SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K/A
(Mark One)
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, 1998
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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 ___________________
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 (I.R.S. Employer
incorporation or organization) Identification No.)
86 Main Street 07424
- ---------------------------------------- ----------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (973) 256-6100
-----------------
Securities registered pursuant to Section 12(b) of the Act: None
---------
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. [ X ]
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 11, was $40.0 million (2,023,824)
shares at $19.75 per share).
As of March 11, 1999 there were issued 3,041,750 and outstanding
2,470,551 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, 1998. (Parts I, II and IV)
<PAGE>
INDEX
PART I Page
----
Item 1. Business...................................................... 1
Item 2. Properties................................................... 25
Item 3. Legal Proceedings............................................ 25
Item 4. Submission of Matters to a Vote of Security-Holders.......... 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 26
Item 6. Selected Financial Data...................................... 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 26
Item 8. Financial Statements and Supplementary Data.................. 26
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant........... 27
Item 11. Executive Compensation....................................... 30
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................. 37
Item 13. Certain Relationships and Related Transactions............... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K................................................ 38
<PAGE>
PART I
Little Falls Bancorp, Inc. (the "Company") may from time to time make
written or oral "forward- looking statements", including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this Annual Report on Form 10-K and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Business
- -----------------
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.
1
<PAGE>
On November 5, 1998, Little Falls and Skylands Community Bank
terminated the proposed merger between the two companies, which had been
announced on August 12, 1998. This merger was terminated by mutual agreement as
both companies recognized the possibility that certain conditions to the closing
of the merger might not be satisfied. Accordingly, the boards of directors of
both companies concluded that it was in the mutual interest of both companies to
terminate the merger, and avoid any additional expense.
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.
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 five
branch offices located in Passaic and Hunterdon 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. 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, the Bank
also invests in mortgage-backed securities and investment securities.
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.
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
2
<PAGE>
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
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,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------- ------------------- ----------------- ------------------
Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loans:
One- to four-family......... $117,417 78.77% $118,254 80.42% $108,367 92.53% $88,828 92.31% $87,851 92.71%
Multi-family and commercial
real estate............... 17,251 11.57 17,362 11.81 3,659 3.13 4,639 4.82 4,463 4.71
Residential construction.... -- 350 0.24 525 0.45 1,098 1.14 521 0.55
Consumer:
Savings account............. 752 0.50 807 0.55 889 0.76 824 0.86 866 .91
Second mortgages............ 14,811 9.94 11,630 7.91 5,028 4.29 2,540 2.64 2,694 2.84
Other....................... 14 0.01 12 0.01 25 0.02 42 0.04 52 .05
------- ------ ------- ------ ------- ------ ----- ---- ------- ------
Total loans receivable
(gross)................... 150,245 100.79 148,415 100.94 118,493 101.18 97,971 101.81 96,447 101.77
Less:
Loans in process.......... -- -- 233 0.16 150 (0.13) 450 (0.47) 186 (.18)
Deferred loan origination
fees and costs........... (146) 0.10 (19) (0.01) 138 (0.12) 333 (0.35) 338 (.36)
Allowance for loan losses. 1,329 (0.89) 1,168 0.79 1,090 (0.93) 958 (0.99) 1,169 (1.23)
------- ------ ------- ------ -------- ------ ------ ------ ------- ------
Total loans, net............ $149,062 100.00% $147,033 100.00% $117,115 100.00% $96,230 100.00% $94,754 100.00%
======= ====== ======= ====== ======= ====== ====== ====== ======= ======
</TABLE>
3
<PAGE>
Loan Maturity Tables
The following table sets forth the contractual maturity of the Bank's
loan portfolio at December 31, 1998. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totaled $23.7 million for the year ended December 31, 1998.
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>
Multi-Family
and
One- to Four- Commercial Residential
Family Real Estate Construction Consumer Total
------------- ------------ ------------ -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year.................. $ 54 $ 250 $ -- $ 741 $ 1,045
1 to 5 years................. 2,432 495 -- 1,049 3,976
5 to 10 years................ 5,127 200 -- 2,849 8,176
Over 10 years................ 109,804 16,306 -- 10,938 137,048
------- ------ ------ -------
Total amount due............... $117,417 $17,251 $15,577 $150,245
Less:
Allowance for loan and
lease loss................... 956 274 -- 99 1,329
Loans in process............... -- -- -- -- --
Deferred loan fees (costs)..... (124) -- -- (22) (146)
------- ------- -------- ------ ------
Loans receivable, net......... $116,585 $ 16,977 $ -- $15,500 $149,062
======= ======= ====== =======
</TABLE>
The following table sets forth the dollar amount at December 31, 1998
of all loans due after December 31, 1999, 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................ $45,201 $72,162 $117,363
Multi-family and
commercial real estate........... 1,600 15,401 17,001
Consumer........................... 12,265 2,571 14,836
------ ------ -------
Total............................ $59,066 $17,972 $149,200
====== ====== =======
4
<PAGE>
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 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.
Multi-Family and Commercial Real Estate Loans. The Bank also originates
and purchases multi-family and commercial real estate loans. These loans are
generally adjustable-rate loans with maturities up to 25 years and are made in
amounts up to 75% of the appraised value of the mortgaged property. In
purchasing such loans, the Bank evaluates the mortgage primarily on the net
operating income generated by the real estate to support the debt service. The
Bank also considers the financial resources and income level of the borrower,
the borrower's experience in owning or managing similar property, the
marketability of the property and the Bank's prior lending experience with the
borrower. The typical multi-family property in the Bank's multi-family lending
portfolio has between 11 and 110 dwelling units with an average loan balance of
approximately $550,000. Most loans originated or purchased are located in New
Jersey and New York.
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
5
<PAGE>
portfolio includes multi-family loans. For a discussion of the Bank's largest
commercial real estate loan, see "- Loans to One Borrower."
Loans secured by multi-family and 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 1% and one point. The loan proceeds are disbursed based upon
work completed.
Consumer Loans. The Bank's consumer loans primarily consist of home
equity loans, and, to a much lesser extent, student loans, personal 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, 1998, the
Bank had $5.1 million of commitments to fund new mortgage loans and commitments
on unused lines of credit relating to home equity loans of $4.6 million.
Loan Purchases. The Bank has purchased and participated in loans,
primarily in its market area. At December 31, 1998, the Bank had $3.9 million of
purchased loans and $15.4 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.
6
<PAGE>
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 $4.5 million as of December 31, 1998.
At December 31, 1998, the Bank's three largest lending relationships
ranged from $1.0 million to $1.1 million. They are all performing loans on
apartment buildings in New Jersey and New York in which the Bank has a
participating interest. See also "-- Multi-Family and Commercial Real Estate."
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,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-performing loans:
Nonaccrual loans:
One- to four-family residential........... $1,003 $ 1,036 $ 989 $1,059 $4,182
Multi-family and commercial real estate... -- 248 860 860 --
Consumer loans............................ -- -- 52 23 20
----- ------- ------- ------ ------
Total nonaccrual loans....................... 1,003 1,284 1,901 1,942 4,202
Accruing one- to four-family residential.. -- -- -- 505 --
----- ------- -------- ------ -------
Total non-performing loans................... 1,003 1,284 1,901 2,447 4,202
----- ------ ------- ------ ------
Real estate owned............................ 297 604 857 1,501 1,765
----- ------ ------- ----- -----
Total non-performing assets 1,888 $ 2,758 $3,948 $5,967
====== ===== =====
Total non-performing loans to net loans..... .67% .87% 1.62% 2.54% 4.43%
===== ===== ===== ===== =====
Total non-performing loans to total assets... .29% .39% .63% .79% 2.17%
===== ===== ===== ===== =====
Total non-performing assets to total assets.. .37% .57% .91% 1.27% 3.09%
===== ===== ===== ===== =====
</TABLE>
Interest income that would have been recorded on nonaccrual loans had
they been current under the original terms of such loans was approximately
$89,000 and $111,000 for the years ended December 31, 1998 and 1997,
respectively. Amounts included in the Bank's interest income attributable to
non-performing loans for the years ended December 31, 1998 and 1997 were
approximately $60,000 and $50,000, respectively.
7
<PAGE>
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 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.
At December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ -------
(In Thousands)
Criticized:
Special Mention........ $1,573 $3,912 $2,931 $2,639 $2,094
Classified:
Substandard............ 1,645 1,637 3,665 3,925 5,901
Doubtful............... -- -- -- -- --
Loss................... -- -- -- -- 123
------ ------ ------ ------ ------
$3,218 $5,549 $6,596 $6,564 $8,118
===== ===== ===== ===== =====
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 approximately $297,000 at December 31, 1998.
8
<PAGE>
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 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.
9
<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,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding............... $150,245 $148,415 $118,493 $97,971 $96,447
======= ======= ======= ====== ======
Allowance balances (at beginning
of period)........................... $ 1,168 $ 1,090 $ 958 $ 1,169 $ 818
Provision:
One- to four-family................. 79 168 136 87 340
Multi-family and commercial
real estate(1).................... 39 35 38 35 13
Consumer............................ 43 37 9 9 3
------- ------- ------- ----- ------
Total provision for loan losses....... 161 240 183 131 356
------- ------- ------- ----- ------
Charge-offs net of recoveries:
One- to four-family................. -- 154 51 342 5
Multi-family and commercial
real estate....................... -- -- -- -- --
Consumer.............................. -- 8 -- -- --
------- ------- ------- ------ ------
Total charge-offs..................... -- 162 51 342 5
------- ------- ------- ------ ------
Allowance balance (at end of
period)............................. $ 1,329 $ 1,168 $ 1,090 $ 958 $ 1,169
======= ======= ======= ====== ======
Allowance for loan losses as
a percent of total loans
outstanding......................... 0.88% 0.79% 0.92% 0.98% 1.21%
======= ======= ======= ====== ======
</TABLE>
- ------------------------
(1) Includes residential construction loans.
10
<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,
-------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ----------------- ----------------- ----------------- ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Loan to Loan to Loan to Loan to Loan
Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of period allocated to:
One-to four-family.......... $ 956 71.39% $ 877 79.68% $ 863 91.66% $778 92.31% $1,033 92.71%
Multi-family and
commercial real
estate(1)................ 274 20.62 235 11.93 200 3.27 162 4.82 127 4.71
Consumer ................... 99 7.45 56 8.39 27 5.07 18 3.54 9 3.80
------ ------ ----- ------ ------ ------ ---- ------ ------ ------
Total allowance............. $1,329 100.00% $1,168 100.00% $1,090 100.00% $958 100.00% $1,169 100.00%
===== ====== ===== ====== ===== ====== === ====== ===== ======
</TABLE>
(1) Includes residential construction loans.
11
<PAGE>
Investment Activities
General. 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, 1998, 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, 1998, the Bank's investment securities portfolio
primarily consisted primarily of short and medium term agency securities,
corporate bonds, trust preferred securities and preferred stock. In addition, at
December 31, 1998, the Bank had federal funds sold of $23.0 million, repurchase
agreements of $4.0 million and FHLB stock of $3.8 million.
To supplement lending activities and to utilize excess liquidity, the
Bank invests in residential mortgage-backed securities. 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,
1998 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.
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.
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.
12
<PAGE>
All of the securities have a cap rate of either 9.0%, or 10.0% and all
of the products meet the current FFIEC tests. The securities are tested on a
quarterly basis.
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,
---------------------------------------------
1998(1) 1997 1996
---------- ----------- -----------
(In Thousands)
Investment Securities:
U.S. Government
securities................. $ -- $ -- $ 6,006
U.S. Agency securities....... 53,419 57,988 45,022
Corporate bonds.............. 1,990 -- --
Trust preferred securities... 11,496 -- --
Preferred stock.............. 13,095 -- --
Other securities............. -- -- 342
------- ------ ------
Total investment
securities............... 80,000 57,988 51,370
------- ------ ------
Federal funds sold............ 23,000 3,500 5,000
Repurchase agreements......... 4,000 -- --
FHLB Stock.................... 3,768 2,518 2,076
------- ------ ------
Total investment
securities, federal
funds sold and FHLB
stock................... $110,768 $64,006 $58,446
======= ====== ======
- --------------------
(1) Includes held to maturity and available for sale (available for sale
issues are reflected net of an unrealized loss of approximately
$493,000).
At December 31,
---------------------------------------
1998(2) 1997(2) 1996
-------- -------- --------
(Dollars in Thousands)
Mortgage-backed securities:
GNMA........................... $17,293 $ 26,337 $ 33,675
FNMA........................... 36,953 42,393 49,434
FHLMC.......................... 20,158 34,932 28,297
------ ------- -------
Total...................... 74,404 103,662 111,406
Net premiums................... 941 1,224 1,067
------- -------- -------
Net mortgage-backed
securities..................... $75,345 $104,886 $112,473
====== ======= =======
- ---------------------
(2) Includes held to maturity and available for sale (available for sale
issues are reflected net of unrealized losses of $16,600 and $111,500
for 1998 and 1997, respectively).
13
<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, 1998.
<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. Agency securities(1).......... $ -- --% $ 2,000 6.74% $51,419 6.20% $53,419 6.22% $53,200
Corporate Bonds(1)................. -- --% -- -- 1,990 7.00 1,990 7.00 1,990
Trust preferred securities(1)...... 11,496 6.60 11,496 6.60 11,496
Preferred stock(1)................. $ 8,910 5.00 4,185 6.26 8,910 5.00 13,095
----- ---- ------ ---- ------ ---- ------ ---- ------
Total investment securities(1).. $ -- --% $10,910 5.32% $69,090 6.29% $80,000 6.16% $79,781
===== ==== ====== ==== ====== ==== ====== ==== ======
GNMA............................... $ -- --% $ 155 8.25% $17,488 7.04% $17,643 7.05% $17,498
FNMA(1)............................ 119 7.00 1,248 7.00 36,052 6.55 37,419 6.57 37,427
FHLMC(1)........................... 1,523 5.92 3,412 6.79 15,347 6.70 20,282 6.65 20,353
----- ---- ------ ---- ------ ---- ------ ---- ------
Total mortgage-backed $1,642 6.00% $ 4,815 6.89% $68,887 6.71% $75,344 6.70% $75,278
securities...................... ===== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
- ----------------------
(1) Includes securities held to maturity and available for sale.
14
<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.
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 $41.4 million, $7.0 million
and $29.1 million, respectively, or 17.05%, 2.87%, and 11.98%, respectively.
Certificates of deposit constituted $165.5 million or 68.10% of the deposit
portfolio. As of December 31, 1998, the Bank had no brokered deposits.
Jumbo Certificate Accounts. The following table indicates the amount of
the Bank's certificates of deposit of greater than $100,000 by time remaining
until maturity as of December 31, 1998.
Certificates
Maturity Period of Deposits
- --------------- --------------
(In Thousands)
Within three months................................. $ 1,971
Three through six months............................ 2,684
Six through twelve months........................... 6,468
Over twelve months.................................. 3,419
------
$14,542
15
<PAGE>
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated.
Year Ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Net increase (decrease)
before interest credited, deposits
purchased and deposits sold............ $ 2,411 $(8,507) $ (21,401)
Deposits purchased....................... -- -- --
Deposits sold............................ -- -- (9,221)
Interest credited........................ 10,504 10,328 11,083
------ ------ --------
Net increase (decrease) in
savings deposits....................... $12,915 $ 1,821 $ (19,539)
====== ====== ========
Borrowings
At December 31, 1998, the Bank had $68.5 million of borrowings with the
Federal Home Loan Bank. These consist of the following:
(a) $9.0 million repurchase agreement with a rate of
5.82%, maturing December, 1999 and is callable
quarterly on interest payment dates. As of March 6,
the borrowing was still in place.
(b) $25.0 million advance maturing March 2008, and with a
rate of 5.35%. On March 12, 2001 and quarterly
thereafter, the borrowing can be called with four
days notice.
(c) $25.0 million advance maturing November 2003, and
with a rate of 4.93%. On November 19, 2001 and
quarterly thereafter, the borrowing can be called
with four days notice.
(d) $9.5 million, 30 day repurchase agreement with a rate
of 5.29%. This repurchase agreement was subsequently
rolled over in January 1999 at a rate of 4.95%. In
February, the repurchase agreement was paid down to
$9.0 million and the rate became 4.92%.
Subsidiary Activities
As of December 31, 1998, the Bank was the sole subsidiary of the
Company. The Bank has no active subsidiaries.
Personnel
As of December 31, 1998, the Bank had 37 full-time and 12 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.
16
<PAGE>
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.
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.
17
<PAGE>
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.
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.
FDIC assessments on SAIF institutions currently range from 0 to 27
basis points. In addition, legislation requires the cost of prior thrift
failures to be shared by both the SAIF and the Bank Insurance Fund ("BIF") (Fico
Bond payments). The Fico Bond assessment for savings institutions in 1998 was
approximately $0.61 per $100 in deposits.
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
18
<PAGE>
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 4% 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 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.
19
<PAGE>
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of December 31, 1998:
Percent of
Adjusted
Amount Assets
------ ----------
(Dollars in Thousands)
Tangible Capital:
Actual capital................................ $28,740 8.33%
Regulatory requirement........................ 5,176 1.50
------- ----
Excess...................................... $23,564 6.83%
====== ====
Core Capital:
Actual capital................................ $28,740 8.33%
Regulatory requirement........................ 13,801 4.00
------ ----
Excess...................................... $14,939 4.33%
====== ====
Risk-Based Capital:
Actual capital................................ $29,988 20.45%
Regulatory requirement........................ 11,729 8.00
------ -----
Excess...................................... $18,259 12.45%
====== =====
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.
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 is deemed to be (i)
"well capitalized", (ii) "adequately capitalized", (iii) "undercapitalized",
(iv) "significantly undercapitalized", or (v) "critically undercapitalized". 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, 1998, 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. Federal law
requires 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
20
<PAGE>
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.
Finally, 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. Savings institutions are 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, 1998, 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).
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 as a result of its last evaluation in March, 1998.
21
<PAGE>
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.
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 4%. At December 31, 1998 the Bank's liquidity ratio was 36.11%.
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 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, 1998, the Bank had $2.5 million
in FHLB stock, which was in compliance with this requirement. For the fiscal
year ended December 31, 1998, dividends paid by the FHLB of New York to the Bank
totaled $256,000.
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.
22
<PAGE>
Item 2. Properties
- --------------------
The Bank operates from its main office located at 86 Main Street,
Little Falls, New Jersey and five branch offices, one of which is leased. This
includes three branches purchased from an unaffiliated commercial bank in
December 1996. The Bank's total investment in office property and equipment is
$4.2 million with a net book value of $2.6 million at December 31, 1998.
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 1998 Annual Report to Stockholders ("Annual Report") on page 2, 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 10 and is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- -------------------------------------------------------------------
The information contained in the Section captioned "Risk Management" in
the Annual Report on page 10 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 18 through 58 and
are incorporated herein by reference.
23
<PAGE>
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The Certificate of Incorporation requires that the Board of Directors
be divided into three classes, each of which contains approximately one-third of
the members of the Board. The directors are elected by the stockholders of the
Company for staggered three-year terms, or until their successors are elected
and qualified. The Board of Directors currently consists of seven members.
The following table sets forth the directors continuing in office,
their name, age, the year they first became a director of the Company or the
Bank, the expiration date of their current term as a director, and the number
and percentage of shares of the Common Stock beneficially owned as of the March
22, 1999. Each director of the Company is also a member of the Board of
Directors of the Bank.
<TABLE>
<CAPTION>
Shares of
Year First Current Common Stock
Elected or Term to Beneficially Percent
Name Age(1) Appointed Expire Owned(2)(3) of Class
- ---- ------ ---------- ------- --------------------- --------
<S> <C> <C> <C> <C> <C>
John P. Pullara 67 1995 1999 52,417(9)(10) 2.06%
George Kuiken 78 1954 1999 25,166(4)(5)(11) 0.99%
Raoul G. Barton 74 1970 2001 39,222(4)(5)(6)(7) 1.54%
Albert J. Weite 64 1976 2001 38,666(4)(5)(8) 1.52%
Norman A. Parker 85 1953 2000 34,366(4)(5)(6)(12) 1.35%
Edward J. Seugling 62 1970 2000 26,666(4)(5)(6)(13) 1.05%
All Directors and
Executive Officers as a
Group (9 persons) 268,296(14)(15)(16) 10.56%
</TABLE>
24
<PAGE>
- ------------------------
* Less than 1.0%.
(1) As of December 31, 1998.
(2) As of the March 22, 1999.
(3) Pursuant to rules promulgated under the 1934 Act, an individual is
considered to beneficially own shares of Common Stock if he or she
directly or indirectly has or shares (1) voting power, which includes
the power to vote or to direct the voting of the shares; or (2)
investment power, which includes the power to dispose or direct the
disposition of the shares. Unless otherwise indicated, a director has
sole voting power and sole investment power with respect to the
indicated shares.
(4) Includes 6,083 shares of Common Stock that have been awarded under the
Management Stock Bonus Plan ("MSBP"), 3,500 shares of Common Stock
under the 1997 Directors Stock Compensation Plan ("1997 DSCP") and
3,500 shares of Common Stock under the 1998 Directors Stock
Compensation Plan ("1998 DSCP") which are subject to forfeiture under
certain circumstances. Shares awarded under the MSBP, 1997 DSCP and the
1998 DSCP vest equally over five year periods beginning July 9, 1997,
April 17, 1998 and April 21, 1999, respectively.
(5) Includes options to purchase 6,083 shares of Common Stock pursuant to
the Little Falls Bancorp, Inc. 1996 Stock Option Plan Options ("1996
Stock Option Plan") which are immediately exercisable within 60 days of
the Voting Record Date. See "Item 12. Director and Executive Officer
Compensation - Director Compensation - Stock awards."
(6) Excludes 241,979 unallocated shares of Common Stock held under the ESOP
for which such individual serves as one of three ESOP trustees.
Beneficial ownership is disclaimed with respect to such ESOP shares
held in a fiduciary capacity.
(7) Includes 4,190 shares held by Mr. Barton's IRA, 4,894 shares held by
the IRA of Mr. Barton's wife and 118 shares held by Mr. Barton's wife,
which Mr. Barton may be deemed to beneficially own.
(8) Includes 14,000 shares held jointly with Mr. Weite's wife, with whom
voting and dispositive power is shared, and 3,000 shares held by Mr.
Weite's IRA and 2,500 shares held by the IRA of Mr. Weite's wife, which
Mr. Weite may be deemed to beneficially own. Does not include 6,000
shares owned by DOB&K, LLC, a partnership between Mr. Weite's children,
of which Mr. Weite disclaims beneficial ownership.
