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, 1999
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.
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(Exact Name of Registrant as Specified in its Charter)
Federal 22-3593532
------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1410 St. Georges Avenue, Avenel, NJ 07001
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(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. |_|
The registrant's revenues for the fiscal year ended December 31, 1999 were
$18.5 million.
As of December 31, 2000, there were issued and outstanding 3,621,329
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 ($6.00) was $8.0 million.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1999 (Parts II and IV).
2. Proxy Statement for the May 2000 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"). As of
December 31, 1999, the Company's assets consist primarily of the outstanding
capital stock of the Bank and cash and investments of $3.8 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, 1999, 1,553,600 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, 1999, the Company had consolidated total assets of $283.3
million, consolidated total deposits of $220.5 million and consolidated total
equity of $31.9 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
four 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,
Linden and Monroe Township, 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 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.
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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,
---------------
1999 1998 1997
---- ---- ----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family $ 182,100 89.86% $ 166,573 93.23% $ 143,623 93.88%
Multi-family 2,143 1.06 1,200 0.67 1,258 0.82
Commercial 7,553 3.72 3,367 1.88 1,906 1.25
Construction -- -- -- -- -- --
------- ----- ------- ----- ------- -----
Total real estate loans 191,796 94.64 171,140 95.78 146,787 95.95
------- ----- ------- ----- ------- -----
Consumer loans:
Home equity 10,616 5.24 7,133 4.00 5,706 3.73
Other 235 .12 388 0.22 491 0.32
------- ----- ------- ----- ------- -----
Total consumer loans 10,851 5.36 7,521 4.22 6,197 4.05
------- ----- ------- ----- ------- -----
Total loans 202,647 100.00% 178,661 100.00% 152,984 100.00%
======= ====== ======= ====== ======= ======
Less:
Loans in process -- -- --
Deferred loan origination fees (172) 24 61
Allowance for loan losses 788 760 723
Total loans, net $ 202,031 $ 177,877 $ 152,200
========= ========= =========
</TABLE>
At December 31,
---------------
1996 1995
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real estate loans:
One-to-four family $120,892 91.93% $ 97,007 92.08%
Multi-family 1,875 1.42 2,018 1.92
Commercial 2,035 1.55 1,862 1.75
Construction 237 0.18 -- --
-------- ------ -------- ------
Total real estate loans 125,039 95.08 100,887 95.76
======== ====== ======== ======
Consumer loans:
Home equity 5,364 4.08 3,345 3.17
Other 1,101 0.84 1,123 1.07
-------- ------
Total consumer loans 6,465 4.92 4,468 4.24
-------- ------ -------- ------
Total loans 131,504 100.00% 105,355 100.00%
======== ====== ======== ======
Less:
Loans in process 3 --
Deferred loan origination fees 277 392
Allowance for loan losses 534 490
-------- --------
Total loans, net $130,690 $104,473
======== ========
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
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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, 1999, $47.5 million, or 23.5%, 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.
Borrowers' 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 and adjustable-rate multi-family
residential real estate loans. Fixed rate loans are generally offered with
balloon
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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,
1999, the average balance of the Bank's multi-family residential real estate
loans was $238,000, and the largest such loan had a balance of $487,500 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,
1999, the average balance of the Bank's commercial real estate loans was
$343,000, and the largest such loan had a balance of $2,500,000 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.
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
5
<PAGE>
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, 1999, 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.
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
6
<PAGE>
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, 1999 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.
One-to-Four
Family Multi-Family Commercial Consumer Total
-------- -------- -------- -------- --------
(In Thousands)
Amounts Due:
Within 1 year ........ $ 18 $ -- $ -- $ 216 $ 234
Over 1 to 2 years .... 816 -- -- 203 1,019
Over 2 to 3 years .... 2,562 -- -- 285 2,847
Over 3 to 5 years .... 5,522 250 -- 570 6,342
Over 5 to 10 years ... 18,952 802 333 4,417 24,504
Over 10 to 25 years .. 74,048 1,341 7,220 5,160 87,769
Over 25 years ........ 79,932 -- -- -- 79,932
-------- -------- -------- -------- --------
Total amount due ..... $181,850 $ 2,393 $ 7,553 $ 10,851 $202,647
======== ======== ======== ======== ========
The following table sets forth the dollar amount of all loans for which
final payment is not due until after December 31, 2000. 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 .................. $138,196 $ 43,636 $181,832
Multi-family ........................ 2,321 72 2,393
Commercial .......................... 5,846 1,707 7,553
-------- -------- --------
Total real estate loans .............. 146,363 45,415 191,778
Consumer ............................. 8,493 2,142 10,635
-------- -------- --------
Total loans ......................... $154,856 $ 47,557 $202,413
======== ======== ========
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
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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.
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Loan Originations, Sales and Purchases. The following table sets forth
total loans originated and repaid during the periods indicated.
Years Ended December 31,
------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Originations:
Adjustable rate:
Real estate
One-to-four family (1) ...... $ 6,632 $ 3,586 $ 22,317
Multi-family ................ -- -- --
Commercial .................. -- 1,320 --
Construction ................ -- -- --
Consumer ...................... 1,441 1,008 1,654
-------- -------- --------
Total adjustable rate ....... 8,073 5,914 23,971
-------- -------- --------
Fixed rate:
Real estate
One-to-four family .......... 41,752 53,680 16,234
Multi-family ................ 1,326 -- --
Commercial .................. 4,810 350 --
Construction ................ -- 178 140
Consumer ...................... 4,960 3,701 838
-------- -------- --------
Total fixed rate ............ 52,848 57,909 17,212
-------- -------- --------
Total loans originated ...... 60,921 63,823 41,183
-------- -------- --------
Purchases:
Real estate:
One-to-four family ............ -- -- --
Multi-family .................. 54 -- --
Commercial .................... -- -- --
Consumer ....................... -- -- --
-------- -------- --------
Total loans purchased ......... 54 -- --
-------- -------- --------
Sales and Repayments:
Real estate:
One-to-four family ............ -- -- --
Multi-family .................. -- -- --
Commercial .................... -- -- --
Consumer ....................... -- 68 647
-------- -------- --------
Total loans sold .............. -- 68 647
-------- -------- --------
Principal repayments ............. 36,627 38,160 19,056
-------- -------- --------
Total reductions ............... 36,627 38,228 19,703
-------- -------- --------
Decrease in other items, net ..... (362) 82 30
-------- -------- --------
Net increase ................... $ 23,986 $ 25,677 $ 21,510
======== ======== ========
- ----------
(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,
1999 1998 1997
----- ----- -----
(In Thousands)
Initial fixed rate:
Five years 3,294 549 $6,087
Seven years 1,219 1,569 6,909
Ten years 257 1,460 1,027
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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 December 31, 1999, the Bank had total loan commitments of $5.4
million and commitments to customers for unused lines of credit of $4.0 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 net 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 as expense $65,000 and $6,500
of deferred loan fees during the years ended December 31, 1999 and 1998,
respectively, and recognized as income $69,000 of deferred fees during the year
ended December 31, 1997.
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.
10
<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,
---------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family ................. $243 $505 $844 $841 $368
Multi-family ....................... 72 66 65 63 --
Commercial ......................... -- 22 -- -- --
Consumer ........................... -- -- -- -- --
---- ---- ------ ---- ----
Total ............................ 315 593 909 904 368
---- ---- ------ ---- ----
Accruing loans delinquent 90 days or more:
One-to-four family ................. -- -- -- -- 440
Multi-family ....................... -- -- -- -- --
Commercial ......................... -- -- -- -- --
Consumer (1) ....................... 7 7 25 26 15
---- ---- ------ ---- ----
Total .............................. 7 7 25 26 455
---- ---- ------ ---- ----
Real estate owned ................... 80 106 121 -- 134
---- ---- ------ ---- ----
Total non-performing assets ......... $402 $706 $1,055 $930 $957
==== ==== ====== ==== ====
Total as a percentage of total assets 0.14% 0.27% 0.49% 0.46% 0.51%
==== ==== ====== ==== ====
</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, 1999 and 1998 had nonaccruing loans been current in accordance with
their original terms amounted to $31,000 and $51,000, respectively. The Bank
recorded $0 and $6,000, 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, 1999.
<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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four family . 3 $115 .06% 4 $243 0.14% 7 $358 0.20%
Multi-family ....... -- -- -- 1 72 3.36 1 72 3.36
Commercial ......... -- -- -- -- -- -- -- -- --
Consumer ........... -- -- -- 3 7 0.06 3 7 0.06
---- ---- ---- ---- ---- ---- ---- ---- ----
Total loans ......... 3 $115 .06% 8 $322 0.16% 11 $437 0.21%
==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
11
<PAGE>
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, 1999, the Bank
had $80,000 of real estate acquired in settlement of loans.
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, 1999.
