal Total Nominal
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------ -------- -------- ------ -------- -------- ------ -------- --------
Passbook and club
Accounts.................... $111,706 38.80% 2.75% $109,476 35.61% 2.75% $111,715 34.27% 2.25%
0.00% demand................. 11,869 2.76 0.00 14,856 4.83 0.00 17,379 5.33 0.00
NOW.......................... 18,676 5.72 2.50 19,679 6.40 2.00 22,127 6.79 2.00
Super NOW.................... 179 .06 2.50 238 .07 2.00 247 .08 2.00
Money market demand.......... 22,140 7.37 2.87 22,214 7.23 2.75 22,854 7.01 3.00
-------- ------ -------- ------ -------- ------
Total passbook, club,
NOW, and money
market accounts............ 164,570 54.71 2.54 166,463 54.14 2.42 174,322 53.48 2.09
-------- ------ -------- ------ -------- ------
Certificate accounts:
91-day money market......... 1,297 .43 4.51 979 .32 4.81 1,253 .38 4.26
26-week money market........ 36,161 12.02 4.69 30,395 9.88 4.77 30,251 9.28 4.59
12- to 30-month money
market..................... 55,071 18.31 5.04 70,406 22.90 5.22 79,955 24.53 5.09
30- to 48-month money
market..................... 8,551 2.84 5.65 4,133 1.34 5.53 9,170 2.81 5.69
IRA and KEOGH............... 28,829 9.59 4.92 29,482 9.59 4.90 26,741 8.20 4.97
Negotiated rate............. 6,306 2.10 6.00 5,614 1.83 6.02 4,293 1.32 6.02
-------- ------ -------- ------ -------- ------
Total certificates......... 136,215 45.29 5.02 141,009 45.86 5.09 151,663 46.52 5.02
-------- ------ -------- ------ -------- ------
Total deposits............. $300,785 100.00% 3.68% $307,472 100.00% 3.61% $325,985 100.00% 3.46%
======== ====== ==== ======== ====== ==== ======== ====== ====
22
The following table sets forth the deposit activity of the Bank for the
periods indicated:
Year Ended December 31,
---------------------------------
1996 1997 1998
------- ------- -------
(In thousands)
Deposits (less than) withdrawals...... $(9,291) $(4,375) $ 7,209
Interest credited..................... 11,175 11,062 11,304
------- ------- -------
Net (decrease) increase in deposits... $ 1,884 $ 6,687 $18,513
======= ======= =======
The following table sets forth, by various rate categories, the amount of
certificate accounts outstanding as of the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 1997.
At December 31, 1998,
At December 31, Maturing in
------------------------------------ ------------------------------------------------------
One Year Two Three Greater than
1996 1997 1998 or Less Years Years Three Years
-------- -------- -------- -------- ------ ------ -------------
(In thousands)
Certificate Accounts:
2.99% or less........... $ 60 $ 209 $ 375 $ 375 $ -- $ -- $ --
3.00% to 4.99%.......... 82,499 61,740 61,357 60,689 448 45 175
5.00% to 5.99%.......... 45,518 61,059 82,954 77,516 1,973 1,166 2,299
6.00% to 6.99%.......... 7,302 13,411 5,701 5,192 377 126 6
7.00% to 7.99%.......... 815 4,566 1,257 757 500 -- --
8.00% to 8.99%.......... 6 7 -- -- -- -- --
9.00% to 9.99%.......... 15 17 19 19 -- -- --
-------- -------- -------- -------- ------ ------ ------
Total.................. $136,215 $141,009 $151,663 $144,548 $3,298 $1,337 $2,480
======== ======== ======== ======== ====== ====== ======
At December 31, 1998, the Bank had outstanding $29.6 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
Amount
(In thousands)
Three months or less........................................... $ 9,094
Over three through six months.................................. 6,110
Over six through twelve months................................. 10,387
Over twelve months............................................. 3,991
-------
Total........................................................ $29,582
=======
Borrowings. Although deposits are the Bank's primary source of funds, the
Bank utilizes borrowings when they are a less costly source of funds or can be
invested at a positive rate of return.
Pamrapo obtains advances from the FHLB-NY upon the security of its capital
stock of the FHLB-NY and a blanket assignment of the Bank's unpledged qualifying
mortgage loans, mortgage-backed
23
securities and investment securities. Such advances are made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. As of December 31, 1998, outstanding advances from the FHLB-NY
amounted to $28.6 million.