(9) Includes options to purchase 12,167 shares of Common Stock pursuant to
the Little Falls Bancorp, Inc. 1996 Stock Option Plan Options ("1996
Stock Option Plan") which are immediately exercisable within 60 days of
the Voting Record Date. See "Item 12. Director and Executive Officer
Compensation - Director Compensation - Stock Awards."
(10) Includes 15,000 shares held jointly with Mr. Pullara's wife, with whom
voting and dispositive power is shared. Includes options to purchase
12,167 shares of Common Stock pursuant to the 1996 Stock Option Plan
which are immediately exercisable within 60 days of the Voting Record
Date. Also includes 18,250 and 3,500 shares of restricted stock awarded
pursuant to the MSBP, 1997 DSCP and 1998 DSCP, and awards vest equally
over five year periods beginning July 9, 1997, April 17, 1998 and April
21, 1999, respectively.
(11) Includes 1,000 shares owned by Mr. Kuiken's wife, which Mr. Kuiken may
be deemed to beneficially own.
(12) Includes 15,000 shares held in trust, which Mr. Parker may be deemed to
beneficially own, and 200 shares held jointly with Mr. Parker's wife,
with whom voting and dispositive power is shared.
(13) Includes 7,390 shares held by Mr. Seugling's IRA and 110 shares held by
Custom Graphics & Design, Inc., which Mr. Seugling may be deemed to
beneficially own.
(14) Includes 4,265 allocated shares of Common Stock held for individual
employee participants under the ESOP. Excludes unallocated shares of
Common stock held under the ESOP. See note (6).
(15) Includes options to purchase 63,548 shares of Common Stock which are
immediately exercisable within 60 days of the Voting Record Date.
(16) Excludes 241,979 unallocated shares of Common Stock held under the ESOP
for which such individual serves as two of three members of the ESOP
Committee. Beneficial ownership is disclaimed with respect to such ESOP
shares held in a fiduciary capacity.
The following table sets forth the non-director executive officers of
the Company, their name, age, the year they first became an officer of the
Company or the Bank, and their current position with
25
<PAGE>
the Company. Executive officers serve for a one-year term at the determination
of the Board of Directors.
Year First
Appointed as Position with
Name of Individual Age(1) Officer(2) the Company or Bank
- ------------------ ------ ------------ ----------------------
Leonard G. Romaine 52 1967 President and Chief
Executive Officer
Richard A. Capone 49 1995 Vice President, Chief
Financial Officer
Anne Bracchitta 59 1997 Corporate Secretary
- ------------------------
(1) As of December 31, 1998.
(2) Refers to the year the individual first became an officer of the
Company or the Bank.
Biographical Information
The business experience of each director and executive officer of the
Company is set forth below. All persons have held their present positions for
five years unless otherwise stated.
Directors
---------
Raoul G. Barton was elected Director of the Bank in 1970 and served as
Chairman from 1982 to 1994. Mr. Barton is a member of the Little Falls Masonic
Lodge. In 1990, Mr. Barton retired as owner of Barton Jewelers which he founded
in 1949.
George Kuiken has served as Director of the Bank since 1954. Mr. Kuiken
retired as President of New Jersey Rental Equipment, Inc.
Norman A. Parker has served as a Director since 1953. Mr. Parker was
Chairman of the Board of the Bank from 1973 to 1981 and President of the Bank
from 1965 to 1977. Mr. Parker is a retired funeral director. Mr. Parker is also
past President of the Passaic County Funeral Directors Association, past
President and charter member of the Passaic Valley Rotary Club, past member of
the Passaic Valley School Board, Elder of the First Reformed Church, charter
member of the Little Falls Parking Authority, charter member of the Mayor's
Committee for Senior Citizens and member of the Little Falls Masonic Lodge.
John P. Pullara was with the Bank from March 1955, serving as its
President from 1977 until his retirement on October 5, 1997. Mr. Pullara was
elected Director of the Bank in June of 1995. Mr. Pullara is also Director and
Treasurer of the Passaic County Historical Society, Director of the Garden State
Concert Band, Treasurer of the Little Falls Historical Society, Chairman of the
Little Falls Parking Authority and a member of the Little Falls Business
Association.
Edward J. Seugling has served as a Director of the Bank since 1970 and
became the Vice Chairman of the Board of Directors in 1994. Mr. Seugling is a
retired teacher at Passaic Valley High School and the sole owner of the Little
Falls Journal. He is a member of the Little Falls Business Association, the
Little Falls Masonic Lodge, the Little Falls Historical Society, and the New
Jersey Education Association. He is a member of the First Reformed Church of
Little Falls, and he has served as an elder and deacon of the First Reformed
Church. He was formerly Chairman of the Little Falls Rent Leveling Board and was
an associate member of the Little Falls Main Street Development Corp.
26
<PAGE>
Albert J. Weite has served as Chairman of the Board of Directors of the
Bank since 1994 and as a Director since 1976. Mr. Weite is a real estate
investor.
Executive Officers who are not Directors
----------------------------------------
Leonard G. Romaine has been employed by the Bank since 1967. He served
as Treasurer and Secretary of the Company and as Senior Vice President,
Secretary and Treasurer of the Bank until he was appointed President of the Bank
and Company on October 6, 1997. Mr. Romaine is a member of the Passaic County
Attorney Ethics Committee.
Richard A. Capone became employed by the Bank and Company in November
1995 as Chief Financial Officer. Prior to that, Mr. Capone was controller or
Treasurer at four different local financial institutions over the past 20 years.
Anne Bracchitta has been employed by the Bank since 1980. She was
appointed Corporate Secretary in 1997.
Item 11. Executive Compensation
- --------------------------------
Director Compensation
Directors Fees. For fiscal year 1998, each member of the Board of
Directors received an attendance fee of $1,450 per regular meeting. Committee
members received an additional $725 per Asset-Liability Committee meeting
attended. No Committee fees are paid to Board members who are employees. For the
year ended December 31, 1998, total fees paid by the Company and the Bank to
directors were $141,000. Directors are also provided with broad medical
insurance coverage.
Directors Retirement and Consultation Plan. The Bank's Board adopted a
Directors' Consultation and Retirement Plan (the "Consultation Plan") on May 9,
1995. Such Consultation Plan provides retirement benefits to directors.
Management believes the Consultation Plan will help to insure that the Bank has
the continued services of these persons as directors to assist in the conduct of
the Bank's business affairs in the future. A director who has served as a
director for at least twenty years shall be a participant in the Consultation
Plan. A consulting director shall be paid a monthly retirement benefit under the
Consultation Plan equal to half of the director fee in effect at the time of
such retirement until the month following the date of death of the consulting
director. At the expiration of the period for which the participant is entitled
to benefits, his status as a consulting director shall cease. All benefits
payable under the plan will be paid by the Bank from current assets. There are
no tax consequences to either the director or the Bank prior to payment of
benefits. Upon receipt of payment of benefits, the director will recognize
taxable ordinary income in the amount of such payment received and the Bank will
be entitled to recognize a tax-deductible compensation expense. In addition, the
Bank has a policy of continuing medical benefits for its retired directors. For
the year ended December 31, 1998, no benefits were paid under the Consultation
Plan and approximately $45,000 was accrued as an expense for the Consultation
Plan and the continuation of such medical benefits.
Stock Awards. On July 9, 1996, the stockholders of the Company approved
the Little Falls Bancorp 1996 Stock Option ("1996 Stock Option Plan") and the
Little Falls Bank Management Stock Bonus Plan ("MSBP"). Pursuant to the terms of
the 1996 Stock Option Plan, each non-employee director received, on the date of
stockholder approval options to purchase 15,208 shares of Common Stock. Under
the MSBP, the same non-employee directors received 6,083 shares of restricted
stock on the date
27
<PAGE>
of stockholder approval. The options granted to these non-employee directors
become first exercisable at a rate of 20% one year from the date of grant and
20% annually thereafter. Restricted stock granted to these non-employee
directors will vest 20% one year from the date awarded and an additional 20%
annually, thereafter. In April 1997, the Company adopted the 1997 Directors
Stock Compensation Plan authorizing the granting of up to 24,500 shares of
Common Stock in the aggregate (representing less than 1% of total shares
outstanding at such time). Each non-employee director (seven persons) was
awarded 3,500 shares of Common Stock which shall vest over a five year period
beginning April 17, 1997. In April 1998, the Company adopted the 1998 Directors
Stock Compensation Plan authorizing the granting of up to 24,500 shares of
Common Stock in the aggregate (representing less than 1% of total shares
outstanding at such time). During 1998, all 24,500 shares were granted under the
plan (3,500 shares to each non-employee director).
Executive Compensation
Summary Compensation Table. The following table sets forth the compensation
paid to the chief executive officer during the fiscal year ended December 31,
1998. All compensation paid to directors, officers and employees is paid by the
Bank. Except as listed below, no other executive officer received cash
compensation in excess of $100,000 during the fiscal year ended December 31,
1998.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation(1) Awards
------------------------------------------------- --------------------------------
Securities
Restricted Underlying All
Name and Other Annual Stock Options/ Other
Principal Position Year Salary Bonus Compensation(2) Awards SARs(#) Compensation(6)
- ------------------ ---- ------ ----- ------------ ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Leonard G. Romaine, 1998 $125,400 $ 9,000 $17,400
President(3) 1997 $115,000 $15,000 $20,200 -- 3,000(3) 42,660
1996 $ 89,420 $ 7,750 $15,000 $129,274(4) 30,417(5) 30,176
</TABLE>
- ------------------------
(1) All compensation set forth above was paid by the Bank.
(2) Consists of Board of Director's fees. For fiscal year 1998, there were
no (a) perquisites over the lesser of $50,000 or 10% of the named
executive officer's total salary and bonuses for the year; (b) payments
of above-market preferential earnings on deferred compensation; (c)
payments of earnings with respect to long term incentive plans prior to
settlement or maturity: (d) tax payment reimbursements; or (e)
preferential discounts on stock.
(3) Options vest equally over a five year period beginning December 9,
1998.
(4) Based upon 12,167 shares of restricted stock granted pursuant to the
MSBP (fair market value on date of grant of $10.625). Restricted stock
vest equally over a five year period beginning July 9, 1997. Dividends
are paid on the restricted stock and are accrued and held in arrears
until the restricted stock for which dividends were paid become vested.
(5) Options vest equally over a five year period beginning July 9, 1997.
(6) Includes 1,472 and 2,133 shares of stock held by the ESOP and allocated
to Mr. Romaine's account for 1996 and 1997, respectively. Based on the
closing price of the Common Stock ($20.00 per share) at December 31,
1998. As of the date of this proxy statement, shares had not yet been
allocated for fiscal 1998.
Employment Agreement. The Bank is a party to an employment agreement
with President and Chief Executive Officer Leonard G. Romaine. The employment
agreement is for a term of three years. Under the agreement, Mr. Romaine's
employment is terminable by the Bank for "just cause" as defined in the
agreement. If the Bank terminates Mr. Romaine without just cause, he will be
entitled to a continuation of his salary from the date of termination through
the remaining term of the agreement. The agreement contains a provision stating
that in the event of termination of employment or diminution of employment in
connection with, or within one year after, any change in control of the Bank,
Mr. Romaine will be paid in a lump sum an amount equal to 2.99 times his five
year average cash compensation. Had a change in control been deemed to have
occurred at completion of the last fiscal
28
<PAGE>
year, Mr. Romaine would have been entitled to a lump sum payment of
approximately $388,000. The payment that would be made would be an expense to
the Bank, thereby reducing net income and the Bank's capital by that amount. The
agreement is reviewed annually by the Board of Directors and may be extended for
additional one-year periods upon a determination of the Board and satisfactory
job performance within the Board's sole discretion.
The Bank also entered into similar employment agreements with eight
officers of the Bank, with terms of three, two and one years and severance
protection upon a termination of employment or diminution of employment
following a change in control with such payment equalling between one and three
times the current annual compensation of such individuals. Upon a change in
control, payment to all executive officers as a group (seven persons), excluding
Mr. Romaine, as of December 31, 1998, would have equalled approximately $1.0
million.
Other Compensation
Employee Stock Ownership Plan. The Bank maintains an ESOP for the
exclusive benefit of participating employees. Participating employees are
employees who have completed one year of service with the Bank or its subsidiary
and have attained the age 21.
The ESOP be funded by contributions made by the Bank in cash or the
Common Stock. Benefits may be paid either in shares of the Common Stock or in
cash. The ESOP borrowed funds with which to acquire 243,340 shares of the Common
Stock issued in the Conversion, representing 8.0% of the Common Stock then
outstanding. The loan is secured by the shares purchased and earnings of ESOP
assets. Shares purchased with such loan proceeds will be held in a suspense
account for allocation among participants as the loan is repaid. This loan is
expected to be fully repaid in approximately 15 years. For the 1998 fiscal year,
the Bank recognized an expense of $299,000 regarding the ESOP.
1996 Stock Option Plan. The Company's Board of Directors adopted a 1996
Stock Option Plan, which was approved by the Company's stockholders on July 9,
1996. Pursuant to the 1996 Stock Option Plan, a number of shares equal to 10% of
the Common Stock issued in the Company's initial public offering (304,175 shares
of Common Stock) were reserved for issuance by the Company upon exercise of
stock options to be granted to officers, directors, and key employees of the
Company (or any present of future parent or subsidiary of the Company), from
time to time under the 1996 Stock Option Plan. The purpose of the 1996 Stock
Option Plan is to provide additional incentive to certain officers, directors,
and key employees by facilitating their purchase of a stock interest in the
Company. The 1996 Stock Option Plan became effective on July 9, 1996 and
provides for a term of ten years, after which no awards may be made, unless
earlier terminated by the Board of Directors pursuant to the terms of the 1996
Stock Option Plan.
An initial grant of stock options under the 1996 Stock Option Plan was
made to officers, directors, and key employees upon the Company's receipt of
stockholder approval on July 9, 1996, and the option exercise price is the
closing price of the Common Stock on the date of stockholder approval. The
initial grant of stock options were the only options granted to officers,
directors, and key employees during the fiscal year ended December 31, 1996. In
December 1997, certain officers and key employees were granted an aggregate of
16,000 additional options under the 1996 Stock Option Plan. The option exercise
price is the closing price of the Company's Common Stock on the date of the
grant. No options were granted to officers, directors and key employees during
the fiscal year ended December 31, 1998. As of the Record Date, 15,208 stock
options have been exercised pursuant to the 1996 Stock Option Plan.
29
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
- ------------------------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SARs in-the-Money Options/SARs
Acquired on Value at Fiscal Year-End at Fiscal Year-End
Exercise Realized (#) ($)
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leonard G. Romaine 0 $0 12,767/20,650 114,066/171,094
</TABLE>
(1) Based on an exercise price of $10.625 for options granted in the fiscal
year ended December 31, 1996, and $20.00 for options granted in the
fiscal year ended December 31, 1996 and the closing price of the Common
Stock on December 31, 1998 of $20.00.
Management Stock Bonus Plan. The board of directors of the Bank has
adopted the MSBP as a method of providing directors, executive officers and key
employees of the Bank with a proprietary interest in the Company in a manner
designed to encourage such persons to remain in the employment or service with
the Bank. Awards under the MSBP were made in recognition of prior and expected
future services to the Bank to those directors, executive officers and key
employees of the Bank responsible for implementation of the policies adopted by
the board of directors of the Bank, the profitable operation of the Bank, and as
a means of providing a further retention incentive and direct link between
compensation and the profitability of the Bank. Awards under the MSBP vest at a
rate of 20% per year beginning on the anniversary date of the date of grant. An
initial grant of 82,732 shares of restricted stock was made on July 9, 1997, the
date of stockholder approval of the MSBP. No awards were granted under the MSBP
in 1998.
Defined Benefit 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 fund
pension costs accrued. 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.
All full-time employees of the Bank are eligible to participate after
one year of service and attainment of age 21. A qualifying employee becomes
fully vested in the Pension Plan upon completion of five years service or when
the normal retirement age of 65 is attained. The Pension Plan is intended to
comply with the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
The Pension Plan provides for monthly payments to each participating
employee at normal retirement age. The annual allowance payable under the
Pension Plan is equal to 25% of an employee's average monthly salary, up to
$650, plus 40% of average monthly salary in excess of $650, reduced for less
than 25 years of service, plus 1/4 of 1% of average monthly salary times years
of service. If benefits are paid prior to age 65, the benefit specified will be
reduced by 1/15 for each of the first five years and 1/30 for each of the next
five years and reduced actuarially for each additional year by which the
starting date of such benefit precedes age 65. There is a minimum monthly
benefit equal to 2% of monthly salary, times years of service up to 10 years.
The Pension Plan also provides for payments in the event of disability or death.
At December 31, 1998, Mr. Romaine had 29 years of credited service under the
Pension Plan. The Bank had a pension expense of $244,000 for the fiscal year
1998. At December 31, 1998, the Pension Plan had projected benefit obligations
greater than plan assets of approximately $1.2 million.
30
<PAGE>
The following table shows the estimated annual benefits payable under
the Pension Plan in calendar year 1998 based on the respective employee's years
of benefit service and applicable average annual salary, as calculated under the
Pension Plan. Benefits under the Pension Plan are not subject to offset for
Social Security benefits.
Years of Benefit Service
------------------------
15 20 25 30 35
-- -- -- -- --
$ 20,000.................. $ 4,848 $ 6,464 $ 8,080 $ 8,330 $ 8,680
40,000.................. 10,398 13,864 17,330 17,830 18,330
60,000.................. 15,948 21,264 26,580 27,330 28,080
80,000.................. 21,498 28,664 35,830 36,830 37,830
100,000.................. 27,048 36,064 45,080 46,330 47,580
120,000.................. 32,598 43,464 54,330 55,830 57,330
150,000.................. 40,823 54,564 68,205 70,080 71,955
Report of the Compensation Committee on Executive Compensation
The Bank Compensation Committee meets annually to review compensation
paid to the chief executive officer. The Committee reviews various published
surveys of compensation paid to employees performing similar duties for
depository institutions and their holding companies, with a particular focus on
the level of compensation paid by comparable stockholder institutions in and
around the Bank's market area, including institutions with total assets of
between $100 million and $300 million. Although the Committee does not
specifically set compensation levels for executive officers based on whether
particular financial goals have been achieved by the Bank, the Committee does
consider the overall profitability of the Bank when making these decisions.
During the year ended December 31, 1998, Leonard G. Romaine, President
received an increase in his base salary from $115,000 to $125,400. The Committee
will consider the annual compensation paid to the presidents and chief executive
officers of publicly owned financial institutions nationally, in the State of
New Jersey and surrounding Northeastern states with assets of between $100
million and $500 million and the individual job performance of such individual
in consideration of its specific salary increase decision with respect to
compensation to be paid to the president and chief executive officers in the
future.
Compensation Committee:
Albert J. Weite
Edward J. Seugling
Raoul G. Barton
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Bank during the year ended December
31, 1998 consisted of Directors Weite, Barton and Seugling, all members of the
Board of Directors of the Company. Romaine was a member of the Compensation
Committee during fiscal 1998 but did not participate in matters involving his
personal compensation.
31
<PAGE>
Performance Graph
Set forth below is a stock performance graph comparing the cumulative
total shareholder return on the Common Stock with (a) the cumulative total
stockholder return on stocks included in the Nasdaq Stock Market index and (b)
the cumulative total stockholder return on stocks included in the Nasdaq Bank
index, as prepared for Nasdaq by the Center for Research in Securities Prices
("CRSP") at the University of Chicago. All three investment comparisons assume
the investment of $100 as of the close of January 5, 1996 (the closing date of
initial issuance of the Common Stock). All of these cumulative total returns are
computed assuming the reinvestment of dividends. In the graph below, the periods
compared were January 5, 1996 and the Company's fiscal years ending of December
31, 1996, 1997 and 1998.
There can be no assurance that the Company's future stock performance
will be the same or similar to the historical stock performance shown in the
graph below. The Company neither makes nor endorses any predictions as to stock
performance.
[GRAPHIC OMITTED]
==========================================================================
1/5/96 12/31/96 12/31/97 12/31/98
- --------------------------------------------------------------------------
CRSP Nasdaq U.S. Index $100 $126 $161 $227
- --------------------------------------------------------------------------
CRSP Nasdaq Bank Index $100 $134 $224 $222
- --------------------------------------------------------------------------
Little Falls Bancorp, Inc. $100 $113 $184 $181
==========================================================================
32
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
Persons and groups owning in excess of 5% of the Common Stock are
required to file certain reports regarding such ownership pursuant to the
Securities Exchange Act of 1934, as amended (the "1934 Act"). The following
table sets forth, as of the March 22, 1999, persons or groups who own more than
5% of the Common Stock and the ownership of all executive officers and directors
of the Company as a group. The information provided is based upon documents
supplied to the Company by the persons providing such information pursuant to
the 1934 Act. The Company does not verify this information. Other than as noted
below, management knows of no person or group that owns more than 5% of the
outstanding shares of Common Stock at the Voting Record Date.
Percent of Shares of
Name and Address Amount and Nature of Common Stock
of Beneficial Owner Beneficial Ownership Outstanding
- ------------------- -------------------- -----------
First Manhattan Co.
437 Madison Avenue
New York, NY 10022 198,000(1) 7.99%
Wellington Management Co. LLP
75 State Street
Boston, MA 02109 126,100(2) 5.09%
Little Falls Bank
Employee Stock Ownership Plan
86 Main Street
Little Falls, NJ 07424 241,979(3) 9.77%
John Hancock Advisors, Inc.
Post Office Box 111
Boston, MA 02117 225,000(4) 9.49%
- -------------------------------
(1) Information provided is based on a Schedule 13G/A dated February 11,
1999.
(2) Information provided is based on a Schedule 13G/A dated February 8,
1999 filed by Wellington Management Co. LLP.
(3) The ESOP purchased such shares for the exclusive benefit of plan
participants with funds borrowed from the Company. These shares are
held in a suspense account and will be allocated among ESOP
participants annually on the basis of compensation as the ESOP debt is
repaid. The Board of Directors has appointed a committee consisting of
John P. Pullara, Leonard G. Romaine and Della Talerico to serve as the
ESOP administrative committee ("ESOP Committee") and Directors Barton,
Parker and Seugling to serve as the ESOP trustees ("ESOP Trustees").