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, 1999, the Bank had $384,000 of assets classified
substandard, and $18,000 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
12
<PAGE>
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, 1999 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 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,
------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period .............. $ 760 $ 723 $ 534 $ 490 $ 442
Charge-offs
Real estate:
One-to-four family ........................ 10 7 11 -- 12
Multi-family and other .................... 22 -- -- -- --
----- ----- ----- ----- -----
Total ................................... 32 7 11 -- 12
Total Recoveries ............................ -- -- -- 1 --
----- ----- ----- ----- -----
Net charge-offs ............................. 32 7 11 (1) 12
Additions charged to operations ............. 60 44 200 43 60
----- ----- ----- ----- -----
Balance at end of period .................... 788 $ 760 $ 723 $ 534 $ 490
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.02% 0.01% 0.01% -- 0.01%
===== ===== ===== ===== =====
Ratio of net charge-offs during the period to
average non-performing assets ............. 5.31% 2.61% 1.04% -- 1.23%
===== ===== ===== ===== =====
</TABLE>
The activity in the allowance for loan losses is as follows:
Years Ended December 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Balance - beginning .................. $ 760 $ 723 $ 534 $ 490 $ 442
Provisions charged to operations ..... 60 44 200 43 60
Loans charged off, net of recoveries . 32 7 (11) 1 (12)
----- ----- ----- ----- -----
Balance - ending ..................... $ 788 $ 760 $ 723 $ 534 $ 490
===== ===== ===== ===== =====
13
<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,
---------------
1999 1998
---- ----
% 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 $ 476 $182,100 89.86% $ 458 $166,573 93.23%
Multi-family 33 2,143 1.06 11 1,200 0.67
Commercial real estate 94 7,553 3.72 40 3,367 1.88
Home equity 98 10,616 5.24 81 7,133 4.00
Other consumer -- 235 0.12 -- 388 0.22
Unallocated 87 -- 0.00 170 -- 0.00
-------- -------- ------ -------- -------- ------
$ 788 $202,647 100.00% $ 760 $178,661 100.00%
======== ======== ====== ======== ======== ======
<CAPTION>
At December 31,
1997
% of
Loan Loans in
Amount of Amounts Each Category
Loan Loss by to Total
Allowances Category Loans
========== ======== ========
(Dollars in Thousands)
<S> <C> <C> <C>
One-to-four family $ 402 $143,623 93.88%
Multi-family 22 1,258 0.82
Commercial real estate 37 1,906 1.25
Home equity 59 5,706 3.73
Other consumer 3 491 0.32
Unallocated 200 -- 0.00
------ -------- ------
$ 723 $152,984 100.00%
====== ======== ======
<CAPTION>
At December 31,
---------------
1996 1995
---- ----
% 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 $ 356 $121,129 92.10% $ 296 $97,007 92.08%
Multi-family 42 1,875 1.43 43 2,018 1.92
Commercial real estate 61 2,035 1.55 61 1,862 1.76
Home equity 75 5,364 4.08 44 3,345 3.17
Other consumer -- 1,101 0.84 -- 1,123 1.07
Unallocated -- -- 0.00 46 -- 0.00
-------- -------- ------ -------- --------- ------
$ 534 $131,504 100.00% $ 490 $ 105,335 100.00%
======== ======== ====== ======== ========= ======
</TABLE>
Investment Activities
14
<PAGE>
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 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 Company catagorizes investment portfolios as held to maturity
and available for sale. No assets are catagorized as held for trading. At
December 31, 1999, all mortgage backed securities are classified as available
for sale and carried at fair value. Such securities amounted to $48.7 million or
17.2% of total assets. US agency obligations in the amount of $19.5 million were
classified as held to maturity.
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,
---------------
1999 1998 1997
---- ---- ----
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%
Unrealized gain (loss), net -- -- -- -- (8) (.01)
Net unamortized (discount) -- -- -- -- -- --
Equity securities -- -- -- -- -- --
Unrealized gains (loss), net -- -- -- -- -- --
-------- ---------- -------- ---------- -------- ----------
Total investment securities -- -- -- -- 992 1.84
-------- ---------- -------- ---------- -------- ----------
Mortgage-backed securities:
GNMA 15,707 32.24% 13,353 21.28 1,184 2.20
Fannie Mae 8,493 17.44 17,490 27.88 19,922 36.95
Freddie Mac 16,746 34.38 30,095 47.97 30,614 56.78
Collateralized Mortgage Obligations 7,761 15.94 868 1.38 545 1.01
Total mortgage backed securities 48,707 100.00 62,735 52,925 98.16
-------- ----------
Total securities available for sale $ 48,707 100.00% $ 62,735 100.00% $ 53,917 100.00%
======== ========== ======== ========== ======== ==========
Held to Maturity:
Investment Securities:
Federal Agency Obligations 19,468 100.00% -- -- -- --
Total Securities Held to Maturity 19,468 100.00% -- -- -- --
-------- ----------
FHLB Stock $ 2,355 $ 2,008 $ 1,084
======== ======== ========
Other interest earning assets:
Interest bearing deposits in banks $ 2,049 $ 12,350 $ 4,739
======== ======== ========
</TABLE>
15
<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, 1999.
Carrying Average
Value Yield
----- -----
One year or less ................... $ 160 7.00%
After one year though five years ... 1,737 6.50
After five years through ten years . -- --
After ten years .................... 39,067 6.70
------- ----
Total .............................. $40,964 6.69%
=======
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 as a long-term funding strategy for
increased loan origination or the purchase of investment securities.
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").
16
<PAGE>
The following table sets forth an analysis of deposit accounts by type,
maturity, and rate at December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Average % of Average % of Average % of
Amount Rate Total Amount Rate Total Amount Rate Total
------- ---- ----- ------- ---- ----- ------- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transactions and savings deposits:
Non-interest bearing $ 4,600 --% 2.09% 4,398 --% 1.97% $ 3,376 --% 1.70%
Money market accounts 2,213 2.79 1.00 2,587 2.64 1.16 2,809 2.69 1.42
NOW accounts 10,314 1.56 4.67 9,995 1.50 4.47 9,696 1.50 4.89
Passbook and statement savings 51,421 3.00 23.32 49,197 3.00 22.03 45,168 3.00 22.77
-------- ---- ------ ------- ------ ------- ---- ------
Total transactions and savings deposits 68,548 2.57 31.08 66,177 2.56 29.63 61,049 2.58 30.78
------- ---- ------
Certificate accounts with
remaining maturities of:
6 months or less 65,281 5.05% 29.60 46,443 5.18 20.80 62,587 5.30 31.55
Over 6 to 12 months 42,296 5.18 19.18 59,895 5.47 26.83 27,714 5.37 13.97
Over 12 months 44,408 5.55 20.14 50,755 5.72 22.74 47,013 5.89 23.70
-------- ---- ------ ------- ---- ------ ------- ---- ------
Total certificates 151,985 5.23 68.92 157,093 5.46 70.37 137,314 5.52 69.22
-------- ---- ------ ------- ---- ------ ------- ---- ------
Total deposits $220,533 4.40% 100.00% 223,270 4.60% 100.00% 198,363 4.62% 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,
1999.
December 31, December 31, December 31, December 31,
2000 2001 2002 2004 Total
-------- -------- -------- -------- --------
(In Thousands)
Less than 4% ..... 5 $ 3 $ -- $ -- 8
4.00-5.99% ....... $ 99,619 39,025 2,853 899 $142,396
6.00-7.99% ....... 7,953 1,577 16 35 9,581
-------- -------- -------- -------- --------
Total ............ $107,577 $ 40,605 $ 2,869 $ 934 $151,985
======== ======== ======== ======== ========
17
<PAGE>
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,
1999.
<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 $ 31,223 $ 68,109 $ 41,093 $ 934 $141,359
Certificates of Deposit of $100,000 or more 2,666 5,579 2,381 -- 10,626
-------- -------- -------- -------- --------
Total Certificates of Deposit $ 33,889 $ 73,688 $ 43,474 $ 934 $151,985
======== ======== ======== ======== ========
</TABLE>
18
<PAGE>
Deposit Activity. The following table sets forth the deposit activity of
the Bank for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance $ 223,270 $ 198,363 $ 184,709 $ 169,842 $ 153,769
--------- --------- --------- --------- ---------
Net increase (decrease) before interest credited (12,167) 15,675 5,283 7,343 6,446
Interest credited 9,430 9,232 8,371 7,524 9,627
--------- --------- --------- --------- ---------
Net increase (decrease) in deposits (2,737) 24,907 13,654 14,867 16,073
--------- --------- --------- --------- ---------
Ending balance $ 220,533 $ 223,270 $ 198,363 $ 184,709 $ 169,842
========= ========= ========= ========= =========
</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,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Maximum balance:
FHLB advances $ -- $ -- $7,500 $ 800 $4,200
Average balance:
FHLB advances $ -- $ -- $1,663 $ 12 $ 962
At December 31, 1999 and 1998, no advances were outstanding from the FHLB
of New York.
The following table sets forth the maximum month-end balance and average
balance of Repurchase Agreements with the FHLB of New York for the year ended
December 31, 1999.
