SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
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- or -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission Number: 0-27010
LITTLE FALLS BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
New Jersey 22-3402073
- --------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
86 Main Street 07424
- ------------------------------------------ -------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (201) 256-6100
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value per share
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(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 (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the Registrant's Common Stock as
quoted on the Nasdaq Stock Market, on March 25, 1997, was $30.8 million
(2,237,207 shares at $13.75 per share).
As of March 25, 1997 there were issued 3,041,750 and outstanding 2,749,180
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1996. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
<PAGE>
INDEX
PART I Page
Item 1. Business........................................................... 1
Item 2. Properties......................................................... 29
Item 3. Legal Proceedings.................................................. 29
Item 4. Submission of Matters to a Vote of Security-Holders................ 29
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ......................................................... 29
Item 6. Selected Financial Data............................................ 29
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 29
Item 8. Financial Statements and Supplementary Data........................ 29
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 29
.
PART III
Item 10. Directors and Executive Officers of the Registrant................. 30
Item 11. Executive Compensation............................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 30
Item 13. Certain Relationships and Related Transactions..................... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 30
<PAGE>
PART I
Item 1. Business
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General
Little Falls Bancorp, Inc. (the "Company") is a New Jersey corporation
organized in August 1995 at the direction of Little Falls Bank (the "Bank") for
the purpose of becoming a savings and loan holding company and to acquire all of
the capital stock issued by the Bank in its conversion from the mutual to stock
form of ownership (the "Conversion"). On January 5, 1996, the Registrant sold
3,041,750 shares of its common stock, par value $0.10 per share (the "Common
Stock") in a subscription offering as part of 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. References to the "Bank" herein, unless the context
required otherwise, refer to the Company on a consolidated basis. The net
conversion proceeds totaled approximately $26.8 million of which $14.6 million
was invested in the Bank.
The Bank is a federally chartered stock savings bank headquartered in
Little Falls, New Jersey. The Bank was originally chartered in 1887 as the
Little Falls Building and Loan Association. On December 2, 1993, the Bank
converted its mutual charter from a federally chartered savings association to a
New Jersey chartered savings bank, changing its name to Little Falls Savings
Bank. Effective October 1995, the Bank converted its New Jersey mutual charter
to a federal mutual charter and changed its name to "Little Falls Bank." The
Bank's deposits are federally insured and the Bank is a member of the Federal
Home Loan Bank ("FHLB") System. At December 31, 1996, the Bank had total assets
of $303.5 million, deposits of $228.3 million, and retained earnings of $40.4
million or 13.3% of total assets as calculated under generally accepted
accounting principles.
The Company and the Bank are subject to regulation by the Office of Thrift
Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the
Securities and Exchange Commission ("SEC").
The Bank is a community oriented savings institution offering a variety of
financial services to meet the needs of the communities it serves. The Bank
conducts its business from its main office in Little Falls, New Jersey and ___
branch offices located in Passaic, Hunterdon and Burlington Counties, New
Jersey. 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. Such loans totaled $108.4 million, or 91.45% of the
Bank's loan portfolio and 35.70% of total assets at December 31, 1996.
To a lesser extent, 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. Further, at December 31, 1996,
the Bank had $112.5 million and $51.4 million or 37.1% and 16.9% of total assets
in its mortgage-backed securities portfolio and investment securities portfolio,
respectively.
1
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The principal sources of funds for the Bank's lending activities are
deposits, the amortization, repayment and maturity of loans, mortgage-backed
securities and investment securities. Principal sources of income are interest
and fees on loans, mortgage-backed securities and investment securities. The
Bank's principal expense is interest paid on deposits.
Because the Bank did not convert to stock form (including the initial sale
of Common Stock by the Company) until January 5, 1996, a part of the
presentation herein is that of the Bank in mutual form.
Market Area and Competition
The Bank focuses on serving its customers located in the New Jersey
community of Little Falls and surrounding communities in Passaic and Hunterdon
Counties, New Jersey. Economic growth in the Bank's market area remains
dependent upon the local economy. The economy of the greater New York - New
Jersey market has historically benefitted from having a large number of
corporate headquarters and concentration of financial services-related
industries. It also has a well-educated employment base and a large number of
industrial, service and high technology businesses. Over the past few years, New
Jersey's economy has slowly begun to recover from the effects of a prolonged
decline in the national and regional economy, layoffs in the financial services
industry and corporate relocations. Employment levels and real estate markets in
the Bank's market area have stabilized and in some instances begun to improve.
Whether such improvement will continue is dependent, in large part, upon the
general economic health of the United States and other factors beyond the Bank's
control and, therefore, cannot be estimated. In addition, the deposit and loan
activity of the Bank is significantly affected by economic conditions in its
market area. The Bank's principal competitors are financial institutions and
mortgage banking companies, many of which are significantly larger and have
greater financial resources than the Bank. The Bank's competition for loans on a
retail and wholesale basis comes principally from commercial banks, mortgage
brokers, banking and insurance companies. The Bank's competition for deposits
has historically come from commercial banks, thrift institutions and credit
unions. In addition, the Bank faces increasing competition for deposits from
non-bank institutions, such as brokerage firms and insurance companies in such
areas as short-term money market funds, corporate and government securities
funds, mutual funds and annuities.
Lending Activities
General. The Bank's loan portfolio primarily consists of first mortgage
loans secured by owner- occupied one- to four-family residences. To a lesser
extent, the Bank's loan portfolio also consists of a number of commercial real
estate, residential construction and consumer loans.
2
<PAGE>
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the loan portfolio as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
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1996 1995 1994 1993 1992
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ---------- ------ ---------- ------ ---------- ------ ---------- -------- ----------
(Dolllars in Thousands)
Type of Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family .....$ 108,367 92.53 $ 88,828 92.31% $ 87,851 92.71% $ 95,278 93.62% $124,792 96.92%
Commercial real estate... 3,659 3.13 4,639 4.82 4,463 4.71 3,614 3.54 467 .36
Residential construction. 525 0.45 1,098 1.14 521 0.55 -- -- -- --
Consumer:
Savings account ......... 889 0.76 824 0.86 866 .91 1,015 1.00 945 .73
Second mortgages ........ 5,028 4.29 2,540 2.64 2,694 2.84 3,007 2.95 3,696 2.87
Other ................... 25 0.02 42 0.04 52 .05 87 .09 127 .10
-------- ------ ------ ------ --------- ------ --------- ------ -------- ------
Total loans receivable
(gross) ................. 118,493 101.18 97,971 101.81 96,447 101.77 103,001 101.20 130,027 100.98
Less:
Loans in process ...... 150 (0.13) 450 (0.47) 186 (.18) -- -- -- --
Deferred loan
origination.......... (0.12)
fees and costs ....... 138 333 (0.35) 338 (.36) 408 (.40) 548 (.43)
Allowance for loan
losses.............. 1,090 (0.93) 958 (0.99) 1,169 (1.23) 818 (.80) 731 (.55)
-------- ------ ------ ------ --------- ------ --------- ------ -------- ------
Total loans, net ........ $117,115 100.00 96,230 100.00 % $ 94,754 100.00% $ 101,775 100.00 % $128,748 100.00 %
======== ====== ====== ====== ========= ====== ========= ====== ======== ======
</TABLE>
3
<PAGE>
Origination and Repayment of Loans. The following table sets forth the
Bank's loan originations and principal repayments for the periods indicated. The
Bank originates loans primarily for retention in its portfolio and did not sell
or purchase loans during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1996 1995 1994
--------- ---------- ---------
(In Thousands)
Total gross loans receivable at
<S> <C> <C> <C>
beginning of period ............. $ 97,971 $ 96,447 $ 103,001
--------- --------- ---------
Loans originated:
One- to four-family .............. 29,525 10,812 10,632
Commercial real estate ........... -- -- 821
Residential construction ......... 697 700 --
Consumer ......................... 3,864 1,868 559
--------- --------- ---------
Total loans originated ............. 34,086 13,380 12,012
Loan principal repayments .......... 13,107 10,842 17,690
Loans transferred to foreclosed real
estate ......................... 406 672 871
Loans charged off .................. 51 342 5
--------- --------- ---------
Net loan activity .................. 20,522 1,524 (6,554)
--------- --------- ---------
Total gross loans receivable at
end of period .................. $ 118,493 $ 97,971 $ 96,447
========= ========= =========
</TABLE>
4
<PAGE>
Loan Maturity Tables
The following table sets forth the contractual maturity of the Bank's loan
portfolio at December 31, 1996. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totaled $13.1 million for the year ended December 31, 1996.
Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities rather than the period in which interest rates are next scheduled to
adjust.
<TABLE>
<CAPTION>
One- to Four- Commercial Residential
Family Real Estate Construction Consumer Total
------------ ------------ ------------ -------- -----
(In Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C>
Within 3 months....... $ 55 $ -- $ -- $ 505 $ 560
3 months to 1 Year.... 24 -- 525 374 923
-------- -------- ------- ------- --------
Total Due Within 1
Year................ 79 -- 525 879 1,483
-------- -------- ------- ------- --------
1 to 3 years........ 203 -- -- 26 229
3 to 5 years........ 1,481 300 -- -- 1,781
5 to 10 years....... 4,623 571 -- 1,635 6,829
10 to 20 years...... 18,319 1,008 -- 3,351 22,677
Over 20 years....... 82,673 920 -- -- 83,593
-------- -------- ------- ------- --------
Total due after one
year................ 107,299 2,799 -- 5,012 115,109
-------- -------- ------- ------- --------
Non-performing........ 989 860 -- 52 1,901
-------- -------- ------- ------- --------
Total amount due...... 108,367 3,659 525 5,943 118,494
Less:
Allowance for loan and
lease loss............ 863 184 16 27 1,090
Loans in process...... -- -- 150 -- 150
Deferred loan fees
(costs)............. 161 -- -- (23) 138
-------- -------- ------- ------- --------
Loans receivable, net $107,343 $ 3,475 $ 359 $ 5,939 $117,116
======== ======== ======= ======= ========
</TABLE>
The following table sets forth the dollar amount at December 31, 1996 of
all loans due after December 31, 1997, which have pre-determined interest rates
and which have floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One- to four-family..... $ 71,934 $ 36,354 $ 108,288
Commercial real estate.. 1,779 1,880 3,659
Consumer................ 2,401 2,662 5,063
-------- -------- --------
Total................. $ 76,114 $ 40,896 $ 117,010
======= ======= =======
One- to Four-Family Residential Loans. The Bank's primary lending activity
consists of the origination of single-family residential mortgage loans secured
by owner-occupied property. The Bank
5
<PAGE>
originates one- to four-family residential mortgage loans in amounts up to 80%
of the appraised value of the mortgaged property and in amounts up to 70% of the
appraised value on loans which exceed $200,000. No private mortgage insurance is
obtained since loan to value ratios do not exceed 80%. All loans are held in the
Bank's portfolio.
The Bank has an agreement with a mortgage solicitation firm pursuant to
which the Bank receives one- to four-family mortgage applications on a
state-wide basis. The Bank then submits bids on the mortgage applications on
which it is interested prior to making the final loan. The submission of a bid
to provide the mortgage loan is not a firm commitment on the Bank's part, as the
Bank applies its own underwriting standards before committing to the loan. All
loans must be documented, including an original appraisal. This agreement has
provided the majority of loan applications received by the Bank in the past
year.
Loan referrals are also obtained from local realtors or builders, existing
or past customers and members of the local community. Mortgage loans generally
include due-on sale clauses which provide the Bank with the contractual right to
deem the loan immediately due and payable in the event that the borrower
transfers ownership of the property without the Bank's consent.
The Bank primarily originates adjustable-rate mortgage loans with a
guaranteed renewal for a thirty-year term. These loans adjust after one, three,
five or ten years. The Bank's ARM loans are originated for its portfolio and do
not conform to FNMA or FHLMC standards. Although the Bank's ARM loans have a 6%
lifetime cap, at the adjustment period, interest rate changes are discretionary.
Generally, ARM loans pose credit risks somewhat greater than the risk inherent
in fixed-rate loans primarily because, as interest rates rise, the underlying
payments of the borrower rise, increasing the potential for default. The Bank
also offers fixed-rate loans with terms of 15 and 30 years. The Bank offers
various loan programs with varying interest rates and fees which are
competitively priced based on market conditions and the Bank's cost of funds.
The Bank has purchased and participated in a limited number of loans,
primarily in its market area. At December 31, 1996, the Bank had $3.0 million of
purchased loans and $4.9 million in loan participations. The Bank purchases and
participates in loans after applying its own underwriting standards. The Bank
typically does not service the loans that it purchases or participates in with
other financial institutions.
Commercial Real Estate. To a lesser extent, the Bank's policy has been to
originate commercial real estate loans. The loans are generally made in amounts
up to 65% of the appraised value of the property. The Bank's commercial real
estate loans primarily have rates equal to the prime rate plus a margin. In
making such loans, the Bank primarily considers the net operating income
generated by the real estate to support the debt service, the financial
resources and income level and managerial resources of the borrower, the
marketability of the property and the Bank's lending experience with the
borrower.
The Bank's commercial real estate loans typically are secured by
properties such as mixed-use properties, retail stores, office buildings and
strip shopping centers. The Bank's commercial real estate portfolio includes
multi-family loans. For a discussion of the Bank's largest commercial real
estate loan, see "- Loans to One Borrower."
6
<PAGE>
Loans secured by commercial real estate generally involve a greater degree
of risk than one- to four-family residential mortgage loans and carry larger
loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial real
estate is typically dependent upon the successful operation of the related real
estate. If the cash flow from the property is reduced, the borrower's ability to
repay the loan may be impaired.
Residential Construction Loans. The Bank's policy has been to originate
residential construction loans to a lesser extent than other types of mortgages.
Residential construction loans are made up to a maximum of 80% of the appraised
value of the home, based upon the builder's plans. The rate charged is generally
the prime rate plus a margin. The loan proceeds are disbursed based upon work
completed. For a discussion of the Bank's largest residential construction loan,
see "-- Loans to One Borrower."
Consumer Loans. The Bank's consumer loans primarily consist of home equity
loans, and, to a much lesser extent, student loans and loans secured by savings
deposits. The home equity lines of credit are made with loan to value ratios of
up to 80% on either a fixed or adjustable rate basis.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to make payments on the proposed loan and
other indebtedness. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount. The Bank's consumer loans tend to
have higher interest rates and shorter maturities than one- to four-family
mortgage loans, but are considered to entail a greater risk of default than
mortgage loans.
Loan Approval Authority and Underwriting. The Board of Directors generally
approves all mortgage loans although the Bank's President has the authority to
approve loans up to $500,000. Any loans exceeding that amount must be approved
by the Board of Directors.
The Bank uses board approved independent fee appraisers on real estate
loans. It is the Bank's policy to obtain title insurance on all properties
securing real estate loans and to obtain fire, flood and casualty insurance on
all loans that require security.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all real estate approved loans. Generally, the commitment requires
the loan to be closed within sixty days of issuance. At December 31, 1996, the
Bank had $3.3 million of commitments to fund new mortgage loans and commitments
on unused lines of credit relating to home equity loans of $3.0 million.
Loans to One Borrower. Savings associations are subject to the same limits
as those applicable to national banks, which under current regulations limit
loans-to-one borrower in an amount equal to 15% of unimpaired capital and
retained income on an unsecured basis and an additional amount equal to 10% of
unimpaired capital and retained income if the loan is secured by readily
marketable collateral (generally, financial instruments, not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $4.0 million as of December 31, 1996.
At December 31, 1996, the Bank's largest lending relationship consisted of
an aggregate of $1.3 million in loans made to a builder in Little Falls, of
which $1.0 is secured by residential building lots. The remaining loans are
mortgages on two one- to four-family homes. All of these loans are performing
7
<PAGE>
in accordance with their original terms. The second largest lending relationship
at December 31, 1996, consisted of an aggregate of $1.1 million in loans to two
local businessmen. Of these loans, four are nonperforming loans secured by
mortgages on two contiguous parcels of commercial real estate located in Little
Falls, New Jersey. At December 31, 1996 the aggregate outstanding balance on
these nonperforming loans was $860,000. An appraisal of the properties as of May
1995 indicated an aggregate value of $995,000. The remaining loans in this
relationship consist of two one- to four-family residential mortgages totaling
$184,000 and a home equity loan totaling $92,000, all of which are performing in
accordance with their original terms.
Non-Performing Loans and Classified Assets
Loan Delinquencies. The Bank's collection procedures provide that when a
mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is
still delinquent after 30 days past due, the customer will receive a letter from
the Bank. If the delinquency continues, similar subsequent efforts are made to
eliminate the delinquency. If the loan continues in a delinquent status for 60
days or more and no repayment plan is in effect, the Bank's attorney will send a
letter to the customer. After 90 days past due, the Board of Directors typically
approves the initiation of foreclosure proceedings as soon as possible. Loans
are reviewed on a monthly basis and are placed on a non-accrual and
non-performing status when the loan becomes more than 90 days delinquent.
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 December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-performing loans:
Nonaccrual loans:
<S> <C> <C> <C> <C> <C>
One- to four-family residential $ 989 $1,059 $4,182 $3,894 $3,888
Commercial real estate...... 860 860 -- -- --
Consumer loans.............. 52 23 20 -- 9
------- ------ ------ ------ ------
Total nonaccrual loans......... 1,901 1,942 4,202 3,894 3,897
Accruing one- to four-family
residential................ -- 505 -- -- --
------- ------ ------ ------ ------
Total non-performing loans..... 1,901 2,447 4,202 3,894 3,897
------- ------ ------ ------ ------
Real estate owned.............. 857 1,501 1,765 1,859 1,677
------- ------ ------ ------ ------
Total non-performing assets.... $ 2,758 $3,948 $5,967 $5,753 $5,574
======= ====== ====== ====== ======
Total non-performing loans to
net loans.................... 1.62% 2.54% 4.43% 3.83% 3.03%
======= ====== ====== ====== ======
Total non-performing loans to
total assets................. .63% .79% 2.17% 1.93% 1.95%
======= ====== ====== ====== ======
Total non-performing assets to
total assets................. .91% 1.27% 3.09% 2.85% 2.79%
======= ====== ====== ====== ======
</TABLE>
Interest income that would have been recorded on nonaccrual loans had they
been current under the original terms of such loans was approximately $198,000
and $189,000 for the years ended December 31, 1996 and 1995, respectively.
Amounts included in the Bank's interest income attributable to non-performing
loans for the years ended December 31, 1996 and 1995 were approximately $84,000
and $39,000, respectively.
Classified and Criticized Assets. OTS regulations provide for a
classification system for problem assets of insured institutions which covers
all problem assets. Under this classification system, problem assets of insured
institutions are classified as "substandard," "doubtful," or "loss." An asset is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the
8
<PAGE>
obligor or of the collateral pledged, if any. Substandard assets include those
characterized by the "distinct possibility" that the insured institution may
sustain "some loss" if the deficiencies are not corrected. Loans classified as
substandard may or may not be considered impaired under generally accepted
accounting principals. Assets classified as doubtful have all of the weaknesses
inherent in those classified substandard, with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as loss are those considered "uncollectible" and
as such, are charged off by the Bank. Assets which do not currently expose the
Bank to sufficient risk to warrant classification in one of the aforementioned
categories but possess weaknesses are designated "special mention" by
management.
When the Bank classifies problem assets as either substandard or doubtful,
it may establish general allowances for loan and lease losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities. When the Bank classifies problem assets as loss, it is considered
uncollectible and the Bank charges off such amount. The Bank's determination as
to the classification of its assets and the amount of its valuation allowances
is subject to review by the OTS, which may order the establishment of additional
general or specific loss allowances. A portion of general loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
The following table provides further information about the Bank's
classified assets as of the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1996 1995 1994 1993
--------------- --------------- ---------------- --------------
(In Thousands)
Criticized:
<S> <C> <C> <C> <C>
Special Mention $ 2,931 $2,639 $2,094 $1,406
Classified:
Substandard.... 3,665 3,925 5,901 8,549
Doubtful....... -- -- -- --
Loss........... $ -- -- 123 501
-------- ------ ------ -------
$ 6,596 $6,564 $8,118 $10,456
======== ====== ====== =======
</TABLE>
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is carried at the lower of the
cost or fair value less selling costs. It is the policy of the Bank to obtain an
appraisal on all real estate acquired through foreclosure as soon as practicable
after it takes possession of the property. The Bank generally reassesses the
value of real estate owned at least every eighteen months. These properties are
subsequently evaluated and carried at the lower of the "new" cost or fair value
minus selling costs of the underlying collateral. The Bank's real estate owned
totaled $857,000 million at December 31, 1996.