The following table sets forth certain information regarding FHLB-NY
advances at the dates indicated:
At December 31,
-------------------------------------------------------------------
1996 1997 1998
---------------------- ------------------------ -----------------
(In thousands)
Fixed-rate advances from the FHLB-NY......................
6.47% due 1999.......................................... $3,000 $ 3,000 $ 3,000
6.27% due 2000.......................................... -- 5,000 5,000
5.10% due 2001.......................................... 243 243 243
6.51% due 2002.......................................... -- 5,000 5,000
5.36% due 2003.......................................... 340 340 15,340
------ ------- -------
Total advances from the FHLB-NY...................... $3,583 $13,583 $28,583
====== ======= =======
The Bank obtained a mortgage loan of $325,000 in connection with the
purchase of premises. The mortgage loan carries an interest rate of 8% and is
amortized over a 12 year term. The unpaid mortgage loan balance at December 31,
1998 amounted to $253,000.
COMPETITION
Pamrapo has substantial competition for both loans and deposits. The New
York City metropolitan area has a high density of financial institutions, many
of which are significantly larger and have substantially greater financial
resources than the Bank, and all of which are competitors of the Bank to varying
degrees. The Bank faces significant competition both in making mortgage loans
and in attracting deposits. The Bank's competition for loans comes principally
from savings and loan associations, savings banks, mortgage banking companies,
insurance companies, commercial banks and other institutional lenders. Its most
direct competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks, credit unions and other financial
institutions. The Bank faces additional competition for deposits from short-
term money market funds and other corporate and government securities funds.
The Bank faces increased competition among financial institutions for deposits.
Competition also may increase as a result of the continuing reduction in the
effective restrictions on the interstate operations of financial institutions
and legislation authorizing the acquisition of thrifts by Banks.
The Bank competes for loans principally through the interest rates and loan
fees it charges and the efficiency and quality of services it provides borrowers
and real estate brokers. It competes for deposits through pricing, service and
by offering a variety of deposit accounts. New powers for thrift institutions
provided by New Jersey and federal legislation enacted in recent years have
resulted in increased competition between savings banks and other financial
institutions for both deposits and loans. Management believes that
implementation of new powers set forth in such recent legislation is expected to
intensify this competition.
SUBSIDIARIES
Pamrapo is generally permitted under New Jersey law and the regulations of
the Commissioner of the New Jersey Department of Banking and Insurance (the
"Commissioner") to invest an amount equal to
24
3% of its assets in subsidiary service corporations. As of December 31, 1998,
Pamrapo had $1.3 million, or .3%, of its assets invested in Pamrapo Service
Corporation (the "Corporation"), a wholly owned subsidiary of the Bank. In the
past, the Corporation has entered into real estate joint ventures for the
principal purpose of land acquisition and development. However, the Corporation
has disposed of all such real estate joint ventures. Currently, the
Corporation's only investments are in bank premises and real estate held for
investment.
Under OTS regulation, investments in and loans to subsidiaries not engaged
in activities permissible to national banks, such as the real estate investment
activities previously entered into by the Bank, generally are required to be
deducted from capital. Although the Bank will continue to consider joint
venture opportunities, it will do so with the effects of the OTS regulations in
mind. The Bank currently has no plans to enter into any joint ventures.
YIELDS EARNED AND RATES PAID
The Bank's earnings depend primarily on its net interest income. Net
interest income is affected by (i) the volume of interest-earning assets and
interest-bearing liabilities, (ii) rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities and (iii) the difference
("interest rate spread") between rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
A large portion of the Bank's real estate loans are long-term, fixed-rate
loans. Accordingly, the average yield recognized by the Bank on its total loan
portfolio changes slowly and generally does not keep pace with changes in
interest rates on deposit accounts and borrowings. At December 31, 1998,
approximately 97.8% of the Bank's gross mortgage loan portfolio, excluding
mortgage-backed securities, consisted of fixed-rate mortgage loans with original
terms consisting primarily of 15 to 30 years. Accordingly, when interest rates
rise, the Bank's yield on its loan portfolio increases at a slower pace than the
rate by which its cost of funds increases, which may adversely impact the Bank's
interest rate spread.
25
The following tables set forth for the periods indicated information
regarding the average balances of interest-earning assets and interest-bearing
liabilities, the dollar amount of interest income earned on such assets and the
resultant yields, the dollar amount of interest expense paid on such liabilities
and the resultant costs. The tables also reflect the interest rate spread for
such periods, the net yield on interest-earning assets (i.e., net interest
income as a percentage of average interest-earning assets) and the ratio of
average interest-earning assets to average interest-bearing liabilities.
