<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
(Mark One) FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ______________ to _______________
Commission File No. 0-25057
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NORTHFIELD BANCORP, INC.
- --------------------------------------------------------------------------------
(Name of Small Business Issuer in Its Charter)
Maryland 52-2098394
- ----------------------------------------- ----------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
8005 Harford Road, Baltimore, Maryland 21234
- --------------------------------------- -------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (410) 665-7900
--------------
Securities registered under Section 12(b) of the Exchange Act:
Not Applicable
Securities registered under Section 12(g) of the Exchange Act:
Common stock, par value, $.01 per share
---------------------------------------
Check whether the issuer: (1) filed all reports required by Section 13 or 15(d)
of the Exchange Act during the past 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ______
------
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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 amendment to this Form 10-KSB. [ X ]
Registrant's revenues for the fiscal year ended December 31, 1999: $3,516,029
As of March 14, 2000, the aggregate market value of the 475,442 shares of Common
Stock of the registrant issued and outstanding held by non-affiliates on such
date was approximately $6.1 million based on the closing sales price of $12.75
per share of the registrant's Common Stock on March 14, 2000 as reported on the
OTC Electronic Bulletin Board. For purposes of this calculation, it is assumed
that directors, executive officers and beneficial owners of more than 10% of the
registrant's outstanding voting stock are affiliates.
Number of shares of Common Stock outstanding as of March 14, 2000: 475,442
shares
Transitional Small Business Disclosure Format Yes ________ No X
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DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of the
Form 10-KSB into which the document is incorporated:
1. Portions of the Annual Report to Stockholders for the fiscal year ended
December 31, 1999. (Part II)
2. Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
Item 1. Description of Business
- --------------------------------
General
The Company. Northfield Bancorp, Inc. (the "Company'), is a Maryland
corporation organized at the direction of the Board of Directors of Northfield
Federal Savings Bank ("us" or "we," etc., or the "Bank") in March 1998 to
acquire all of the capital stock to be issued by the Bank in its conversion from
mutual to stock form (the "Conversion"). The Conversion was completed on
November 12, 1998, with the Company issuing 475,442 shares of its common stock,
par value $0.01 per share (the "Common Stock") to the public, and the Bank
issuing all of its issued and outstanding common stock to the Company. Prior to
the Conversion, the Company did not engage in any material operations. The
Company does not have any significant assets other than the capital stock of the
Bank, cash and a note receivable from its ESOP. The Company's principal
business is the business of the Bank. At December 31, 1999, the Company had
total assets of $53.6 million, deposits of $36.6 million and stockholders'
equity of $7.1 million.
Northfield Federal Savings Bank. The Bank is a federal stock savings bank
operating through two offices in Baltimore County, Maryland. The Bank was
founded in 1923 as a federally chartered savings association with the name
"Northfield Federal Savings." Upon completion of the Conversion, the Bank
adopted the name "Northfield Federal Savings Bank." The Bank's deposits are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC") under the Savings Association Insurance Fund ("SAIF") and the Bank is a
member of the Federal Home Loan Bank ("FHLB") of Atlanta.
The Company's and Bank's executive offices are located at 8005 Harford Road,
Baltimore, Maryland 21234 and the main telephone number is (410) 665-7900.
Market Area
We consider our primary market area to be Baltimore County, Maryland. In
addition, we focus our lending efforts on Harford and Cecil Counties, Maryland.
The principal sources of employment in Baltimore, Harford and Cecil Counties are
the services, retail trade and manufacturing industries.
Financial Modernization Legislation
On November 12, 1999, President Clinton signed legislation which could have a
far-reaching impact on the financial services industry. The Gramm-Leach- Bliley
("G-L-B") Act authorizes affiliations between banking, securities and insurance
firms and authorizes bank holding companies and national banks to engage in a
variety of new financial activities. Among the new activities that will be
permitted to bank holding companies are securities and insurance brokerage,
securities underwriting, insurance underwriting and merchant banking. The Board
of Governors of the Federal Reserve System (the "Federal Reserve Board"), in
consultation with the Secretary of the Treasury, may approve additional
financial activities. The G-L-B Act, however, prohibits future acquisitions of
existing unitary savings and loan holding companies, like the Company, by firms
which are engaged in commercial activities and limits the permissible activities
of unitary holding companies formed after May 4, 1999.
The G-L-B Act imposes new requirements on financial institutions with respect to
customer privacy. The G-L-B Act generally prohibits disclosure of customer
information to non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such disclosure. Financial
institutions are further required to disclose their privacy policies to
customers annually. Financial institutions, however, will be required to comply
with state law if it is more protective of customer privacy than the G-L- B Act.
The G-L-B Act directs the federal banking agencies, the National Credit Union
Administration, the Secretary of the Treasury, the Securities and Exchange
Commission and the Federal Trade Commission, after consultation with the
National Association of Insurance Commissioners, to promulgate implementing
regulations within six months of enactment. The privacy provisions will become
effective six months thereafter.
2
<PAGE>
The G-L-B Act contains significant revisions to the FHLB System. The G-L-B
Act imposes new capital requirements on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net earnings formula. The G-L-B Act expands the permissible uses of FHLB
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small agri-
businesses. The G-L-B Act makes membership in the FHLB voluntary for federal
savings associations.
The G-L-B Act contains a variety of other provisions including a
prohibition against ATM surcharges unless the customer has first been provided
notice of the imposition and amount of the fee. The G-L-B Act reduces the
frequency of Community Reinvestment Act examinations for smaller institutions
and imposes certain reporting requirements on depository institutions that make
payments to non-governmental entities in connection with the Community
Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and
authorizes a federal savings association that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.
The Company is unable to predict the impact of the G-L-B Act on its
operations at this time. Although the G-L-B Act reduces the range of companies
with which the Company may affiliate, it may facilitate affiliations with
companies in the financial services industry.
3
<PAGE>
Lending Activities
Most of our loans are construction/permanent loans on one- to four-family
residences. We also make multi-family real estate mortgage loans as well as
commercial real estate, home equity and savings account loans. We also purchase
commercial leases from a local leasing company.
The following table sets forth information concerning the types of loans
held by us at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1999 1998
------- -------
Amount % Amount %
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential mortgage loans... $39,464 88.20% $31,332 81.51%
Land............................................. 173 .39 123 .32
Construction loans............................... 2,208 4.93 3,664 9.53
Commercial real estate loans..................... 1,961 4.38 2,478 6.45
Commercial and auto loans collateralized by lease
finance receivables............................. 698 1.56 643 1.67
Consumer loans:
Home equity lines of credit...................... 134 .30 125 .33
Loans secured by deposits........................ 108 .24 73 .19
------- ------ ------- ------
Total loans................................ 44,746 100.00% 38,438 100.00%
====== ======
Add:
Premiums......................................... 15 --
Less:
Undisbursed portion of loans in process.......... 1,402 2,223
Deferred loan origination fees................... 320 316
Allowance for losses.............................. 183 197
------- -------
Loan portfolio, net......................... $42,856 $35,702
======= =======
</TABLE>
The following table sets forth the estimated maturity of our loan
portfolio at December 31, 1999. The table does not include the effects of
possible prepayments or scheduled repayments. All mortgage loans are shown as
maturing based on the date of the last payment required by the loan agreement.
<TABLE>
<CAPTION>
Due After
Due Within 1 Through Due After
One Year After 5 Years After 5 Years After
December 31, 1999 December 31, 1999 December 31, 1999 Total
----------------- ----------------- ----------------- -------
(In thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family............... $129 $ 312 $39,023 $39,464
Land.............................. -- 123 50 173
Commercial........................ -- 230 1,731 1,961
Construction...................... -- -- 2,208 2,208
Home equity......................... 134 -- -- 134
Passbook............................ 108 -- -- 108
Commercial and auto loans
collateralized by lease finance
receivables...................... 57 641 -- 698
---- ------ ------- -------
Total.......................... $428 $1,306 $43,012 $44,746
==== ====== ======= =======
</TABLE>
4
<PAGE>
The next table sets forth at December 31, 1999, the dollar amount of
all loans due one year or more after December 31, 1999 which have predetermined
interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
Rate Adjustable Rates
------------- ----------------
<S> <C> <C>
(In thousands)
Real estate loans:
One- to four-family........................ $39,335 $ --
Construction............................... 2,208 --
Commercial real estate..................... 1,704 257
Land....................................... 173 --
Commercial and auto loans collateralized by
lease finance receivables................... 641 --
------- ------
Total..................................... $44,061 $257
======= ======
</TABLE>
Residential Construction Loans. Our most significant loan product is
lending to finance the construction of one- to four-family residential property
to the individuals who will be the owners and occupants upon completion of
construction. Construction/permanent loans account for a majority of our
single-family loan originations. We have historically emphasized these loans
and have established a reputation in our market areas for this type of lending.
We believe that we can continue to respond to the demand for these loans by
borrowers engaged in building and development of single-family residential
properties in the growing communities of our market areas. Virtually all of
these loans are structured to be converted to permanent loans at the end of the
construction phase. Borrowers are required to pay interest during the
construction period. Loan proceeds are disbursed according to a draw schedule
and we inspect the progress of the construction before additional funds are
disbursed. The interest rate we charge is fixed during the construction phase
(based on the prime rate) and fixed thereafter, and these loans generally have
30 year terms.
While we believe we have substantial experience in construction
lending, this type of lending involves a higher degree of credit risk than long
term financing of residential properties. Our risk of loss on a construction
loan is dependent largely upon the accuracy of the initial estimate of the
property's value at completion of construction and the estimated cost of
construction. If the estimate of construction cost and the marketability of the
property upon completion of the project prove to be inaccurate, we may be
compelled to advance additional funds to complete the construction.
