SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-----------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- --------------------
Commission file number 0-27010
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LITTLE FALLS BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-3402073
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
86 Main Street, Little Falls, New Jersey 07424
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 256-6100
--------------
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check x/ 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date November 8, 1996.
Class Outstanding
- --------------------------- ----------------
$.10 par value common stock 2,745,180 shares
<PAGE>
LITTLE FALLS BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION OF LITTLE FALLS
BANCORP, INC.
Item 1. Financial Statements and Notes Thereto.......................... 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 13
Item 2. Changes in Securities........................................... 13
Item 3. Defaults upon Senior Securities................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............. 13
Item 5. Other Materially Important Events............................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 14
SIGNATURES
<PAGE>
LITTLE FALLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995*
---- -----
ASSETS
<S> <C> <C>
Cash and due from banks...................................................... $2,258,072 $ 2,518,055
Interest-bearing deposits in other banks..................................... 5,374,656 11,101,033
Federal funds sold........................................................... 6,000,000 39,800,000
----------- -----------
Total cash and cash equivalents......................................... 13,632,728 53,419,088
Investment securities held-to-maturity net
(estimated fair values $26,065,000 (1996)
and $29,856,000 (1995)).................................................... 26,370,960 29,999,470
Mortgage-backed securities held to maturity, net
(estimated fair values $115,777,000 (1996)
and $118,842,000 (1995))................................................... 116,573,220 118,020,300
Loans receivable, net........................................................ 111,194,407 96,229,678
Premises and equipment, net.................................................. 2,799,232 2,789,468
Investment in real estate, net............................................... 539,181 546,786
Foreclosed real estate, net.................................................. 1,006,829 1,500,825
Interest receivable, net..................................................... 1,754,213 1,717,349
Federal Home Loan Bank of New York stock, at cost............................ 2,075,700 1,395,200
Excess of cost over assets acquired.......................................... 3,307,213 3,577,800
Other assets................................................................. 1,347,852 1,158,999
----------- -----------
TOTAL ASSETS........................................................... $280,601,535 $310,354,963
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits................................................................... $236,935,100 $247,851,373
Advances by borrowers for taxes............................................ -- 701,773
Stock subscriptions payable................................................ -- 44,831,296
Accounts payable and other liabilities..................................... 1,899,281 747,298
----------- -----------
Total liabilities...................................................... 238,834,381 $294,131,740
----------- -----------
Stockholders' Equity:
Preferred stock; 5,000,000 authorized shares;
none outstanding......................................................... -- --
Common stock, par value $.10; 10,000,000
authorized shares; shares issued 3,041,750;
shares outstanding 2,889,663............................................ 304,175 --
Additional paid-in-capital................................................. 28,980,035 --
Retained earnings.......................................................... 16,505,156 16,327,286
Unearned ESOP shares....................................................... (2,311,730) -
Minimum pension liability net of deferred taxes............................ (104,063) (104,063)
Treasury stock, at cost; 152,087 shares.................................... (1,606,419) --
---------- -----------
Total stockholders' equity............................................. 41,767,154 16,223,223
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $280,601,535 $310,354,963
=========== ===========
</TABLE>
- ---------------------
* The consolidated balance sheet at December 31, 1995 has been taken from the
audited balance sheet at that date.
See notes to unaudited consolidated financial statements.
