SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ___________________ to ______________________
Commission File Number: 0-24519
LIBERTY BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Federal 22-3593532
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1410 St. Georges Avenue, Avenel, NJ 07001
(Address of Principal Executive Office) (Zip Code)
(732) 499-7200
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $1.00 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
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-B 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-KSB or any amendments to
this Form 10-KSB. [X]
The registrant's revenues for the fiscal year ended December 31, 1998 were
$16.0 million.
As of March 18, 1999, there were issued and outstanding 3,626,329 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the closing price of
the Common Stock as of such date ($10.3125) was $15.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1998 (Parts II and IV).
2. Proxy Statement for the May 1999 Annual Meeting of Stockholders (Part III).
<PAGE>
PART I
ITEM 1. Business
Liberty Bancorp, Inc.
Liberty Bancorp, Inc. (the "Company") was formed on June 30, 1998 for the
purpose of acting as the holding company for Liberty Bank (the "Bank"). The
Company's assets consist primarily of the outstanding capital stock of the Bank
and cash and investments of $8.9 million, representing a portion of the net
proceeds from the Company's stock offering completed June 30, 1998 in connection
with the mutual holding company reorganization of the Bank. At December 31,
1998, 1,833,646 shares of the Company's common stock, par value $1.00 per share,
were held by the public, and 2,067,729 shares were held by Liberty Bancorp, MHC,
the Company's parent mutual holding company. The Company's principal business is
overseeing and directing the business of the Bank and investing the net stock
offering proceeds retained by it.
At December 31, 1998, the Company had consolidated total assets of $260.4
million, consolidated total deposits of $223.3 million and consolidated total
equity of $34.4 million.
The Company's executive office is located at 1410 St. Georges Avenue,
Avenel, New Jersey 07001. Its telephone number at this address is (732)
499-7200.
Liberty Bank
The Bank was organized as a building and loan association in 1927 and
became a federal savings and loan association in 1942. The Bank changed its name
from Axia Federal Savings Bank to Liberty Bank in connection with the Bank's
mutual holding company reorganization completed June 30, 1998. The Bank conducts
its business from its corporate headquarters located in Avenel, New Jersey and
three branch offices located in Union and Middlesex Counties, New Jersey. The
Bank has traditionally operated as a community-oriented lender offering various
mortgage and consumer loan products. The Bank is primarily engaged in the
business of offering savings and other FDIC-insured deposits to the general
public and using those funds to originate loans secured by one-to-four family
residences located in Union and Middlesex Counties.
The Bank's executive offices are located at 1410 St. Georges Avenue,
Avenel, New Jersey 07001. Its telephone number at that location is (732)
499-7200.
Market Area
The Bank's headquarters are located in Avenel, New Jersey in the township
of Woodbridge. Branch offices of the Bank are located in East Brunswick, Rahway
and Linden, all of which branches, and the main office, are located in the
Bank's primary market area consisting of Middlesex and Union Counties. Middlesex
and Union Counties are contiguous and are located in the eastern central part of
New Jersey. The economies of Middlesex and Union counties are based on retail
services and light manufacturing, especially pharmaceuticals. Both Johnson and
Johnson and Merck and Co. have an administrative and research presence in this
market. Among the largest employers in Middlesex and Union Counties are John F.
Kennedy Medical Center, Robert Wood Johnson Medical Center, Merck and Co. and
Johnson & Johnson. The Bank faces intense competition from many financial
institutions for deposits and loan originations.
Lending Activities
General. The Bank has traditionally concentrated its lending activities on
first mortgage loans secured by one- to-four family properties that conform to
the underwriting guidelines of Fannie Mae and Freddie Mac (often referred
<PAGE>
to as "conforming loans"). Fannie Mae and Freddie Mac are federally chartered
corporations that purchase loans in the secondary mortgage market and issue
mortgage-backed securities that are secured by the underlying mortgages. In
addition, the Bank originates construction loans, multi-family residential real
estate loans, commercial real estate loans, home equity loans and other consumer
loans.
Loan Portfolio Analysis. The following tables set forth the composition of
the Bank's loan portfolio at the dates indicated. The Bank had no concentration
of loans exceeding 10% of total gross loans other than as disclosed below.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family............... $ 166,573 93.23% $ 143,623 93.88% $120,892 91.93%
Multi-family..................... 1,200 0.67 1,258 0.82 1,875 1.42
Commercial....................... 3,367 1.88 1,906 1.25 2,035 1.55
Construction..................... -- -- -- -- 237 0.18
--------- ------- --------- ------ -------- ------
Total real estate loans........ 171,140 95.78 146,787 95.95 125,039 95.08
--------- ------- --------- ------ -------- ------
Consumer loans:
Home equity...................... 7,133 4.00 5,706 3.73 5,364 4.08
Other............................ 388 0.22 491 0.32 1,101 0.84
--------- ------- --------- ------ -------- ------
Total consumer loans............. 7,521 4.22 6,197 4.05 6,465 4.92
--------- ------- --------- ------ -------- ------
Total loans...................... 178,661 100.00% 152,984 100.00% 131,504 100.00%
--------- ======= --------- ====== -------- ======
Less:
Loans in process................. -- 3
Deferred loan origination fees... 24 61 277
Allowance for loan losses........ 760 723 534
--------- --------- --------
Total loans, net................... $ 177,877 $ 152,200 $130,690
========= ========= ========
</TABLE>
At December 31,
----------------------------------------
1995 1994
------------------ ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
One-to-four family ................. $ 97,007 92.08% $ 91,895 91.56%
Multi-family ....................... 2,018 1.92 2,102 2.09
Commercial ......................... 1,862 1.75 2,049 2.04
Construction ....................... -- -- -- --
-------- ------ -------- ------
Total real estate loans .......... 100,887 95.76 96,046 95.69
-------- ------ -------- ------
Consumer loans:
Home equity ........................ 3,345 3.17 3,005 2.99
Other .............................. 1,123 1.07 1,321 1.32
-------- ------
Total consumer loans ............... 4,468 4.24 4,326 4.31
-------- ------
Total loans ........................ 105,355 100.00% 100,372 100.00%
-------- ====== -------- ======
Less:
Loans in process ................... -- --
Deferred loan origination fees ..... 392 428
Allowance for loan losses .......... 490 442
-------- --------
Total loans, net ..................... $104,473 $ 99,502
======== ========
One-to-Four Family Real Estate Lending. Historically, the Bank has
concentrated its lending activities on the origination of conforming first
mortgage loans secured by one-to-four family residences located in its primary
market area. The Bank originates fixed rate mortgage loans and adjustable rate
mortgage ("ARM") loans. The Bank's fixed-rate one-to-four family mortgage loans
have maturities ranging from 10 to 30 years and are fully amortizing with
monthly payments sufficient to repay the total amount of the loan with interest
at the end of the loan term. Fixed rate
2
<PAGE>
loans are generally originated under terms, conditions and documentation which
permit them to be sold to Fannie Mae and Freddie Mac in the secondary mortgage
market, although the Bank rarely sells fixed-rate loans. The Bank's fixed-rate
loans customarily include "due on sale" clauses, which give the Bank the right
to declare a loan immediately due and payable in the event the borrower sells or
otherwise disposes of the real property subject to the mortgage and the loan is
not paid.
The Bank offers ARM loans at competitive interest rates and terms. At
December 31, 1998, $59.0 million, or 33.04%, of the Bank's gross loan portfolio
consisted of ARM loans or other loans subject to periodic interest rate
adjustments. Substantially all of the Bank's ARM loans meet the underwriting
standards of Fannie Mae or Freddie Mac, even though the Bank originates ARM
loans primarily for its own portfolio. Most of the Bank's ARM loans have
interest rates that adjust every year based on the one year Treasury constant
maturity index. The Bank also originates ARM loans that have fixed interest
rates for an initial period of three to ten years, and thereafter adjust
annually based on the one year Treasury constant maturity index. A small
percentage of the Bank's ARM loans adjust based on other indices. Most of the
Bank's ARM loans amortize over a 30-year period. The Bank determines whether a
borrower qualifies for an ARM loan based on the initial interest rate on the
loan, except that one year ARM loan borrowers are qualified at the initial rate
plus 2%. The Bank's current ARM loans do not provide for negative amortization.
The Bank's ARM loans generally provide for annual and lifetime interest rate
adjustment limits of 2% and 6%, respectively. The Bank offers initial interest
rates that may be more than 2% below the interest rate to which the loan may
adjust after the first adjustment date, (based on market interest rates at the
time the loan is originated). Accordingly, because of the Bank's 2% interest
rate adjustment limitation, the interest rates on these loans would not adjust
to the fully-indexed rate at the end of the adjustment period if interest rates
were to increase or remain unchanged at the end of the adjustment period.
Borrower demand for ARM loans versus fixed-rate mortgage loans is affected
by market interest rates, borrowers' expectations of future changes in the level
of market interest rates, and the difference between the initial interest rates
and fees charged for each type of loan. The relative amount of fixed-rate
mortgage loans and ARM loans that the Bank originates at any time is largely
determined by borrowers' demand for each type of loan.
Retaining ARM loans helps reduce the Bank's exposure to changes in interest
rates. There are, however, potential credit risks associated with ARM loans in a
rising interest rate environment. Specifically, during periods of rising
interest rates the risk of default on ARM loans may increase as a result of
repricing and the increased monthly payments required of the borrower. In
addition, although ARM loans allow the Bank to increase the sensitivity of its
asset base to changes in market interest rates, the extent of this interest
sensitivity is limited by the annual and lifetime interest rate adjustment
limits. Because of these considerations, the Bank has no assurance that yields
on ARM loans will be sufficient to offset increases in the Bank's cost of funds.
The Bank believes these risks, which have not had a material adverse effect on
the Bank to date, generally are less than the risks associated with holding
long-term, fixed-rate loans in portfolio during a rising interest rate
environment.
The Bank requires title insurance insuring the status of the underlying
mortgaged properties and an acceptable attorney's opinion on all loans where
real estate is the primary source of security. The Bank also requires that fire
and casualty insurance be maintained in an amount at least equal to the
outstanding loan balance and, if appropriate, flood insurance also must be
maintained.
Pursuant to underwriting guidelines adopted by the Bank's Board of
Directors, the Bank can lend up to 95% of the appraised value of the property
securing a one-to-four family residential loan. The Bank does not require
private mortgage insurance for loans of up to and including 80% of the appraised
value of the property. The Bank requires private mortgage insurance for between
17% and 30% of the amount of the loan for loans of 80% to 95% of the appraised
value of the property.
Multi-Family Residential Real Estate Lending. The Bank originates mortgage
loans secured by multi-family residential properties (consisting of more than
four units). The majority of the Bank's multi-family residential real estate
loans are secured by apartment buildings located in the Bank's primary market
area. The Bank offers both fixed-rate
3
<PAGE>
and adjustable-rate multi-family residential real estate loans. Fixed rate loans
are generally offered with balloon terms of three, five and seven years, with a
25 year amortization period, and with a "balloon" or final principal payment due
at maturity. The Bank also offers a 15 year fixed rate multi-family residential
loan with a 15 year term and amortization period and a one-year adjustable-rate
loan with a 25 year term and amortization period. The interest rate on the
adjustable rate loans is tied to the one year constant maturity Treasury index,
with annual and lifetime interest rate adjustment limits of 2% and 6%,
respectively. At December 31, 1998, the average balance of the Bank's
multi-family residential real estate loans was $239,912, and the largest such
loan had a balance of $450,244 and was performing in accordance with its
contractual terms.
The Bank requires appraisals of all properties securing multi-family
residential real estate loans. Appraisals are performed by an independent State
licensed and qualified appraiser approved by the Bank, and all appraisals are
reviewed by management. The Bank, when underwriting such loans, considers the
quality of the real estate, the credit of the borrower, the cash flow of the
project and the quality of management involved with the property. Loan-to-value
ratios on the Bank's multi-family residential real estate loans are generally
limited to 75%. As part of the criteria for underwriting multi-family
residential real estate loans, the Bank generally imposes a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt
service) of not less than 1.25. The Bank's policy is also to obtain personal
guarantees from the principals of its corporate borrowers on multi-family
residential real estate loans.
Multi-family residential real estate loans generally have higher interest
rates than those available on one-to-four family residential loans. However,
loans secured by multi-family residential real estate usually have higher
balances and are more difficult to evaluate and monitor and, therefore, may
involve a greater degree of credit risk than one-to-four family residential
mortgage loans. If the estimated value is inaccurate, the value of the property
may be insufficient to assure full repayment in the event of default and
foreclosure. Because payments on such loans often depend on the successful
operation and management of the properties, repayment of such loans may be
affected by adverse conditions in the real estate market or the economy. The
Bank seeks to minimize these risks by limiting the maximum loan-to-value ratio,
and strictly scrutinizing the financial condition of the borrower, the quality
of the collateral and the management of the property securing the loan. The Bank
also generally obtains loan guarantees from financially capable parties based on
a review of personal financial statements.
Commercial Real Estate Lending. The Bank originates mortgage loans for the
acquisition and refinancing of commercial real estate properties. The majority
of the Bank's commercial real estate loans are secured by office buildings and
retail stores that are located in the Bank's primary market area. The Bank
offers both fixed rate and adjustable rate commercial real estate loans.
Fixed-rate loans are generally approved with terms of three, five and seven
years, with a 25 year amortization period, resulting in a balloon payment at the
end of the stated term. The Bank also offers an adjustable rate commercial real
estate loan with annual interest rate adjustments tied to the one year Treasury
constant maturity index, and with annual and lifetime interest rate adjustment
limits of 2% and 6%, respectively. Adjustable-rate commercial real estate loans
are offered for terms of 25 years and are fully amortizing. At December 31,
1998, the average balance of the Bank's commercial real estate loans was
$259,000, and the largest such loan had a balance of $1,320,000 and was
performing in accordance with its contractual terms.
The Bank requires appraisals of all properties securing commercial real
estate loans. Appraisals are performed by an independent State licensed and
qualified appraiser approved by the Bank, all of which are reviewed by
management. The Bank, when underwriting such loans, considers the quality and
location of the real estate, the credit of the borrower, the cash flow of the
project and the quality of management involved with the property.
Loan-to-value ratios on the Bank's commercial real estate loans are
generally limited to 75% of the appraised value of the secured property. As part
of the criteria for underwriting commercial real estate loans, the Bank
generally imposes a debt coverage ratio (the ratio of net cash from operations
before payment of debt service to debt service) of not less than 1.25. It is
also the Bank's policy to obtain personal guarantees from the principals of its
corporate borrowers on its commercial real estate loans.
4
<PAGE>
Commercial real estate loans generally have higher interest rates than
those available on one-to-four family residential loans. However, loans secured
by such properties usually have higher balances and are more difficult to
evaluate and monitor and, therefore, may involve a greater degree of risk than
one-to-four family residential mortgage loans. If the estimated value is
inaccurate, in the event of default and foreclosure the value of the property
securing the loan may be insufficient to assure full repayment. Because payments
on such loans often depend on the successful development, operation and
management of the properties, repayment of such loans may be affected by adverse
conditions in the real estate market or the economy. The Bank seeks to minimize
these risks by limiting the maximum loan-to-value ratio and strictly
scrutinizing the financial condition of the borrower, the quality of the
collateral and the management of the property securing the loan. The Bank also
obtains loan guarantees from financially capable parties based on a review of
personal financial statements.
Construction Lending. To a lesser extent, the Bank originates residential
construction loans to local home builders, generally with whom it has an
established relationship, and to individuals who have a contract with a builder
for the construction of their residence. The Bank's construction loans are
generally secured by property located in the Bank's primary market area. At
December 31, 1998, the Bank had no construction loans outstanding.
The Bank's construction loans to home builders generally have fixed
interest rates and are for a term of 12 months. Construction loans to builders
typically are originated with a maximum loan to value ratio of 80%. Construction
loans to individuals are generally originated pursuant to the same policy
guidelines regarding loan to value ratios that are used in connection with loans
secured by one-to-four family residential real estate.
Construction loans to builders are made where the home is pre-sold or on a
speculative (unsold) basis. However, the Bank generally limits the number of
outstanding loans on unsold homes under construction to individual builders,
with the amount dependent on the financial strength of the builder, the present
exposure of the builder, and prior sales of homes in the development. Prior to
making a commitment to fund a construction loan, the Bank requires an appraisal
of the property, and all appraisals are reviewed by management. Loan proceeds
are disbursed after an inspection of the property based on a percentage of
completion. Monthly payment of accrued interest is required.
Construction loans generally have higher interest rates with shorter terms
to maturity relative to single-family permanent mortgage lending. Construction
loans, however, are generally considered to involve a higher degree of risk than
single-family permanent mortgage loans because of the inherent difficulty in
estimating both a property's value at completion of the project and the
estimated cost of the project. If the estimate of construction costs is
inaccurate, the Bank may be required to advance funds beyond the amount
originally committed to permit completion of the project. If the estimate of
value upon completion is inaccurate, the value of the property may be
insufficient to assure full repayment. Projects may also be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no purchaser
has been identified carry more risk because the repayment of the loan depends on
the builder's ability to sell the property prior to the time that the
construction loan is due. The Bank has attempted to minimize the foregoing risks
by, among other things, limiting its construction lending primarily to
residential properties and generally requiring personal guarantees from the
principals of its corporate borrowers.
Consumer Lending. The Bank's consumer loans consist of both fixed-rate and
adjustable-rate line of credit home equity loans, and loans secured by deposit
accounts. The Bank's home equity loans and lines of credit are secured by a
first or second mortgage on residential property, and have fixed and variable
interest rates that are tied to The Wall Street Journal prime lending rate (the
"Prime Rate"). Variable interest rate equity lines of credit adjust monthly and
generally have terms of up to 20 years. Home equity loans are offered with fixed
interest rates and have terms from five to 20 years. Loans secured by deposit
accounts do not have a fixed term, and are due and payable when the underlying
deposit account or certificate is withdrawn or matures. The Bank promotes
consumer loans by contacting existing customers and by other promotions and
advertising directed at existing and prospective customers. All of the Bank's
consumer loans are secured by real estate or deposits.