Furthermore, if the final value of the completed property is less than the
estimated amount, the value of the property might not be sufficient to assure
the repayment of the loan.
Our underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, we consider the amount of
the borrower's equity in the project, independent valuations and reviews of cost
estimates and pre-construction sale, the builder's financial report and the
reputation of the borrower. In addition, we review the builder's financial
reports and other information. We have longstanding relationships with several
builders in our area and do most of our construction lending with them.
One- to Four-Family Residential Loans. We also originate standard
one- to four-family residential mortgage loans secured by property located in
our primary market area. These are made in amounts up to 80% of the lesser of
the appraised value or purchase price, with private mortgage insurance or
additional collateral required on loans with a loan to-value ratio in excess of
80%. Although, all of our one- to four-family loans are underwritten to conform
with secondary market standards, we originate such loans with the intention that
we will hold them in our portfolio rather than sold in the secondary mortgage
market.
5
<PAGE>
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable
in the event the borrower transfers ownership of the property securing the
mortgage loan without our consent.
Commercial Real Estate Loans. Our commercial real estate loans are
secured primarily by office buildings and multi-family residential investment
properties. Some of our commercial real estate loans are participations with
other financial institutions in our market area. Commercial real estate loans
are made in amounts of up to 75% of the appraised value of the property. Our
commercial real estate loans generally have variable rates with terms of five
years and amortization schedules of up to 30 years. At December 31, 1999, the
largest of our commercial real estate loans was a $809,000 loan participation,
of which our interest totaled $304,000. This loan was secured by an office
building.
Commercial real estate lending, which accounted for approximately
4.38% of our loan portfolio at December 31, 1999, entails significant additional
risks compared to single-family residential property lending. These loans
typically involve large loan balances to single borrowers or groups of related
borrowers. The repayment of these loans typically is dependent on the
successful operation of the real estate project securing the loan. These risks
can be significantly affected by supply and demand conditions in the market for
office and retail space and may also be subject to adverse conditions in the
economy. To minimize these risks, we generally limit this type of lending to
our market area and to borrowers who are otherwise well known to us.
Commercial and Automobile Leases. For over ten years, we have
purchased commercial finance leases from a local leasing company. These leases
are primarily on office equipment. We purchase the lease, but all servicing is
conducted by the seller. The average length of the individual leases ranges
from 3.5 to four years and the average size ranges from $1,500 to $5,000. At
December 31, 1999, our portfolio of commercial leases totaled $144,000 or .32%,
of total loans. Our portfolio includes both recourse and non-recourse
purchases, but in accordance with OTS comments, we are purchasing on a recourse
basis only.
Commercial leases are subject to the same risk of default as direct
commercial loans. Although these loans provide for higher interest rates and
shorter terms than permanent single-family residential real estate loans, they
involve more credit risk because of the type and nature of the collateral.
Commercial business loans are typically made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business, and
repayment is therefore substantially dependent on the success of the business
itself.
Since the program began, we have experienced losses of $17,000 in
connection with these leases, all involving non-recourse purchases. As
indicated above, we are purchasing on a recourse basis only.
As of December 31, 1999, we invested $554,000 in automobile finance
leases from another local company. These lease purchases, in which we
participate with other local lenders, are structured in the same manner as the
commercial finance leases discussed above. All of our purchases from the
automobile leasing company are with full recourse. Automobile finance leases
are subject to the same risk of default as direct automobile loans. These loans
involve a higher risk of default than loans secured by one- to four-family
residential loans because they are secured by automobiles, which are rapidly
depreciable assets. The repossessed collateral for a defaulted automobile loan
may not provide an adequate source of repayment of the outstanding loan balance
as a result of the greater likelihood of damage, loss or depreciation, and the
remaining deficiency may not warrant further substantial collection efforts
against the borrower. In addition, automobile loan collections depend on the
borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, illness or personal bankruptcy. The application
of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may also limit the amount which can be recovered on such loans.
Consumer Loans. Our consumer loans consist of home equity lines of
credit and savings account loans. We began offering home equity lines of credit
in December 1996. These loans are secured by a real estate mortgage with our
security interest in the borrower's primary residence. These are variable rate
loans indexed to the prime rate with
6
<PAGE>
terms of 20 years. Our savings account loans are made for up to 90% of the
balance on deposit in savings accounts or certificates of deposit. These loans
are secured by an interest in the borrower's account.
CRA Compliance. We are periodically examined by the OTS for our
record of meeting the credit needs of our local communities pursuant to the
Community Reinvestment Act ("CRA"). The OTS rates the performance of a savings
institution under applicable CRA performance standards and assigns one of the
following ratings: Outstanding, Satisfactory, Needs to Improve, or Substantial
Non-Compliance. In our 1999 CRA evaluation, we received a "Satisfactory" CRA
rating. We had a "Needs to Improve" CRA rating in 1998 and in response to this
rating, we adopted a CRA action plan in 1998.
In implementing our CRA action plan, we purchased ten loans totaling
$864,000. The security property for all ten purchased loans is located in
moderate-income census tracts in the Bank's assessment area. Seven of the loans
totaling $641,000 are to low or moderate-income borrowers. For the reasons set
forth in purchasing these loans, the Bank was assigned a CRA rating of
"Satisfactory record of meeting community credit needs" in its 1999 CRA
evaluation. See " -- Regulation -- Community Reinvestment Act."
Loan Approval Authority and Underwriting. Our president may approve
all commercial leases that we purchase up to $25,000 and all home equity lines
of credit up to that amount. All other loans are approved by our Board of
Directors.
Upon receipt of a completed loan application from a prospective
borrower, we order a credit report. Income and certain other information is
verified. If necessary, additional financial information may be requested. An
appraisal or other estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are prepared by outside
fee appraisers who are approved by the Board of Directors.
Either title insurance or a title opinion is generally required on all
real estate loans. Borrowers also must obtain fire and casualty insurance.
Flood insurance is also required on loans secured by property which is located
in a flood zone.
Loan Originations, Purchases and Sales. All of the loans we originate
are intended to be held in our portfolio rather than sold in the secondary
mortgage market. Our one- to four-family residential loans do, however, conform
to secondary market guidelines. We may, therefore, decide to sell loans in the
secondary market in the future. We occasionally purchase loan participations
from other financial institutions. These participation interest purchases are
reflected in the above table. Generally, the purchase of participation
interests involves the same risks as would the origination of the same types of
loans as well as the additional risk that results from the fact that we have
less control over the origination and subsequent administration of such loans.
Loan Commitments. Written commitments are given to prospective
borrowers on all approved real estate loans. Generally, the commitment requires
acceptance within 10 days of the date of issuance. At December 31, 1999,
commitments to cover originations of mortgage loans were $1.2 million. We
believe that virtually all of our commitments will be funded.
Loans to One Borrower. The maximum amount of loans which we may make
to any one borrower may not exceed the greater of $747,000 or 15% of our
unimpaired capital and unimpaired surplus. We may lend an additional 10% of our
unimpaired capital and unimpaired surplus if the loan is fully secured by
readily marketable collateral. Our loan-to-one borrower limit was approximately
$747,000 at December 31, 1999. At December 31, 1999, our largest loan
outstanding had a balance of $554,000.
7
<PAGE>
Nonperforming and Problem Assets
Loan Delinquencies. Generally when a mortgage loan becomes 30 days
past due, a notice of nonpayment is sent to the borrower. Additional notices
and letters from us are sent if the loan remains delinquent after 45, 60 and 75
days. If the loan continues in a delinquent status for 90 days past due and no
repayment plan is in effect, a notice of right to cure default is sent to the
borrower giving 30 additional days to bring the loan current before foreclosure
is commenced. Our Board meets regularly to determine when foreclosure
proceedings should be initiated. The customer will be notified when foreclosure
is commenced. At December 31, 1999, our loans past due between 30 and 89 days
totaled $316,000.
Loans are reviewed on a monthly basis and are generally placed on a
nonaccrual status when the loan becomes more than 90 days' delinquent or when,
in our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
Nonperforming Assets. The following table sets forth information
regarding our nonperforming loans. As of the dates indicated, we had no loans
categorized as troubled debt restructurings within the meaning of SFAS 15 and no
real estate owned.
<TABLE>
<CAPTION>
At December 31,
-----------------
1999 1998
-------- -------
(In thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate:
One- to four-family........................................ $ -- $ --
Commercial real estate..................................... -- --
------- ------
Total real estate loans................................. -- --
Commercial and auto loans collateralized by lease finance
receivables.......................................... -- --
Consumer loans:
Loans secured by deposits.................................. -- --
Home improvement........................................... -- --
Automobile................................................. -- --
Other consumer............................................. -- --
------- ------
Total................................................... -- --
------- ------
Accruing loans delinquent 90 days or more:
Real estate:
One- to four-family........................................ $ -- $ --
Commercial real estate..................................... 8 263
Commercial and auto loans collateralized by lease finance
receivables.............................................. -- 33
Consumer loans............................................... -- --
Loan secured by deposits.................................... -- --
Home equity lines of credit................................. -- --
Automobile.................................................. -- --
Other consumer.............................................. -- --
------- ------
Total................................................... 8 296
------- ------
Total nonperforming loans............................ $ 8 $ 296
======= ======
Total non-performing loans as a percentage of total net loans.. .02% .83%
======= ======
Total non-performing assets as a percentage of total assets.... .01% .67%
======= ======
</TABLE>
8
<PAGE>
We had a $90,000 loan which at December 31, 1999 was not classified as
nonaccrual, 90 days past due or restructured, but where known information causes
us to have serious concerns as to the ability of these borrowers to comply with
their current loan terms.