Average balances are based on month-end amounts.
Year Ended December 31,
-------------------------------------------------------------------
1996 1997
-------------------------------- ------------------------------
Average Interest Yield/ Average Interest Yield/
Balance Cost Balance Cost
---------- -------- ------ -------- -------- ------
Interest-earning assets:
Loans (1)...................................... $213,122 $19,191 9.00% $205,594 $18,700 9.10%
Mortgage-backed securities..................... 108,500 7,324 6.75 127,004 8,572 6.75
Investments.................................... 11,725 906 7.73 6,541 508 7.77
Other interest-earning assets.................. 12,599 614 4.87 11,079 616 5.56
-------- ------- -------- -------
Total interest-earning assets................. $345,946 28,035 8.10% $350,218 $28,396 8.11%
-------- ------- -------- -------
Non-interest-earning assets..................... 21,301 19,018
-------- --------
Total assets (1).............................. $367,247 $369,236
======== ========
Interest-bearing liabilities:
Passbook and club account...................... 112,489 3,166 2.81% $108,105 $ 3,078 2.85%
NOW and money market accounts.................. 41,289 1,079 2.61 41,603 994 2.39
Certificates of Deposits....................... 137,193 6,930 5.05 139,242 6,990 5.02
Advances and other borrowings.................. 3,369 206 6.11 11,743 800 6.81
-------- ------- -------- -------
Total interest-bearing liabilities............ 294,340 11,381 3.87% $300,693 $11,862 3.94%
-------- ------- -------- -------
Non-interest-bearing liabilities:
Non-interest-bearing demand accounts........... 11,004 $ 13,046
Other.......................................... 5,606 6,461
-------- --------
Total non-interest-bearing demand
liabilities.................................. 16,610 19,507
-------- --------
Total liabilities............................. 310,950 320,200
Stockholders' equity............................ 56,297 49,036
-------- --------
Total liabilities and stockholders' equity.... $367,247 $369,236
======== ========
Net interest income/interest rate spread........ $16,654 4.23% $16,534 4.17%
======= ==== ======= ====
Net interest-earning assets/net yield on
Interest- earning assets....................... $ 51,606 4.81% $ 49,525 4.72%
======== ==== ======== ====
Ratio of average interest-earning assets to
Average interest-bearing liabilities........... 1.17x 1.16x
======== ========
Year Ended December 31,
-----------------------------------------------
1998
-----------------------------------------------
Average Interest Yield/
Balance Cost
------------- ----------- ---------
Interest-earning assets:
Loans (1)...................................... 222,154 $ 19,380 8.72%
Mortgage-backed securities..................... 127,086 8,389 6.60
Investments.................................... 3,588 223 6.22
Other interest-earning assets.................. 15,671 979 6.25
-------- --------
Total interest-earning assets................. 368,499 28,971 7.86%
-------- --------
Non-interest-earning assets..................... 19,505
--------
Total assets (1).............................. $388,004
========
Interest-bearing liabilities:
Passbook and club account...................... $110,930 2,834 2.55%
NOW and money market accounts.................. 42,299 1,045 2.47
Certificates of Deposits....................... 143,430 7,425 5.18
Advances and other borrowings.................. 17,636 1,124 6.37
-------- --------
Total interest-bearing liabilities............ 314,295 12,428 3.95%
-------- --------
Non-interest-bearing liabilities:
Non-interest-bearing demand accounts........... 15,966
Other.......................................... 8,695
--------
Total non-interest-bearing demand
liabilities.................................. 24,661
--------
Total liabilities............................. 338,956
Stockholders' equity............................ 49,048
--------
Total liabilities and stockholders' equity.... $338,004
========
Net interest income/interest rate spread........ $ 16,543 3.91%
======== ====
Net interest-earning assets/net yield on
Interest- earning assets....................... $ 54,204 4.49%
======== ====
Ratio of average interest-earning assets to
Average interest-bearing liabilities........... 1.17x
=====
- ----------------
(1) Non-accruing loans are part of the average balances of loans outstanding.