(In Thousands)
Maximum balance:
FHLB advances $ 24,800
Average balance:
FHLB advances $ 13,258
Investment Securities underlying agreements at year end:
Carrying Value $ 35,179
Fair Value $ 35,074
19
<PAGE>
Employees
As of December 31, 1999, the Bank had 49 full-time and 2 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 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, 1999.
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. A "well
20
<PAGE>
capitalized" institution can, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year in an amount up to 100
percent of its net income during the calendar year, plus its retained net income
for the preceding two years. As of September 30, 1999, the Bank was a "well
capitalized" institution.
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, 1999 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 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
21
<PAGE>
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.
22
<PAGE>
At December 31, 1999, the Bank exceeded all 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, 1999.
<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, 1999:
Tier I core capital $26,298 9.38% $11,213 4% $14,016 5%
Tier I risk-based capital 26,298 21.01 11,213 4 7,512 6%
Total risk-based capital 27,086 21.63 10,015 8 12,519 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.
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.
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, 1999, 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
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<PAGE>
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, 1999, 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 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
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<PAGE>
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 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
25
<PAGE>
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, 1999, was approximately
$586,000.
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, 1999, the Bank's total federal pre-1988 reserve was
approximately $3,009,000. 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.
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 1996. At December 31, 1999, 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.
26
<PAGE>
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, 1999.
Location Year Opened Approximate Square Feet Deposits
- -------- ----------- ----------------------- --------
1410 St. Georges Avenue 1986 9,200 $65.9 million
Avenel, NJ 07001
1515 Irving Street 1995 7,300 $41.2 million
Rahway, NJ 07065
225 North Wood Ave. 1977 1,400 $42.4 million
Linden, NJ 07036
755 State Highway 18 1974 2,000 $64.7 million
East Brunswick, NJ 08816
1600 Perrineville Rd. 1999 2,400 $6.5 million
Monroe Township, NJ
At December 31, 1999, the net book value of the Company's office
properties and fixtures, furniture, and equipment and capitalized leases was $
4.87 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
27
<PAGE>
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, 1999.
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, 1999 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.
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.
28
<PAGE>
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 2000 Annual Meeting of Stockholders
(the "2000 Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
The "Proposal I--Election of Directors" section of the Company's 2000
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 2000
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
2000 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 Stockholder's Equity
(F) Consolidated Statements of Cash Flows
(G) Notes to Consolidated Financial Statements
(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
29
<PAGE>
The Company has not filed a Current Report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1999.
(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 Security Holders 13
21 Subsidiaries of Registrant 21
23 Consent of Radics & Co., LLC 23
* 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.
30
<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 27, 2000 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.
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 27, 2000 Date: March 27, 2000
By: /s/ Dr. Neil R. Bryson By: /s/ Anthony V. Caruso
---------------------- -------------------------------
Dr. Neil R. Bryson Anthony V. Caruso
Director Director
Date: March 27, 2000 Date: March 27, 2000
By: /s/ John W. Fox By: /s/ John C. Marsh
---------------------- -------------------------------
John W. Fox John C. Marsh
Director Director
Date: March 27, 2000 Date: March 27, 2000
By: /s/Paul J. McGovern By: /s/ Nelson L. Taylor, Jr.
---------------------- -------------------------------
Paul J. McGovern Nelson L. Taylor, Jr.
Director Director
Date: March 27, 2000 Date: March 27, 2000
<PAGE>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(With Independent Auditors' Report Thereon)
December 31, 1999
--------------------------------------
INDEX
Page
----
Management Responsibility Statement 1
Independent Auditors' Report 2
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998 3
Consolidated Statements of Income
for the Years Ended December 31, 1999 and 1998 4
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 1999 and 1998 5
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1999 and 1998 6
Consolidated Statements of Cash Flows
for the Years Ended December 31, 1999 and 1998 7 - 8
Notes to Consolidated Financial Statements 9 - 37
All schedules are omitted as the required information is either not applicable
or is presented in the consolidated financial statements.
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,
--------------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Financial Condition Data:
Total assets ................................................ $283,269 $260,447 $217,437
Loans receivable, net ....................................... 202,031 177,877 152,200
Securities available for sale ............................... 48,707 62,735 53,917
Deposits .................................................... 220,533 223,270 198,363
Equity capital .............................................. 31,948 34,433 16,541
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Operating Data:
Interest income ............................................. $ 18,205 $ 16,014 $ 15,083
Interest expense ............................................ 10,941 9,817 9,004
-------- -------- --------
Net interest income ......................................... 7,264 6,197 6,079
Provision for loan losses ................................... 60 45 200
-------- -------- --------
Net interest income after provision for loan losses ......... 7,204 6,152 5,879
-------- -------- --------
Non-interest income ......................................... 338 311 442
-------- -------- --------
Non-interest expense ........................................ 5,276 4,307 3,891
-------- -------- --------
Income before income taxes .................................. 2,266 2,156 2,430
Income taxes ................................................ 826 766 877
-------- -------- --------
Net income .................................................. $ 1,440 $ 1,390 $ 1,553
======== ======== ========
</TABLE>
KEY OPERATING RATIOS AND OTHER DATA
<TABLE>
<CAPTION>
At or For The Year
Ended December 31,
------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Selected Ratios:
Performance Ratios:
Return on assets (ratio of net income to average total assets) .............................. 0.52% 0.58% 0.73%
Return on equity (ratio of net income to average equity) .................................... 4.51% 5.44% 9.95%
Average interest rate spread during period (1) .............................................. 2.17% 2.05% 2.54%
Net interest margin (net interest income divided by average interest-earning assets) ........ 2.71% 2.63% 2.92%
Operating expenses to average total assets .................................................. 1.92% 1.79% 1.84%
Average interest-earning assets to average interest-bearing liabilities ..................... 113.37% 114.02% 108.77%
Asset Quality Ratios:
Non-performing assets to total assets ....................................................... 0.18% 0.27% 0.49%
Allowance for loan losses to non-performing loans ........................................... 187.62% 126.67% 77.41%
Allowance for loan losses to total loans receivable ......................................... 0.39% 0.43% 0.48%
Capital Ratios:
Equity to total assets at end of period ..................................................... 11.31% 13.22% 7.61%
Average equity to average assets ............................................................ 11.60% 10.61% 7.37%
Other Data:
Number of full service customer facilities at end of period ................................. 5 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.
2
<PAGE>
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 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) increasing adjustable rate home equity lending and fixed-rate home equity
lending with maturities of five years or less, (3) purchasing adjustable rate
mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac or GNMA, 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.
7
<PAGE>
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. Of the
Bank's investment securities and mortgage-backed securities, other than Federal
Home Loan Bank ("FHLB") stock, 71% 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. The Bank measures the market value of its assets,
liabilities and off-balance sheet items to calculate the net portfolio value
(NPV). The NPV is then tested through calculations in six interest rate
scenarios which assume an instantaneous and permanent change in market interest
rates up or down from 1% to 3% (100 to 300 basis points). The following table
presents the Bank's NPV at December 31, 1999, as calculated by the Office of
Thrift Supervision (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)
300 (75.00)% (75.00)% $5,564 ($17,768)
200 (48.00)% (50.00)% 12,178 (11,454)
100 (23.00)% (37.50)% 18,256 (5,376)
0 -0- -- 23,632 -0-
(100) 18.00% 15.00% 27,773 4,141
(200) 31.00% 25.00% 30,905 7,273
(300) 39.00% 50.00% 32,865 9,233
- --------------
(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, 1999 increased by
$22.9 million, or 8.76%, to $283.3 million from $260.4 million at December 31,
1998. The increase resulted primarily from an increase of $24.1 million, or
13.6%, in loans receivable to $202.0 million from $177.9 million. Decreases of
$10.3 million, or 83.4%, in interest bearing deposits to $2.0 million at
December 31, 1999 from $12.3 million at December 31, 1998 and securities
available for sale of $14.0 million, or 22.4%, to $48.7 million at December 31,
1999 from $62.7 million at December 31, 1998 were largely offset by an increase
in securities held to maturity to $19.4 million at December 31, 1999. At
December 31, 1998 there were no
8
<PAGE>
securities held to maturity.
Liabilities. Total liabilities for the year ended December 31, 1999
increased by $25.2 million, or 11.2%, to $251.2 million from $226.0 million at
December 31, 1998. The increase was primarily due to a $24.8 million increase in
borrowings under repurchase agreements with the Federal Home Loan Bank ("FHLB").
At December 31, 1998, the Company had no outstanding borrowings. This was
partially offset by a decrease in deposits of $2.7 million, or 1.2%, to $220.5
million at December 31, 1999 from $223.3 million at December 31, 1998.
Total Equity. Total equity as of the year ended December 31, 1999
decreased by $2.4 million, or 7.21%, to $32 million from $34.4 million at
December 31, 1998. This decrease was the result of $2.8 million utilized to
repurchase shares of Company common stock under repurchase programs initiated in
1999.
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.
9
<PAGE>
The following table sets forth certain information relating to the Bank at
December 31, 1999, and for the years ended December 31, 1999, 1998, and 1997.