Classified Assets. OTS regulations provide for a classification
system for problem assets of savings associations which covers all problem
assets. Under this classification system, problem assets of savings
associations such as ours are classified as "substandard," "doubtful," or
"loss." An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the borrower or of the collateral
pledged, if any. Substandard assets include those characterized by the
"distinct possibility" that the savings association will sustain "some loss" if
the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full, on the basis of currently existing facts, conditions, and, values, highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that do not
currently warrant classification in one of the aforementioned categories.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. A savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS, which may order the establishment of additional general or specific
loss allowances. A portion of general loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining a savings association's regulatory capital. Specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
At December 31, 1999, $15,000 of our assets were classified as special
mention, none of our assets were classified as doubtful and none of our assets
were classified as substandard or loss.
Foreclosed Real Estate. Real estate acquired by us as a result of
foreclosure is recorded as "real estate owned" until such time as it is sold.
When real estate owned is acquired, it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less estimated disposal
costs. Any write down of real estate owned is charged to operations. At
December 31, 1999, we did not have any real estate owned.
Allowance for Loan Losses. Our policy is to provide for losses on
unidentified loans in our loan portfolio. A provision for loan losses is
charged to operations based on management's evaluation of the losses that may be
incurred in our loan portfolio. The evaluation, including a review of all loans
on which full collectibility of interest and principal may not be reasonably
assured, considers: (i) our past loan loss experience, (ii) known and inherent
risks in our portfolio, (iii) adverse situations that may affect the borrower's
ability to repay, (iv) the estimated value of any underlying collateral, and (v)
current economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance
for loan losses at a level that we consider adequate for the inherent risk of
loss in our loan portfolio, actual losses could exceed the balance of the
allowance for loan losses and additional provisions for loan losses could be
required. In addition, our determination as to the amount of its allowance for
loan losses is subject to review by the OTS, as part of its examination process.
After a review of the information available, the OTS might require the
establishment of an additional allowance.
9
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998
-------- -------
(In thousands)
<S> <C> <C>
Balance at beginning of period............ $ 197 $ 216
Charge-offs:
- ------------
Real estate loans:
One- to four-family..................... -- (16)
Commercial real estate.................. -- --
--------- ------
Total real estate loans.............. (16)
Commercial loans collateralized by lease
finance receivables.................. (14) (3)
--------- ------
(14) (3)
--------- ------
Consumer loans:
Loan secured by deposits............... -- --
Home equity line of credit............. -- --
Automobile............................. -- --
Other consumer......................... -- --
--------- ------
Recoveries................................ -- --
--------- ------
Net recoveries (charge-offs).............. (14) (19)
--------- ------
Additions charged to operations........... -- --
--------- ------
Balance at end of period.................. $ 183 $ 197
========= ======
Allowance for loan losses to total
non-performing loans at end of period... 2,287.50% 66.55%
========= ======
Allowance for loan losses to net loans
at end of period........................ .43% .55%
========= ======
Net loans charge-offs..................... (14) (19)
--------- ------
Provision for loan losses................. -- --
--------- ------
Ratio of net charge-offs to average
loans outstanding during the period..... .04% .06%
========= ======
</TABLE>
10
<PAGE>
The following table illustrates the allocation of the allowance for
loan losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1999 1998
--------------------- ----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family........................ $ 80 88.20% $ 80 81.51%
Construction............................... -- 4.93 -- 9.53
Land....................................... -- .39 -- .32
Commercial real estate loans............... 60 4.38 60 6.45
Commercial and auto loans collateralized by
lease finance receivables................. 43 1.56 57 1.67
Consumer loans............................... -- .54 -- .52
---- ------ ----- ------
Total allowance for loan losses.......... $183 100.00% $ 197 100.00%
==== ====== ===== ======
</TABLE>
Investment Activities
Investment Securities. We are required under federal regulations to
maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. For additional
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" in the Annual
Report to Stockholders for the year ended December 31, 1999 (the "Annual
Report"), which is filed as Exhibit 13 to this report. The level of liquid
assets varies depending upon several factors, including: (i) the yields on
investment alternatives, (ii) our judgment as to the attractiveness of the
yields then available in relation to other opportunities, (iii) expectation of
future yield levels, and (iv) our projections as to the short-term demand for
funds to be used in loan origination and other activities. We classify our
investment securities as "held to maturity", "available-for-sale" or "trading"
in accordance with SFAS No. 115. At December 31, 1999, our investment portfolio
policy allowed investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored agency obligations,
(iii) mortgage-backed securities, (iv) certificates of deposit, (v) federal
funds, including FHLB overnight and term deposits, (vi) A-rated state and local
municipal bonds, and (vii) A-rated corporate bonds.
Mortgage-Backed Securities. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of single-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. Our
mortgage-backed securities portfolio consists of participations or pass-through
certificates issued by the Federal Home Loan Mortgage Corporation (the "FHLMC"),
the Federal National Mortgage Association ("FNMA") and the Government National
Mortgage Association ("GNMA"). GNMA certificates are guaranteed as to principal
and interest by the full faith and credit of the United States, while FHLMC and
FNMA certificates are guaranteed by those agencies only.
Expected maturities will differ from contractual maturities due to scheduled
repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
11
<PAGE>
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the
life of the underlying mortgages.
We have also in the past made investments in real estate mortgage
investment conduits ("REMICs"). REMICs are securities derived by reallocating
the cash flows from mortgage-backed securities or pools of mortgage loans in
order to create multiple classes, or tranches, of securities with coupon rates
and average lives that differ from the underlying collateral as a whole. At
December 31, 1998 and December 31, 1999, we had no investments in REMICs.
The following table sets forth the carrying (i.e., amortized cost)
value of our investment securities and mortgage-backed securities, at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
---------------
1999 1998
------- ------
<S> <C> <C>
(In thousands)
Held to Maturity:
Interest-bearing deposits in other banks.. $1,039 $4,834
Other investments......................... -- 799
Mortgage-backed securities................ 524 2,123
Federal Home Loan Bank of Atlanta stock... 445 273
------ ------
Total.................................... $2,008 $8,029
====== ======
Available for Sale:
Other investments......................... $4,874 $ --
Mortgage-backed securities................ 2,551 --
------ ------
Total.................................... $7,425 $ --
====== ======
</TABLE>
12
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for our investment portfolio at December 31,
1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years
-------------------- -------------------- -------------------- -------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
--------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held to
maturity:
Interest-bearing deposits $ 660 6.72% $379 5.94% $ -- --% $ -- --%
Mortgage-backed
securities.............. -- -- -- -- -- -- 524 5.55
FHLB stock............... 445 7.25 -- -- -- -- -- --
-------- -------- -------- ------
Total............... $1,105% --% $379 5.94% $ -- --% $ 524 5.55%
======== ======== ======== ======
Securities Available for
Sale
Other investments........ $ -- --% $ -- --% $369 5.08% $4,505 7.43%
Mortgage-backed
securities.............. -- -- -- -- 95 6.48 2,456 6.35
-------- -------- -------- ------
Total............... $ -- --% $ -- --% $464 5.37% $6,961 7.05%
======== ======== ======== ======
<CAPTION>
Total Investment Portfolio
----------------------------
Weighted
Carrying Market Average
Value Value Yield
-------- ------ ---------
<S> <C> <C> <C>
Securities held to
maturity:
Interest-bearing deposits $1,039 $1,039 6.44%
Mortgage-backed
securities.............. 524 469 5.55
FHLB stock............... 445 445 7.75
------ ------
Total............... $2,008 $1,953 6.50%
====== ======
Securities Available for
Sale
Other investments........ $4,874 $4,874 7.25%
Mortgage-backed
securities.............. 2,551 2,551 6.35
------ ------
Total............... $7,425 $7,425 6.94%
====== ======
</TABLE>
13
<PAGE>
Sources of Funds
Deposits and FHLB borrowings are our major external source of funds for
lending and other investment purposes. Funds are also derived from the receipt
of payments on loans and prepayment of loans and, to a much lesser extent,
maturities of investment securities and mortgage-backed securities, borrowings
and operations. Scheduled loan principal repayments are a relatively stable
source of funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally from
within our primary market area through the offering of a selection of deposit
instruments including regular savings accounts, money market accounts, and term
certificate accounts. IRA accounts are also offered. Deposit account terms
vary according to the minimum balance required, the time period the funds must
remain on deposit, and the interest rate. The interest rates paid by us on
deposits are set weekly at the direction of our senior management. Interest
rates are determined based on our liquidity requirements, interest rates paid by
our competitors, and our growth goals and applicable regulatory restrictions and
requirements. We do not accept brokered deposits.
The following table sets forth information about our average deposit
balances and interest rates during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1999 1998
----------------- -----------------
Average Average Average Average
Balance Rate Balance Rate
------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Now accounts............. $ 2,554 1.64% $ 1,870 3.08%
Money market deposits.... 8,129 3.36 8,571 3.76
Passbook savings......... 2,822 2.71 3,243 2.88
Certificates of deposit.. 22,950 5.70 21,380 5.97
------- -------
Total.............. $36,455 4.66 $35,064 4.99
======= =======
</TABLE>
The following table indicates the amount of our certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1999.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposit
--------------- --------------
(In thousands)
<S> <C>
Three months or less........... $ 550
Over three through six months.. 318
Over six through 12 months..... 626
Over 12 months................. 2,196
------
Total........................ $3,690
======
</TABLE>
14
<PAGE>
Borrowings. Advances (borrowings), which includes a $3.0 million
long-term, fixed-rate advance and $5.9 million short-term advances, may be
obtained from the FHLB of Atlanta to supplement our supply of lendable funds.