1
<PAGE>
LITTLE FALLS BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1996 1995 1996 1995
------ ------ --------------- ----------
Interest income:
<S> <C> <C> <C> <C>
Loans receivable.......................... $2,108,759 $1,867,215 $6,016,945 $5,635,713
Mortgage backed securities................ 2,014,796 1,108,813 6,073,012 2,766,172
Investment securities and other interest
earning assets.......................... 490,555 561,367 1,905,197 1,534,005
---------- --------- ---------- ----------
Total interest income................. 4,614,110 3,537,395 13,995,154 9,935,890
Interest expense:
Deposits.................................. 2,721,029 2,383,449 8,384,704 6,648,365
---------- --------- ---------- ----------
Net interest income ........................ 1,893,081 1,153,946 5,610,450 3,287,525
Provision for loan losses................... 152,900 106,839 182,900 391,564
---------- --------- ---------- ----------
Net interest income after provision for
loan losses.......................... 1,740,181 1,047,107 5,427,550 2,895,961
Non-interest income
Income (expense) on foreclosed real estate (26,976) (187,337) (6,317) (192,103)
Other..................................... 66,531 112,917 201,370 184,637
---------- ---------- ---------- ---------
Total non-interest income.............. 39,555 ( 74,420) 195,053 ( 7,466)
---------- ---------- ---------- ---------
Non-interest expense:
Compensation and employee benefits........ 633,518 369,916 1,843,683 1,151,295
Occupancy, net............................ 92,380 36,216 302,213 120,940
Equipment................................. 96,359 44,623 290,301 164,558
Deposit insurance premiums................ 1,303,927 106,500 1,549,366 319,500
Amortization of intangibles............... 90,197 -- 270,586 --
Other..................................... 320,473 152,694 934,566 668,017
--------- ---------- ---------- ----------
Total non-interest expense............. 2,536,854 709,949 5,190,715 2,424,310
---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes.......................... (757,118) 262,738 431,888 464,185
Provision (benefit) for income taxes........ (275,526) 138,242 177,974 198,320
--------- ---------- ---------- ---------
Net income (loss)..................... (481,592) 124,496 253,914 265,865
========= ========== ========== =========
Weighted average number of common
shares outstanding........................ 2,732,507 N/A 2,766,472 N/A
Earnings (loss) per share................... $(0.18) N/A $0.09 N/A
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
LITTLE FALLS BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
1996 1995
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income.............................................................. $ 253,914 $ 265,865
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................................... 110,745 72,266
Provision for loan losses............................................. 182,900 391,564
Amortization of intangibles........................................... 270,586 --
Amortization (accretion) of deferred fees, premiums and discounts, net 45,680 (1,451)
Amortization of unearned ESOP shares.................................. 128,321 --
Gain on sale of foreclosed real estate................................ (4,455) --
Increase in other assets.............................................. (611,483) (676,734)
Increase in interest receivable, net.................................. (36,864) (113,817)
Increase in interest payable.......................................... 157,977 8,981
Increase in accounts payable and other liabilities.................... 1,194,147 242,814
------------ ------------
Net cash provided by operating activities........................... 1,691,468 189,488
------------ ------------
Cash flows from investing activities:
Purchase of mortgage-backed securities held to maturity............... (16,073,205) (20,530,434)
Principal collections on mortgage-backed securities held to maturity.. 17,407,442 4,474,146
Net (increase) decrease in loans receivable........................... (15,418,684) 2,625,474
Maturity of investments held to maturity.............................. 9,000,000 9,000,000
Purchase of investments held to maturity.............................. (5,342,000) (8,000,000)
Purchases of premises and equipment................................... (112,904) (329,995)
Proceeds from sale of foreclosed real estate.......................... 807,179 284,764
Redemption (purchases) of Federal Home Loan Bank of New York stock.... (680,500) 116,100
------------ -------
Net cash used in investing activities............................... (10,412,672) (12,359,945)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits.................................... (8,214,792) 14,924,394
Decrease in advances from borrowers.................................... (743,937) (80,324)
Refund of oversubscribed stock subscription............................ (19,706,653) --
Costs of issuance of common stock...................................... (717,311) --
Repurchase of common stock............................................. (1,606,419) --
Cash dividends paid.................................................... (76,044) --
------------ ------------
Net cash provided by (used in) financing activities.................. (31,065,156) 14,844,070
------------ ------------
Increase (decrease) in cash and cash equivalents..................... (39,786,360) 2,673,613
Cash and cash equivalents:
Beginning of period..................................................... 53,419,088 4,065,128
---------- ------------
End of period........................................................... $13,632,725 $6,738,741
============ ============
Supplemental disclosures:
Cash paid during the year for:
Interest................................................................ $8,226,727 $ 6,639,384
Income taxes............................................................ 403,000 375,339
Loans receivable transferred to foreclosed real estate.................... 308,728 607,655
Issuance of common stock:
Deposits used for stock purchase........................................ 2,859,458 --
Stock subscriptions used for stock purchase............................. 25,124,642 --
Deferred costs.......................................................... (422,630) --
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
LITTLE FALLS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the three month and
nine month periods ended September 30, 1996 include the accounts of
Little Falls Bancorp, Inc. (the "Company") and its subsidiary, Little
Falls Bank (the "Bank") which, as discussed in Note 3, became the
wholly owned subsidiary of the Company on January 5, 1996. The
Company's business is conducted principally through the Bank. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not
include all information necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows
in conformity with generally accepted accounting principles. However,
all adjustments, consisting of normal recurring accruals, which, in the
opinion of management, are necessary for a fair presentation of the
consolidated financial statements have been included. The results of
operations for the periods ended September 30, 1996 are not necessarily
indicative of the results which may be expected for the entire fiscal
year or any other period.