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>
------------------------------
At December 31, 1999 1999
-------------------- ------------------------------
Yield/ Average Yield/
Balance Cost Balance Interest Cost
------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1)(2) ............... $202,031 7.25% $189,917 $ 13,578 7.15%
Mortgage-backed securities ............ 48,707 6.61 58,159 3,365 5.79
Investment securities ................. 19,468 6.07 14,506 919 6.34
Other interest-earning assets ......... 4,404 6.50 5,196 343 6.60
-------- -------- --------
Total interest-earning assets ......... 274,610 7.04 267,778 18,205 6.80
--------
Non-interest earning assets ........... 8,659 7,396
-------- --------
Total assets .......................... $283,269 $275,174
======== ========
Interest-bearing liabilities:
Interest bearing deposits
Demand ......................... 12,238 1.78 12,465 218 1.75
Savings and club ............... 51,419 3.00 50,986 1,389 2.72
Certificates of deposit ........ 151,985 5.23 155,971 8,360 5.36
Borrowed funds ..................... 27,396 5.72 16,780 974 5.80
-------- -------- --------
Total interest-bearing liabilities .... 243,038 4.63 236,202 10,941 4.63
--------
Non-interest bearing liabilities ...... 8,283 7,062
Stockholders' equity .................. 31,948 31,910
-------- --------
Total liabilities and retained earnings $283,269 $275,174
======== ========
Net interest income ................... $ 7,264
========
Net interest rate spread .............. 2.17%
====
Net yield on average
interest-earning assets ............. 2.72%
====
Ratio of average interest-earning
assets to interest-bearing
liabilities......................... 1.13x
====
<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 $ 12,239 7.46% $144,513 $ 10,944 7.57%
Mortgage-backed securities ............ 52,406 2,681 5.12 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>
- ------------------
(1) Calculated net of deferred loan fees and discounts and loans in process.
(2) Includes non-accrual loans.
10
<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, 1999 vs December 31, 1998 December 31, 1998 vs December 31, 1997
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 .......................... $ 1,848 $ (509) $ 1,339 $ 1,458 $ (163) $ 1,295
Mortgage Backed Securities ................ 333 351 684 (50) (805) (855)
Investment Securities ..................... 862 (2) 860 (143) 5 (138)
Other interest-earning assets ............. (862) 170 (692) 633 (4) 629
------- ------- ------- ------- ------- -------
Total interest income ................. 2,181 10 2,191 1,898 (967) 931
------- ------- ------- ------- ------- -------
Interest expense:
Interest-bearing demand ................... 7 (9) (2) (6) (18) (24)
Savings and club accounts ................. 88 (163) (75) 95 23 118
Certificates of deposit ................... 496 (269) 227 789 26 815
Borrowed funds ............................ 974 -0- 974 (96) -0- (96)
------- ------- ------- ------- ------- -------
Total interest expense .................... 1,565 (441) 1,124 782 31 813
------- ------- ------- ------- ------- -------
Change in interest income ...................... $ 616 $ 451 $ 1,067 $ 1,116 $ (998) $ 118
======= ======= ======= ======= ======= =======
</TABLE>
Comparison of Operating Results
General. Net income depends primarily on its level of net interest income,
which is the difference between interest earned on 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 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.
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 $2.2 million, or 13.7%, to
$18.2 million for the year ended December 31, 1999 from $16.0 million for the
prior year. The increase was the result of a $1.5 million increase in income on
securities and a $1.3 million increase in interest on loans, which were
partially offset by a $692,000 decrease in interest on other earning assets. The
increase in income from securities was partly due to a $19.3 million, or 36.3%,
increase in the average balances on securities combined with a 76 basis point
increase, to 5.90% from 5.14%, in the average yield on the portfolio. The
increase in income on loans was partly due to the $25.8 million, or 15.7%
increase in the average balance of loans to $189.9 million from $164.1 million.
This was partially offset by a reduction of 31 basis points, to 7.15% from
7.46%, in the average yield in the portfolio.
11
<PAGE>
Interest on other earning assets decreased by $692,000, or 66.9%, to
$343,000 from $1.0 million. The decrease was largely the result of a decline of
$13.1 million, or 71.6%, in average balances to $5.2 million from $18.3 million.
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 $993,000
decrease in income from mortgage backed and other securities. The increase in
income from loans was due to a $19.6 million, or 13.6% increase in the average
balance of loans to $164.1 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
loan portfolio and is responsible for the decline in average yield in the
portfolio.
Interest on other earning assets increased by $629,000, or 154.9%, to $1.0
million for the year ended December 31, 1998, from $406,000 for the prior year.
The increase in income on other earning assets is largely the result of higher
average balances in 1998 compared with 1997. The average balance of other
earning assets increased by $11.2 million, or 157.7%, to $18.3 million for the
year ended December 31, 1998 from $7.1 million for the year ended December 31,
1997.
Interest Expense. Interest expense increased $1.1 million, or 11.45%, to
$10.9 million for the year ended December 31, 1999 from $9.8 million for the
prior year. The increase was the result of an increase in the average balance of
borrowed funds to $16.8 million for the year ended December 31, 1999 from zero
in the prior year. Additionally, the average balance on interest bearing
deposits increased by $12.7 million, or 6.17%, to $219.4 million for the year
ended December 31, 1999 from $206.7 million for the prior year. This increase
was partially offset by a reduction in the average cost of interest bearing
deposits of 21 basis points to 4.54% for the year ended December 31, 1999 from
4.75% for the prior year.
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 for the year ended December 31, 1998 from
$191.3 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.
Net Interest Income. Net interest income increased by $1.1 million, or
17.2%, to $7.3 million for the year ended December 31, 1999 from $6.2 million
for the prior year. The increase is the combined result of a higher yielding
investment portfolio and a reduction of the cost of deposits.
Net interest income increased by $118,000, or 1.9%, to $6.2 million for
the year ended December 31, 1998 from $6.1 million for the prior year. 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.
12
<PAGE>
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 $60,000 and $45,000 in loan loss provisions during the
years ended December 31, 1999 and 1998, respectively. At December 31, 1999 and
1998, the Bank's allowance for loan losses was $788,000 and $760,000,
respectively, and the Bank's loans delinquent for ninety days or more were
$420,000 and $600,000, respectively. The Bank's allowance for loan losses as a
percentage of total nonperforming loans at December 31, 1999 and 1998 was
187.62% and 126.67%, respectively. 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.
Non-interest Income. Non-interest income consists primarily of fees and
service charges on deposit accounts and loans, gains on sale of assets, and
other income. Non-interest income increased $27,500, or 8.8%, to $338,000 for
the year ended December 31, 1999 from $311,000 for the prior year. The increase
is the result of an increase in miscellaneous income of $24,800, which includes
a $15,600 gain on the trade-in of two automobiles.
Non-interest income decreased by $131,000, or 29.8%, to $311,000 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.
Non-interest Expense. Non-interest expense increased $969,000, or 22.5%,
to $5.3 million for the year ended December 31, 1999 from $4.3 million for the
prior year. Compensation and occupancy expenses increased by $450,000, or 22.5%
and $199,000, or 46.1%, respectively, related to the establishment of one new
branch office, the relocation of one office and the construction of two other
offices. Additionally, the Bank initiated a comprehensive marketing program
during the year ended December 31, 1999, resulting in an increase of $50,000 in
advertising expense. Such a program involves the hiring of a marketing director
and associate and an increase in various advertising media expenses.
Non-interest 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.
Provision for Income Taxes. The provision for income taxes was $826,000
and $766,000 for the years ended December 31, 1999 and 1998, respectively,
resulting in an effective income tax rate of 36.5% and 35.5%, respectively.
13
<PAGE>
Net Income. Net income increased by $50,000, or 3.6%, to $1.44 million for
the year ended December 31, 1999 from $1.39 million for the prior year. Such
increase was primarily the result of an increase of $2.2 million in net interest
income offset by a $1.1 million increase in interest expense, a $969,000
increase in the non-interest expenses and a $50,000 increase in income taxes.
Net income decreased by $163,000, or 10.5%, to $1.39 million for the year
ended December 31, 1998 from $1.55 million for the prior year. The decrease was
primarily due to an increase of $416,000, or 10.7%, in operations expenses,
partially offset by a $118,000 increase in net interest income and a $111,000
decrease in income taxes.
Liquidity and Capital Resources
The objective of 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 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 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, 1999, the
Bank had $4.9 million outstanding 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 $70.8 million. At December
31, 1999, approximately $107.6 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, 1999, 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, 1999, the Bank was in compliance with all
applicable capital requirements.
14
<PAGE>
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, 2000, which is the quarter ended March 31, 2001 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 its consolidated financial position or results of
operations.
Impact of Inflation and Changing Prices
The consolidated 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 Company'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.
15
<PAGE>
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, 1999, the Company had seven registered
market makers, 572 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
3,621,329 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
1,553,600 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, 1999 High Low Declared
----------------- ------- ------- --------------
Fourth quarter $ 6.69 $ 5.88 $ .025
Third quarter 7.88 6.00 .025
Second quarter 9.88 7.25 .020
First quarter 10.44 8.75 .020
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 by the Bank to the Company, 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 or, if
declared, what the amount of dividends will be, or whether such dividends, once
declared, will continue.