Advances from the FHLB of Atlanta are typically secured by a pledge of our stock
in the FHLB of Atlanta, a portion of our first mortgage loans and other assets.
Each FHLB credit program has its own interest rate, which may be fixed or
adjustable, and range of maturities.
<TABLE>
<CAPTION>
At or for the
Year Ended
December 31,
-----------------------
1999 1998
---------------- -----
(Dollars in thousands)
<S> <C> <C>
Amounts outstanding at end of period:
FHLB advances............................. $5,900 $ --
Other short-term borrowings............... -- --
Weighted average rate paid on:
Other short-term borrowings............... -- --
FHLB advances............................... 4.79% --
Maximum amount of borrowings outstanding
at any month end:
FHLB advances............................. $5,900 $ --
Other short-term borrowings............... -- --
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances............................. $2,471 $ --
Other short-term borrowings............... -- --
Approximate weighted average rate paid on:
Other short-term borrowings............... -- --
FHLB advances............................. 4.95% --
</TABLE>
Competition
We compete for deposits with other insured financial institutions such as
commercial banks, thrift institutions, credit unions, finance companies, and
multi-state regional banks in our market area. Loan competition varies
depending upon market conditions. Our competition in originating real estate
loans comes primarily from commercial banks, thrift institutions, credit unions
and mortgage bankers, many of whom have greater resources than the we have.
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings institution, we
are subject to extensive regulation by the OTS and the FDIC. Our lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements, and the OTS periodically examines us for
compliance with various regulatory requirements. The FDIC also has authority to
conduct periodic examinations of us. We must file reports with the OTS
describing our activities and our financial condition and we must obtain
approvals from regulatory authorities before entering into certain transactions
such as the conversion or mergers with other financial institutions. We are
also subject to certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System ("Federal Reserve System"). Our
relationship with our depositors and borrowers is also regulated to a great
extent by federal and state law, especially in such matters as the ownership of
savings accounts and the form and content of our mortgage documents. This
supervision and regulation are primarily intended to protect depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and
15
<PAGE>
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in regulations, whether by the OTS, the FDIC or any other
government agency, could have a material adverse impact on our operations.
Insurance of Deposit Accounts. The FDIC maintains two separate funds for
the insurance of deposits up to prescribed statutory limits. The Bank Insurance
Fund ("BIF") insures the deposits of commercial banks and the SAIF insures the
deposits of savings institutions. We are a member of the SAIF. The FDIC is
authorized to establish separate annual assessment rates for deposit insurance
for members of the BIF and the SAIF. We are required to pay assessments based
on a percent of our insured deposits to the FDIC for insurance of our deposits
by the SAIF. The FDIC is required to set semi-annual assessments for SAIF-
insured institutions at a rate determined by the FDIC to be necessary to
maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured
deposits or at a higher percentage of insured deposits that the FDIC determines
to be justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
The assessment rate for an insured depository institution is determined by
the assessment risk classification assigned to the institution by the FDIC based
on the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.
The FDIC's current assessment schedule for SAIF deposit insurance sets the
assessment rate for well-capitalized institutions with the highest supervisory
ratings at zero and institutions in the worst risk assessment classification are
assessed at the rate of 0.27% of insured deposits. In addition, FDIC-insured
institutions are required to pay assessments to the FDIC to help fund interest
payments on certain bonds issued by the Financing Corporation ("FICO"), an
agency of the federal government established to finance takeovers of insolvent
thrifts. Until December 31, 1999, SAIF-insured institutions were required to
pay FICO assessments at five times the rate at which Bank Insurance Fund ("BIF")
members were assessed. After December 31, 1999, both BIF and SAIF members will
be assessed at the same rate for FICO payments.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (i) tangible capital equal to at
least 1.5 % of total adjusted assets, (ii) core capital equal to at least 4% (3%
if the institution has received the highest rating on its most recent
examination) of total adjusted assets, and (iii) risk-based capital equal to at
least 8% of total risk-weighted assets. In addition, the OTS may require that a
savings institution that has a risk-based capital ratio less than 8%, a ratio of
Tier 1 capital to risk-weighted assets of less than 4% or a ratio of Tier 1
capital to adjusted total assets of less than 4% (3% if the institution has
received the highest rating on its most recent examination) take certain actions
to increase its capital ratios. If the institution's capital is significantly
below the minimum required levels or if it is unsuccessful in increasing its
capital ratios, the OTS may significantly restrict its activities.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders'
equity (including retained earnings), non-cumulative perpetual preferred stock
and minority interests in the equity accounts of consolidated subsidiaries,
certain non-withdrawable accounts and pledged deposits of mutual savings
associations and qualifying supervisory goodwill, less non-qualifying intangible
assets, certain mortgage servicing rights and certain investments. Tier 1 has
the same definition as core capital.
Risk-based capital equals the sum of core capital plus supplementary
capital. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt,
16
<PAGE>
mandatory convertible subordinated debt, intermediate-term preferred stock, the
portion of the allowance for loan losses not designated for specific loan losses
and up to 45% of unrealized gains on equity securities. Overall, supplementary
capital is limited to 100% of core capital. A savings institution must calculate
its risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans, and other assets. At December 31, 1999, we were in compliance with all
regulatory capital requirements as is shown on the table below.
<TABLE>
<CAPTION>
Percent
Amount of Assets
--------- ------------
(Dollars in thousands)
<S> <C> <C>
Tangible capital................ $5,300 9.83%
Tangible capital requirement.... 808 1.50
------ -----
Excess........................ $4,492 8.33%
====== =====
Core capital.................... $5,300 9.83%
Core capital requirement........ 2,156 4.00
------ -----
Excess........................ $3,144 5.83%
====== =====
Risk-based capital.............. $5,483 19.20%
Risk-based capital requirement.. 2,284 8.00
------ -----
Excess........................ $3,199 11.20%
====== =====
</TABLE>
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A
savings institution will be considered to have a "normal" level of interest rate
risk exposure if the decline in its net portfolio value after an immediate 200
basis point increase or decrease in market interest rates (whichever results in
the greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital will be based on the institution's Thrift
Financial Report filed two quarters earlier. Savings institutions with less
than $300 million in assets and a risk-based capital ratio above 12% are
generally exempt from filing the interest rate risk schedule with their Thrift
Financial Reports. However, the OTS may require any exempt institution that it
determines may have a high level of interest rate risk exposure to file such
schedule on a quarterly basis and may be subject to an additional capital
requirement based upon its level of interest rate risk as compared to its peers.
Due to our size and risk-based capital level, we are exempt from the interest
rate risk component.
At December 31, 1999, we were "well-capitalized" under applicable
regulations.
Dividend and Other Capital Distribution Limitations. Under OTS regulations,
we are not permitted to pay dividends on our capital stock if our regulatory
capital would thereby be reduced below the amount then required for the
liquidation account established for the benefit of certain of our depositors at
the time of our conversion to stock form.
17
<PAGE>
Savings associations must submit notice to the OTS prior to making a
capital distribution (including cash dividends, stock repurchases and amounts
paid to stockholders of another institution in a cash merger) if (a) they would
not be well capitalized after the distribution, (b) the distribution would
result in the retirement of any of the association's common or preferred stock
or debt counted as its regulatory capital, or (c) the association is a
subsidiary of a holding company. A savings association must make application to
the OTS to pay a capital distribution if (x) the association would not be
adequately capitalized following the distribution, (y) the association's total
distributions for the calendar year exceeds the association's net income for the
calendar year to date plus its net income (less distributions) for the preceding
two years, or (z) the distribution would otherwise violate applicable law or
regulation or an agreement with or condition imposed by the OTS.
At December 31, 1999, we had an aggregate total of approximately $1.7
million that was available for distribution to the Company as dividends or other
capital distributions without application to the OTS under the foregoing
regulations.
Qualified Thrift Lender Test. Savings institutions must meet a Qualified
Thrift Lender test. We must maintain at least 65% of our portfolio assets
(total assets less intangible assets, property we use in conducting our business
and liquid assets in an amount not exceeding 20% of total assets) in Qualified
Thrift Investments to satisfy the test. Qualified Thrift Investments consist
primarily of residential mortgage loans and mortgage-backed and other securities
related to domestic, residential real estate or manufactured housing. The
shares of stock we own in the FHLB of Atlanta also qualify as Qualified Thrift
Investments. Subject to an aggregate limit of 20% of portfolio assets, we may
also count the following as Qualified Thrift Investments: (i) 50% of the dollar
amount of residential mortgage loans originated for sale, (ii) investments in
the capital stock or obligations of any service corporation or operating
subsidiary as long as such subsidiary derives at least 80% of its revenues from
domestic housing related activities, (iii) 200% of the dollar amount of loans
and investments to purchase, construct or develop "starter homes," subject to
certain other restrictions, (iv) 200% of the dollar amount of loans for the
purchase, construction or development of domestic residential housing or
community centers in "credit needy" areas or loans for small businesses located
in such areas, (v) loans for the purchase, construction or development of
community centers, (vi) loans for personal, family, household or educational
purposes, subject to a maximum of 10% of portfolio assets, and (vii) shares of
FHLMC or FNMA stock.
If we satisfy the test, we will continue to enjoy full borrowing privileges
from the FHLB of Atlanta. If a savings institution does not satisfy the test,
the institution must either convert to a bank charter or comply with the
following restrictions on its operations: (i) the institution may not engage in
any new activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution are restricted to those of a national bank; and (iii)
payment of dividends by the institution will be subject to the rules regarding
payment of dividends by a national bank. Upon the expiration of three years
from the date the institution ceases to be a Qualified Thrift Lender, it must
cease any activity, and not retain any investment unless the activity or
investment is permissible for a national bank and a savings association.