The ESOP Committee or the Board instructs the ESOP Trustees regarding
investment of ESOP plan assets. The ESOP Trustees must vote all shares
allocated to participant accounts under the ESOP as directed by
participants. Unallocated shares and shares for which no timely voting
direction is received will be voted by the ESOP Trustees as directed by
the ESOP Committee. As of March 11, 1999, 33,927 shares had been
allocated under the ESOP to participant accounts.
(4) Information provided is based on a Schedule 13G/A dated January 13,
1999. JHA has direct beneficial ownership of 225,000 shares of common
stock. Through separate Advisory Agreements, JHA has sole power to vote
120,000 shares for the John Hancock Regional Fund and 105,000 shares
for the John Hancock and Thrift Opportunity Fund.
33
<PAGE>
(b) Security Ownership of Management.
Included under Item 10 of this report.
(c) Changes in Control.
On January 26, 1999, the Registrant entered into a definitive merger
agreement that will result in the acquisition of the Registrant by HUBCO, Inc.
This acquisition is expected to occur during the third fiscal quarters of the
Registrant's 1999 fiscal year. The Registrant has executed a stock option
agreement with HUBCO, Inc. that provides HUBCO, Inc. with options that may be
exercised for approximately 19.9% of the common stock of the Registrant at an
exercise price of $19.25 per share in the event the planned acquisition does not
occur. The planned acquisition is subject to numerous conditions.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
No directors, executive officers, or immediate family members of such
individuals were engaged in transactions with the Bank or any subsidiary
involving more than $60,000 during the year ended December 31, 1998.
Furthermore, the Bank had no "interlocking" relationships existing during the
year ended December 31, 1998 in which (i) any executive officer is a member of
the Board of Directors/Trustees of another entity, one of whose executive
officers is a member of the Bank's Board of Directors, or where (ii) any
executive officer is a member of the compensation committee of another entity,
one of whose executive officers is a member of the Bank's Board of Directors.
The Bank, like many financial institutions, has followed a policy of
granting various types of loans to officers, directors, and employees. All loans
to executive officers and directors of the Bank have been made in the ordinary
course of business and on substantially the same terms and conditions, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with the Bank's other customers, and do not involve more than the
normal risk of collectibility nor present other unfavorable features. 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. All loans by the Bank to its directors and executive officers are
subject to OTS regulations restricting loans and other transactions with
affiliated persons of the Bank. Loans to executive officers and directors of the
Bank, the Company and their affiliates amounted to approximately $684,000 or
2.19% of the Bank's retained earnings at December 31, 1998.
34
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference
to the following indicated pages of the Annual Report.
PAGE
----
Independent Auditors' Report......................................... 18
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1997......................................... 19
Consolidated Statements of Income for the Years Ended
December 31, 1998, 1997 and 1996................................... 20
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 1998, 1997 and 1996............... 21
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996............... 22-23
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996................................... 24-25
Notes to Consolidated Financial Statements........................... 26-58
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 Eight Employees of the Bank***
10.6 1996 Management Stock Bonus Plan***
10.7 1996 Stock Option Plan***
10.8 1997 Directors Stock Compensation Plan
10.9 1998 Directors Stock Compensation Plan
10.10 Directors Retirement and Consultation Plan
13.0 1998 Annual Report to Stockholders
21.0 Subsidiary of the Registrant (See Item 1 - Business-Subsidiary
Activities)
23.0 Consent of Accountants
27.0 Financial Data Schedule****
35
<PAGE>
(b) Reports on Form 8-K.
On November 12, 1998 the Registrant filed a Current Report on
Form 8-K (Items 5 and 7), announcing the termination of the
Agreement of Merger between the Registrant and Skylands
Community Bank.
- ------------------------
* 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).
*** Incorporated by reference into this document from the Exhibits to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996 (File No. 0-27010).
**** In electronic filing only.
36
<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 19, 1999 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/ Albert J. Weite By: /s/ Richard A. Capone
--------------------------------- ----------------------------------
Albert J. Weite Richard A. Capone
Chairman of the Board Chief Financial Officer
and Director (Principal Financial and
Accounting Officer)
Date: March 19, 1999 Date: March 19, 1999
By: /s/ Edward J. Seugling By:
--------------------------------- ----------------------------------
Edward J. Seugling John P. Pullara
Vice Chairman of the Board Director
and Director
Date: March 19, 1999 Date: __________ ___, 1999
By: /s/ George Kuiken By: /s/ Norman A. Parker
--------------------------------- ---------------------------------
George Kuiken Norman A. Parker
Director Director
Date: March 19, 1999 Date: March 19, 1999
By: ---------------------------------
Raoul G. Barton
Director
Date: __________ ___, 1999
<PAGE>
Little Falls Bancorp, Inc.
1997 Directors Stock Compensation Plan
Article I
---------
ESTABLISHMENT OF THE PLAN
1.01 Little Falls Bancorp, Inc. ("Company") hereby establishes the 1997
Directors Stock Compensation Plan (the "Plan") upon the terms and conditions
hereinafter stated.
Article II
----------
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and to retain personnel of
experience and ability as members of the Board of Directors of the Company by
providing such members of the Board with an additional equity interest in the
Company as compensation for their future professional contributions and service
to the Company and its subsidiaries.
Article III
-----------
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meaning as set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Beneficiary" means the person or persons designated by the
Participant to receive any benefits payable under the Plan in the event of such
Participant's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Participant's surviving spouse, if
any, or if none, the Participant's estate.
3.02 "Board" means the Board of Directors of the Company, or any
successor corporation thereto.
3.03 "Cause" means the personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profits, intentional
failure to perform stated duties, willful violation of a material provision of
any law, rule or regulation (other than traffic violations and similar offense),
or a material violation of a final cease-and-desist order or any other action
which results in a substantial financial loss to the Company or its
Subsidiaries.
3.04 "Change in Control" shall mean: (i) the sale of all, or a material
portion, of the assets of the Company or its Subsidiaries; (ii) the merger or
recapitalization of the Company whereby the Company is not the surviving entity;
(iii) a change in control of the Company as otherwise defined or determined by
the Office of Thrift Supervision ("OTS") or regulations promulgated by it; or
(iv) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the 1934 Act
and the rules and regulations promulgated thereunder) of twenty-five percent
(25%) or more of the outstanding voting securities of the Company by any person,
1
<PAGE>
trust, entity or group. This limitation shall not apply to the purchase of
shares of up to 25% of any class of securities of the Company by a tax-qualified
employee stock benefit plan sponsored by the Company or its subsidiaries which
is exempt from the approval requirements, set forth under 12 C.F.R.
ss.574.3(c)(1)(vi) as now in effect or as may hereafter be amended. The term
"person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
decision of the Committee as to whether a Change in Control has occurred shall
be conclusive and binding.
3.05 "Committee" means the Board of Directors as a whole or the
Executive Committee appointed by the Board from time to time, if such Executive
Committee shall exist.
3.06 "Common Stock" means shares of the common stock, $.10 par value
per share, of the Company or any successor thereto.
3.07 "Company" shall mean Little Falls Bancorp, Inc., the parent
corporation of the Company.
3.08 "Director" means a member of the Board of the Company.
3.09 "Director Emeritus" means a person serving as an director
emeritus, advisory director, consulting director, or other similar position as
may be appointed by the Board of Directors of the Company from time to time.
3.10 "Disability" means any physical or mental impairment which renders
the Participant incapable of continuing in the service of the Company in his
current capacity as determined by the Committee.
3.11 "Employee" means any person who is employed by the Company or a
Subsidiary. "Non- employee" shall refer to an individual that is not in the
employ of the Company or its subsidiaries within the meaning of the Internal
Revenue Code of 1986, as amended.
3.12 "Effective Date" shall mean the date of Board approval of the Plan
on April 17, 1997.
3.14 "Participant" means a Non-employee Director who receives a Plan
Share Award under the Plan.
3.15 "Plan Shares" means shares of Common Stock awarded to a
Participant pursuant to the Plan.
3.16 "Plan Share Award" or "Award" means a right granted to a
Participant under this Plan to earn or to receive Plan Shares.
3.17 "Plan Share Reserve" means the shares of Common Stock authorized
for issuance in accordance with the Plan.
2
<PAGE>
3.18 "Savings Bank" means Little Falls Bank, and any successor
corporation thereto.
3.19 "Subsidiary" means the subsidiaries of the Company.
Article IV
----------
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and
interpreted by the Board of Directors of the Company or a Committee appointed by
said Board, which shall consist of not less than two Non-employee members of the
Board, which shall have all of the powers allocated to it in this and other
sections of the Plan. All persons designated as members of the Committee shall
be "Non-Employee Directors" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended ("1934 Act"). The interpretation and
construction by the Committee of any provisions of the Plan or of any Plan Share
Award granted hereunder shall be final and binding. The Committee shall act by
vote or written consent of a majority of its members. Subject to the express
provisions and limitations of the Plan, the Committee may adopt such rules,
regulations and procedures as it deems appropriate for the conduct of its
affairs. The Committee shall report its actions and decisions with respect to
the Plan to the Board at appropriate times, but in no event less than one time
per calendar year.
4.02 Role of the Board. The members of the Committee shall be appointed
or approved by, and will serve at the pleasure of the Board. The Board may in
its discretion from time to time remove members from, or add members to, the
Committee. The Board shall have all of the powers allocated to it in this and
other sections of the Plan, may take any action under or with respect to the
Plan which the Committee is authorized to take, and may reverse or override any
action taken or decision made by the Committee under or with respect to the
Plan, provided, however, that the Board may not revoke any Plan Share Award
already made except as provided in Section 7.01(a) herein.
4.03 Limitation on Liability. No member of the Board or the Committee
shall be liable for any determination made in good faith with respect to the
Plan or any Plan Share Awards granted. If a member of the Board or the Committee
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by any reason of anything done or not done by him in such
capacity under or with respect to the Plan, the Company shall indemnify such
member against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in the best interests of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Article V
---------
PLAN SHARE RESERVE
5.01 Plan Share Reserve. The Committee is authorized to deliver Plan
Share Awards representing up to 25,000 shares of Common Stock of the Company.
Such Awards may be from authorized, but unissued shares, treasury shares or
shares purchased by the Company for such purposes.
3
<PAGE>
5.02 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards or the decision of the
Committee to return Plan Shares to the Company, the Plan Share Reserve shall be
reduced by the number of Shares subject to the Awards so allocated or returned.
Any Shares subject to an Award which may not be earned because of forfeiture by
the Participant shall be added to the Plan Share Reserve.
Article VI
----------
ELIGIBILITY; ALLOCATIONS
6.01 Allocations. As of the Effective Date of the Plan, each
Non-employee Director of the Company shall be granted a Plan Share Award under
the Plan consisting of 3,500 shares of Common Stock, subjected to the terms and
conditions specified hereinafter. Additionally, the Committee may make
additional Plan Share Awards under the Plan from time to time, provided that
such Awards in the agggregate do not exceed the limitations specified at Section
5.01.
6.02 Terms of Awards. Such Plan Share Awards shall be earned and
non-forfeitable at the rate of one-fifth as of the one-year anniversary of the
Effective Date and an additional one-fifth following each of the next four
successive years during such periods of service as a Director or Director
Emeritus. Further, such Plan Share Award shall be immediately 100% earned and
non-forfeitable in the event of the death or Disability of such Director or
Director Emeritus, or upon a Change in Control of the Company. Subsequent to the
Effective Date, Plan Share Awards may be awarded to newly elected or appointed
Directors of the Company by the Committee, provided that in no event shall
Awards to any individual Non-employee Director exceed 20% of the aggregate
authorized Plan Share Reserve. All actions by the Committee shall be deemed
final, except to the extent that such actions are revoked by the Board.
6.03 Form of Allocation. As promptly as practicable after a
determination is made that a Plan Share Award is to be made, the Committee shall
notify the Participant in writing of the grant of the Award, the number of Plan
Shares covered by the Award, and the terms upon which the Plan Shares subject to
the award may be earned. The date on which the Committee makes its award
determination or the date the Committee so notifies the Participant shall be
considered the date of grant of the Plan Share Awards as determined by the
Committee. The Committee shall maintain records as to all grants of Plan Share
Awards under the Plan.
6.04 Allocations Not Required. Notwithstanding anything to the
contrary, no Director shall have any right or entitlement to receive a Plan
Share Award hereunder, such Awards being at the total discretion of the
Committee and the Board. The Committee may, with the approval of the Board (or,
if so directed by the Board) return all Common Stock in the Plan Share Reserve
to the Company at any time, and cease issuing Plan Share Awards.
4
<PAGE>
Article VII
-----------
FORFEITURES; DIVIDENDS; DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Forfeitures.
(a) Revocation for Misconduct. Notwithstanding anything herein to the
contrary, the Board may, by resolution, immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously awarded under
this Plan, to the extent such Plan Shares have not been deemed earned and non-
forfeitable in the case of a Participant who is discharged from the employ or
service of the Company, Savings Bank or a Subsidiary for Cause, or who is
discovered after termination of employment or service to have engaged in conduct
that would have justified termination for Cause. A determination of Cause shall
be made by the Board within its sole discretion.
(b) Exception for Terminations Due to Death or Disability. All Plan
Shares subject to a Plan Share Award held by a Participant whose service with
the Company shall terminate due to death or Disability, shall be deemed 100%
earned and nonforfeitable as of the Participant's last date of service with the
Company.
(c) Exception for Termination after a Change in Control. All Plan
Shares subject to a Plan Share Award held by a Participant shall be deemed to be
immediately 100% earned and non- forfeitable in the event of a Change in Control
of the Company or Savings Bank.
7.02 Payment of Dividends. A holder of a Plan Share Award, whether or
not earned, shall also be entitled to receive an amount equal to any cash
dividends declared and paid with respect to shares of Common Stock represented
by such Plan Share Award commencing on the date the Plan Shares are awarded.
Such cash dividend amounts shall be paid directly to the Participant.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Plan Shares shall be
distributed to the Participant or his Beneficiary, as the case may be, as soon
as practicable after the date of grant of the Plan Share Award; provided that
such Common Stock representing such Plan Shares shall contain a restrictive
legend detailing the applicable limitations of such shares with respect to
transfer and forfeiture.
(b) Form of Distribution. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be given for each Plan Share earned.
(c) Regulatory Exceptions. No Plan Shares shall be distributed,
however, unless and until all of the requirements of all applicable law and
regulation shall have been fully complied with.
7.04 Voting of Plan Shares. The Participant shall be entitled to direct
the voting of all Common Stock represented by a Plan Share Award once
distributed.
5
<PAGE>
Article VIII
------------
MISCELLANEOUS
8.01 Adjustments for Capital Changes. The aggregate number of Plan
Shares available for issuance pursuant to the Plan Share Awards and the number
of Shares to which any Plan Share Award relates shall be proportionately
adjusted for any increase or decrease in the total number of outstanding shares
of Common Stock issued subsequent to the effective date of the Plan resulting
from any split, subdivision or consolidation of the Common Stock or other
capital adjustment, change or exchange of the Common Stock, or other increase or
decrease in the number or kind of shares effected without receipt or payment of
consideration by the Company.
8.02 Amendment and Termination of the Plan. The Board may, by
resolution, at any time, amend or terminate the Plan.
8.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall
not be transferable by a Participant prior to being deemed 100% earned and
non-forfeitable, except in the event of death of the Participant.
8.04 No Employment Rights. Neither the Plan nor any grant of a Plan
Share Award or Plan Shares hereunder nor any action taken by the Committee or
the Board in connection with the Plan shall create any right, either express or
implied, on the part of any Participant to continue in the employ or service of
the Company, Savings Bank, or a Subsidiary thereof.
8.05 Voting and Dividend Rights. No Participant shall have any voting
or dividend rights of a stockholder with respect to any Plan Shares covered by a
Plan Share Award prior to the time said Plan Shares are actually distributed to
such Participant.
8.06 Governing Law. The Plan shall be governed by and construed under
the laws of the State of New Jersey, except to the extent that Federal Law shall
be deemed applicable.
8.07 Effective Date. The Plan shall be effective as of April 17, 1997.
8.08 Term of Plan. This Plan shall remain in effect until the earlier
of (i) termination by the Board, (ii) the distribution of all shares of Common
Stock authorized under the Plan Share Award, or (iii) 10 years from the
Effective Date. Termination of the Plan shall not effect any Plan Share Awards
previously granted, and such Plan Share Awards shall remain valid and in effect
until they have been earned and paid, or by their terms expire or are forfeited.
8.09 Non-Trust Status of Plan. It is intended that benefits under the
Plan shall be awarded in the form of Common Stock of the Company. Prior to the
time of delivery of such Common Stock to a Participant, no assets of the Company
shall be deemed to constitute a trust hereunder.
6
<PAGE>
Little Falls Bancorp, Inc.
1998 Directors Stock Compensation Plan
Article I
---------
ESTABLISHMENT OF THE PLAN
1.01 Little Falls Bancorp, Inc. ("Company") hereby establishes the 1998
Directors Stock Compensation Plan (the "Plan") upon the terms and conditions
hereinafter stated.
Article II
----------
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to reward and to retain personnel of
experience and ability as members of the Board of Directors of the Company by
providing such members of the Board with an additional equity interest in the
Company as compensation for their future professional contributions and service
to the Company and its subsidiaries.
Article III
-----------
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meaning as set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Beneficiary" means the person or persons designated by the
Participant to receive any benefits payable under the Plan in the event of such
Participant's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Participant's surviving spouse, if
any, or if none, the Participant's estate.
3.02 "Board" means the Board of Directors of the Company, or any
successor corporation thereto.
3.03 "Cause" means the personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profits, intentional
failure to perform stated duties, willful violation of a material provision of
any law, rule or regulation (other than traffic violations and similar offense),
or a material violation of a final cease-and-desist order or any other action
which results in a substantial financial loss to the Company or its
Subsidiaries.
3.04 "Change in Control" shall mean: (i) the sale of all, or a material
portion, of the assets of the Company or its Subsidiaries; (ii) the merger or
recapitalization of the Company whereby the Company is not the surviving entity;
(iii) a change in control of the Company as otherwise defined or determined by
the Office of Thrift Supervision ("OTS") or regulations promulgated by it; or
(iv) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the 1934 Act
and the rules and regulations promulgated thereunder) of twenty-five percent
(25%) or more of the outstanding voting securities of the Company by any person,
1
<PAGE>
trust, entity or group. This limitation shall not apply to the purchase of
shares of up to 25% of any class of securities of the Company by a tax-qualified
employee stock benefit plan sponsored by the Company or its subsidiaries which
is exempt from the approval requirements, set forth under 12 C.F.R.
ss.574.3(c)(1)(vi) as now in effect or as may hereafter be amended. The term
"person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. The
decision of the Committee as to whether a Change in Control has occurred shall
be conclusive and binding.
3.05 "Committee" means the Board of Directors as a whole or the
Executive Committee appointed by the Board from time to time, if such Executive
Committee shall exist.
3.06 "Common Stock" means shares of the common stock, $.10 par value
per share, of the Company or any successor thereto.
3.07 "Company" shall mean Little Falls Bancorp, Inc., the parent
corporation of the Company.
3.08 "Director" means a member of the Board of the Company.
3.09 "Director Emeritus" means a person serving as an director
emeritus, advisory director, consulting director, or other similar position as
may be appointed by the Board of Directors of the Company from time to time.
3.10 "Disability" means any physical or mental impairment which renders
the Participant incapable of continuing in the service of the Company in his
current capacity as determined by the Committee.
3.11 "Employee" means any person who is employed by the Company or a
Subsidiary. "Non- employee" shall refer to an individual that is not in the
employ of the Company or its subsidiaries within the meaning of the Internal
Revenue Code of 1986, as amended.
3.12 "Effective Date" shall mean the date of Board approval of the Plan
on April 21, 1998.
3.14 "Participant" means a Non-employee Director who receives a Plan
Share Award under the Plan.
3.15 "Plan Shares" means shares of Common Stock awarded to a
Participant pursuant to the Plan.
3.16 "Plan Share Award" or "Award" means a right granted to a
Participant under this Plan to earn or to receive Plan Shares.
3.17 "Plan Share Reserve" means the shares of Common Stock authorized
for issuance in accordance with the Plan.
3.18 "Savings Bank" means Little Falls Bank, and any successor
corporation thereto.
3.19 "Subsidiary" means the subsidiaries of the Company.
2
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Article IV
----------
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and
interpreted by the Board of Directors of the Company or a Committee appointed by
said Board, which shall consist of not less than two Non-employee members of the
Board, which shall have all of the powers allocated to it in this and other
sections of the Plan. All persons designated as members of the Committee shall
be "Non-Employee Directors" within the meaning of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended ("1934 Act"). The interpretation and
construction by the Committee of any provisions of the Plan or of any Plan Share
Award granted hereunder shall be final and binding. The Committee shall act by
vote or written consent of a majority of its members. Subject to the express
provisions and limitations of the Plan, the Committee may adopt such rules,
regulations and procedures as it deems appropriate for the conduct of its
affairs. The Committee shall report its actions and decisions with respect to
the Plan to the Board at appropriate times, but in no event less than one time
per calendar year.
4.02 Role of the Board. The members of the Committee shall be appointed
or approved by, and will serve at the pleasure of the Board. The Board may in
its discretion from time to time remove members from, or add members to, the
Committee. The Board shall have all of the powers allocated to it in this and
other sections of the Plan, may take any action under or with respect to the
Plan which the Committee is authorized to take, and may reverse or override any
action taken or decision made by the Committee under or with respect to the
Plan, provided, however, that the Board may not revoke any Plan Share Award
already made except as provided in Section 7.01(a) herein.
4.03 Limitation on Liability. No member of the Board or the Committee
shall be liable for any determination made in good faith with respect to the
Plan or any Plan Share Awards granted. If a member of the Board or the Committee
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by any reason of anything done or not done by him in such
capacity under or with respect to the Plan, the Company shall indemnify such
member against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding if he or she acted in good faith
and in a manner he or she reasonably believed to be in the best interests of the
Company, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Article V
---------
PLAN SHARE RESERVE
5.01 Plan Share Reserve. The Committee is authorized to deliver Plan
Share Awards representing up to 24,500 shares of Common Stock of the Company.
Such Awards may be from authorized, but unissued shares, treasury shares or
shares purchased by the Company for such purposes.
5.02 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards or the decision of the
Committee to return Plan Shares to the Company, the Plan Share Reserve shall be
reduced by the number of Shares subject to the Awards so allocated or returned.
Any Shares subject to an Award which may not be earned because of forfeiture by
the Participant shall be added to the Plan Share Reserve.