5
<PAGE>
Consumer lending is an important part of the Bank's business because such
loans generally have shorter terms and higher yields than one-to-four family
mortgage loans, thus reducing exposure to changes in interest rates. In
addition, consumer loans expand the products and services offered by the Bank to
better meet all of the financial services needs of its customers. Consumer loans
generally involve greater credit risk than residential mortgage loans because of
the difference in the underlying collateral. Repossessed collateral for a
defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance because of the greater likelihood of damage, loss or
depreciation in the underlying collateral. The remaining deficiency often does
not warrant further substantial collection efforts against the borrower beyond
obtaining a deficiency judgment. In addition, consumer loan collections depend
on the borrower's personal financial stability. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount that can be recovered on such loans. The
Bank believes that these risks are not as prevalent in the case of the Bank's
consumer loan portfolio because a large percentage of the portfolio consists of
home equity loans that are underwritten so that their credit risk is
substantially similar to that of one-to-four family residential mortgage loans.
Nevertheless, these loans have greater credit risk than one-to-four family
residential mortgage loans because they often are secured by mortgages
subordinated to the existing first mortgage on the property, which may or may
not be held by the Bank.
The Bank's underwriting procedures for consumer loans include an assessment
of the applicant's credit history and the ability to meet existing and proposed
debt obligations. Although the applicant's creditworthiness is the primary
consideration, the underwriting process also includes a comparison of the value
of the security, to the proposed loan amount. The Bank underwrites and
originates its consumer loans internally, which the Bank believes limits its
exposure to credit risks associated with loans underwritten or purchased from
brokers and other external sources.
Maturity of Loan Portfolio. The following table sets forth certain
information at December 31, 1998 regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity, but does
not include scheduled payments or potential prepayments. Demand loans and loans
with no stated maturity are reported as becoming due within one year. Loan
balances do not include undisbursed loan proceeds, unearned discounts, unearned
income and allowance for loans losses.
<TABLE>
<CAPTION>
One-to-Four
Family Multi-Family Commercial Consumer Total
----------- ------------ ---------- -------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year ............................ $ 25 $ -- $ -- $ 306 $ 331
Over 1 to 2 years ........................ 61 -- -- 116 177
Over 2 to 3 years ........................ 359 -- -- 73 432
Over 3 to 5 years ........................ 10,676 -- -- 857 11,533
Over 5 to 10 years ....................... 20,512 863 122 2,857 24,354
Over 10 to 25 years ...................... 60,736 337 3,245 3,312 67,630
Over 25 years ............................ 74,204 -- -- -- 74,204
-------- -------- -------- -------- --------
Total amount due ......................... $166,573 $ 1,200 $ 3,367 $ 7,521 $178,661
======== ======== ======== ======== ========
</TABLE>
6
<PAGE>
The following table sets forth the dollar amount of all loans for which
final payment is not due until after December 31, 1999. The table also shows the
amount of loans which have fixed rates of interest and those which have
adjustable rates of interest.
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
Real estate loans:
One-to-four family .............. $111,508 $ 54,847 $166,355
Multi-family .................... 1,134 66 1,200
Commercial ...................... 952 2,415 3,367
-------- -------- --------
Total real estate loans ........... 113,594 57,328 170,922
Consumer .......................... 5,591 1,817 7,408
-------- -------- --------
Total loans ..................... $119,185 $ 59,145 $178,330
======== ======== ========
Scheduled contractual principal repayments of loans do not necessarily
reflect the actual life of such loans. The actual life of a loan is often less
than its contractual term because of prepayment. In addition, due-on-sale
clauses on mortgage loans give the Bank the right to declare loans immediately
due and payable in the event, among other things, that the borrower sells the
real property subject to the mortgage and the loan is not repaid. The average
life of the Bank's mortgage loans portfolio tends to increase, however, when
current mortgage loan market interest rates are substantially higher than
interest rates on existing mortgage loans. Conversely, the average life of the
Bank's loan portfolio would decrease when interest rates on existing mortgage
loans are substantially higher than current mortgage loan market interest rates.
Loan Solicitation and Processing. The Bank's lending activities are subject
to the written underwriting standards and loan origination procedures
established by the Board of Directors. Loan originations come from a number of
sources. The principal sources of loan originations are newspaper advertising,
real estate agents, home builders, walk-in customers, referrals and existing
customers. The Bank uses professional fee appraisers for residential real estate
loans and construction loans and all commercial real estate loans. The Bank
requires hazard, title and, to the extent applicable, flood insurance on all
property securing its real estate loans. Mortgage loan applications are
initiated by loan officers. All loans of $500,000 or more must be approved by
the Board of Directors. Loans of less than $350,000 may be approved by any three
members of the Bank's Loan Committee, which consists of the Bank's President,
the Bank's Executive Vice President and two lending officers. Loans in excess of
$350,000, but less than $500,000 may be approved by the Bank's Executive
Committee, which consists of the Bank's President and three non-employee
directors.
7
<PAGE>
Loan Originations, Sales and Purchases. The following table sets forth
total loans originated and repaid during the periods indicated.
Years Ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
Originations:
Adjustable rate:
Real estate
One-to-four family (1) ........... $ 3,586 $22,317 $22,542
Multi-family ..................... -- -- --
Commercial ....................... 1,320 -- --
Construction ..................... -- -- --
Consumer ........................... 1,008 1,654 2,122
------- ------- -------
Total adjustable rate ............ 5,914 23,971 24,664
------- ------- -------
Fixed rate:
Real estate
One-to-four family ............... 53,680 16,234 15,713
Multi-family ..................... -- -- --
Commercial ....................... 350 -- --
Construction ..................... 178 140 631
Consumer ........................... 3,701 838 564
------- ------- -------
Total fixed rate ................. 57,909 17,212 16,908
------- ------- -------
Total loans originated ........... 63,823 41,183 41,572
------- ------- -------
Purchases:
Real estate:
One-to-four family ................. -- -- --
Multi-family ....................... -- -- 97
Commercial ......................... -- -- --
Consumer ............................. -- -- --
------- ------- -------
Total loans purchased .............. -- -- 97
------- ------- -------
Sales and Repayments:
Real estate:
One-to-four family ................. -- -- --
Multi-family ....................... -- -- --
Commercial ......................... -- -- --
Consumer ............................. 68 647 --
------- ------- -------
Total loans sold ................... 68 647 --
------- ------- -------
Principal repayments .................... 38,160 19,056 15,524
------- ------- -------
Total reductions ..................... 38,228 19,703 15,524
------- ------- -------
Increase in other items, net ............ 82 30 72
------- ------- -------
Net increase (decrease) .............. $25,677 $21,510 $26,217
======= ======= =======
- ----------
(1) Originations include mortgage loans which adjust annually after an initial
fixed-rate period of five, seven or ten years in the following amounts:
Years Ended December 31,
-----------------------------------
1998 1997 1996
----- ------ -----
(In Thousands)
Initial fixed rate:
Five years ...................... 549 $6,087 2,871
Seven years ..................... 1,569 6,909 3,377
Ten years ....................... 1,460 1,027 2,866
Loan Commitments. The Bank issues commitments for mortgage loans
conditioned upon the occurrence of certain events. Such commitments are made in
writing on specified terms and conditions and generally remain outstanding for
45 to 60 days from the date the commitment is issued, depending on the type of
transaction. At
8
<PAGE>
December 31, 1998, the Bank had total loan commitments of $5.2 million and
commitments to customers for unused lines of credit of $3.1 million outstanding.
Loan Fees. In addition to interest earned on loans, the Bank receives
income from fees in connection with loan originations, late payments and for
miscellaneous services related to its loans. Income from these activities varies
from period-to-period depending upon the volume and type of loans made and
competitive conditions.
The Bank charges loan origination fees which are calculated as a percentage
of the amount borrowed. In accordance with applicable accounting procedures,
loan origination fees in excess of loan origination costs are deferred and
recognized over the contractual remaining lives of the related loans on a level
yield basis. Discounts and premiums on loans purchased are accreted and
amortized in the same manner. The Bank recognized income of $(6,500), $69,000
and $44,000 of deferred loan fees during the years ended December 31, 1998, 1997
and 1996, respectively.
Nonperforming Assets and Delinquencies. When a borrower fails to make a
required payment on a loan, the Bank attempts to cure the deficiency by
contacting the borrower and seeking the payment. Computer generated late notices
are mailed 15 days after a payment is due. In most cases, deficiencies are cured
promptly. If a delinquency continues, additional contact is made either through
a notice or other means, and the Bank will attempt to work out a payment
schedule and actively encourage delinquent borrowers to seek home ownership
counseling. While the Bank generally prefers to work with borrowers to resolve
such problems, the Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.
Loans are placed on nonaccrual status generally if, in the opinion of
management, principal or interest payments are not likely to be received in
accordance with the terms of the loan agreement, or when principal or interest
is past due 90 days or more. Interest accrued but not collected at the date the
loan is placed on nonaccrual status is reversed against income when it is
considered uncollectible. Loans may be reinstated to accrual status when
payments are under 90 days past due and, in the opinion of management,
collection of the remaining past due balances can be reasonably expected.
The Bank's Board of Directors is informed monthly of the status of all
mortgage loans delinquent more than 60 days, all loans in foreclosure and all
foreclosed and repossessed property owned by the Bank.
9
<PAGE>
The following table sets forth information with respect to the Bank's
nonperforming assets at the dates indicated. As of such dates, 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-accruing loans:
One-to-four family ......................... $ 505 $ 844 $ 841 $ 368 $ 737
Multi-family ............................... 66 65 63 -- --
Commercial ................................. 22 -- -- -- --
Consumer ................................... -- -- -- -- --
------ ------ ------ ------ ------
Total .................................... 593 909 904 368 737
------ ------ ------ ------ ------
Accruing loans delinquent 90 days or more:
One-to-four family ......................... -- -- -- 440 58
Multi-family ............................... -- -- -- -- --
Commercial ................................. -- -- -- -- --
Consumer (1) ............................... 7 25 26 15 51
------ ------ ------ ------ ------
Total ...................................... 7 25 26 455 109
------ ------ ------ ------ ------
Real estate owned ............................ 106 121 -- 134 144
------ ------ ------ ------ ------
Total non-performing assets .................. $ 706 $1,055 $ 930 $ 957 $ 990
====== ====== ====== ====== ======
Total as a percentage of total assets ........ 0.27% 0.49% 0.46% 0.51% 0.58%
====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Consists of student loans backed by a government guarantee.
Interest income that would have been recorded for the fiscal years ended
December 31, 1998 and 1997 had nonaccruing loans been current in accordance with
their original terms amounted to $51,000 and $84,000, respectively. The Bank
recorded $6,000 and $36,000, respectively, of interest income on such loans for
such periods.
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at December 31, 1998.
<TABLE>
<CAPTION>
Loans delinquent for:
---------------------------------------------------------------------------------------
60-89 days 90 Days and Over Total Delinquent Loans
-------------------------- -------------------------- ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family ............ 5 $160 0.1% 7 $505 0.3% 12 $665 0.4%
Multi-family .................. -- -- -- 1 66 5.5 1 66 5.5
Commercial .................... -- -- -- 1 22 0.6 1 22 0.6
Consumer ...................... -- -- -- 3 7 -- 3 7 --
---- ---- ---- ---- ---- ---- ---- ---- ----
Total loans .................. 5 $160 0.1% 12 $600 0.3% 17 $760 0.4%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
Real Estate Acquired in Settlement of Loans. Real estate acquired by the
Bank as a result of foreclosure or by deed-in-lieu of foreclosure is classified
as real estate acquired in settlement of loans until sold. Foreclosed real
estate is held for sale and such assets are carried at fair value minus
estimated cost to sell the property. After the date of acquisition, all costs
incurred in maintaining the property are expensed and costs incurred for the
improvement or development of such property are capitalized up to the extent of
their fair value less estimated selling costs. At December 31, 1998, the Bank
had $106,000 of real estate acquired in settlement of loans.
10
<PAGE>
Restructured Loans. Under Generally Accepted Accounting Principals
("GAAP"), the Bank is required to account for certain loan modifications or
restructuring as "troubled debt restructuring." In general, the modification or
restructuring of a debt constitutes a troubled debt restructuring if the Bank
for economic or legal reasons related to the borrower's financial difficulties
grants a concession to the borrowers that the Bank would not otherwise consider.
Debt restructurings or loan modifications for a borrower do not necessarily
always constitute troubled debt restructurings, however, and troubled debt
restructurings do not necessarily result in nonaccrual loans. The Bank had no
restructured loans as of December 31, 1998.
Asset Classification. The OTS has adopted various regulations regarding
problem assets of savings institutions. The regulations require that each
insured institution review and classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, OTS examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: substandard,
doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful can be included in determining an
institution's regulatory risk based capital, while specific valuation allowances
for loan losses generally do not qualify as regulatory capital. Assets that do
not currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" and monitored by the Bank. As of December 31,
1998, the Bank had $299,000 of assets designated as "special mention."
At December 31, 1998, the Bank had $604,000 of assets classified
substandard, and $22,000 classified doubtful.
Allowance for Loan Losses. The Bank has established a systematic
methodology for the determination of provisions for loan losses. The methodology
is set forth in a formal policy and takes into consideration the need for an
overall general valuation allowance as well as specific allowances that are tied
to individual loans.
In originating loans, the Bank recognizes that losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan,
general economic conditions and, in the case of a secured loan, the quality of
the security for the loan. The Bank increases its allowance for loan losses by
charging provisions for loan losses against the Bank's income.
The general valuation allowance is maintained to cover losses inherent in
the loan portfolio. Management's periodic evaluation of the adequacy of the
allowance is based on 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, the estimated value of any underlying collateral, current
economic conditions and the size and growth of the loan portfolio. Specific
valuation allowances are established to absorb losses on loans for which full
collectibility cannot be reasonably assured. The amount of the allowance is
based on the estimated value of the collateral securing the loan and other
analyses pertinent to each situation. Generally, a provision for losses is
charged against income monthly to maintain the allowances.
Management believes that the amount maintained in the allowance at December
31, 1998 will be adequate to absorb losses inherent in the portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary and results of operations could be significantly and adversely
affected if circumstances differ substantially from the assumptions used in
making the determinations. Furthermore, while the Bank believes it has
established its existing allowance for loan losses in accordance with GAAP,
there can be no assurance that regulators, in reviewing the Bank's loan
portfolio, will not
11
<PAGE>
request the Bank to increase significantly its allowance for loan losses. In
addition, because future events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that substantial increases will not be necessary
should the quality of any loan deteriorate as a result of the factors discussed
above. Any material increase in the allowance for loan losses may adversely
affect the Bank's financial condition and results of operations.
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
At or For the Years
Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ......................... $ 723 $ 534 $ 490 $ 442 $ 392
Charge-offs
Real estate:
One-to-four family ................................... 7 11 -- 12 3
Multi-family and other ............................... -- -- -- -- --
----- ----- ----- ----- -----
Total .............................................. 7 11 -- 12 3
Total Recoveries ....................................... -- -- 1 -- --
----- ----- ----- ----- -----
Net charge-offs ........................................ 7 11 (1) 12 3
Additions charged to operations ........................ 44 200 43 60 53
----- ----- ----- ----- -----
Balance at end of period ............................... $ 760 $ 723 $ 534 $ 490 $ 442
===== ===== ===== ===== =====
Ratio of net charge-offs during the period
to average loans outstanding during the
period ............ ................................. 0.01% 0.01% -- 0.01% --
===== ===== ===== ===== =====
Ratio of net charge-offs during the period
to average non-performing assets ....... ............. 2.61% 1.04% -- 1.23% 0.31%
===== ===== ===== ===== =====
</TABLE>
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance - beginning .................................... $ 723 $ 534 $ 490 $ 442 $ 392
Provisions charged to operations ....................... 44 200 43 60 53
Loans charged off, net of recoveries ................... 7 (11) 1 (12) (3)
----- ----- ----- ----- -----
Balance - ending ....................................... $ 760 $ 723 $ 534 $ 490 $ 442
===== ===== ===== ===== =====
</TABLE>
12
<PAGE>
The following tables set forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any other category.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------- ---------------------------------- ---------------------------------
% of % of % of
Loan Loans in Loan Loans in Loan Loans in
Amount of Amounts Each Category Amount of Amounts Each Category Amount of Amounts Each Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowances Category Loans Allowances Category Loans Allowances Category Loans
---------- -------- ------------- ---------- -------- ------------- ---------- -------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four family........ $ 458 $166,573 93.23% $ 402 $143,623 93.88% $ 356 $121,129 92.10%
Multi-family ............. 11 1,200 .67 22 1,258 0.82 42 1,875 1.43
Commercial real estate ... 40 3,367 1.88 37 1,906 1.25 61 2,035 1.55
Home equity .............. 81 7,133 4.00 59 5,706 3.73 75 5,364 4.08
Other consumer ........... -- 388 0.22 3 491 0.32 -- 1,101 0.84
Unallocated .............. 170 -- 0.00 200 -- 0.00 -- -- 0.00
-------- -------- ------ -------- -------- ------ -------- -------- ------
$ 760 $178,661 100% $ 723 $152,984 100.00% $ 534 $131,504 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1995 1994
----------------------------------- ------------------------------------
% of % of
Loan Loans in Loan Loans in
Amount of Amounts Each Category Amount of Amounts Each Category
Loan Loss by to Total Loan Loss by to Total
Allowances Category Loans Allowances Category Loans
---------- -------- ------------- ---------- -------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four-family ...... $ 296 $ 97,007 92.08% $ 240 $ 91,895 91.56%
Multi-family ............ 43 2,018 1.92 37 2,102 2.09
Commercial real
estate ................. 61 1,862 1.76 33 2,049 2.04
Home equity ............. 44 3,345 3.17 30 3,005 2.99
Other consumer .......... -- 1,123 1.07 -- 1,321 1.32
Unallocated ............. 46 -- 0.00 102 -- 0.00
-------- -------- ------ -------- -------- ------
$ 490 $105,335 100.00% $ 442 $100,372 100.00%
======== ======== ====== ======== ======== ======
</TABLE>
Investment Activities
The Bank is permitted under federal law to invest in various types of
liquid assets, including U.S. Treasury obligations, government sponsored
corporation securities, securities of various federal agencies and of state and
municipal governments, deposits at the FHLB of New York, certificates of deposit
of federally insured institutions, certain bankers' acceptances and federal
funds. Subject to various restrictions, the Bank may also invest a portion of
its assets in commercial paper and corporate debt securities. The Bank is not
permitted to invest in corporate equity securities. Savings institutions like
the Bank are also required to maintain an investment in FHLB stock. The Bank is
required under federal regulations to maintain a minimum amount of liquid
assets.