Compliance with the Qualified Thrift Lender test is determined on a monthly
basis in nine out of every 12 months. As of December 31, 1999, we were in
compliance with our Qualified Thrift Lender requirement with approximately 91%
of our assets invested in Qualified Thrift Investments, as currently defined.
Community Reinvestment Act. In enacting the CRA, the Congress required
each federal banking regulatory agency to assess an institution's record of
helping to meet the credit needs of the local communities in which the
institution is chartered, consistent with the safe and sound operation of the
institution, and to take this record into account in the agency's evaluation of
an application for a deposit facility by the institution. OTS regulations
provide that the OTS will take into account the record of performance under the
CRA for, among other things, the following applications: (i) the establishment
of branches or other deposit-accepting facilities of a savings institution; (ii)
the relocation of a main office or branch of a savings institution; (iii) the
merger or consolidation of a savings institution with another depository
institution; or (iv) acquisition by a thrift holding company of a savings
institution. A savings institution's record of CRA performance may be the basis
for denying or conditioning approval of any of these types
18
<PAGE>
of applications. The OTS rates the performance of a savings institution under
the applicable CRA performance standards and assigns one of the following
ratings: Outstanding, Satisfactory, Needs to Improve, or Substantial
NonCompliance. In our 1999 CRA evaluation, we received a rating of
"Satisfactory." See "Management's Discussion and Analysis and Results of
Operations -- CRA Compliance" in the Annual Report.
Transactions With Affiliates. Generally, transactions between a savings
institution and its affiliates are subject to certain limitations. Our
affiliates include the Company and any company which would be under common
control with us. Such transactions must be on terms as favorable to the
savings institution as comparable transactions with non-affiliates. In
addition, certain of these transactions are restricted to an aggregate
percentage of the savings institution's capital. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
the savings institution. In addition, a savings institution may not extend
credit to any affiliate engaged in activities not permissible for a bank holding
company or acquire the securities of any affiliate that is not a subsidiary.
The OTS has the discretion to treat subsidiaries of savings institution as
affiliates on a case-by-case basis.
Loans to Directors, Executive Officers and Principal Stockholders. Loans
from us to our directors, executive officers and our principal stockholders may
not be made on terms more favorable than those afforded to other borrowers. In
addition, we cannot make loans in excess of certain levels to directors,
executive officers or 10% or greater stockholders (or any of their affiliates)
unless the loan is approved in advance by a majority of our Board of Directors
with any "interested" director not voting. We are also prohibited from paying
any overdraft of any of our executive officers or directors. We are also
subject to certain other restrictions on the amount and type of loans to
executive officers and directors and must annually report such loans to our
regulators.
Liquidity Requirements. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At December 31, 1999, our required liquid
asset ratio was 4% and our actual ratio was 17.58%. Monetary penalties may be
imposed upon institution for violations of liquidity requirements.
Federal Home Loan Bank System. We are a member of the FHLB of Atlanta,
which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
funds deposited by savings institutions and proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the Board of
Directors of the FHLB.
As a member, we are required to purchase and maintain stock in the FHLB of
Atlanta in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase contracts or similar obligations at the beginning
of each year, or 1/20 of our advances from the FHLB of Atlanta, whichever is
greater. At December 31, 1999, we had $445,000 in FHLB stock, at cost, which
was in compliance with this requirement.
Federal Reserve System. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity requirements that are imposed by the OTS. At December
31, 1999, our reserve met the minimum level required by the Federal Reserve
System.
Regulation of the Company
General. The Company is registered as a savings and loan holding company
and files reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS will have enforcement authority over the Company
and any non-savings institution subsidiaries. This will permit the OTS to
restrict or prohibit activities that
19
<PAGE>
it determines to be a serious risk to us. This regulation is intended primarily
for the protection of our depositors and not for the benefit of stockholders of
the Company. The Company is also required to file certain reports with, and
comply with the rules and regulations of the Securities and Exchange Commission
under the federal securities laws.
Activities Restrictions. Since the Company will only own one savings
institution, it will be able to diversify its operations into activities not
related to banking, but only so long as we satisfy the Qualified Thrift Lender
Test. If the Company controls more than one savings institution, it would lose
the ability to diversify its operations into non-banking related activities,
unless such other savings institutions each also qualify as a Qualified Thrift
Lender and were acquired in a supervised acquisition. See "-- Qualified Thrift
Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the
OTS before acquiring control of any other savings institution or savings and
loan holding company, substantially all the assets thereof or in excess of 5% of
the outstanding shares of another savings institution or savings and loan
holding company. The Company's directors and officers or persons owning or
controlling more than 25% of the Company's stock, must also obtain approval of
the OTS before acquiring control of any savings institution or savings and loan
holding company.
The OTS may only approve acquisitions that will result in the formation of
a multiple savings and loan holding company which controls savings institutions
in more than one state if: (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
in the state of the institution to be acquired as of March 5, 1987; (ii) the
acquiror is authorized to acquire control of the savings institution pursuant to
the emergency acquisition provisions of the Federal Deposit Insurance Act; or
(iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state-chartered savings institutions).
Federal Taxation
We are subject to the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), in the same general manner as other corporations.
However, prior to August 1996, savings institutions such as us, which met
certain definitional tests and certain other conditions prescribed by the Code
could benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. The amount of
the bad debt deduction that a qualifying savings institution could claim for tax
purposes with respect to additions to its reserve for bad debts for "qualifying
real property loans" could be based upon our actual loss experience (the
"experience method") or as a percentage of our taxable income (the "percentage
of taxable income method"). Historically, we used the method that would allow
us to take the largest deduction.
In August 1996, the Code was revised to equalize the taxation of savings
institutions and banks. Savings institutions, such as us, no longer have a
choice between the percentage of taxable income method and the experience method
in determining additions to bad debt reserves. Thrifts with $500 million of
assets or less may still use the experience method, which is generally available
to small banks currently. Larger thrifts may only take a tax deduction when a
loan is actually charged off. Any reserve amounts added after 1987 will be
taxed over a six year period beginning in 1996; however, bad debt reserves set
aside through 1987 are generally not taxed. A savings institution may delay
recapturing into income its post-1987 bad debt reserves for an additional two
years if it meets a residential-lending test. This law is not expected to have
a material impact on us. At December 31, 1999, we had $577,000 of post-1987 bad
debt reserves.
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution (including distributions
made on dissolution or liquidation), unless we include the amount in income,
along with the amount deemed necessary to pay the resulting federal income tax.
If such amount is used for any purpose other than bad debt losses, including a
dividend distribution or a distribution in liquidation, it will be subject to
federal income tax at the then current rate.
20
<PAGE>
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, our AMTI is increased by an amount equal to 75% of the amount by which our
adjusted current earnings exceeds our AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). In tax years
beginning after December 31, 1997, a "small" corporation will not be subject to
the AMT because its tentative minimum tax will be treated as zero. For a tax
year beginning in 1998, a corporation that has had average annual gross receipts
of $5,000,000 or less for its 1995-1997 tax years will be a small corporation.
Once a corporation is recognized as a small corporation, it will continue to be
exempt from AMT as long as its average annual gross receipts for the prior 3-
year period is not in excess of $7,500,000. If a corporation ceases to be a
small corporation, the AMT will apply prospectively only.
The Company may exclude from its income 100% of dividends received from us
as a member of the same affiliated group of corporations. A 70% dividends
received deduction generally applies with respect to dividends received from
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company owns more than 20% of the
stock of a corporation paying a dividend. The above exclusion amounts, with the
exception of the affiliated group figure, were reduced in years in which we
availed our self of the percentage of taxable income bad debt deduction method.
Our federal income tax returns have not been audited by the IRS in the last
ten years.
State Taxation
The Company is subject to Maryland corporation income tax which is 7%. The
Company is incorporated under Maryland law.
Item 2. Description of Property
- --------------------------------
The following table sets forth certain information regarding the Bank's
offices and other material property.
<TABLE>
<CAPTION>
Book Value Deposits
Year Owned or at December 31, Approximate at December 31,
Opened Leased 1999 (1) Square Footage 1999
------ ---------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
(Deposits in thousands)
Main Office:
1844 E. Joppa Road 1983 Leased (2) $ 13,486 3,150 $20,169
Baltimore, Maryland
Branch Office:
8705 Harford Road
Baltimore, Maryland 1923 Owned 26,591 750 16,434
Executive Offices:
8005 Harford Road
Baltimore, Maryland 1998 Leased (3) 57,075 2,915 --
- -------------------------
</TABLE>
(1) Cost less accumulated depreciation and amortization.
(2) Lease has been renewed through 03/31/03.
(3) Lease commenced March 10, 1998 and will expire on June 10, 2000.
The book value of the Bank's investment in premises and equipment totaled
$97,153 at December 31, 1999.
21
<PAGE>
Personnel
At December 31, 1999, we had ten full-time employees and one part-time
employee. None of our employees are represented by a collective bargaining
group. We believe that our relationship with our employees is good.
Executive Officers Who Are Not Directors
The following table sets forth information regarding the executive officers
of the Company who do not serve on the Board of Directors.
<TABLE>
<CAPTION>
Age at
December 31,
Name 1999 Title
- ---- ---- -----
<S> <C> <C>
Anthony B. Quigley 62 Vice President
John P. Sabol, Jr. 34 Vice President, Chief Financial Officer and Treasurer
</TABLE>
Anthony B. Quigley has been employed by us since 1984 and currently
serves as the Company's Vice President and the Bank's Vice President, Security
Officer, Savings Compliance Officer and Operations Officer. He is a member of
the Glen Burnie Park Improvement Association and the Holy Trinity Roman Catholic
Church.