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Article VI
----------
ELIGIBILITY; ALLOCATIONS
6.01 Allocations. As of the Effective Date of the Plan, each
Non-employee Director of the Company shall be granted a Plan Share Award under
the Plan consisting of 3,500 shares of Common Stock, subjected to the terms and
conditions specified hereinafter. Additionally, the Committee may make
additional Plan Share Awards under the Plan from time to time, provided that
such Awards in the agggregate do not exceed the limitations specified at Section
5.01.
6.02 Terms of Awards. Such Plan Share Awards shall be earned and
non-forfeitable at the rate of one-fifth as of the one-year anniversary of the
Effective Date and an additional one-fifth following each of the next four
successive years during such periods of service as a Director or Director
Emeritus. Further, such Plan Share Award shall be immediately 100% earned and
non-forfeitable in the event of the death or Disability of such Director or
Director Emeritus, or upon a Change in Control of the Company. Subsequent to the
Effective Date, Plan Share Awards may be awarded to newly elected or appointed
Directors of the Company by the Committee, provided that in no event shall
Awards to any individual Non-employee Director exceed 20% of the aggregate
authorized Plan Share Reserve. All actions by the Committee shall be deemed
final, except to the extent that such actions are revoked by the Board.
6.03 Form of Allocation. As promptly as practicable after a
determination is made that a Plan Share Award is to be made, the Committee shall
notify the Participant in writing of the grant of the Award, the number of Plan
Shares covered by the Award, and the terms upon which the Plan Shares subject to
the award may be earned. The date on which the Committee makes its award
determination or the date the Committee so notifies the Participant shall be
considered the date of grant of the Plan Share Awards as determined by the
Committee. The Committee shall maintain records as to all grants of Plan Share
Awards under the Plan.
6.04 Allocations Not Required. Notwithstanding anything to the
contrary, no Director shall have any right or entitlement to receive a Plan
Share Award hereunder, such Awards being at the total discretion of the
Committee and the Board. The Committee may, with the approval of the Board (or,
if so directed by the Board) return all Common Stock in the Plan Share Reserve
to the Company at any time, and cease issuing Plan Share Awards.
Article VII
-----------
FORFEITURES; DIVIDENDS; DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Forfeitures.
(a) Revocation for Misconduct. Notwithstanding anything herein to the
contrary, the Board may, by resolution, immediately revoke, rescind and
terminate any Plan Share Award, or portion thereof, previously awarded under
this Plan, to the extent such Plan Shares have not been deemed earned and non-
forfeitable in the case of a Participant who is discharged from the employ or
service of the Company, Savings Bank or a Subsidiary for Cause, or who is
discovered after termination of employment or service
4
<PAGE>
to have engaged in conduct that would have justified termination for Cause. A
determination of Cause shall be made by the Board within its sole discretion.
(b) Exception for Terminations Due to Death or Disability. All Plan
Shares subject to a Plan Share Award held by a Participant whose service with
the Company shall terminate due to death or Disability, shall be deemed 100%
earned and nonforfeitable as of the Participant's last date of service with the
Company.
(c) Exception for Termination after a Change in Control. All Plan
Shares subject to a Plan Share Award held by a Participant shall be deemed to be
immediately 100% earned and non- forfeitable in the event of a Change in Control
of the Company or Savings Bank.
7.02 Payment of Dividends. A holder of a Plan Share Award, whether or
not earned, shall also be entitled to receive an amount equal to any cash
dividends declared and paid with respect to shares of Common Stock represented
by such Plan Share Award commencing on the date the Plan Shares are awarded.
Such cash dividend amounts shall be paid directly to the Participant within 30
calendar days of the payment of the respective dividend on the Common Stock.
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Plan Shares shall be
distributed to the Participant or his Beneficiary, as the case may be, as soon
as practicable after the date of grant of the Plan Share Award; provided that
such Common Stock representing such Plan Shares shall contain a restrictive
legend detailing the applicable limitations of such shares with respect to
transfer and forfeiture.
(b) Form of Distribution. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of Common Stock.
One share of Common Stock shall be given for each Plan Share earned.
(c) Regulatory Exceptions. No Plan Shares shall be distributed,
however, unless and until all of the requirements of all applicable law and
regulation shall have been fully complied with.
7.04 Voting of Plan Shares. The Participant shall be entitled to direct
the voting of all Common Stock represented by a Plan Share Award once the Common
Stock is distributed to the Participant.
Article VIII
------------
MISCELLANEOUS
8.01 Adjustments for Capital Changes. The aggregate number of Plan
Shares available for issuance pursuant to the Plan Share Awards and the number
of Shares to which any Plan Share Award relates shall be proportionately
adjusted for any increase or decrease in the total number of outstanding shares
of Common Stock issued subsequent to the effective date of the Plan resulting
from any split, subdivision or consolidation of the Common Stock or other
capital adjustment, change or exchange of the Common Stock, or other increase or
decrease in the number or kind of shares effected without receipt or payment of
consideration by the Company.
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8.02 Amendment and Termination of the Plan. The Board may, by
resolution, at any time, amend or terminate the Plan.
8.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall
not be transferable by a Participant prior to being deemed 100% earned and
non-forfeitable, except in the event of death of the Participant.
8.04 No Employment Rights. Neither the Plan nor any grant of a Plan
Share Award or Plan Shares hereunder nor any action taken by the Committee or
the Board in connection with the Plan shall create any right, either express or
implied, on the part of any Participant to continue in the employ or service of
the Company, Savings Bank, or a Subsidiary thereof.
8.05 Voting Rights. No Participant shall have any voting rights of a
stockholder with respect to any Plan Shares covered by a Plan Share Award prior
to the time said Plan Shares are actually distributed to such Participant.
8.06 Governing Law. The Plan shall be governed by and construed under
the laws of the State of New Jersey, except to the extent that Federal Law shall
be deemed applicable.
8.07 Effective Date. The Plan shall be effective as of April 21, 1998.
8.08 Term of Plan. This Plan shall remain in effect until the earlier
of (i) termination by the Board, (ii) the distribution of all shares of Common
Stock authorized under the Plan Share Award, or (iii) 10 years from the
Effective Date. Termination of the Plan shall not effect any Plan Share Awards
previously granted, and such Plan Share Awards shall remain valid and in effect
until they have been earned and paid, or by their terms expire or are forfeited.
8.09 Non-Trust Status of Plan. It is intended that benefits under the
Plan shall be awarded in the form of Common Stock of the Company. Prior to the
time of delivery of such Common Stock to a Participant, no assets of the Company
shall be deemed to constitute a trust hereunder.
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* 4/13/95 *
LITTLE FALLS SAVINGS BANK
DIRECTORS CONSULTATION AND RETIREMENT PLAN
WHEREAS, Little Falls Savings Bank ("Savings Bank") wishes to reward
the years of extensive service provided by the current members of the Board of
Directors and to continue to attract and to retain the best talent available to
serve on its Board of Directors, and
WHEREAS, it is deemed advisable and in the best interests of the
Savings Bank to offer such members of the Boards of Directors additional
financial incentives in the form of deferred compensation to encourage such
participation and service to the Savings Bank, as directors, and following
retirement as a director to encourage such individuals to continue to serve the
Savings Bank as a consulting director for a period of time thereafter,
NOW THEREFORE, BE IT RESOLVED that the Little Falls Savings Bank
Directors Consultation and Retirement Plan ("Plan"), attached hereto and made a
part of these minutes, be adopted and implemented effective May 9, 1995.
ARTICLE I
DEFINITIONS
The following words and phrases as used herein shall, for the purpose
of this Plan and any subsequent amendment thereof, have the following meanings
unless a different meaning is plainly required by the content:
1.1 "Savings Bank" means Little Falls Savings Bank, Little Falls, New
Jersey, or any successor thereto.
1.2 "Board" means the Board of Directors of the Savings Bank, as
constituted from time to time and successors thereto.
1.3 "Change in Control" means the power to control proxies by any
person, other than the Board of Directors of the Savings Bank to direct more
than 25% of the outstanding votes of the Savings Bank, the control of the
election of a majority of the Savings Bank's directors or the exercise of a
controlling influence over the management or policies of the Savings 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, as amended, ("Exchange Act"). In the event
the Savings Bank converts in the future from mutual-to-stock form, the term
"control" shall refer to the ownership, holding or power to vote more than 25%
of the Savings Bank's (or any parent holding company's) outstanding voting stock
by any person, the control of the election of a majority of the Savings Bank's
(or any parent holding company's) directors, or the exercise of
<PAGE>
a controlling influence over the management or policies of the Savings Bank by
any person or by persons acting as a group within the meaning of Section 13(d)
of the Exchange Act. 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. Change of Control shall also
mean: (i) the execution of an agreement for the sale of all, or a material
portion, of the assets of the Savings Bank; (ii) the execution of an agreement
for a merger or recapitalization of the Savings Bank or any merger or
recapitalization whereby the Savings Bank is not the surviving entity; (iii) a
change of control of the Savings Bank, as otherwise defined or determined by the
New Jersey Department of Banking, or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder) of twenty-five percent (25%) or
more of the outstanding voting securities of the Savings Bank by any person,
trust, entity or group. This limitation shall not apply to the purchase of
shares by underwriters in connection with a public offering of the Savings Bank
stock (or a parent holding company's stock), or the purchase of shares of up to
25% of any class of securities of the Savings Bank by a tax-qualified employee
stock benefit plan. The term "person" refers to an individual or a corporation,
partnership, trust, association, joint venture, pool, syndicate, sole
proprietorship, unincorporated organization or any other form of entity not
specifically listed herein. The decision of the Committee as to whether a change
in control has occurred shall be conclusive and binding. A change in control
shall not be deemed to have occurred as a result of a holding company
reorganization of the Savings Bank and simultaneous acquisition of 100% of such
stock by a parent savings and loan holding company or bank holding company.
1.4 "Committee" means the Executive Committee of the Board of the
Savings Bank.
1.5 "Director" means a member of the Board of the Savings Bank.
1.6 "Disability" (total and permanent disability) means a mental or
physical disability which prevents the Director from performing the normal
duties of his or her position with the Savings Bank. Such disability must have
prevented the Director from performing his or her duties for at least six
months, and a physician satisfactory to both the Director and the Savings Bank
must certify that the Director is disabled from performing his or her normal
duties with the Savings Bank.
1.7 "Effective Date" means May 9, 1995.
1.8 "Participant" means a Director serving as such on or after the
Effective Date. Such participation shall continue as long as such Participant
fulfills all requirements for participation subject to the right of termination,
amendment and modification of the Plan hereinafter set forth.
1.9 "Plan" means the Little Falls Savings Bank Directors Consultation
and Retirement Plan herein set forth, as amended from time to time.
2
<PAGE>
1.10 "Retirement Date" means the date of termination of service as a
Director following the participant's completion of not less than 20 years of
Board service and attainment of not less than age 60 while serving as a
Director.
1.11 "Service" means all years of service as a member of the Board and
all predecessor entities.
ARTICLE II
BENEFITS
2.1 Retirement. Upon a Participant's retirement from service as a
Director of the Savings Bank on or after the Retirement Date, the Savings Bank
shall pay to the participant a monthly pension in an amount approved by the
Board and set forth herein at Article II, Section 2.4, on the first business day
of each calendar month commencing on or after the Retirement Date. Except as
provided at Article II, Sections 2.2 and 2.3 herein, upon a Participant's
termination from service as a Director of the Savings Bank prior to the
Retirement Date, the Savings Bank shall have no financial obligations to the
Participant under the Plan.
2.2 Change in Control. All benefits payable, or that would become
payable if a Director were to retire prior to such Change in Control, shall
remain payable thereafter. Upon termination of service following a Change in
Control, all benefits shall be deemed payable in accordance with Article II,
Section 2.4; provided that if Participant has not yet attained the Retirement
Date as of such date of termination of service, such Participant shall
nevertheless be deemed to have served until the Retirement Date as of the date
of such termination following a Change of Control, and in order to calculate
benefits payable hereunder. Notwithstanding anything herein to the contrary, for
purposes of calculation of benefits in accordance with this Section, in the
event that a Participant shall not otherwise have commenced receipt of benefits
as of the date of a Change of Control, it shall be presumed that such
Participant shall have completed 20 years of service and attained age 60 as of
such date of a Change of Control and benefits shall be immediately payable as of
such date of a Change of Control.
2.3 Total and Permanent Disability. In the event of the Disability of
the Participant, the Participant will be entitled to a monthly pension in the
amount specified at Article II, Section 2.4, payable on the first day of the
month following certification of such Disability without regard to the actual
age of such Participant and presuming that the Participant shall have attained
the age of not less than 60 as of the date of such Disability; provided,
however, that such Participant shall have completed not less than 20 years of
service as of the date of certification of such Disability.
2.4 Level of Benefit Payments. Participants that retire as a Director
of the Savings Bank in accordance with Sections 2.1, 2.2 or 2.3 herein, shall be
eligible to receive retirement benefits as follows:
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A Participant who upon retirement on or after the Retirement Date
enters into an agreement to be a consulting director of the Savings Bank (in a
form similar to that contained at Schedule A hereto) shall be paid the
retirement benefit equal to the product of 50% times the regular monthly Board
fees in effect as of the date of retirement from the Board as a monthly sum
until the month following the date of death of such Participant.
ARTICLE III
INSURANCE
3.1 Ownership of Insurance. The Savings Bank, in its sole discretion,
may elect to purchase one or more life insurance policies on the lives of
Participants in order to provide funds to the Savings Bank to pay part or all of
the benefits accrued under this Plan. All rights and incidents of ownership in
any life insurance policy that the Savings Bank may purchase insuring the life
of the Participant (including any right to proceeds payable thereunder) shall
belong exclusively to the Savings Bank or its designated Trust, and neither the
Participant, nor any beneficiary or other person claiming under or through him
or her shall have any rights, title or interest in or to any such insurance
policy. The Participant shall not have any power to transfer, assign,
hypothecate or otherwise encumber in advance any of the benefits payable
thereunder, nor shall any benefits be subject to seizure for the benefit of any
debts or judgments, or be transferable by operation of law in the event of
bankruptcy, insolvency or otherwise. Any life insurance policy purchased
pursuant hereto and any proceeds payable thereunder shall remain subject to the
claims of the Savings Bank's general creditors.
3.2 Physical Examination. As a condition of becoming or remaining
covered under this Plan, each Participant, as may be requested by the Savings
Bank from time to time shall take a physical examination by a physician approved
by an insurance carrier. The cost of the examination shall not be borne by the
Participant. The report of such examination shall be transmitted directly from
the physician to the insurance carrier designated by the Savings Bank to
establish certain costs associated with obtaining insurance coverages as may be
deemed necessary under this Plan. Such examination shall remain confidential
among the Participant, the physician and the insurance carrier and shall not be
made available to the Savings Bank in any form or manner.
3.3 Death of Participant. On death of the Participant, the proceeds
derived from such insurance policy, if any, shall be paid to the Savings Bank or
its designated Trust.
ARTICLE IV
TRUST
4.1 Trust. Except as may be specifically provided, nothing contained in
this Plan and no action taken pursuant to the provisions of this Plan shall
create or be construed to create a trust of any kind, or a fiduciary
relationship between the Savings Bank and the Participant or
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<PAGE>
any other person. Any funds which may be invested under the provisions of this
Plan shall continue for all purposes to be a part of the general funds of the
Savings Bank. No person other than the Savings Bank shall by virtue of the
provisions of this Plan have any interest in such funds. The Savings Bank shall
not be under any obligation to use such funds solely to provide benefits
hereunder, and no representations have been made to a Participant that such
funds can or will be used only to provide benefits hereunder. To the extent that
any person acquires a right to receive payments from the Savings Bank under the
Plan, such rights shall be no greater than the right of any unsecured general
creditor of the Savings Bank.
In order to facilitate the accumulation of funds necessary to meet the
costs of the Savings Bank under this Plan (including the provision of funds
necessary to pay premiums with respect to any life insurance policies purchase
pursuant to Article III above and to pay benefits to the extent that the cash
value and/or proceeds of any such policies are not adequate to make payments to
a Participant or his or her beneficiary as and when the same are due under the
Plan), the Savings Bank may enter into a Trust Agreement. The Savings Bank, in
its discretion, may elect to place any life insurance policies purchased
pursuant to Article III above into the Trust. In addition, such sums shall be
placed in said Trust as may from time to time be approved by the Board of
Directors, in its sole discretion. To the extent that the assets of said Trust
and/or the proceeds of any life insurance policy purchased pursuant to Article
III are not sufficient to pay benefits accrued under this Plan, such payments
shall be made from the general assets of the Savings Bank.
ARTICLE V
VESTING
5.1 Vesting. All benefits under this Plan are deemed non-vested and
forfeitable prior to the Retirement Date. Notwithstanding the foregoing, all
benefits payable hereunder shall deemed 100% non-forfeitable by the Participant
upon the Retirement Date, upon termination of service following a Change in
Control of the Savings Bank, or upon the Disability of the Participant following
not less than 20 years of prior Board service. No benefits shall be deemed
payable hereunder for any time period prior to the time that such benefits shall
be deemed 100% non-forfeitable. Notwithstanding anything herein to the contrary,
in no event shall benefits payable hereunder be deemed vested and payable within
3 years of the Effective Date of the Plan except as follows: one-third of
benefits payable hereunder shall be deemed vested following one year after the
Effective Date of the Plan and one-third annually thereafter, except however in
the event that a Participant shall have attained age 60 and shall have completed
not less than 30 years of service, benefits shall be deemed 100% non-forfeitable
and payable as of the date of retirement on or after the Effective Date.
5
<PAGE>
ARTICLE VI
TERMINATION
6.1 Termination. All rights of the Participant hereunder shall
terminate immediately upon the Participant ceasing to be in the active service
of the Savings Bank prior to the time that benefits payable under the Plan shall
be deemed to be 100% non-forfeitable. A leave of absence approved by the Board
shall not constitute a cessation of service within the meaning of this
paragraph, within the sole discretion of the Committee.
ARTICLE VII
FORFEITURE OR SUSPENSION OF BENEFITS
7.1 Forfeiture or Suspension of Benefits. Notwithstanding any other
provision of this Plan to the contrary, benefits shall be forfeited or suspended
during any period of paid service with the Savings Bank following the
commencement of benefit payments, within the sole discretion of the Committee.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Other Benefits. Nothing in this Plan shall diminish or impair the
Participant's eligibility, participation or benefit entitlement under any other
benefit, insurance or compensation plan or agreement of the Savings Bank now or
hereinafter in effect.
8.2 No Effect on Employment. This Plan shall not be deemed to give any
Participant or other person in the employ or service of the Savings Bank any
right to be retained in the employment or service of the Savings Bank, or to
interfere with the right of the Savings Bank to terminate any Participant or
such other person at any time and to treat him or her without regard to the
effect which such treatment might have upon him or her as a Participant in this
Plan.
8.3 Legally Binding. The rights, privileges, benefits and obligations
under this Plan are intended to be legal obligations of the Savings Bank and
binding upon the Savings Bank, its successors and assigns.
8.4 Modification. The Savings Bank, by action of the Board of
Directors, reserves the exclusive right to amend, modify, or terminate this
Plan. Any such termination, modification or amendment shall not terminate or
diminish any rights or benefits accrued by any Participant prior thereto. The
Savings Bank shall give thirty (30) days' notice in writing to any Participant
prior to the effective date of any such amendment, modification or termination
of this
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Plan. Notwithstanding the foregoing, in no event shall such benefits payable
under the Plan be reduced below those provided for in Section 2.4 herein.
8.5 Arbitration. Any controversy or claim arising out of or relating to
any contract or the breach thereof shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association,
with such arbitration hearing to be held at the offices of the American
Arbitration Association ("AAA") nearest to the home office of the Savings Bank,
unless otherwise mutually agreed to by the Participant and the Savings Bank, and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
8.6 Limitation. No rights of any Participant are assignable by any
Participant, in whole or in part, either by voluntary or involuntary act or by
operation of law. Rights of Participants hereunder are not subject to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance or garnishment by creditors of the Participant. Such rights are not
subject to the debts, contracts, liabilities, engagements, or torts of any
Participant. No Participant shall have any right under this Plan or any Trust
referred to in Article IV or against any assets held or acquired pursuant
thereto other than the rights of a general, unsecured creditor of the Savings
Bank pursuant to the unsecured promise of the Savings Bank to pay the benefits
accrued hereunder in accordance with the terms of this Plan. The Savings Bank
has no obligation under this Plan to fund or otherwise secure its obligations to
render payments hereunder to Participants. No Participant shall have any voice
in the use, disposition, or investment of any asset acquired or set aside by the
Savings Bank to provide benefits under this Plan.
8.7 ERISA and IRC Disclaimer. It is intended that the Plan be neither
an "employee welfare benefit plan" nor an "employee pension benefit plan" for
purposes of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Further, it is intended that the Plan will not cause the interest of
a Participant under the Plan to be includable in the gross income of such
Participant prior to the actual receipt of a payment under the Plan for purposes
of the Internal Revenue Code of 1986, as amended ("IRC"). No representation is
made to any Participant to the effect that any insurance policies purchased by
the Savings Bank or assets of any Trust established pursuant to this Plan will
be used solely to provide benefits under this Plan or in any way shall
constitute security for the payment of such benefits. Benefits payable under
this Plan are not in any way limited to or governed by the proceeds of any such
insurance policies or the assets of any such Trust. No Participant in the Plan
has any preferred claim against the proceeds of any such insurance policies or
the assets of any such Trust.
8.8 Conduct of Participants. Notwithstanding anything contained herein
to the contrary, no payment of any then unpaid benefits shall be made and all
rights under the Plan payable to a Participant, or any other person, to receive
payments thereof shall be forfeited if the Participant shall engage in any
activity or conduct which in the opinion the Board of the Savings Bank is
inimical to the best interests of the Savings Bank.
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<PAGE>
8.9 Incompetency. If the Savings Bank shall find that any person to
whom any payment is payable under the Plan is deemed unable to care for his or
her personal affairs because of illness or accident, any payment due (unless a
prior claim therefor shall have been made by a duly appointed guardian,
committee or other legal representative) may be paid to the spouse, a child, a
parent, or a brother or sister, or to any person deemed by the Savings Bank to
have incurred expense for such person otherwise entitled to payment, in such
manner and proportions as the Board may determine in its sole discretion. Any
such payments shall constitute a complete discharge of the liabilities of the
Savings Bank under the Plan.
8.10 Construction. The Savings Bank shall have full power and authority
to interpret, construe and administer this Plan and the Savings Bank's
interpretations and construction thereof, and actions thereunder, shall be
binding and conclusive on all persons for all purposes. Directors of the Savings
Bank shall not be liable to any person for any action taken or omitted in
connection with the interpretation and administration of this Plan unless
attributable to his own willful, gross misconduct or lack of good faith.