16
<PAGE>
<PAGE>
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,
1999 and 1998 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,
1999 and 1998, 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
January 21, 2000
2.
<PAGE>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
---------------------------------
Notes 1999 1998
-------------- ------------- -------------
<S> <C> <C> <C>
Assets
Cash and amounts due from depository institutions $ 1,563,041 $ 1,474,529
Interest-bearing deposits in other banks 2,049,256 12,349,621
Total cash and cash equivalents 1 and 14 3,612,297 13,824,150
Investment securities available for sale 1,3, 8 and 14 48,707,248 62,734,597
Investment securities held to maturity 1,3, 8 and 14 19,468,185 --
Loans receivable 1,4 and 14 202,031,204 177,876,607
Premises and equipment 1,5,9 and 13 4,867,039 2,132,110
Foreclosed real estate 1 80,222 105,620
Federal Home Loan Bank of New York stock 8 2,355,100 2,007,500
Interest receivable 1,6 and 14 1,539,332 1,315,997
Other assets 12 608,061 450,231
Total assets $ 283,268,688 $ 260,446,812
Liabilities and retained earnings
Liabilities
Deposits 7 and 14 $ 220,532,547 $ 223,270,284
Securities sold under agreements to repurchase 8 and 14 24,800,000 --
Capitalized lease obligations 1 and 9 2,596,031 --
Advance payments by borrowers for taxes and insurance 2,262,379 1,910,748
Other liabilities 11 and 12 1,129,787 832,722
Total liabilities 251,320,744 226,013,754
Commitments and contingencies 9,13 and 14
Stockholders' equity 2, 10, 11 and 12
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; 3,621,329 and
3,901,375 shares outstanding at December 31, 1999
and 1998, respectively 3,901,375 3,901,375
Additional paid-in capital 13,796,320 13,827,420
Retained earnings - substantially restricted 18,695,283 17,512,659
Unearned employees' stock ownership plan
("ESOP") shares (1,246,874) (1,393,565)
Treasury stock, at cost; 280,046 at December 31, 1999 (2,849,415) --
Accumulated other comprehensive income - Unrealized
(loss) gain on securities available for sale, net (348,745) 585,169
Total stockholders' equity 31,947,944 34,433,058
Total liabilities and stockholders' equity $ 283,268,688 $ 260,446,812
</TABLE>
See notes to consolidated financial statements.
3.
<PAGE>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
Notes 1999 1998
---------- ------------ ------------
<S> <C> <C> <C>
Interest income:
Loans 1 and 4 $ 13,578,153 $ 12,238,409
Mortgage-backed securities 1 3,364,053 2,680,973
Investment securities 1 919,245 59,004
Other interest-earning assets 343,980 1,035,176
Total interest income 18,205,431 16,013,562
Interest expense:
Deposits 1 and 7 9,967,444 9,816,890
Borrowings 8 750,224 --
Capitalized lease 223,733 --
Total interest expense 10,941,401 9,816,890
Net interest income 7,264,030 6,196,672
Provision for loan losses 1 and 4 60,000 44,556
Net interest income after provision for loan losses 7,204,030 6,152,116
Non-interest income:
Fees and service charges 214,282 211,087
Gain on sale of loans -- 511
Miscellaneous 123,596 98,828
Total non-interest income 337,878 310,426
Non-interest expenses:
Salaries and employee benefits 11 2,451,107 2,001,495
Net occupancy expense of premises 1 and 9 631,919 432,525
Equipment 1 575,672 445,123
Advertising 287,500 237,375
Director fees 182,775 168,043
Federal insurance premium 130,941 124,842
(Gain) loss from foreclosed real estate 1 (3,265) 27,444
Miscellaneous 1,019,288 870,219
Total non-interest expenses 5,275,937 4,307,066
Income before income taxes 2,265,971 2,155,476
Income taxes 1 and 12 826,173 765,750
Net income $ 1,439,798 $ 1,389,726
Net income per common share: 1
Basic $ 0.41 $ 0.37
Diluted $ 0.41 $ 0.37
Weighted average number common shares
outstanding: 1
Basic 3,540,149 3,758,362
Diluted 3,553,275 3,758,362
</TABLE>
See notes to consolidated financial statements.
4.
<PAGE>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income $ 1,439,798 $ 1,389,726
Other comprehensive income, net of income taxes:
Unrealized holding (losses) gains on securities
available for sale, net of income taxes
of $548,489, and $(108,597), respectively (933,914) 167,259
----------- -----------
Comprehensive income $ 505,884 $ 1,556,985
=========== ===========
</TABLE>
5.
<PAGE>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Additional earnings - Unearned
Common Paid-In Substantially ESOP
Stock Capital Restricted Shares
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Balance - December 31, 1997 $ -- $ -- $ 16,122,933 $ --
Net income for the year ended December 31, 1998 -- -- 1,389,726 --
Net proceeds from initial public stock offering 3,901,375 13,830,168 -- --
Common stock acquired by ESOP -- -- -- (1,466,910)
ESOP shares committed to be released -- (2,748) -- 73,345
Unrealized gain on securities available for sale, net
of income tax effect -- -- -- --
Balance - December 31, 1998 3,901,375 13,827,420 17,512,659 (1,393,565)
Net income for the year ended December 31, 1999 -- -- 1,439,798 --
Dividends declared -- -- (257,174) --
ESOP shares committed to be released -- (31,100) -- 146,691
Purchase of 280,046 shares of treasury stock -- -- -- --
Unrealized (loss) on securities available for sale, net
of income losses (benefit) -- -- -- --
------------ ------------ ------------ ------------
Balance - December 31, 1999 $ 3,901,375 $ 13,796,320 $ 18,695,283 $ (1,246,874)
============ ============ ============ ============
<CAPTION>
Accumulated
Other Total
Treasury Comprehensive Stockholders'
Stock Income Equity
------------ ------------- -------------
<S> <C> <C> <C>
Balance - December 31, 1997 $ -- $ 417,910 $ 16,540,843
Net income for the year ended December 31, 1998 -- -- 1,389,726
Net proceeds from initial public stock offering -- -- 17,731,543
Common stock acquired by ESOP -- -- (1,466,910)
ESOP shares committed to be released -- -- 70,597
Unrealized gain on securities available for sale, net
of income tax effect -- 167,259 167,259
Balance - December 31, 1998 $ -- 585,169 34,433,058
Net income for the year ended December 31, 1999 -- -- 1,439,798
Dividends declared -- -- (257,174)
ESOP shares committed to be released -- -- 115,591
Purchase of 280,046 shares of treasury stock (2,849,415) -- (2,849,415)
Unrealized (loss) on securities available for sale, net
of income losses (benefit) -- (933,914) (933,914)
------------ ------------ ------------
Balance - December 31, 1999 $ (2,849,415) $ (348,745) $ 31,947,944
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
6.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,439,798 $ 1,389,726
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes (105,739) (19,069)
Depreciation and amortization of premises and equipment 393,588 209,586
Amortization of premiums, net of accretion of discounts
and deferred loan fees 353,564 393,352
Provision for loss on real estate owned -- 15,444
Provision for loan losses 60,000 44,556
Gain on sale of foreclosed real estate (8,265) --
Gain on sale of loans -- (511)
Gain on trade-in of automobile (15,625) --
(Increase) decrease in accrued interest receivable (223,335) (96,019)
Decrease (increase) in other assets 201,264 (320,836)
Increase (decrease) in other liabilities 499,151 (130,240)
ESOP shares committed to be released 115,591 70,597
------------ ------------
Net cash provided by operating activities 2,709,992 1,556,586
------------ ------------
Cash flows from investing activities:
Purchases of securities available for sale (18,984,642) (46,890,204)
Principal repayments on securities available for sale 31,178,455 35,962,187
Proceeds from calls of securities available for sale -- 2,000,000
Purchase of securities held to maturity (19,421,500) --
Net increase in loans receivable (24,343,935) (25,795,395)
Proceeds from sales of loans receivable -- 68,055
Net additions to premises and equipment (512,892) (227,792)
Proceeds from foreclosed real estate 113,885 --
Purchase of Federal Home Loan Bank of New York stock (347,600) (203,400)
------------ ------------
Net cash (used in) investing activities (32,318,229) (35,086,549)
------------ ------------
Cash flows from financing activities
(Decrease) increase in deposits (2,737,737) 28,189,280
Increase in advance payments by
borrowers for taxes and insurance 351,631 251,133
Repayment of capitalized lease obligation (3,969) --
Proceeds from securities sold under agreements to repurchase 30,400,000 --
Repurchase of securities sold under agreements to repurchase (5,600,000) --
Dividends paid (164,126) --
Treasury stock purchased (2,849,415) --
Net proceeds from issuance of common stock -- 14,449,719
Common stock acquired by ESOP -- (1,466,910)
------------ ------------
Net cash provided by financing activities 19,396,384 41,423,222
------------ ------------
Net (decrease) increase in cash and cash equivalents (10,211,853) 7,893,259
Cash and cash equivalents - beginning 13,824,150 5,930,891
------------ ------------
Cash and cash equivalents - ending $ 3,612,297 $ 13,824,150
============ ============
</TABLE>
See notes to consolidated financial statements.