John P. Sabol, Jr. has been employed with us since February 1993. He
began his employment with us as a management trainee and, in November 1997, was
appointed as the Bank's Vice President and Chief Financial Officer. Upon the
formation of the Company in March 1998, he became its Vice President, Chief
Financial Officer and Treasurer. He is a member of the Financial Managers
Society.
Item 3. Legal Proceedings.
- -------------------------
The Bank is, from time to time, a party to legal proceedings arising
in the ordinary course of the Bank's business, including legal proceedings to
enforce the Bank's rights against borrowers. At December 31, 1999, there were
no legal proceedings to which the Company or the Bank was a party, or to which
any of their property was subject, which were expected by management to result
in material loss to the Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
There were no matters submitted to a vote of the security holders
during the fourth quarter of the fiscal year ended December 31, 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the sections captioned "Market and
Dividend Information" in the Annual Report, filed as Exhibit 13 hereto, is
incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
22
<PAGE>
Item 7. Financial Statements
- -----------------------------
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements and Independent Auditors' Report in the Annual Report are
incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
-------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------
For information concerning the directors of the Company, the
information contained under the section captioned "Proposal I -- Election of
Directors" in the Company's definitive Proxy Statement for the Company's 2000
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference. For information concerning the executive officers of the Company,
see "Item 1. Business -- Executive Officers Who Are Not Directors" under Part I
of this report, which is incorporated herein by reference.
For information regarding compliance with Section 16(a) of the
Exchange Act, as required by Section 405 of Regulation S-B, reference is made to
the section captioned in the Proxy Statement entitled "Section 16(a) Beneficial
Ownership Reporting Compliance," which is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the sections captioned "Executive
Compensation -- Summary Compensation Table", "Directors' Compensation" and
"Executive Compensation -- Employment Agreement" in the Proxy Statement is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the sections captioned "Voting Securities and
Principal Holders Thereof" and "Proposal I -- Election of
Directors" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements,
including any pledge by any person of securities of the
Company, the operation of which may at a subsequent date
result in a change in control of the registrant.
23
<PAGE>
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.
Item 13. Exhibits, Lists and Reports on Form 8-K.
- -------------------------------------------------
(a) List of Documents Filed as Part of this Report
----------------------------------------------
(1) a. Financial Statements. The following financial statements are
incorporated by reference from Item 7 (see Exhibit 13 hereto):
Independent Auditor's Report
Consolidated Statements of Financial Condition as of December 31, 1999
and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 1998
Notes to Consolidated Financial Statements
24
<PAGE>
b. Financial Statement Schedules. All schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because of the absence of conditions under which they are
required or because the required information is included in the consolidated
financial statements and related notes thereto.
(2) Exhibits. The following is a list of exhibits filed as part of this
Annual Report on Form 10-KSB and is also the Exhibit Index.
<TABLE>
<CAPTION>
No. Description
--- -----------
<C> <S> <C>
3.1 Articles of Incorporation of Northfield Bancorp, Inc. *
3.2 Bylaws of Northfield Bancorp, Inc. *
4 Form of Common Stock Certificate of Northfield Bancorp, Inc. **
10.1 Northfield Bancorp, Inc. 199__ Stock Option and Incentive Plan *+
10.2 Northfield Bancorp, Inc. Management Recognition Plan *+
10.3 Northfield Federal Savings Deferred Compensation Plan *+
10.4 Employment Agreement between Northfield Federal Savings and G. Ronald Jobson *+
13 Portions of the Annual Report to Stockholders
27 Financial Data Schedule
</TABLE>
- -------------------------
(*) Incorporated herein by reference from Registration Statement on Form
SB-2 filed (File No. 333-48615).
(**) Incorporated herein by reference from Registration Statement on Form
8-A filed November 12, 1998 (File No. 0-25057).
(+) Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K. There were no Current Reports on Form 8-K
-------------------
filed by the Company during the fourth quarter of the fiscal year ended December
31, 1999.
25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTHFIELD BANCORP, INC.
March 27, 2000 By: /s/ G. Ronald Jobson
------------------------------------
G. Ronald Jobson
President and Chief Executive Officer
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ G. Ronald Jobson March 27, 2000
- -----------------------------------
G. Ronald Jobson
President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ John P. Sabol, Jr. March 27, 2000
- -----------------------------------
John P. Sabol, Jr.
Vice President, Chief Financial Officer and Treasurer
(Principal Accounting and Financial Officer)
/s/ Gary R. Bozel March 27, 2000
- -----------------------------------
Gary R. Bozel
Chairman of the Board
/s/ J. Thomas Hoffman March 27, 2000
- -----------------------------------
J. Thomas Hoffman
Director
/s/ E. Thomas Lawrence, Jr. March 27, 2000
- -----------------------------------
E. Thomas Lawrence, Jr.
Director
- -----------------------------------
David G. Rittenhouse
Director
/s/ William R. Rush March 27, 2000
- -----------------------------------
William R. Rush
Director
<PAGE>
EXHIBIT 13
MARKET INFORMATION
The Common Stock is listed in the over-the-counter through the OTC
"Electronic Bulletin Board" under the symbol "NFSB". There are currently 475,442
shares of the Common Stock outstanding. The number of registered holders of
Common Stock on March 14, 2000 was 221. The high and low bid prices for the
Common Stock for the quarter ended December 31, 1999 were $11.875 and $10.25,
respectively.
The following table sets forth certain information as to the range of
the high and low bid prices for the Company's Common Stock for the calendar
quarters indicated from the commencement of trading on November 12, 1998 through
the Company's most recent fiscal year.
<TABLE>
<CAPTION>
High Bid (1) Low Bid (1) Dividends Paid
------------ ----------- ---------------
<S> <C> <C> <C>
1998:
Fourth Quarter $10.25 $10.00 --
1999:
First Quarter 10.75 9.625 --
Second Quarter 11.25 10.00 $.10
Third Quarter 10.625 10.25 --
Fourth Quarter 11.875 10.25 $.10
</TABLE>
- ---------------
(1) Quotations reflect inter-dealer price, without retail mark-up,
mark-down or commissions, and may not represent actual transactions.
The income of the Company consists of interest from an ESOP loan to the
Bank and dividends which may periodically be declared and paid by the Board of
Directors of the Bank on the common shares of the Bank held by the Company.
In addition to certain federal income tax considerations, OTS
regulations impose limitations on the payment of dividends and other capital
distributions by savings institutions. Under OTS regulations applicable to
converted savings institutions, we are not permitted to pay a cash dividend on
our common shares if our regulatory capital would, as a result of the payment of
such dividend, be reduced below the amount required for the liquidation account
established in connection with the Conversion or applicable regulatory capital
requirements prescribed by the OTS.
Savings associations must submit notice to the OTS prior to making a
capital distribution (including cash dividends, stock repurchases and amounts
paid to stockholders of another institution in a cash merger) if (a) they would
not be well capitalized after the distribution, (b) the distribution would
result in the retirement of any of the association's common or preferred stock
or debt counted as its regulatory capital, or (c) the association is a
subsidiary of a holding company. A savings association must make application to
the OTS to pay a capital distribution if (x) the association would not be
adequately capitalized following the distribution, (y) the association's total
distributions for the calendar year exceeds the association's net income for the
calendar year to date plus its net income (less distributions) for the preceding
two years, or (z) the distribution would otherwise violate applicable law or
regulation or an agreement with or condition imposed by the OTS.
We currently meet all of our regulatory requirements and, unless the
OTS determines that we are an institution requiring more than normal
supervision, we may pay dividends in accordance with the foregoing provisions of
the OTS regulations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's principal business is that of the Bank. Therefore, this
discussion relates primarily to the Bank. Our profitability depends primarily on
our net interest income, which is the difference between interest and dividend
income on our interest-earning assets, principally loans, mortgage-backed
securities and investment securities, and interest expense on our
interest-bearing deposits and borrowings. Our net earnings also are dependent,
to a lesser extent, on the level of our noninterest income (including servicing
fees and other fees) and our noninterest expenses, such as compensation and
benefits, occupancy and equipment, insurance premiums, and miscellaneous other
expenses, as well as federal income tax expense.
Forward Looking Statements
When used in this discussion and elsewhere in this Annual Report, the
words or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national economic conditions, unfavorable judicial decisions, substantial
changes in levels of market interest rates, credit and other risks of lending
and investment activities and competitive and regulatory factors could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from those anticipated or projected.
The Company does not undertake and specifically disclaims any
obligation to update any forward-looking statements to reflect occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
CRA Compliance
We are periodically examined by the OTS for our record of meeting the
credit needs of our local communities pursuant to the Community Reinvestment Act
("CRA"). The OTS rates the performance of a savings institution under applicable
CRA performance standards and assigns one of the following ratings: Outstanding,
Satisfactory, Needs to Improve, or Substantial Non-Compliance. In our 1999 CRA
evaluation, we received a "Satisfactory" CRA rating. We had a "Needs to Improve"
CRA rating in 1998 and in response to this rating, we adopted a CRA action plan
in 1998.
In implementing our CRA action plan, we purchased ten loans totaling
$864,000. The security property for all ten purchased loans is located in
moderate-income census tracts in the Bank's assessment area. Seven of the loans
totaling $641,000 are to low or moderate-income borrowers. For the reasons set
forth in purchasing these loans, the Bank was assigned a CRA rating of
"Satisfactory record of meeting community credit needs" in its 1999 CRA
evaluation.