Allowance 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
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<PAGE>
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.
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.
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.
10
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets forth
information with respect to the Bank's allowance for loan losses at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ....... $118,493 $ 97,971 $ 96,447 $103,001 $130,027
======== ======== ======== ======== ========
Allowance balances (at
beginning of period) ........ $ 958 $ 1,169 $ 818 $ 731 $ 835
Provision:
One- to four-family ......... 136 87 340 325 391
Commercial real estate(1) ... 38 35 13 -- --
Consumer .................... 9 9 3 3 --
======== -------- -------- -------- --------
Total provision for loan losses 183 131 356 328 391
-------- -------- -------- -------- --------
Charge-offs net of recoveries:
One- to four-family ......... 51 342 5 241 495
Commercial real estate ...... -- -- -- -- --
Consumer ...................... -- -- -- -- --
-------- -------- -------- -------- --------
Total charge-offs ............. 51 342 5 241 495
-------- -------- -------- -------- --------
Allowance balance (at end of
period) ..................... $ 1,090 $ 958 $ 1,169 $ 818 $ 731
======== ======== ======== ======== ========
Allowance for loan losses as
a percent of total loans
outstanding ................. 0.92% 0.98% 1.21% 0.79% 0.56%
======== ======== ======== ======== ========
</TABLE>
- -----------------------------
(1) Includes residential construction loans.
11
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan and lease losses by loan
category and the percentage of loans in each category to net loans receivable at
the dates indicated. The portion of the loan loss allowance allocated to each
loan category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------- --------------------- -------------------- ----------------------- ----------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Loan Portfolio Amount Loan Portfolio AmountLoan Portfolio Amount Loan Portfolio Amount Loan Portfolio
------ -------------- ------ -------------- -------------------- ------- -------------- ------ --------------
(Dollars in Thousands)
At end of period
allocated to:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family..$ 863 91.66% $778 92.31% $1,033 92.71% $814 93.62% $730 96.92%
Commercial real
estate(1)......... 200 3.27 162 4.82 127 4.71 -- 3.54 -- 0.36
Consumer ........... 27 5.07 18 3.54 9 3.80 4 4.04 1 3.70
------ -------- ---- ----- ------ ------ --- ------ --- ------
Total allowance.....$ 1,090 100.00% $958 100.00% $1,169 100.00% $818 100.00% $731 100.00%
===== ====== === ====== ===== ====== === ====== === ======
</TABLE>
(1) Includes residential construction loans.
12
<PAGE>
Investment Activities
The investment policy of the Bank, which is approved by the Board of
Directors and implemented by certain officers as authorized by the Board, is
designed primarily to provide and maintain liquidity and to manage the interest
rate sensitivity of its overall assets and liabilities, to generate a favorable
return without incurring undue interest rate and credit risk, to provide a flow
of earnings and a countercyclical balance to earnings and to provide a balance
of quality and diversification of the Bank's assets. In establishing its
investment strategies, the Bank considers its business and growth plans, the
economic environment, its interest rate sensitivity position, the types of
securities to be held, and other factors. Federally chartered savings
institutions have authority to invest in various types of assets, including U.S.
Treasury obligations, securities of various federal agencies, mortgage-backed
and mortgage-related securities, certain certificates of deposit of insured
banks and savings institutions, certain bankers acceptances, repurchase
agreements, loans of federal funds, and, subject to certain limits, corporate
securities, commercial paper and mutual funds.
Current regulatory and accounting guidelines regarding investment
portfolio policy require insured institutions to categorize securities as held
for "investment," "sale," or "trading." At December 31, 1996, the Bank had no
securities held available for sale or trading. The Bank's securities portfolio,
which the Bank has the ability and intent to hold to maturity, are accounted for
on an amortized cost basis. The Bank may purchase securities in the future to be
held available for sale or trading.
At December 31, 1996, the Bank had an investment securities portfolio of
$51.4 million, consisting primarily of short and medium term U.S. Government and
agency securities. The estimated fair value of the Bank's investment securities
portfolio at December 31, 1996 was $51.2 million, resulting in a net unrealized
loss at that date of approximately $166,000. In addition, at December 31, 1996,
the Bank had federal funds sold of $5.0 million and FHLB stock of $2.1 million.
To supplement lending activities and to utilize excess liquidity, the Bank
invests in residential mortgage-backed securities. The Bank's investment in
mortgage-backed securities, which had increased significantly during the past
few years as a result of a decline in loan demand, decreased by approximately
4.7% or $5.5 million during the year ended December 31, 1996. The decrease was
primarily due to the Bank using more of its funds for loan originations. While
the Bank did purchase $16.1 million of mortgage-backed securities in 1996, these
were more than offset by repayments and prepayments received. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. The mortgage-backed securities portfolio at December 31,
1996 consisted of both fixed-rate and adjustable rate certificates issued by the
FHLMC, GNMA and FNMA. The fixed rate certificates provide the certificate holder
principal payments while the adjustable rate securities provide protection
against rising interest rates. At December 31, 1996, the mortgage-backed
securities portfolio had an estimated fair value of $112.4 million and a
carrying value of $112.5 million. The portfolio is classified as held to
maturity, and is recorded at amortized cost.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi- family mortgages, the principal and interest payments on
which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, FNMA, and GNMA.
13
<PAGE>
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, fixed rate or adjustable rate, as well as prepayment risk, are passed
on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
Investment and Mortgage-backed Securities Portfolio
The following table sets forth the carrying value of the Bank's investment
and mortgage-backed securities portfolio.
At December 31,
--------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Investment Securities:
U.S. Government securities .. $ 6,006 $10,014 $14,016
U.S. Agency securities ...... 45,022 19,985 21,977
Other securities ............ 342 -- 153
------- ------- -------
Total investment securities 51,370 29,999 36,146
------- ------- -------
Federal funds sold ........... 5,000 39,800 1,100
FHLB Stock ................... 2,076 1,395 1,511
------- ------- -------
Total investment
securities, federal funds
sold and FHLB stock ....... $58,446 $71,194 $38,757
======= ======= =======
At December 31,
-----------------------------
1996 1995 1994
---- ---- ----
Amount Amount Amount
------ ------ ------
(Dollars in Thousands)
Mortgage-backed securities:
GNMA .................... $ 33,675 $ 38,714 $ 26,206
FNMA .................... 49,434 45,613 5,895
FHLMC ................... 28,297 32,590 19,416
-------- -------- --------
Total ............... 111,406 116,917 51,517
Net premiums ............ 1,067 1,103 147
-------- -------- --------
Net mortgage-backed
securities ................ $112,473 $118,020 $ 51,664
======== ======== ========
14
<PAGE>
Investment and Mortgage-backed Securities Portfolios Maturities. The
following table sets forth certain information regarding the carrying values,
weighted average yields and maturities of the Bank's investment and
mortgage-backed securities portfolios at December 31, 1996.
<TABLE>
<CAPTION>
Total Investment and
One Year or Less One to Five Years More Than Five Years Mortgage-backed Securities
-------------------- ------------------ -------------------- --------------------------
Weighted Weighted Weighted Weighted Estimated
Carrying Average Carrying Average Carrying Average Carrying Average Fair
Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities......... $ 6,006 5.63% $ -- --% $ -- --% $ 6,006 5.63% $ 6,000
U.S. Agency securities ............ 3,002 5.35 15,014 5.39 27,006 7.23 45,022 6.49 44,862
Other securities .................. 342 6.00 -- -- -- -- 342 6.00 342
-------- ---- ------- ---- -------- ---- -------- ---- --------
Total investment securities...... 9,350 5.55% $15,014 5.39% $ 27,006 7.23% $ 51,370 6.39% $ 51,204
======== ==== ======= ==== ======== ==== ======== ==== ========
GNMA .............................. $ -- --% $ 52 7.66%$ 34,114 6.86% $ 34,166 6.86 $ 34,369
FNMA .............................. 112 8.50 3,129 7.00 46,674 6.74 49,915 6.76 49,703
FHLMC ............................. 752 8.02 9,872 6.66 17,768 6.87 28,392 6.83 28,354
-------- ---- ------- ---- -------- ---- -------- ---- --------
Total mortgage-backed
securities ..................... $ 864 8.08% $13,053 6.75% $ 98,556 6.80% $112,473 6.81% $112,426
======== ==== ======= ==== ======== ==== ======== ==== ========
</TABLE>
15
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending and
other investment purposes. The Bank derives funds from amortization and
prepayment of loans and maturities of investment securities, mortgage-backed
securities and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are significantly influenced by general interest rates and market conditions.
The Bank can obtain advances from the FHLB as an alternative to retail deposit
funds. FHLB advances may also be used to acquire certain other assets as may be
deemed appropriate for investment purposes. These advances are collateralized by
the capital stock of the FHLB held by the Bank and by certain of the Bank's
mortgage loans and mortgage-backed securities. At December 31, 1996, the Bank
has a $9.0 million FHLB advance, with a rate of 5.82% and a term of three years,
with a one-time callable feature at the end of the second year. In addition, the
Bank also has three repurchase agreements with an independent third party
totaling $24.6 million. The terms of the repurchase agreements are one year, six
months and overnight. The annual rates 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.
Deposits. The Bank currently offers NOW Accounts, Super NOW accounts,
regular passbook statement savings accounts and savings accounts, money market
deposit accounts and term certificate accounts, primarily to consumers within
its primary market area. Deposit account terms vary according to the minimum
balance required, the time period the funds must remain on deposit and the
interest rate, among other factors.
Although the Bank partially relies on customer service and relationships
with customers to attract and retain deposits, market interest rates and rates
offered by competing financial institutions significantly affect the Bank's
ability to attract and retain deposits.
The interest rates paid by the Bank on deposits are monitored regularly
and are set as needed at the direction of the Board of Directors. The interest
rates on deposit account products are determined by evaluating the interest
rates offered by other local institutions, and the degree of competition the
Bank wishes to maintain; the Bank's anticipated need for cash and the timing of
that desired cash flow; the cost of borrowing from other sources versus the cost
of acquiring funds through customer deposits; and the Bank's anticipation of
future economic conditions and related interest rates. The Bank's interest rates
typically are competitive with those offered by competitors in the Bank's
primary market area.
Regular savings accounts, money market accounts and NOW accounts including
non-interest bearing deposits constituted $49.7 million, $14.8 million and $20.9
million, respectively, or 21.8%, 6.5%, and 9.1%, respectively. Certificates of
deposit constituted $142.9 million or 62.6% of the deposit portfolio. As of
December 31, 1996, the Bank had no brokered deposits.
16
<PAGE>
Jumbo Certificate Accounts. The following table indicates the amount of
the Bank's certificates of deposit of $100,000 or more by time remaining until
maturity as of December 31, 1996.
Certificates
of Deposits
------------
Maturity Period (In Thousands)
- ---------------
Within three months............................ $1,655
Three through six months....................... 1,634
Six through twelve months...................... 3,211
Over twelve months............................. 3,552
-------
$10,052
=======
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated.
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Net increase (decrease)
before interest credited, deposits
purchased and deposits sold....... $(21,401) $ 7,949 $(17,672)
Deposits purchased ................. -- 54,415 --
Deposits sold ...................... (9,221) -- --
Interest credited .................. 11,083 9,314 7,170
-------- -------- --------
Net increase (decrease) in
savings deposits ................. $(19,539) $ 71,678 $(10,502)
======== ======== ========
Subsidiary Activities
As of January 5, 1996, the Bank was the sole subsidiary of the Company.
The Bank has no active subsidiaries.
Personnel
As of December 31, 1996, the Bank had 35 full-time and 9 part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
Regulation
Set forth below is a brief description of all materials laws and
regulations which relate to the regulation of the Bank and the Company. The
description does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
17
<PAGE>
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company. The Company is also
required to file certain reports with, and otherwise comply with, the rules and
regulations of the OTS and the SEC.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
Savings Association Insurance Fund ("SAIF")-insured savings association) would
become subject to restrictions applicable to bank holding companies unless such
other associations each also qualify as a QTL and were acquired in a supervisory
acquisition. See "Regulation of the Bank -- Qualified Thrift Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval.
Federal Securities Law. The Company is subject to filing and reporting
requirements by virtue of having its common stock registered under the
Securities Exchange Act of 1934. Furthermore, Company stock held by persons who
are affiliates (generally officers, directors and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
18
<PAGE>
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
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. 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 SAIF 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 regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company, the Bank and their
operations.
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of federally insured banks and
savings institutions and safeguards the safety and soundness of the banking and
savings industries. Two separate insurance funds, the Bank Insurance Fund
("BIF") for commercial banks, state savings banks and some federal savings
banks, and the SAIF for savings associations, are maintained and administered by
the FDIC. The Bank is a member of the SAIF and its deposit accounts are insured
by the FDIC, up to the prescribed limits. The FDIC has examination authority
over all insured depository institutions, including the Bank, and has under
certain circumstances, authority to initiate enforcement actions against
federally insured savings institutions to safeguard safety and soundness and the
deposit insurance fund.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and the SAIF. The
FDIC may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to its target level within a
reasonable time and may decrease such assessment rates if such target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments are set within a range, based on
the risk the institution poses to its deposit insurance fund. This risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Because a significant portion of the assessments paid into the SAIF by
savings associations were used to pay the cost of prior thrift failures, the
reserves of the SAIF were below the level required by law. The BIF had, however,
met its required reserve level during the third calendar quarter of 1995. As a
result, deposit insurance premiums for deposits insured by the BIF were
substantially less than premiums for SAIF-insured deposits. Legislation to
capitalize the SAIF and to eliminate the significant premium disparity between
the BIF and the SAIF became effective December 31, 1996. The recapitalization
plan provided for a special assessment equal to $.657 per $100 of SAIF deposits
held at March 31, 1995, in order to increase SAIF reserves to the level required
by law. Certain BIF institutions holding SAIF-insured deposits were required to
pay a lower special assessment. Based on its deposits at March 31, 1995, on
November 27, 1996, the Bank paid a pre-tax special assessment of $1.2 million.
Such payment was recorded as an expense and accounted for by the Bank as of
December 31, 1996. Earnings and capital were, therefore, negatively affected for
the quarter ended September 30, 1996, by an after-tax amount of approximately
$750,000.
19
<PAGE>
The recapitalization plan also provides that the cost of prior thrift
failures will be shared by both the SAIF and the BIF (Fico Bond payments), which
will increase BIF assessments for healthy banks to approximately $.013 per $100
of deposits in 1997. SAIF assessments for healthy savings institutions in 1997
will be approximately $.064 per $100 in deposits and may never be reduced below
the level set for healthy BIF institutions.
The FDIC has lowered the rates on assessments paid to the SAIF and widened
the spread of those rates. The FDIC's action established a base assessment
schedule for the SAIF with rates ranging from 4 to 31 basis points, and an
adjusted assessment schedule that reduces these rates by 4 basis points. As a
result, the effective SAIF rates range from 0 to 27 basis points as of October
1, 1996. In addition, the FDIC's final rule prescribed a special interim
schedule of rates ranging from 18 to 27 basis points for SAIF-member savings
institutions for the last quarter of calendar 1996, to reflect the assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure for making limited adjustments to the base assessment rates by
rulemaking without notice and comment, for both the SAIF and the BIF.
Examination Fees. In addition to federal deposit insurance premiums,
savings institutions like the Bank are required by OTS regulations to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
is paid on a semi-annual basis and is computed based on total assets of the
institution, including subsidiaries.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
Savings associations with a greater than "normal" level of interest rate
exposure will, in the future, be subject to a deduction for an interest rate
risk ("IRR") component which may be from capital for purposes of calculating
their risk-based capital requirement. See "-- Net Portfolio Value Analysis."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
The OTS requires a core capital ratio of at least 3% for those savings
associations in the strongest financial and managerial condition. All other
savings associations are required to maintain minimum core capital of at least
4% of total adjusted assets, with a maximum core capital ratio requirement of
5%. In determining the required minimum core capital ratio, the OTS assesses the
quality of risk management and the level of risk in each savings association on
a case-by-case basis.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of
20
<PAGE>
1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100%
of core capital. A savings association must calculate its risk-weighted assets
by multiplying each asset and off-balance sheet item by various risk factors as
determined by the OTS, which range from 0% for cash to 100% for delinquent
loans, property acquired through foreclosure, commercial loans and other assets.
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of December 31, 1996:
Percent of
Adjusted
Amount Assets
------ --------
(Dollars in Thousands)
Tangible Capital:
Actual capital.......................... $25,657 8.54%
Regulatory requirement.................. 4,506 1.50
------- ----
Excess................................ $21,151 7.04%
======= =====
Core Capital:
Actual capital.......................... $25,657 8.54%
Regulatory requirement.................. 9,013 3.00
------- ----
Excess................................ $16,644 5.54%
======= =====
Risk-Based Capital:
Actual capital.......................... $25,910 27.37%
Regulatory requirement.................. 7,573 8.00
------- ----
Excess................................ $18,337 19.37%
======= =====
The Bank is not under any agreement with regulatory authorities nor is it
aware of any current recommendations by the regulatory authorities which, if
they were to be implemented, would have a material effect on liquidity, capital
resources or operations of the Bank or the Company.
Net Portfolio Value Analysis. In order to encourage associations to reduce
their IRR, the OTS adopted a final rule in August 1993 incorporating an IRR
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its Net Portfolio Value ("NPV") to changes in interest rates. NPV
is the difference between incoming and outgoing discounted cash flows from
assets, liabilities, and off-balance sheet contracts. An institution's IRR is
measured as the change to its NPV as a result of a hypothetical 200 basis point
("bp") change in market interest rates. A resulting change in NPV of more than
2% of the estimated market value of its assets will require the institution to
deduct from its capital 50% of that excess change. The rules provide that the
OTS will calculate the IRR component quarterly for each institution. The rule
will not become effective until the OTS evaluates the process by which savings
associations may appeal an interest rate risk reduction determination. It is
uncertain as to when this evaluation may be completed.
21
<PAGE>
The following table presents the Bank's NPV at December 31, 1996, as
calculated by OTS and based on OTS assumptions using raw data provided to
FinPro, Inc. by the Bank.
<TABLE>
<CAPTION>
Net Portfolio Value
($ In Thousands)
Change in Percent of Change in NPV
Interest Rate Amount of Estimated NPV Ratio Ratio (4)
(Basis Points) NPV Change (1) NPV (2) (3)
- -------------- -------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
+400 3,599 (24,295) -87% 1.31% -786 bp
+300 10,104 (17,789) -64% 3.58% -560 bp
+200 16,562 (11,331) -41% 5.71% -346 bp
+100 22,609 (5,284) -19% 7.60% -157 bp
Par 27,893 -- 9.17%
-100 32,089 4,195 +15% 10.36% 119 bp
-200 35,404 7,511 +27% 11.26% 209 bp
-300 38,295 10,402 +37% 12.01% 284 bp
-400 41,916 14,023 +50% 12.94% 377 bp
</TABLE>
- ----------------------------
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming
no change in interest rates.
If the OTS rule regarding the IRR component had been in effect at December
31, 1996, the Bank would have had to deduct from its risk-based capital
approximately $2.6 million. The Bank would have met its capital requirements,
had this rule been in effect at December 31, 1996.
December 31, December 31,
1996 1995(1)
------------ ------------
*** RISK MEASURES: 200 BP RATE SHOCK ***
Pre-Shock NPV Ratio: NPV as % of PV of Assets... 9.17% 6.76%
Exposure Measure: Post-Shock NPV Ratio.......... 5.71% 5.63%
Sensitivity Measure: Change in NPV Ratio........ (346) bp (113) bp
*** CALCULATION OF CAPITAL COMPONENT ***
Change in NPV as % of PV of Assets.............. 3.73% 1.3%
Interest Rate Risk Capital Component ($000)..... $2,630 --
- -----------------------------
(1) Percentages for 1995 are calculated by FinPro, Inc. and based on OTS
assumptions using raw data provided to FinPro, Inc. by the Bank.