26
INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income while a positive gap would tend to result in an increase in net interest
income. During a period of falling interest rates, a negative gap would tend to
result in an increase in net interest income while a positive gap would tend to
adversely affect net interest income.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
expected to reprice or mature in each of the future time periods shown. Except
as stated below, the amount of assets and liabilities shown which reprice or
mature during a particular period were determined in accordance with the
contractual terms of the asset or liability. Loans and mortgage-backed
securities that have adjustable rates are shown as being due in the period
during which the interest rates are next subject to change. The Bank has
assumed that its passbook savings and club accounts which totaled $111.7 million
at December 31, 1998, are withdrawn at the following rates, 17.00%, 31.11%,
29.44%, 52.96%, 77.87% and 100.00% on the cumulative declining balance of such
accounts during the periods shown. The Bank has further assumed that its money
market accounts which totaled $22.9 million at December 31, 1998, are withdrawn
at the following rates, 79.00%, 52.39%, 52.39%, 84.36%, 97.62% and 100.00% on
the cumulative declining balance of such accounts during the periods shown.
Additionally, the Bank has assumed that its non-interest bearing demand,
NOW and Super NOW accounts which totaled $39.8 million at December 31, 1998, are
withdrawn at the following rates, 37.00%, 53.76%, 31.11%, 60.62%, 84.47% and
100.00% on the cumulative declining balance of such accounts during the periods
shown.
27
More than
More than More than More than 10 Years
1 Year 1 Year to 3 Years to 5 Years to to More than
or Less 3 Years 5 Years 10 Years 20 Years 20 Years Total
--------- ------------ ----------- ----------- --------- --------- ---------
(In thousands)
Interest-earning Assets:
Loans............................. $ 5,914 $ 3,571 $ 12,961 $ 50,312 $108,903 $63,731 $245,392
Mortgage-backed securities (1).... - 77 1,842 5,149 98,039 20,947 126,054
Investments (1) (2)............... 3,189 - - - 2,000 - 5,189
Other interest-earning assets (3). 18,597 - - - - - 18,597
--------- --------- --------- --------- -------- ------- --------
Total interest-earning assets.... 27,700 3,648 14,803 55,461 208,942 84,678 395,232
--------- --------- --------- --------- -------- ------- --------
Interest-bearing Liabilities:
NOW and Super NOW
accounts (4)..................... 14,708 13,464 3,603 4,836 2,654 488 39,753
Money market accounts............. 18,055 2,514 1,197 918 166 4 22,854
Passbook and club accounts........ 18,992 28,846 18,806 23,870 16,510 4,692 111,716
Certificate accounts 144,548 4,635 2,012 402 66 - 151,663
Advances and other borrowings...... - 8,243 20,340 - 253 - 28,836
--------- --------- --------- --------- -------- ------- --------
Total interest-bearing
liabilities...................... 196,303 57,702 45,958 30,026 19,649 5,184 354,822
--------- --------- --------- --------- -------- ------- --------
Interest sensitivity gap per period $(168,603) $ (54,054) $ (31,155) $ 25,435 $189,293 $79,494 $ 40,410
========= ========= ========= ========= ======== ======= ========
Cumulative interest sensitivity gap $(168,603) $(222,657) $(253,812) $(228,377) $(39,084) $40,410
========= ========= ========= ========= ======== =======
Cumulative gap as a percent of
Total assets...................... (40.78)% (53.85)% (61.39)% (55.23)% (9.45)% 9.76%
========= ========= ========= ========= ======== =======
Cumulative interest-sensitive
assets as a percent of interest-
sensitive liabilities....... ....... 14.11% 12.34% 15.38% 30.79% 88.82% 111.39%
========= ========= ========= ========= ======== =======
- -------------
(1) Includes available for sale securities.
(2) Includes marketable equity securities which have no stated maturity.
(3) Includes FHLB-NY stock.
(4) Includes non-interest bearing demand accounts.
RATE/VOLUME ANALYSIS
Changes in net interest income are attributable to three factors: (i) a
change in volume or amount of an interest-earning asset or interest-bearing
liability, (ii) a change in interest rates or (iii) a change caused by a
combination of changes in volume and interest rate. The table below sets forth
certain information regarding changes in interest income and interest expense of
the Bank for the periods indicated, reflecting the extent to which such changes
are attributable to changes in volume and changes in rate. The amount
attributable to a change in volume or amount is calculated by multiplying the
average interest rate for the prior period by the increase (decrease) in the
average balance of the related asset or liability. The amount attributable to a
change in rate is calculated by multiplying the increase (decrease) in the
average interest rate from the prior period by the average balance of the
related asset or liability for
28
the prior period. The rate/volume change represents a change in rate multiplied
by a change in volume and is allocated proportionately to volume and rate
changes.