NOTE 3 - CONVERSION FROM MUTUAL SAVINGS BANK TO STOCK SAVINGS BANK AND
FORMATION OF SAVINGS AND LOAN HOLDING COMPANY
On January 5, 1996, the Bank consummated its conversion from a
federally chartered mutual savings bank to a stock savings bank
pursuant to a Plan of Conversion (the "Conversion") via the issuance of
common stock. In connection with the Conversion, the Company sold
3,041,750 shares of common stock which, after giving effect to offering
expenses of $1.1 million and 243,340 shares issued to the Bank's
Employee Stock Ownership Plan ("ESOP"), resulted in net proceeds of
$26.8 million. Pursuant to the Conversion, the Bank transferred all of
its outstanding shares to a newly organized holding company, Little
Falls Bancorp, Inc., in exchange for 50% of the net proceeds.
Upon consummation of the Conversion, the preexisting liquidation rights
of the depositors of the Bank were unchanged. Specifically, such rights
were retained and will be accounted for by the Bank for the benefit of
such depositors in proportion to their liquidation interests as of the
eligibility and supplemental eligibility record dates as required by
Office of Thrift Supervision ("OTS") regulations.
NOTE 4 - EARNINGS PER SHARE
Earnings per share for the three and nine month periods ended September
30, 1996 are calculated by dividing the net loss and net earnings for
the periods from July 1, 1996 and January 1, 1996 (the beginning of the
Company's fiscal year) to September 30, 1996 of $(481,592) and
$253,914, respectively, by the weighted average number of shares
outstanding during these same periods (as if the Conversion had taken
place on January 1, 1996) of 2,732,507 and 2,766,472 shares,
respectively. The weighted average number of common shares outstanding
is adjusted for the
4
<PAGE>
unallocated portion of shares held by the ESOP. Earnings per share is
not presented for the 1995 period as the Bank was a mutual savings bank
at that time and no common stock was outstanding.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, the Bank adopted FASB Statement Nos. 114,
"Accounting by Creditors for Impairment of a Loan" and 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." The provision of these statements are applicable to all
loans, uncollateralized as well as collateralized, except for large
groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment and loans that are measured at fair value or
at the lower of cost or fair value. Additionally, such provisions apply
to all loans that are renegotiated in troubled debt restructurings
involving a modification of terms.
Statement No. 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan
is collateral dependent, except that loans renegotiated as part of a
troubled debt restructuring subsequent to the adoption of Statement
Nos. 114 and 118 must be measured for impairment by discounting the
total expected cash flow under the renegotiated terms at each loan's
original effective interest rate.
A loan evaluated for impairment pursuant to Statement No. 114 is deemed
to be impaired when, based on current information and events, it is
probable that the Bank will be unable to collect all amounts due
according to the contractual terms of the loan agreement. An
insignificant payment delay, which is defined by the Bank as up to
ninety days, will not cause a loan to be classified as impaired. A loan
is not impaired during the period of delay in payment if the Bank
expects to collect all amounts due, including interest accrued at the
contractual interest rate for the period of delay. Thus, a demand loan
or other loan with no stated maturity is not impaired if the Bank
expects to collect all amounts due, including interest accrued at the
contractual interest rate, during the period the loan is outstanding.
All loans identified as impaired are evaluated independently. The Bank
does not aggregate such loans for evaluation purposes.
The adoption of Statement Nos. 114 and 118 did not have a material
adverse impact on financial condition or operations.
Payments received on impaired loans are applied first to interest
receivable and then to principal.