8.11 Plan Administration. The Board of Directors of the Savings Bank
shall administer the Plan; provided, however, that the Board may appoint an
administrative committee ("Committee") to provide administrative services or
perform duties required by this Plan. The Committee shall have only the
authority granted to it by the Board.
8.12 Governing Law. This Plan shall be construed in accordance with and
governed by the laws of the State of New Jersey, except to the extent that
Federal law shall be deemed to apply. No payments of benefits shall be made
hereunder if the Board of the Savings Bank, or counsel retained thereby, shall
determine that such payments shall be in violation of applicable regulations, or
likely result in imposition of regulatory action, by the New Jersey Department
of Banking, Federal Deposit Insurance Corporation or other appropriate banking
regulatory agencies.
8.13 Successors and Assigns. The Plan shall be binding upon any
successor or successors of the Savings Bank, and unless clearly inapplicable,
reference herein to the Savings Bank shall be deemed to include any successor or
successors of the Savings Bank.
8.14 Sole Agreement. The Plan expresses, embodies, and supersedes all
previous agreements, understandings, and commitments, whether written or oral,
between the Savings Bank and any Participants hereto with respect to the subject
matter hereof.
8
<PAGE>
SCHEDULE A
Little Falls Savings Bank
Little Falls, New Jersey
-----------------------------------------------
DIRECTORS CONSULTATION AND RETIREMENT PLAN
-----------------------------------------------
WHEREAS, the Board of Directors of Little Falls Savings Bank, Little
Falls, New Jersey ("Savings Bank") has previously adopted the Directors
Consultation and Retirement Plan ("Plan"); and
WHEREAS, upon retirement as a Director, I am eligible to elect to
participant in such Plan;
My signature below hereby evidences my request to the Savings Bank of
my election to participate in the Plan, as follows:
1. This election to participate in the Plan is being delivered to
the Savings Bank effective ________________;
2. I hereby resign as a director of the Savings Bank as of
_____________; ("Retirement Date").
3. Upon retirement from the Board as of the Retirement Date, I
shall be appointed as a Consulting Director to the Savings
Bank and shall advise the Savings Bank from time to time on
business and community relations matters as may be requested;
4. As a Consulting Director, I will not have any specific duties
or responsibilities, except as may be specifically requested
from time to time by the Board;
5. Compensation as a Consulting Director shall be as specified at
Section II of the Plan as a consulting retainer and retirement
benefit.
6. I understand that the above listed items constitutes the only
benefits that shall be delivered to me as a participant in the
Plan.
<PAGE>
Little Falls Bancorp, Inc.
Annual Report - 1998
- --------------------------------------------------------------------------------
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................ 4
Management Responsibility Statement............................ 17
Independent Auditors' Report................................... 18
Consolidated Statements of Financial Condition................. 19
Consolidated Statements of Income.............................. 20
Consolidated Statements of Comprehensive Income................ 21
Consolidated Statements of Changes in Stockholders' Equity..... 22
Consolidated Statements of Cash Flows.......................... 23
Notes to Consolidated Financial Statements..................... 26
Other Corporate Information.................................... 59
<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 fourth annual stockholders' report. Last year was quite eventful. As you
know, we had initially hoped to combine with Skylands Community Bank to form a
more diversified institution with a wider customer base.
However, the agreement was mutually terminated in November 1998.
As previously reported, on January 26, 1999, we signed an agreement with HUBCO,
Inc., Mahwah, New Jersey, whereby HUBCO would acquire Little Falls. If the
required shareholder and regulatory approvals are obtained, we expect to close
the transaction in the second quarter of 1999.
We look forward to the proposed transaction and the opportunities that it
presents.
Your Board of Directors and management team are committed to protecting and
enhancing the value of your investment in the Company. We appreciate the
confidence, support and loyalty of our customers, employees, and stockholders.
Sincerely,
/s/Leonard G. Romaine
- ------------------------
Leonard G. Romaine
President
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"). 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 uses such
deposits primarily to originate loans secured by first mortgages on
owner-occupied one- to four-family residences in its market area, purchase loans
to diversify its loan portfolio, and to purchase mortgage-backed and investment
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, 1998 - December 31, 1998 $21 1/2 $11 1/2
July 1, 1998 - September 30, 1998 22 14
April 1, 1998 - June 30, 1998 22 1/4 18 1/4
January 1, 1998 - March 31, 1998 20 1/2 17 1/2
October 1, 1997 - December 31, 1997 20 1/2 16 1/4
July 1, 1997 - September 30, 1997 18 1/2 15 1/4
April 1, 1997 - June 30, 1997 15 7/8 12 5/8
January 5, 1997 - March 31, 1997 14 1/8 12 1/4
The number of stockholders of record of common stock as of the record
date of March 19, 1999 ("Record Date"), was 376. 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 2,470,551 shares
outstanding.
2
<PAGE>
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 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>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total Assets......................... $350,617 $328,522 $303,518 $310,355 $193,385
Loans receivable (net)............... 149,062 147,033 117,116 96,230 94,754
Mortgage-backed securities held
to maturity......................... 61,373 90,957 112,473 118,020 51,664
Mortgage-backed securities
available for sale.................. 13,971 13,929 -- -- --
Investment securities - held to
maturity............................ 40,577 57,988 51,370 29,999 36,146
Investment securities - available
for sale........................... 39,423 -- -- -- --
Cash and cash equivalents............ 33,393 6,788 10,374 53,419 4,065
Deposits............................. 243,048 230,133 228,312 247,851 176,173
Stockholders' equity................. 37,445 38,295 40,448 16,223 15,715
</TABLE>
Selected Operating Data
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total interest income.................. $22,746 $ 21,064 $ 18,776 $13,813 $13,075
Total interest expense................. 14,695 12,920 11,258 9,314 7,170
------- ------- ------- ------ ------
Net interest income.................. 8,051 8,144 7,518 4,499 5,905
Provision for loan losses.............. 161 240 183 131 356
------- ------- ------- ------ ------
Net interest income after
provision for loan losses........... 7,890 7,904 7,335 4,368 5,549
------- ------- ------- ------ ------
Total non-interest income............ 404 427 409 178 143
------- -------
Total non-interest expense........... 5,702 5,403 6,747(1) 3,840(2) 2,912
------- ------- ------- ------
Income before provision for
income taxes ......................... 2,592 2,928 996 705 2,781
Income tax expense..................... 844 1,072 385 241 1,066
------- ------- ------- ------ ------
Net income........................... $ 1,748 $ 1,856 $ 611 $ 464 $ 1,715
======= ======= ======= ====== ======
</TABLE>
(footnotes on following page)
3
<PAGE>
Other Selected Data
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets...................... 0.51% 0.60% 0.21%(1) 0.22%(2) 0.86%
Return on average equity...................... 4.65% 4.74% 1.44%(1) 2.89%(2) 11.62%
Average equity to average assets.............. 10.92% 12.57% 14.78% 7.64% 7.62%
Net interest rate spread...................... 2.03% 2.27% 2.22% 1.97% 2.86%
Per Share Information:
Diluted earnings per share (1) (2) (3)...... $ 0.76 $ 0.75 $0.22 N/A N/A
Dividends per share (3)..................... $ 0.22 $ 0.155 $0.05 N/A N/A
Tangible book value per
share (3)................................... $14.11 $13.59 $13.56 N/A N/A
Dividend payout ratio (1) (2) (3)............. 28.94% 20.62% 22.28% N/A N/A
Non-performing assets to total assets......... 0.37% 0.57% 0.91% 1.27% 3.09%
Non-performing loans to total assets.......... 0.29% 0.39% 0.63% 0.79% 2.18%
Allowance for loan losses to total loans...... 0.88% 0.79% 0.92% 0.98% 1.21%
</TABLE>
- ------------------------
(1) Includes one-time special assessment of $1,167,000 to recapitalize the
SAIF.
(2) Includes a non-recurring expense of $195,000 due to the implementation
of a directors' medical plan. (3) 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.
Financial Condition
The Bank's total assets increased by $22.1 million to $350.6 million at
December 31, 1998 from $328.5 million at December 31, 1997. Total loans
receivable increased by $2.0 million due to loan originations of $25.5 million,
offset somewhat by loan repayments. Investment securities held to maturity
decreased by $17.4 million due to maturing or called securities of $52.0 million
and the sale of $3.0 million of securities which were within three months of
their maturity, offset somewhat by purchases of $37.6 million. Investment
securities available for sale increased by $39.4 million due to purchases of
$45.9 million, offset somewhat by maturing or called securities of $5.3 million
and the sale of $1.0 million of securities. Mortgage-backed securities held to
maturity decreased by $29.6 million due to repayments of principal. Total cash
and cash equivalents increased by $26.6 million due in part to the increase in
deposits of $12.9 million.
Total deposits increased by $12.9 million. Borrowed funds increased by
$9.8 million as the Bank took advantage of lower interest rates to fund
investing and lending activities.
Total stockholders' equity decreased by $849,000 primarily due to the
repurchase of shares of Company stock pursuant to the Company's stock repurchase
program (130,396 shares at a total price of approximately $2.6 million), a
$247,000 unrealized loss on securities available for sale net of deferred taxes
and dividends paid, offset somewhat by earnings for the year.
5
<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>
1998 1997 1996
------------------------------- ------------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1)............... $150,345 $11,381 7.57% $131,625 $10,081 7.66% $105,794 $ 8,255 7.80%
Mortgage-backed securities(5)..... 90,582 5,481 6.05 107,304 7,118 6.63 119,684 7,972 6.64
Investment securities(2)(5)....... 79,604 5,236 6.64 55,615 3,624 6.52 40,316 2,164 5.37
Other interest-earning assets..... 11,390 598 5.25 4,596 241 5.24 7,431 385 5.18
------- ------ ------- ------ ------- ------
Total interest-earning
assets......................... 331,921 22,746 6.85 299,140 21,064 7.04 273,225 18,776 6.87
------ ------ ------
Non-interest-earning assets........ 12,284 12,566 14,223
------- ------- -------
Total assets..................... $344,205 $311,706 $287,448
======= ======= =======
Interest-bearing liabilities:
Savings accounts.................. $ 42,848 1,277 2.98 $ 45,724 1,440 3.15 $ 51,633 1,860 3.60
Now and money market.............. 33,639 607 1.80 32,788 642 1.96 39,270 1,155 2.94
Certificates of deposit........... 156,216 8,620 5.52 148,122 8,246 5.57 147,707 8,068 5.46
Borrowed funds.................... 72,357 4,191 5.79 43,975 2,592 5.89 3,173 175 5.52
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities.................... 305,060 14,695 4.82 270,609 12,920 4.77 241,783 11,258 4.66
------ ------ ------
Non-interest bearing
liabilities...................... 1,546 1,928 3,171
------- ------- -------
Total liabilities................. 306,606 272,537 244,954
Stockholders' equity............... 37,599 39,169 42,494
------- ------- -------
Total liabilities and
stockholders' equity............. $344,205 $311,706 $287,448
======= ======= =======
Net interest income................ $ 8,051 $ 8,144 $ 7,518
====== ====== ======
Interest rate spread(3)............ 2.03% 2.27% 2.21%
==== ==== ====
Net yield on interest-
earning assets(4)................ 2.42% 2.72% 2.75%
==== ==== ====
Ratio of average interest-
earning assets to average
interest-bearing liabilities..... 108.81% 110.54% 111.00%
======= ====== ======
</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.
(5) Includes both held to maturity and available for sale.
6
<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,
----------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
----------------------------------------- -------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- -------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ------ ------ ----- ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable................ $ 1,434 $ (117) $ (17) $ 1,300 $2,016 $(152) $ (38) $1,826
Mortgage-backed securities...... (1,109) (625) 97 (1,637) (825) (33) 4 (854)
Investment securities........... 1,453 149 60 1,662 821 463 176 1,460
Other interest-earning assets... 569 (63) (149) 357 (147) 5 (2) (144)
------ ----- ----- ------ ----- ---- ---- -----
Total interest-earning assets.. 2,347 (656) ( 9) 1,682 1,865 283 140 2,288
------ ----- ----- ------ ----- ---- ---- -----
Interest expense:
Savings accounts................ (91) (77) 5 (163) (213) (234) 27 (420)
Now and money market............ 17 (51) (1) (35) (191) (386) 64 (513)
Certificates of deposit......... 450 (72) (4) 374 23 155 - 178
Borrowed funds.................. 1,774 (104) (71) 1,599 2,250 12 155 2,417
------ ----- ----- ------ ----- ---- ---- -----
Total interest-bearing
liabilities.................. 2,150 (304) (71) 1,775 1,869 (453) 246 1,662
------ ----- ----- ------ ----- ---- ---- -----
Net change in net interest
income......................... $ 197 $ (352) $ 62 $ (93) $ (4) $ 736 $(106) $ 626
====== ===== ===== ====== ===== ==== ==== =====
</TABLE>
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General. Net income decreased by $108,000, or 5.84% to $1.7 million for
the year ended December 31, 1998 from $1.9 million for the year ended December
31, 1997.
The decrease in earnings for the year was due in part to the costs
associated with terminating a merger agreement with Skylands Community Bank, the
expense incurred due to the immediate vesting of stock awards to a deceased
director during the fourth quarter of fiscal 1998, and an increase in losses on
foreclosed real estate, offset somewhat by a decrease in taxes.
Interest Income. Interest income increased $1.7 million, or 7.99% to
$22.7 million for the year ended December 31, 1998 from $21.1 million for the
year ended December 31, 1997. The increase was primarily due to increases of
$18.7 million, $24.0 million and $6.8 million in the average balance of loans,
investment securities, both held to maturity and available for sale and other
interest earning assets, respectively, offset somewhat by a decrease of $16.7
million in mortgage-backed securities, both held to maturity and available for
sale. Also, the average yield on all interest earning assets decreased by 19
basis points (100 basis points equals 1%) to 6.85%.
7
<PAGE>
Interest Expense. Interest expense increased $1.8 million to $14.7
million for the year ended December 31, 1998 from $12.9 million for the year
ended December 31, 1997. This was due to an increase in the average balance of
borrowed funds of $28.4 million and an increase of $6.1 million in the average
balance of deposits coupled with an increase in the average rate paid on
interest-bearing liabilities of 5 basis points to 4.82%.
Net Interest Income. Net interest income decreased by $93,000 or 1.14%
for the year ended December 31, 1998 as compared to the year ended December 31,
1997. The increase was due to the reasons noted above.
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 $79,000 or 32.86% to $161,000 for the year ended
December 31, 1998 from $240,000 for the year ended December 31, 1997, primarily
due to a decrease in the Bank's non-performing loans. 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 decreased by $24,000 or 5.66%
to $403,000 at December 31, 1998 from $428,000 at December 31, 1997. A gain of
$125,000 was recorded on the sale of the Bank's Frenchtown office building in
1997. The Frenchtown branch was closed in 1996, and the related deposits were
transferred to the Bank's other Hunterdon County offices. This was offset by
$47,000 of gains recorded in 1998 on the sales of investment and mortgage-backed
securities and an $81,000 increase in service fee income.
Non-Interest Expense. Non-interest expense increased $299,000, or 5.53%
to $5.7 million at December 31, 1998 from $5.4 million for the year ended
December 31, 1997. This increase was due to the recording of $106,000 of
expenses connected with the terminated merger agreement with Skylands Community
Bank and $140,000 of expense for the immediate vesting of stock awards for a
director who died during the fourth quarter of 1998. Exclusive of the
aforementioned items, non-interest expense increased $53,000, or 0.98%.
Income Tax Expense. Income tax expense decreased $229,000 or 21.31% to
$844,000 for the year ended December 31, 1998 from $1.1 million for the year
ended December 31, 1997. This increase was due to a decrease in pre-tax income
of $337,000 and an increase in investments in assets that are taxed at a reduced
federal income tax rate.
Comparison of Operating Results for Years Ended December 31, 1997 and 1996
General. Net income increased by $1.2 million, or 203.8% to $1.9
million for the year ended December 31, 1997 from $611,000 for the year ended
December 31, 1996.
The increase in earnings for the year was due in part to the $1.2
million charge in the third quarter of 1996 connected with a one time special
assessment from the Savings Association Insurance Fund ("SAIF"). This one time
assessment was the result of legislation that was effective on September 30,
1996 for the purpose of recapitalizing the SAIF. Other factors for the increase
in earnings
8
<PAGE>
were an increase of $569,000 in net interest income after the provision for loan
losses, a decrease of $62,000 in the loss on foreclosed real estate and an
additional decrease of $270,000 in deposit insurance premiums offset somewhat by
increases in the provision for income taxes of $687,000, and miscellaneous
expense of $184,000.
Interest Income. Interest income increased $2.3 million, or 12.2% to
$21.1 million for the year ended December 31, 1997 from $18.6 million for the
year ended December 31, 1996. The increase was primarily due to increases of
$25.8 million and $15.3 million in the average balances of loans and investment
securities, respectively, offset somewhat by decreases of $12.4 million and $2.8
million in the average balances of mortgage-backed securities and other interest
earnings assets, respectively. Also, the average yield on all interest earning
assets increased by 17 basis points to 7.04%. In addition, the payoff of two
problem loans resulted in the recording of approximately of $170,000 of income
previously reserved for.
Interest Expense. Interest expense increased $1.7 million to $12.9
million for the year ended December 31, 1997 from $11.3 million for the year
ended December 31, 1996. This was due to an increase in the average balance of
borrowed funds of $40.8 million coupled with an increase in the average rate
paid on interest-bearing liabilities of 11 basis points to 4.77% partially,
offset by a decrease in the average balance of interest-bearing deposits of
$12.0 million.
Net Interest Income. Net interest income increased by $626,000, or 8.3%
for the year ended December 31, 1997 as compared to the year ended December 31,
1996. The increase was due to the reasons noted above.
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 $57,000 or 31.2% to $240,000 for the year ended
December 31, 1997 from $183,000 for the year ended December 31, 1996, primarily
due to the increase in the loan portfolio. The allowance for loan losses was
$1.2 million at December 31, 1997. 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 $19,000, or 4.7%
to $428,000 at December 31, 1997 from $409,000 at December 31, 1996. A gain of
$125,000 was recorded on the sale of the Bank's Frenchtown office building in
1997. The Frenchtown branch was closed in 1996, and the related deposits were
transferred to the Bank's other Hunterdon County offices. This offset a gain of
$138,000 recorded in 1996 on the sale of the deposits of the Bank's Mount Holly
office to an unaffiliated financial institution.
Non-Interest Expense. Non-interest expense decreased $1.3 million, or
19.9% to $5.4 million at December 31, 1997 from $6.7 million for the year ended
December 31, 1996. This decrease was primarily due to the $1.2 million charge in
the third quarter of 1996 connected with a one time special assessment from the
Savings Association Insurance Fund ("SAIF"). This one time assessment was the
result of legislation that was effective on September 30, 1996 for the purpose
of recapitalizing the SAIF. Other factors for the decrease in non-interest
expense were the additional decrease in deposit insurance
9
<PAGE>
premiums of $270,000, a decrease of $62,000 in the loss on foreclosed real
estate offset somewhat by an increase of $184,000 in miscellaneous expense.
The decrease on the loss on foreclosed real estate was primarily due to
a gain of $11,000 being recorded on the sales of a foreclosed properties for the
year ended December 31, 1997, compared to a loss of $28,000 on the sale of
foreclosed properties for the year ended December 31, 1996. Miscellaneous
expense increased by $184,000 due in most part to the expense connected with the
director's management stock bonus plan, which increased to $139,000 in 1997 from
$39,000 for 1996 due to a full year of vesting, an increase in legal expense of
$50,000 and a loss of $19,000 on the sale of the Bank's Mount Holly office. The
deposits of this branch were sold in 1996.
Income Tax Expense. Income tax expense increased $687,000, or $178.2%
to $1.1 million for the year ended December 31, 1997 from $385,000 for the year
ended December 31, 1996. This increase was due to an increase in pre-tax income
of $1.9 million.
Risk 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 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.
In order to encourage monitor its interest rate risk, the Company
utilizes the services of an outside consultant to calculate 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,
10
<PAGE>
liabilities, and off-balance sheet contracts. The Company's interest rate risk
("IRR") is measured as the change to its NPV as a result of hypothetical 100
basis point ("bp") changes in market interest rates.
<TABLE>
<CAPTION>
Net Portfolio Equity Value NPV as % of PV of Assets
----------------------------------------------------- ---------------------------------
Change in
Interest Rates $ Change
in Basis Points in Market % Change
(Rate Shock) Amount Value(1) From Base NPV Ratio(2) Changes(3)
--------------- -------- ---------- ----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
300 29,875 (12,238) (29) 9.04% (287)bp
200 34,118 (7,995) (19) 10.08% (183)bp
100 38,197 (3,916) (9) 11.04% (87)bp
0 42,113 -- -- 11.91% --
(100) 45,866 3,753 9 12.71% 80 bp
(200) 49,454 7,341 17 13.44% 153 bp
(300) 52,879 10,766 26 14.11% 220 bp
</TABLE>
- -------------------------------------------------------
(1) Represents the increase (decrease) of the estimated NPV at the
indicated change in interest rates compared to the NPV assuming no
change in interest rates.
(2) Calculated as the estimated NPV divided by the present value of total
assets. The Company's PV is the estimated present value of total
assets.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
Certain assumptions utilized by the Company in assessing its interest
rate risk were employed in preparing the previous table. These assumptions
related to interest rates, loan prepayment rates, core deposit duration, and the
market values of certain assets under the various interest rate scenarios. It
was also assumed that delinquency rates will not change as a result of changes
in interest rates although there can be no assurance that this will be the case.
The calculation methodology used by the Company has certain shortcomings which
include, among others, that the repricing of both loans and deposits is often
discretionary and under the control of the Bank's customers. Even if interest
rates change in the designated amounts, there can be no assurance that the
Company's assets and liabilities would perform as projected.
Generally, net interest income should decrease with an instantaneous
100 basis point increase in interest rates while net interest income should
increase with instantaneous declines in interest rates. Generally, during
periods of increasing interest rates, the Company's liabilities are expected to
reprice faster than its assets, causing a decline in the Company's interest rate
spread. This would result from an increase in the Company's cost of funds that
would not be immediately offset by an increase in its
11
<PAGE>
yield on earning assets. An increase in the cost of funds without an equivalent
increase in the yield on interest-earning assets would tend to reduce net
interest income.