The Bank purchases investment securities with excess liquidity arising when
investable funds exceed loan demand. The Bank's current investment policy limits
investments to U.S. Government and government sponsored corporation securities,
certificates of deposit, marketable corporate debt obligations, and
mortgage-backed securities. The Bank's investment policy does not permit
engaging directly in hedging activities or purchasing high risk mortgage
derivative products or non-investment grade corporate bonds. Investments are
made based on certain considerations, which include the interest rate, yield,
settlement date and maturity of the investment, the Bank's liquidity position,
and
13
<PAGE>
anticipated cash needs and sources (which in turn include outstanding
commitments, upcoming maturities, estimated deposits and anticipated loan
amortization and repayments). The effect that the proposed investment would have
on the Bank's credit and interest rate risk and risk-based capital is also
considered.
The following table sets forth the carrying value of the Bank's securities
portfolio, at the dates indicated. All securities, other than FHLB stock, are
available for sale.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------
1998 1997 1996
---------------------- ----------------------- ------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
Federal agency obligations .................. $ -- --% $ 1,000 1.85% $ 4,007 6.72%
Unrealized gain (loss), net ................. -- -- (8) (.01) (63) (.10)
Equity securities ........................... -- -- -- -- -- --
Unrealized gains (loss), net ................ -- -- -- -- 120 .20
-------- --------- -------- --------- -------- ---------
Total investment securities ............... -- -- 992 1.84 4,064 6.82
-------- --------- -------- --------- -------- ---------
Mortgage-backed securities:
GNMA ........................................ 13,353 21.28 1,184 2.20 1,813 3.04
Fannie Mae .................................. 17,490 27.88 19,922 36.95 12,300 20.64
Freddie Mac ................................. 30,095 47.97 30,614 56.78 40,604 68.14
Net unamortized premium, (discounts) ........ 868 1.38 545 1.01 487 0.82
Unrealized gains, net ....................... 929 1.49 660 1.22 321 0.54
-------- --------- -------- --------- -------- ---------
Total mortgage backed securities .......... 62,735 52,925 98.16 55,525 93.18
-------- -------- --------- -------- ---------
Total securities available for sale ........... $ 62,735 100.00% $ 53,917 100.00% $ 59,589 100.00%
======== ========= ======== ========= ======== =========
FHLB Stock .................................... $ 2,008 $ 1,804 $ 1,615
======== ======== ========
Other interest earning assets:
Interest bearing deposits in banks .......... $ 12,350 $ 4,739 $ 4,471
======== ======== ========
</TABLE>
14
<PAGE>
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each of the range at maturities at December 31, 1998.
Carrying Average
Value Yield
-------- -------
One year or less ........................... $ 631 6.50%
After one year though five years ........... 3,072 6.57
After five years through ten years ......... -- --
After ten years ............................ 59,032 7.10
------- ----
Total ...................................... $62,735 7.07%
=======
Deposit Activities and Other Sources of Funds
General. Deposits are the major external source of funds for the Bank's
lending and other investment activities. In addition, the Bank also generates
funds internally from loan principal repayments and prepayments and maturing
investment securities. Scheduled loan repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and money market conditions. Borrowings
from the FHLB of New York may be used on a short-term basis to compensate for
reductions in the flow of funds from other sources or as a long-term funding
strategy. Presently, the Bank has no other borrowing arrangements.
Deposit Accounts. The Bank's deposit products include negotiable order of
withdrawal ("NOW") accounts, demand deposit accounts, money market accounts,
regular passbook savings, statement savings accounts and term certificate
accounts. Deposit account terms vary with the principal difference being the
minimum balance deposit, early withdrawal penalties and the interest rate. The
Bank reviews its deposit mix and pricing weekly. The Bank does not utilize
brokered deposits, nor has it sought jumbo certificates of deposit.
The Bank believes it is competitive in the type of accounts and interest
rates it offers on its deposit products. The Bank determines the rates paid
based on a number of conditions, including rates paid by competitors, rates on
U.S. Treasury securities, rates offered on various FHLB of New York lending
programs, and the deposit growth rate the Bank is seeking to achieve.
The Bank may use premiums to attract new checking accounts, particularly in
conjunction with new branch openings. These premiums are reflected as an
increase in the Bank's advertising and promotion expense, as well as its cost of
funds. The Bank also attracts business checking accounts and promotes individual
retirement accounts ("IRAs").
15
<PAGE>
The following table sets forth an analysis of deposit accounts by type,
maturity, and rate at December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ------------------------------
Weighted Weighted Weighted
Average % of Average % of Average % of
Amount Rate Total Amount Rate Total Amount Rate Total
------- -------- ----- ------ -------- ----- ------ -------- --------
(Dollars in Thousands)
Transactions and savings deposits:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing .............. $ 4,398 --% 1.97% $ 3,376 --% 1.70% $ 2,417 --% 1.31%
Money market accounts ............. 2,587 2.64 1.16 2,809 2.69 1.42 3,160 2.75 1.71
NOW accounts ...................... 9,995 1.50 4.47 9,696 1.50 4.89 8,816 2.25 4.77
Passbook and statement savings .... 49,197 3.00 22.03 45,168 3.00 22.77 44,120 2.99 23.89
-------- ------ -------- ------ -------- ------
Total transactions and
savings deposits .............. 66,177 2.56 29.63 61,049 2.58 30.78 58,513 2.74 31.68
-------- ------ -------- ------
Certificate accounts with remaining
maturities of:
6 months or less .................. 46,443 5.18 20.80 62,587 5.30 31.55 52,974 5.05 28.68
Over 6 to 12 months ............... 59,895 5.47 26.83 27,714 5.37 13.97 31,902 5.50 17.27
Over 12 months .................... 50,755 5.72 22.74 47,013 5.89 23.70 41,320 5.75 22.37
-------- ------ -------- ------ -------- ------
Total certificates .............. 157,093 5.46 70.37 137,314 5.52 69.22 126,196 5.39 68.32
-------- ------ -------- ------ -------- ------
Total deposits ................. $223,270 4.60% 100.00% $198,363 4.62% 100.00% $184,709 4.55% 100.00%
======== ====== ====== ======== ====== ====== ======== ====== ======
</TABLE>
Time Deposits by Maturities. The following table sets forth the amount of
time deposits in the Bank categorized by rates and maturities at December 31,
1998.
<TABLE>
<CAPTION>
After
December 31, December 31, December 31, December 31,
1999 2000 2001 2001 Total
------------ ------------ ------------ ------------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Less than 4% ................... 786 $ 62 $ -- $ 12 860
4.00-5.99% ..................... $104,691 39,953 1,812 1,202 $147,658
6.00-7.99% ..................... 861 7,714 -- -- 8,575
-------- -------- -------- -------- --------
Total .......................... $106,338 $ 47,729 $ 1,812 $ 1,214 $157,093
======== ======== ======== ======== ========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1998.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------------------
3 Months Over 3 Months Over 12 Months Over
Or Less to 12 Months to 36 Months 36 Months Total
-------- ------------ -------------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of Deposit less than $100,000 ......... $ 24,473 $ 75,219 $ 45,560 $ 1,214 $146,467
Certificates of Deposit of $100,000 or more ........ 1,475 5,171 3,981 -- 10,626
-------- -------- -------- -------- --------
Total Certificates of Deposit ...................... $ 25,948 $ 80,390 $ 49,541 $ 1,214 $157,093
======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
Deposit Activity. The following table sets forth the deposit activity of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance .............................. $ 198,363 $ 184,709 $ 169,842 $ 153,769 $ 154,055
--------- --------- --------- --------- ---------
Net increase (decrease) before interest credited 15,675 5,283 7,343 6,446 (5,192)
Interest credited .............................. 9,232 8,371 7,524 9,627 4,906
--------- --------- --------- --------- ---------
Net increase (decrease) in deposits ............ 24,907 13,654 14,867 16,073 (286)
--------- --------- --------- --------- ---------
Ending balance ................................. $ 223,270 $ 198,363 $ 184,709 $ 169,842 $ 153,769
========= ========= ========= ========= =========
</TABLE>
Borrowings. Savings deposits are the primary source of funds for the Bank's
lending and investment activities and for its general business purposes. The
Bank has the ability to use advances from the FHLB of New York to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. The FHLB
of New York functions as a central reserve bank providing credit for savings
associations and certain other member financial institutions. As a member of the
FHLB of New York, the Bank is required to own capital stock in the FHLB of New
York and is authorized to apply for advances on the security of such stock and
certain of its mortgage loans and other assets (principally securities that are
obligations of, or guaranteed by, the U.S. Government) provided certain
creditworthiness standards have been met. Advances are made pursuant to several
different credit programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based on the financial condition of the member institution and the
adequacy of collateral pledged to secure the credit.
The following table sets forth the maximum month-end balance and average
balance of FHLB of New York advances for the periods indicated.
Years Ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------ ------ ------ ------
(In Thousands)
Maximum balance:
FHLB advances ..... $ -- $7,500 $ 800 $4,200 $4,100
Average balance:
FHLB advances ..... $ -- $1,663 $ 12 $ 962 $ 304
At December 31, 1998 and 1997, no advances were outstanding from the FHLB
of New York.
Employees
As of December 31, 1998, the Bank had 43 full-time and 1 part-time
employee, none of whom is represented by a collective bargaining unit. The Bank
believes its relationship with its employees is good.
REGULATION
As a federally chartered SAIF-insured savings bank, the Bank is subject to
examination, supervision and extensive regulation by the OTS and the FDIC. The
Bank is a member of the FHLB of New York. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The Bank also is subject to regulation by the Board of Governors of
the Federal Reserve System (the "Federal Reserve Board") governing reserves to
be maintained against deposits and certain other matters. The OTS examines the
Bank and prepares reports for the consideration of the Bank's Board of
Directors. The FDIC also examines the Bank in its role as the administrator of
the SAIF. The Bank's relationship with its depositors and borrowers also is
regulated to a great extent by both federal and state laws, especially
17
<PAGE>
in such matters as the ownership of savings accounts and the form and content of
the Bank's mortgage documents. Any change in such regulation, whether by the
FDIC, OTS, or Congress, could have a material adverse impact on the Company and
the Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act (the "FDI Act") and the regulations issued by the
agencies to implement these statutes. These laws and regulations delineate the
nature and extent of the activities in which savings association may engage. The
description of statutory provisions and regulations applicable to savings
associations set forth herein does not purport to be a complete description of
such statutes and regulations and their effect on the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to a single or related group of
borrowers. Generally, this limit is 15% of the Bank's unimpaired capital and
surplus, and an additional 10% of unimpaired capital and surplus if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the loans
to one borrower rule to permit savings associations meeting certain requirements
to extend loans to one borrower in additional amounts under circumstances
limited essentially to loans to develop or complete residential housing units.
Qualified Thrift Lender Test. In general, savings associations are required
to maintain at least 65% of their portfolio assets in certain qualified thrift
investments (which consist primarily of loans and other investments related to
residential real estate and certain other assets). A savings association that
fails the qualified thrift lender test is subject to substantial restrictions on
activities and to other significant penalties.
Recent legislation has expanded the qualified thrift lender test to provide
savings associations with greater authority to lend and diversify their
portfolios. In particular, credit card and education loans may now be made by
savings associations without regard to any percentage-of-assets limit, and
commercial loans may be made in an amount up to 10% of total assets, plus an
additional 10% for small business loans. Loans for personal, family and
household purposes (other than credit card, small business and educational
loans) are now included without limit with other assets that, in the aggregate,
may account for up to 20% of total assets. The Bank satisfied the qualified
thrift lender test on December 31, 1998.
Limitations on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution, such as the
Bank, that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Association") and has not been advised by
the OTS that it is in need of more than normal supervision, could, after prior
notice but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings institution may make a
capital distribution without notice to the OTS, unless it is a subsidiary of a
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holding company, provided that it has a regulatory rating in the two top
categories, is not of supervisory concern, and would remain adequately
capitalized, as defined in the OTS prompt corrective action regulations,
following the proposed distribution. Savings institutions that would remain
adequately capitalized following the proposed distribution but do not meet the
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
savings institution may not make a capital distribution without prior approval
of the OTS and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No assurance
may be given as to whether or in what form the regulations may be adopted.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage (currently 4%) of its net withdrawable deposit accounts plus
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average liquidity ratio
at December 31, 1998 exceeded the then applicable requirements.
Community Reinvestment Act and Fair Lending Laws. Savings association share
a responsibility under the Community Reinvestment Act ("CRA") and related
regulations of the OTS to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of CRA could, at a minimum, result in regulatory
restrictions on its activities, and failure to complete with the Fair Lending
Laws could result in enforcement actions by the OTS, as well as other federal
regulatory agencies and the Department of Justice. The Bank received a
satisfactory CRA rating under the current CRA regulations in its most recent
federal examination by the OTS.
Transactions with Related Parties. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any nonsavings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Under the
FDI Act, the FDIC has the authority to recommend to the Director of OTS that
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
Standards for Safety and Soundness. The FDI Act requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, and compensation fees and
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<PAGE>
benefits and such other operational and managerial standards as the agency deems
appropriate. The federal banking agencies adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
the FDI Act. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The Guidelines address
internal controls and information systems; internal audit systems; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the FDI
Act. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 4% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus, minority
interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights ("MSRs"), and credit card relationships.
The OTS regulations require that, in meeting the leverage ratio, tangible and
risk-based capital standards institutions generally must deduct investments in
and loans to subsidiaries engaged in activities not permissible for a national
bank. In addition, the OTS prompt corrective action regulation provides that a
savings institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest CAMEL examination rating) will be deemed to
be "undercapitalized" and may be subject to certain restrictions.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as core capital and supplementary
capital) to risk-weighted assets of 8%. In determining the amount of risk-
weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the leverage standard. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock and,
within specified limits, the allowance for loan and lease losses. Overall, the
amount of supplementary capital included as part of total capital cannot exceed
100% of core capital.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. The final interest rate risk rule also adjusts the
risk-weighting for certain mortgage derivative securities. Under the rule,
savings associations with "above normal" interest rate risk exposure would be
subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates
divided by the estimated economic value of the association's assets, as
calculated in accordance with guidelines set forth by the OTS. A savings
association whose measured interest rate risk exposure exceeds 2% must deduct an
interest rate component in calculating its total capital under the risk-based
capital rule. The interest rate risk component is an amount equal to one-half of
the difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is a
two quarter lag between the reporting date of an institution's financial data
and the effective date for the new capital requirement based on that data. A
savings association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component on a
case-by-case basis. The OTS has postponed the effective date of the capital
component in order to provide it with an opportunity to review the interest rate
risk approaches taken by the other federal banking agencies. At December 31,
1998, the Bank met each of its capital requirements, in each case on a fully
phased-in basis.
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At December 31, 1998, the Bank exceeded each of the three OTS capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of December 31, 1998.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------- --------------------- -----------------------
Amount Ratio(1) Amount Ratio(1) Amount Ratio(1)
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Tier I core capital ................... $24,952 9.60% $10,397 4.00% $12,996 5%
Tier I risk-based capital ............. 24,952 23.08 10,397 4.00 6,497 6%
Total risk-based capital .............. 25,713 23.78 8,650 8.00 10,812 10%
</TABLE>
- ----------
(1) Core capital is calculated on the basis of a percentage of total adjusted
assets; risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
Thrift Charter. Congress has been considering legislation in various forms
that would require federal thrifts, such as the Bank, to convert their charters
to national or state bank charters. The Bank cannot determine whether, or in
what form, such legislation may eventually be enacted and there can be no
assurance that any legislation that is enacted would not adversely affect the
Bank and the Company.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has total
risk-based capital of less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized," and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS may also take any one
of a number of discretionary supervisory actions, including the issuance of a
capital directive and the replacement of senior executive officers and
directors.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and the
risk posed to the deposit insurance funds. An institution's assessment rate
depends on the capital category and supervisory category to which it is
assigned. The FDIC is authorized to raise the assessment rates in certain
circumstances. The FDIC has exercised this authority several times in the past
and may raise insurance premiums in the future. If such action is taken by the
FDIC, it could have an adverse effect on the earnings of the Bank.
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Federal Home Loan Bank System
The Bank, as a federal association, is required to be a member of the FHLB
System, which consists of 12 regional FHLBs. The FHLB provides a central credit
facility primarily for member institutions. The Bank, as a member of the FHLB of
New York, is required to acquire and hold shares of capital stock in that FHLB
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is
greater. As of December 31, 1998, the Bank was in compliance with this
requirement. The FHLBs are required to provide funds for the resolution of
insolvent thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain noninterest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). At December 31, 1998, the Bank
was in compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the FRB may be used to satisfy
liquidity requirements imposed by the OTS.
Holding Company Regulation
Generally. The Mutual Holding Company and the Company are nondiversified
mutual savings and loan holding companies within the meaning of the HOLA. As
such, the Mutual Holding Company and the Company are registered with the OTS and
are subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Mutual
Holding Company and the Company and any nonsavings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. As federal corporations, the Company and the Mutual Holding Company
are generally not subject to state business organizations law.
Permitted Activities. Pursuant to Section 10(o) of the HOLA and OTS
regulations and policy, a mutual holding company and a federally chartered
mid-tier holding company such as the Company may engage in the following
activities: (i) investing in the stock of a savings association; (ii) acquiring
a mutual association through the merger of such association into a savings
association subsidiary of such holding company or an interim savings association
subsidiary of such holding company; (iii) merging with or acquiring another
holding company, one of whose subsidiaries is a savings association; (iv)
investing in a corporation, the capital stock of which is available for purchase
by a savings association under federal law or under the law of any state where
the subsidiary savings association or associations share their home offices; (v)
furnishing or performing management services for a savings association
subsidiary of such company; (vi) holding, managing or liquidating assets owned
or acquired from a savings subsidiary of such company; (vii) holding or managing
properties used or occupied by a savings association subsidiary of such company
properties used or occupied by a savings association subsidiary of such company;
(viii) acting as trustee under deeds of trust; (ix) any other activity (A) that
the Federal Reserve Board, by regulation, has determined to be permissible for
bank holding companies under Section 4(c) of the Bank Holding Company Act of
1956, unless the Director, by regulation, prohibits or limits any such activity
for savings and loan holding companies; or (B) in which multiple savings and
loan holding companies were authorized (by regulation) to directly engage on
March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director. If a mutual
holding company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed in (i)
through (x) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.