22
<PAGE>
Certain shortcomings are inherent in the methodology used in the above
table. Modeling changes in NPV requires the making of certain assumptions that
may tend to oversimplify the manner in which actual yields and costs respond to
changes in market interest rates. First, the models assume that the composition
of the Bank's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured. Second,
the models assume that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. Accordingly, although the NPV
measurements do provide an indication of the Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to provide a
precise forecast of the effect of changes in market interest rates on the Bank's
net interest income.
In times of decreasing interest rates, the value of fixed-rate assets
could increase in value and the lag in repricing of interest rate sensitive
assets could be expected to have a positive effect on the Bank.
Prompt Corrective Action. The FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, which became effective December 19, 1992, the banking
regulators are required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Under the OTS final rule implementing
the prompt corrective action provisions, an institution shall be deemed to be
(i) "well capitalized" if it has total risk-based capital of 10.0% or more, has
a Tier I risk- based capital ratio (core or leverage capital to risk-weighted
assets) of 6.0% or more, has a leverage capital of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risked-based ratio of
4.0% or more and a leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized," (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
capital ratio that is less than 4.0% (3.0% in certain circumstances), (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. In addition, under certain circumstances, a federal
banking agency may reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized institution or an
undercapitalized institution to comply with supervisory actions as if it were in
the next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized). Immediately upon
becoming undercapitalized, an institution shall become subject to various
restrictions and could be subject to additional supervisory actions.
As of December 31, 1996, the Bank was a "well capitalized institution" as
defined in the prompt corrective action regulations and as such is not subject
to any prompt corrective action measures.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established in
connection with the Conversion.
23
<PAGE>
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, 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
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income 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 income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. Based on
the Bank's capital levels at December 31, 1996, the Bank was a Tier 1
institution. In the event the Bank's capital fell below its fully phased-in
requirement 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.
Finally, under the FDICIA, a savings association is prohibited from making
a capital distribution if, after making the distribution, the savings
association would be "undercapitalized" (not meet any one of its minimum
regulatory capital requirements). OTS regulations also prohibit the Bank from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory (or total) capital of the Bank would be reduced below the
amount required to be maintained for the liquidation account established by it
for certain depositors in connection with its conversion from mutual to stock
form. In addition, such regulations prohibit an institution from repurchasing
any of its stock for a period of at least one year from the date of its
conversion without a waiver of such prohibition by the OTS.
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as
amended, requires savings institutions to meet a QTL test. If the Bank maintains
an appropriate level of Qualified Thrift Investments (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full
borrowing privileges from the FHLB of New York. The required percentage of QTIs
is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The
method for measuring compliance with the QTL test is on a monthly basis in nine
out of every 12 months. As of December 31, 1996, the Bank was in compliance with
its QTL requirement.
A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations: (i)
the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
24
<PAGE>
Loans-to-One Borrower. See "Business -- Lending Activities -- Loans-to-One
Borrower."
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. Current law requires public disclosure of an institution's
CRA rating and requires the OTS to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
in lieu of the existing five-tiered numerical rating system. The Bank received a
satisfactory rating (the second highest rating available) as a result of its
last evaluation in November, 1993. In April 1995, final CRA regulations were
adopted by the federal banking agencies, including the OTS. Under these
regulations, the Bank, as a relatively small institution, will have several
alternatives to choose from to satisfy its CRA obligations. These alternatives
were effective January 1, 1996.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital;
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
The Bank's authority to extend credit to its officers, directors and 10%
shareholders, as well as to entities that such persons control is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed. Recent legislation permits savings
institutions to make loans to executive officers, trustees and principal
shareholders ("insiders") on preferential terms, provided the extension of
credit is made pursuant to a benefit or compensation program of the Bank that is
widely available to employees of the Bank or its affiliates and does not give
preference to any insider over other employees of the Bank or affiliate.
Branching by Federal Savings Banks. Effective May 11, 1992, the OTS
amended its Policy Statement on Branching by Federal Savings Associations to
permit interstate branching to the full extent permitted by statute (which is
essentially unlimited). This permits savings associations with interstate
networks to diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
associations. However, the OTS will evaluate a branching applicant's record of
compliance with the CRA. A poor CRA record may be the basis for denial of a
branching application.
25
<PAGE>
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 5%. At December 31, 1996, the Bank's liquidity ratio was 12.88%.
Liquid assets for purposes of this ratio include specified short-term
assets (e.g., cash, certain time deposits, certain banker's acceptances and
short-term U.S. Government obligations), and long-term assets (e.g., U.S.
Government obligations of more than one and less than five years and state
agency obligations with a minimum term of 18 months). The regulations governing
liquidity requirements include as liquid assets debt securities hedged with
forward commitments obtained from, or debt securities subject to repurchase
agreements with, members of the Bank of Primary Dealers in United States
Government Securities or banks whose accounts are insured by the FDIC, debt
securities directly hedged with a short financial future position, and debt
securities that provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of the securities. FIRREA also
authorized the OTS to designate as liquid assets certain mortgage-related
securities with less than one year to maturity. Short- term liquid assets
currently must constitute at least 1% of an association's average daily balance
of net withdrawable deposit accounts and current borrowings. Monetary penalties
may be imposed upon associations for violations of liquidity requirements.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. As of December
31, 1996, the Bank had no borrowed funds from the FHLB of New York to fund
operations; however, there can be no assurances that borrowings will not be made
in the future.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. As of December 31, 1996, the Bank had $2.1 million
in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1996, dividends paid by
the FHLB of New York to the Bank totaled $126,000.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS.
26
<PAGE>
Savings associations have authority to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at December 31, 1996.
Federal Taxation
Savings institutions 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, savings institutions such as the Bank, which meet certain
definitional tests and other conditions prescribed by the Code may 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 may claim with respect to additions to its
reserve for bad debts is subject to certain limitations.
Prior to certain changes to the Code in 1996, thrift institutions enjoyed
a tax advantage over banks with respect to determining additions to its bad debt
reserves. All thrift institutions, prior to 1996, were generally allowed a
deduction for additions to a reserve for bad debts. In contrast, only "small
banks" (the average adjusted bases of all assets of such institution equals $500
million or less) were allowed a similar deduction for additions to their bad
debt reserves. In addition, while small banks were only allowed to use the
experience method in determining their annual addition to a bad debt reserve,
all thrift institutions generally enjoyed a choice between (i) the percentage of
taxable income method and, (ii) the experience method, for determining the
annual addition to their bad debt reserve. This choice of methods provided a
distinct advantage to thrift institutions that continually experienced little or
no losses from bad debts, over small banks in a similar situation, because
thrift institutions in comparison to small banks were generally allowed a
greater tax deduction by using the percentage of taxable income method (rather
than the experience method) to determine their deductible addition to their bad
debt reserves.
The Code was revised in August 1996 to equalize the taxation of thrift
institutions and banks, effective for taxable years beginning after 1995. All
thrift institutions are now subject to the same provisions as banks with respect
to deductions for bad debt. Now only thrift institutions that are treated as
small banks may continue to account for bad debts under the reserve method;
however such institutions may only use the experience method for determining
additions to their bad debt reserve. Thrift institutions that are not treated as
small banks may no longer use the reserve method to account for their bad debts
but must alternatively use the specific charge-off method.
The revisions to the Code in 1996 also provided that all thrift
institutions must generally recapture any "applicable excess reserves" into
their taxable income, over a six year period beginning in 1996; however, such
recapture may be delayed up to two years if a thrift institution meets a
residential-lending test. Generally, a thrift institution's applicable excess
reserves equals the excess of (i) the balance of its bad debt reserves as of the
close of its taxable year beginning before January 1, 1996, over (ii) the
balance of such reserves as of the close of its last taxable year beginning
before January 1, 1988 ("pre- 1988 reserves"). The Bank will not be required to
recapture any amounts into income with regard to any applicable excess reserves
because the balance of its bad debt reserves as of the close of its taxable year
beginning before January 1, 1996 did not exceed the balance of its pre-1988
reserves.
In addition, all thrift institutions must continue to keep track of their
pre-1988 reserves because this amount remains subject to recapture in the future
under the Code. A thrift institution such as the Bank, would generally be
required to recapture into its taxable income its pre-1988 reserves in the case
of certain excess distributions to, and redemptions of, shareholders (e.g.,
stock repurchases). For taxable years after 1995, the Bank will continue to
account for its bad debts under the reserve method. Any
27
<PAGE>
additions to the Bank's bad debt reserves after 1995 will generally not be
subject to the recapture provisions of the Code. The balance of the Bank's
pre-1988 reserves equaled $2.4 million.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items defined
in the Code. Only a portion of AMTI can be offset by net operating loss
carryovers; however, the Bank currently has no net operating loss carryovers.
AMTI is also adjusted by determining the tax treatment of certain items in a
manner that negates the deferral of income resulting from the regular tax
treatment of those items. Thus, the Company's AMTI is increased by an amount
equal to 75% of the amount by which the Company's adjusted current earnings
exceeds its AMTI (determined without regard to this adjustment and prior to
reduction for net operating losses).
28
<PAGE>
Item 2. Properties
- ---------------------
The Bank operates from its main office located at 86 Main Street, Little
Falls, New Jersey and 7 branch offices. This includes three branches purchased
from an unaffiliated commercial bank in December 1995. The Bank's total
investment in office property and equipment is $4.0 million with a net book
value of $2.7 million at December 31, 1996.
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Stock Market Information" in the
Registrant's 1996 Annual Report to Stockholders ("Annual Report") on page _, and
is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears in the Annual Report on pages 3
and 4, and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
- --------------------------------------------------------------------------
The above-captioned information appears under Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Annual Report
on pages 5 through 15 and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
The Financial Statements of the Bank, together with the report thereon by
Radics & Co., LLC, appear in the Annual Report on pages 16 through 51 and are
incorporated herein by reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
- -------------------------------------------------------------------------
Lewis W. Parker, III declined to stand for re-election in 1995 as
indenpendent auditor for the Bank. The reports of Lewis W. Parker, III on the
financial statements of the Bank for the past three years prior to his
resignation contained no adverse opinion or disclaimer of opinion, and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
Further, during the three most recent fiscal years and the subsequent period
preceding the resignation of Lewis W. Parker, III, there were no
29
<PAGE>
disagreements with Lewis W. Parker, III on any matters of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which disagreements, if not resolved to the satisfaction of Lewis W. Parker,
III, would have caused Lewis W. Parker, III to make reference to the subject
matter of the disagreements in connection with his report. The Bank accepted
Lewis W. Parker, III's resignation, effective as of the closing of the
Conversion, and appointed Radics & Co., LLC, Pine Brook, New Jersey, certified
public accountants, to conduct an audit of the financial statements for the
fiscal years ended December 31, 1995 and 1996.
PART III
Item 10. Directors and Executive Officers of the Registrant
- -------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" at pages 4 through 8 of the Registrant's definitive proxy
statement for the Registrant's 1997 Annual Meeting of Stockholders to be held on
April 17, 1997 (the "Proxy Statement"), which was filed with the Commission on
March 24, 1997 and incorporated herein by reference. See also "Item 1. Business
of the Bank -- Personnel" included herein.
Item 11. Executive Compensation
- ---------------------------------
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement at pages 10 through 14.
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 at pages 5-6.
PART IV
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 at page
16.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
30
<PAGE>
(1) Financial Statements of the Company are incorporated by reference to the
following indicated pages of the Annual Report.
PAGE
----
Independent Auditors' Report......................................... 17
Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995......................................... 18
Consolidated Statements of Income For the Years Ended
December 31, 1996, 1995 and 1994................................... 19
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994............... 20
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994................................... 21
Notes to Consolidated Financial Statements........................... 24
The remaining information appearing in the Annual Report 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.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
2.0 Branch Sale Agreement**
3.1 Articles of Incorporation of Little Falls Bancorp, Inc.*
3.2 Bylaws of Little Falls Bancorp, Inc.*
4.0 Form of Stock Certificate of Little Falls Bancorp, Inc.*
10.1 Employment Agreement between the Bank and John P. Pullara**
10.2 Employment Agreement between the Bank and Leonard G. Romaine**
10.4 Form of Employment Agreement with Seven Employees of the Bank
10.6 1996 Management Stock Bonus Plan
10.7 1996 Stock Option Plan
13.0 1996 Annual Report to Stockholders
21.0 Subsidiary of the Registrant (See Item 1 - Business-Subsidiary
Activities)
(b) Reports on Form 8-K.
None.
- ------------------------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, initially filed with the Securities and
Exchange Commission on September 25, 1995, Registration No. 33-97316.
** Incorporated by reference into this document from the Exhibits to
Registrant's Annual Report on Form 10-K for the Year Ended December 31,
1995 (File No. 0-27010).
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LITTLE FALLS BANCORP, INC.
Dated: March 24, 1997 By: /s/ Leonard G. Romaine
--------------------------------
Leonard G. Romaine
President and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Leonard G. Romaine By: /s/ Richard A. Capone
----------------------------- ----------------------------------
Leonard G. Romaine Richard A. Capone
President and Director Chief Financial Officer
(Principal Executive Officer) Principal Financial and Accounting
Officer)
Date: March 24, 1997 Date: March 24, 1997
By: By: /s/ John P. Pullara
------------------------- --------------------
Albert J. Weite John P. Pullara
Chairman of the Board and Director
Director
Date: March __, 1997 Date: March 25, 1997
By: /s/ Edward J. Seugling By: /s/ George Kuiken
----------------------- -------------------
Edward J. Seugling George Kuiken
Vice Chairman of the Board Director
and Director
Date: March 25, 1997 Date: March 25, 1997
By: By: /s/ Norman A. Parker
------------------------ -------------------------
Raoul G. Barton Norman A. Parker
Director Director
Date: March ____, 1997 Date: March 25, 1997
By: /s/ C. Evan Daniels
--------------------
C. Evans Daniels
Director
Date: March 25, 1997
EXHIBIT 10.4
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this _____ day of ________ 199_ ("Effective
Date"), by and between Little Falls Bank, a Federal stock savings bank (the
"Bank") and __________________ (the "Employee").
WHEREAS, the Bank employs the Employee as an ______________ of
the Bank; and
WHEREAS, the parties desire by this writing to set forth the employment
relationship between the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as an Vice
President of the Bank. The Employee shall render such administrative and
management services to the Bank, a subsidiary of Little Falls Bancorp, Inc.
("Parent") as are currently rendered and as are customarily performed by persons
situated in a similar executive capacity. The Employee shall promote the
business of the Bank and Parent. The Employee's other duties shall be such as
the Board of Directors for the Bank (the "Board of Directors" or "Board") may
from time to time reasonably direct, including normal duties as an officer of
the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $_________ per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Board of Directors not less often than annually, and
Employee shall be entitled to receive annually an increase at such percentage or
in such an amount as the Board of Directors in its sole discretion may decide at
such time.
3. Discretionary Bonus. The Employee shall be entitled to participate
in an equitable manner with all other management employees of the Bank in
discretionary bonuses that may be authorized and declared by the Board of
Directors to its management employees from time to time. No other compensation
provided for in this Agreement shall be deemed a substitute for the Employee's
right to participate in such discretionary bonuses when and as declared by the
Board of Directors.
<PAGE>
4. (a) Participation in Retirement and Medical Plans. The Employee
shall be entitled to participate in any plan of the Bank relating to pension,
profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's management or employees, and any other benefits which are commensurate
with the responsibilities and functions to be performed by the Employee under
this Agreement. The Bank shall reimburse Employee for all reasonable
out-of-pocket expenses which Employee shall incur in connection with her service
for the Bank.
5. Term. The term of employment of Employee under this Agreement shall
be for the period commencing on the Effective Date and ending twenty-four (24)
months thereafter ("Term"). Additionally, on, or before, each annual anniversary
date from the Effective Date, the Term of this Agreement shall be extended for
an additional one year period beyond the then effective expiration date upon a
determination and resolution of the Board of Directors that the performance of
the Employee has met the requirements and standards of the Board, and that the
Term of such Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) The Employee shall devote her full time and attention to the
performance of her employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Section 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform her duties under this
Agreement in accordance with such reasonable standards expected of employees
with comparable positions in comparable organizations and as may be established
from time to time by the Board of Directors.
2
<PAGE>
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent herself voluntarily from the performance of her
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in
accordance with the policies as are periodically established by the Board of
Directors for management employees of the Bank.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of her failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent herself voluntarily from the performance
of her employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for management employees of the
Bank. In the event that any sick leave benefit shall not have been used during
any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
9. Termination and Termination Pay.
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month in which Employee's
death shall have occurred.
3
<PAGE>
(b) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Board of Directors other than termination
for Just Cause, shall not prejudice the Employee's right to compensation or
other benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
The Board may within its sole discretion, acting in good faith, terminate the
Employee for Just Cause and shall notify such Employee accordingly. Termination
for "Just Cause" shall include termination because of the Employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) or final cease-and- desist order, or material breach of any provision
of the Agreement.
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the term (including any renewal term) of this Agreement and the
cost of Employee obtaining all health, life, disability, and other benefits
which the Employee would be eligible to participate in through such date based
upon the benefit levels substantially equal to those being provided Employee at
the date of termination of employment.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation enters into an agreement to provide assistance to or on behalf of
the Bank under the authority contained in Section 13(c) of FDIA; or (ii) by the
Director of the OTS, or his or her designee, at the time that the Director of
the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Bank or when the Bank is determined by the
Director of the OTS
4
<PAGE>
to be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may within its discretion
(i) pay the Employee all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate any of its obligations which were
suspended.
11. Disability. If the Employee shall become disabled or incapacitated
to the extent that she is unable to perform her duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits provided under the terms of this Agreement
as follows: 100% of such compensation and benefits for a period of 12 months,
but not exceeding the remaining term of the Agreement, and 65% thereafter for
the remainder of the term of the Agreement. Such benefits noted herein shall be
reduced by any benefits otherwise provided to the Employee during such period
under the provisions of disability insurance coverage in effect for Bank
employees. Thereafter, Employee shall be eligible to receive benefits provided
by the Bank under the provisions of disability insurance coverage in effect for
Bank employees. Upon returning to active full-time employment, the Employee's
full compensation as set forth in this Agreement shall be reinstated as of the
date of commencement of such activities. In the event that the Employee returns
to active employment on other than a full-time basis, then her compensation (as
set forth in Section 2 of this Agreement) shall be reduced in proportion to the
time spent in said employment, or as shall otherwise be agreed to by the
parties.
5
<PAGE>
12. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment during the term of this
Agreement following any change in control of the Bank or Parent, absent Just
Cause, Employee shall be paid an amount equal to the product of two (2) times
the total taxable compensation paid by the Bank to the Employee for the one year
period completed prior to the date of termination of employment, but in no event
greater than the sum of 2.99 times the Employee's "base amount" as defined in
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")
and regulations promulgated thereunder. Said sum shall be paid, at the option of
Employee, either in one (1) lump sum within thirty (30) days of such termination
discounted to the present value of such payment using as the discount rate equal
to the rate of interest paid on the two year US Treasury Note established at the
most recent Treasury auction prior to the date of such payment, or in periodic
payments over the next 24 months or the remaining term of this Agreement
whichever is less, as if Employee's employment had not been terminated, and such
payments shall be in lieu of any other future payments which the Employee would
be otherwise entitled to receive under Section 9 of this Agreement.