5
<PAGE>
LITTLE FALLS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
General
The Company is a New Jersey corporation organized in August 1995 at the
direction of the Board of Directors of the Bank to acquire all of the capital
stock of the Bank issued in the Conversion. The Company is a unitary savings and
loan holding company which, under existing laws, generally is not restricted in
the types of business activities in which it may engage provided that the Bank
retains a specified amount of its assets in housing-related investments.
The Bank is a federally chartered stock savings bank headquartered in
Little Falls, New Jersey. The Bank was founded in 1887 and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") and the
Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products. It is the Bank's intent to remain an independent
community savings bank serving the local banking needs of its community.
The Bank attracts deposits from the general public and has historically
used such deposits primarily to originate loans secured by first mortgages on
owner-occupied one- to four-family residences in its market area and to purchase
mortgage-backed securities. The Bank also originates a limited number of
commercial real estate, residential construction, and consumer loans, which
mainly consist of home equity lines of credit.
The largest components of the Bank's net income are net interest
income, which is the difference between interest income and interest expense,
and noninterest income derived primarily from fees. Consequently, the Bank's
earnings are dependent on its ability to originate loans, net interest income,
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Bank's net income is also affected by its provision for loan
losses and foreclosed real estate as well as the amount of non-interest
expenses, such as compensation and benefit expense, occupancy and equipment
expense and deposit insurance premium expenses. Earnings of the Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Comparison of Financial Condition
Total assets decreased by $29.8 million to $280.6 million at September
30, 1996 from $310.3 million at December 31, 1995. Net loans increased by $15.0
million primarily due to loan originations of $23.5 million offset by loan
repayments. Mortgage-backed securities decreased by $1.4 million due to
repayments being greater than the $16.0 million of purchases. Of the securities
purchased, $10.1 million were adjustable rate securities. Total cash and cash
equivalents decreased by $39.8 million due to the $23.5 million of loans
originated, the $16.0 million mortgage-backed securities purchased, the purchase
of $5.3 million of investment securities, the $8.1 million outflow of deposits
and the refund of $19.7 million of over-subscribed stock subscriptions partially
offset by amortization and repayments on loans and mortgage-backed securities,
and maturities of investment securities.
6
<PAGE>
Total deposits decreased by $10.9 million, due in part to $2.8 million
being used for the purchase of stock in the Conversion. In addition, the
decrease was also the result of the Bank's strategy to lower its cost of
deposits. This strategy resulted in a decrease of the weighted average rate on
total deposits from 4.73% on December 31, 1996 to 4.55% on September 30, 1996.
Total stockholders' equity increased by $25.5 million, primarily due to
the completion of the mutual to stock conversion, partially offset by the
repurchase of 152,077 shares of Common Stock at an aggregate cost of $1.6
million. Earnings for the nine months ended September 30, 1996, also contributed
to the increase, although to a much smaller extent.
On October 28, 1996, the Company completed a 5% repurchase of its
common stock. A total of 144,483 shares of common stock were repurchased at an
average net price of $11.5625 per share. The total price for all shares was
approximately $1.67 million.
Non-performing Assets
The following table sets forth information regarding non-performing
loans and real estate owned. During the periods indicated, the Bank had no
restructured loans within the meaning of SFAS No. 15.
<TABLE>
<CAPTION>
At At
September 30, December 31,
------------- ------------
1996 1995
---- ----
(Dollars in Thousands)
<S> <C> <C>
Total non-performing loans................... $ 2,314 $2,447
Real estate owned............................ 1,007 1,501
----- -----
Total non-performing assets.................. $ 3,321 $3,948
===== =====
Total non-performing loans to net loans...... 2.08% 2.54%
===== =====
Total non-performing loans to total assets... 0.82% 0.79%
===== =====
Total non-performing assets to total assets.. 1.18% 1.26%
===== =====
</TABLE>
Non-performing assets decreased by $627,000 to $3.3 million at
September 30, 1996. The decrease was due in most part to the sale of six
properties previously classified as real estate owned. Of these sales, four were
completed in the third quarter.