Year Ended December 31,
----------------------------------------------------------------
1997 v. 1996 1998 v. 1997
------------------------------- ----------------------------
Increase (decrease) Increase (decrease)
due to due to
------------------------------- ---------------------------
Volume Rate Net Volume Rate Net
----------- ------- ------ ------- --------- -----
Interest income:
Loans......................................... $ (698) $207 $ (491) $1,484 $(804) $ 680
Mortgaged-backed securities................... 1,248 - 1,248 6 (189) (183)
Investments................................... (403) 5 (398) (206) (79) (285)
Other interest-earning assets................. (79) 81 2 271 92 363
------ ---- ------ ------ ----- -----
Total interest income....................... 68 293 361 1,555 (980) 575
------ ---- ------ ------ ----- -----
Interest expense:
Passbook and club accounts.................... (130) 42 (88) 81 (325) (244)
NOW and money market accounts................. 9 (94) (85) 18 33 51
Certificates of deposit....................... 102 (42) 60 212 223 435
Advance and other borrowings.................. 567 27 594 389 (65) 324
------ ---- ------ ------ ----- -----
Total interest expense...................... 548 (67) 481 700 (134) 566
------ ---- ------ ------ ----- -----
Net change in net interest..................... $ (480) $360 $ (120) $ 855 $(846) $ 9
====== ==== ====== ====== ===== =====
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
Office of Thrift Supervision ("OTS") under the Home Owners' Loan Act, as amended
(the "HOLA"). In addition, the activities of savings institutions, such as the
Bank, are governed by the HOLA and the Federal Deposit Insurance Act ("FDI
Act").
The Bank is subject to extensive regulation, examination and supervision by
the OTS, as its primary federal regulator, and the Federal Deposit Insurance
Corporation ("FDIC"), as the deposit insurer. The Bank is a member of the
Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured up
to applicable limits by the Savings Association Insurance Fund ("SAIF") managed
by the FDIC. The Bank must file reports with the OTS and the FDIC concerning
its activities and financial condition in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on the Company, the Bank and their operations. Certain of the
regulatory requirements applicable to the Bank and to the Company are
29
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this Form 10-K does not purport to be a complete description of
such statutes and regulations and their effects on the Bank and the Company.
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally is not restricted under existing laws as to the types of
business activities in which it may engage, provided that the Bank continues to
be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition by
the Company of another savings institution or savings bank that meets the QTL
test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its non-
insured institution subsidiaries primarily to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC
Act"), subject to the prior approval of the OTS, and certain activities
authorized by OTS regulation, and no multiple savings and loan holding company
may acquire more than 5% the voting stock of a company engaged in impermissible
activities.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio.
Core capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus,
and minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain mortgage servicing rights and credit card
relationships. The OTS regulations require that, in meeting the tangible,
leverage (core)
30
and risk-based capital standards, institutions must generally deduct investments
in and loans to subsidiaries engaged in activities that are not permissible for
a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital
regulation based on the risks the OTS believes are inherent in the type of
asset. The components of core capital are equivalent to those discussed earlier
under the 3% leverage standard. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock and, within specified limits, the allowance for loan and lease
losses. Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate
risk component. Savings institutions with "above normal" interest rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. That dollar amount is deducted from an institution's
total capital in calculating compliance with its risk-based capital requirement.
Under the rule, there is a two quarter lag between the reporting date of an
institution's financial data and the effective date for the new capital
requirement based on that data. A savings institution with assets of less than
$300 million and risk-based capital ratios in excess of 12% is not subject to
the interest rate risk component, unless the OTS determines otherwise. The
Director of the OTS may waive or defer a savings institution's interest rate
risk component on a case-by-case basis. For the present time, the OTS has
deferred implementation of the interest rate risk component. At December 31,
1998, the Bank met each of its capital requirements.
The following table presents the Bank's capital position at December 31,
1998.
(Dollars in thousands)
Actual Amount Required Amount Excess Amount Actual Percent Required Percent
Tangible $41,411 $ 6,181 $35,230 10.05% 1.50%
Core (Leverage) $41,411 $ 16,481 $24,930 10.05% 4.00%
Risk-based $43,020 $ 16,214 $26,806 21.23% 8.00%
PROMPT CORRECTIVE REGULATORY ACTION. Under the OTS prompt corrective
action regulations, the OTS is required to take certain supervisory actions
against undercapitalized institutions, the severity of which depends upon the
institution's degree of undercapitalization. Generally, a savings institution
that has a total risk-based capital of less than 8% or a leverage ratio or a
Tier 1 capital ratio that is less than 4% is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to
31
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by any parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to the institution
depending upon its category, including, but not limited to, increased monitoring
by regulators and restrictions on growth, capital distributions and expansion.