Notwithstanding the forgoing, all sums payable hereunder shall be reduced in
such manner and to such extent so that no such payments made hereunder when
aggregated with all other payments to be made to the Employee by the Bank or the
Parent shall be deemed an "excess parachute payment" in accordance with Section
280G of the Code and be subject to the excise tax provided at Section 4999(a) of
the Code. The term "control" shall refer to the ownership, holding or power to
vote more than 25% of the Parent's or Bank's voting stock, the control of the
election of a majority of the Parent's or Bank's directors, or the exercise of a
controlling influence over the management or policies of the Parent or Bank by
any person or by persons acting as a group within the meaning of Section 13(d)
of the Securities Exchange Act of 1934. The term "person" means an individual
other than the Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship, unincorporated organization
or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Employee may voluntarily terminate her employment during the term of
this Agreement following a change in control of the Bank or Parent, and Employee
shall thereupon be entitled to receive the payment described in Section 12(a) of
this Agreement, upon the occurrence, or within ninety (90) days thereafter, of
any of the following events, which have not been consented to in advance by the
Employee in writing: (i) if Employee would be required to move her personal
residence or perform her principal executive functions more than thirty-five
(35) miles from the Employee's primary office as of the signing of this
Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee
6
<PAGE>
would be required to report to a person or persons other than the President of
the Bank; (iii) if the Bank or Parent should fail to maintain Employee's base
compensation in effect as of the date of the Change in Control and the existing
employee benefits plans, including material fringe benefit, stock option and
retirement plans; (iv) if Employee would be assigned duties and responsibilities
other than those normally associated with her position as referenced at Section
1, herein; (v) if Employee's responsibilities or authority have in any way been
materially diminished or reduced.
13. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding upon
any corporate or other successor of the Bank or Parent which shall acquire,
directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets or stock of the Bank or Parent.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating her
rights or duties hereunder without first obtaining the written consent of the
Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
15. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of New Jersey, the extent that Federal law shall be deemed to
apply.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extend that the parties may otherwise reach a mutual
settlement of such issue. Further, the settlement of the dispute to be approved
by the Board of the Bank or the Parent may include a provision for the
reimbursement by the Bank or Parent to the Employee for all reasonable costs and
expenses, including reasonable attorneys' fees, arising from such dispute,
proceedings or actions, or the Board of the Bank or the Parent may authorize
such reimbursement of such reasonable costs and expenses by
7
<PAGE>
separate action upon a written action and determination of the Board following
settlement of the dispute. Such reimbursement shall be paid within ten (10) days
of Employee furnishing to the Bank or Parent evidence, which may be in the form,
among other things, of a canceled check or receipt, of any costs or expenses
incurred by Employee.
18. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
Exhibit 13.0
1996 Annual Report to Stockholders
<PAGE>
[** LOGO **]
Little Falls Bancorp, Inc.
ANNUAL REPORT - 1996
------------------------------------------------
<PAGE>
Little Falls Bancorp, Inc.
Annual Report - 1996
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Letter to Stockholders .................................................... 1
Corporate Profile and Stock Market Information............................. 2
Selected Financial and Other Data.......................................... 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 5
Management Responsibility Statement....................................... 16
Independent Auditors' Report.............................................. 17
Consolidated Statements of Financial Condition............................ 18
Consolidated Statements of Income......................................... 19
Consolidated Statements of Retained Earnings.............................. 20
Consolidated Statements of Cash Flows..................................... 21
Notes to Consolidated Financial Statements................................ 24
Other Corporate Information............................................... 51
<PAGE>
Little Falls Bancorp, Inc.
86 Main Street
Little Falls, New Jersey 07424
To Our Stockholders:
On behalf of our directors, officers and employees, we are pleased to present to
you our second annual stockholders' report.
The year 1996 was an historic year for Little Falls Bank. The year began with
Little Falls Bancorp, Inc., selling 3,041,750 shares of stock in its initial
public offering to the Bank's customers, directors, employees and interested
investors in connection with the Bank's conversion from a federally chartered
mutual savings bank to a federally chartered stock savings bank and the
acquisition of all of the issued and outstanding capital stock of the Bank by
the Company. The Conversion generated $26.8 million of net proceeds.
After much anticipation and speculation, the FDIC imposed a special assessment
on SAIF members to recapitalize the deposit insurance fund. For the Bank, this
resulted in a one-time expense of $1.2 million. While this materially impacted
earnings for 1996, it is expected to significantly decrease federal deposit
insurance premiums going forward. In spite of the special assessment, 1996
earnings increased over 1995's level.
During the past year, there were several other positive accomplishments achieved
by the Company. For example, loans increased by $20.9 million due to record
originations in excess of $31.0 million; non-performing assets decreased by $1.2
million as the area economy continued to improve and the Bank was able to
resolve some problem assets, and the net interest spread increased by 25 basis
points as the Bank was able to reduce its cost of funds.
In addition, the Bank closed its Mount Holly office, and sold the $9.2 million
of deposits to an unaffiliated financial institution. A small gain was recorded
on the sale. The Bank also closed its Frenchtown office, with the deposits being
retained. We believe this consolidation will better serve our customers and we
anticipate a reduction in operating costs going forward as a result of these
transactions.
In October 1996, John P. Pullara retired as President of Little Falls Bank. Mr.
Pullara started with the Bank in 1955, serving as President since 1977. His
guidance helped the Bank through some very difficult times for the thrift
industry, culminating in the January 5, 1996 completion of Little Falls Bancorp,
Inc.'s initial public offering. The Board of Directors and the management team
want to take this moment to offer their thanks for the leadership John Pullara
provided.
Your Board of Directors and management team are committed to protecting and
enhancing the value of your investment in the Company. To do so, we are
challenged to continue delivering high quality services to our customers and
communities and build on our past accomplishments. We appreciate the confidence,
support and loyalty of our customers, employees, and stockholders.
Sincerely,
/s/ Leonard G. Romaine
Leonard G. Romaine
President
March 17, 1997
- 1 -
<PAGE>
Little Falls Bancorp, Inc.
Corporate Profile
Little Falls Bancorp, Inc. (the "Company") is a New Jersey corporation
organized in August 1995 at the direction of the Board of Directors of the
Little Falls Bank (the "Bank") to acquire all of the capital stock of the Bank
issued upon its conversion from the mutual to stock form of ownership on January
5, 1996 (the "Conversion"). In connection with the Conversion, the Company sold
3,041,750 shares of Common Stock for net proceeds of $26.8 million. 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. At the present time, because the Company does not
conduct any active business, the Company does not intend to employ any persons
other than officers of the Bank but utilizes the support staff of the Bank from
time to time.
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.
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
consists mainly of second mortgages and home equity lines of credit.
Stock Market Information
Since its issuance on January 5, 1996, the Company's common stock has
traded on the Nasdaq National Market. The following table reflects the stock
price as published by the Nasdaq National Market. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission, and may
not represent actual transactions.
HIGH LOW
---- ---
October 1, 1996 - December 31, 1996 $ 13 3/4 $ 11
July 1, 1996 - September 30, 1996 11 3/4 10
April 1, 1996 - June 30, 1996 11 9 1/2
January 5, 1996 - March 31, 1996 11 7/8 10
The number of stockholders of record of common stock as of the record date
of February 28, 1997 ("Record Date"), was approximately 444. This does not
reflect the number of persons or entities who held stock in nominee or "street"
name through various brokerage firms. As of the Record Date, there were
2,745,180 shares outstanding.
The Company's ability to pay dividends to stockholders is subject to the
requirements of New Jersey law. No dividend may be paid by the Company unless
its board of directors determines that the Company will be able to pay its debts
in the ordinary course of business after payment of the dividend. In addition,
the Company's ability to pay dividends is dependent, in part, upon the dividends
it receives from the Bank. The Bank may not declare or pay a cash dividend on
any of its stock if the effect thereof would cause the Bank's regulatory capital
to be reduced below (1) the amount required for the liquidation
- 2 -
<PAGE>
account established in connection with the Bank's conversion from mutual to
stock form, or (2) the regulatory capital requirements imposed by the Office of
Thrift Supervision ("OTS").
Selected Financial Condition Data
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total Assets............. $303,518 $310,355 $193,385 $202,280 $200,091
Loans receivable (net)... 117,116 96,230 94,754 101,775 128,748
Mortgage-backed securities 112,473 118,020 51,664 56,401 38,119
Investment securities.... 51,370 29,999 36,146 24,999 13,971
Cash and cash equivalents 10,374 53,419 4,065 12,608 12,701
Deposits................. 228,312 247,851 176,173 186,704 187,502
Retained earnings........ 40,448 16,223 15,715 14,149 11,259
</TABLE>
Selected Operating Data
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total interest income...... $ 18,776 $13,813 $13,075 $14,237 $16,549
-------- -------- ------- ------- -------
Total interest expense..... 11,258 9,314 7,170 7,708 9,691
-------- -------- ------- ------- -------
Net interest income...... 7,518 4,499 5,905 6,529 6,858
Provision for loan losses.. 183 131 356 328 391
-------- -------- ------- ------- -------
Net interest income after
provision for loan losses 7,335 4,368 5,549 6,201 6,467
-------- -------- ------- ------- -------
Total non-interest income 409 178 143 917 310
-------- -------- ------- ------- -------
Total non-interest expense 6,747(1) 3,840(2) 2,912 3,059 2,698
-------- -------- ------- ------- -------
Income before provision for
income taxes and cumulative
effect of accounting change 996 705 2,781 4,058 4,079
Income tax expense......... 385 241 1,066 1,493 1,430
-------- -------- ------- ------- -------
Net income before cumulative
effect of accounting
change................. 611 464 1,715 2,565 2,649
-------- -------- ------- ------- -------
Cumulative effect of accounting
change................... -- -- -- 325(3) --
-------- -------- ------- ------- -------
Net income............... $ 611 $ 464 $ 1,715 $ 2,890 $ 2,649
======== ======== ======= ======= =======
</TABLE>
- ---------------
(1) Includes one-time special assessment to recapitalize the SAIF.
(2) Includes a non-recurring expense of $195,000 due to the implementation of
a directors' medical plan.
(3) Reflects the adoption of Statement of Financial Accounting Standard
("SFAS") No. 109 which relates to the accounting of deferred income taxes.
- 3 -
<PAGE>
Other Selected Data
- --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Return on average assets....... 0.21% 0.22% 0.86% 1.43% 1.32%
Return on average equity....... 1.44% 2.89% 11.62% 21.67% 26.11%
Average equity to average
assets....................... 14.78% 7.64% 7.62% 6.42% 5.07%
Net interest rate spread....... 2.22% 1.97% 2.86% 3.20% 3.41%
Per Share Information:
Earnings per share (1)....... $ 0.22 N/A N/A N/A N/A
Dividends per share(1)....... 0.05 N/A N/A N/A N/A
Tangible book value per
share (1).................... 13.56 N/A N/A N/A N/A
Dividend payout ratio(1)....... 22.28% N/A N/A N/A N/A
Non-performing assets to total
assets....................... 0.91% 1.27% 3.09% 2.85% 2.37%
Non-performing loans to total
assets....................... 0.63% 0.79% 2.18% 1.93% 1.94%
Allowance for loan losses to
total loans.................. 0.92% 0.98% 1.21% 0.79% 0.56%
- ---------------------
(1) No shares of common stock were outstanding until January 5, 1996.
- 4 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
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.
Branch Purchases/Consolidation
In December 1995, the Bank purchased three branch offices located in
Milford, Glen Gardner, and Baptistown, New Jersey from an unaffiliated
commercial bank ("Seller"). This increased the Bank's branch office network at
that time to a total of seven offices, plus its main office. The amount paid by
the Seller to the Bank for the transfer of such assets and liabilities of the
three branches equaled the outstanding balances and accrued interest on the
deposit liabilities transferred, reduced by (i) $1.0 million, net of
adjustments, (ii) petty cash and vault cash transferred, and (iii) a cash
premium equal to 7.55% of the deposit liabilities to be assumed. The acquisition
was paid for with cash received from the deposits acquired. The result was a
$4.1 million acquisition cost in excess of the fair market value of the tangible
net assets acquired and was recorded as an intangible asset net of $500,000,
which is a premium over the cost of fixed assets. In connection with the
acquisition, the Bank assumed approximately $54.4 million of deposit
liabilities. In consideration of the assumption of the deposit liabilities and
certain other obligations, the Bank purchased branch office properties and fixed
assets at a purchase price of $1.0 million, which had an estimated fair market
value of approximately $1.5 million. Management initially reinvested a
substantial portion of the cash received as a result of the branch purchases in
investment and mortgage-backed securities with short and medium terms.
Management completed the branch acquisition based upon its analysis indicating a
reduction in the Bank's cost of funds would result from the lower cost of funds
of the acquired deposits. These lower costing funds were in turn invested in
primarily investment and adjustable rate mortgage-backed securities which
resulted in an increase in net income, as well as a beneficial impact on the
Bank's interest rate sensitivity.
During the year ended December 31, 1996, the Bank closed two branches. On
August 30, 1996, the branch office located at Frenchtown was closed. The
deposits were retained, and customers were able to use the Alexandria, Milford
and Kingwood offices for their transactions. Based upon Management's evaluation
of the above noted branch purchases, the proximity of other offices to the
Frenchtown office and the ability of the Bank to decrease expenses and improve
efficiencies through consolidation, the decision was made to close the branch.
On December 20, 1996, the Bank closed its Mount Holly branch office, and sold
the deposits to an unaffiliated financial institution. Deposits sold totaled
$9.2 million, for which a premium of 1.5%, or $138,000 was received. The sale of
deposits was funded through a Federal Home Loan Bank ("FHLB") advance. The
branch closing and related sale of deposits is expected to result in reduced
operating expenses for the Bank, and eliminates the Bank's only branch in
Burlington County.
- 5 -
<PAGE>
Management Strategy
The Bank has been and intends to continue to be a community-oriented
financial institution offering a variety of financial services. Management's
strategy has been to emphasize residential mortgage loans, monitor interest rate
risk through asset and liability management, maintain asset quality and control
operating expense. The Bank's purchase of three branches from an unaffiliated
commercial bank reflects the Bank's intention to provide a variety of services
to its community which includes the origination of more consumer loans.
Historically, the Bank's strategy has been primarily to make loans and
secondarily to invest remaining funds in mortgage-backed securities and
investment securities.
During 1996, the Bank originated in excess of $31.0 million of loans, an
increase of 231% over 1995 originations. However, during the past few years
prior to 1996, due to decreased loan demand coupled with prepayments on loans
due to a generally lower interest rate environment, the Bank had been investing
excess liquidity in investments and mortgage-backed securities. Management
believes that the Bank's purchases of mortgage-backed securities and investment
securities have enhanced the Bank's asset quality and interest rate sensitivity.
Financial Condition
The Bank's total assets decreased by $6.9 million to $303.5 million at
December 31, 1996 from $310.4 million at December 31, 1995. Total loans
receivable increased by $20.9 million due to mortgage originations of $30.9
million offset by loan repayments. Investment securities increased by $21.4
million due to purchases of $32.3 million offset by securities which matured.
Mortgage-backed securities decreased by $5.5 million due to repayments being
greater than the $16.1 million of purchases. Total cash and cash equivalents
decreased by $43.0 million due to the $30.9 million of mortgages originated, the
$32.3 million of investment securities purchased, the purchase of $16.1 million
of mortgage-backed securities, the $19.5 million decrease in 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, the
maturities of investment securities and borrowed funds.
Total deposits decreased by $19.5 million due in part to $2.8 million
being used for the purchase of stock in the Conversion, and the sale of $9.2
million of deposits in connection with the closing of the Mount Holly branch
office. Borrowed funds increased by $33.6 million, due to $9.0 million of FHLB
advances used to fund the sale of the Mount Holly deposits, and $24.6 million of
repurchase agreements with terms of one year, six months and overnight. The $9.0
million FHLB advance has a rate of 5.82% and a term of three years, with a
one-time callable feature at the end of the second year. The repurchase
agreements were the result of a financial transaction entered into by the Bank,
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.
- 6 -
<PAGE>
Accounts payable and other liabilities decreased by $44.5 million
primarily due to the decrease of stock subscriptions payable of $44.8 million.
The decrease was due to the refund of $19.7 million of over-subscribed stock
subscriptions and the remaining funds being used to purchase the Company's
common stock in the Conversion.
Total stockholders equity increased by $24.2 million mainly due to the
completion of the mutual to stock conversion, partially offset by the repurchase
of 296,570 shares at an aggregate cost of $3.3 million. Earnings for the year
ended December 31, 1996, also contributed to the increase, although to a much
smaller extent.
- 7 -
<PAGE>
Average Balance, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material difference in the information presented.
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------- ------------------------------ ------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)........ $105,794 $ 8,255 7.80% $ 93,638 $7,580 8.09% $ 97,481 $7,776 7.98%
Mortgage-backed securities. 119,684 7,972 6.64 63,605 3,839 6.04 53,984 3,187 5.90
Investment securities(2)... 40,316 2,164 5.37 36,163 1,998 5.52 35,827 2,000 5.58
Other interest-earning
assets.................... 7,431 385 5.18 6,900 395 5.72 4,993 112 2.24
-------- ------- ------ ------ ----- ------
Total interest-earning
assets.................. 273,225 18,776 6.87 200,306 13,812 6.90 192,285 13,075 6.80
------- ------ ------
Non-interest-earning assets. 14,223 9,940 6,406
-------- ------- -------
Total assets.............. $287,448 $210,246 $198,691
======= ======= =======
Interest-bearing
liabilities:
Savings accounts........... $ 51,633 1,860 3.60 $ 31,425 929 2.95 $ 31,602 860 2.72
Now and money market 39,270 1,155 2.94 27,099 1,086 4.01 28,326 945 3.34
Certificates of deposit.... 147,707 8,068 5.46 130,513 7,299 5.59 122,080 5,365 4.39
Borrowed funds............. 3,173 175 5.52 -- -- -- -- -- --
Total interest-bearing
liabilities.............. 241,783 11,258 4.66 189,037 9,314 4.93 182,008 7,170 3.94
------- ------ ------
Non-interest bearing
liabilities............... 3,171 5,149 1,551
-------- -------- --------
Total liabilities.......... 244,954 194,186 183,559
Retained earnings........... 42,494 16,060 15,132
-------- -------- --------
Total liabilities and
retained earnings........ $287,448 $210,246 $198,691
======== ======== ========
Net interest income......... $ 7,518 $4,498 $5,905
======= ====== ======
Interest rate spread(3)..... 2.21% 1.97% 2.86%
====== ====== ======
Net yield on interest-earning
assets(4)................. 2.75% 2.25% 3.07%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 111.00% 105.96% 105.65%
====== ====== ======
</TABLE>
- ---------------------------------
(1) Average balances include non-performing loans.
(2) Includes interest-bearing deposits in other financial institutions and
FHLB stock.
(3) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
- 8 -
<PAGE>
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by prior rate); (ii) changes in rates
(changes in rate multiplied by prior average volume); (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
1996 vs. 1995 (1) 1995 vs. 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- ------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- ------- ------- ------- -------- ------- -------- -------
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable .............. $ 985 $ (274) $ (36) $ 675 $ (306) $ 115 $ (5) $ (196)
Mortgage-backed securities..... 3,385 398 351 4,134 568 71 13 652
Investment securities ......... 142 22 2 166 19 (21) -- (2)
Other interest-earning assets.. 45 (49) (6) (10) 43 174 66 283
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets. 4,557 97 311 4,965 324 339 74 737
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Savings accounts .............. 597 203 131 931 (5) 74 -- 69
Now and money market .......... 488 (289) (130) 69 (41) 190 (8) 141
Certificates of deposit ....... 962 (170) (22) 770 371 1,462 101 1,934
Borrowed funds ................ 175 -- -- 175 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ................ 2,222 (256) (21) 1,945 325 1,726 93 2,144
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest
income ....................... $ 2,335 $ 353 $ 332 $ 3,020 $ (1) $(1,387) $ (19) $(1,407)
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
General. Net income increased $147,000 or 31.7% to $611,000 for the year
ended December 31, 1996 from $464,000 for the year ended December 31, 1995. This
was primarily the result of a $3.0 million increase in net interest income and a
$230,000 increase in non-interest income, offset by a $2.9 increase in
non-interest expenses and an $144,000 increase in the provision for income taxes
in fiscal 1996 compared to fiscal 1995.
Interest Income. Interest income increased $5.0 million or 35.9% to $18.8
million for the year ended December 31, 1996 from $13.8 million for the year
ended December 31, 1995. This increase was primarily due to increases of $56.1
million and $12.2 million in the average balances of mortgage-backed securities
and loans receivable, respectively. These increases were primarily due to the
funds received from the purchase of three branches in December, 1995 and from
the Conversion.