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. OTS regulations require that a savings
association maintain liquid assets of not less than 4% of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. At December 31, 1998, 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, 1998, cash and cash equivalents totaled $33.4 million.
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, 1998 the Bank had a
$9.0 million repurchase agreement with a rate of 5.82%. The repurchase agreement
matures in December 1999 and is callable quarterly on interest payment dates. As
of March 6, 1999, the borrowing was still in place. The repurchase agreement was
used to fund the sale of the Mount Holly branch deposits which were sold in
December 1996. In an effort to increase earnings, reduce the Company's interest
rate sensitivity, and to better match its interest rate position, in November
1998, the Company entered into a financial transaction whereby it purchased two
fixed rate agency securities at an average rate of 6.17%, with terms of 15
years, and each is callable after one year. The funds for the purchase of these
securities came from a Federal Home Loan Bank of New York convertible advance.
The borrowing has a rate of 4.93% and matures November 19, 2003, but is callable
quarterly on interest payment dates starting November 19, 2001. At December 31,
1998, the Bank had a 30-day $9.5 million repurchase agreement with a rate of
5.29% and maturing on January 14, 1999. (This repurchase agreement subsequently
rolled over in January 1999, at a rate of 4.95%. In February, the repurchase
agreement was paid down to $9.0 million and the rate became 4.92%.) On March 10,
1998, the Bank took advantage of low interest rates to increase its borrowings
to fund investing and lending activities, and to allow for the maturing and
withdrawal of high yielding savings deposits, to borrow $25.0 million from the
Federal Home Loan Bank of New York. This convertible advance has a rate of
5.35%, with a maturity date of March 11, 2008. On March 12, 2001, and quarterly
thereafter, the Federal Home Loan Bank of New York has the right to call this
advance.
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
12
<PAGE>
owned losses, were $3.0, $3.4 million and $1.6 million for the years ended
December 31, 1998, 1997 and 1996, respectively. Net cash provided by (used in)
investing activities, which consisted primarily of disbursement of loan
originations, loan purchases, mortgage-backed security purchases and investment
security purchases, offset by principal collections on loans and mortgage-backed
securities and proceeds from the maturities of investment securities, were $3.9
million, $(29.5) million and $(37.2) million for fiscal 1998, 1997 and 1996,
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 $19.7 million, $22.5
million and $(7.5) million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Operating activities in 1998 provided $3.0 million in cash due in most
part to income of $1.7 million adjusted for $180,000 in the provision for loan
and real estate owned losses, $361,000 of goodwill amortization and $352,000 in
the amortization of deferred fees, premiums and discounts. Investing activities
in 1998 provided funds of $3.9 million due to maturities of $52.0 million and
$5.0 million of investment securities held to maturity and investment securities
available for sale, respectively, repayments of $29.4 million of mortgage backed
securities held to maturity, $6.6 million of repayments of mortgage-backed
securities available for sale and $8.4 million in proceeds from the sale of
mortgage-backed securities available for sale, offset somewhat by purchases of
$45.9 million, $37.6 million and $15.0 million in investment securities
available for sale, investment securities held to maturity and mortgage-backed
securities available for sale, respectively. Financing activities in 1998
provided $19.7 million primarily due to an increase of $50.0 million in long
term borrowed funds and a net change of $13.0 million in deposits offset
somewhat by a decrease of $40.2 million in short term borrowings.
Operating activities in 1997 provided $3.4 million in cash primarily
due to income of $1.9 million adjusted for $149,000 in depreciation, $367,000 in
the provision for loan and real estate owned losses and $361,000 of goodwill
amortization. Investing activities in 1997 used $29.5 million due to $16.0
million, $14.0 million and $15.1 million in purchases of investment securities
held to maturity, mortgage-backed securities available for sale, and loans,
respectively, and the $15.0 million increase in loans receivable, offset
somewhat by $21.4 million from principal collections on mortgage-backed
securities held to maturity and $9.3 million from the maturity of investment
securities held to maturity. Financing activities in 1997 provided $22.5 million
due to a $1.8 million change in deposits and $25.1 million increase in borrowed
funds offset somewhat by $1.7 million and $2.4 million for the repurchase of
stock for the MSBP program and stock repurchase program, 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.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. As of December 31, 1998, the Bank had mortgage
commitments to fund loans of $5.1 million. Also, at December 31, 1998, there
were commitments on unused lines of credit relating to home equity loans of $4.6
million. Certificates of deposit scheduled to mature in one year or less at
December 31, 1998
13
<PAGE>
totaled $125.7 million. Based on historical deposit withdrawals and outflows,
and on internal monthly deposit reports monitored by management, management
believes that a majority of such deposits will remain with the Bank. As a
result, no adverse liquidity effects are expected.
At December 31, 1998, the Bank exceeded each of the three regulatory
capital requirements on a fully phased-in basis. See Note 11 to the Consolidated
Financial Statements.
Year 2000 Readiness
The following discussion of the implications of the Year 2000 problem
for the Company, contains numerous forward looking statements based on
inherently uncertain information. The cost of the project and the date on which
the Company plans to complete the internal Year 2000 modifications are based on
management's assumptions of future events including the continued availability
of internal and external resources, third party modifications and other factors.
However, there can be no guarantee that these statements will be achieved and
actual results could differ. Moreover, although management believes it will be
able to make the necessary modifications in advance, there can be no guarantee
that failure to modify the systems would not have a material adverse effect on
the Company.
During fiscal 1998, the Bank adopted a Year 2000 Compliance Plan (the
"Plan") and established a Year 2000 Compliance Committee (the "Committee"). The
objectives of the Plan and the Committee are to prepare the Bank for the
millennium. As recommended by the Federal Financial Institutions Examination
Council, the Plan encompasses the following phases: Awareness, Assessment,
Renovation, Validation and Implementation. These phases will enable the Bank to
identify risks, develop an action plan, perform adequate testing and complete
certification that its processing systems will be Year 2000 ready. The Bank is
currently in Phase 3, Renovation, (which includes code enhancements, program
changes, hardware and software upgrades, system replacements and third party
vendor monitoring) and Phase 4, Validation, (which includes testing of
incremental changes to hardware and software, testing connections with
third-party vendors and establishing controls to ensure timely completion of all
hardware and software prior to final implementation). Prioritization of the most
critical applications has been addressed, along with contract and service
agreements. The primary operating software for the Bank is obtained and
maintained by an external provider of software (the "External Provider"). The
Bank has maintained ongoing contact with this vendor so that modification of the
software is a top priority and is expected to be accomplished, though there is
no assurance, by March 31, 1999. The Bank has contacted all other material
vendors and suppliers regarding their Year 2000 readiness. Each of these third
parties has delivered written assurance to the Bank that they expect to be Year
2000 compliant prior to the Year 2000. Due to the announcement of the Company's
potential acquisition by HUBCO, the Renovation and Valuation phases targeted
completion dates have been changed to April 30, 1999 and May 31, 1999,
respectively. The Implementation phase is to certify that systems are Year 2000
ready, along with assurances that any new systems are compliant on a going
forward basis. The implementation phase is targeted for completion by September
30, 1999.
The Bank expects to incur consulting and other expenses related to
testing and enhancements to prepare the systems for the Year 2000. The Bank does
not anticipate that the related costs will be material in any single year. In
total, the Bank estimates that it's cost for compliance will amount to
approximately $100,000 over the two year period from 1998 - 1999. As of December
31, 1998 approximately $65,000 of these costs have been incurred. No assurance
can be given that the Year 2000 Compliance Plan will be completed successfully
by the Year 2000, in which event the Bank could incur significant costs. If the
External Provider is unable to resolve the potential problem in time, the Bank
would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a significant adverse
impact on the financial statements of the Company.
14
<PAGE>
The Company does not separately track the internal costs incurred for
the Year 2000 project because such costs are principally the related payroll
costs.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the Bank's
External Provider, testing plans, and all vendors, suppliers and customer
readiness.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with the Company, such as public utilities, customers, vendors, payment systems
providers and other financial institutions, makes it impossible to assure that a
failure to achieve compliance by one or more of these entities would not have
material adverse impact on the operations of the Company.
Impact of Inflation 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.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
(With Independent Auditor's Report Thereon)
December 31, 1998
--------------------------------------------------------
INDEX
-----
Page
---------
Management Responsibility Statement 17
Independent Auditors' Report 18
Consolidated Statements of Financial Condition
as of December 31, 1998 and 1997 19
Consolidated Statements of Income
for Each of the Years in the Three Year
Period Ended December 31, 1998 20
Consolidated Statements of Comprehensive Income
for Each of the Years in the Three Year
Period Ended December 31, 1998 21
Consolidated Statements of Changes in Stockholders' Equity
for Each of the Years in the Three Year Period Ended
December 31, 1998 22
Consolidated Statements of Cash Flows
for Each of the Years in the Three Year Period Ended
December 31, 1998 23 - 24
Notes to Consolidated Financial Statements 25 - 58
All schedules are omitted because the required information is either not
applicable or not required or the required information is included in the
consolidated financial statements or notes thereto.
16
<PAGE>
[LOGO] LITTLE FALLS
BANCORP, INC.
Little Falls Bancorp, Inc.
86 Main Street
Little Falls, NJ 07424-1493
973-256-6100
January 22, 1999
MANAGEMENT RESPONSIBILITY STATEMENT
-----------------------------------
Management of Little Falls Bancorp, Inc. is responsible for the preparation of
the consolidated financial statements and all other financial information 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
17
<PAGE>
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, 1998 and
1997 and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. 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.
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 audits
provide 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, 1998 and 1997 and the results of their operations and cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/Radics & Co., LLC
Pine Brook, New Jersey
January 22, 1999, except for the last two paragraphs of Note 2, as to which the
date is January 26, 1999.
18
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------------
Assets Notes 1998 1997
- ------ ------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash and due from banks $ 5,780,361 $ 2,737,709
Interest-bearing deposits in other banks 612,931 550,522
Federal funds sold and securities purchased under
agreements to resell 27,000,000 3,500,000
-------------- --------------
Total cash and cash equivalents 1 and 17 33,393,292 6,788,231
Investment securities available for sale 1,4, 10 and 17 39,422,602 -
Investment securities held to maturity 1,4, 10 and 17 40,577,457 57,987,644
Mortgage-backed securities available for sale 1,5, 10 and 17 13,971,394 13,929,048
Mortgage-backed securities held to maturity 1,5, 10 and 17 61,373,296 90,957,446
Loans receivable 1,6, 10 and 17 149,061,512 147,033,259
Premises and equipment 1 and 7 2,601,679 2,617,175
Investment in real estate 1 and 8 81,281 427,317
Foreclosed real estate 1 297,000 604,219
Interest receivable 1 and 17 1,961,170 2,079,091
Federal Home Loan Bank of New York stock 10 3,767,600 2,517,600
Excess of cost over assets acquired 1 2,495,443 2,856,230
Other assets 13 1,613,221 725,234
-------------- --------------
Total assets $ 350,616,947 $ 328,522,494
============= =============
Liabilities and stockholders' equity
- ------------------------------------
Liabilities
- -----------
Deposits 9 and 17 $ 243,048,053 $ 230,132,675
Borrowed money 10 and 17 68,500,000 58,719,500
Accounts payable and other liabilities 12 and 13 1,623,438 1,375,658
-------------- --------------
Total liabilities 313,171,491 290,227,833
-------------- --------------
Commitments 16 and 17 - -
Stockholders' equity 1,2,3,11,12 and 13
- --------------------
Preferred stock $.10 par value, 5,000,000 shares
authorized; none issued and outstanding - -
Common stock $.10 par value, 10,000,000 shares
authorized; 3,041,750 shares issued; shares outstanding
2,477,525 (1998) and 2,607,921 (1997) 304,175 304,175
Additional paid in capital 29,204,431 29,067,633
Retained earnings - substantially restricted 19,517,521 18,275,517
Common stock acquired by employee
stock ownership plan ("ESOP") (1,936,741) (2,106,432)
Unearned restricted Management Stock
Bonus Plan ("MSBP") stock, at cost (855,791) (1,329,167)
Treasury stock, at cost; 564,225 shares (1998)
and 433,829 shares (1997) (8,191,308) (5,632,286)
Accumulated other comprehensive income (596,831) (284,779)
-------------- --------------
Total stockholders' equity 37,445,456 38,294,661
-------------- --------------
Total liabilities and stockholders' equity $ 350,616,947 $ 328,522,494
============== ==============
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
Notes 1998 1997 1996
-------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable 5 $11,380,802 $10,081,393 $ 8,255,040
Mortgage-backed securities 5,481,359 7,117,907 7,972,069
Investment securities and other
interest-earning assets 5,884,145 3,864,885 2,549,230
----------- ----------- -----------
Total interest income 22,746,306 21,064,185 18,776,339
----------- ----------- -----------
Interest expense:
Deposits 8 10,504,020 10,327,779 11,082,926
Borrowings 4,190,912 2,592,479 175,324
----------- ----------- -----------
Total interest expense 14,694,932 12,920,258 11,258,250
----------- ----------- -----------
Net interest income 8,051,374 8,143,927 7,518,089
Provision for loan losses 5 161,132 240,000 182,900
----------- ----------- -----------
Net interest income after provision for
loan losses 7,890,242 7,903,927 7,335,189
----------- ----------- -----------
Non-interest income:
Service fees 228,722 147,818 169,678
Other 4 and 5 174,774 279,877 238,893
----------- ----------- -----------
Total non-interest income 403,496 427,695 408,571
----------- ----------- -----------
Non-interest expenses:
Compensation and employee benefits 12 2,679,782 2,622,159 2,608,587
Occupancy, net 6 290,877 295,305 334,406
Equipment 6 432,893 430,366 401,510
Deposit insurance premiums 15 117,613 126,987 1,596,307
Loss on foreclosed real estate 44,017 26,900 88,981
Amortization of deposit premium 1 360,787 360,787 360,783
Other 12 1,776,203 1,540,603 1,356,853
----------- ----------- -----------
Total non-interest expenses 5,702,172 5,403,107 6,747,427
----------- ----------- -----------
Income before provision for income taxes 2,591,566 2,928,515 996,333
Provision for income taxes 13 843,850 1,072,400 385,444
----------- ----------- -----------
Net income $ 1,747,716 $ 1,856,115 $ 610,889
=========== =========== ===========
Net income per common share: 1 and 14
Basic $ 0.79 $ 0.78 $ 0.22
=========== =========== ===========
Diluted $ 0.76 $ 0.75 $ 0.22
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ----------
<S> <C> <C> <C>
Net income $ 1,747,716 $ 1,856,115 $ 610,889
----------- ----------- ---------
Other comprehensive income, net of income taxes:
Unrealized holding gains on securities available for sale,
net of income taxes of $134,235 and $39,938 in 1998 and 1997, respectively (217,386) (71,062) -
Reclassification adjustment for realized gains on securities
available for sale, net of income taxes of $16,754 in 1998 (29,810) - -
----------- ----------- ---------
(247,196) (71,062) -
Minimum pension liability adjustment, net of income taxes
of $36,450, $72,590 and $(10,964), respectively (64,856) (129,162) 19,508
----------- ----------- ---------
Other comprehensive income (312,052) (200,224) 19,508
----------- ----------- ---------
Comprehensive income $ 1,435,664 $ 1,655,891 $ 630,397
=========== =========== =========
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
<TABLE>
<CAPTION>
Retained Common
Additional Earnings - Stock
Common Paid in Substantially Acquired
Stock Capital Restricted By ESOP
---------- ------------ ------------- --------------
<S> <C> <C> <C> <C>
Balance - December 31, 1995 $ - $ - $ 16,327,286 $ -
Net income - - 610,889 -
Net proceeds from
issuance of common stock 304,175 28,959,347 - -
Acquisition of common stock by ESOP - - - (2,433,400)
ESOP shares committed to be released - 15,452 - 162,227
Purchase of 296,570 shares of treasury stock - - - -
Decrease in minimum pension
liability, net of deferred income taxes - - - -
Dividends paid - - (136,119) -
--------- ----------- ------------ -------------
Balance - December 31, 1996 304,175 28,974,799 16,802,056 (2,271,173)
Net income - - 1,856,115 -
Acquisition of common stock by MSBP - - - -
ESOP shares committed to be released - 92,834 - 164,741
Amortization of MSBP stock - - - -
Purchase of 137,259 shares of treasury stock - - - -
Unrealized (loss) on securities available for sale, net - - - -
(Increase) in minimum pension
liability, net of deferred income taxes - - - -
Dividends paid - - (382,654) -
--------- ----------- ------------ -------------
Balance - December 31, 1997 304,175 29,067,633 18,275,517 (2,106,432)
Net income - - 1,747,716 -
ended December 31, 1998
ESOP shares committed to be released - 136,798 - 169,691
Amortization of MSBP stock - - - -
Purchase of 130,396 shares of treasury stock - - - -
Unrealized (loss) on securities available for sale, net - - - -
(Increase) in minimum pension
liability, net of deferred income taxes - - - -
Dividends paid - - (505,712) -
--------- ----------- ------------ -------------
Balance - December 31, 1998 $ 304,175 $29,204,431 $ 19,517,521 $ (1,936,741)
========= =========== ============ =============
</TABLE>
22
- -----------------2nd half of table follows--------------------------------------
<PAGE>
- -----------------2nd half of table below----------------------------------------
<TABLE>
<CAPTION>
Unearned Accumulated
Restricted Other
MSBP Treasury Comprehensive
Stock Stock Income Total
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance - December 31, 1995 $ - $ - $ (104,063) $ 16,223,223
Net income - - - 610,889
Net proceeds from issuance of common stock
issuance of common stock - - - 29,263,522
Acquisition of common stock by ESOP - - - (2,433,400)
ESOP shares committed to be released - - - 177,679
Purchase of 296,570 shares of treasury stock - (3,277,004) - (3,277,004)
Decrease in minimum pension
liability, net of deferred income taxes - - 19,508 19,508
Dividends paid - - - (136,119)
--------- ----------- ------------ -------------
Balance - December 31, 1996 - (3,277,004) (84,555) 40,448,298
Net income - - - 1,856,115
Acquisition of common stock by MSBP (1,600,268) - - (1,600,268)
ESOP shares committed to be released - - - 257,575
Amortization of MSBP stock 271,101 - - 271,101
Purchase of 137,259 shares of treasury stock - (2,355,282) - (2,355,282)
Unrealized (loss) on securities available for sale, net - - (71,062) (71,062)
(Increase) in minimum pension
liability, net of deferred income taxes - - (129,162) (129,162)
Dividends paid - - - (382,654)
--------- ----------- ------------ -------------
Balance - December 31, 1997 (1,329,167) (5,632,286) (284,779) 38,294,661
Net income ended December 31, 1998 - - - 1,747,716
ESOP shares committed to be released - - - 306,489
Amortization of MSBP stock 473,376 - - 473,376
Purchase of 130,396 shares of treasury stock - (2,559,022) - (2,559,022)
Unrealized (loss) on securities available for sale, net - - (247,196) (247,196)
(Increase) in minimum pension
liability, net of deferred income taxes - - (64,856) (64,856)
Dividends paid - - - (505,712)
--------- ----------- ------------ -------------
Balance - December 31, 1998 $(855,791) $(8,191,308) $ (596,831) $ 37,445,456
========= =========== ============ =============
</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,
--------------------------------------------------
1998 1997 1996
------------ ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,747,716 $ 1,856,115 $ 610,889
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 131,395 149,187 153,207
Provision for loan and real estate owned losses 180,000 367,356 182,900
Amortization of intangibles 360,787 360,787 360,783
Amortization of deferred fees, premiums and discounts, net 352,432 117,732 40,903
Gain on sales of investment securities available for sale (16,654) - -
Gain on sales of mortgage-backed seucrities available for sale (29,910) - -
Gain on sale of branch - - (138,320)
Gain on sale of investment in real estate (37,911) (106,318) -
Loss (gain) on sale of foreclosed real estate 19,875 (11,086) 28,418
Deferred income taxes (148,250) (35,527) (243,005)
Decrease (increase) in interest receivable 117,921 (343,800) (17,942)
(Increase) decrease in other assets (566,063) 366,147 (2,447)
(Decrease) increase in interest payable (54,160) 92,789 180,501
Increase in accounts payable and other liabilities 127,036 55,364 256,012
ESOP shares committed to be released 306,489 257,575 177,679
Amortization of MSBP cost 501,237 271,101 -
----------- ----------- ---------
Net cash provided by operating activities 2,991,940 3,397,422 1,589,578
----------- ----------- ---------
Cash flows from investing activities:
Purchases of:
Investment securities available for sale (45,929,794) - -
Investment securiites held to maturity (37,583,247) (15,977,500) (32,347,937)
Mortgage-backed seucriites available for sale (15,035,553) (14,048,125) -
Mortgage-backed securities held to maturity - - (16,073,205)
Loans - (15,096,510) -
Premises and equipment (112,479) (102,193) (159,246)
Federal Home Loan Bank of New York stock (1,250,000) (441,900) (680,500)
Proceeds from maturities of and repayments on:
Investment securities available for sale 5,000,000 - -
Investment securities held to maturity 52,000,000 9,342,000 11,000,000
Mortgage-backed securities available for sale 6,615,242 - -
Mortgage-backed securities held to maturity 29,375,738 21,444,380 21,500,221
Proceeds from sales of:
Investment securities available for sale 1,028,100 - -
Investment securities held to maturity 3,000,000 - -
Mortgage-backed securities available for sale 8,352,991 - -
Investment in real estate 380,527 42,125 -
Foreclosed real estate 268,476 394,486 849,629
Net (increase) in loans receivable (2,187,526) (15,023,967) (21,265,657)
----------- ----------- ---------
Net cash provided by (used in) investing activities 3,922,475 (29,467,204) (37,176,695)
----------- ----------- ---------
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits $12,974,880 $ 1,814,156 $(7,464,225)
Decrease in advances from borrowers for taxes - - (701,773)
(Refunds of) proceeds from stock subscriptions - - 19,706,653)
Net change in short-term borrowings (40,219,500) 10,096,000 24,623,500
Proceeds of long-term borrowings 50,000,000 15,000,000 9,000,000
Costs of issuance of common stock - - (731,348)
Dividends paid (505,712) (382,654) (136,119)
Cash paid in connection with branch sales - - (9,064,385)
Cost of MSBP shares - (1,688,171) -
Treasury stock acquired (2,559,022) (2,355,282) (3,277,004)
----------- ----------- -----------
Net cash provided by (used in) financing activities 19,690,646 22,484,049 (7,458,007)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 26,605,061 (3,585,733) (43,045,124)
Cash and cash equivalents - beginning 6,788,231 10,373,964 53,419,088
----------- ----------- -----------
Cash and cash equivalents - ending $33,393,292 $ 6,788,231 $10,373,964
=========== =========== ===========
Supplemental disclosures:
Cash paid during the period for:
Interest $14,749,082 $12,827,469 $11,077,749
=========== =========== ===========
Income taxes, net of refunds $ 1,305,745 $ 957,808 $ 410,701
=========== =========== ===========
Unrealized loss on securities available
for sale, net of deferred income taxes $ 247,196 $ 71,062 $ -
=========== =========== ===========
Loans to facilitate sales of investment in real estate $ - $ 215,000 $ -
=========== =========== ===========
Loans receivable transferred to foreclosed real estate $ - $ 157,818 $ 406,379
=========== =========== ===========
Loans to facilitate sales of foreclosed real estate $ - $ - $ 172,000
=========== =========== ===========
Increase (decrease) in minimum
pension liability, net of deferred income taxes $ 64,856 $ 129,162 $ (19,508)
=========== =========== ===========
Property transferred to investment in real estate $ - $ 9,629 $ 145,478
=========== =========== ===========
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
Reduction in MSBP liability in connection with purchase
of MSBP shares $ - $ (87,903) $ -
=========== =========== ===========
Liabilities assigned in connection with branch sales:
Deposits $ - $ - $ 9,221,324
=========== =========== ===========
Assets sold in connection with branch sales:
Loans $ - $ - $ 18,619
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
24
<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 Little Falls Bancorp, Inc. (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 dates of the
consolidated statements 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 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
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.