7.
<PAGE>
LIBERTY BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 10,821,622 $ 9,816,890
============ ============
Income taxes, net of refunds $ 868,305 $ 991,941
============ ============
Supplemental disclosure of noncash activities:
Loans receivable transferred to foreclosed real estate $ 80,222 $ --
============ ============
Unrealized (depreciation) appreciation on securities
available for sale $ (1,482,403) $ 275,856
Deferred income taxes 548,489 (108,597)
------------ ------------
$ (933,914) $ 167,259
============ ============
Property acquired under capital leases $ 2,600,000 $ --
============ ============
Issuance of common stock in exchange for deposits $ -- $ 3,281,824
============ ============
Dividends declared, but not paid $ 93,048 $ --
============ ============
</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 are provided utilizing the straight-line
method over the estimated useful lives of the assets or lease terms,
whichever is shorter. Property under capital leases is amortized over the
lease terms.
The annual provisions for depreciation and amortization have been computed
in accordance with the following ranges of useful lives:
Buildings 30 to 50 years
Property under capital leases Term of lease
Furniture and fixtures 3 to 10 years
Leasehold and capital lease improvements Shorter of estimated useful
life or term of lease.
Motor vehicles 3 years
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 by dividing net
income by the weighted average number of shares of common stock
outstanding, adjusted for unearned shares of the ESOP. For the year ended
December 31, 1998, such amounts were calculated based upon income for the
entire year, 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 for 1999 includes dilutive effects of 12,618 shares related to
securities to be issued in regard to the recognition retention plan and
508 shares in regard to stock options outstanding (see note 11). There
were no potentially dilutive securities or contracts at or during the year
ended December 31, 1998.
Reclassification
Certain amounts for the year ended December 31, 1998 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 AND STOCKHOLDERS' EQUITY
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, 1999, there were no shares of
Preferred Stock issued.
During the year ended December 31, 1999, the Company repurchased, in the open
market, 280,046 shares of its common stock at an aggregate cost of $2,849,415.
These repurchases are reflected as treasury stock in the consolidated statements
of financial condition. As of December 31, 1999, the Company has obtained
regulatory approval and currently plans to repurchase an additional 72,930
shares of its common stock.
The MHC waived its right to receive its share of common stock dividends declared
by the Company during the quarter ended June 30, 1999. The Office of Thrift
Supervision (the "OTS") requires that retained earnings be restricted by the
amount of such waived dividends. Such restricted amounts aggregated $41,355 at
and for the year ended December 31, 1999.
13.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------------------
Gross Unrealized Fair
Amortized -------------------------- -----------
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale
Mortgage-backed securities:
Due after one year through five years $ 1,897,299 $ -- $ 14,794 $ 1,882,505
Due after five years through ten years 47,363,512 169,477 708,246 46,824,743
----------- ----------- ----------- -----------
$49,260,811 $ 169,477 $ 723,040 $48,707,248
----------- ----------- ----------- -----------
Held to maturity
U.S. Government Agencies obligations
Due after one year through five years $10,680,229 $ -- $ 94,544 $10,585,685
Due after five years through ten years 8,787,956 -- 22,081 8,765,875
----------- ----------- ----------- -----------
$19,468,185 $ -- $ 116,625 $19,351,560
----------- ----------- ----------- -----------
<CAPTION>
December 31, 1998
--------------------------------------------------------
Gross Unrealized Fair
Amortized -------------------------- -----------
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available for sale
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
----------- ----------- ----------- -----------
</TABLE>
The amortized cost and carrying value of securities at December 31, 1999 and
1998 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, 1999 and 1998. There were no sales of securities held to maturity
during the year ended December 31, 1999.
Securities available for sale with a carrying value of approximately $92,000 and
$184,000 at December 31, 1999 and 1998, respectively, were pledged to secure
public funds.
14.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS RECEIVABLE
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Real estate mortgage:
One-to-four family $ 182,100,635 $ 166,573,554
Multi-family 2,142,912 1,199,558
Commercial 7,552,838 3,366,711
------------- -------------
191,796,385 171,139,823
------------- -------------
Consumer:
Home equity loans 10,615,900 7,133,410
Other 234,832 388,225
------------- -------------
10,850,732 7,521,635
------------- -------------
Total loans 202,647,117 178,661,458
------------- -------------
Less:
Allowance for loan losses 787,961 760,496
Deferred loan fees (costs) and discounts (172,048) 24,355
------------- -------------
615,913 784,851
------------- -------------
$ 202,031,204 $ 177,876,607
============= =============
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Balance - beginning $ 421,000 $ 570,000
New loans -- 143,000
Repayments (7,000) (292,000)
------------- -------------
Balance - ending $ 414,000 $ 421,000
============= =============
</TABLE>
15.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS RECEIVABLE (Cont'd.)
Nonaccrual loans totalled approximately $315,000 and $593,000 at December 31,
1999 and 1998, respectively. Interest income on these loans, which is recorded
only when collected, amounted to approximately $ - 0 - and $6,000 for the years
ended December 31, 1999 and 1998, respectively. Had these loans been performing
in accordance with their original terms, interest income for the years ended
December 31, 1999 and 1998, would have been approximately $31,000 and $51,000,
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,
-----------------------
1999 1998
--------- ---------
Balance - beginning $ 760,496 $ 723,319
Provisions charged to operations 60,000 44,556
Loans charged off, net of recoveries (32,535) (7,379)
--------- ---------
Balance - ending $ 787,961 $ 760,496
========= =========
At December 31, 1999 and 1998, loans serviced for the benefit of others totalled
approximately $49,000 and $104,000, respectively.
5. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Land $ 181,386 $ 181,386
Buildings and improvements 628,179 628,179
Capital leases 2,600,000 --
Leasehold improvements 1,610,897 1,425,240
Furniture and equipment 1,904,618 1,638,611
------------- -------------
6,925,080 3,873,416
Less accumulated deprecation and amortization (2,058,041) (1,741,306)
------------- -------------
$ 4,867,039 $ 2,132,110
============= =============
</TABLE>
16.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PREMISES AND EQUIPMENT (Cont'd.)
Assets recorded under capital leases include the following:
December 31,
-------------------------
1999 1998
----------- ---------
Land and building $ 2,600,000 $ --
Less accumulated amortization (120,000) --
----------- ---------
Net capital lease assets $ 2,479,570 $ --
=========== =========
6. INTEREST RECEIVABLE
December 31,
------------------------
1999 1998
---------- ----------
Loans, net of allowance for uncollected
interest of $12,544 (1999) and $35,469 (1998) $ 880,630 $ 846,417
Investment securities 658,702 468,167
Other interest-earnings assets -- 1,413
---------- ----------
$1,539,332 $1,315,997
========== ==========
7. DEPOSITS
December 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
-------- ------------ -------- ------------
Demand accounts:
Non-interest bearing -- $ 4,600,293 --% $ 4,398,178
Money Market 2.79% 2,213,206 2.64% 2,586,665
NOW 1.56% 10,313,583 1.59% 9,995,226
Savings and clubs 3.00% 51,420,608 3.00% 49,196,933
Certificates of deposit 5.23% 151,984,857 5.46% 157,093,282
------------ ------------
4.40% $220,532,547 4.60% $223,270,284
------------ ------------
17.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DEPOSITS (Cont'd.)
The scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
----------- -----------
(In Thousands)
<S> <C> <C>
One year or less $ 107,577 $ 106,338
After one through three years 43,474 49,541
After three years 934 1,214
----------- -----------
$ 151,985 $ 157,093
----------- -----------
</TABLE>
At December 31, 1999 and 1998, certificates of deposit of $100,000 or more
totaled approximately $10,626,000 and $8,312,000, respectively.
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Money Market $ 69,991 $ 74,610
NOW 148,130 145,010
Savings and club 1,390,649 1,464,058
Certificates of deposit 8,393,680 8,158,431
----------- -----------
10,002,450 9,842,109
Less penalties for
early withdrawal of certificates of deposits 35,006 25,219
----------- -----------
$ 9,967,444 $ 9,816,890
----------- -----------
</TABLE>
18.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
<TABLE>
<CAPTION>
Interest December 31,
Lender Maturity Rate 1999
---------------------- ----------------- -------- ------------
<S> <C> <C> <C>
Federal Home Loan Bank April 3, 2000 5.24% $ 4,800,000
Federal Home Loan Bank February 15, 2000 5.83% 20,000,000
-----------
$24,800,000
===========
</TABLE>
Information concerning securities sold under agreements to repurchase is
summarized as follows:
December 31,
1999
------------
Average balance during the year $13,258,000
Average interest rate during the year 5.15%
Maximum month end balance $24,800,000
Investment securities underlying the
agreement at year end
Carrying value $35,179,000
Fair value $35,074,000
The Bank also has an available line of credit with Federal Home Loan Bank of New
York ("FHLB") subject to terms and conditions of the lender's overnight advance
program, in the amount of $27,869,000 at December 31, 1999. Advances under this
line of credit, which expires on December 1, 2000, are made for one day periods
only. The advances are secured by stock of the FHLB in the amount of $2,355,100
at December 31, 1999. No advances were outstanding at December 31, 1999.