Interest Expense. Interest expense increased $1.9 million, or 20.9% to
$11.3 million for the year ended December 31, 1996 from $9.3 million for the
year ended December 31, 1996. The increase was mainly due to the increase in the
average balance of interest-bearing deposits to $238.6 million for
- 9 -
<PAGE>
the year ended December 31, 1996 from $189.0 million for the year ended December
31, 1995. In addition, the average balance of borrowed funds increased to $3.2
million during 1996. In 1995, the Company had no borrowed funds. The increase in
the average balance of interest-bearing liabilities was offset somewhat by the
decrease in the average rate paid on interest-bearing liabilities of 29 basis
points (100 basis points equals 1%) to 4.66% for the year ended December 31,
1996.
Net Interest Income. Net interest income increased by $3.0 million, or
67.1% for the year ended December 31, 1996 as compared to the year ended
December 31, 1995. This increase was due to the investment of $26.8 million
received from the Conversion in loans and mortgage-backed securities and the
decrease in the average rate paid on interest-bearing liabilities, as described
earlier. This resulted in an increase in the net interest spread and net
interest margin to 2.21% and 2.75%, respectively, for the year ended December
31, 1996 compared with a net interest spread and net interest margin of 1.97%
and 2.25%, respectively, for the year ended December 31, 1995.
Provision for Losses on Loans. The Bank maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience, adverse situations that
may affect the borrowers' ability to repay loans, estimated value of the
underlying collateral and current and expected market conditions. The provision
for loan losses increased $52,000 or 39.2% to $183,000 for the year ended
December 31, 1996 from $131,000 for the year ended December 31, 1995, primarily
due to the write-off of a loan in the third quarter. The allowance for loan
losses was $936,000 at December 31, 1996. While the Bank maintains its allowance
for losses at a level which it considers to be adequate, there can be no
assurance that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts.
Non-Interest Income. Non-interest income increased by $230,000, or 129.3%
to $409,000 for the year ended December 31, 1996 from $178,000 for the year
ended December 31, 1995. The increase was due in most part to a $138,000 gain
recorded on the sale of the Mount Holly deposits in December, 1996. Income on
checking accounts increased by $70,000 to $121,000 for the year ended December
31, 1996, from $51,000 for the year ended December 31, 1995 primarily due to the
increase in checking accounts that resulted from the purchase of three branches
from an unaffiliated commercial bank.
Non-Interest Expense. Non-interest expense increased $2.9 million, or
75.7% to $6.7 million for the year ended December 31, 1996 from $3.8 million for
the year ended December 31, 1995. This was primarily due to the increase in
deposit insurance premiums of $1.2 million, or 286.9%. This increase was due to
a special assessment charged by the FDIC on its SAIF members to capitalize the
SAIF at the designated reserve level of 1.25% as of October 1, 1996. The Bank
paid $1.2 million in November 1996 for this special assessment. The FDIC has
subsequently lowered its premium rate for deposits. Other factors causing the
increase in non-interest expense was the increase in compensation and employee
benefits of $920,000 and the increase in other expenses of $714,000. The
increase in compensation and employee benefits was due to the additional
employees resulting from the purchase of three branch offices in December 1995,
the adoption of an employee stock ownership plan ("ESOP") and the management
stock bonus plan ("MSBP"). For the year ended December 31, 1996, the ESOP and
MSBP expenses were $178,000 and $49,000, respectively. The acquisition of the
branch offices also caused increases in occupancy, equipment and deposit
insurance premiums. In addition, the acquisition resulted in an increase in the
amortization of goodwill to $361,000 for the year ended December 31, 1996, from
$30,000 for the year ended December 31, 1995.
- 10 -
<PAGE>
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
December 20, 1996, the Bank closed its Mount Holly office, and sold the related
deposits to an unaffiliated local financial institution. This should result in
decreased operating expenses going forward.
Income Tax Expense. Income tax expense increased $144,000 to $385,000 for
the year ended December 31, 1996 from $241,000 for the year ended December 31,
1995 due to an increase in pre-tax income of $291,000.
Comparison of Operating Results for Years Ended December 31, 1995 and 1994
General. Net income decreased $1.3 million or 73.0% to $464,000 for the
year ended December 31, 1995 from $1.7 million for the year ended December 31,
1994. This was primarily the result of a $1.4 million decrease in net interest
income and a $929,000 increase in non-interest expense, offset somewhat by a
$225,000 decrease in the provision for loan losses and a $825,000 decrease in
the provision for income taxes in fiscal 1995 compared to fiscal 1994.
Interest Income. Interest income increased $737,000 or 5.6% to $13.8
million for the year ended December 31, 1995 from $13.1 million for the year
ended December 31, 1994. This increase was primarily due to increases of $9.6
million and $1.9 million in the average balances of mortgage-backed securities
and other interest-earning assets, respectively. These increases were due
primarily to the funds received from the purchase of three branches, as well as
the Bank investing excess liquidity in such securities and stock subscriptions
received in connection with the Conversion. In addition, there was a decrease of
$196,000 in income earned on loans due to a decrease in the average balance of
loans receivable, reflecting both lower demand and increased competition for
loans in the Bank's market area.
Interest Expense. Interest expense increased $2.1 million or 29.9% to $9.3
million for the year ended December 31, 1995 from $7.2 million for the year
ended December 31, 1994. The average balance of interest-bearing deposits
increased by $7.0 million and the average rate paid on interest-bearing
liabilities increased 99 basis points (100 basis points equals 1%) to 4.93% for
the year ended December 31, 1995 from 3.94% in 1994 due to the increase in
general market rates and a shift in the deposit mix to higher yielding
certificate accounts. The Bank's average cost of certificates of deposit
increased from 4.39% for the year ended December 31, 1994 to 5.59% for the year
ended December 31, 1995 and the average balance of certificates of deposit
increased by $8.4 million.
Net Interest Income. Net interest income decreased primarily due to
interest income increasing at a slower pace than interest expense, as loan
originations decreased dramatically due to increased competition and low demand
for residential lending in the Bank's primarily market area and depositors
sought higher returns in certificate accounts compared to traditional savings
accounts. This resulted in a decline in the net interest spread and the net
interest margin to 1.97% and 2.25%, respectively, for the year ended December
31, 1995 compared with a net interest spread and net interest margin of 2.86%
and 3.07%, respectively, for the year ended December 31, 1994.
- 11 -
<PAGE>
Provision for Losses on Loans. The Bank maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience, adverse situations that
may affect the borrowers' ability to repay loans, estimated value of the
underlying collateral and current and expected market conditions. The provision
for loan losses decreased $225,000 or 63.1% to $131,000 for the year ended
December 31, 1995 from $356,000 for the year ended December 31, 1994, primarily
due to a decrease in non-performing loans. The allowance for loan losses was
$958,000 at December 31, 1995. While the Bank maintains its allowance for losses
at a level which it considers to be adequate, there can be no assurance that
further additions will not be made to the loss allowances and that such losses
will not exceed the estimated amounts.
Non-Interest Income. Non-interest income, primarily consisting of loan
fees and checking account fees, increased $35,000 or 24.3% to $178,000 for the
year ended December 31, 1995 from $143,000 for the year ended December 31, 1994.
Non-Interest Expense. Non-interest expense increased $929,000 or 31.9% to
$3.8 million for the year ended December 31, 1995 from $2.9 million for the year
ended December 31, 1994. This was primarily due to the loss on foreclosed real
estate, which increased by $355,000 to $372,000 at December 31, 1995 from
$17,000 at December 31, 1994. This increase was due in most part to the payment
of back taxes of approximately $141,000 on seven properties, as well as
additional write downs of approximately $150,000 on foreclosed properties due to
the Bank receiving updated appraisals. Also contributing to increased
non-interest expense was a nonrecurring expense of $195,000 for the
implementation of a directors' medical plan. Pursuant to SFAS No. 106, this
nonrecurring expense represents a transition obligation which is permitted to be
recognized in the period when the plan was adopted. To a lesser extent, the
increase in non-interest expense was due to increases in compensation and
related expenses of $150,000 to $1.7 million for the year ended December 31,
1995 from $1.5 million in the same period in 1994, $30,000 of amortization of a
deposit premium resulting from the December, 1995 purchase of three branches,
and increases of $27,000 and $35,000 to $54,000 and $68,000, respectively, for
legal and consulting service expenses, respectively. Non-interest expense
includes insurance premiums paid to the FDIC which were $413,000 and $425,000
for the years ended December 31, 1995 and 1994, respectively.
Management anticipates that its non-interest expense will increase as a
result of additional expenses relating to the Company operating as a public
stock company, as well as expenses relating to its stock benefit plans.
Income Tax Expense. Income tax expense decreased $825,000 to $241,000 for
the year ended December 31, 1995 from $1.1 million for the year ended December
31, 1995 due to a reduction in pre-tax income of $2.1 million.
Asset and Liability Management
In an effort to reduce interest rate risk and protect it from the negative
effect of rapid increases and decreases in interest rates, the Bank has
instituted certain asset and liability management measures including emphasizing
the origination of three, five and ten year adjustable-rate mortgage loans and
investing excess funds in short- and medium-term mortgage-backed and investment
securities. The Bank retains an asset/liability consultant, FinPro, Inc., to
assist it in analyzing its asset liability position. With the consultant's
assistance, the Bank undertakes a quarterly extensive study of various trends,
conducts separate deposit and asset analyses and prepares various
asset/liability tables including contractual interest
- 12 -
<PAGE>
rate gap, interest rate gap with prepayment assumptions, margin/spread and
duration tables. Interest rate gap analysis measures the difference between
amounts of interest-earning assets and interest-bearing liabilities which either
reprice or mature within a given period of times and their sensitivity to
changing interest rates.
The Bank, like many other thrift institutions, is exposed to interest rate
risk as a result of the difference in the maturity of interest-bearing
liabilities and interest-earning assets and the volatility of interest rates.
Most deposit accounts react more quickly to market interest rate movements than
do the existing mortgage loans because of the deposit accounts' shorter terms to
maturity; sharp decreases in interest rates would typically increase the Bank's
earnings. Conversely, this same mismatch will generally adversely affect the
Bank's earnings during periods of increasing interest rates. The extent of
movement of interest rates is an uncertainty that could have a negative impact
on the earnings of the Bank.
Volatility in interest rates can also result in disintermediation, which
is the flow of funds away from savings institutions (such as the Bank) and into
other investments, such as U.S. Government and corporate securities and other
investment vehicles. Because of the absence of federal insurance premiums and
reserve requirements, such investments may pay higher rates of return than
investment vehicles offered by savings institutions.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
OTS regulations require that a savings association maintain liquid assets of not
less than 5% of its average daily balance of net withdrawable deposit accounts
and borrowings payable in one year or less, of which short-term liquid assets
must consist of not less than 1%. At December 31, 1996, the Bank's liquidity was
in excess of the minimum requirement. The Bank adjusts liquidity as appropriate
to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan repayments
are a relatively predictable source of funds, deposit flows and loan and
mortgage-backed security prepayments are significantly influenced by general
interest-rates, economic conditions and competition. In addition, the Bank
invests excess funds in overnight deposits which provide liquidity to meet
lending requirements.
The Bank's most liquid asset is cash, which includes investments in highly
liquid short-term investments. The level of these assets are dependent on the
Bank's operating, financing and investing activities during any given period. At
December 31, 1996, cash and cash equivalents totaled $10.4 million, with cash
received from stock subscriptions accounting for $44.8 million in 1995. The Bank
has other sources of liquidity if a need for additional funds arises. Another
source of liquidity is the repayment and prepayment of mortgage-backed and
investment securities. Additional sources of funds include the ability to
utilize FHLB of New York advances and the ability to borrow against
mortgage-backed and investment securities. At December 31, 1996, the Bank had a
$9.0 million advance with a rate of 5.82%. The advance matures in December 1999,
and has a one time call feature at December 20, 1998. This advance was used to
fund the sale of the Mount Holly branch deposits. In an effort to increase
earnings, reduce the Company's interest rate sensitivity, and to better match
its interest rate
- 13 -
<PAGE>
position, on November 13, 1996, the Company entered into a financial transaction
whereby it purchased a $25.0 million fixed-rate 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.
The Bank's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
Cash flows from operating activities, consisting primarily of net income
adjusted for depreciation, amortization and provisions for loan and real estate
owned losses, were $1.6 million, $368,000, and $1.6 million for the years ended
December 31, 1996, 1995, and 1994, respectively. Net cash provided by (used in)
investing activities consisted primarily of disbursement of loan originations,
mortgage-backed security purchases and investment purchases, offset by principal
collections on loans and mortgage-backed securities and proceeds from the
maturities of investment securities or sales of securities, were $(37.2)
million, $(12.8) million and $453,000 for fiscal 1996, 1995 and 1994,
respectively. Net cash provided by (used in) financing activities consisting
primarily of proceeds from stock subscriptions, net activity in deposit and
escrow accounts, and activity in borrowed funds were $(7.5) million, $61.8
million and $(10.6) million for the years ended December 31, 1996, 1995 and
1994, respectively.
Operating activities in 1996 provided $1.6 million in cash primarily due
to net income of $611,000 adjusted for $153,000 in depreciation, a $183,000
provision for loan and real estate owned losses, $361,000 of goodwill
amortization. Investing activities in 1996 used $37.2 million due to $16.1
million and $32.3 million in purchases of mortgage-backed and investment
securities, respectively, and a $21.3 million increase in loans receivable,
$11.0 million from the maturity of investment securities held to maturity, and
$21.5 million from principle collections on mortgage-backed securities held to
maturity. Financing activities used $7.8 million due to a $7.5 million decrease
in deposits, a $19.7 million refunding of oversubscribed deposits related to the
initial public offering completed in January 1996, $9.1 million used to fund the
sale of the deposits of the Mount Holly branch, and $3.3 million for the
repurchase of common stock, offset somewhat by an increase in borrowed funds of
$33.6 million.
Operating activities in 1995 provided $368,000 in cash due primarily to
net income of $464,000 adjusted for $103,000 in depreciation, a $382,000
provision for loan and real estate owned losses and $355,000, $127,000 and
$528,000 increases in interest receivable, net, interest payable and other
assets, respectively. Investing activities in 1995 used $12.8 million due to
$75.2 million and $6.0 million in purchases of mortgage-backed and investment
securities, respectively, and $2.2 million due to an increase in loans
receivable offset somewhat by $49.3 million of cash received in connection with
the branch acquisitions, $12.2 million provided due to the maturity of
investment securities held to maturity and $8.8 million from principle
collections on mortgage-backed securities held to maturity. Financing activities
provided $61.6 million primarily due to $44.8 million in proceeds from stock
subscriptions and a $17.1 million increase in deposits.
Operating activities in 1994 provided $1.6 million in cash due primarily
to net income of $1.7 million adjusted for $93,000 in depreciation, a $356,000
provision for loan and real estate owned losses and increases of $262,000 in
interest receivable, net and $160,000 in other assets. Investing activities in
1994 provided $453,000 due to $8.0 million from the maturity of investment
securities held to maturity, $7.7 million from principle collections on
mortgage-backed securities held to maturity and $6.2
- 14 -
<PAGE>
million from the decrease in loans receivable, offset by $3.1 million and $19.1
million in purchases of mortgage-backed and investment securities. Financing
activities used $10.6 million primarily due to a $10.5 million decrease in
deposits.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. As of December 31, 1996, the Bank had mortgage
commitments to fund loans of $3.3 million. Also, at December 31, 1996, there
were commitments on unused lines of credit relating to home equity loans of $3.0
million. Certificates of deposit scheduled to mature in one year or less at
December 31, 1996 totaled $103.4 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.
At December 31, 1996, the Bank exceeded each of the three regulatory
capital requirements on a fully phased-in basis.
Impact of Information and Changing Prices
The financial statements of the Bank and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, 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 and due to inflation. The
impact of inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, nearly all the assets and liabilities of
the Bank are monetary. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessary move in the same direction or to the same extent as the
price of goods and services.
- 15 -
<PAGE>
LITTLE FALLS BANCORP, INC. LOGO
Little Falls Bancorp, Inc.
86 Main Street
Little Falls, NJ 07424-1493
(201) 256-6100
January 31, 1997
MANAGEMENT RESPONSIBILITY STATEMENT
-----------------------------------
Management of Little Falls Bancorp, Inc. is responsible for the preparation of
the consolidated financial statements and all other financial information
included in this report. The consolidated financial statements were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis. All financial information included in the report agrees with the
consolidated financial statements. In preparing the consolidated financial
statements, management makes informed estimates and judgments, with
consideration given to materiality, about the expected results of various events
and transactions.
Management maintains a system of internal accounting control that includes
personnel selection, appropriate division of responsibilities, and formal
procedures and policies consistent with high standards of accounting and
administrative practice. Consideration has been given to the necessary balance
between the costs of systems of accounting and internal control and the benefits
derived.
Management reviews and modifies its systems of accounting and internal control
in light of changes in conditions and operations as well as in response to
recommendations from the independent certified public accountants. Management
believes the accounting and internal control systems provide reasonable
assurance that assets are safeguarded and financial information is reliable.
The Board of Directors is responsible for determining that management fulfills
its responsibilities in the preparation of the consolidated financial statements
and the control of operations. The Board appoints the certified public
accountants. The Board meets with management and the independent certified
public accountants, approves the overall scope of audit work and related fee
arrangements and reviews audit reports and findings.
/s/Leonard G. Romaine /s/Richard A. Capone
- --------------------- --------------------
Leonard G. Romaine Richard A. Capone
President Chief Financial Officer and Treasurer
<PAGE>
[LOGO]
R RADICS & CO., LLC
- --------------------------------------------------------------------------------
Established Certified Public Accountants & Consultants
1933
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors and Stockholders
Little Falls Bancorp, Inc.
Little Falls, New Jersey
We have audited the consolidated statements of financial condition of Little
Falls Bancorp, Inc. (the "Company") and subsidiary as of December 31, 1996 and
1995 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated statements of income, changes
in stockholders' equity, and cash flows for the year ended December 31, 1994
were audited by other auditors, whose report, dated January 31, 1995, expressed
an unqualified opinion on these statements.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the consolidated
financial position of Little Falls Bancorp, Inc. and subsidiary as of December
31, 1996 and 1995 and the results of their operations and cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Radics & Co., LLC
January 31, 1997
-17-
55 US Highway 46 East, Post Office Box 676, Pine Brook, NJ 07058-0676
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
---------------------------------------
Assets Notes 1996 1995
- ------ ------------------ ----------------- ------------------
<S> <C> <C> <C>
Cash and due from banks $ 1,746,743 $ 2,518,055
Interest-bearing deposits in other banks 3,627,221 11,101,033
Federal funds sold 5,000,000 39,800,000
----------------- -----------------
Total cash and cash equivalents 1 and 16 10,373,964 53,419,088
Investment securities held to maturity 1,3 and 16 51,370,297 29,999,470
Mortgage-backed securities held to maturity 1,4 and 16 112,473,144 118,020,300
Loans receivable 1,5 and 16 117,115,784 96,229,678
Premises and equipment 1 and 6 2,659,239 2,789,468
Investment in real estate 1 and 7 683,054 546,786
Foreclosed real estate 1 857,157 1,500,825
Interest receivable 1 and 16 1,735,291 1,717,349
Federal Home Loan Bank of New York stock 9 and 16 2,075,700 1,395,200
Excess of cost over assets acquired 1 3,217,017 3,577,800
Other assets 13 957,091 1,158,999
----------------- ------------------
Total assets $303,517,738 $310,354,963
================= ==================
Liabilities and stockholders equity
- -----------------------------------
Liabilities
- -----------
Deposits 8 and 16 $228,311,543 $247,851,373
Advance payments from borrowers for taxes - 701,773
Stock subscriptions payable 2 - 44,831,296
Securities sold under agreements to repurchase 10 33,623,500 -
Accounts payable and other liabilities 12 1,134,397 747,298
----------------- ------------------
Total Liabilities 263,069,440 294,131,740
----------------- ------------------
Commitments 15 and 16 - -
Stockholders' equity 2,11,12, and 13
- --------------------
Preferred stock $0.10 par value, 5,000,000 shares - -
authorized; none issued and outstanding
Common stock $0.10 par value, 10,000,000 shares
authorized; 3,041,750 shares issued
at December 31, 1996 304,175 -
Additional paid in capital 28,974,799 -
Retained earnings - substantially restricted 16,802,056 16,327,286
Common stock aquired by employee stock (2,271,173) -
ownership plan ("ESOP")
Treasury stock, at cost; 296,569 shares at (3,277,004) -
December 31,1996
Minimum pension liability,
net of deferred income taxes (84,555) (104,063)
----------------- ------------------
Total stockholders' equity 40,448,298 16,223,223
----------------- ------------------
Total liabilities and stockholders' equity $303,517,738 $310,354,963
================= ==================
</TABLE>
- 18 -
See notes to consolidated financial statements.