The OTS could also take any one of a number of discretionary supervisory
actions, including the issuance of a capital directive and the replacement of
senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS. Deposits of the Bank are presently insured
by SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to pay on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. During 1998, FICO
payments for SAIF members approximated 6.10 basis points, while Bank Insurance
Fund ("BIF" -- the deposit insurance fund that covers most commercial bank
deposits) members paid 1.22 basis points. By law, there will be equal sharing
of FICO payments between the members of both insurance funds on the earlier of
January 1, 2000 or the date the two insurance funds are merged.
The Bank's assessment rate for the year ended December 31, 1998 was 6.4
basis points and the premium paid for this period was $190,000, including
payments toward FICO bonds. A significant increase in SAIF insurance premiums
would likely have an adverse effect on the operating expenses and results of
operations of the Bank.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
THRIFT RECHARTERING LEGISLATION. Legislation enacted in 1996 provided that
BIF and SAIF would merge by January 1, 1999, if there were no savings
associations in existence on that date. Various proposals to eliminate the
federal thrift charter, create a uniform financial institutions charter and
abolish the OTS have been introduced in Congress. The Bank is unable to predict
whether such legislation would be enacted or the extent to which the legislation
would restrict or disrupt its operations.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the limits on loans to one borrower applicable to national banks.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain financial instruments and bullion. At December 31,
1998, the Bank's limit on loans to one borrower was $6.78 million. At December
31, 1998, the Bank's largest aggregate outstanding balance of loans to one
borrower was $3.0 million.
32
QTL TEST. The HOLA requires savings institutions to meet a QTL test.
Under the QTL test, a savings association is required to maintain at least 65%
of its "portfolio assets" (total assets less: (i) specified liquid assets up to
20% of total assets; (ii) intangibles, including goodwill; and (iii) the value
of property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed and related securities) in at least 9 months out of each 12
month period. A savings association that fails the QTL test must either convert
to a bank charter or operate under certain restrictions. As of December 31,
1998, the Bank maintained 89.03% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test. Recent legislation has expanded
the extent to which education loans, credit card loans and small business loans
may be considered "qualified thrift investments."
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in
need of more than normal supervision, could, after prior notice but without
obtaining approval of the OTS, make capital distributions during a calendar year
equal to the greater of (i) 100% of its net earnings to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (ii) 75% of its net earnings for the previous
four quarters. Any additional capital distributions would require prior
regulatory approval. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. At December 31, 1998, the Bank was classified as a Tier 1 Bank.
The OTS has adopted new capital distribution regulations which will become
effective on April 1, 1999. Under the new regulations, an application to and
the prior approval of the Office of Thrift supervision will be required before
an institution makes a capital distribution if (1) the institution does not meet
certain criteria for "expedited treatment" for applications under the
regulations, (2) the total capital distributions by the institution for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, (3) the institution would be
undercapitalized following the distribution or (4) the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. If an
application is not required, the institution may still need to give advance
notice to the OTS of the capital distribution.
LIQUIDITY. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus short-
term borrowings. Monetary penalties may be imposed for failure to meet these
liquidity requirements. The Bank's average liquidity ratio for the year ended
December 31, 1998 was 10.54%, which exceeded the applicable requirements. The
Bank has never been subject to monetary penalties for failure to meet its
liquidity requirements.
ASSESSMENTS. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are based upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Bank's latest quarterly thrift
financial report. The assessments paid by the Bank for the fiscal year ended
December 31, 1998 totaled $97,500.
33
BRANCHING. OTS regulations permit nationwide branching by federally
chartered savings institutions to the extent allowed by federal statute. This
permits federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) is limited by Sections 23A and 23B
of the Federal Reserve Act ("FRA"). Section 23A restricts the aggregate amount
of covered transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A and
the purchase of low quality assets from affiliates is generally prohibited.