Market Risk Disclosure
Asset/Liability Management. Our assets and liabilities may be analyzed
by examining the extent to which our assets and liabilities are interest-rate
sensitive and by monitoring the expected effects of interest rate changes on our
net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by pursuing certain
strategies designed to decrease the vulnerability of our earnings to material
and prolonged changes in interest rates.
<PAGE>
To manage the interest rate risk of this type of loan portfolio, we are
attempting to emphasize loans with shorter terms and variable interest rates and
longer term deposits. Most of the loans in our portfolio, however, have fixed
rates. Unlike many other thrift institutions who offer both adjustable and fixed
rates on single family loans and tend to emphasize adjustable rate loans under
rising interest rate conditions, our policy is to originate all of our one- to
four-family residential loans, representing 88.20% of our total loans at
December 31, 1999, with fixed rates. While we plan to emphasize the origination
of home equity loans with shorter terms and variable rates, our primary loan
product will continue to be long-term, fixed-rate construction/permanent loans.
Our interest rate risk is, therefore, significant, and our earnings will
continue to be vulnerable to a rise in prevailing interest rates.
At December 31, 1999, the average weighted term to maturity of our
mortgage loan portfolio was approximately 25 years and the average weighted term
of our fixed maturity deposits was slightly more than 16 months.
Net Portfolio Value. In recent years, we have measured our interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain time periods, based on
assumptions regarding loan prepayment and deposit decay rates formerly provided
by the OTS. However, the OTS now measures an institution's interest rate risk by
computing the amount by which the net present value of cash flow from assets,
liabilities and off balance sheet items (the institution's net portfolio value
or "NPV") would change in the event of a range of assumed changes in market
interest rates. These computations estimate the effect on an institution's NPV
from instantaneous and permanent 1% to 3% (100 to 300 basis points) increases
and decreases in market interest rates. The following table presents the
interest rate sensitivity of our NPV at December 31, 1999, as calculated by the
OTS, which is based upon quarterly information that we voluntarily provided to
the OTS.
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of Portfolio Value of Assets
Change --------------------------------------- --------------------------------------
in Rates $ Amount $ Change % Change NPV Ratio Basis Point Change
-------- -------- -------- -------- --------- ----- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 300 bp $(1,051) $(5,639) (123)% (2.27)% (1,095) bp
+ 200 bp 736 (3,852) (84) 1.52 (715) bp
+ 100 bp 2,645 (1,943) (42) 5.23 (345) bp
0 bp 4,588 8.68
- - 100 bp 6,201 1,613 35 11.30 262 bp
- - 200 bp 7,030 2,442 53 12.53 385 bp
- - 300 bp 7,424 2,836 62 13.04 436 bp
</TABLE>
While we cannot predict future interest rates or their effects on our
NPV or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit runoff and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as variable rate
loans, generally have features which restrict changes in interest rates on a
short-term basis and over the life of the loan. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
Our Board of Directors reviews our asset and liability policies and
meets regularly to review interest rate risk and trends, as well as liquidity
and capital ratios and requirements. The estimated changes of our NPV set forth
above fell within the targets established by our Board of Directors. Management
administers the policies and determinations of our Board of Directors with
respect to our asset and
<PAGE>
liability goals and strategies. We expect that our asset and liability policies
and strategies will continue as described so long as competitive and regulatory
conditions in the financial institution industry and market interest rates
continue as they have in recent years.
Average Balances, Interest and Average Yields
The following table sets forth certain information relating to our
average statement of financial condition and reflects the average yield on
assets and average cost of liabilities for the periods indicated and the average
yields earned and rates paid at the date and for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
monthly balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. We do not
believe that the use of month-end balances instead of daily balances has caused
any material difference in the information presented. For the purposes of
computing the average yield, nonaccruing loans have been included in the average
balances.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.................................... $ 39,947 $ 2,979 7.46% $ 32,216 $ 2,566 7.97%
Investment securities available for sale. 3,656 237 6.48 -- -- --
Other investments held to maturity....... -- -- -- 66 2 3.03
Mortgage-backed securities............... 2,882 154 5.34 1,984 150 7.56
Other interest-earning assets (1)........ 1,815 102 5.62 4,915 266 5.41
---------- ------- ---------- --------
Total interest-earning assets ........ 48,300 3,472 7.19 39,181 2,984 7.62
Non-interest-earning assets................ 980 636
---------- ----------
Total assets.......................... $ 49,280 $ 39,817
========== ==========
Interest-bearing liabilities:
Savings deposits......................... $ 34,323 $ 1,699 4.95 $ 35,064 $ 1,748 4.99
Short-term borrowings (2)................ 2,471 124 5.02 53 2 3.77
Long-term borrowings (3)................. 2,250 112 4.98 -- -- --
---------- ------- ---------- --------
Total interest-bearing liabilities.... 39,044 1,935 4.96 35,117 1,750 4.99
------- --------
Non-interest-bearing liabilities........... 3,015 886
---------- ----------
Total liabilities..................... 42,059 36,003
Equity..................................... 7,221 3,814
---------- ----------
Total liabilities and equity.......... $ 49,280 $ 39,817
========== ==========
Net interest income........................ $ 1,537 $ 1,234
======= =======
Net interest rate spread (4)............... 2.23% 2.63%
==== ======
Net interest-earning assets................ $ 9,356 $ 4,064
========== ==========
Net interest margin (5).................... 3.18% 3.15%
==== ======
Ratio of average interest-earning assets
to average interest-bearing liabilities... 123.70% 111.57%
====== ======
</TABLE>
- --------------------
(1) Other interest-earning assets includes interest-bearing deposits and
FHLB of Atlanta stock.
(2) Short-term borrowings includes FHLB advances and advance payments by
borrowers for expenses.
(3) Long-term borrowings include a FHLB advance.
(4) Net interest rate spread represents the difference between the average
yield on interest-earning assets and the average rate on
interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
Rate/Volume Analysis
The table shows certain information regarding changes in our interest
income and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to: (i) changes in volume (changes in volume multiplied
by old rate); and (ii) changes in rates
<PAGE>
(change in rate multiplied by old volume); and (iii) change in rate-volume
(changes in rate multiplied by the changes in volume).
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------------- ------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------------- ------------------------------------------
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------ ---- ------ ----- ------ ---- ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans........................... $ 616 $ (164) $ (39) $ 413 $ 399 $ (35) $ (6) $ 358
Investment securities available
for sale..................... 86 3 149 237 (15) -- -- (15)
Investments held to maturity.... (2) -- -- (2) 2 -- -- 2
Mortgage-backed securities...... 68 (44) (20) 4 (14) (2) -- (16)
Other interest-earning assets... (168) 10 (7) (164) 53 (19) (4) 30
------- ------ ------- ------- ------- ------- ------ -------
Total interest-earning assets. 600 (195) 83 488 425 (56) (10) 359
------- ------ ------- ------- ------- ------- ------ -------
Interest-bearing liabilities:
Deposits........................ (36) (13) -- (49) 257 15 3 275
Short-term borrowings (1)....... 81 1 40 (122) (17) (5) 5 (17)
Long-term borrowings (2)........ 112 -- -- 112 -- -- -- --
------- ------ ------- ------- ------- ------- ------ -------
Total interest-bearing
liabilities.............. 157 (12) 40 185 240 10 8 258
------- ------ ------- ------- ------- ------- ------ -------
Increase (decrease) in net interest
income........................ $ 443 $ (183) $ 43 $ 303 $ 185 $ (66) $ (18) $ 101
======= ======== ======= ======= ======= ======= ========= =========
</TABLE>
- ---------------
(1) Includes FHLB of Atlanta advances and advance payments by borrowers
for expenses.
(2) Includes a FHLB of Atlanta advance.
Comparison of Financial Condition at December 31, 1999 and December 31, 1998
Total assets increased by $9.3 million, or 21%, from $44.3 million at
December 31, 1998 to $53.6 million at December 31, 1999. Total liabilities
increased by $9.3 million, or 25%, from $37.2 million at December 31, 1998 to
$46.5 million at December 31, 1999. The increase in assets was primarily due to
increases in investments of $4.1 million and loans of $7.2 million, partially
offset by a decrease in interest bearing deposits in other banks of $3.8
million. The asset and liability balance increases were the result of investing
the proceeds of FHLB advances of $8.9 million.
Comparison of Results of Operations for the Years Ended December 31, 1999 and
1998
Net Income. Our net income increased $72,000 from $307,000 for the
fiscal year ended December 31, 1998 to $379,000 for the fiscal year ended
December 31, 1999. The primary reason for the increase was an increase in net
interest income of $303,000 and a cumulative effect of accounting change of
$9,000, offset by an increase in non-interest expense of $200,000 and in the
provision for income taxes of $38,000.
Net Interest Income. Our net interest income increased from $1.23
million for fiscal 1998 to $1.54 million for fiscal year 1999. The $303,000
increase was primarily due to interest earned on a significantly larger, but a
slightly lower yielding average loan portfolio and a substantially larger and
higher yielding average investment portfolio in fiscal 1999 compared to fiscal
1998. The utilization of an average $4.7 million of FHLB advances in fiscal 1999
compared
<PAGE>
to none in fiscal 1998, slightly offset by a decline in average deposit
balances, resulted in an increase of $184,000 in interest expense.
Provision for Loan Losses. There were no provisions for loan losses
during fiscal years 1999 and 1998. Future additions to the loan loss allowance
will be based on the analysis of the loan portfolio, and accordingly, are not
predictable.
Non-Interest Income. Non-interest income decreased slightly from
$31,000 for fiscal year 1998 to $29,000 for fiscal year 1999 due to a drop in
all other income.