Comparison of Earnings for the Three and Nine Months Ended September 30, 1996
and 1995
Net Income. Net income for the three and nine months ended September
30, 1996 decreased $606,000 and $12,000, respectively, to a net loss of $482,000
and net income of $254,000, respectively, when compared to the same periods
ended September 30, 1995. The decreases were primarily due to a $1.2 million
charge connected with a one time special assessment from the Savings Association
Insurance Fund ("SAIF"). This one time assessment was the result of legislation
that was signed into law on September 30, 1996 for the purpose of recapitalizing
the SAIF. This was partially offset by the increase in net interest income
before the provision for loan losses of $739,000 and $2.3 million for the three
and nine months ended September 30, 1996, respectively, as compared to the same
periods in 1995. In addition, the Company recorded a nonrecurring expense of
$195,000 in the second quarter of 1995
7
<PAGE>
in connection with the implementation of a directors' medical plan. Non-interest
expenses, excluding the non-recurring directors' medical expense and the one
time SAIF assessment, increased $659,000 and $1.8 million for the three and nine
months ended September 30, 1996, respectively, as compared to the same periods
in 1995.
Total Interest Income. Interest income increased by $1.1 million and
$4.1 million for the three and nine months ended September 30, 1996. These
increases were primarily due to the increase of the average balances of interest
earning assets of $65.5 million and $74.8 million for the three months and nine
months ended September 30, 1996, as compared to the same periods in 1995. The
primary reasons for the increased average balances of interest earning assets
were the receipt of $50.8 million from the purchase of three branches and their
deposits in December 1995 and the receipt of $26.8 million of net proceeds from
the Bank's Conversion on January 5, 1996.
Total Interest Expense. Interest expense increased $338,000, or 14.2%
and $1.7 million or 26.1% for the three and nine month periods ended September
30, 1996, respectively, as compared to the same periods ended September 30,
1995. These increases were primarily due to the increase in the average balances
of deposits of $41.1 million and $56.2 million, respectively. Deposits increased
due to the purchase of three branches and their deposits of $54.1 million in
December 1995. The average rate paid on deposits decreased to 4.61% and 4.68%
from 4.97% and 4.85%, respectively, for the three and nine months ended
September 30, 1996, as compared to the same periods ended September 30, 1995.
Net Interest Income. Net interest income increased $739,000 or 64.1%
and $2.3 million or 70.1% for the three and nine month periods ended September
30, 1996, respectively, as compared to the same periods ended September 30,
1995. These increases were due in most part to the investment of $26.8 million
received from the Conversion in loans, investment and mortgage-backed
securities, as well as a decrease in the average rate paid on savings, as
described earlier.
Provisions for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the potential losses that may be
incurred in the Bank's loan portfolio. Such evaluation, which includes a review
of certain loans of which full collectibility of interest and principal may not
be reasonably assured, considers the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
current economic conditions. The provision for loan losses increased $46,000 and
decreased $209,000 during the three and nine month periods, respectively. The
primary cause for the increase for the three month period was the write off of a
loan which was a performing loan in the previous quarter. The decrease for the
nine month period was due in most part to the decision by the Bank's management
during 1995, to establish an increased general reserve for portfolio losses
based on an assessment of the risks inherent in the loan portfolio and trends in
the local and national economies.
As a result of the declines in regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institution by the FDIC, OTS or other federal or state regulators. Results
of recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate market values, requiring
significantly increased provisions for potential loan losses. While the Bank
believes it has established an adequate allowance for loan losses, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to significantly increase its allowance for loan losses,
thereby negatively affecting the Bank's financial condition and earnings or that
the Bank may not have to increase its level of loan loss allowance in the
future.
8
<PAGE>
Management will continue to review its loan portfolio to determine the
extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Quarter Ended September 30,
---------------------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Balance - beginning $ 931 $ 1,015
Provisions charged to operations............... 153 107
Loans charged off, net of recoveries........... (146) (107)
----- -----
Balance-ending................................. $ 938 $ 1,015
==== ======
</TABLE>
Impaired loans and related amounts recorded in the allowance for loan
losses at September 30, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
With recorded allowances............................ $ 1,479
Without recorded allowances......................... --
-----
Total impaired loans................................. 1,479
Related allowance for loan losses.................... 205
-----
Net impaired loans................................... $1,274
=====
</TABLE>
Non-interest Income. Non-interest income increased $114,000 and
$203,000 for the three and nine month periods ended September 30, 1996, as
compared to the same periods ended September 30, 1995 due primarily to a
decrease in expenses on foreclosed properties of $160,000 and $186,000 for the
three and nine month periods, and to an increase in service fees charged, due in
most part to the increase in deposits resulting from the purchase of three
branches and their deposits in December, 1995.