9. LEASE COMMITMENTS
The Bank leases certain branches and the land on which the main office is
constructed. The leases generally provide for the leasee to pay taxes,
maintenance, insurance and certain other operating costs of the leased property.
The leases on most of the properties contain renewal provisions.
The following is a summary of future minimum payments under capitalized leases
and under operating leases that have initial or remaining noncancelable terms in
excess of one year at December 31, 1999.
19.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LEASE COMMITMENTS (Cont'd.)
<TABLE>
<CAPTION>
Capitalized Operating
Leases Leases
----------- ---------
(In Thousands)
<S> <C> <C>
Year Ending December 31,
2000 $ 272 $ 178
2001 280 132
2002 288 54
2003 297 28
2004 305 27
Years subsequent 4,596 --
Total minimum net lease payments 6,038 $ 419
Imputed interest 3,442
Present value of minimum capitalized lease payments $2,596
</TABLE>
Rentals, including related expenses, under long-term operating leases for
certain branch offices amounted to approximately $242,000 and $168,000 for the
years ended December 31, 1999 and 1998, respectively.
10. 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,
----------------------
1999 1998
-------- --------
(In Thousands)
GAAP capital $ 25,949 $ 25,537
Less: unrealized loss (gain) on securities
available for sale 349 (585)
-------- --------
Core and tangible capital 26,298 24,952
Add: loan valuation allowance 788 761
-------- --------
Total regulatory capital $ 27,086 $ 25,713
======== ========
20.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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
------- ------ -------- ------- ------ -----
(Dollars in Thousands)
<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, 1999
--------------------------------------------------------------------
To Be Well
Capitalized
Under Prompt
Minimum Capital Corrective
Actual Requirements Actions Provisions
------------------- ---------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ -------- ------- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk-weighted assets) $27,086 21.63% $10,015 8.00% $12,519 10.00%
Tier 1 Capital
(to risk-weighted assets) 26,298 21.01% -- -- 7,512 6.00%
Core (Tier 1) Capital
(to adjusted total assets) 26,298 9.38% 11,213 4.00% 14,016 5.00%
Tangible Capital
(to adjusted total assets) 26,298 9.38% 4,205 1.50% -- --
</TABLE>
As of December 22, 1998, 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 years ended December 31, 1999 and 1998.
21.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations,
including vested benefits of $1,221,745 and
$1,034,596, respectively $ 1,221,745 $ 1,051,640
----------- -----------
Projected benefit obligation - beginning $ 1,474,206 $ 1,366,657
Service cost 52,621 76,958
Interest cost 89,222 90,832
Actuarial loss (222,658) 108,154
Settlements (51,515) (168,395)
Curtailment (120,131) --
----------- -----------
Projected benefit obligation - ending 1,221,745 1,474,206
----------- -----------
Plan assets at fair value - beginning 1,088,924 1,047,217
Actual return on plan assets 145,703 99,221
Employer contribution 56,640 110,881
Settlements (51,515) (168,395)
----------- -----------
Plan assets at fair value - ending 1,239,752 1,088,924
----------- -----------
Projected benefit obligation (less than) in excess of plan assets (18,007) 385,282
Unrecognized net transition obligation -- (61,080)
Unrecognized gain (loss) 78,502 (251,397)
Unrecognized past service liability -- (15,644)
----------- -----------
Accrued pension cost included in other liabilities $ 60,495 $ 57,161
----------- -----------
</TABLE>
22.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BENEFIT PLANS (Cont'd.)
Retirement plan (Cont'd.)
Net periodic pension cost for the plan included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Service cost $ 52,621 $ 76,958
Interest cost 89,222 90,832
Expected return on plan assets (88,259) (83,174)
Amortization of net transition obligation 8,867 11,822
Amortization of unrecognized loss 8,391 9,686
Amortization of unrecognized past service liability 1,326 1,768
Settlement charge -- 28,711
Curtailment gain (12,194) --
--------- ---------
Net periodic pension cost
included in salaries and employee benefits $ 59,974 $ 136,603
========= =========
</TABLE>
Assumptions used in accounting for the plan were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Discount rate 6.00% 6.50%
Rate of increase in compensation 0.00% 4.50%
Long-term rate of return on plan assets 6.00% 8.00%
</TABLE>
Effective October 1, 1999, the plan ceased all benefit accruals. The Bank
expects to terminate the plan during 2000.
23.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit
obligation - beginning $ 480,423 $ 555,818
Service cost 18,971 22,317
Interest cost 30,744 36,703
Actuarial (gain) (135,112) (110,281)
Premiums/claims paid (11,939) (24,134)
--------- ---------
Accumulated postretirement benefit
obligation - ending (includes benefit obligation for
retirees and dependents of $176,846 and
$253,686, respectively 383,087 480,423
Employer contribution (11,939) (24,134)
Premium paid 11,939 24,134
--------- ---------
Accumulated and unfunded postretirement
benefit obligation 383,087 480,423
Unrecognized transition obligation (372,099) (396,905)
Unrecognized gain 288,741 160,424
--------- ---------
Accrued expense included in other liabilities $ 299,729 $ 243,942
--------- ---------
</TABLE>
The following table sets forth the components of net periodic postretirement
benefits costs:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Service cost $ 18,971 $ 22,317
Interest cost on
accumulated postretirement benefit obligation 30,744 36,703
Amortization of transition obligation 24,806 24,806
Amortization of unrecognized gain (6,795) --
--------- ---------
Net postretirement benefit cost included in
compensation and employee benefits $ 67,726 $ 83,826
--------- ---------
</TABLE>
24.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BENEFIT PLANS (Cont'd.)
Assumptions used in accounting for the plan are as follows:
Year Ended December 31,
------------------------
1999 1998
-------- ---------
Discount rate 6.50% 6.50%
Rate of increase in compensation 4.50% 4.50%
For the years ended December 31, 1999 and 1998, 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, 1999 and 1998,
by $52,000 and $76,000, respectively, and the aggregate of the service and
interest components of net periodic postretirement benefit cost for the years
ended December 31, 1999 and 1998, by $10,000 and $12,000, respectively.
Decreasing the assumed medical cost trend by one percent in each year would
decrease the accumulated postretirement benefit obligation as of December 31,
1999 and 1998, by $43,000 and $63,000, respectively, and the aggregate of the
service and interest components of net periodic postretirement benefit cost for
the year ended December 31, 1999 and 1998 by $8,000 and $10,000, respectively.
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 has and 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
years ended December 31, 1999 and 1998, the Bank made cash contributions of
$254,000 and $133,000, respectively, to the ESOP, of which $147,000 and $73,000,
respectively, was applied to loan principal. The loan had an outstanding balance
of $1,247,000 and $1,394,000 at December 31, 1999 and 1998, respectively.
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 $116,000 and $71,000 for the years ended
December 31, 1999 and 1998, respectively.
25.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BENEFIT PLANS (Cont'd.)
ESOP (Cont'd.)
The ESOP shares are summarized as follows:
December 31,
--------------------------
1999 1998
---------- ----------
Allocated shares 22,004 --
Shares committed to be released -- 7,335
Unreleased shares 124,687 139,356
146,691 146,691
Fair value of unreleased shares $ 748,122 $1,254,204
Recognition and Retention Plan
During 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 of authorized but
unissued common stock or sufficient funds for the RRP to acquire 73,345
shares of common stock of the Company. Such shares 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. As of December 31, 1999, no shares had been
transferred to the to RRP trust. During the year ended December 31, 1999,
the Company/Bank awarded 70,203 shares of Company common stock under the
RRP and recorded a related expense of $77,000.
Stock Option Plan
During 1999, 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 at an option price
of $10.06. During the year ended December 31, 1999, options for 7,852
shares were forfeited. At December 31, 1999, options for 165,148 shares
were outstanding, of which none were vested.
26.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. BENEFIT PLANS (Cont'd.)
The Company, as permitted by Statement No. 123, recognized compensation
cost for stock options granted based on the intrinsic value method instead
of the fair value based method. The weighted average fair value of options
granted during 1999, all of which have exercise prices equal to the market
price of the Company's common stock as of the grant date, is estimated
using the Black-Sholes option-pricing model. Such fair value and the
assumptions used for estimating fair value are as follows:
Weighted average grant - date fair value per share $ 4.02
Expected common stock dividend yield 0.84%
Expected volatility 38.38%
Expected option life 5 years
Risk-free interest rate 5.88%
Had the Company used the fair value based method, net income for the year
ended December 31, 1999 would have decreased to approximately $1,363,000
and net income per share, both basic and diluted, would have been reduced
to $ 0.38.