The HOLA prohibits a savings and loan holding company, including the
Company and the Mutual Holding Company, directly or indirectly, or through one
or more subsidiaries, from acquiring another savings institution or
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holding company thereof, without prior written approval of the OTS. It also
prohibits the acquisition or retention of, with certain exceptions, more than 5%
of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a
nonsubsidiary company engaged in activities other than those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources,
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance fund, the convenience and needs of the
community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Waivers of Dividends by the Mutual Holding Company. OTS regulations require
the Mutual Holding Company to notify the OTS of any proposed waiver of its right
to receive dividends. The OTS reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver if: (i) the mutual
holding company's board of directors determines that such waiver is consistent
with such directors' fiduciary duties to the mutual holding company's members;
(ii) for as long as the savings association subsidiary is controlled by the
mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction to the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; (iv) the
amount of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the mutual holding company.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to issue from the mutual to the stock form of
ownership (a "Conversion Transaction"). There can be no assurance when, if ever,
a Conversion Transaction will occur, and the Board of Directors has no current
intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction a new holding company would be formed as the successor to the
Company (the "New Holding Company"), the Mutual Holding Company's corporate
existence would end, and certain depositors of the Bank would receive the right
to subscribe for additional shares of the New Holding Company. In a Conversion
Transaction, each share of Common Stock held by the Company's public
stockholders ("Minority Stockholders") would be automatically converted into a
number of shares of common stock of the New Holding Company determined pursuant
an exchange ratio that ensures that after the Conversion Transaction, subject to
the Dividend Waiver Adjustment described below and any adjustment to reflect the
receipt of cash in lieu of fractional shares, the percentage of the to-be
outstanding shares of the New Holding Company issued to Minority Stockholders in
exchange for their Common Stock would be equal to the percentage of the
outstanding shares of Common Stock held by Minority Stockholders immediately
prior to the Conversion Transaction. The total number of shares held by Minority
Stockholders after the Conversion Transaction would also be affected by any
purchases by such persons in the offering that would be conducted as part of the
Conversion Transaction.
The Dividend Waiver Adjustment would decrease the percentage of the to-be
outstanding shares of common stock of the New Holding Company issued to Minority
Stockholders in exchange for their shares of Common Stock to reflect (i) the
aggregate amount of dividends waived by the Mutual Holding Company and (ii)
assets other than Common Stock held by the Mutual Holding Company. Pursuant to
the Dividend Waiver Adjustment, the percentage of the to-be outstanding shares
of the New Holding Company issued to Minority Stockholders in exchange for their
shares of Common Stock would be equal to the percentage of the outstanding
shares of Common Stock held by Minority
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<PAGE>
Stockholders multiplied by the Dividend Waiver Fraction. The Dividend Waiver
Fraction is equal to the product of (a) a fraction, of which the numerator is
equal to the Company's stockholders' equity at the time of the Conversion
Transaction less the aggregate amount of dividends waived by the Mutual Holding
Company and the denominator is equal to the Company's stockholders' equity at
the time of the Conversion Transaction, and (b) a fraction, of which the
numerator is equal to the appraised pro forma market value of the New Holding
Company minus the value of the Mutual Holding Company's assets other than Common
Stock and the denominator is equal to the pro forma market value of the New
Holding Company.
Federal Securities Law
Shares of the Company's Common Stock are registered with the SEC under the
Section R(g) of Securities Exchange Act of 1934 (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
TAXATION
Federal Income Taxes
General. The Bank is, and the Company will be, subject to federal income
taxation in the same general manner as other corporations, with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Bank.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its federal income tax returns. The Small
Business Protection Act of 1996 (the "1996 Act") eliminated the use of the
reserve method of accounting for bad debt reserves by savings institutions,
effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of December 31, 1998, was approximately
$733,000.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions or cease to maintain a savings
bank charter.
At December 31, 1998, the Bank's total federal pre-1988 reserve was
approximately $3.0 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
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<PAGE>
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1986. At December 31, 1998, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated return, and corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct only
70% of dividends received or accrued on their behalf.
The Bank is not currently under audit with respect to its federal income
tax returns and has not been audited with respect to its federal income tax
returns during the past five years.
State and Local Taxation
State of New Jersey. The Bank files New Jersey income tax returns. For New
Jersey income tax purposes, savings institutions are presently taxed at a rate
equal to 3% of taxable income. For this purpose, "taxable income" generally
means federal taxable income, subject to certain adjustments (including the
addition of net interest income on state and municipal obligations). The Bank is
not currently under audit with respect to its New Jersey income tax returns.
The Company is required to file a New Jersey income tax return because it
is doing business in New Jersey. For New Jersey tax purposes, regular
corporations are presently taxed at a rate equal to 9% of taxable income. For
this purpose, "taxable income" generally means federal taxable income subject to
certain adjustments (including addition of interest income on state and
municipal obligation). However, if the Company meets certain requirements, it
may be eligible to elect to be taxed as a New Jersey Investment Company at a tax
rate presently equal to 2.25% (25% of 9%) of taxable income.
ITEM 2. Properties
(a) Properties
The following table sets forth certain information regarding the Bank's
offices at December 31, 1998.
Approximate
Location Year Opened Square Feet Deposits
- -------- ----------- ----------- --------
1410 St. Georges Avenue 1986 9,200 $68.0 million
Avenel, NJ 07001
1515 Irving Street 1995 7,300 $43.0 million
Rahway, NJ 07065
225 North Wood Ave 1977 1,400 $42.0 million
Linden, NJ 07036
755 State Highway 18 1974 2,000 $70.0 million
East Brunswick, NJ 08816
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At December 31, 1998, the net book value of the Company's office properties
and fixtures, furniture, and equipments was $2.1 million.
(b) Investment Policies
For a description of the Bank's policies (all of which may be changed
without a vote of the Bank's security holders) and the limitations on the
percentage of assets which may be invested in any one investment, or type of
investment with respect to: (1) investments in real estate or interests in real
estate; (2) investments in real estate mortgages; and (3) securities of or
interests in primarily engaged in real estate activities, reference is made
hereunder to the information presented above under "Item 1. Description of
Business.
(c) Description of Real Estate and Operating Data
Not Applicable. The book value of each of the Bank's properties is less
than 10% of the Bank's total consolidated assets at December 31, 1998.
ITEM 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Bank, such as claims to enforce liens, condemnation proceedings on properties in
which the Bank holds security interests, claims involving the making and
servicing of real property loans and other issues incident to the Bank's
business. The Bank is not a party to any pending legal proceedings that it
believes would have a material adverse effect on the financial condition or
operations of the Bank.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. Market for Company's Common Stock and Related Security Holder Matters
The "Market for Common Stock" section of the Company's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 6. Selected Financial Data
The selected financial information for the year ended December 31, 1998 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
26
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
The financial statements are contained in the Company's Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Company
The "Proposal I--Election of Directors" section of the Company's definitive
proxy statement for the Company's 1999 Annual Meeting of Stockholders (the "1999
Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
The "Proposal I--Election of Directors" section of the Company's 1999 Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The "Proposal I--Election of Directors" section of the Company's 1999 Proxy
Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The "Transactions with Certain Related Persons" section of the
Company's 1999 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form
10-KSB are as follows:
(A) Report of Independent Auditors
(B) Consolidated Statements of Financial Condition
(C) Consolidated Statements of Income
(D) Consolidated Statements of Comprehensive Income
(E) Consolidated Statements of Stockholders' Equity
(F) Consolidated Statements of Cash Flows
(G) Notes to Consolidated Financial Statements
27
<PAGE>
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
(b) Reports on Form 8-K
The Company has not filed a Current Report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1998.
(c) Exhibits
3 Federal Stock Charter and Bylaws *
4 Instruments defining the rights of
security holders, including indentures *
10.1 Form of Employment Agreement *
10.2 Form of Employee Stock Ownership Plan *
13 Annual Report to Stockholders 13
21 Subsidiaries of Registrant 21
* Incorporated herein by reference to the Company's Registration Statement on
Form SB-2 (file no. 333-48003), originally filed with the SEC on March 16,
1998, as amended on May 4, 1998 and May 12, 1998.
28
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Liberty Bancorp, Inc.
Date: March 26, 1999 By: /s/ John R. Bowen
------------------------------
John R. Bowen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange 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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ John R. Bowen By: /s/ Michael J. Widmer
-------------------------------------- -----------------------------------
John R. Bowen Michael J. Widmer
President, Chief Executive Officer and Executive Vice President, Chief
Director (Principal Executive Officer) Financial Officer and Director
(Principal Financial and Accounting
Officer)
Date: March 26, 1999 Date: March 26, 1999
By: /s/ Dr. Neil R. Bryson By: /s/ Anthony V. Caruso
-------------------------------------- -----------------------------------
Dr. Neil R. Bryson Anthony V. Caruso
Director Director
Date: March 26, 1999 Date: March 26, 1999
By: /s/ John W. Fox By:
-------------------------------------- -----------------------------------
John W. Fox Donald F. Marsh
Director Director
Date: March 26, 1999 Date:
By: By: /s/ Paul J. McGovern
-------------------------------------- -----------------------------------
John C. Marsh Paul J. McGovern
Director Director
Date:
By: /s/ Nelson L. Taylor, Jr.
--------------------------------------
Nelson L. Taylor, Jr.
Director
Date: March 26, 1999
</TABLE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial
and other data of Liberty Bancorp, Inc. (the "Company"), or prior to June 30,
1998, Liberty Bank (the "Bank," and formerly "Axia Federal Savings Bank") for
the periods and at the dates indicated. The information is derived in part from
and should be read in conjunction with the Consolidated Financial Statements and
Notes thereto of the Company contained elsewhere herein.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Financial Condition Data:
Total assets $260,447 $217,437 $201,574
Loans receivable, net 177,877 152,200 130,690
Securities available for sale 62,735 53,917 59,589
Deposits 223,271 198,363 184,709
Equity capital 34,433 16,541 14,812
Year Ended December 31,
------------------------------------------------
1998 1997 1996(1)
-------- -------- --------
(In Thousands)
Operating Data:
Interest income $ 16,014 $ 15,083 $ 13,723
Interest expense 9,817 9,004 8,049
-------- -------- --------
Net interest income 6,197 6,079 5,674
Provision for loan losses 45 200 43
-------- -------- --------
Net interest income after provision for loan losses 6,152 5,879 5,631
-------- -------- --------
Non-interest income 310 442 351
-------- -------- --------
Non-interest expense 4,307 3,891 5,090(1)
-------- -------- --------
Income before income taxes 2,155 2,430 892
Income taxes 766 877 283(1)
-------- -------- --------
Net income $ 1,389 $ 1,553 $ 609(1)
======== ======== ========
</TABLE>
- ----------
(1) Operating data for the year ended December 31, 1996 includes the effect of
a one-time Savings Association Insurance Fund ("SAIF") recapitalization
assessment of $1.0 million, or $648,000 net of taxes. Excluding this
non-recurring assessment, total non-interest expense would have been $4.0
million, income taxes would have totaled $635,000 and net income would have
been $1.3 million.
2
<PAGE>
KEY OPERATING RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
At or For The Year
Ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Selected Ratios:
Performance Ratios:
Return on assets (ratio of net income to average total assets)...... 0.58% 0.73% 0.32%
Return on equity (ratio of net income to average equity)............ 5.44% 9.95% 4.23%
Average interest rate spread during period.......................... 2.05% 2.54% 2.65%
Net interest margin (net interest income divided by
average interest-earning assets) ................................. 2.63% 2.92% 3.01%
Operating expenses to average total assets.......................... 1.79% 1.84% 2.64%
Average interest-earning assets to average
interest-bearing liabilities ..................................... 114.02% 108.77% 108.31%
Asset Quality Ratios:
Non-performing assets to total assets............................... 0.23% 0.49% 0.46%
Allowance for loan losses to non-performing loans................... 128.25% 77.41% 57.61%
Allowance for loan losses to loans receivable, net.................. 0.43% 0.48% 0.41%
Capital Ratios:
Equity to total assets at end of period............................. 13.22% 7.61% 7.35%
Average equity to average assets.................................... 10.61% 7.37% 7.47%
Other Data:
Number of full service customer facilities at end of period......... 4 4 4
</TABLE>
- ----------
(1) Interest rate spread represents the difference between the weighted average
yield on average interest-earning assets and the weighted average cost of
average interest-bearing liabilities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this document contains
forward-looking statements. The forward looking statements contained in the
following sections are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed. Readers should not place undue
reliance on these forward-looking statements, as they reflect management's
analysis as of the date of this report. The Company has no obligation to update
or revise these forward-looking statements to reflect events or circumstances
that occur after the date of this report. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the SEC, including quarterly reports on Form 10-QSB and current reports
filed on Form 8-K.
General
The Company's primary business activity is the ownership of 100% of the
outstanding common stock of the Bank. The Bank's results of operations depend
primarily on its net interest income, which is the difference between the income
earned on its loan and securities portfolios and the interest expense paid on
interest-bearing liabilities. Results of operations are also affected by the
Bank's provision for loan losses, fees and service charges on deposits and
loans, and gains on sales of securities. The Bank's non-interest expense
consists primarily of salaries and employee benefits, occupancy expense,
equipment expense, federal deposit insurance premiums, advertising and other
expenses. Results of operations are also significantly
3
<PAGE>
affected by general economic and competitive conditions, particularly changes in
market interest rates, government policies and actions of regulatory
authorities.
Management of Market Risk
General. As with other savings institutions, the Bank's most significant
form of market risk is interest rate risk. The Bank's assets, consisting
primarily of mortgage loans, have longer maturities than its liabilities,
consisting primarily of deposits. As a result, a principal part of the Bank's
business strategy is to manage interest rate risk and manage the exposure of the
Bank's net interest income to changes in market interest rates. Accordingly, the
Board of Directors has established an Asset/Liability Management Committee which
is responsible for evaluating the interest rate risk inherent in the Bank's
assets and liabilities, determining the level of risk that is appropriate given
the Bank's business strategy, operating environment, capital, liquidity and
performance objectives, and managing this risk consistent with the guidelines
approved by the Board of Directors. The Asset/Liability Management Committee
consists of senior management operating under a policy adopted by the Board of
Directors and meets at least quarterly to review the Bank's asset/liability
policies and interest rate risk position.
The Bank has pursued the following strategies to manage interest rate risk:
(1) originating one- to- four family adjustable rate mortgage ("ARM") loans, (2)
purchasing adjustable rate mortgage-backed securities guaranteed by Fannie Mae,
Freddie Mac or GNMA, (3) increasing adjustable rate home equity lending and
fixed-rate home equity lending with maturities of five years or less, and (4)
investing in shorter-term securities which generally have lower yields compared
to longer term investments, but which better position the Bank to reinvest its
assets if market interest rates increase.
The Bank's current investment strategy is to maintain a securities
portfolio that provides a source of liquidity and that contributes to the Bank's
overall profitability and asset mix within given quality and maturity
considerations. The securities portfolio consists primarily of U.S. Treasury,
Federal Government and government sponsored corporation securities. All of the
Bank's investment securities and mortgage-backed securities, other than Federal
Home Loan Bank ("FHLB") stock, are classified as available for sale to provide
management with the flexibility to make adjustments to the portfolio in the
event of changes in interest rates, to fulfill unanticipated liquidity needs, or
to take advantage of alternative investment opportunities.
Net Portfolio Value. In past years, the Bank measured interest rate
sensitivity by computing the "gap" between the assets and liabilities which were
expected to mature or reprice within certain time periods, based on assumptions
regarding loan prepayment and deposit decay rates formerly provided by the
Office of Thrift Supervision (the "OTS"). However, the OTS now requires the
computation of amounts by which the net present value of an institution's cash
flow from assets, liabilities and off balance sheet items (the institution's net
portfolio value or "NPV") would change in the event of a range of assumed
changes in market interest rates. These computations estimate the effect on an
institution's NPV from instantaneous and permanent 1% to 4% (100 to 400 basis
point) increases and decreases in market interest rates.
4
<PAGE>
The following table presents the Bank's NPV at December 31, 1998, as
calculated by the OTS, which is based upon quarterly information that the Bank
provided voluntarily to the OTS.
Percentage Change in Net Portfolio Value
--------------------------------------------------------------------
Changes Board
in Market Projected Policy Estimated Amount of
Interest Rates Change(1) Guidelines NPV Change
-------------- ---------- ---------- --------- ---------
(basis points) (Dollars in Thousands)
400 (56)% (75)% $ 11,614 $(14,761)
300 (38)% (50)% 16,306 (10,069)
200 (23)% (38)% 20,405 (5,970)
100 (10)% (19)% 23,794 (2,581)
0 -- 26,375
(100) 7% 15% 28,231 1,856
(200) 12% 25% 29,466 3,091
(300) 19% 50% 31,357 4,982
(400) 26% 100% 33,163 6,788
- ----------
(1) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV requires making certain
assumptions which may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remain constant over the
period being measured and assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration or
repricing of specific assets and liabilities. Accordingly, although the NPV
table provides an indication of the Bank's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Bank's net interest income, and will differ from actual results.
Additionally, the guidelines established by the Board of Directors are not
strict limitations. While a goal of the Asset/Liability Management Committee and
the Board of Directors is to limit projected NPV changes within the Board's
guidelines, the Bank will not necessarily limit projected changes in NPV if the
required action would present disproportionate risk to the Bank's continued
profitability.
Comparison of Financial Condition
Assets. Total assets for the year ended December 31, 1998 increased by $43
million, or 19.8%, to $260.4 million from $217.4 million. The increase resulted
primarily from an increase of $25.6 million, or 16.8%, in loans receivable to
$177.8 million at December 31, 1998 from $152.2 million at December 31, 1997.