Comprehensive income
--------------------
Effective January 1, 1998, the Company and the Bank adopted Statement
of Financial Accounting Standards ("Statement") No. 130, " Reporting
Comprehensive Income". Statement No. 130 requires the reporting of
comprehensive income in addition to net income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net
income. As required, the provisions of Statement No. 130 have been
retroactively applied to previously reported periods. The application
of Statement No. 130 had no material effect on the Company's
consolidated financial condition or operations.
At December 31, 1998 and 1997, accumulated other comprehensive income
includes unrealized losses on securities available for sale, net of
deferred income taxes, of $(318,258) and $(71,062), respectively, and
additional minimum pension liability, net of deferred income taxes, of
$(213,717) and $(278,573), respectively.
25
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------------------
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.
Investment and mortgage-backed securities
-----------------------------------------
Debt securities for which there is 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, included in accumulated other comprehensive
income.
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
costs 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.
26
<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 impaired
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 impaired 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.
Impaired loans are 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 to the contractual terms of
the loan agreement. An insignificant payment delay, which is defined by
the Bank as up to ninety days, will not cause a loan to be classified
as impaired. A loan is not impaired during 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.
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
-------------------------
Investments in real estate are carried at the lower of cost less
accumulated depreciation or fair value less estimated disposal costs.
27
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ------------------------------------------------
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 properties 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.
Deferred income tax expense or benefit is determined by recognizing
deferred tax assets and liabilities for the estimated future tax
consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary difference 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 all 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 Financial Accounting Standards Board ("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. While all
entities are encouraged to adopt the "fair value based method" of
accounting for employee stock compensation plans, Statement No. 123
also allows an entity to continue to measure compensation cost under
such plans using the "intrinsic value based method" specified in
Accounting Principles Board Opinion No. 25.
28
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------------------
Accounting for stock-based compensation (Cont'd.)
---------------------------------------
Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period, usually the vesting period. Fair value is determined
using an option pricing model that takes into account the stock price
at the grant date, the exercise price, the expected life of the option,
the volatility of the underlying stock and the expected dividends on
it, and the risk free interest rate over the expected life of the
option. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the
grant date or other measurement date over the amount an employee must
pay to acquire the stock.
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
---------------------------
Basic net income per common share is calculated by dividing net income
by the weighted average number of shares of common stock 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. Diluted net income per
share is calculated by adjusting the weighted average number of shares
of common stock outstanding to include the effect of stock options,
stock-based compensation grants and other securities, if dilutive,
using the treasury stock method. See Note 14 to consolidated financial
statements for a reconciliation of such amounts.
Per share amounts for the year ended December 31, 1996 have been
calculated based on the net income for the entire year. The calculation
of the weighted average number of common shares outstanding 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).
Nature of operations and interest rate risk
-------------------------------------------
The Company is a holding company whose principal activity is the
ownership and management of the Bank. The Bank is principally engaged
in the business of attracting deposits from the customers located
primarily in northern New Jersey and using these deposits, along with
borrowings and other funds, to make loans secured by real estate
located primarily in northern New Jersey 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.
29
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------------------
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 year ended December 31, 1997 and 1996 have been
reclassified to conform to the current year's presentation.
2. REORGANIZATION AND STOCKHOLDERS' EQUITY
- --------------------------------------------
On January 5, 1996, the Bank converted 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., a New
Jersey corporation organized in August 1995, acquired all of the capital stock
of the Bank upon the completion of the conversion. On January 5, 1996, the
conversion and initial public stock offering were completed with the issuance of
3,041,750 shares of the Company's common stock, par value $.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, 1998 has not been determined.
The ability of the Company to pay dividends to stockholders is dependent 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 years ended December 31, 1998, 1997 and 1996, the Company approved
plans to repurchase 130,396, 137,259 and 296,570 shares, respectively, of its
common stock outstanding, up to five percent (5%) of the shares outstanding at
any single instance. In accordance therewith, during the years ended December
31, 1998, 1997 and 1996, 130,396, 137,259 and 296,570 shares, respectively, at
an aggregate cost of $2,599,022, $2,355,282, and $3,277,004, respectively, were
purchased in the open market.
30
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. PENDING MERGER
- --------------------
On January 26, 1999, the Company signed a definitive merger agreement under
which HUBCO, Inc. ("HUBCO") will acquire the Company in a combination stock and
cash transaction. Under the terms of the agreement, Company shareholders will
receive either 0.65 shares of HUBCO common stock or $20.64 in cash or a
combination of shares of HUBCO common stock and cash. The shares of HUBCO common
stock offered in this transaction will be in an amount equal to approximately
51% of the outstanding shares of the Company multiplied by the exchange ratio.
The remaining 49% of the outstanding shares will be purchased for cash at the
fixed per share price of $20.64. The exchange ratio of 0.65 shares of HUBCO
common stock is based upon HUBCO's median common stock price being between
$34.43 and $29.23 during a pre-determined pricing period. If the median
pre-closing price of HUBCO common stock is $29.00 or less, the exchange ratio
shall be increased in increments to a maximum exchange ratio of 0.70 effective
if the HUBCO median common stock price is $27.14 or lower. If the median
pre-closing price of HUBCO common stock is $34.50 or more, the exchange ratio
will be decreased in increments to a minimum exchange ratio of 0.60 at $37.50.
In connection with the execution of the merger agreement, the Company has issued
an option to HUBCO, which would enable HUBCO to purchase up to 493,000 shares of
Company common stock under certain circumstances. As part of the transaction,
the Company will be merged into Hudson United Bank. The merger is subject to
approval, by Federal and New Jersey bank regulatory authorities and Company
shareholders, as well as other customary conditions. The transaction is expected
to close in the second quarter of 1999.
4. INVESTMENT SECURITIES
- --------------------------
Available for sale:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Carrying
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
Due after five years through ten years $ 7,002,442 $ 10,370 $ 4,600 $ 7,008,212
Due after ten years 5,751,429 81,696 -- 5,833,125
----------- ----------- -----------
12,753,871 92,066 4,600 12,841,337
Corporate bonds due after ten years 2,001,080 -- 11,080 1,990,000
Trust preferred securities 11,960,918 36,876 501,529 11,496,265
Preferred stock 13,199,307 10,000 114,307 13,095,000
----------- ----------- ----------- -----------
$39,915,176 $ 138,942 $ 631,516 $39,422,602
=========== =========== =========== ===========
</TABLE>
Held to maturity:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
Due after one year through five years $ 5,685,303 $ 47,187 $ -- $ 5,732,490
Due after five years through ten years 5,002,894 14,606 -- 5,017,500
Due after ten years 29,889,260 -- 281,447 29,607,813
----------- ----------- ----------- -----------
$40,577,457 $ 61,793 $ 281,447 $40,357,803
=========== =========== =========== ===========
</TABLE>
31
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. INVESTMENT SECURITIES (Cont'd.)
- ---------------------------
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U.S. Government (including agencies):
Due in one year or less $10,005,774 $ -- $ 69,571 $ 9,936,203
Due after one year through five years 11,000,000 26,270 46,875 10,979,395
Due after five years through ten years 30,981,870 239,337 -- 31,221,207
Due after ten years 6,000,000 2,500 10,000 5,992,500
----------- ----------- ----------- -----------
$57,987,644 $ 268,107 $ 126,446 $58,129,305
=========== =========== =========== ===========
</TABLE>
During the year ended December 31, 1998, proceeds from sales of investment
securities available for sale totaled $1,028,100 and resulted in gross gains of
$16,654. During the year ended December 31, 1998, proceeds from the sale of an
investment security held to maturity, which was within three months of final
maturity, totaled $3,000,000 and did not result in any gain or loss. There were
no sales of investment securities available for sale or held to maturity during
the years ended December 31, 1997 and 1996.
Investment securities held to maturity with a carrying value of approximately
$2,000,000 at both December 31, 1998 and 1997, were pledged to secure public
funds.
5. MORTGAGE-BACKED SECURITIES
- -------------------------------
Available for sale:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Carrying
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $ 5,324,055 $ -- $ 4,761 $ 5,319,294
Federal National Mortgage Association 8,663,950 51 11,901 8,652,100
----------- ----------- ----------- -----------
$13,988,005 $ 51 $ 16,662 $13,971,394
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Carrying
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $12,512,965 $ -- $ 104,516 $12,408,449
Federal National Mortgage Association 1,527,083 -- 6,484 1,520,599
----------- ----------- ----------- -----------
$14,040,048 $ -- 111,000 13,929,048
=========== =========== =========== ===========
</TABLE>
32
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. MORTGAGE-BACKED SECURITIES (Cont'd.)
- -------------------------------
Held to maturity:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $17,643,283 $ 37,940 $ 183,033 $17,498,190
Federal Home Loan Mortgage Corporation 14,963,351 119,208 48,363 15,034,196
Federal National Mortgage Association 28,766,662 126,559 118,173 28,775,048
----------- ----------- ----------- -----------
$61,373,296 $ 283,707 $ 349,569 $61,307,434
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $26,771,595 $ 215,909 $ 35,973 $26,951,531
Federal Home Loan Mortgage Corporation 22,853,912 219,635 143,405 22,930,142
Federal National Mortgage Association 41,331,939 200,891 168,976 41,363,854
----------- ----------- ----------- -----------
$90,957,446 $ 636,435 $ 348,354 $91,245,527
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premium Discounts Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $17,293,334 $ 355,946 $ 5,997 $17,643,283
Federal Home Loan Mortgage Corporation 14,856,408 119,872 12,929 14,963,351
Federal National Mortgage Association 28,436,352 349,880 19,570 28,766,662
----------- ----------- ----------- -----------
$60,586,094 $ 825,698 $ 38,496 $61,373,296
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premium Discounts Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Government National Mortgage Association $26,336,892 $ 442,503 $ 7,800 $26,771,595
Federal Home Loan Mortgage Corporation 22,725,681 185,390 57,159 22,853,912
Federal National Mortgage Association 40,898,959 460,159 27,179 41,331,939
----------- ----------- ----------- -----------
$89,961,532 $ 1,088,052 $ 92,138 $90,957,446
=========== =========== =========== ===========
</TABLE>
During the year ended December 31, 1998, proceeds from sales of mortgage-backed
securities available for sale totaled $8,352,991 and resulted in gross gains of
$29,910. There were no sales of mortgage-backed securities available for sale
during the years ended December 31, 1997 and 1996 and there were no sales of
mortgage-backed securities held to maturity during the years ended December 31,
1998, 1997 and 1996.
33
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE
- ---------------------
December 31,
------------------------------
1998 1997
------------- --------------
Real estate mortgage:
One-to-our family $ 117,232,070 $ 118,254,242
Commercial and multi-family 17,435,462 17,361,751
------------ ------------
134,667,532 135,615,993
------------ ------------
Construction - 350,000
------------ ------------
Consumer:
Second mortgage 14,811,424 11,629,689
Passbook or certificate 752,217 807,062
Other 14,615 12,451
------------ ------------
15,578,256 12,449,202
------------ ------------
Total loans 150,245,788 148,415,195
------------ ------------
Less: Loans in process - 233,125
Allowance for loan losses 1,329,292 1,168,160
Deferred loan fees, costs and discounts, net (145,016) (19,349)
------------ ------------
1,184,276 1,381,936
------------ ------------
$149,061,512 $147,033,259
============ ============
An analysis of the allowance for loan losses follows:
Year Ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- -----------
Balance - beginning $1,168,160 $1,089,828 $ 958,149
Provisions charged to operations 161,132 240,000 182,900
Loans charged off, net of recoveries - (161,668) (51,221)
---------- ---------- ----------
Balance - ending $1,329,292 $1,168,160 $1,089,828
========== ========== ==========
34
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE (Cont'd.)
- ---------------------
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows (in thousands):
December 31,
--------------------------------
1998 1997 1996
--------- --------- ----------
Recorded investment in impaired loans:
With recorded allowances $ 367 $ 744 $1,777
Without recorded allowance - - -
Total impaired loans 367 744 1,777
------ ------ ------
Related allowance for loan losses 55 111 404
------ ------ ------
Net impaired loans $ 312 $ 633 $1,373
====== ====== ======
Average recorded investment in impaired loans $ 596 $1,509 $1,717
====== ====== ======
Interest income recognized on impaired loans
during the period each loan was impaired:
Total $ 43 $ 214 $ 57
====== ====== ======
Cash basis $ 43 $ 197 $ 57
====== ====== ======
At December 31, 1998, 1997 and 1996, nonaccrual loans for which the accrual of
interest had been discontinued totaled approximately $1,003,000, $1,284,000 and
$1,901,000, 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,
-------------------------
1998 1997 1996
------- ------- -------
Interest income that would have been recorded $ 89 $111 $198
Interest income recognized 60 50 84
The activity with respect to loans to directors, executive officers and
associates of such persons is as follows:
Year Ended December 31,
---------------------------
1998 1997
------------ ------------
Balance - beginning $ 1,448,625 $ 1,168,277
Loans originated 57,252 242,128
Collection of principal (46,580) (14,879)
Other additions -- 53,099
----------- -----------
Balance - ending $ 1,459,297 $ 1,448,625
=========== ===========
35
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
7. PREMISES AND EQUIPMENT
- ---------------------------
December 31,
-----------------------------
1998 1997
------------- ------------
Land $ 614,714 $ 614,714
Buildings and improvements 2,294,053 2,301,063
Furniture, fixture and equipment 1,184,423 1,071,944
Leasehold improvements 61,132 54,122
---------- ----------
4,154,322 4,041,843
Less accumulated depreciation and amortization 1,552,643 1,424,668
---------- ----------
$2,601,679 $2,617,175
========== ==========
Depreciation and amortization expense totaled $127,975, $134,628 and $143,997
for the years ended December 31, 1998, 1997 and 1996, respectively.
8. INVESTMENT IN REAL ESTATE
- ------------------------------
The Bank owns real estate originally acquired for a future office site which is
no longer to be used for that purpose. During the year ended December 31, 1997,
a $100,000 impairment loss was recorded on a parcel of land to reduce its
carrying value from $243,667 to $143,667. A portion of that land was sold in
1998 for $62,386, with no gain or loss resulting. Property adjoining the Bank's
main office, which had been rented, was sold in 1998 for proceeds of $318,141,
resulting in a gain of $37,911. During the years ended December 31, 1997 and
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 $9,629 and
$145,478, respectively, were transferred from premises and equipment to
investment in real estate. These properties were sold during the year ended
December 31, 1997 at a gain of $106,318. The income received from the
properties, net of expenses, is included in other income. The properties are
summarized as follows:
December 31,
-------------------------
1998 1997
---------- -----------
Land $ 81,281 $143,667
Buildings and improvements - 363,452
-------- --------
81,281 507,119
Less accumulated depreciation and amortization - 79,802
-------- --------
$ 81,281 $427,317
======== ========
36
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. DEPOSITS
- -------------
December 31, 1998
--------------------------------
Weighted
Average
Rate Amount Percent
------ ------------ -------
NOW accounts and non-interest-bearing deposits 1.55 % $ 29,110,521 11.98
Money Market accounts 2.73 6,995,025 2.87
Passbook and club accounts 2.97 41,427,787 17.05
Certificates of deposit 5.44 165,514,720 68.10
------------ ------
4.48 $243,048,053 100.00
============ ======
December 31, 1997
--------------------------------
Weighted
Average
Rate Amount Percent
------ ------------ -------
NOW accounts and non-interest-bearing deposits 1.33 % $ 21,338,938 9.27
Money Market accounts 2.94 9,952,885 4.33
Passbook and club accounts 3.08 44,468,893 19.32
Certificates of deposit 5.63 154,371,959 67.08
------------ ------
4.62 $230,132,675 100.00
============ ======
The aggregate amount of certificates of deposit with a minimum denomination of
greater than $100,000 was approximately $14,542,000 and $10,020,000 at December
31, 1998 and 1997, 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,
--------------------------
1998 1997
---------- -----------
(In Thousands)
Three months or less $ 31,395 $ 40,847
Over three months to one year 94,352 89,942
Over one year to three years 34,287 21,296
Over three years 5,481 2,287
-------- --------
$165,515 $154,372
======== ========
37
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. DEPOSITS (Cont'd.)
- -------------
A summary of interest on deposits follows:
Year Ended December 31,
------------------------------------------
1998 1997 1996
------------- ------------- --------------
NOW accounts $ 263,010 $ 260,813 $ 366,984
Money Market 344,020 380,732 788,001
Passbook and club 1,276,998 1,440,145 1,859,939
Certificates of deposit 8,619,992 8,246,089 8,068,002
----------- ----------- -----------
$10,504,020 $10,327,779 $11,082,926
=========== =========== ===========
10. BORROWED MONEY
- -------------------
The Bank has an available line of credit with the Federal Home Loan Bank of New
York ("FHLB"), subject to the terms and conditions of the lenders' overnight
advances program, in the amount of $34,807,900 at December 31, 1998. Borrowings
under this line of credit, which expires on November 23, 1999, are made for one
day periods and are secured by the Bank's investment in FHLB stock and an
assignment of the Bank's unpledged, qualifying one-to-four family mortgage
loans. During the year ended December 31, 1998, the Bank did not borrow funds
under this program. The following table presents borrowed money at the dates
indicated:
<TABLE>
<CAPTION>
Interest December 31,
-----------------------------------
Lender Maturity Rate 1998 1997
- ------ ----------------------- ------------ ----------------- ----------------
Securities sold under agreement to repurchase:
<S> <C> <C> <C> <C>
FHLB January 30, 1998 6.05% $ - $ 10,000,000
FHLB February 17, 1998 5.74% - 8,175,000
Security broker dealer February 18, 1998 5.77% - 8,368,500
FHLB February 19, 1998 5.76% - 8,176,000
FHLB January 14, 1999 5.29% 9,500,000 -
Advance:
FHLB August 3, 1998 5.80% 15,000,000
FHLB (a) December 20, 1999 5.82% 9,000,000 9,000,000
FHLB (b) November 19, 2003 4.93% 25,000,000 -
FHLB (b) March 11, 2008 5.35% 25,000,000 -
------------ ------------
$ 68,500,000 $ 58,719,500
============ ============
</TABLE>
(a) Lender has option to terminate the advance on March 20, 1999, and quarterly
thereafter, upon four days advance notice.
(b) Convertible at lender option to replacement funding at then current rates
on November 19, 2001 and March 12, 2001.
38
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. BORROWED MONEY (Cont'd.)
- -------------------
Certain information concerning borrowed money is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- ------------- ---------------
<S> <C> <C> <C>
Average balance during the year $ 72,357,000 $ 43,974,600 $ 3,173,000
Average interest rate during the year 5.79% 5.89% 5.53%
Maximum month-end balance during the year $ 83,877,000 $ 58,719,500 $ 33,625,000
Average interest rate at year end 5.25% 5.83% 6.02%
</TABLE>
At December 31, 1998 and 1997, borrowed money is collateralized by the Bank's
investment in FHLB stock, a blanket assignment of the Bank's unpledged,
qualifying one-to-four family mortgage loans and securities as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Investment securities held to maturity $ 5,002,894 $ 18,700,000
Mortgage-backed securities available for sale 593,718 9,749,213
Mortgage-backed securities held to maturity 41,425,704 21,500,903
------------- ------------
$ 47,022,316 $ 49,950,116
============= ============
</TABLE>
11. REGULATORY CAPITAL
- -----------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to met 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.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
39
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. REGULATORY CAPITAL (Cont'd.)
- -----------------------
The following table sets forth the capital position of the Bank:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
Minimum Capital Corrective
Actual Requirements Actions Provisions
----------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ---------- ------------ ---------- ------------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
-----------------
Total Capital
(to risk-weighted assets) $ 29,988 20.45% $ 11,729 8.00% $ 14,661 10.00%
Tier I Capital
(to risk-weighted assets) 28,740 19.60% - - 8,797 6.00%
Core (Tier I) Capital
(to adjusted total assets) 28,740 8.33% 13,801 4.00% 17,252 5.00%
Tangible Capital
(to adjusted total assets) 28,740 8.33% 5,176 1.50% - -
December 31, 1997
-----------------
Total Capital
(to risk-weighted assets) 27,138 23.83% 9,112 8.00% 11,390 10.00%
Tier I Capital
(to risk-weighted assets) 26,416 23.20% - - 6,834 6.00%
Core (Tier I) Capital
(to adjusted total assets) 26,416 8.10% 13,040 4.00% 16,300 5.00%
Tangible Capital
(to adjusted total assets) 26,416 8.10% 4,890 1.50% - -
</TABLE>
As of June 23, 1997, the most recent notification from the OTS, the Bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions existing or events which have
occurred since notification, that management believes have changed the
institution's category.