Non-interest Expense. Non-interest expense increased $1.8 million and
$2.8 million for the three and nine months ended September 30, 1996, as compared
to the three and nine months ended September 30, 1995 for a number of reasons.
Compensation and employee benefits increased by $264,000 and $692,000,
respectively, due in part to additional employees resulting from the purchase of
three branch offices in December, 1995 and the adoption of an employee stock
ownership plan ("ESOP") in connection with the Bank's mutual to stock
conversion. The ESOP expense was $42,000 and $128,000 for the three and nine
months ended September 30, 1996, respectively. The acquisition of the branch
offices also caused increases in occupancy, equipment and deposit insurance
premium expenses, as well as the amortization of goodwill during these periods.
In addition, for the nine months ended September 30, 1996, a portion of the
increase was due to one time costs associated with new services offered by the
Bank. The 1996 increases were partially offset by a nonrecurring 1995 expense of
$195,000 for the implementation of a directors' medical plan, which was recorded
during the three months ended June 30, 1995. On August 30, 1996, the Bank closed
its Frenchtown office. The decision to close the branch was based on
management's evaluation of the purchase of three branch offices in the same
county from an unaffiliated commercial bank in December 1995 and the ability of
the Bank to decrease expenses and improve efficiencies through consolidation. On
October 18 the Bank announced that it plans to close its Mount Holly branch and
sell the deposits to another depository institution in the area. The branch
closing and related sale of deposits is expected to result in reduced operating
expenses and lower cost of funds. The closing of the office and sale of the
related deposits is anticipated to occur no later than December 31, 1996,
subject to regulatory approval or non-objection, if any.
9
<PAGE>
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996
(the "Act"), the FDIC imposed a special assessment on SAIF members to capitalize
the SAIF at the designated reserve level of 1.25% as of October 1, 1996. Based
on the Bank's deposits as of March 31, 1995, the date for measuring the amount
of the special assessment pursuant to the Act, the Bank will pay a special
assessment of $1.2 million on or about November 27, 1996 to recapitalize the
SAIF. The FDIC is expected to lower the premium for deposit insurance to a level
necessary to maintain the SAIF at its required reserve level; however, the range
of premiums has not been determined at this time.
Pursuant to the Act, the Bank will pay, in addition to its normal
deposit insurance premium as a member of the SAIF, an amount equal to
approximately 6.4 basis points toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Member of the Bank Insurance Fund ("BIF"), by
contrast, will pay, in addition to their normal deposit insurance premium,
approximately 1.3 basis points. Based on total deposits as of September 30,
1996, had the Act been in effect, the Bank's Fico Bond premium would have been
approximately $37,900 in addition to its normal deposit insurance premium.
Beginning no later than January 1, 2000, the rate paid to retire the Fico Bonds
will be equal for members of the BIF and the SAIF. The Act also provides for the
merging of the BIF and the SAIF by January 1, 1999 provided there are no
financial institutions still chartered as savings associations at that time.
Should the insurance funds be merged before January 1, 2000, the rate paid by
all members of this new fund to retire the Fico Bonds would be equal.
On July 9, 1996, the stockholders of the Company approved the MSBP and
a Stock Option Plan. The MSBP will, subject to regulatory non-objection,
purchase up to 121,670 shares of Common Stock to be awarded to key employees and
directors of the Bank. Such shares will be expensed at fair market value at 20%
per year beginning July 1997. The Company expects the MSBP to increase
compensation expense over such periods.
Income Tax Expense. Income tax expense decreased $414,000 and $20,000,
respectively for the three and nine month periods ended September 30, 1996, as
compared to the same periods one year ago due to the decrease of pre-tax income
for the same periods.