The Bank also added $8.8 million, or 16.4%, to it portfolio of securities
available for sale, including mortgage backed securities, growing this portfolio
to $62.7 million at December 31, 1998 from $53.9 million at December 31, 1997.
Cash and cash equivalents increased by $7.9 million, or 133.90%, to 13.8 million
at December 31, 1998 from $5.9 million at December 31, 1997.
5
<PAGE>
Liabilities. Total liabilities for the year ended December 31, 1998
increased by $25.1 million, or 12.5%, to $226 million from $200.8 million. This
increase was primarily due to an increase of $24.9 million in the Bank's
deposits.
Total Equity. Total equity as of the year ended December 31, 1998 increased
by $17.9 million, or 108.4%, to $34.4 million from $16.5 million. The increase
in total equity was due to the receipt of $16.3 million from the Bank's mutual
holding company reorganization and the Company's offering of common stock, which
was completed on June 30, 1998.
Analysis of Results of Operations
Net Interest Income. Net interest income represents the difference between
income on interest-earning assets and expense on interest-bearing liabilities.
Net interest income depends on the interest yield on interest-earning assets and
the interest paid on interest-bearing liabilities, as well as the relative
amounts of interest-earning assets and interest-bearing liabilities.
6
<PAGE>
The following table sets forth certain information relating to the Bank at
December 31, 1998, and for the years ended December 31, 1997, 1997 and 1996. For
the periods indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities and the resultant cost, is
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly averages.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------
1998 1997
------------------------------------ ---------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------ -------- -------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)(2) .............. $164,067 $ 12,218 7.46% $144,513 $ 10,944 7.57%
Mortgage-backed securities ........... 52,406 2,681 5.23 53,333 3,536 6.63
Investment securities ................ 915 59 6.45 3,126 197 6.30
Other interest-earning assets ........ 18,264 1,035 5.66 7,086 406 5.73
-------- -------- -------- --------
Total interest-earning assets .......... 235,652 16,014 6.80 208,058 15,083 7.25
-------- --------
Non-interest earning assets ............ 4,888 3,572
-------- --------
Total assets ........................... $240,540 $211,630
======== ========
Interest-bearing liabilities:
Interest bearing deposits
Demand ............................. $ 12,049 220 1.83 $ 12,358 244 1.97
Savings and club ................... 47,914 1,464 3.06 44,803 1,346 3.00
Certificates of deposit ............ 146,704 8,133 5.54 132,467 7,318 5.52
Borrowed funds ....................... -- -- 1,663 96 5.77
-------- -------- -------- --------
Total interest-bearing liabilities ..... 206,667 9,817 4.75 191,291 9,004 4.71
-------- --------
Non-interest bearing liabilities ....... 8,348 4,734
Stockholders' equity ................... 25,525 15,605
-------- --------
Total liabilities and retained earnings $240,540 $211,630
======== ========
Net interest income .................... $ 6,197 $ 6,079
======== ========
Net interest rate spread ............... 2.05% 2.54%
==== ====
Net yield on average interest-earning
assets ............................... 2.63% 2.92%
==== ====
Ratio of average interest-earning assets
to interest-bearing liabilities ...... 1.14x 1.09x
======== ========
</TABLE>
-----------------------------------
1996
-----------------------------------
Average Yield/
Balance Interest Cost
-------- -------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1)(2) .............. $117,720 $ 9,067 7.70%
Mortgage-backed securities ........... 61,131 4,037 6.60
Investment securities ................ 3,264 249 7.63
Other interest-earning assets ........ 6,602 371 5.62
-------- -------- --------
Total interest-earning assets .......... 188,717 13,724 7.27
-------- -------- --------
Non-interest earning assets ............ 3,855
--------
Total assets ........................... $192,572
========
Interest-bearing liabilities:
Interest bearing deposits
Demand ............................. $ 12,453 290 2.33
Savings and club ................... 44,426 1,312 2.95
Certificates of deposit ............ 117,347 6,446 5.49
Borrowed funds ....................... 12 1 5.49
-------- -------- --------
Total interest-bearing liabilities ..... 174,238 8,049 4.62
-------- -------- --------
Non-interest bearing liabilities ....... 3,943
Stockholders' equity ................... 14,391
--------
Total liabilities and retained earnings $192,572
========
Net interest income .................... $ 5,675
========
Net interest rate spread ............... 2.65%
========
Net yield on average interest-earning
assets ............................... 3.01%
========
Ratio of average interest-earning assets
to interest-bearing liabilities ...... 1.08x
========
- ----------
(1) Calculated net of deferred loan fees and discounts and loans in process.
(2) Includes non-accrual loans.
7
<PAGE>
The table below sets forth information regarding changes in the Bank's
interest income and interest expense 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 volume multiplied by old rate) and (ii) changes in rate (changes in
rate multiplied by old volume). Changes attributable to both rate and volume,
which cannot be segregated, have been allocated proportionately to the change
due to volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 vs December 31, 1998 December 31, 1997 vs December 31, 1996
Increase (Decrease) Increase (Decrease)
Due to Due to
-------------------------------------- --------------------------------------
Volume Rate Total Volume Rate Total
------- ---- ----- ------ ---- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable ....................... $ 1,456 $ (161) $ 1,295 $ 2,032 $ (155) $ 1,877
Investment securities, available
for sale ............................. (198) (795) (993) (10) (42) (52)
Other interest-earning assets .......... 633 (4) 629 28 7 35
------- ------- ------- ------- ------- -------
Total interest income ........... 1,891 (960) 931 1,531 (172) 1,359
------- ------- ------- ------- ------- -------
Interest expense:
Interest-bearing demand ................. (6) (18) (24) (2) (44) (46)
Savings and club accounts ............... 95 23 118 11 23 34
Certificates of deposit ................. 789 26 815 837 35 872
Borrowed funds .......................... (96) -- (96) 95 -- 95
------- ------- ------- ------- ------- -------
Total interest expense .......... 782 31 813 941 14 955
------- ------- ------- ------- ------- -------
Change in interest income ................ $ 1,109 $ (991) $ 118 $ 590 $ (186) $ 404
======= ======= ======= ======= ======= =======
</TABLE>
Comparison of Operating Results
General. The Bank's net income depends primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of one-to-four family mortgage
loans, mortgage-backed securities, home equity loans, commercial real estate
loans, multi-family real estate loans, and investment securities, and the
interest paid on interest-bearing liabilities, consisting primarily of deposits.
Net interest income is affected primarily by (i) the Bank's interest rate
spread, which is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities, and by (ii) the average balance of interest-earning assets as
compared to interest-bearing liabilities. The Bank's net income is also affected
by its level of non-interest income consisting primarily of fees and service
charges on deposits and loans, and gains on sale of securities, loans and other
assets, as well as its level of non-interest expense, including salaries and
employee benefits, occupancy, equipment, advertising, deposit insurance,
professional services and other non-interest expenses.
Interest Income. Interest income increased by $931,000, or 6.2%, to $16.0
million for the year ended December 31, 1998 from $15.1 million for the prior
year. The increase was the result of a $1.3 increase in income on loans and a
$629,000 increase in income on other earning assets, which were partially offset
by a $994,000 decrease in income from mortgage backed and other securities. The
increase in income from loans was partly due to a $19.5 million, or 13.5%
increase in the average balance of loans to $164.0 million from $144.5 million,
which was partially offset by an 11 basis point decrease in average yield on
loans to 7.46% in 1998 from 7.57% in 1997. The lower interest rate environment
led to refinances in the Bank's loan portfolio and is responsible for the
decline in average yield in the portfolio.
Interest on other earning assets increased by $629,000, or 154.7%, to 1.0
million from $406,000. The increase in income on other earning assets is largely
the result of higher cash balances in 1998 compared
8
<PAGE>
with 1997. The average balance of other earning assets increased by $11.1
million, or 157.8%, to $18.2 million for the year ended December 31, 1998 from
$7.1 million for the year ended December 31, 1997.
Income on the Bank's mortgage backed investments and securities decreased
$993,000, or 26.6%, to $2.7 million for the year ended December 31, 1998 from
$3.7 million for the year ended December 31, 1997. Although the average balance
of mortgage-backed and investment securities decreased $3.1 million or 5.5%, to
$53.3 million from $56.4 million, the average yield on mortgage backed
securities decreased 151 basis points, to 5.23% for the year ended December 31,
1998 from 6.63% for the year ended December 31, 1997. This decline in yield is
due to the rapid repayment of the mortgage backed securities portfolio and the
write-down of premiums associated with these securities which had been paid off
during 1998.
Interest income increased by $1.4 million, or 10.2%, to $15.1 million for
the year ended December 31, 1997 from $13.7 million for the prior year. The
increase was due to a $1.9 million increase in income on loans and a $35,000
increase in income on other interest earning assets, which were only partially
offset by a $500,000 decrease in income from mortgage-backed securities, and a
$52,000 decrease in income from investment securities. The increase in income
from loans was attributable primarily to a $26.8 million, or 22.8%, increase in
the average balance of loans to $144.5 million from $117.7 million, which was
partially offset by a 13 basis point decrease in the average yield on loans to
7.57% in 1997 from 7.70% in 1996. The increase in the Bank's average loan
portfolio resulted from the Bank's originations exceeding repayments and loans
sold by $21.5 million. The decrease in average yield on loans receivable
resulted from originating lower yielding residential mortgage loans in a
relatively low interest rate environment.
Interest income on the Bank's investment securities decreased by $52,000,
or 20.5%, to $197,000 from approximately $249,000. The decrease in interest
income on investment securities resulted from a scheduled maturity of one
investment and another investment being called, the interest rate of which
exceeded the average rate for the Bank's investment securities, which resulted
in a decrease in the average yield on investment securities to 6.30% during 1997
from 7.63% during 1996. Interest income on mortgage-backed securities decreased
by $500,000, or 12.5%, to $3.5 million in 1997 from $4.0 million in 1996. The
decrease in interest income on mortgage-backed securities resulted from a $7.8
million, or 12.8%, decrease in average mortgage-backed securities to $53.3
million from $61.1 million, which was partially offset by a slight increase in
the yield on average mortgage-backed securities to 6.63% from 6.60%. The yield
on mortgage-backed securities decreased to 6.51% at December 31, 1997. The
decline in yield as of December 31, 1997 resulted primarily from management's
strategy to replace $27.0 million of fixed rate mortgage backed securities with
$27.0 million of adjustable-rate mortgage securities. This strategy was
implemented in the third and fourth quarters of 1997 in an effort to reduce the
Bank's overall interest rate risk. The decrease in the average balance of
mortgage-backed securities also resulted from prepayments of the underlying
mortgage loans in a declining interest rate environment and the reinvestment of
the proceeds of such prepayments in one-to-four family mortgage loans.
Interest Expense. Interest expense increased by $813,000, or 9.0%, to $9.8
million for the year ended December 31, 1998 from $9.0 million for the prior
year. This increase was the result of an increase in average interest bearing
deposits by $15.4 million, or 8.0%, to $206.7 million or the year ended December
31, 1998 from $191.2 million for the year ended December 31, 1997. Additionally,
the average cost of funds increased by 4 basis points to 4.75% at December 31,
1998 from 4.71% at December 31, 1997.
Interest expense increased by $955,000, or 11.9%, to $9.0 million for the
year ended December 31, 1997 from $8.0 million for the prior year. This increase
was the result of a $17.1 million, or 9.8%, increase in the Bank's average
interest bearing liabilities combined with a slight increase in the Bank's
average cost
9
<PAGE>
of funds to 4.71% from 4.62%. The increase in average interest bearing
liabilities resulted primarily from increases in the average balances of the
Bank's certificate of deposit products, as well as an increase in other borrowed
funds. The increase in the average cost of the Bank's deposits resulted from
increasing the rates paid on deposits in order to better compete with rates
offered by other financial institutions.
Net Interest Income. Net interest income increased by $117,700, or 1.9%, to
$6.2 million from $6.1 million. The increase in net interest income resulted
from the increase in average interest earning assets relative to the increase in
average interest bearing liabilities. The asset growth was partially funded by
the proceeds of the Company's offering of common stock which was completed on
June 30, 1998.
Net interest income increased by $404,000, or 7.1%, to $6.1 million from
$5.7 million. The increase in net interest income resulted from a greater
increase in average interest earning assets compared to average interest bearing
liabilities, which was partially offset by a narrowing of the Bank's average
interest rate spread to 2.54% in 1997 from 2.65% in 1996. Management believes
that the narrowing of the Bank's interest rate spread is due in part to the
relatively large percentage of the Bank's total loan portfolio that had been
originated in the low interest rate environment of the past two years, and the
fact that 69.2% of the Bank's total deposits consisted of certificates of
deposit at December 31, 1997. The Bank's net interest spread was 2.61% at
December 31, 1997.
Provision for Loan Losses. The Bank establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed appropriate to absorb future charge-offs of
loans deemed uncollectible. In determining the appropriate level of the
allowance for loan losses, management considers past and anticipated loss
experience, valuations of real estate collateral, current and anticipated
economic conditions, volume and type of lending and the levels of nonperforming
and other classified loans. The amount of the allowance is based on estimates
and the ultimate losses may vary from such estimates. Management of the Bank
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses monthly in order to maintain the adequacy of the allowance.
The Bank provided $45,000 and $200,000 in loan loss provisions during the
years ended December 31, 1998 and 1997, respectively. The decrease was based in
part on management's assessment of the risk in the loan portfolio relative to
the existing provisions for loan loss. At December 31, 1998 and 1997 the Bank's
allowance for loan losses was $760,000 and $723,000, respectively, and the
Bank's loans delinquent for ninety days or more were $600,000 and $934,000,
respectively. The Bank's allowance for loan losses as a percentage of total
nonperforming loans at December 31, 1998 and 1997 was 126.6% and 77.4%,
respectively. While management believes that, based on information currently
available, the Bank's allowance for loan losses is sufficient to cover losses
inherent in its loan portfolio at this time. However, future loan loss
provisions may be necessary based on changes in general economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses and may require the
Bank to recognize additional provisions based on their judgment of information
available to them at the time of their examination.
Noninterest Income. Noninterest income consists primarily of fees and
service charges on deposit accounts and loans, gain on sale of securities and
other assets, and other income. Noninterest income decreased by $132,000, or
29.8%, to $310,000 for the year ended December 31, 1998 from $442,000 for the
prior year, as a result of a decrease in gain on sale of securities and student
loans of $133,000 from December 31, 1997.
10
<PAGE>
Noninterest income increased by $181,000, or 51.6%, to $532,000 for the
year ended December 31, 1997 from $351,000 for the prior year, as service
charges increased by $20,000, or 7.2%, gain on sale of securities increased to
$129,000 from no gain in the prior year, and other income increased by $32,000,
or 44.4%.
Noninterest Expense. Noninterest expense increased by $416,000, or 10.7%,
to $4.3 million for the year ended December 31, 1998 from $3.9 million for the
prior year. The increase was due to $100,000 of non-recurring expenses related
to the Bank's name change, $74,000 in Employee Stock Ownership Plan ("ESOP")
expense and increases in the Bank's audit and legal expenses related to the
mutual holding company reorganization and stock offering by the Company.
Noninterest expense decreased by $1.1 million, or 21.8%, to $4.0 million
for the year ended December 31, 1997 from $5.1 million for the prior year. The
decrease was due to a $1.3 million decrease in deposit insurance as a result of
legislation, enacted in September 1996, to recapitalize the SAIF. The one-time
assessment was 65.7 basis points per $100 in SAIF-insured deposits held as of
March 31, 1995, payable on November 30, 1996. For the Bank, the assessment
amounted to $1.0 million (or approximately $648,000, on an after-tax basis),
based on the Bank's SAIF-insured deposits as of March 31, 1995. Excluding this
one-time assessment, non-interest expense totaled $4.0 million for the year
ended December 31, 1996. In addition, beginning January 1, 1997, pursuant to the
legislation, interest payments on FICO bonds issued in the late 1980's by the
Financing Corporation to recapitalize the former Federal Savings and Loan
Insurance Corporation are paid jointly by institutions insured by the Bank
Insurance Fund (the "BIF") and SAIF-insured institutions. The FICO assessment
will be 1.29 basis points per $100 of BIF deposits and 6.44 basis points per
$100 in SAIF deposits. Beginning January 1, 2000, the FICO interest payments
will be paid pro-rata by banks and thrifts based on deposits (approximately 2.4
basis points per $100 of deposits).
Salaries and employee benefits increased by $14,000, or 0.7%, to $1.98
million for the year ended December 31, 1997 from $1.97 million for the prior
year. Net occupancy expense decreased slightly in 1997 because of the sale of a
previously closed branch office. Equipment expense increased by $60,000, or
17.0%, because of an increase in data processing expense. Advertising expense
increased $87,000, or 88.8%, because of increased advertising to promote the
Bank's new consumer loans and other loan products and services.
Provision for Income Taxes. The Bank's provision for income taxes was
$766,000 and $877,000 for the years ended December 31, 1998 and 1997,
respectively.
Net Income. Net income decreased by $164,000, or 10.5%, to $1.4 million for
the year ended December 31, 1998 from $1.6 million for the prior year. The
decrease was primarily due to an increase of $416,000, or 10.7%, in operations
expenses to $4.3 million for the year ended December 31, 1998.
Net income increased by $944,000, or 155.1%, to $1.6 million for the year
ended December 31, 1997 from $609,000 for the prior year. The increase was
primarily due to a $404,000 increase in net interest income, a $181,000 increase
in non-interest income, and a $1.1 million decrease in noninterest expense
(primarily due to the special assessment in 1996 to recapitalize the SAIF),
which were only partially offset by a $157,000 increase in the provision for
loan losses and a $594,000 increase in the provision for income taxes. Excluding
the special SAIF assessment, net income totaled $1.3 million for the year ended
December 31, 1996.
11
<PAGE>
Liquidity and Capital Resources
The objective of the Bank's liquidity management is to ensure the
availability of sufficient cash flows to meet all financial commitments and to
capitalize on opportunities for expansion. Liquidity management addresses the
Bank's ability to meet deposit withdrawals on demand or at contractual maturity,
to repay borrowings as they mature, and to fund new loans and investments as
opportunities arise.