Savings incentive plan
The Bank has a savings incentive plan effective October 1, 1999 pursuant
to Section 401(k) of the Internal Revenue Code, for all eligible employees
of the Bank. Employees may elect to save from 1% to 10% of their eligible
compensation, of which the Bank will match up to 4% of eligible
compensation. Total savings incentive plan expense for the year ended
December 31, 1999 was approximately $10,000.
12. 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, 1999, 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.
27.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES (Cont'd.)
The components of income taxes are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Current tax expense:
Federal income $ 856,416 $ 717,141
State income 75,496 67,678
--------- ---------
931,912 784,819
--------- ---------
Deferred tax (benefit):
Federal income (96,830) (17,545)
State income (8,909) (1,524)
--------- ---------
(105,739) (19,069)
--------- ---------
$ 826,173 $ 765,750
========= =========
</TABLE>
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,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Federal income tax expense $ 770,430 $ 732,862
Increases (reductions) in income taxes resulting from:
New Jersey savings institution tax,
net of federal income tax effect 43,947 43,662
Other items, net 11,796 (10,774)
--------- ---------
Effective income tax $ 826,173 $ 765,750
========= =========
</TABLE>
28.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES (Cont'd.)
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,
------------------------
Deferred tax assets 1999 1998
--------- ---------
<S> <C> <C>
Benefit plans $ 116,255 $ 88,084
Deferred loan fees 45,033 62,947
Uncollected interest 11,694 13,061
Allowance for loss on loans 283,508 280,052
Capitalized lease 44,374 --
Unrealized loss on securities available for sale 204,818 --
705,682 444,144
Deferred tax liabilities
Unrealized gain on securities available for sale -- 343,671
Depreciation 135,621 125,692
Bad debt deduction in excess of base year 210,967 269,915
346,588 739,278
Net deferred tax assets (liabilities) included in
other assets (liabilities) $ 359,094 $(295,134)
</TABLE>
Income taxes payable of $49,390 at December 31, 1999 are included in other
liabilities and refundable income taxes of $14,606 at December 31, 1998 are
included in other assets.
13. 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.
29.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS AND CONTINGENCIES (Cont'd.)
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,
---------------------------
1999 1998
---------- ----------
Mortgage $4,643,000 $4,934,000
Fixed rate home equity loans 621,000 297,000
Home equity credit lines 120,000 --
---------- ----------
$5,384,000 $5,231,000
========== ==========
At December 31, 1999, of the $5,384,000 in commitments to originate loans,
$2,659,000 are for loans at fixed interest rates ranging from 8.25% to 8.50%,
$2,605,000 are for loans at adjustable interest rates with initial rates ranging
from 5.50% to 8.50% and $120,000 are for home equity lines at the prime rate
plus 1%.
At December 31, 1999 and 1998, outstanding commitments related to unused home
equity lines of credit totalled approximately $3,993,000 and $3,141,000,
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.
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 Company and its subsidiaries are also parties 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.
30.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. 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.
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 and held to maturity 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.
Borrowings
Fair value is estimated using rates currently offered for liabilities of
similar remaining maturities, or when available, quoted market prices.
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.
31.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
The carrying amounts and fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1999 1998
----------------------- -----------------------
Carrying Estimated Carrying Estimated
Financial assets Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,612 $ 3,612 $ 13,824 $ 13,824
Investment securities 68,175 68,059 62,735 62,735
Loans receivable 202,031 202,818 177,877 181,861
Interest receivable 1,539 1,539 1,316 1,316
Financial liabilities
Deposits 220,533 221,219 223,270 224,714
Borrowings 24,800 24,792 -- --
Commitments
To originate loans 5,384 5,384 5,231 5,231
Unused lines of credit 3,993 3,993 3,141 3,141
</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.
32.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PARENT ONLY FINANCIAL INFORMATION
The Company's primary business is the operation of 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, 1999 and 1998. The Company had no earnings prior to June 30, 1998.
Condensed statements of financial condition
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 271,735 $ 120,319
Investments held to maturity 3,489,427 --
Investment in Liberty Bank 26,041,585 25,536,981
ESOP loan receivable 1,246,874 1,393,565
Receivable from Liberty Bank 947,804 7,398,861
Accrued interest receivable 43,567 --
----------- -----------
Total assets $32,040,992 $34,449,726
=========== ===========
Liabilities and stockholder's equity
Dividends payable $ 93,048 $ --
Income taxes payable -- 16,668
Stockholders' equity 31,947,944 34,433,058
----------- -----------
Total liabilities and stockholders' equity $32,040,992 $34,449,726
=========== ===========
</TABLE>
33.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
Condensed statements of income
Year From Inception
Ended (June 30, 1998) to
December 31, December 31,
1999 1998
------------ ------------------
Interest $ 251,763 $ 59,984
Equity in earnings of Liberty Bank 1,322,928 738,151
---------- ----------
1,574,691 798,135
Expenses 132,751 13,012
---------- ----------
Income before income taxes 1,441,940 785,123
Income taxes 2,142 16,668
---------- ----------
Net income $1,439,798 $ 768,455
========== ==========
34.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
Condensed statements of cash flows
<TABLE>
<CAPTION>
Year From Inception
Ended (June 30, 1998) to
December 31, December 31,
1999 1998
------------ -----------------
<S> <C> <C>
Cash flow from operating activities
Net income $ 1,439,798 $ 768,455
Equity in earnings of Liberty Bank (1,322,927) (738,151)
(Decrease) increase in other liabilities (16,668) 16,668
Increased in accrued interest receivable (43,567) --
Accretion of discounts (2,552) --
------------ ------------
Net cash provided by operating activities 54,084 46,972
------------ ------------
Investing activities
Purchase of investment securities (3,486,875) --
Decrease (increase) in loan receivable from Liberty Bank 6,451,057 (7,398,861)
Loan made to ESOP -- (1,466,910)
Repayment of loan receivable from ESOP 146,691 73,345
Purchase of 100% of the outstanding stock of Liberty Bank -- (8,865,770)
Net cash provided by (used in) investing activities 3,110,873 (17,658,196)
------------ ------------
Financing activities
Net proceeds from sale of common stock -- 17,731,543
Purchase of treasury stock (2,849,415) --
Dividends paid (164,126) --
------------ ------------
Net cash (used in) provided by financing activities (3,013,541) 17,731,543
------------ ------------
Net increase in cash and cash equivalents 151,416 120,319
Cash and cash equivalents at beginning of period 120,319 --
------------
Cash and cash equivalents at end of period $ 271,735 $ 120,319
============ ============
</TABLE>
35.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands Except Per Share Data)
Interest income $4,220 $4,595 $4,676 $4,714
Interest expense 2,523 2,803 2,803 2,812
Net interest income 1,697 1,792 1,873 1,902
Provision for loan losses 15 15 15 15
Non-interest income 77 92 78 91
Non-interest expense 1,268 1,372 1,371 1,265
Income taxes 180 197 195 254
Net income $ 311 $ 300 $ 370 $ 459
Net income per common
share: Basic/diluted 0.085 0.085 0.106 0.131
Year Ended December 31, 1999
First Second Third Fourth
Quarter Quarter Quarter Quarter
(In Thousands Except Per Share Data)
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) $0.111 $0.094
(1) Liberty Bancorp, Inc. converted to stock form on June 30, 1998.
36.
<PAGE>
LIBERTY BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. 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, 2000, the quarter ended March 31, 2001 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.
37.
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
CONSENT OF INDEPENDENT AUDITORS
We have issued our report dated January 21, 2000, accompanying the consolidated
financial statements of Liberty Bancorp, Inc. and Subsidiaries included in the
Annual Report on Form 10-KSB for the year ending December 31, 1999. We consent
to the incorporation by reference of said report in the Registration Statement
of Liberty Bancorp, Inc. on Form S-8, (File No. 333-95819, effective February 1,
2000).
\s\ Radics & Co., LLC
Pine Brook, New Jersey
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,563
<INT-BEARING-DEPOSITS> 2,049
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 48,707
<INVESTMENTS-CARRYING> 19,468
<INVESTMENTS-MARKET> 19,352
<LOANS> 202,031
<ALLOWANCE> 788
<TOTAL-ASSETS> 283,269
<DEPOSITS> 220,533
<SHORT-TERM> 24,800
<LIABILITIES-OTHER> 5,988
<LONG-TERM> 0
0
0
<COMMON> 3,901
<OTHER-SE> 28,047
<TOTAL-LIABILITIES-AND-EQUITY> 283,269
<INTEREST-LOAN> 13,578
<INTEREST-INVEST> 4,283
<INTEREST-OTHER> 344
<INTEREST-TOTAL> 18,205
<INTEREST-DEPOSIT> 9,967
<INTEREST-EXPENSE> 10,941
<INTEREST-INCOME-NET> 7,264
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,276
<INCOME-PRETAX> 2,266
<INCOME-PRE-EXTRAORDINARY> 1,440
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,440
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 7.04
<LOANS-NON> 315
<LOANS-PAST> 7
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 760
<CHARGE-OFFS> 32
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 788
<ALLOWANCE-DOMESTIC> 788
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 85
</TABLE>