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
Notes 1996 1995 1994
----------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable 5 $ 8,255,040 $ 7,579,947 $ 7,776,258
Mortgage-backed securities 7,972,069 3,839,383 3,186,726
Investment securities
and other interest-earning assets 2,549,230 2,393,297 2,112,506
------------------ ----------------- ------------------
Total interest income 18,776,339 13,812,627 13,075,490
------------------ ----------------- ------------------
Interest expense:
Deposits 8 11,082,926 9,313,730 7,170,191
Borrowings 175,324 - -
------------------ ----------------- ------------------
Total interest expense 11,258,250 9,313,730 7,170,191
------------------ ----------------- ------------------
Net interest income 7,518,089 4,498,897 5,905,299
Provision for loan losses 5 182,900 131,359 356,083
------------------ ----------------- ------------------
Net interest income
after provision for loan losses 7,335,189 4,367,538 5,549,216
------------------ ----------------- ------------------
Non-interest income:
Service fees 199,033 152,662 126,649
Other 209,538 25,501 16,721
------------------ ----------------- ------------------
Total non-interest income 408,571 178,163 143,370
------------------ ----------------- ------------------
Non-interest expenses:
Compensation and employee benefits 12 2,608,587 1,688,213 1,538,337
Occupancy, net 6 334,406 166,347 154,817
Equipment 6 401,510 268,841 226,489
Deposit insurance premiums 14 1,596,307 412,639 424,870
Loss on foreclosed real estate 88,981 372,304 17,141
Amortization of deposit premium 360,783 30,069 -
Other 12 1,356,853 902,059 550,131
------------------ ----------------- ------------------
Total non-interest expenses 6,747,427 3,840,472 2,911,785
------------------ ----------------- ------------------
Income before provision for income taxes 996,333 705,229 2,780,801
Provision for income taxes 13 385,444 241,490 1,066,207
------------------ ----------------- ------------------
Net income $ 610,889 $ 463,739 $ 1,714,594
================== ================= ==================
Net income per common share and common
stock equivalents $ 0.22 N/A (1) N/A (1)
================== ================= ==================
Weighted average number of common
shares and common stock equivalents outstanding 2,733,000 N/A (1) N/A (1)
================== ================= ==================
</TABLE>
(1) Little Falls Bancorp, Inc. converted to stock form on January 5, 1996.
See notes to consolidated financial statements.
-19-
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
<TABLE>
<CAPTION>
Minimum
Pension
Retained Liability,
Earnings - Common Stock Net of
Common Additional Substantially Aquired by Treasury Deferred
Stock Paid in Capital Restricted ESOP Stock Income Taxes Total
-------- --------------- ---------------- ------------ --------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
December 31, 1993 $ -- $ -- $ 14,148,953 $ -- $ -- $ -- $ 14,148,953
Net income for the year
ended December 31, 1994 -- -- 1,714,594 -- -- -- 1,714,594
Additional pension liability,
net of deferred income taxes -- -- -- -- -- (148,825) (148,825)
---------- ------------ ----------- ------------ ---------- --------- ------------
Balance -
December 31, 1994 -- -- 15,863,547 -- -- (148,825) 15,714,722
Net income for the year
ended December 31, 1995 -- -- 463,739 -- -- -- 463,739
Decrease in minimum
pension liability, net
of deferred income taxes -- -- -- -- -- 44,762 44,762
---------- ------------ ----------- ------------ ---------- ---------- ------------
Balance - December 31, 1995 -- -- 16,327,286 -- -- (104,063) 16,223,223
Net income for the year ended
December 31, 1996 -- -- 610,889 -- -- -- 610,889
Net proceeds from issuance of
common stock 304,175 28,959,347 -- -- -- -- 29,263,522
Acquisition of common stock
by ESOP -- -- -- (2,433,400) -- -- (2,433,400)
ESOP shares committed to be
released -- 15,452 -- 162,227 -- -- 177,679
Purchase of 296,570 shares
of treasury stock -- -- -- -- (3,277,004) -- (3,277,004)
Decrease in minimum pension
liability, net of -- -- -- -- -- 19,508 19,508
of deferred income taxes
Dividends paid -- -- (136,119) -- -- -- (136,119)
---------- ------------ ------------ ----------- ----------- ------------ ------------
Balance - December 31, 1996 $304,175 $ 28,974,799 $ 16,802,056 $ (2,271,173) $(3,277,004) $ (84,555) $ 40,448,298
========== ============ ============ ============= =========== ============ ============
</TABLE>
See notes to consolidated financial statements. -20-
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1995 1994
------------- ------------ --------------
<S> <C> <C> <C>
Cash flows form operating activities:
Net income $ 610,889 $ 463,739 $ 1,714,594
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 153,207 102,863 92,817
Provision for loan and real estate owned losses 182,900 381,809 356,083
Amortization of intangibles 360,783 30,069 --
Amortization (accretion) of
deferred fees, premiums and discounts, net 40,903 7,186 (77,004)
Gain on sale of branch (138,320) -- --
Loss (Gain) on sale of foreclosed real estate 28,418 (27,705) --
Deferred income taxes (243,005) 1,808 71,772
Increase in interest receivable (17,942) (354,543) (261,626)
Increase in other assets (2,446) (528,405) (160,072)
Increase (decrease) in interest payable 180,501 127,445 (28,276)
Increase (decrease) in
accounts payable and other liabilities 256,012 163,438 (131,108)
ESOP shares committed to be released 177,679 -- --
------------ ------------ ------------
Net cash provided by operating activities 1,589,579 367,704 1,577,180
------------ ------------ ------------
Cash flows from investing activities:
Purchases of investment securities held to maturity (32,347,937) (6,022,500) (19,147,279)
Maturities of investment securities held to maturity 11,000,000 12,167,500 8,000,000
Purchases of mortgage-backed securities held to maturity (16,073,205) (75,243,631) (3,059,236)
Principal collections on
mortgage-backed securities held to maturity 21,500,221 8,849,495 7,756,975
Net (increase) decrease in loans receivable (21,265,657) (2,239,571) 6,177,391
Purchases of premises and equipment (159,246) (482,366) (40,619)
Proceeds from sales of foreclosed real estate 849,629 713,646 698,604
(Purchase) Redemption of Federal Home Loan Bank
of New York stock (680,500) 116,100 67,600
Cash and cash equivalents
received in connection with acquisition -- 49,303,415 --
------------ ------------ ------------
Net cash (used in ) provided by investing activities (37,176,695) (12,837,912) 453,436
------------ ------------ ------------
</TABLE>
See notes to consolidated financial statements.
-21-
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
-------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits $ (7,464,225) $ 17,135,595 $(10,501,656)
Decrease in advances from borrowers for taxes (701,773) (142,723) (72,156)
(Refunds of) proceeds from stock subscriptions (19,706,653) 44,831,296 --
Proceeds of securities sold under
agreement to repurchase 33,623,500 -- --
Costs of insurance of common stock (731,348) -- --
Dividends paid (136,119) -- --
Cash paid in connection with branch sales (9,064,385) -- --
Treasury stock acquired (3,277,004) -- --
------------ ------------ ------------
Net cash (used in) provided by financing activities (7,458,007) 61,824,168 (10,573,812)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (43,045,124) 49,353,960 (8,543,196)
Cash and cash equivalents:
Beginning 53,419,088 4,065,128 12,608,324
------------ ------------ ------------
Ending $ 10,373,964 $ 53,419,088 $ 4,065,128
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-22-
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid during the period for:
Interest $ 11,077,749 $ 9,186,285 $ 7,199,015
============ ============ ============
Income taxes $ 410,701 $ 403,925 $ 1,072,511
============ ============ ============
Loans receivable transferred to foreclosed real estate $ 406,379 $ 672,584 $ 871,350
============ ============ ============
Loans to facilitate sale of foreclosed real estate $ 172,000 -- --
============ ============ ============
(Decrease) increase in minimum
pension liability, net of deferred income taxes (19,508) (44,762) $ 148,825
============ ============ ============
Property transferred to investment in real estate $ 145,478 $ 243,667 $ --
============ ============ ============
Issuance of common stock:
Deposits used for stock purchases $ 2,859,458 $ -- $ --
Stock subscriptions used for stock purchases 25,124,642 -- --
Deferred costs (422,630) -- --
------------ ------------ ------------
$ 27,561,470 $ -- $ --
============ ============ ============
Assets acquired in connection with acquisition:
Cash and cash equivalents $ -- $ 49,303,415 $ --
Loans receivable -- 8,564 --
Premises and equipment -- 1,500,000 --
------------ ------------ ------------
-- 50,811,979 --
------------ ------------ ------------
Liabilities assumed in connection with acquisition:
Deposits -- 54,414,848 --
Other -- 5,000 --
------------ ------------ ------------
-- 54,419,848 --
------------ ------------ ------------
Excess of cost over assets acquired $ -- $ (3,607,869) $ --
============ ============ ============
Liabilities assigned in connection with sale of branch:
Deposits $ 9,221,324 $ -- $ --
============ ============ ============
Assets sold in connection with sale of branch:
Loans $ 18,619 $ -- $ --
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-23-
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------
Basis of financial statement presentation
-----------------------------------------
The consolidated financial statements, which have been prepared in
conformity with generally accepted accounting principles, include the
accounts of the Company and its wholly owned subsidiary, Little Falls
Bank (the "Bank"). All significant intercompany accounts and
transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amount of assets and
liabilities as of the date of the consolidated statement of financial
condition and revenues and expenses for the periods then ended. Actual
results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes in
the near term relate to the determination of the allowance for loan
losses, the valuation of foreclosed real estate, the assessment of
prepayment risks associated with mortgage-backed securities and the
determination of the amount of deferred tax assets that are more likely
than not to be realized. Management believes that the allowance for
loan losses is adequate, foreclosed real estate is appropriately
valued, prepayment risks associated with mortgage-backed securities are
properly recognized and all deferred tax assets are more likely than
not to be recognized. While management uses available information to
recognize losses on loans and foreclosed real estate, future additions
to allowance for loan losses or further writedowns of foreclosed real
estate may be necessary based on changes in economic conditions in the
market area. Additionally, assessments of prepayment risks related to
mortgage - backed securities are based upon current market conditions,
which are subject to frequent change. Finally, the assessment of the
amount of the amount of deferred tax assets more likely than not to be
realized is based on projected future taxable income, which is subject
to continual revisions for updated information.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses and foreclosed real estate. Such agencies may require the Bank
to recognize additions to the allowance or additional writedowns on
real estate based on their judgments about information available to
them at the time of their examination.
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash and amounts due from banks,
federal funds sold and interest-bearing deposits in other banks having
original maturities of three months or less. Generally, federal funds
sold are sold for one day periods.
-24-
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Investment and mortgage-backed securities
-----------------------------------------
Investments in debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Debt and equity securities that are bought
and held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized holding gains and losses included in earnings. Debt and equity
securities not classified as trading securities nor as held-to maturity
securities are classified as available for sale securities and reported at
fair value, with unrealized holding gains or losses, net of deferred income
taxes, reported in a separated component of retained earnings. The Bank has
both the intent and ability to hold all securities to maturity.
Premiums are amortized and discounts are accreted to interest income using
the interest method. Gains or losses on the sale of securities are based on
specifically identifiable cost and are accounted for on a trade date basis.
Loans receivable
----------------
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan origination fees and
discounts.
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost accreted or amortized as an adjustment of yield using the
interest method over the contractual lives of the related loans. Unearned
interest on consumer loans is recognized over the contractual lives of the
loans using a method which approximates the interest method.
Uncollectible interest on loans that are contractually past due is charged
off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is reestablished, in which case the loan is returned to
accrual status.
Allowance for loans losses
--------------------------
An allowance for loan losses is maintained at a level considered adequate
to absorb future loan losses. Management of the Bank, in determining the
allowance for loan losses, considers the risks inherent in its loan
portfolio and changes in the nature and volume of its loan activities,
along with the general economic and real estate market conditions.
-25-
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Allowance for loan losses (Cont'd)
-------------------------
The Bank utilizes a two tier approach: ( 1 ) identification of problem
loans and the establishment of specific loss allowances on such loans; and
( 2 ) establishment of general valuation allowances on the remainder of its
loan portfolio. The Bank maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of
potential problem loans. Such system takes into consideration, among other
things, delinquency status, size of loans, types of collateral and
financial condition of the borrowers. Specific loan loss allowances are
established for identified loans based on a review of such information
and/or appraisals of the underlying collateral. General loan loss
allowances are based upon a combination of factors including, but not
limited to, actual loan loss experience, composition of the loan portfolio,
current economic conditions and management's judgment. Although management
believes that adequate specific and general loan loss allowances are
established, actual losses are dependent upon future events and, as such,
further additions to the level of the loan loss allowance may be necessary.
Effective January 1, 1995, the Bank adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards (`Statement")
No. 114, "Accounting by Creditors for Impairment of a Loan" , and Statement
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". The provisions 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.
The Statements require 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. A loan evaluated for impairment 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 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 a 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. Payments received on impaired
loans are applied first to interest receivable and then to principal.
The adoption of Statements No. 114 and 118 did not have a material adverse
impact on consolidated financial condition or operations.
-26-
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Premises and equipment
----------------------
Land is carried at cost. Buildings and improvements, leasehold improvements
and furniture, fixtures and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed
on a straight-line basis over the lesser of the estimated useful lives of
the assets or, if applicable, the term of lease. Significant renovations
and additions are capitalized. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in operations for
the period. Maintenance and repairs are charged to expense as incurred.
Rental income is netted against occupancy expense.
Investment in real estate
-------------------------
Investment in real estate is carried at cost less accumulated depreciation.
Foreclosed real estate
----------------------
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at the lower of cost or fair value at the date of
foreclosure. Subsequent valuations are periodically performed and an
allowance for losses established by a charge to operations if the carrying
value of a property exceeds its fair value less estimated selling costs.
Costs relating to development and improvement of property are capitalized,
whereas income and expenses relating to the operating and holding of
properties are recorded in operations as earned or incurred. Gains and
losses from sales of these properties are recognized as they occur.
Excess of cost over assets acquired
-----------------------------------
The cost in excess of the fair value of net assets acquired through the
acquisition of certain assets and assumption of certain liabilities of
branch offices is being amortized to expense over a ten year period by use
of the straight-line method.
Income taxes
------------
The Company and its subsidiary file a consolidated federal income tax
return and separate state income tax returns. Income taxes are allocated to
the Company and its subsidiary based upon the contribution of their
respective income or loss to the consolidated return. Federal and State
income taxes have been provided on the basis of reported income. The
amounts reflected on the tax returns differ from these provisions due
principally to temporary differences in the reporting of certain items for
financial reporting and tax reporting purposes. In accordance with FASB
Statement No. 109, "Accounting for Income Taxes", deferred income tax
expense or benefit is determined by recognizing deferred tax assets and
liabilities for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
- 27 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Income taxes (Cont'd)
------------
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The realization of
deferred tax assets is assessed and a valuation allowance provided, when
necessary, for that portion of the asset which more likely than not will
not be realized. Management believes, based upon current facts, that it is
more likely than not that there will be sufficient taxable income in future
years to realize the deferred tax assets. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
Accounting for stock based compensation
---------------------------------------
In October 1995, the FASB issued Statement No. 123 " Accounting for
Stock-Based Compensation." Statement No. 123 establishes financial
accounting and reporting standards for stock-based employees compensation
plans. Statement No. 123 encourages all entities to adopt the "fair value
based method" of accounting for employee stock compensation plans. However,
Statement No. 123 also allows an entity to continue to measure compensation
cost under such plans using the "intrinsic value based method." Underthe
fair value based method, compensation cost is measured at the grant date
based on the value of the award and is recognized over the service period,
usually the vesting period. Fair value is determined using an option
pricing model that takes into account the stock price at the grant date,
the exercise price, the expected life of the option, the volatility of the
underlying stock and the expected dividends on it, and the risk free
interest rate over the expected life of the option. Under the intrinsic
value based method, compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date or other measurement date over
the amount an employee must pay to acquire the stock.
The accounting requirements of Statement No. 123 are effective for
transactions entered into in fiscal years that begin after December 15,
1995. The Company has elected to account for compensation cost under the
intrinsic value based method. Included in note 12 to consolidated financial
statements are the pro forma disclosures required by Statement No. 123.
Net income per common share
---------------------------
Net income per common share is calculated by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding, adjusted for the unallocated portion of shares
held by the ESOP in accordance with the American Institute of Certified
Public Accountants' ("AICPA") Statement of Position ("SOP") 93-6. Stock
options granted are considered common stock equivalents and therefore
considered in net income per common share calculations, if dilutive, using
the treasury stock method.
Net income per common share for the year ended December 31, 1996 is
calculated based on the net income for the entire year. The calculation of
the weighted average number of common shares outstanding, adjusted for the
unallocated portion of shares held by the ESOP, from the date of conversion
to stock form (January 5, 1996) through December 31, 1996, assumes such
shares were outstanding for the entire year (as if the conversion had taken
place on January 1, 1996).
- 28 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------------------
Interest rate risk
------------------
The Bank is principally engaged in the business of attracting deposits from
the general public and using these deposits, along with borrowings and
other funds, to make loans secured by real estate and to purchase
mortgage-backed and investment securities. The potential for interest-rate
risk exists as a result of the generally shorter duration of the Bank's
interest-sensitive liabilities compared to the generally longer duration of
its interest-sensitive assets. In a rising interest rate environment,
liabilities will reprice faster than assets, thereby reducing the market
value of long-term assets and net interest income. For this reason,
management regularly monitors the maturity structure of the Bank's
interest-earning assets and interest-bearing liabilities in order to
measure its level of interest-rate risk and to plan for future volatility.
Concentration of risk
---------------------
The Bank's lending and real estate activity is concentrated in real estate
and loans secured by real estate located in the State of New Jersey. In
general, the Bank's loan portfolio performance is dependent upon local
economic conditions.
Reclassification
----------------
Certain amounts for the years ended December 31, 1995 and 1994 have been
reclassified to conform to the current year's presentation.
2. REORGANIZATION AND STOCKHOLDERS' EQUITY
- -------------------------------------------
On July 13, 1995, the Board of Directors of the Bank adopted a Plan of
Conversion, which was subsequently amended, pursuant to which the Bank
would convert from a federally chartered mutual savings bank to a federally
chartered stock savings bank, with the concurrent formation of a holding
company. The holding company, Little Falls Bancorp, Inc., ( the "company")
is a New Jersey corporation organized in August 1995 to acquire all of the
capital stock of the Bank upon the completion of the conversion. In October
1995, the Bank converted from a New Jersey chartered mutual savings bank to
a federally chartered mutual savings bank. Concurrently, the Bank changed
its name from "Little Falls Savings Bank" to " Little Falls Bank". On
January 5, 1996, the conversion and initial public stock offering were
completed with the issuance of 3,041,750 shares of Company's common stock,
par value $0.10 per share, for net proceeds, after conversion costs and the
effect of the shares acquired by the ESOP, of $26,830,022. Concurrently
with the issuance of the Company's common stock, the Company utilized
$14,671,962 of the net proceeds to purchase all of the outstanding capital
stock of the Bank.
At the time of the conversion, the Bank, in order to grant priority to
eligible depositors in the event of future liquidation, established a
liquidation account of $15,488,000, an amount equal to its total net worth
as of September 30, 1995, the date of the latest statement of financial
condition appearing in the final prospectus. The liquidation account will
be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases in the
deposit account will not restore an eligible account holder's interest in
the liquidation account. In the unlikely event of a complete liquidation,
each eligible account holder will be entitled to receive a distribution
from the liquidation account in an amount proportionate to their current
adjusted qualifying balances. The balance of the liquidation account on
December 31, 1996 has not been determined.