Section 23B generally requires that certain transactions with affiliates,
including loans and asset purchases, be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring actions
against the institution and all institution-affiliated parties, including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors to institution of receivership, conservatorship or termination of
deposit insurance. Civil penalties cover a wide range of violations and can
amount to $25,000 per day, or even $1 million per day in especially egregious
cases. Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director, the FDIC has
authority to take such action under certain circumstances. Federal law also
establishes criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation, fees and benefits and such other
operational and managerial standards as the agency deems appropriate. The
federal banking agencies have adopted final regulations and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement these safety and soundness standards. The Guidelines set forth the
safety and soundness standards that the federal banking agencies use to identify
and address problems at insured depository institutions before capital becomes
impaired. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
rule establishes deadlines for the submission and review of such safety and
soundness compliance plans.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts. The
Federal Reserve Board regulations generally require that reserves be maintained
against aggregate transaction accounts as follows: for accounts aggregating
$46.5 million or less (subject to adjustment by the Federal Reserve Board) the
reserve requirement was 3%; and for accounts aggregating greater than $46.5
million, the reserve requirement
34
was $1.395 million plus 10% (subject to adjustment by the Federal Reserve Board)
against that portion of total transaction accounts in excess of $46.5 million.
The first $4.9 million of otherwise reservable balances (subject to adjustments
by the Federal Reserve Board) were exempted from the reserve requirements. The
Bank maintained compliance with the foregoing requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements imposed by the OTS.
NEW JERSEY LAW
The Commissioner regulates, among other things, the Bank's internal
business procedures as well as its deposits, lending and investment activities.
The Commissioner must approve changes to the Bank's Certificate of
Incorporation, establishment or relocation of branch offices, mergers and the
issuance of additional stock. In addition, the Commissioner conducts periodic
examinations of First Savings. Certain of the areas regulated by the
Commissioner are not subject to similar regulation by the FDIC.
Recent federal and state legislative developments have reduced distinctions
between commercial banks and SAIF-insured savings institutions in New Jersey
with respect to lending and investment authority, as well as interest rate
limitations. As federal law has expanded the authority of federally chartered
savings institutions to engage in activities previously reserved for commercial
banks, New Jersey legislation and regulations ("parity legislation") have given
New Jersey chartered savings institutions, such as the Bank, the powers of
federally chartered savings institutions.
New Jersey law provides that, upon satisfaction of certain triggering
conditions, as determined by the Commissioner, insured institutions or savings
and loan holding companies located in a state which has reciprocal legislation
in effect on substantially the same terms and conditions as stated under New
Jersey law may acquire, or be acquired by New Jersey insured institutions or
holding companies on either a regional or national basis. New Jersey law
explicitly prohibits interstate branching.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Bank report their income on a consolidated
basis and the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS in the past eight
years. For its 1998 taxable year, the Bank is subject to a maximum federal
income tax rate of 34%.
BAD DEBT RESERVES. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code of 1986 (the "Code") were permitted to
use certain favorable provisions to calculate their deductions from taxable
income for annual additions to their bad debt reserve. A reserve could be
established for bad debts on qualifying real property loans (generally secured
by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The Bank's reserve for nonqualifying loans was computed using the
Experience Method.
35
The Small Business Job Protection Act of 1996 (the "1996 Act"), which was
enacted on August 20, 1996, requires savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves. The
1996 Act repeals the reserve method of accounting for bad debts effective for
tax years beginning after 1995. Thrift institutions that would be treated as
small banks are allowed to utilize the Experience Method applicable to such
institutions, while thrift institutions that are treated as large banks (those
generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the IRS.
Any Section 481(a) adjustment required to be taken into income with respect to
such change generally will be taken into income ratably over a six-taxable year
period, beginning with the first taxable year beginning after 1995, subject to
the residential loan requirement
Under the residential loan requirement provision, the recapture required by
the 1996 Act will be suspended for each of two successive taxable years,
beginning with the Bank's current taxable year, in which the Bank originates a
minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank is
not permitted to make additions to its tax bad debt reserves. In addition, the
Bank is required to recapture (i.e., take into income) over a six year period
the excess of the balance of its tax bad debt reserves as of December 31, 1995,
other than its supplemental reserve for losses on loans, if any, over the
balance of such reserves as of December 31, 1987. As a result of such
recapture, the Bank incurred an additional tax payment of approximately $150,000
which is being paid beginning in 1996 over a six year period.
DISTRIBUTIONS. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to the Company, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Banks does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
STATE AND LOCAL TAXATION
NEW JERSEY TAXATION. The Bank is taxed under the New Jersey Savings
Institutions Tax Act. The tax is an annual privilege tax imposed at a rate of
3% of the net income of the Bank has reported for federal income tax purposes
with certain modifications. The Company is taxed under the New Jersey
Corporation Business Tax Act. If it meets certain tests, the Company would be
taxed as an investment
36
company at an effective annual rate of approximately 2.25% of New Jersey taxable
income. If it fails to meet such test, it will be taxed at an annual rate of
approximately 9% of New Jersey taxable income. As a Delaware business
corporation, the Company will be required to file annual returns with the
Secretary of the State of Delaware and pay an annual Delaware franchise tax. The
Bank's subsidiary, Pamrapo Service Corporation, which is taxed at an annual rate
of 9%, files its own tax return.