The Bank's primary sources of internally generated funds are principal and
interest payments on loans receivable, cash flows generated from operations, and
cash flows generated by investments. External sources of funds include increases
in deposits and advances from the FHLB of New York. At December 31, 1998, the
Bank had outstanding $5.2 million in commitments to originate loans. If the Bank
requires funds beyond its internal funding capabilities, agreements with the
FHLB of New York are available to borrow funds up to $10.5 million. At December
31, 1998, approximately $105.6 million in certificates of deposit were scheduled
to mature within a year. The Bank's experience has been that a large portion of
its maturing certificates of deposit accounts remain on deposit with the Bank.
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
Current 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. Monetary penalties
may be imposed for failure to meet applicable liquidity requirements. At
December 31, 1998, the Bank's liquidity, as measured for regulatory purposes,
was in excess of the minimum OTS requirement.
The Company's primary source of funds, other than income from its
investments and principal and interest payments received on the ESOP loan, is
capital dividends from the Bank. As a stock savings association, the Bank may
not declare or pay a cash dividend on or repurchase any of its capital stock if
the effect of such transaction would be to reduce its net worth to an amount
which is less than the minimum amount required by applicable federal
regulations. At December 31, 1998, the Bank was in compliance with all
applicable capital requirements.
Capability of the Bank's Data Processing Hardware to Accommodate the Year 2000
Like many financial institutions the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is
concern among industry experts that on January 1, 2000 computers will be unable
to "read" the new year and there may be widespread computer malfunctions. The
Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Bank's
computer programs that would have date-sensitive software may recognize a date
ending "00" as the year 1900 rather than the year 2000. This could result in a
systems failure or miscalculations causing disruptions of operations, including
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Bank recognized that a comprehensive and coordinated plan of action was
needed to ensure complete readiness to perform Year 2000 processing. Year 2000
compliance responsibility has been assigned to initiate and implement the Year
2000 project, policies, document readiness of the Bank to accommodate Year 2000
processing, and to track and test progress towards full compliance. The Bank
generally relies on independent third parties to provide data processing service
to the Bank, and has been advised by its data processing service center that the
issue is being addressed. The Bank is also in the
12
<PAGE>
process of ensuring that external vendors and additional servicers are
adequately addressing the system and software issues related to the Year 2000.
The Bank's personnel have actively participated in a proxy testing process with
other users of the independent third party vendor. This process involves
developing implementing and validating scripts which will test the software of
the independent third party vendor. The Bank continues to actively monitor all
external vendors to ensure that they are adequately addressing the system and
software issues related to the Year 2000.
The Bank has installed and tested vendor provided software updates or
replacements for all of its systems, including; loan processing and closing,
investment accounting, accounts payable, fixed assets and ATM software. By the
end of the first quarter of 1999, the Bank will have completed an end-to end
testing process with the Bank's independent third party vendor. This testing is
designed to ensure that the hardware and communications software can properly
function in a Year 2000 date environment. Through December 31, 1998 the Bank has
invested approximately $100,000 in the effort to upgrade its computer systems.
The Bank does not anticipate future expenses related to system remediation.
Future expenses are expected to be related to testing the business resumption
contingency plan (the "Contingency Plan") and should be nominal.
The Bank has developed a contingency plan that would be utilized in the
event of a failure of one or more systems. This plan assigns responsibility,
identifies the core business processes, establishes an event timeline and
analyzes the risks in each core business process. The Bank is in the process of
developing a plan to test the effectiveness of the contingency plan. That plan
will include training employees and simulating a disaster. The Bank intends to
engage our independent auditors to validate the effectiveness of the contingent
procedures.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued a
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 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 of 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 SFAS 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. SFAS 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. SFAS No. 133 provides that such transfers from the
held-to-maturity category of the date
13
<PAGE>
of initial adoption shall not call into question an entity's intent to hold
other debt securities to maturity in the future.
SFAS 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 subsidiaries. Initial application shall be as of the beginning of an
entity's fiscal quarter. Earlier application of all of the provisions of SFAS
No. 133 is permitted only as of the beginning of a fiscal quarter. Earlier
application of selected provisions or retroactive application of provisions of
SFAS No. 133 are not permitted.
Management of the Company has not yet determined when SFAS No. 133 will be
implemented, but does not believe the ultimate implementation of SFAS No. 133
will have a material impact on their consolidated financial position or results
of operations.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein have
been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollars, without
considering changes in relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Bank's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than does the
effect of inflation.
14
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected financial data for the years ended December 31, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands Except Per Share Data)
Fiscal 1998
<S> <C> <C> <C> <C>
Interest income ................... $3,753 $3,911 $4,201 $4,149
Net interest income ............... 1,448 1,460 1,753 1,534
Provision for losses .............. 15 15 15 --
Income before provision for
income taxes .................... 494 483 638 540
Net income ........................ 308 311 417 353
Net income per common share:
Basic/Diluted ................... N/A(1) N/A(1) .11 .09
Fiscal 1997
Interest income ................... $3,639 $3,768 $3,940 $3,757
Net interest income ............... 1,514 1,538 1,605 1,443
Provision for losses .............. 50 50 50 50
Income before provision
for income taxes ................ 554 609 691 576
Net income ........................ 330 371 427 425
Net income per common share:
Basic/Diluted ................... N/A(1) N/A(1) N/A(1) N/A(1)
</TABLE>
- ----------
(1) Liberty Bancorp, Inc. began operations on June 30, 1998.
COMMON STOCK AND RELATED MATTERS
The Company's common stock is listed on the Nasdaq National Market under
the symbol "LIBB." As of December 31, 1998, the Company had seven registered
market makers, 599 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
3,901,375 shares outstanding. As of such date, Liberty Bancorp, MHC (the "Mutual
Holding Company"), the Company's mutual holding company, held 2,067,729 shares
of common stock and stockholders other than the Mutual Holding Company held
1,833,646 shares.
The following table sets forth market price and dividend information for
the Common Stock since the completion of the Bank's reorganization and stock
offering on June 30, 1998.
Fiscal Year Ended Cash Dividends
December 31, 1998 High Low Declared
----------------- ---------- --------- --------------
Third quarter $ 11.69 $ 9.38 $ --
Fourth quarter 9.75 7.25 --
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and depends upon a
number of factors, including capital requirements, regulatory limitations on the
payment of dividends, the Company's results of operations and financial
condition, tax considerations and general economic conditions. No assurance can
be given that dividends will be declared
15
<PAGE>
or, if declared, what the amount of dividends will be, or whether such
dividends, once declared, will continue.
OTS regulations impose limitations upon all "capital distributions" by
savings institutions, including cash dividends, payments by a savings
institution to repurchase or otherwise acquire its stock, payments to
stockholders of another savings institution in a cash-out merger, and other
distributions charged against capital. The regulations establish a three-tiered
system of regulation, with the greatest flexibility being afforded to
well-capitalized or Tier 1 savings associations. As of the date hereof, the Bank
was a Tier 1 institution. Accordingly, under the OTS capital distribution
regulations, the Bank would be permitted to pay dividends during any calendar
year up to 100 percent of its net income during that calendar year, plus the
amount that would reduce by one-half its surplus capital ratio at the beginning
of the calendar year.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings institution may make a
capital distribution without notice to the OTS, unless it is a subsidiary of a
holding company, provided that it has a regulatory rating in the two top
categories, is not of supervisory concern, and would remain adequately
capitalized, as defined in the OTS prompt corrective action regulations,
following the proposed distribution. Savings institutions that would remain
adequately capitalized following the proposed distribution but do not meet the
other noted requirements must notify the OTS 30 days prior to declaring a
capital distribution. The OTS stated it will generally regard as permissible
that amount of capital distributions that do not exceed 50% of the institution's
excess regulatory capital plus net income to date during the calendar year. A
savings institution may not make a capital distribution without prior approval
of the OTS and the FDIC if it is undercapitalized before, or as a result of,
such a distribution. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No assurance
may be given as to whether or in what form the regulations may be adopted.
In addition to the foregoing, earnings of the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions. The Bank intends to make full
use of this favorable tax treatment and does not contemplate any distribution by
the Bank in a manner that would limit the Bank's bad debt deduction or create
federal tax liability.
OTS regulations require the Mutual Holding Company to notify the OTS of any
proposed waiver of the right to receive dividends. It is the OTS' recent
practice to review dividend waiver notices on a case- by case-basis, and, in
general, not object to any such waiver if: (i) the mutual holding company's
board of directors determines that such a waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association
as a note to the financial statements; (iii) the amount of any dividend waived
by the mutual holding company is available for declaration as a dividend solely
to the mutual holding company, and, in accordance with SFAS 5, where the savings
association determines that the payment of such dividend to the mutual holding
company is probable, an appropriate dollar amount is recorded as a liability;
(iv) the amount of any waived dividend is considered as having been paid by the
savings association (and the savings association's capital ratios adjusted
accordingly) in evaluating any proposed dividend under OTS capital distribution
regulations; and (v) in the event the mutual holding company converts to stock
form, the appraisal submitted to the OTS in connection with the conversion
application takes into account the aggregate amount of the dividends waived by
the mutual holding company. As of December 31, 1998, the Mutual Holding Company
had not waived the right to receive any dividends paid by the Company.
16
<PAGE>
[Letterhead of Radics & Co., LLC]
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
Liberty Bancorp, Inc.
We have audited the accompanying consolidated statements of financial condition
of Liberty Bancorp, Inc. (the "Company") and Subsidiaries as of December 31,
1998 and 1997 and the related consolidated statements of income, comprehensive
income, stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those 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 Liberty Bancorp, Inc. and Subsidiaries as of December 31,
1998 and 1997, and the results of their operations and their cash flows for the
years then ended, in conformity with generally accepted accounting principles.
/S/ RADICS & CO., LLC
February 12, 1999
2.
<PAGE>
<TABLE>
<CAPTION>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
---------------------------------
Notes 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Assets
Cash and amounts due from depository institutions $ 1,474,529 $ 1,192,270
Interest-bearing deposits in other banks 12,349,621 4,738,621
------------ ------------
Total cash and cash equivalents 1 and 12 13,824,150 5,930,891
Securities available for sale 1,3 and 12 62,734,597 53,917,520
Loans receivable 1,4 and 12 177,876,607 152,199,868
Premises and equipment 1,5 and 11 2,132,110 2,113,904
Foreclosed real estate 1 105,620 121,064
Federal Home Loan Bank of New York stock 2,007,500 1,804,100
Interest receivable 1,6 and 12 1,315,997 1,219,978
Other assets 10 450,231 129,395
------------ ------------
Total assets $260,446,812 $217,436,720
============ ============
Liabilities and retained earnings
Liabilities
Deposits 7 and 12 $223,270,284 $198,362,828
Advance payments by borrowers for taxes and insurance 1,910,748 1,659,615
Other liabilities 9 and 10 832,722 873,434
------------ ------------
Total liabilities 226,013,754 200,895,877
------------ ------------
Commitments and contingencies 11 and 12
Stockholders' equity 2, 8, 9, 10 and 13
Preferred stock; $1.00 par value, 10,000,000 shares
authorized, none issued and outstanding -- --
Common stock; $1.00 par value; 20,000,000 shares
authorized; 3,901,375 shares issued and outstanding
at December 31, 1998 3,901,375 --
Additional paid-in capital 13,827,420 --
Retained earnings - substantially restricted 17,512,659 16,122,933
Unearned employees' stock ownership plan
("ESOP") shares (1,393,565) --
Accumulated other comprehensive income - Unrealized
gain on securities available for sale, net 585,169 417,910
------------ ------------
Total stockholders' equity 34,433,058 16,540,843
------------ ------------
Total liabilities and stockholders' equity $260,446,812 $217,436,720
============ ============
</TABLE>
See notes to consolidated financial statements.
3.
<PAGE>
<TABLE>
<CAPTION>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
---------------------------------
Notes 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans 1 and 4 $12,238,409 $10,942,843
Securities available for sale 1 2,739,977 3,733,784
Other interest-earning assets 1,035,176 406,373
----------- -----------
Total interest income 16,013,562 15,083,000
----------- -----------
Interest expense:
Deposits 1 and 7 9,816,890 8,908,267
Advances -- 95,774
----------- -----------
Total interest expense 9,816,890 9,004,041
----------- -----------
Net interest income 6,196,672 6,078,959
Provision for loan losses 1 and 4 44,556 200,000
----------- -----------
Net interest income after provision for loan losses 6,152,116 5,878,959
----------- -----------
Non-interest income:
Fees and service charges 211,087 208,911
Gain on sale of securities available for sale 1 and 3 -- 128,716
Gain on sale of loans 511 4,395
Miscellaneous 98,828 99,929
----------- -----------
Total non-interest income 310,426 441,951
----------- -----------
Non-interest expenses:
Salaries and employee benefits 9 2,001,495 1,980,390
Net occupance expense of premises 1 and 11 432,525 445,516
Equipment 1 445,123 415,666
Advertising 237,375 184,000
Director fees 168,043 131,100
Federal insurance premium 124,842 119,643
Loss from foreclosed real estate 1 27,444 3,144
Miscellaneous 870,219 611,296
----------- -----------
Total non-interest expenses 4,307,066 3,890,755
----------- -----------
Income before income taxes 2,155,476 2,430,155
Income taxes 1 and 10 765,750 876,950
----------- -----------
Net income $ 1,389,726 $ 1,553,205
=========== ===========
Net income per common share - basic and diluted 1 $ 0.37 N/A (1)
Weighted average number common shares
outstanding - basic and diluted 1 3,758,362 N/A (1)
</TABLE>
(1) Liberty Bancorp, Inc. converted to stock form on June 30, 1998.
See notes to consolidated financial statements.
4.
<PAGE>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
-------------------------
1998 1997
----------- -----------
Net income $ 1,389,726 $ 1,553,205
----------- -----------
Other comprehensive income, net of income taxes:
Unrealized holding gains on securities
available for sale, net of income taxes
of $108,597, and $145,385, respectively 167,259 258,253
Reclassification adjustment
for realized gains on securities
available for sale, net of income taxes
of $ - 0 - and $46,338, respectively -- (82,378)
----------- -----------
Other comprehensive income 167,259 175,875
----------- -----------
Comprehensive income $ 1,556,985 $ 1,729,080
=========== ===========
5.
<PAGE>
<TABLE>
<CAPTION>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Accumulated
Additional earnings - Unearned Other Total
Common Paid-In Substantially ESOP Comprehensive Stockholders'
Stock Capital Restricted Shares Income Equity
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 $ -- $ -- $ 14,569,728 $ -- $ 242,035 $ 14,811,763
Net income for the year
ended December 31, 1997 -- -- 1,553,205 -- -- 1,553,205
Unrealized gain on securities available
for sale, net of income tax effect -- -- -- -- 175,875 175,875
------------ ------------ ------------ ------------ ------------ ------------
Balance - December 31, 1997 -- -- 16,122,933 -- 417,910 16,540,843
Net income for the year
ended December 31, 1998 -- -- 1,389,726 -- -- 1,389,726
Net proceeds from initial
public stock offering 3,901,375 13,830,168 -- -- -- 17,731,543
Common stock acquired by ESOP -- -- -- (1,466,910) -- (1,466,910)
ESOP shares committed to be released -- (2,748) -- 73,345 -- 70,597
Unrealized gain on securities available
for sale, net of income tax effect -- -- -- -- 167,259 167,259
------------ ------------ ------------ ------------ ------------ ------------
Balance - December 31, 1998 $ 3,901,375 $ 13,827,420 $ 17,512,659 $ (1,393,565) $ 585,169 $ 34,433,058
============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
6.
<PAGE>
<TABLE>
<CAPTION>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,389,726 $ 1,553,205
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (19,069) (24,501)
Depreciation and amortization of premises and equipment 209,586 218,465
Amortization of premiums, net of accretion of discounts
and deferred loan fees 393,352 60,411
Provision for loss on real estate owned 15,444 520
Provision for loan losses 44,556 200,000
Gain on sale of securities available for sale -- (128,716)
Gain on sale of loans (511) (4,395)
(Increase) decrease in accrued interest receivable (96,019) 3,509
(Increase) decrease in other assets (320,836) 243,508
(Decrease) in accrued interest payable -- (1,154)
(Decrease) increase in other liabilities (130,240) 230,278
ESOP shares committed to be released 70,597 --
------------ ------------
Net cash provided by operating activities 1,556,586 2,351,130
------------ ------------
Cash flows from investing activities:
Purchases of securities available for sale (46,890,204) (41,279,181)
Principal repayments on securities available for sale 35,962,187 13,375,397
Proceeds from calls of securities available for sale 2,000,000 2,000,000
Proceeds from sales of securities available for sale -- 31,842,498
Net increase in loans receivable (25,795,395) (22,422,328)
Proceeds from sales of loans receivable 68,055 651,014
Net additions to premises and equipment (227,792) (24,046)
Capitalized expense on real estate owned -- (675)
Proceeds from sale of and recovery
from insurance on foreclosed real estate -- 20,787
Purchase of Federal Home Loan Bank of New York stock (203,400) (188,700)
------------ ------------
Net cash (used in) investing activities (35,086,549) (16,025,234)
------------ ------------
Cash flows from financing activities
Increase in deposits 28,189,280 13,654,981
Increase in advance payments by
borrowers for taxes and insurance 251,133 175,231
Net proceeds from issuance of common stock 14,449,719 --
Common stock acquired by ESOP (1,466,910) --
------------ ------------
Net cash provided by financing activities 41,423,222 13,830,212
------------ ------------
Net increase in cash and cash equivalents 7,893,259 156,108
Cash and cash equivalents - beginning 5,930,891 5,774,783
------------ ------------
Cash and cash equivalents - ending $ 13,824,150 $ 5,930,891
============ ============
</TABLE>
See notes to consolidated financial statements.
7.
<PAGE>
<TABLE>
<CAPTION>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 9,816,890 $ 9,005,195
=========== ===========
Income taxes, net of refunds $ 991,941 $ 455,900
=========== ===========
Supplemental disclosure of noncash activities:
Loans receivable transferred from foreclosed real estate $ -- $ 204,696
=========== ===========
Loan to facilitate the sale of foreclosed real estate $ -- $ (63,000)
=========== ===========
Unrealized appreciation on securities available for sale $ 275,856 $ 274,922
Deferred income taxes (108,597) (99,047)
----------- -----------
$ 167,259 $ 175,875
=========== ===========
Issuance of common stock in exchange for deposits $ 3,281,824 $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
8.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of financial statement presentation
The consolidated financial statements include the accounts of the Company
and its wholly own subsidiaries, Liberty Bank ("Bank"), formerly Axia
Federal Savings Bank, and Axia Financial Corporation ("Subsidiary"), and
have been prepared in conformity with generally accepted accounting
principles. All significant intercompany accounts and transactions have
been eliminated in consolidation.