- 29 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. REORGANIZATION AND STOCKHOLDERS' EQUITY (Cont'd)
- ------------------------------------------
The ability of the Company to pay dividends to stockholders is dependant
upon the receipt of income from the subsidiary Bank. The Bank may not
declare or pay any dividend on or repurchase any of its capital stock if
the effect thereof would cause its net worth to be reduced below: 1) the
amount required for the liquidation account, or 2) the net worth
requirements contained in section 563.13 ( b ) of the rules and regulation
of the Office of Thrift Supervision ("the OTS").
During the year ended December 31, 1996, the Company approved plans to
repurchase 296,570 shares of its common stock outstanding, up to five
percent (5%) of the shares outstanding at any single instance. In
accordance therewith, 296,570 shares, at an aggregate cost of $3,277,004,
were purchased in the open market.
3. INVESTMENT SECURITIES HELD TO MATURITY
- -------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
Amortized Gross Unrealized Estimated
------------------
Cost Gains Losses Fair Value
---------- ----- ------ -----------
U.S. Government
(including agencies):
<S> <C> <C> <C> <C>
Due in one year or less $ 9,008,182 $ -- $ 23,182 $ 8,985,000
Due after one year through five years 15,014,352 -- 147,477 14,866,875
Due after five years 27,005,763 4,237 -- 27,010,000
Municipal bonds
Due within one year 342,000 -- -- 342,000
----------- ----------- ----------- -----------
$51,370,297 $ 4,237 $ 170,659 $51,203,875
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------
Amortized Gross Unrealized Estimated
---------------------
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
U.S. Government
(including agencies):
<S> <C> <C> <C> <C>
Due in one year or less $ 8,000,083 $ - $ 58,833 $ 7,941,250
Due after one year through five years 21,999,387 73,792 158,179 21,915,000
----------- ----------- ----------- -----------
$29,999,470 $ 73,792 $ 217,012 $29,856,250
=========== =========== =========== ===========
</TABLE>
There were no sales of investment securities held to maturity during the years
ended December 31, 1996, 1995 and 1994.
Investment securities held to maturity with a carrying value of approximately
$2,000,000 at December 31 1996, were pledged to secure public funds. See note 10
for securities pledged as collateral for repurchase agreements.
- 30 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
- -------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------
Carrying Gross Unrealized Estimated
------------------------------
Value Gains Losses Fair Value
------------- -------- --------- -------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 34,166,041 $211,082 $ 8,570 $ 34,368,553
Federal Home Loan Mortgage Corporation 28,391,893 223,170 260,908 28,354,155
Federal National Mortgage Association 49,915,210 148,410 360,828 49,702,792
------------ -------- --------- ------------
$112,473,144 $582,662 $ 630,306 $112,425,500
============ ======== ========= ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------------------
Carrying Gross Unrealized Estimated
---------------------
Value Gains Losses Fair Value
-------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 39,246,722 $386,465 $ 7,365 $ 39,625,822
Federal Home Loan Mortgage Corporation 32,652,388 368,631 116,363 32,904,656
Federal National Mortgage Association 46,121,190 203,454 12,777 46,311,867
------------ -------- ---------- ------------
$118,020,300 $958,550 $ 136,505 $118,842,345
============ ======== ========== ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------ ------------------
Principal Unamortized Unearned Carrying
Balance Premium Discounts Value
---------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 33,675,013 $ 510,696 $ 19,668 $ 34,166,041
Federal Home Loan Mortgage Corporation 28,296,802 219,734 124,643 28,391,893
Federal National Mortgage Association 49,434,097 517,150 36,037 49,915,210
------------ ----------- -------- ------------
$111,405,912 $ 1,247,580 $180,348 $112,473,144
============ =========== ======== ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premium Discounts Value
----------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $ 38,714,537 $ 562,120 $ 29,935 $ 39,246,722
Federal Home Loan Mortgage Corporation 32,589,950 264,915 202,477 32,652,388
Federal National Mortgage Association 45,612,561 508,629 - 6,121,190
------------ ------------ ---------- ------------
$116,917,048 $ 1,335,664 $ 232,412 $118,020,300
============ ============ ========== ============
</TABLE>
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 1996, 1995 and 1994.
- 31 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. LOANS RECEIVABLE
- ---------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1996 1995
----------------- --------------
Real estate mortgage:
<S> <C> <C>
One-to-four family $ 108,367,393 $ 88,828,104
Commercial and multi-family 3,658,543 4,638,556
112,025,936 93,466,660
-------------- --------------
Construction 525,000 1,098,087
-------------- --------------
Consumer:
Second mortgage 5,028,193 2,539,240
Passbook or certificate 888,885 824,151
Student education guaranteed
by the State of New Jersey 25,368 42,418
-------------- --------------
5,942,446 3,405,809
-------------- --------------
Total loans 118,493,382 97,970,556
-------------- --------------
Less: Loans in process 150,000 450,000
Allowance for loan losses 1,089,828 958,149
Deferred loan fees and discounts 137,770 332,729
-------------- --------------
1,377,598 1,740,878
-------------- --------------
$ 117,115,784 $ 96,229,678
============== ==============
</TABLE>
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Balance - beginning $ 958,149 $ 1,169,058 $ 817,636
Provisions charged to operations 182,900 131,359 356,083
Loans charged off, net of recoveries (51,221) (342,268)
---------- ------------ -----------
Balance - ending $1,089,828 $ 958,149 $ 1,169,058
========== ============ ===========
</TABLE>
- 32 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. LOANS RECEIVABLE (Cont'd.)
- ---------------------
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows ( in thousands):
<TABLE>
<CAPTION>
December, 31
-----------------------
1996 1995
---------- -----------
Recorded investment in impaired loans:
<S> <C> <C>
With recorded allowances $ 1,777 $ 1,743
Without recorded allowances - 267
--------- ---------
Total impaired loans 1,777 2,010
Related allowance for loan losses 404 30
--------- ---------
Net impaired loans $ 1,373 $ 1,980
========= =========
Average recorded investment in impaired loans $ 1,717 $ 1,783
========= =========
Interest income recognized on impaired loans during
the period each loan was impaired:
Total $ 57 $ 42
========= =========
Cash basis $ 57 $ 33
========= =========
</TABLE>
At December 31, 1996, 1995 and 1994, nonaccrual loans for which the accrual of
interest had been discontinued totalled approximately $1,901,000, $1,942,000 and
$4,202,000, respectively. Interest income that would have been recorded under
the original terms of such loans and the interest income actually recognized is
summarized as follows (in thousands):
Year Ended December 31,
----------------------------
1996 1995 1994
-------- ----------- -------
Interest income
that would have been recorded $ 198 $ 189 $ 419
Interest income recognized $ 84 $ 39 $ 33
The activity with respect to loans to directors, officers and associates of such
persons is as follows:
Year ended December 31,
-------------------------------
1996 1995
---------------- --------------
Balance - beginning $ 855,760 $ 882,640
Loans originated 569,187 40,439
Collection of principal (256,670) (67,319)
---------- -----------
Balance - ending $1,168,277 $ 855,760
========== ===========
- 33 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. PREMISES AND EQUIPMENT
- ---------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------- ------------
<S> <C> <C>
Land $ 614,714 $ 662,324
Buildings and improvements 2,296,452 2,549,603
Furniture, fixtures and equipment 1,038,673 886,222
Leasehold improvements 54,122 54,122
---------- ------------
4,003,961 4,152,271
Less accumulated depreciation and amortization 1,344,722 1,362,803
---------- ------------
$2,659,239 $ 2,789,468
========== ============
</TABLE>
Depreciation and amortization expense totalled $143,997, $92,735 and $83,704 for
the years ended December 31, 1996,1995 and 1994, respectively.
7. INVESTMENT IN REAL ESTATE
- ------------------------------
The Bank owns real estate adjoining its main office and other land originally
acquired for a future office site no longer to be used for that purpose. The
real estate adjoining the main office is comprised of various rental units both
residential and commercial. During the year ended December 31, 1996, as a result
of the relocation of a branch office and the sale of deposits in another branch
office, properties with a carrying value of $145,478 were transferred from
premises and equipment to investment in real estate. The Bank does not have
immediate plans to utilize these facilities . The income received from the
properties, net of expenses, is included in other income. The properties are
summarized as follows:
December 31,
------------------------
1996 1995
----------- ----------
Land $ 291,277 $ 243,667
Buildings and improvements 622,480 362,534
---------- ----------
913,757 606,201
Less accumulated depreciation and amortization 230,703 59,415
---------- ----------
$ 683,054 $ 546,786
========== ==========
- 34 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
8. DEPOSITS
- -------------
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------
Weighted
Average
Rate Amount Percent
--------- --------------- --------
<S> <C> <C> <C>
Now accounts and non-interest-bearing deposits 1.46% $ 20,871,936 9.14
Money market accounts 3.33 14,822,840 6.49
Passbook and club accounts 3.26 49,700,347 21.77
Certificates of deposit 5.48 142,916,420 62.60
------------- ------
4.48 $ 228,311,543 100.00
============= ======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------
Weighted
Average
Rate Amount Percent
---------- ---------------- --------
<S> <C> <C> <C>
Now accounts and non-interest-bearing deposits 1.94% $ 23,113,126 9.32
Money market accounts 5.15 19,575,052 7.90
Passbook and club accounts 3.21 51,850,350 20.92
Certificates of deposit 5.44 153,312,845 61.86
-------------- ------
4.26 $ 247,851,373 100.00
============== ======
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of greater than $100,000 was approximately $18,177,000 and
$13,221,000 at December 31, 1996 and 1995, respectively. These certificates of
deposit do not receive a preferential interest rate. Deposits in excess of
$100,000 are not federally insured.
The scheduled maturities of certificates of deposit are as follows:
December 31,
---------------------
1996 1995
----------- --------
(In thousands)
Three months or less $ 27,834 $ 38,811
Over three months to one year 75,561 67,233
Over one year to three years 37,488 43,292
Over three years 2,033 3,977
---------- ---------
$ 142,916 $ 153,313
========== =========
- 35 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. DEPOSITS (Cont'd)
- -------------
A summary of interest on deposits follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1995 1994
---------------- --------------- ---------------
<S> <C> <C> <C>
Now accounts $ 366,984 $ 195,025 $ 228,544
Money market 788,001 890,973 716,033
Passbook and club 1,859,939 970,934 860,198
Certificates of deposit 8,068,002 7,256,798 5,365,416
------------ ----------- -----------
$ 11,082,926 $ 9,313,730 $ 7,170,191
============ =========== ===========
</TABLE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
- -----------------------------------------------------
The Bank has an available line of credit with the Federal Home Loan Bank of New
York, subject to the terms and conditions of the lenders' overnight advances
program, in the amount of $28,068,200 at December 31, 1996. Advances under this
line of credit, which expires on November 21, 1997, are made for one day
periods. During the year ended December 31, 1996, the bank did not borrow funds
under this program.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPUCHASE
- ---------------------------------------------------
December 31, 1996
-----------------------------------------
Interest
Lender Maturity Rate Amount
------------- ----------- ---------------
Security broker dealer 5-19-97 7.20% $ 8,175,000
Security broker dealer 11-20-97 5.68 8,148,000
Security broker dealer overnight 7.10 8,300,000
Federal Home Loan Bank 12-20-99 5.82 9,000,000
-------------
6.44 $ 33,623,500
=============
- 36 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. SECURITIES SOLD UNDER AGREEMENTS TO REPUCHASE (Cont'd.)
- ---------------------------------------------------
Certain information concerning securities sold under agreements to repurchase is
summarized as follows:
Year Ended
December 31, 1996
--------------------------
Average balance during the year $ 3,173,000
Average interest rate during the year 5.53%
Maximum month-end balance during the year $ 33,624,000
Investment securities held to maturity
underlying the agreement at year end:
Carrying value $ 35,331,000
Estimated fair value $ 35,168,000
There were no similar borrowings during the year ended December 31, 1995.
11. REGULATORY CAPITAL
- ------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material adverse effect on
the Bank. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The OTS has prescribed capital requirements which include three separate
measurements of capital adequacy: a leverage-ratio capital standard ("Core"), a
tangible capital standard and a risk based capital standard (collectively known
as the "Capital Rule"). The Capital Rule requires each savings institution to
maintain tangible capital equal to at least 1.5% of its tangible assets and core
capital equal to at least 3.0% of its adjusted total assets. The Capital Rule
further requires each savings institution to maintain total capital equal to at
least 8.0% of its risk-weighted assets.
The following table sets forth the capital position of the Bank as calculated as
of December 31, 1996:
<TABLE>
<CAPTION>
Tangible Core Risk-Based
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
Capital as calculated under GAAP $ 28,874 9.61 $ 28,874 9.61 $ 28,874 30.50
Deduct goodwill ( 3,217) (1.07) (3,217) 1.07 (3,217) (3.40)
Deduct investment in real estate - - - - (683) (0.72)
Add qualifying
general loan loss allowance - - - - 936 0.99
-------- ----- -------- ----- --------- -----
Capital, as calculated 25,657 8.54 25,657 8.54 25,910 27.37
Capital, as required 4,506 1.50 9,013 3.00 7,573 8.00
-------- ----- -------- ----- --------- -----
Excess $ 21,151 7.04 $ 16,644 5.54 $ 18,337 19.37
======== ==== ======== ==== ========= =====
</TABLE>
- 37 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. REGULATORY CAPITAL (Cont'd)
- ----------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
imposes increased requirements on the operations of financial institutions and
mandated the development of regulations designed to empower regulators to take
prompt corrective action with respect to institutions that fall below certain
capital standards. FDICIA stipulates that an institution with less than 4% core
capital is deemed to be undercapitalized. Quantitative measures established by
FDICIA to ensure capital adequacy require the Bank to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
As of March 31, 1996, the most recent notification from the OTS, the Bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total, risk-based, and Tier I leverage ratios of 10%, 6%, and 5%,
respectively. There are no conditions existing or events which have occurred
since notification that management believes have changed the institution's
category.
12. BENEFIT PLANS
- -------------------
Employee Pension Plan
- ---------------------
The Bank has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and employees'
compensation. The Bank's funding policy is to contribute the maximum amount
deductible for federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future.
Plan assets are composed primarily of certificates of deposit, savings accounts
and insurance contracts. The following tables present the plan's funded status
and the components of net periodic pension cost:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1995
---------------- ----------------
Actuarial present value of benefit obligations:
<S> <C> <C>
Vested $ 1,493,630 $ 1,327,888
Non-vested
4,382 7,116
------------ ------------
Total benefit obligation $ 1,498,012 $ 1,335,004
============ ============
</TABLE>
- 38 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- ----------------
Employee Pension Plan (Cont'd)
- ---------------------
<TABLE>
<CAPTION>
December 31,
------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Projected benefit obligation $ 1,919,617 $ 1,743,089
Plan assets at fair value 1,222,245 1,010,000
Projected benefit
obligation in excess of plan assets 697,372 733,089
Unrecognized net transition
obligation being amortized over fifteen years (96,350) (110,115)
Unrecognized net loss (553,681) (570,632)
Additional minimum liability 228,426 272,663
------------ -------------
Accrued pension cost including in accounts payable and
other liabilities $ 275,767 $ 325,005
============ =============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
------------ -------------- -------------
Net periodic pension cost included the following
components:
<S> <C> <C> <C>
Service cost $ 87,161 $ 113,020 $ 93,368
Interest cost 127,080 122,026 91,045
Actual return on plan assets (74,297) (89,941) (52,500)
Net amortization and deferral 60,784 63,398 55,064
---------- ------------ -----------
Net periodic pension cost included in
compensation and employee benefits $ 200,728 $ 208,493 $ 186,977
========== ============ ===========
</TABLE>
Significant actuarial assumptions used in determining plan benefits are:
Year Ended December 31,
----------------------------------
1996 1995 1994
Annual salary increase 5.00% 6.00% 5.00%
Long-term return on assets 8.00% 8.00% 7.00%
Discount rate 7.00% 8.25% 7.00%
- 39 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- -------------------
Directors retirement plan
- -------------------------
The board of Directors adopted a plan, effective January 1, 1995, which provides
that any director with twenty or more years of service may retire and continue
to be paid at the rate of 50% of regular directors fees. These payments will
continue for the directors' lifetime. This plan is unfunded. The following
tables present the status of the plan and the components of net periodic plan
cost:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
-------------- ----------------
Actuarial present value of benefit obligation:
<S> <C> <C>
Vested $ 189,536 $ 98,892
Non-vested 143,912 162,232
----------- -------------
$ 333,448 $ 261,124
=========== =============
Projected benefit obligation $ 357,661 $ 279,624
Unrecognized past service cost (235,914) (253,231)
Unrecognized net (loss) gain (46,819) 3,866
----------- -------------
Accrued plan cost included in accounts payable and other
liabilities $ 74,928 $ 30,259
=========== =============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995
-------------- ----------------
Net periodic plan cost included the following components:
<S> <C> <C>
Service cost $ 6,380 $ 4,151
Interest cost 20,972 14,563
amortization of past service cost 17,317 11,545
------------ ----------
Net periodic plan cost included in other expense $ 44,669 $ 30,259
============ ==========
</TABLE>
A discount rate of 7.50% and 8.25% and a rate of increase in future compensation
levels of 7% and 8% were assumed in the plan valuation for the years ended
December 31, 1996 and 1995, respectively.
- 40 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- -------------------
Directors health benefits plan
- ------------------------------
The Board of Directors also adopted a plan, effective January 1, 1995, providing
for the continuation of the directors' medical insurance coverage for their
lifetime after retirement. Benefits under this plan are available to directors
retiring after December 31, 2000 upon their attainment of the later of age 75 or
twenty years of service. This plan is unfunded. The following tables present the
status of the plan and the net components of periodic plan cost:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
------------- ---------------
<S> <C> <C>
Accumulated postretirement benefit obligation $ 160,094 $ 198,828
Unrecognized net gain (loss) 44,907 (3,646)
---------- -----------
Accrued plan cost included in accounts payable
and other liabilities $ 205,001 $ 195,182
========== ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995
-------------- ----------------
Net periodic plan cost included the following components:
<S> <C> <C>
Service cost $ 2,866 $ 4,082
Interest cost 10,969 13,270
Immediate recognition of prior service cost - 177,830
Net amortization (4,016) -
------------ -----------
Net periodic plan cost included in other expense $ 9,819 $ 195,182
============ ===========
</TABLE>
A discount rate of 7.50% and 8.25% was assumed for the years ended December 31,
1996 and 1995, respectively. For both the year ended December 31, 1996 and 1995,
a medical cost trend rate of 10.5%, decreasing 0.5% per year thereafter until an
ultimate rate of 5.5% is reached, was used in the plan's valuation. Increasing
the assumed medical cost trend by one percent in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1996, by
$20,000 and the aggregate of the service and interest components of net periodic
postretirement benefit cost for the year ended December 31, 1996, by $2,000.
- 41 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- -------------------
Employee Stock Ownership Plan (ESOP)
- -----------------------------
Effective upon conversion, an ESOP was established for all eligible employees.
The ESOP used $2,433,400 of proceeds from a term loan from the Company to
purchase 243,340 shares of Company common stock in the initial offering. The
term loan from the Company to the ESOP, including interest, is payable over one
hundred and eighty (180) equal monthly installments. The initial interest rate
is 8.25% and is subject to semi-annual adjustment based on the prime rate. The
Bank intends to make contributions to the ESOP which will be equal to the
principal and interest payment required from the ESOP on the term loan. Shares
purchased with the loan proceeds are pledged as collateral for the term loan and
are held in a suspense account for future allocation among participants.
Contributions to the ESOP and shares released from the suspense account will be
allocated among the participants on the basis of compensation, as described by
the plan in the year of allocation. During the year ended December 31, 1996, the
Bank made a $286,659 cash contribution to the ESOP of which $196,181 and $90,478
were applied to interest and principal, respectively. At December 31, 1996, the
loan had an outstanding balance of $ 2,342,922. The ESOP is accounted for in
accordance with SOP 93-6, which was issued by the AICPA in November 1993.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP
shares in the consolidated statements of financial condition. As shares are
committed to be released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares become
outstanding for net income per common share computations. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings. Contributions
equivalent to dividends on unallocated ESOP shares are recorded as a reduction
of debt. ESOP compensation expenses were $177,679 for the year ended December
31, 1996.