PERSONNEL
As of December 31, 1998, the Bank had 83 full-time employees and 60 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employers to be good.
37
Item 2. Properties.
- --------------------
The Bank conducts its business through eleven branch offices and one
administrative office. Five offices have drive-up facilities. The Bank has
automatic teller machines at nine of its eleven branch facilities. The
following table sets forth information relating to each of the Bank's offices as
of December 31, 1998. The total net book value of the Bank's premises and
equipment at December 31, 1998 was $4.7 million.
Year Net
Location Office Opened Book Value
- --------------------------------------------------------- -------------- ------------------
(In thousands)
Executive Office
591 Avenue C
Bayonne, New Jersey..................................... 1985 $ 566
Branch Offices
611 Avenue C
Bayonne, New Jersey..................................... 1984 769
155 Broadway
Bayonne, New Jersey..................................... 1973 140
175 Broadway
Bayonne, New Jersey..................................... 1985 (1)
861 Broadway
Bayonne, New Jersey..................................... 1962 167
987 Broadway
Bayonne, New Jersey..................................... 1977 292
1475 Bergen Boulevard
Fort Lee, New Jersey.................................... 1990 (2)
544 Broadway
Bayonne, New Jersey..................................... 1995 (2)
1930 Route 88
Brick, New Jersey....................................... 1996 370 (2)
401 Washington Street
Hoboken, New Jersey..................................... 1990 424 (2)
2518 Old Hooper Avenue
Brick, New Jersey....................................... 1998 (2)
473 Spotswood-Englishtown Road
Jamesburg, New Jersey................................... 1998 687 (2)
595-597 Avenue C
Bayonne, New Jersey..................................... (3) 417
-------
Net book value of properties............................ 3,832
Furnishings and equipment............................... 863
-------
Total premises and equipment.......................... $ 4,695
=======
- ------------------
(1) The net book value of the property is included in investment in real
estate.
(2) Leased Property.
(3) To be renovated.
38
Item 3. Legal Proceedings.
- ---------------------------
The Bank is from time to time a party to litigation which arises primarily
in the ordinary course of business. In the opinion of management, the ultimate
disposition of any such existing litigation should not have material effect on
the consolidated financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
None.
39
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- -------------------------------------------------------------------------------
Information relating to the market for Registrant's common stock and
related stockholder matters appears under Market for Common Stock and Related
Matters in the Registrant's 1998 Annual Report to Stockholders on page 39 and is
incorporated herein by reference.
Item 6. Selected Financial Data.
- ---------------------------------
The selected financial data appears under Selected Consolidated Financial
Condition and Other Data of the Corporation in the Registrant's 1998 Annual
Report to Stockholders on page 38and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
The above-captioned information appears under Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Registrant's
1998 Annual Report to Stockholders on pages 7 through 13 and is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
The Consolidated Statements of Financial Condition, and related notes
thereto, of Pamrapo Bancorp, Inc. and its subsidiaries, together with the report
thereon by Radics & Co., LLC appears in the Registrant's 1998 Annual Report to
Stockholders on pages 14 through 36 and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
Not Applicable.
40
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 1999 at
pages 6 through 17.
Item 11. Executive Compensation.
- ---------------------------------
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on April 28, 1999 at pages 9 through 17, excluding the
Stock Performance Graph and the Compensation Committee Report.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on April 28, 1999 at
pages 5 through 8.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on April 28, 1999 at page 17.
41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Page
----
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of Pamrapo Bancorp, Inc.
are incorporated by reference to the indicated pages of the
1998 Annual Report to Stockholders.
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1998............................................ 14
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1997 and 1998...................................... 15
Consolidated Statements of Comprehensive Income for
the Years Ended December 31, 1996, 1997 and 1998...................... 16
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1997 and 1998.................. 17
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1997 and 1998................................ 18-19
Notes to Consolidated Financial Statements................................. 20-35
Independent Auditors' Report............................................... 36
The remaining information appearing in the 1998 Annual Report to
Stockholders is not deemed to be filed as part of this report, except as
expressly provided herein.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial
statements or the notes thereto.
42