Liquidity and Capital Resources
On September 30, 1996, the Bank was in compliance with its three
regulatory capital requirements as follows:
<TABLE>
<CAPTION>
Amount Percent
------ -------
(Dollars in thousands)
<S> <C> <C>
Tangible capital................................................ $25,235 9.10%
Tangible capital requirement.................................... 4,161 1.50%
------ ------
Excess over requirement......................................... $21,074 7.60%
====== ======
Core capital.................................................... $25,235 9.10%
Core capital requirement........................................ 8,321 3.00%
------ ------
Excess over requirement......................................... $16,914 6.10%
====== ======
Risk based capital.............................................. $25,634 29.26%
Risk based capital requirement.................................. 7,007 8.00%
------ -------
Excess over requirement......................................... $18,627 21.26%
====== =======
</TABLE>
10
<PAGE>
Management believes that under current regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future.
Events beyond the control of the Bank, such as increased interest rates or a
downturn in the economy in areas in which the Bank operates could adversely
affect future earnings and as a result, the ability of the Bank to meet its
future minimum capital requirements.
The Bank's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost effective
manner. The Bank's primary sources of funds are deposits and scheduled
amortization and prepayment of loan and mortgage-backed principal. During the
past several years, the Bank has used such funds primarily to fund maturing time
deposits, pay savings withdrawals, fund lending commitments, purchase new
investments, and increase liquidity. The Bank is currently able to fund its
operations internally. Additionally, sources of funds include the ability to
utilize Federal Home Loan Bank of New York advances and the ability to borrow
against mortgage-backed and investment securities. As of September 30, 1996, the
Bank had no such borrowed funds. Loan payments, maturing investments and
mortgage-backed security prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. As of September 30, 1996, the Bank had mortgage
commitments to fund loans of $4.6 million. Also, at September 30, 1996, there
were commitments on unused lines of credit relating to home equity loans of $2.7
million. Certificates of deposit scheduled to mature in one year or less at
September 30, 1996 totaled $105.7 million. Based on historical deposit
withdrawals and outflows, and on internal monthly deposit reports monitored by
management, management believes that a majority of such deposits will remain
with the Bank. As a result, no adverse liquidity effects are expected. Note,
however, that purchases of common stock of the Company pursuant to the
repurchase plan and MSBP will require additional liquidity. Management is
currently evaluating its options on these matters.
The Bank is required under federal regulations to maintain certain
specified levels of "liquid investments," which include certain United States
government obligations and other approved investments. Current regulations
require the Bank to maintain liquid assets of not less than 5% of its net
withdrawable accounts plus short term borrowings. Short term liquid assets must
consist of not less than 1% of such accounts and borrowings, which amount is
also included within the 5% requirement. Those levels may be changed from time
to time by the regulators to reflect current economic conditions. The Bank has
maintained liquidity in excess of regulatory requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
11
<PAGE>
Additional Key Operating Ratios
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996(1) 1995(1) 1996(1) 1995(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Earnings (loss) per common share $(0.18) N/A $0.09 N/A
(2)(3).........................................
Return on average assets....................... (0.68)% 0.24% 0.12% 0.18%
Return on average equity....................... (4.52)% 3.12% 0.78% 2.21%
Interest rate spread........................... 2.32% 2.10% 2.27% 2.00%
Net interest margin............................ 2.84% 2.39% 2.78% 2.33%
Noninterest expense to average assets.......... 3.61% 1.36% 2.48% 1.61%
Noninterest expense, excluding one-
time SAIF special assessment, to
average assets............................... 1.97% 1.36% 1.89% 1.61%
Net charge-offs to average outstanding
loans........................................ 0.54% 0.12% 0.22% 0.78%
</TABLE>
<TABLE>
<CAPTION>
At September 30, At December 31,
1996 1995
---- ----
<S> <C> <C>
Tangible book value per share...................................... $13.31 N/A (2)
</TABLE>
- ----------------
(1) The ratios for the three- and nine-month periods are annualized.
(2) There were no shares outstanding prior to the completion of the
Company's initial public offering on January 5, 1996.
(3) The average number of shares outstanding during the three and nine
months ended September 30, 1996 was 2,732,507 and 2,766,472,
respectively.
(4) The number of shares issued and outstanding as of September 30, 1996,
was 2,889,663.