On June 30, 1998, Axia Federal Savings Bank changed its name to Liberty
Bank. Such change did not materially impact financial condition or
operations.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the consolidated statement of
financial condition and revenues and expenses for the period then ended.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes relate
to the determination of the allowance for loan losses and the assessment of
prepayment risks associated with mortgage-backed securities. Management
believes that the allowance for loan losses is adequate and that the risks
associated with mortgage-backed securities prepayments have been properly
recognized. While management uses available information to recognize losses
on loans, future additions to the allowance for loan losses 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.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowances for loan losses.
Such agencies may require additions to the allowance for loan losses based
on their judgments about information available to them at the time of their
examination.
Cash and cash equivalents
Cash and cash equivalents include cash and amounts due from depository
institutions and interest-bearing deposits in other banks with initial
maturities of three months or less.
Securities
Investments in debt securities that the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Debt and equity securities that are bought
and held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized holding gains and losses included in earnings. Debt and equity
securities not classified as trading securities nor as held-to-maturity
securities are classified as available for sale securities and reported at
fair value, with unrealized holding gains or losses, net of applicable
deferred income taxes, reported in the accumulated other comprehensive
income component of stockholders' equity.
9.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Securities (Cont'd.)
Premiums and discounts on all securities are amortized/accreted using the
interest method. Interest and dividend income on securities, which includes
amortization of premiums and accretion of discounts, is recognized in the
consolidated financial statements when earned. The adjusted cost basis of
an identified security sold or called is used for determining security
gains and losses recognized in the consolidated statements of income.
Loans receivable
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan origination fees and
discounts.
The Bank defers loan origination fees and certain direct loan origination
costs and accretes such amounts, using a method which approximates the
level-yield method, as an adjustment of yield over the contractual lives of
the related loans. Discounts on loans are recognized as income by use of a
method which approximates the level-yield method over the terms of the
respective loans.
Allowance for loan 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 general economic and real estate market conditions. 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 losses 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. 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 accrued interest receivable
and then to principal. The Bank does not have any loans deemed to be
impaired.
10.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Concentration of risk
The Bank's lending activity is concentrated in loans secured by real estate
located in the State of New Jersey.
Premises and equipment
Premises and equipment are comprised of land, at cost, and buildings,
building improvements, furnishings and equipment and leasehold
improvements, at cost, less accumulated depreciation and amortization.
Depreciation and amortization charges are computed on the straight-line
method over the following estimated useful lives:
Buildings and improvements 30 to 50 years
Furnishings and equipment 3 to 10 years
Leasehold improvements Shorter of estimated useful
life or term of lease
Significant renewals and betterments are charged to the premises and
equipment account. Maintenance and repairs are charged to operations in the
year incurred.
Foreclosed real estate
Real estate properties acquired through, or in lieu of, foreclosure are
initially recorded at the lower of cost or estimated fair value at the date
of acquisition. 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 or improvement of properties are capitalized.
Income and expenses of holding and operating properties are recorded in
operations as incurred or earned. Gains and losses from sales of these
properties are recognized as incurred.
Allowance for uncollected interest
The Bank provides an allowance for the loss of uncollected interest on
loans based upon management's evaluation of the collectibility of such
interest. Such interest ultimately collected is credited to income in the
period of recovery.
Income taxes
The Company and its subsidiaries file a consolidated federal income tax
return. Income taxes are allocated based on the contribution of income to
the consolidated income tax return. Separate state income tax returns are
filed.
11.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
Income taxes (Cont'd.)
Federal and state income taxes have been provided on the basis of reported
income. The amounts reflected on the Company's tax returns differ from
these provisions due principally to temporary differences in the reporting
of certain items for financial reporting and income 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 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 differences are expected to be recovered or settled. 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. The
realization of deferred tax assets is assessed and a valuation allowance
provided, when necessary, for that portion of the asset which is not likely
to 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.
Interest rate risk
The Bank is principally engaged in the business of attracting deposits from
the general public and using these deposits, together with other funds, to
purchase securities and to make loans secured by real estate. 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 interest-sensitive assets. In a rising rate environment,
liabilities will reprice faster than assets, thereby reducing 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.
Net income per share
Basic and diluted net income per share were computed in 1998 by dividing
net income for the year ended December 31, 1998 by the weighted average
number of shares of common stock outstanding, adjusted for unearned shares
of the ESOP. Such amounts were calculated based upon income for the entire
year 1998, although the Bank converted to Stock form on June 30, 1998, and
the weighted average number of shares outstanding since June 30, 1998, as
if such shares were outstanding during all of 1998. Diluted net income per
share did not differ from basic net income per share as there were no
contracts or securities exercisable or which could be converted into common
stock which would have a diluted effect.
Reclassification
Certain amounts for the year ended December 31, 1997 have been reclassified
to conform to the current year's presentation.
12.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. REORGANIZATION TO MUTUAL HOLDING COMPANY FORM OF ORGANIZATION
The Company is a business corporation formed at the direction of the Bank under
the laws of the United States on June 30, 1998. On June 30, 1998: (i) the Bank
reorganized from a federally chartered mutual savings bank to a federally
chartered stock savings bank in the mutual holding company form of organization;
(ii) the Bank issued all of its outstanding capital stock to the Company; and
(iii) the Company consummated its initial public offering of common stock, par
value $1.00 per share (the "Common Stock"), by selling, at a price of $10.00 per
share, 1,686,955 and 146,691 shares of common stock to certain eligible account
holders of the Bank who had subscribed for such shares and the ESOP,
respectively, and by issuing 2,067,729 shares of common stock to Liberty Bancorp
MHC ("MHC"), a mutual holding company formed at the direction of the Bank
(collectively, the "Reorganization and Offering"). The Reorganization and
Offering resulted in net proceeds of $16.3 million, after expenses of $605,000.
In addition to the 20,000,000 authorized shares of Common Stock, the company
authorized 10,000,000 shares of preferred stock with a par value of $1.00 per
share (the "Preferred Stock"). The Board of Directors is authorized, subject to
any limitations by law, to provide for the issuance of the shares of Preferred
Stock in series, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences,
and rights of the shares of each such series and any qualifications, limitations
or restriction thereof. As of December 31, 1998, there were no shares of
Preferred Stock issued.
3. SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------
Gross Unrealized
Amortized ----------------------------- Carrying
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Due in one year or less $ 627,215 4,145 $ -- $ 631,360
Due after one year through five years 3,045,823 26,023 -- 3,071,846
Due after five years 58,132,719 921,180 22,508 59,031,391
----------- ----------- ----------- -----------
$61,805,757 $ 951,348 $ 22,508 $62,734,597
=========== =========== =========== ===========
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
Gross Unrealized
Amortized ----------------------------- Carrying
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Due in one year or less $ 71,353 $ -- $ 1,360 $ 69,993
Due after one year through five years 5,113,106 25,322 -- 5,138,428
Due after five years 47,080,077 636,835 -- 47,716,912
----------- ----------- ----------- -----------
52,264,536 662,157 1,360 52,925,333
U.S. Government Agencies
due after five years 1,000,000 -- 7,813 992,187
----------- ----------- ----------- -----------
$53,264,536 $ 662,157 $ 9,173 $53,917,520
=========== =========== =========== ===========
</TABLE>
13.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES AVAILABLE FOR SALE (Cont'd.)
The amortized cost and carrying value of securities at December 31, 1998 and
1997 are shown above by contractual final maturity. Actual maturities will
differ from contractual final maturities due to scheduled monthly payments
related to mortgage-backed securities and due to the borrowers having the right
to call or prepay obligations with or without call or prepayment penalties.
There were no sales of securities available for sale during the year ended
December 31, 1998. Proceeds from the sales of securities available for sale
during the year ended December 31, 1997 totalled $31,842,498. Gross gains of
$389,869 and gross losses of $261,153 were realized on those sales.
Securities available for sale with a carrying value of approximately $184,000
and $220,000 at December 31, 1998 and 1997, respectively, were pledged to secure
public funds.
4. LOANS RECEIVABLE
December 31,
-----------------------------
1998 1997
------------ ------------
Real estate mortgage:
One-to-four family $166,573,554 $143,624,030
Multi-family 1,199,558 1,257,488
Commercial 3,366,711 1,906,160
------------ ------------
171,139,823 146,787,678
------------ ------------
Consumer:
Home equity loans 7,133,410 5,705,884
Other 388,225 490,831
------------ ------------
7,521,635 6,196,715
------------ ------------
Total loans 178,661,458 152,984,393
------------ ------------
Less:
Allowance for loan losses 760,496 723,319
Deferred loan fees and discounts 24,355 61,206
------------ ------------
784,851 784,525
------------ ------------
$177,876,607 152,199,868
============ ============
14.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS RECEIVABLE (Cont'd)
The Bank has granted loans to its officers and directors and to their
associates. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. Activity in such loans is as follows:
Year Ended December 31,
-----------------------------
1998 1997
--------- ---------
Balance - beginning $ 570,000 $ 438,000
New loans 143,000 323,000
Repayments (292,000) (19,000)
Other changes -- (172,000)
--------- ---------
Balance - ending $ 421,000 $ 570,000
========= =========
Nonaccrual loans totalled approximately $593,000 and $909,000 at December 31,
1998 and 1997, respectively. Interest income on these loans, which is recorded
only when collected, amounted to approximately $6,000 and $36,000 for the years
ended December 31, 1998 and 1997, respectively. Had these loans been performing
in accordance with their original terms, interest income for the years ended
December 31, 1998 and 1997, would have been approximately $51,000 and $84,000,
respectively. The Bank is not committed to lend additional funds to the
borrowers whose loans have been placed on nonaccrual status.
The activity in allowance for loan losses follows:
Year Ended December 31,
--------------------------
1998 1997
--------- ---------
Balance - beginning $ 723,319 $ 533,840
Provisions charged to operations 44,556 200,000
Loans charged off, net of recoveries (7,379) (10,521)
--------- ---------
Balance - ending $ 760,496 $ 723,319
========= =========
At December 31, 1998 and 1997, loans serviced for the benefit of others totalled
approximately $104,000 and $337,000, respectively.
15.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PREMISES AND EQUIPMENT
December 31,
--------------------------
1998 1997
----------- -----------
Land $ 181,386 $ 181,386
Buildings and improvements 628,179 628,179
Leasehold improvements 1,425,240 1,423,412
Furniture and equipment 1,638,611 1,440,226
----------- -----------
3,873,416 3,673,203
Less accumulated deprecation and amortization (1,741,306) (1,559,299)
----------- -----------
$ 2,132,110 $ 2,113,904
=========== ===========
6. INTEREST RECEIVABLE
December 31,
------------------------
1998 1997
---------- ----------
Loans, net of allowance for uncollected
interest of $35,469 (1998) and $134,403 (1997) $ 846,417 $ 769,385
Securities available for sale 468,167 449,997
Other interest-earnings assets 1,413 596
---------- ----------
$1,315,997 $1,219,978
========== ==========
16.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1998 1997
------------------------- -----------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Demand accounts:
Non-interest bearing -- % $ 4,398,178 -- % $ 3,375,404
Money Market 2.64% 2,586,665 2.69% 2,809,401
NOW 1.59% 9,995,226 1.50% 9,695,916
Savings and clubs 3.00% 49,196,933 3.00% 45,168,430
Certificates of deposit 5.46% 157,093,282 5.52% 137,313,677
------------ ------------
4.60% $223,270,284 4.62% $198,362,828
============ ============
</TABLE>
The scheduled maturities of certificates of deposit are as follows:
December 31,
-------------------------
1998 1997
-------- --------
(In Thousands)
One year or less $106,338 $ 90,301
After one through three years 49,541 45,697
After three years 1,214 1,316
-------- --------
$157,093 $137,314
======== ========
At December 31, 1998 and 1997, certificates of deposit of $100,000 or more
totalled approximately $10,626,000 and $8,312,000, respectively.
17.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS (Cont'd.)
Interest expense on deposits consists of the following:
Year Ended December 31,
-------------------------
1998 1997
---------- ----------
Money Market $ 74,610 $ 80,720
NOW 145,010 163,128
Savings club 1,464,058 1,345,955
Certificates of deposit 8,158,431 7,344,414
---------- ----------
9,842,109 8,934,217
Less penalties for
early withdrawal of certificates of deposits 25,219 25,950
---------- ----------
$9,816,890 $8,908,267
========== ==========
8. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possible additional discretionary, actions by
regulators that, if undertaken, could have a direct material 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 of total and Tier 1
capital (as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital to adjusted total assets (as defined). The following
tables present a reconciliation of capital per generally accepted accounting
principles ("GAAP") and regulatory capital and information as to the Bank's
capital levels at the dates presented:
December 31,
------------------------
1998 1997
-------- --------
(In Thousands)
GAAP capital $ 25,537 $ 16,541
Less: unrealized gain on securities
available for sale (585) (418)
-------- --------
Core and tangible capital 24,952 16,123
Add: loan valuation allowance 761 711
-------- --------
Total regulatory capital $ 25,713 $ 16,834
======== ========
18.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. REGULATORY CAPITAL (Cont'.d)
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------------------------------
To Be Well
Capitalized
Under Prompt
Minimum Capital Corrective
Actual Requirements Actions Provisions
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets) $25,713 23.78% $ 8,650 8.00% $10,812 10.00%
Tier 1 Capital
(to risk-weighted assets) 24,952 23.08% -- -- 6,487 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 24,952 9.60% 10,397 4.00% 12,996 5.00%
Tangible Capital
(to adjusted total assets) 24,952 9.60% 3,899 1.50% -- --
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------
To Be Well
Capitalized
Under Prompt
Minimum Capital Corrective
Actual Requirements Actions Provisions
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets) $16,834 17.69% $ 7,614 8.00% $ 9,517 10.00%
Tier 1 Capital
(to risk-weighted assets) 16,123 16.94% -- -- 5,710 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 16,123 7.43% 8,680 4.00% 10,850 5.00%
Tangible Capital
(to adjusted total assets) 16,123 7.43% 3,255 1.50% -- --
</TABLE>
As of March 31, 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.
Dividend payments to the Company by the Bank are subject to the profitability of
the Bank and applicable regulations. The Bank did not pay any dividends to the
Company during the year ended December 31, 1998.
19.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BENEFIT PLANS
Retirement plan
The Bank has a non-contributory pension plan covering all eligible employees.
The plan is a defined benefit plan which provides benefits based on a
participant's years of service and compensation. The Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes.
Plan assets are comprised primarily of stocks, bonds, mutual funds and bank
deposits. The following tables set forth the plan's funded status and components
of net periodic pension cost:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations,
including vested benefits of $1,034,596 and
$943,459, respectively $ 1,051,640 $ 953,621
=========== ===========
Projected benefit obligation - beginning $ 1,366,657 $ 1,066,754
Service cost 76,958 77,439
Interest cost 90,832 80,404
Actuarial loss 108,154 99,248
Settlements (168,395) (3,040)
Plan amendments -- 45,852
----------- -----------
Projected benefit obligation - ending 1,474,206 1,366,657
----------- -----------
Plan assets at fair value - beginning 1,047,217 808,689
Actual return on plan assets 99,221 97,001
Employer contribution 110,881 144,567
Settlements (168,395) (3,040)
----------- -----------
Plan assets at fair value - ending 1,088,924 1,047,217
----------- -----------
Projected benefit obligation in excess of fair value 385,282 319,440
Unrecognized net transition obligation (61,080) (72,902)
Unrecognized loss (251,397) (197,687)
Unrecognized past service liability (15,644) (17,412)
----------- -----------
Accrued pension cost included in other liabilities $ 57,161 $ 31,439
=========== ===========
</TABLE>
20.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BENEFIT PLANS (Cont'd.)
Retirement plan (Cont'd.)
Net periodic pension cost for the plan included the following components:
Year Ended December 31,
----------------------
1998 1997
--------- ---------
Service cost $ 76,958 $ 77,439
Interest cost 90,832 80,404
Expected return on plan assets (83,174) (68,660)
Amortization of net transition obligation 11,822 11,822
Amortization of unrecognized loss 9,686 2,811
Amortization of unrecognized past service liability 1,768 (1,777)
Settlement charge 28,711 --
--------- ---------
Net periodic pension cost
included in salaries and employee benefits $ 136,603 $ 102,039
========= =========
Assumptions used in accounting for the plan are as follows:
Year Ended December 31,
----------------------
1998 1997
--------- ---------
Discount rate 6.50% 6.75%
Rate of increase in compensation 4.50% 4.50%
Long-term rate of return on plan assets 8.00% 8.00%
21.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BENEFIT PLANS (Cont'd.)
Postretirement benefits
Postretirement benefits offered by the Bank include health care and life
insurance coverage and are provided to all employees retiring after the
attainment of age 60 and fifteen years of service. The plan is unfunded. The
following tables set forth the plan's funded status and components of
postretirement benefit costs:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit
obligation - beginning $ 555,818 $ 531,441
Service cost 22,317 21,004
Interest cost 36,703 38,992
Actuarial (gain) (110,281) (12,526)
Premiums/claims paid (24,134) (23,093)
--------- ---------
Accumulated postretirement benefit
obligation - ending (includes benefit obligation for
retirees and dependents of $253,686 and
$274,758, respectively 480,423 555,818
Employer contribution (24,134) (23,093)
Premium paid 24,134 23,093
--------- ---------
Accumulated and unfunded postretirement
benefit obligation 480,423 555,818
Unrecognized transition obligation (396,905) (421,711)
Unrecognized gain 160,424 50,143
--------- ---------
Accrued expense included in other liabilities $ 243,942 $ 184,250
========= =========
</TABLE>
The following table sets forth the components of net periodic postretirement
benefits costs:
Year Ended December 31,
-----------------------
1998 1997
------- -------
Service cost $22,317 $21,004
Interest cost on
accumulated postretirement benefit obligation 36,703 38,992
Amortization of transition obligation 24,806 24,806
------- -------
Net postretirement benefit cost included in
compensation and employee benefits $83,826 $84,802
======= =======
22.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BENEFIT PLANS (Cont'd.)