The ESOP shares at December 31, 1996 were as follows:
Allocated shares 9,048
Shares committed to be released 7,175
Unreleased Shares 227,117
-------------
Total ESOP Shares 243,340
=============
Fair value of unreleased shares $ 2,895,742
=============
Management Stock Bonus Plan (the "MSBP")
- -----------------------------------------
On July 3, 1996, the Bank established a MSBP to provide both key employees and
outside directors with a proprietary interest in the company in a manner
designed to encourage such persons to remain with the Bank. The Bank will
contribute sufficient funds to the MSBP to purchase 121,670 shares of common
stock of the Company in the open market.
Underthe MSBP, awards are granted in the form of common stock held by the MSBP
Trust. The awards vest over a period of time not more than five years,
commencing one year from the date of award. The awards become fully vested upon
termination of employment due to death, disability or change in control of the
Bank or Company. At December 31, 1996, 54,748 shares were granted to directors
and 27,986 shares were granted to officers and employees. None of the granted
shares were vested at December 31, 1996. $87,903 of expense related to the MSBP
shares was recorded during the year ended December 31, 1996.
- 42 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- -------------------
Management Stock Bonus Plan (the "MSRP") (Cont'd)
- ----------------------------------------
During the year ended December 31, 1996, the Bank did not contribute funds to
the MSBP trust to enable the trust to purchase the 121,670 shares of Company
common stock. Based on the market price on December 31, 1996, had the Bank
contributed sufficient funds to purchase the shares in the open market,
stockholders' equity would have been decreased by $1,463,390.
Stock Option Plan
- -----------------
The company has adopted the 1996 Stock Option Plan (the "Plan") authorizing the
grant of stock options equal to 304,175 shares of common stock to officers,
directors and key employees of the Bank or the Company. Options granted under
the Plan may be either options that qualify as incentive stock options as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
non-statutory options. Options granted will vest and will be exercisable on a
cumulative basis in equal installments at the rate of 20% per year commencing
one year from the date of grant. All options granted will be exercisable in the
event the optionee terminates his employment due to death, disability or normal
retirement or in the event of a change in control of the Bank or the Company.
The options expire ten years from the date of grant.
In the event of change in control of the Bank or Company the optionee will be
given (1) substitute options by the acquiring or succeeding corporation, (2)
shares of stock issueable upon the exercise of such substitute options or (3)
cash for each option granted, equal to the difference between the exercise price
of the option and the fair market value or merger price equivalent to cash
payment for each share of common stock exchanged in the change of control
transaction.
During the year ended December 31, 1996, 121,655 and 109,496 shares of common
stock were granted under the plan at an option price of $10.625 (the market
price on the date of stockholders approval ) as non-incentive stock options to
directors and incentive stock options to officers and employees, respectively.
The weighted average excercise price of the options granted in 1996 and
outstanding at December 31, 1996 is $10.625. No options were exercised or
exerciseable as of December 31, 1996.
The Company, as permitted by Statement No. 123, recognizes compensation cost for
stock options granted based on the intrinsic value method instead of the fair
value based method. The weighted-average grant-date fair value of options
granted during 1996, all of which have excercise prices equal to the market
price of the Company's common stock as the grant date, is estimated at $2.81 per
share using the Black-Scholes option-pricing model. The assumptions used for
estimating fair value are expected common stock divided yield of 0.94%, expected
volatility of 13.9%, expected option life of 5 years and a risk free
interest-rate of 6.875%. Had the Company used the fair value based method, net
income would be decreased to $571,000 and net income per common share and common
stock equivalents would be $0.21.
13. INCOME TAXES
- -------------------
The Bank qualifies as a Saving and Loan Association under the provisions of the
Internal Revenue Code and was therefore, prior to January 1, 1996, permitted to
deduct from taxable income an allowance for bad debts based on the greater of:
(1) actual loan losses (the "experience method"); or (2) eight (8) percent of
taxable income before such bad debt deduction less certain adjustments (the
"percentage of taxable income method"). For the tax years 1995 and 1994, the
Bank used the percentage of taxable income method.
- 43 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. INCOME TAXES (Cont'd)
- -------------------
On August 21, 1996, legislation was signed into law which repealed the
percentage of taxable income method for tax bad debt deductions. The repeal is
effective for the Bank's taxable year beginning January 1, 1996. In addition,
the legislation requires the Bank to include in taxable income its bad debt
reserves in excess of its base year reserves over a six, seven, or eight year
period depending upon the attainment of certain loan origination levels. Since
the percentage of taxable income method for Federal tax bad debt deductions and
the corresponding increase in the Federal tax bad debt reserve in excess of the
base year have been reflected as temporary differences pursuant to FASB
Statement No. 109, with deferred income taxes recorded thereon, this change in
the tax law is not expected to have a material adverse effect on the Company's
consolidated financial position or operations.
Retained earnings at December 31, 1996 includes approximately $2.4 million of
tax bad debt deductions which, in accordance with FASB Statement No. 109, are
considered a permanent difference between the book and income tax basis of loans
receivable, and for which income taxes have not been provided. If such amount is
used for purposes other than bad debt losses, including distributions in
liquidation, it will be subject to income tax at the then current rate.
The provision for income taxes is summarized as follows:
Year Ended December 31,
----------------------------------------------
1996 1995 1994
----------- ------------ -------------
Current:
Federal $ 540,688 $ 222,142 $ 913,197
State 87,761 17,540 81,238
---------- ---------- ------------
628,449 239,682 994,435
---------- ---------- ------------
Deferred:
Federal (222,744) 1,658 65,953
State (20,261) 150 5,819
---------- ---------- ------------
(243,005) 1,808 71,772
---------- ---------- ------------
$ 385,444 $ 241,490 $ 1,066,207
========== ========== ============
The provision for income taxes differs from that computed at the federal
statutory rate of 34% as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
------------------ ------------------ -------------------
<S> <C> <C> <C>
Tax at the statutory rate $ 338,753 $ 239,777 $ 945,472
New Jersey Savings Institution Tax 44,550 11,675 53,616
Other 2,141 (9,962) 67,119
---------- ------------- -----------
$ 385,444 $ 241,490 $ 1,066,207
========== ============= ===========
</TABLE>
- 44 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. INCOME TAXES (Cont'd)
- -------------------
The tax effects of existing temporary differences which give rise to significant
portions of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
-------------- --------------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 346,353 $ 148,769
Deferred loan origination fees, net 46,702 104,609
Deferred compensation 97,185 75,670
Minimum pension liability 47,521 58,485
Goodwill 46,829 -
MSBP 31,627 -
Other 1,920 -
------------ -----------
Total deferred tax assets 618,137 387,533
------------ -----------
Deferred tax liabilities:
Depreciation of premises and equipment 64,196 63,450
Other 11,852 14,035
------------ -----------
Total deferred tax liabilities 76,048 77,485
------------ -----------
Net deferred tax asset included in other assets $ 542,089 $ 310,048
============ ===========
</TABLE>
At December 31, 1996 and 1995, current income taxes receivable of $55,769 and
$273,517, respectively, are included in other assets.
14. LEGISLATIVE MATTERS
- -------------------------
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Savings Association Insurance Fund
("SAIF") member institutions, including the Bank, to recapitalize the SAIF and
spread the obligation for payment of Financial Corporation ("FICO") bonds across
all SAIF and Bank Insurance Fund ("BIF") members. The special assessment levied
amounted to 65.7 basis points on SAIF assessable deposits held as of March 31,
1995. The special assessment was recognized in the third quarter of 1996 and is
tax deductible. The Bank took a charge of $1,167,427 as result of the special
assessment. This legislation eliminated the substantial disparity between the
amount that BIF and SAIF members had been paying for deposit insurance premiums.
Beginning on January 1, 1997, the FDIC has estimated that, in addition to normal
deposit insurance premiums, BIF members will pay a portion of the FICO payment
equal to 1.3 basis points on BIF-insured deposits compared to 6.4 basis points
by SAIF members on SAIF-insured deposits. All institutions will pay a pro-rate
share of the FICO payment on the earlier of January 1, 2000 or the date upon
which the last savings association ceases to exist. The legislation also
requires BIF and SAIF to be merged by January 1, 1999 provided that legislation
is adopted to eliminate the saving association charter and no savings
associations remain as of the time.
The FDIC has recently lowered SAIF assessments to a range comparable to that of
BIF members, although SAIF members must also make the FICO payments described
above. Management cannot predict the precise level of FDIC insurance assessments
on an ongoing basis or whether the BIF and SAIF will eventually be merged.
- 45 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. COMMITMENTS
- ------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing need of its customers. These
financial instruments include commitments to extend credit. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the loan agreement. These commitments
are comprised of the undisbursed portion of construction loans, unused amounts
of lines of credit and residential loan originations. The Bank's exposure to
credit loss from nonperformance by the other party to the financial instruments
for commitments to extend credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Collateral, usually in the form of residential real estate, is generally
required to support financial instruments with credit risk.
At December 31, 1996, the Bank had commitments outstanding to originate mortgage
loans of $ 3,313,000, of which $2,898,000, were for adjustable rate loans with
initial rates ranging from 6.50% to 8.25%, $265,000 were for fixed rate loans
with rates ranging from 7.25% to 8.25% and $150,000 was for a commercial loan
with a fixed rate of 10.25%. The commitments are due to expire within sixty
days. The rates at which the Bank has committed to fund these loans are set
based on the rate in effect when the borrower accepts the commitment in writing.
At December 31, 1996, outstanding commitments related to unused home equity
lines of credit totalled $2,974,000. These amounts, when used, will carry
interest rates that will float at the prime rate plus 13/4%.
Rental expenses related to the occupancy of premises totalled approximately
$38,000 for each of the years ended December 31, 1996, 1995 and 1994. Minimum
non-cancelable obligations under lease agreements with original terms of more
than one year are as follows:
December 31, Amount
------------ -------------
1997 $ 22,800
1998 22,800
1999 22,800
2000 22,800
2001 22,800
Thereafter 22,800
------------
$ 136,800
============
16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------------------------------
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. Singnificant estimations were used for
the purposes of this disclosure. The following methods and assumptions were used
to estimate the fair value of each class of financial instruments for which it
is practicable to estimate such value:
Cash and cash equivalents and interest receivable
-------------------------------------------------
For cash and cash equivalents and interest receivable, the carrying amounts
approximate fair value.
Investment and mortgage-backed securities
-----------------------------------------
For investment and mortgage-backed securities, fair value is estimated
using quoted market prices.
- 46 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd)
- ---------------------------------------------------------------
Loans receivable
----------------
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Deposits
--------
The fair value of demand, savings and money market deposits is the
amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated by discounting the future cash
flows using the rates currently offered for deposits of similar
remaining maturities.
Securities sold under agreements to repurchase
----------------------------------------------
The fair value of securities sold under agreements to repurchase is
estimated by discounting cash flows using rates currently available for
borrowings of similar remaining securities.
Commitments to extend credit
----------------------------
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
credit-worthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1996 1995
------------------------------ ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
Financial assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 10,374 $ 10,374 $ 53,419 $ 53,419
Investment
securities held to maturity 51,370 51,204 29,999 29,855
Mortgage-backed
securities held to maturity 112,473 112,426 118,020 118,842
Loans receivable 117,116 114,850 96,230 98,506
Interest receivable 1,735 1,735 1,717 1,717
Financial liabilities:
Deposits 228,312 227,954 247,851 248,661
Securities sold under agreements to
repurchase 33,624 33,475 - -
Commitments:
To fund loans 6,287 6,287 6,835 6,835
</TABLE>
- 47 -
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd)
- ---------------------------------------------------------------
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings of a particular financial instrument.
Because no market value exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature, involve uncertainties and matters of judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. In addition, fair value estimates are based on existing
on-and-off balance sheet financial instruments without attempting to estimate
the value of anticipated future business, and exclude the value of assets and
liabilities that are not considered financial instruments. Other significant
assets that are not considered financial assets include premises and equipment.
In addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates. Finally, reasonable comparability
between financial institutions may not be likely due to the wide range of
permitted valuation techniques and numerous estimates which must be made given
the absence of active secondary markets for many of the financial instruments.
The lack of uniform valuation methodologies introduces a greater degree of
subjectivity to those estimated fair values.
17. PARENT ONLY FINANCIAL INFORMATION
- --------------------------------------
Little Falls Bancorp, Inc. operates one wholly owned subsidiary, Little Falls
Bank. The earnings of the subsidiary are recognized by the holding Company using
the equity method of accounting. Accordingly, the earnings of the subsidiary are
recorded as increases in the Company's investment in the subsidiary. The
following are the condensed financial statements for Little Falls Bancorp, Inc.
(parent company only) as of December 31, 1996 and for the period then ended. The
Company had no operations prior to the Bank's conversion to stock form on
January 5, 1996.
December 31,
Statement of Financial Condition 1996
- -------------------------------- -----
Assets
- ------
Cash and due from banks $ 555,582
Loan receivable from Little Falls Bank 8,854,264
ESOP loan receivable 2,342,922
Investment in subsidiary 28,874,037
Other assets 12,167
------------
Total assets $ 40,638,972
============
Liabilities and stockholders' equity
- ------------------------------------
Liabilities
- -----------
Other liabilities $ 190,674
Stockholders' equity
- --------------------
Common stock 304,175
Additional paid in capital 28,974,799
Retained earnings 16,802,056
Common Stock acquired by ESOP (2,271,173)
Treasury stock (3,277,004)
Minimum pension liability, net (84,555)
------------
Total stockholders' equity 40,448,298
------------
Total liabilities and stockholders' equity $ 40,638,972
============
- 48 -
<PAGE>
LITTLE FALLS BANCORP, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
17. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
- -------------------------------------
Statement of Income
- ------------------- From Inception,
January 5, 1996,
to December 31, 1996
---------------------
Interest income $ 880,582
Equity in undistributed earnings of subsidiary 248,247
------------
1,128,829
Expenses 270,940
------------
Income before income taxes 853,889
Income taxes 243,000
------------
Net income $ 610,889
============
From Inception,
Statement of Cash Flows January 5, 1996
- ----------------------- to December 31, 1996
---------------------
Cash flow from operations activities:
Net income $ 610,889
Adjustments to reconcile net income
provided by operations activities:
Equity in undistributed earnings of the subsidiary (248,247)
(Increase) in other assets (12,167)
Increase in other liabilities 190,674
------------
Net cash provided by operations activities 541,149
------------
Cash flow from investing activities:
Purchase of all outstanding stock of the Bank (14,638,780)
Loan to Little Falls Bank (12,205,380)
Repayments of loan by Little Falls Savings Bank 3,351,116
Loan to ESOP (2,433,400)
Repayments of loan by ESOP 90,478
------------
Net cash used in investing activities (25,835,966)
------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 29,263,522
Acquisition of treasury stock (3,277,004)
Dividends paid (136,119)
------------
Net cash provided by financing activities 25,850,399
------------
Net increase in cash and cash equivalents 555,582
Cash and cash equivalents-beginnings --
------------
Cash and cash equivalents- ending $ 555,582
============
- 49 -
<PAGE>
LITTLE FALLS BANCORP, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 1996
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- --------
(In thousands except per share data)
Interest income $ 3,237 $ 4,670 $ 4,614 $ 4,782
Interest expense 2,912 2,751 2,721 2,874
------- ------- -------- -------
Net interest income 1,798 1,919 1,893 1,908
Provision for loan losses 30 -- 153 --
Non-interest income 53 82 67 207
Non-interest expenses 1,427 1,296 2,564 1,460
Income taxes 133 282 (275) 246
------- ------- -------- -------
Net income (loss) $ 261 $ 423 $ (482) $ 409
======= ======= ======== =======
Net income (loss) per common share
and common stock equivalents $ 0.09 $ 0.15 $ (0.18) $ 0.16
======= ======= ======== =======
Year Ended December 31, 1995
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- --------
(In thousands except per share data)
Interest income $ 3,237 $ 3,161 $ 3,537 $ 3,878
Interest expense 1,998 2,266 2,383 2,667
------- ------- -------- -------
Net interest income 1,239 895 1,154 1,211
Provision for loan losses -- 285 107 (261)
Non-interest income (loss) 34 37 113 (6)
Non-interest expenses 724 995 898 1,224
Income taxes 181 (121) 138 43
------- ------- -------- -------
Net income (loss) $ 368 $ (227) $ 124 $ 199
======= ======= ========= =======
Net income (loss) per common share
and common stock equivalents (1) N/A N/A N/A N/A
======= ======= ========= =======
(1) Little Falls Bancorp., Inc. converted to stock form on January 5, 1996
- 50 -
<PAGE>
<TABLE>
<CAPTION>
Board of Directors of Little Falls Bancorp, Inc.
and
Little Falls Bank
<S> <C>
Albert J. Weite, Chairman of the Board Edward J. Seugling, Vice Chairman of the Board
Leonard G. Romaine (Bank only) Raoul G. Barton
John P. Pullara George Kuiken
C. Evan Daniels Norman A. Parker
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Executive Officers of Little Falls Bancorp, Inc.
and/or
Little Falls Bank
Leonard G. Romaine Richard A. Capone Anne Bracchitta
President Chief Financial Officer and Treasurer Secretary
Della Talerico Michael J. Allen Mary Denise Hopper
Vice President Vice President Vice President
</TABLE>
------------------------------------------------
Corporate Counsel: Independent Auditors:
Vincent Marino Radics & Co., LLC
86 Main Street 55 US Highway #46
Little Falls, New Jersey 07424 Pine Brook, New Jersey 07058
Special Counsel: Transfer Agent and Registrar:
Malizia, Spidi, Sloane & Fisch, P.C. Chase Mellon Shareholder
One Franklin Square Services, L.L.C.
1301 K Street, N.W., Suite 700 East 450 West 33rd Street
Washington, D.C. 20005 New York, New York 10001-2697
------------------------------------------------
The Company's Annual Report for the Year Ended December 31, 1996 filed
with the Securities and Exchange Commission on Form 10-K without exhibits
is available without charge upon written request. For a copy of the Form
10-K or any other investor information, please write the Secretary of the
Company at 86 Main Street, Little Falls, New Jersey. Copies of any
exhibits to the Form 10-K are available at cost. The Annual Meeting of
Stockholders will be held on April 17, 1997 at 3:30 p.m. at the office of
the Company.
-51-
<PAGE>
OFFICE LOCATIONS
LITTLE FALLS BANCORP, INC.
86 Main Street
Little Falls, New Jersey 07424
(201) 256-6100
LITTLE FALLS BANK
Main Office
86 Main Street
Little Falls, New Jersey 07424
(201) 256-6100
Branch Offices
West Paterson
Route 46 & McBride Avenue
West Paterson, New Jersey 07424
Spruce Run
220 Main Street
Glen Gardner, New Jersey 08826
Milford
34 Bridge Street
Milford, New Jersey 08848
Alexandria
636 Milford-Frenchtown Road
Alexandria Township, New Jersey 08848
Kingwood
Route 12 and 519
Baptistown, New Jersey 08825
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,747
<INT-BEARING-DEPOSITS> 3,627
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 163,843
<INVESTMENTS-MARKET> 163,630
<LOANS> 118,206
<ALLOWANCE> 1,090
<TOTAL-ASSETS> 303,518
<DEPOSITS> 228,312
<SHORT-TERM> 24,623
<LIABILITIES-OTHER> 1,134
<LONG-TERM> 9,000
0
0
<COMMON> 304
<OTHER-SE> 40,144
<TOTAL-LIABILITIES-AND-EQUITY> 303,518
<INTEREST-LOAN> 8,255
<INTEREST-INVEST> 10,521
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 18,776
<INTEREST-DEPOSIT> 11,083
<INTEREST-EXPENSE> 175
<INTEREST-INCOME-NET> 7,518
<LOAN-LOSSES> 183
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,747
<INCOME-PRETAX> 996
<INCOME-PRE-EXTRAORDINARY> 611
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 611
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 2.76
<LOANS-NON> 1,901
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,931
<ALLOWANCE-OPEN> 958
<CHARGE-OFFS> 146
<RECOVERIES> 95
<ALLOWANCE-CLOSE> 1,090
<ALLOWANCE-DOMESTIC> 1,090
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 936
</TABLE>