40
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS
- ----------------------
Employee pension plan
---------------------
The Bank has a defined benefit pension plan covering all eligible
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,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $ 2,126,247 $ 1,873,615
Non-vested 37,156 16,195
----------- -----------
Total benefit obligation $ 2,163,403 $ 1,889,810
=========== ===========
Projected benefit obligation - beginning $ 2,410,463 $ 1,919,617
Service cost 88,844 94,253
Interest cost 167,472 168,152
Actuarial loss 101,359 280,229
Benefits paid (19,344) -
Settlements (59,936) (51,788)
----------- -----------
Projected benefit obligation - ending 2,688,858 2,410,463
----------- -----------
Plan assets at fair value - beginning 1,245,710 1,222,245
Actual return on assets 37,126 26,654
Employer's contributions 291,033 73,432
Benefits paid (19,344) -
Settlements (59,936) (51,788)
----------- -----------
Plan assets at fair value - ending 1,494,589 1,270,543
----------- -----------
Plan benefit obligation in excess of plan assets 1,194,269 1,139,920
Unrecognized net transition
obligation being amortized over fifteen years (68,820) (82,585)
Unrecognized net loss (960,589) (842,511)
Additional minimum liability 503,954 416,413
----------- -----------
Accrued pension cost included
in accounts payable and other liabilities $ 668,814 $ 631,237
=========== ===========
</TABLE>
41
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ----------------------
Employee pension plan (Cont'd.)
---------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Net periodic pension cost included
the following components:
Service cost $ 88,844 $ 94,253 $ 87,161
Interest cost 167,472 168,152 127,080
Expected return on plan assets (107,863) (103,159) (82,697)
Amortization of transition obligation 13,765 13,765 13,765
Amortization of unrecognized loss 54,018 67,904 55,419
--------- --------- ---------
Net periodic pension cost included
in compensation and employee benefits $ 216,236 $ 240,915 $ 200,728
========= ========= =========
</TABLE>
Significant actuarial assumptions used in determining plan benefits are:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
Annual salary increase 5.50% 5.50% 5.00%
Long-term return on assets 8.00% 8.00% 8.00%
Discount rate 7.25% 7.50% 7.00%
</TABLE>
Directors retirement plan
-------------------------
The Bank has a directors retirement plan, 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,
-----------------------------
1998 1997
------------- -----------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 339,498 $ 253,159
Non-vested - 57,394
$ 339,498 $ 310,553
========= =========
Projected benefit obligation - begining $ 366,691 $ 357,661
Service cost 843 784
Interest cost 26,585 26,825
Actuarial gain (16,753) (18,579)
--------- ---------
Projected benefit obligation - ending 377,366 366,691
Unrecognized past service cost (201,322) (218,618)
Unrecognized net (loss) (6,805) (23,558)
Accrued plan cost included
in accounts payable and other liabilities $ 169,239 $ 124,515
========= =========
</TABLE>
42
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ----------------------
Directors retirement plan (Cont'd.)
-------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
<S> <C> <C> <C>
Net periodic plan cost included the following components:
Service cost $ 843 $ 784 $ 6,380
Interest cost 26,585 26,825 20,972
Amortization of past service cost 17,296 17,296 17,296
Amortization of unrecognized net loss - 4,682 21
--------- -------- --------
Net periodic plan cost included in other expense $ 44,724 $ 49,587 $ 44,669
========= ======== ========
</TABLE>
Significant actuarial assumptions used in determining plan benefits are:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
<S> <C> <C> <C>
Annual compensation increase 4.50% 7.00% 7.00%
Discount rate 6.50% 7.25% 7.50%
</TABLE>
Directors health benefits plan
------------------------------
The Bank has a directors health benefit plan which provides for the
continuation of the directors' medical insurance coverage for their
lifetime after retirement. Benefits under this plan are available to
directors retiring after attainment of age 60 and twenty years of
service. This plan is unfunded. The following tables present the status
of the plan and the net components of net periodic plan cost:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Accumulated postretirement benefit obligation - beginning $ 158,388 $ 160,094
Service cost 204 190
Interest cost 11,483 12,007
Actuarial loss (gain) 4,987 (13,903)
--------- ---------
Accumulated postretirement benefit obligation - ending 175,062 158,388
Unrecognized net gain 45,709 55,426
--------- ---------
Accrued plan cost included in
accounts payable and other liabilities $ 220,771 $ 213,814
========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- --------------
<S> <C> <C> <C>
Net periodic plan cost included the following components:
Service cost $ 204 $ 190 $ 2,866
Interest cost 11,483 12,007 10,969
Amortization of unrecognized gain (4,730) (3,384) (4,016)
--------- ------- -------
Net periodic plan cost included in other expense $ 6,957 $ 8,813 $ 9,819
========= ======= =======
</TABLE>
43
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ------------------
Directors health benefit plan (Cont'd.)
-----------------------------
A discount rate of 6.50%, 7.25% and 7.50% was assumed for the years
ended December 31, 1998, 1997 and 1996, respectively. For the years
ended December 31, 1998 1997and 1996, a medical cost trend rate of
6.5%, 7.0% and 7.5%, respectively, decreasing 0.5% per year thereafter
until an ultimate rate of 5.0% 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, 1998, by $15,335 and the aggregate of the
service and interest components of net periodic postretirement benefit
cost for the year ended December 31, 1998 by $1,392, while a one
percent decrease in the assumed medical cost trend would result in
comparable decreases of $13,475 and $1,299, respectively.
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-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.
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 basic net income per common share computations. ESOP
compensation expenses were $306,489, $257,575 and $177,679 for the
years ended December 31, 1998, 1997 and 1996, respectively.
44
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ------------------
ESOP (Cont'd.)
----
The ESOP shares were as follows:
December 31,
-----------------------------
1998 1997
------------- ------------
Allocated shares 33,927 16,223
Shares committed to be released 15,739 16,474
Unreleased shares 193,674 210,643
----------- -----------
Total ESOP shares 243,340 243,340
=========== ===========
Fair value of unreleased shares $ 3,873,480 $ 4,318,182
=========== ===========
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, during the year ended December 31, 1997 contributed
$1,688,171 to the MSBP to allow the MSBP to purchase 121,670 shares of
common stock of the Company in the open market at an average cost of
$13.875 per share.
Under the 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 or
disability. At December 31, 1998 and 1997, 103,798 shares and 79,248
shares, respectively, had been granted to directors and, at both
December 31, 1998 and 1997, 26,767 shares had been granted to officers
and employees. 37,522 shares and 16,311 shares were vested at December
31, 1998 and 1997, respectively. $501,237, $271,101 and $87,903 of
expense related to the MSBP shares was recorded during the years ended
December 31, 1998, 1997 and 1996, respectively.
45
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ----------------------
Stock Option Plan
-----------------
The Company 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 or disability. 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.
Shares of common stock have been granted under the plan as
non-incentive stock options to directors and incentive stock options to
officers and employees, respectively, as follows:
<TABLE>
<CAPTION>
Shares Weighted
-------------------------------------- Average
Non- Exercise Exercise
Incentive Incentive Total Price Price
----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Granted in 1996 121,665 109,496 231,161 $ 10.625 $ 10.625
Granted in 1997 - 16,000 16,000 20.000 20.000
------- ------- -------
Balance at December 31, 1997 121,665 125,496 247,161 11.232
Cancelled - (304) (304) 10.625 10.625
Forfeited - (6,083) (6,083) 10.625 10.625
------- ------- -------
Balance at December 31, 1998 121,665 119,109 240,774 11.248
======= ======= =======
</TABLE>
No options have been exercised. Options for 93,110 shares were
excercisable at December 31, 1998 at a weighted average exercise price
of $10.947. Options for 46,232 shares were exercisable at December 31,
1997 at a weighted average exercise price of $10.625.
46
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ----------------------
Stock Option Plan (Cont'd.)
-----------------
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 1997 and 1996, all of which have
exercise prices equal to the market price of the Company's common stock
at the grant date, were estimated using the Black-Scholes
option-pricing model. Such fair values and the assumptions used for
estimating fair values are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
------------ ----------
<S> <C> <C>
Weighted average grant-date fair value per share $ 5.87 $ 2.81
Expected common stock dividend yield 1.00% 0.94%
Expected volatility 23.29% 13.90%
Expected option life 5 years 5 years
Risk-free interest rate 5.88% 6.875%
</TABLE>
Had the Company used the fair value based method, net income for the
years ended December 31, 1998, 1997 and 1996 would have been decreased
to $1,616,000, $1,736,000 and $574,000, respectively, and basic and
diluted net income per common share would have been reduced to $0.73
and $0.70, respectively, for the year ended December 31, 1998, $0.73
and $0.70, respectively, for the years ended December 31, 1997 and
$0.21 each during the year ended December 31, 1996.
13. INCOME TAXES
- ---------------------
The Bank qualifies as a Savings Institution 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").
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 did not have a material adverse effect on the Company's consolidated
financial position or operations.
47
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. INCOME TAXES (Cont'd.)
- ---------------------
Retained earnings at December 31, 1998 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,
----------------------------------------------
1998 1997 1996
-------------- -------------- -------------
Current:
Federal $ 887,989 $ 990,405 $ 540,688
State 104,111 117,522 87,761
--------- ---------- ---------
992,100 1,107,927 628,449
--------- ---------- ---------
Deferred:
Federal (135,889) (32,405) (222,744)
State (12,361) (3,122) (20,261)
--------- ---------- ---------
(148,250) (35,527) (243,005)
--------- ---------- ---------
$ 843,850 $1,072,400 $ 385,444
========= ========== =========
The provision for income taxes differs from that computed at the federal
statutory rate of 34% as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
-------------- --------------- -------------
<S> <C> <C> <C>
Tax at the statutory rate $ 881,132 $ 995,695 $ 338,753
New Jersey Savings Institution Tax,
net of federal income tax effect 60,555 75,504 44,550
Dividends received deduction (96,381) - -
Other (1,456) 1,201 2,141
--------- ----------- ---------
$ 843,850 $ 1,072,400 $ 385,444
========= =========== =========
</TABLE>
48
<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,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 380,915 $ 316,151
Deferred loan origination fees, net 63,821 63,821
Deferred compensation 176,979 115,025
Minimum pension liability 156,561 120,111
Goodwill 133,544 90,101
MSBP 4,757 15,513
Unrealized loss on securities available for sale 190,927 39,938
---------- ---------
Total deferred tax assets 1,107,504 760,660
---------- ---------
Deferred tax liabilities:
Depreciation of premises and equipment 81,671 67,944
Other - 2,572
---------- ---------
Total deferred tax liabilities 81,671 70,516
---------- ---------
Net deferred tax asset included in other assets $1,025,833 $ 690,144
========== =========
</TABLE>
At December 31, 1998 and 1997, current income taxes receivable of $309,549 and
$25,526, respectively, are included in other assets. At December 31, 1998 and
1997, income taxes payable of $95,242 and $119,876, respectively, are included
in other liabilities.
49
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. NET INCOME PER COMMON SHARE
- ------------------------------------
Year Ended December 31, 1998
-----------------------------------------
Weighted
Net Average Per Share
Income Shares Amounts
------------ ------------- ----------
Basic net income per share $ 1,747,716 2,207,591 $ 0.79
======
Effect of dilutive securities:
Stock options - 96,875
MSBP unearned shares - 6,774
----------- -----
Diluted net income per share $ 1,747,716 2,311,240 $ 0.76
=========== ========== ======
Year Ended December 31, 1997
-----------------------------------------
Weighted
Net Average Per Share
Income Shares Amounts
------------ -------------- ----------
Basic net income per share $ 1,856,115 2,389,063 $ 0.78
======
Effect of dilutive securities:
Stock options - 71,296
MSBP unearned shares - 6,531
----------- ---------
Diluted net income per share $ 1,856,115 2,466,890 $ 0.75
=========== ========= ======
Year Ended December 31, 1996
-----------------------------------------
Weighted
Net Average Per Share
Income Shares Amounts
------------ ------------ ----------
Basic net income pre share $ 610,889 2,727,627 $ 0.22
======
Effect of dilutive securities:
Stock options - 7,336
MSBP unearned shares - 1,681
----------- ---------
Diluted net income per share $ 610,889 2,736,644 $ 0.22
=========== ========= ======
50
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. 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 a 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.
Currently, the Federal Deposit Insurance Corporation ("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.
The FDIC has lowered SAIF assessments to a range comparable to that of BIF
members, although SAIF members must also make the FICO payments described above.
Management cannot predict the precise level of FDIC insurance assessments on an
ongoing basis.
16. COMMITMENTS
- ----------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. 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, 1998, the Bank had commitments outstanding to originate mortgage
loans of $5,128,000, of which $1,251,000 were for adjustable rate loans with
initial rates over the first ten years of the loan terms ranging from 6.25% to
6.75% and $3,877,000 were for fixed rate loans with rates ranging from 6.25% to
7.00%. 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, 1998, outstanding commitments related to unused home equity
lines of credit totaled $4,618,000. These amounts, when used, will carry
interest rates that will float at rates ranging from the prime rate plus 1/4% to
the prime rate plus 1 3/4%.
51
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. COMMITMENTS (Cont'd.)
- --------------------
Rental expenses related to the occupancy of premises totaled approximately
$68,000, $30,000 and $38,000 for the years ended December 31, 1998, 1997 and
1996, respectively. Minimum non-cancellable obligations under lease agreements
with original terms of more than one year are as follows:
December 31, Amount
------------ ----------
1999 $ 36,360
2000 36,360
2001 36,360
2002 15,150
--------
$124,230
========
17. 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. Significant 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, both available for sale
and held to maturity, fair value is estimated using quoted market
prices.
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.
52
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- ---------------------------------------------------------------
Borrowed money
--------------
The fair value of advances and 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
creditworthiness 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,
-----------------------------------------------------
1998 1997
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 33,393 $ 33,393 $ 6,788 $ 6,788
Investment securities available for sale 39,423 39,423 - -
Investment securities held to maturity 40,577 40,358 57,988 58,129
Mortgage-backed securities available for sale 13,971 13,971 13,929 13,929
Mortgage-backed securities held to maturity 61,373 61,307 90,957 91,246
Loans receivable 149,062 154,536 147,033 148,534
Interest receivable 1,961 1,961 2,079 2,079
Financial liabilities:
Deposits 243,048 244,613 230,133 226,113
Borrowed money 68,500 68,488 58,720 58,708
Commitments:
To fund loans 9,746 9,746 7,306 7,306
</TABLE>
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 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.
53
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. PARENT ONLY FINANCIAL INFORMATION
- --------------------------------------
The Company operates one wholly owned subsidiary, the Bank. The earnings of the
Bank are recognized by the Company using the equity method of accounting.
Accordingly, the earnings of the Bank are recorded as increases in the Company's
investment in the subsidiary. The following are the condensed financial
statements for the Company (parent company only) as of December 31, 1998, 1997
and for the periods ended December 31, 1998, 1997 and 1996. The Company had no
operations prior to the Bank's conversion to stock form on January 5, 1996.
<TABLE>
<CAPTION>
December 31,
---------------------------------
Statements of Financial Condition 1998 1997
--------------------------------- --------------- --------------
<S> <C> <C>
Assets
------
Cash and due from banks $ 1,167,896 $ 1,167,965
Securities available for sale 6,331,875 -
Loan receivable from subsidiary - 6,044,666
ESOP loan receivable 2,049,555 2,213,081
Investment in subsidiary 31,273,275 29,200,841
Other assets 127,965 18,000
----------- -----------
Total assets $40,950,566 $38,644,553
=========== ===========
Liabilities and stockholders' equity
Liabilities
Due to subsidiary $ 3,405,982 $ 257,783
Other liabilities 99,128 92,109
----------- -----------
3,505,110 349,892
----------- -----------
Stockholders' equity
Common stock 304,175 304,175
Additional paid in capital 29,204,431 29,067,633
Retained earnings 19,517,521 18,275,517
Common stock acquired by ESOP (1,936,741) (2,106,432)
Unearned restricted MSBP stock (855,791) (1,329,167)
Treasury stock (8,191,308) (5,632,286)
Accumulated other comprehensive income (596,831) (284,779)
----------- -----------
Total stockholders' equity 37,445,456 38,294,661
----------- -----------
Total liabilities and stockholders equity $40,950,566 $38,644,553
=========== ===========
</TABLE>
54
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
- --------------------------------------
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
From
Inception
January 5,
Year Ended December 31, 1996 to
--------------------------------- December 31,
1998 1997 1996
------------- ------------ -------------
<S> <C> <C> <C>
Interest income $ 543,398 $ 666,225 $ 880,582
Equity in undistributed earnings of subsidiary 1,591,741 1,598,621 248,247
----------- ----------- ----------
2,135,139 2,264,846 1,128,829
Expenses 336,173 235,731 274,940
----------- ----------- ----------
Income before income taxes 1,798,966 2,029,115 853,889
Income taxes 51,250 173,000 243,000
----------- ----------- ----------
Net income $ 1,747,716 $ 1,856,115 $ 610,889
=========== =========== ==========
</TABLE>
55
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
- --------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
From
Inception
January 5,
Year Ended December 31, 1996 to
----------------------------------- December 31,
1998 1997 1996
----------------- ------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,747,716 $ 1,856,115 $ 610,889
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums 1,044 - -
Equity in undistributed earnings of subsidiary (1,591,741) (1,598,620) (248,247)
(Increase) in other assets (100,764) (5,833) (12,167)
Increase in other liabilities 7,019 30,327 61,782
----------- ----------- -----------
Net cash provided by operating activities 63,274 281,989 412,257
----------- ----------- -----------
Cash flows from investing activities:
Purchase of all outstanding stock of the Bank - - (14,638,780)
Purchase of securities available for sale (6,355,000) - -
Loan to the Bank - - (12,205,380)
Repayments of loan by the Bank 6,044,666 2,809,598 3,351,116
Loan to ESOP - - (2,433,400)
Repayments of loan by ESOP 163,526 129,841 90,478
----------- ----------- -----------
Net cash (used in) provided by investing activities (146,808) 2,939,439 (25,835,966)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock - - 29,263,522
Increase in due from subsidiary 3,148,199 128,891 128,892
Acquisition of treasury stock (2,559,022) (2,355,282) (3,277,004)
Dividends paid (505,712) (382,654) (136,119)
----------- ----------- -----------
Net cash provided by (used in) financing activities 83,465 (2,609,045) 25,979,291
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (69) 612,383 555,582
Cash and cash equivalents - beginning 1,167,965 555,582 -
----------- ----------- -----------
Cash and cash equivalents - ending $ 1,167,896 $ 1,167,965 $ 555,582
=========== =========== ===========
</TABLE>
56
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
- -----------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 5,608 $ 5,898 $ 5,651 $ 5,589
Interest expense 3,518 3,768 3,745 3,664
------- ------- ------- -------
Net interest income 2,090 2,130 1,906 1,925
Provision for loan losses 60 60 60 (19)
Non-interest income 63 102 116 122
Non-interest expenses 1,387 1,432 1,253 1,629
Income taxes 247 246 226 125
------- ------- ------- -------
Net income $ 459 $ 494 $ 483 $ 312
======= ======= ======= =======
Net income per common share:
Basic $ 0.20 $ 0.23 $ 0.22 $ 0.14
======= ======= ======= =======
Diluted $ 0.19 $ 0.22 $ 0.21 $ 0.14
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest income $ 4,981 $ 4,971 $ 5,348 $ 5,764
Interest expense 2,995 3,034 3,322 3,569
------- ------- ------- -------
Net interest income 1,986 1,937 2,026 2,195
Provision for loan losses 60 60 60 60
Non-interest income 61 215 68 84
Non-interest expenses 1,272 1,307 1,348 1,477
Income taxes 270 316 229 257
------- ------- ------- -------
Net income $ 445 $ 469 $ 457 $ 485
======= ======= ======= =======
Net income per common share:
Basic $ 0.18 $ 0.20 $ 0.19 $ 0.21
======= ======= ======= =======
Diluted $ 0.17 $ 0.19 $ 0.19 $ 0.20
======= ======= ======= =======
</TABLE>
57
<PAGE>
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
20. IMPACT OF RECENT ACCOUNTING STANDARDS
- ----------------------------------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation.
At the date of initial application of Statement No. 133, an entity may transfer
any held-to-maturity security into the available-for-sale category or the
trading category. An entity will then be able in the future to designate a
security transferred into the available-for-sale category as the hedged item, or
its variable interest payments as the cash flow hedged transactions, in a hedge
of the exposure to changes in market interest rates, changes in foreign currency
exchange rates, or changes in the overall fair value. (Statement No. 133
precludes a held-to-maturity security from being designated as the hedged item
in a fair value hedge of market interest rate risk or the risk of changes in its
overall fair value and precludes the variable cash flows of a held-to-maturity
security from being designated as the hedged transaction in a cash flow hedge of
market interest rate risk). Statement No. 133 provides that such transfers from
the held-to-maturity category at the date of initial adoption shall not call
into question an entity's intent to hold other debt securities to maturity in
the future.
Statement No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, the quarter ended March 31, 2000 for the Company
and Bank. Initial application shall be as of the beginning of an entity's fiscal
quarter. Earlier application of all of the provisions of Statement No. 133 is
permitted only as of the beginning of a fiscal quarter. Earlier application of
selected provisions or retroactive application of provisions of Statement No.
133 are not permitted.
Management of the Company and Bank has not yet determined when Statement No. 133
will be implemented, but does not believe the ultimate implementation of
Statement No. 133 will have a material impact on their consolidated financial
position or results of operations.
58
<PAGE>
Board of Directors of Little Falls Bancorp, Inc.
and
Little Falls Bank
Albert J. Weite, Chairman of the Board Edward J. Seugling, Vice Chairman of
Leonard G. Romaine (Bank only) the Board
John P. Pullara Raoul G. Barton
George Kuiken
Norman A. Parker
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
Michael J. Allen Mary Denise Hopper
Vice President Vice President
------------------------------------------------
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 4 50 West 33rd Street
Washington, D.C. 20005 New York, New York 10001-2697
------------------------------------------------
The Company's Annual Report for the Year Ended December 31, 1998 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.
59
<PAGE>
OFFICE LOCATIONS
LITTLE FALLS BANCORP, INC.
86 Main Street
Little Falls, New Jersey 07424
(973) 256-6100
LITTLE FALLS BANK
Main Office
86 Main Street
Little Falls, New Jersey 07424
(973) 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
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the previously
filed Registration Statement on Form S-8 (No. 333-39897) of Little Falls
Bancorp, Inc. (the "Company") of our report dated January 22, 1999, except for
the last two paragraphs of Note 2, as to which the date is January 26, 1999,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
/s/Radics & Co., LLC
-----------------------------------
Radics & Co., LLC
- -------------------------
Pine Brook, New Jersey
March 22, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
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<FISCAL-YEAR-END> DEC-31-1998
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0
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