Assumptions used in accounting for the plan are as follows:
Year Ended December 31,
-----------------------
1998 1997
---- ----
Discount rate 6.50% 6.75%
Rate of increase in compensation 4.50% 4.50%
For the years ended December 31, 1998 and 1997, a medical cost trend rate of
6.50% and 7.00%, respectively, decreasing 0.5% per year thereafter until an
ultimate rate of 5.00% 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 and 1997,
by $76,000 and $91,000, respectively, and the aggregate of the service and
interest components of net periodic postretirement benefit cost for the years
ended December 31, 1998 and 1997, by $12,000 and $14,000, respectively.
Decreasing the assumed medical cost trend by one percent in each year would
decrease the accumulated postretirement benefit obligation as of December 31,
1998, by $63,000 and the aggregate of the service and interest components of net
periodic postretirement benefit cost for the year ended December 31, 1998 by
$10,000.
ESOP
Effective upon conversion, an ESOP was established for all eligible employees.
The ESOP used $1,466,910 of proceeds from a term loan from the Company to
purchase 146,691 shares of Company common stock in the initial offering. The
term loan from the Company to the ESOP is payable over 10 years. Interest on the
term loan is payable monthly, commencing on July 31, 1998, at the prime rate.
The Bank intends to make discretionary contributions to the ESOP which will be
equal to principal and interest payments required from the ESOP on the term
loan. Shares purchased with the loan proceeds were initially 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 ESOP, in the year of allocation. During the
year ended December 31, 1998, the Bank made cash contributions of $133,330 to
the ESOP, of which $73,345 was applied to loan principal. At December 31, 1998,
the loan had an outstanding balance of $1,393,565.
The ESOP is accounted for in accordance with Statement of Position 93-6
"Accounting for Employee Stock Ownership Plans", which was issued by the
American Institute of Certified Public Accountants in November 1994.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP
shares in the consolidated statements of financial condition. As shares are
committed to be released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares become
outstanding for net income per common share computations. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings. Contributions
equivalent to dividends on unallocated ESOP shares are recorded as a reduction
of debt. ESOP compensation expense was $70,597 for the year ended December 31,
1998.
23.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BENEFIT PLANS (Cont'd.)
ESOP (Cont'd.)
The ESOP shares are summarized as follows:
Allocated shares --
Shares committed to be released 7,335
Unreleased shares 139,356
----------
146,691
==========
Fair value of unreleased shares $1,254,204
==========
10. INCOME TAXES
The Bank qualifies as a thrift institution under the provisions of the Internal
Revenue Code and, therefore, must calculate its bad debt deduction using either
the experience or the specific charge off method. Retained earnings at December
31, 1998, includes approximately $3,009,000 of bad debt deductions, for which
income taxes have not been provided. If such amount is used for purposes other
than for bad debts losses, including distributions in liquidation, it will be
subject to income tax at the then current rate.
The components of income taxes are summarized as follows:
Year Ended December 31,
----------------------------
1998 1997
--------- ---------
Current tax expense:
Federal income $ 717,141 $ 827,699
State income 67,678 73,752
--------- ---------
784,819 901,451
--------- ---------
Deferred tax (benefit):
Federal income (17,545) (22,466)
State income (1,524) (2,035)
--------- ---------
(19,069) (24,501)
--------- ---------
$ 765,750 $ 876,950
========= =========
24.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (Cont'd.)
The following table presents a reconciliation between the reported income taxes
and the income taxes which would be computed by applying the normal federal
income tax rate of 34% to income before income taxes:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Federal income tax expense $ 732,862 $ 826,253
Increases (reductions) in income taxes resulting from:
New Jersey savings institution tax,
net of federal income tax effect 43,662 47,333
Other items, net (10,774) 3,364
--------- ---------
Effective income tax $ 765,750 $ 876,950
========= =========
</TABLE>
The tax effects of existing temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets
Benefit plans $ 88,084 $ 84,742
Deferred loan fees 62,947 80,311
Uncollected interest 13,061 49,729
Allowance for loss on loans 280,052 267,628
Other items -- 1,433
--------- ---------
444,144 483,843
--------- ---------
Deferred tax liabilities
Unrealized gain on securities available for sale 343,671 235,074
Depreciation 125,692 128,936
Bad debt deduction in excess of base year 269,915 325,439
--------- ---------
739,278 689,449
--------- ---------
Net deferred tax liabilities included in other liabilities $(295,134) $(205,606)
========= =========
</TABLE>
Refundable income taxes of $14,606 at December 31, 1998 are included in other
assets. Current income tax liabilities of $192,516 at December 31, 1997 are
included in other liabilities.
25.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers and
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to extend credit and purchase securities. The
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated statement of
financial condition. The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. The Bank uses the same credit policies in making commitments as it
does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend a customer as long as there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since commitments may expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies but primarily includes residential real
estate.
Commitments to purchase securities are contracts for delayed delivery of
securities in which the seller agrees to make delivery at a specified future
date of a specified instrument, at a specified price or yield. Risks arise from
the possible inability of counterparties to meet the terms of their contracts
and from movements in securities values and interest rates.
The Bank has the following outstanding commitments to originate loans, expiring
in three months or less:
December 31,
----------------------------
1998 1997
---------- ----------
Mortgage $4,934,000 $1,950,000
Fixed rate home equity loans 297,000 74,000
Home equity credit lines -- 29,000
---------- ----------
$5,231,000 $2,053,000
========== ==========
At December 31, 1998, of the $5,231,000 in commitments to originate loans,
$3,082,000 are for loans at fixed interest rates ranging from 6.50% to 7.375%
and $2,149,000 are for loans at adjustable interest rates with initial rates
ranging from 6.49% to 7.00%.
At December 31, 1997, the Bank had outstanding $150,000 in loan participation
purchase commitments. Loan participation purchase commitments represent
commitments to purchase participation interests in loans where the interest rate
will be set at the funding date based upon the Federal Home Loan Bank of New
York C.I.P. advance rates plus a margin.
26.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES (Cont'd.)
At December 31, 1998 and 1997, outstanding commitments related to unused home
equity lines of credit totalled approximately $3,141,000 and $3,098,000,
respectively. Commitments under home equity credit line programs represent
undisbursed funds from approved lines of credit. Unless specifically cancelled
by notice from the Bank, these are firm commitments to the respective borrowers
on demand. The lines of credit are secured by one-to-four family residential
property owned by the borrowers. The interest rate charged for any month on
funds disbursed under the Homeowners' Equity Credit Line Program is 1.75% above
the prime rate as most recently published in The Wall Street Journal prior to
the last business day of the month immediately preceding the month in which the
billing cycle begins. The interest rate charged under the Preferred Home Equity
Credit Line is fixed at 6.49% for one year, and thereafter is adjusted monthly
to a rate of 1.00% above the prime rate as discussed above.
Rentals, including related expenses, under long-term operating leases for
certain branch offices amounted to approximately $168,000 and $178,000 for the
years ended December 31, 1998 and 1997, respectively. At December 31, 1998, the
minimum rental commitments under all noncancellable leases with initial or
remaining terms of more than one year and expiring through March 31, 2002 are as
follows:
Year Ending Minimum
December 31, Rent
------------ --------
1999 $175,000
2000 150,000
2001 105,000
2002 27,000
--------
$457,000
========
See note 14 to consolidated financial statements.
The Bank also has, in the normal course of business, commitments for services
and supplies. Management does not anticipate losses on any of these
transactions.
The Bank is also a party to litigation which arises primarily in the ordinary
course of business. In the opinion of management, the ultimate disposition of
such litigation should not have a material effect on consolidated financial
position or operations.
12. 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. Estimated fair values have been determined
using the best available data and estimation methodology suitable for each
category of financial instruments. The estimation methodologies used and
assumptions made in estimating fair values of financial instruments are set
forth below.
27.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
Cash and cash equivalents and interest receivable
The carrying amounts for cash and cash equivalents and interest receivable
approximate fair value because they mature in three months or less.
Securities
The fair values for securities available for sale are based on quoted
market or dealer prices, if available. If quoted market or dealer prices
are not available, fair value is estimated using quoted market prices for
similar securities.
Loans receivable
Fair value is estimated by discounting 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, of such loans.
Deposits
The fair value of demand deposits, savings accounts and club accounts is
equal to the amount payable on demand at the reporting date. The fair value
of certificates of deposit is estimated by discounting future cash flows,
using rates currently offered for deposits of similar remaining maturities.
The fair value estimates do not include the benefit that results from the
low-cost funding provided by deposit liabilities compared to the cost of
borrowing funds in the market.
Commitments
The fair value of loan commitments is estimated using fees currently
charged to enter into similar agreements taking into account the remaining
terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers
the difference between current levels of interest and the committed rates.
28.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
The carrying amounts and fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997
----------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 13,824 $ 13,824 $ 5,931 $ 5,931
Securities available for sale 62,735 62,735 53,918 53,918
Loans receivable 177,877 181,861 152,200 154,192
Interest receivable 1,316 1,316 1,220 1,220
Financial liabilities
Deposits 223,270 224,714 198,363 198,717
Commitments
To originate loans 5,231 5,231 2,053 2,053
Unused lines of credit 3,141 3,141 3,098 3,098
Loan participation purchase -- -- 150 150
</TABLE>
The fair value estimates are made at a discrete point in time based on relevant
market information and information about the financial instruments. 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 and
involve uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
In addition, the fair value estimates were based on existing on-and-off balance
sheet financial instruments without attempting to value anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Other significant assets and liabilities that are not
considered financial assets and liabilities include premises and equipment and
advances from borrowers for taxes and insurance. In addition, the tax
ramifications related to the realization of the unrealized gains and losses can
have a significant effect on fair value estimates and have not been considered
in any of the estimates.
Finally, reasonable comparability between financial institutions may not be
likely due to the wide range of permitted valuation techniques and numerous
estimates which must be made given the absence of active secondary markets for
many of the financial instruments. This lack of uniform valuation methodologies
introduces a greater degree of subjectivity to these estimated fair values.
29.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENTS
Repurchase of common stock
The Company received the necessary regulatory approval to repurchase
275,046 shares of common stock in the open market. As of February 12, 1999,
186,500 shares were repurchased at an aggregate cost of $1,899,000.
Recognition and Retention Plan
On February 3, 1999, the Company established the 1999 Recognition and
Retention Plan ("RRP") to provide key employees and non-employee directors
of the Company and their affiliates with a proprietary interest in the
Company in a manner designed to encourage such persons to remain with the
Company and its affiliates. The Company intends to contribute shares or
sufficient funds for the RRP to acquire 73,345 of authorized but unissued
shares of common stock of the Company, which will be available to be
awarded to employees and non-employee directors. Under the RRP, awards are
granted in the form of common stock held by the RRP trust. The awards vest
over a period of time at a rate not to exceed 20% per year beginning one
year from the date of grant.
Stock Option Plan
The Company adopted the 1999 Stock Option Plan ("Stock Option Plan")
authorizing the granting of stock options and limited rights to officers,
employees and non-employee directors of the Company and the Bank to
purchase 183,364 shares of Company common stock. Options granted under this
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 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 employment due to death or disability. The options expire ten
years from the date of grant. The Company granted "limited rights" with
respect to shares covered by options granted to officers and employees,
which enables the optionee, upon a change of control of the Company or the
Bank, to elect to receive cash for each option granted, equal to the
difference between the exercise price of the option and the fair market
value of the common stock on the date of exercise of the limited rights. In
1999, the Company granted options for 55,000 shares to non-employee
directors and 118,000 shares to officers and employees.
Proposed Branch Locations
The Bank received necessary regulatory approvals to open three new branches
in Edison, Milltown and Monroe Township, New Jersey. The Bank also received
regulatory approval to relocate its Linden, New Jersey branch.
The Bank signed a twenty year capital lease for the new location of the
Linden branch, effective March 1, 1999, at an annual lease payment of
$150,000. The Bank also entered into a five year operating lease for the
new Edison branch office, to be opened at an unspecified date, with an
annual lease payment of $125,000, which will be effective when the property
is ready for occupancy.
30.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PARENT ONLY FINANCIAL INFORMATION
The Company operates its wholly owned subsidiary, the Bank. The earnings of the
Bank are recognized by the Company under the equity method of accounting. The
following are the condensed financial statements for the Company (Parent Company
only) as of and for the period ended December 31, 1998. The Company had no
earnings prior to June 30, 1998.
Condensed statement of financial condition
December 31,
1998
------------
Assets
Cash and cash equivalents $ 120,319
Investment in Liberty Bank 25,536,981
ESOP loan receivable 1,393,565
Receivable from Liberty Bank 7,398,861
-----------
Total assets $34,449,726
===========
Liabilities and stockholder's equity
Income taxes payable $ 16,668
Stockholders' equity 34,433,058
-----------
Total liabilities and stockholders' equity $34,449,726
===========
31.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
Condensed statement of income
From Inception
June 30, 1998 to
December 31,
1998
----------------
Interest $ 59,984
Equity earnings in Liberty Bank 738,151
--------
798,135
Expenses 13,012
--------
Income before income taxes 785,123
Income taxes 16,668
--------
Net income $768,455
========
32.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
Condensed statement of cash flows
From Inception
June 30, 1998 to
December 31,
1998
----------------
Cash flow from operating activities
Net income $ 768,455
Equity earnings on Liberty Bank (738,151)
Increase in other liabilities 16,668
------------
Net cash provided by operating activities 46,972
------------
Investing activities
Increase in loan receivable from Liberty Bank (7,398,861)
Net increase in loan receivable from ESOP (1,393,565)
Purchase of 100% of the outstanding stock of Liberty Bank (8,865,770)
------------
Net cash (used) in investing activities (17,658,196)
------------
Financing activities
Net proceeds from sale of common stock 17,731,543
------------
Net cash provided by financing activities 17,731,543
------------
Net increase in cash and cash equivalents 120,319
Cash and cash equivalents at beginning of period --
Cash and cash equivalents at end of period $ 120,319
============
33.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 $3,753 $3,911 $4,201 $4,149
Interest expense 2,305 2,451 2,448 2,613
------ ------ ------ ------
Net interest income 1,448 1,460 1,753 1,536
Provision for loan losses 15 15 15 --
Non-interest income 84 73 75 79
Non-interest expense 1,023 1,035 1,175 1,074
Income taxes 186 172 221 187
------ ------ ------ ------
Net income $ 308 $ 311 $ 417 $ 354
====== ====== ====== ======
Net income per common
share: Basic/diluted N/A (1) N/A (1) $ 0.11 $ 0.09
====== ====== ====== ======
<CAPTION>
Year Ended December 31, 1997
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In Thousands Except Per Share Data)
<S> <C> <C> <C> <C>
Interest income $3,621 $3,768 $3,940 $3,754
Interest expense 2,125 2,230 2,335 2,314
------ ------ ------ ------
Net interest income 1,496 1,538 1,605 1,440
Provision for loan losses 50 50 50 50
Non-interest income 62 82 109 189
Non-interest expense 954 961 973 1,003
Income taxes 224 238 264 151
------ ------ ------ ------
Net income $ 330 $ 371 $ 427 $ 425
====== ====== ====== ======
Net income per common
share: Basic/diluted N/A (1) N/A (1) N/A (1) N/A (1)
====== ====== ====== ======
</TABLE>
(1) Liberty Bancorp, Inc. converted to stock form on June 30, 1998.
34.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 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 SFAS 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. (SFAS 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). SFAS 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.
SFAS 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
subsidiaries. Initial application shall be as of the beginning of an entity's
fiscal quarter. Earlier application of all of the provisions of SFAS No. 133 is
permitted only as of the beginning of a fiscal quarter. Earlier application of
selected provisions or retroactive application of provisions of SFAS No. 133 are
not permitted.
Management of the Company has not yet determined when SFAS No. 133 will be
implemented, but does not believe the ultimate implementation of SFAS No. 133
will have a material impact on their consolidated financial position or results
of operations.
35.
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m. on May 12, 1999 at
the Columbia Country Club, 300 Colonia Boulevard, Colonia, New Jersey 07067.
Stock Listing
The Company's Common Stock trades over-the-counter on the Nasdaq National Market
under the symbol "LIBB."
Special Counsel
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
Independent Auditors
Radics & Co., LLC
55 U.S. Highway #46
Pine Brook, NJ 07058
Transfer Agent
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road, Overpeck Centre
Ridgefield Park, NJ 07660
Annual Report on Form 10-KSB
A copy of the Company's Form 10-KSB for the fiscal year ended December 31, 1998,
will be furnished without charge to stockholders as of April 6, 1999, upon
written request to the Secretary, Liberty Bancorp, Inc., 1410 St. Georges
Avenue, Avenel, New Jersey 07001.
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned State of Incorporation
- -------------------------- ------------- ----------------------
Liberty Bank 100% Federal
|
Axia Financial Corporation 100% New Jersey
Axia Financial Services 100% New Jersey
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,474
<INT-BEARING-DEPOSITS> 12,350
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,735
<INVESTMENTS-CARRYING> 0
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<TOTAL-ASSETS> 260,447
<DEPOSITS> 223,270
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<LIABILITIES-OTHER> 2,743
<LONG-TERM> 0
0
3,901
<COMMON> 0
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<INTEREST-LOAN> 12,238
<INTEREST-INVEST> 2,740
<INTEREST-OTHER> 1,035
<INTEREST-TOTAL> 16,013
<INTEREST-DEPOSIT> 9,817
<INTEREST-EXPENSE> 9,817
<INTEREST-INCOME-NET> 6,197
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,307
<INCOME-PRETAX> 2,155
<INCOME-PRE-EXTRAORDINARY> 2,155
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,389
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
<YIELD-ACTUAL> 6.80
<LOANS-NON> 593
<LOANS-PAST> 7
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<LOANS-PROBLEM> 0
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<RECOVERIES> 0
<ALLOWANCE-CLOSE> 760
<ALLOWANCE-DOMESTIC> 590
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 170
</TABLE>