12
<PAGE>
LITTLE FALLS BANCORP, INC. AND SUBSIDIARY
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank was engaged in any legal proceeding
of a material nature at September 30, 1996. From time to time, the
Company is a party to legal proceedings in the ordinary course of
business wherein it enforces its security interest in loans.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on July 9, 1996
(the "Special Meeting"). The purpose of the Special Meeting was to
seek stockholder approval of the Company's stock option plan (the
"Option Plan") and the Association's management stock bonus plan
("MSBP"). The following table indicates the voting on each matter
considered.
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C> <C>
Option Plan 2,164,539 292,628 11,475
MSBP 1,827,552 627,208 16,091
</TABLE>
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Recent Developments. In an effort to increase earnings, reduce the
Company's interest rate sensitivity, and to better match its interest rate
position, on November 13, 1996, the Company entered into a financial transaction
whereby it purchased a $25.0 million fixed-rate Federal National Mortgage
Association ("FNMA") note and simultaneously borrowed $25.0 million from an
independent third party, using the FNMA note as collateral. The note has an
initial term of ten years at an annual rate of 7.20% and is callable after two
years and continuously thereafter. The borrowings are comprised of a combination
of repurchase agreements with terms of one year, six months and overnight. The
annual rates payable on the one year and six month repurchase agreements are
5.68% and 5.50%, respectively. The effective rate on the overnight repurchase
agreement adjusts daily.
Change in Tax Code. Savings associations are subject to the provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), in the same
general manner as other corporations. However, prior to August 1996, savings
associations such as the Bank, which met certain definitional tests and other
conditions prescribed by the Code could benefit from certain favorable
provisions regarding their deductions from taxable income for annual additions
to their bad debt reserve. The amount of the bad debt deduction that a
qualifying savings institution could claim with respect to additions to its
reserve for
13
<PAGE>
bad debts was subject to certain limitations. The Bank reviewed the most
favorable way to calculate the deduction attributable to an addition to its bad
debt reserve on an annual basis.
In August 1996, the Code was revised to equalize the taxation of
thrifts and banks. Thrifts, such as the Bank, no longer have a choice between
the percentage of taxable income method and the experience method in determining
additions to bad debt reserves. Thrifts with $500 million of assets or less may
still use the experience method, which is generally available to small banks
currently. Larger thrifts such as the Bank must use the specific charge off
method regarding bad debts. Any reserve amounts added after 1987 will be taxed
over a six year period beginning in 1996; however, bad debt reserves set aside
through 1987 are generally not taxed. An institution may delay recapturing into
income its post-1987 bad debt reserves for an additional two years if it meets a
residential-lending test. This law is not expected to have a material impact on
the Bank. At September 30, 1996, the Bank had approximately $1.5 million of post
1987 bad-debt reserves.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
14
<PAGE>
LITTLE FALLS BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITTLE FALLS BANCORP, INC.
Date: November 14, 1996 By: /s/Leonard G Romaine
--------------------------------------------
Leonard G. Romaine
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1996 By: /s/Richard Capone
--------------------------------------------
Richard Capone
Senior Vice President and
Chief Financial Officer
(Principal Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,258
<INT-BEARING-DEPOSITS> 5,375
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 142,944
<INVESTMENTS-MARKET> 141,842
<LOANS> 112,132
<ALLOWANCE> 938
<TOTAL-ASSETS> 280,602
<DEPOSITS> 236,935
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,899
<LONG-TERM> 0
0
0
<COMMON> 304
<OTHER-SE> 41,463
<TOTAL-LIABILITIES-AND-EQUITY> 280,602
<INTEREST-LOAN> 6,017
<INTEREST-INVEST> 7,978
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,995
<INTEREST-DEPOSIT> 8,385
<INTEREST-EXPENSE> 8,385
<INTEREST-INCOME-NET> 5,610
<LOAN-LOSSES> 183
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,191
<INCOME-PRETAX> 432
<INCOME-PRE-EXTRAORDINARY> 254
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 254
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<YIELD-ACTUAL> 2.79
<LOANS-NON> 2,314
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,872
<ALLOWANCE-OPEN> 931
<CHARGE-OFFS> 146
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 938
<ALLOWANCE-DOMESTIC> 938
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 938
</TABLE>