Non-interest Expense. For fiscal year 1999, total non-interest expenses
were $961,000 as compared to $761,000 for fiscal 1998. Higher compensation
expenses following personnel additions, an increase in employee stock ownership
and deferred compensation expenses, and a decrease in payroll related deferred
loan origination costs contributed $129,000 to the total increase. In addition,
occupancy expense rose $28,000 in fiscal 1999 reflecting a full year's expenses
for the administrative office that opened mid-1998. The Company expects the
level of its non-interest expense to continue to increase in future periods as a
result of expenses associated with the employee stock ownership plan that the
Company implemented in connection with its stock conversion.
Our deposit insurance premium expense increased slightly during 1999 as
the result of a slight increase in deposits.
Income Tax Expense. Our income tax expense for fiscal 1999 was $234,000
compared to $196,000 for the prior year. The increase was principally the result
of an increase in pre-tax earnings. The effective tax rate fell slightly to
38.72% from 39.01%. The higher tax rate in fiscal 1998 was primarily the result
of a net operating loss of the holding company for which no income tax benefit
was recorded.
Cumulative Effect of Accounting Change
The Company early implemented SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" on January 1, 1999. In accordance with the
pronouncement's provisions, the Company reclassified approximately $1,071,000 of
mortgage-backed securities from held to maturity to trading. On January 11,
1999, the Company sold the entire trading investment for $1,048,335 and realized
a gain of $8,980, net of $5,956 tax. In addition, the Company reclassified
approximately $1,054,000 of mortgage-backed securities and $800,000 of
investments from held to maturity to available for sale. Accordingly, the net
unrealized loss of $1,328 at the date of transfer is reflected on the
consolidated statements of stockholders' equity as the cumulative effect of a
change in accounting principle, net of taxes.
Liquidity and Capital Resources
We are required to maintain minimum levels of liquid assets as defined
by OTS regulations. This requirement, which varies from time to time (currently
4%) depending upon economic conditions and deposit flows, is based upon a
percentage of our deposits and short-term borrowings. The required ratio at
December 31, 1999 was 4% and our liquidity ratio for the quarter ended December
31, 1999 was 17.58%.
Our primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the FHLB of Atlanta.
While scheduled repayments of loans and mortgage-backed securities and
maturities of investment securities are predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by the general level of
interest rates, economic conditions and competition. We use our liquidity
resources principally to fund existing and future loan commitments, to fund
maturing certificates of deposit and demand deposit withdrawals, to invest in
other interest-earning assets, to maintain liquidity, and to meet operating
expenses.
<PAGE>
Liquidity may be adversely affected by unexpected deposit outflows,
higher interest rates paid by competitors, adverse publicity relating to the
savings and loan industry, and similar matters. Management monitors projected
liquidity needs and determines the level desirable, based in part on our
commitments to make loans and management's assessment of our ability to generate
funds.
A major portion of our liquidity consists of cash and cash equivalents,
which include cash and interest-bearing deposits in other banks with a maturity
date of less than ninety days. The level of these assets is dependent upon our
operating, investing, lending and financing activities during any given period.
At December 31, 1999, cash and cash equivalents totaled $1.3 million.
Our primary investing activities include origination of loans and
purchase of investment securities and mortgage-backed securities. During the
years ended December 31, 1999 and 1998, purchases of investment securities
totaled $4.5 million and $800,000, respectively, while purchases of
mortgage-backed securities totaled $2.9 million and $1.3 million, respectively,
and loan originations and purchases totaled $13.9 million and $12.2 million,
respectively. These investments were funded in part by FHLB advances of $8.9
million, loan and mortgage-backed security repayments of $7.6 million and $7.5
million, respectively, proceeds from the sale of mortgage-backed securities
trading of $1.0 million, an increase in certificates of deposit received of
$500,000 and $2.3 million for the years ended December 31, 1999 and 1998,
respectively.
At December 31, 1999, we had $1.2 million in outstanding commitments to
originate fixed-rate loans with rates that ranged from 7.25% to 8.5% and had no
non-recourse commercial finance lease commitments outstanding. We anticipate
that we will have sufficient funds available to meet our current loan
origination commitments. Certificates of deposit which are scheduled to mature
in one year or less totaled $12.9 million at December 31, 1999. Based on
historical experience management believes that a significant portion of such
deposits will remain with us.
We are subject to federal regulations that impose certain minimum
capital requirements. At December 31, 1999 we were in compliance with all
applicable capital requirements.
Impact of Inflation and Changing Prices
Our financial statements and the accompanying notes presented elsewhere
in this report, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of our operations. As a
result, interest rates have a greater impact on our performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
Impact of New Accounting Standards
FASB Statement on Accounting for Derivative Instruments and Hedging
Activities. In June 1998, FASB issued SFAS No. 133. This Statement standardizes
the accounting for derivative instruments including certain derivative
instruments embedded in other contracts, by requiring that an entity recognize
these items as assets or liabilities in the statement of financial position and
measure them at fair value. This Statement generally provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of the changes in the fair value of the hedged asset or liability
that are attributable to the hedged risk or the earnings effect of the hedged
forecasted transaction. The Statement is effective for all fiscal quarters of
all fiscal years beginning after June 15, 1999.
The Company implemented SFAS No. 133 on January 1, 1999. In accordance
with the pronouncement's provisions, the Company reclassified approximately
$1.07 million of mortgage-backed securities from held to maturity to trading. On
January 11, 1999, the Company sold mortgage-backed securities with an aggregate
net book value of $1,033,399 for $1,048,335 and realized a gain of $8,980, net
of taxes. In addition, the Company reclassified approximately $1.05 million of
mortgage-backed securities and $800,000 of investments from held to maturity to
available for sale. Accordingly, the net unrealized loss of $1,328 at the date
of transfer is reflected on the consolidated statements of stockholders' equity
as the cumulative effect of a change in accounting principle, net of taxes.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Stockholders and Board of Directors
Northfield Bancorp, Inc.
Baltimore, Maryland
We have audited the consolidated statements of financial condition of
Northfield Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the two year period ended December 31, 1999.
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 audit 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.
F-1
<PAGE>
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Northfield Bancorp, Inc. and Subsidiary as of December 31, 1999 and 1998, and
the consolidated results of its operations and cash flows for each of the two
years in the two year period ended December 31, 1999 in conformity with
generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, the
Company adopted the Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" as of January 1,
1999.
/s/ Anderson Associates, LLP
March 3, 2000
Baltimore, Maryland
F-2
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
Assets
------
<S> <C> <C>
Cash $ 620,282 $ 166,446
Interest bearing deposits in other banks 1,038,521 4,833,876
Investments available for sale (Note 2) 4,873,550 -
Investments held to maturity (Note 2) - 799,256
Mortgage backed securities available for sale (Note 3) 2,551,277 -
Mortgage backed securities held to maturity (Note 4) 524,188 2,122,590
Loans receivable, net (Note 5) 42,856,212 35,701,656
Accrued interest receivable - loans 171,294 163,989
- investments 65,508 19,016
- mortgage backed securities 16,086 13,569
Premises and equipment, at cost, less accumulated
depreciation (Note 6) 97,153 128,325
Federal Home Loan Bank of Atlanta stock at cost (Note 7) 445,000 272,900
Deferred income taxes (Note 13) 286,708 57,526
Prepaid and refundable income taxes (Note 13) 410 -
Prepaid expenses and other assets 33,886 30,963
----------- -----------
Total assets $53,580,075 $44,310,112
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
- -----------
Deposit accounts (Note 8) $36,602,858 $36,434,786
Borrowings (Note 9) 8,900,000 -
Advance payments by borrowers for expenses 553,961 462,726
Income taxes payable (Note 13) 11,237 18,449
Other liabilities 439,377 266,230
----------- -----------
Total liabilities 46,507,433 37,182,191
Commitments and contingencies - Notes 5, 6, 9, 10, 11 and 12
Stockholders' Equity (Notes 11 and 12)
- --------------------
Serial Preferred stock $.01 par value; authorized 2,000,000
shares; none issued or outstanding
Common stock $.01 par value; authorized 8,000,000 shares;
issued and outstanding 475,442 shares in 1999 and1998 4,754 4,754
Additional paid-in capital 4,351,177 4,415,682
Retained earnings (substantially restricted) 3,491,960 3,200,542
----------- -----------
7,847,891 7,620,978
Accumulated other comprehensive income (318,280) -
Stock held by Rabbi Trust (134,650) (134,650)
Employee Stock Ownership Plan (322,319) (358,407)
----------- -----------
Total stockholders' equity 7,072,642 7,127,921
----------- -----------
Total liabilities and stockholders' equity $53,580,075 $44,310,112
=========== ===========
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</TABLE>
F-3
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Income
- ------
Interest and fees on loans (Note 5) $2,978,697 $2,566,734
Interest on investments 338,930 267,728
Interest on mortgage backed securities 154,003 149,753
---------- ----------
Total interest income 3,471,630 2,984,215
Interest Expense
- ----------------
Interest on deposits (Note 8) 1,699,241 1,748,825
Interest on long-term borrowings 111,775 -
Interest on short-term borrowings 124,025 1,782
---------- ----------
Total interest expense 1,935,041 1,750,607
---------- ----------
Net interest income 1,536,589 1,233,608
Provision for losses on loans (Note 5) - -
---------- ----------
Net interest income after provision for losses on loans 1,536,589 1,233,608
Non-Interest Income
- -------------------
Fees on loans 8,006 7,803
Fees on deposits 14,554 12,201
All other income 6,904 10,613
---------- ----------
Net non-interest income 29,464 30,617
Non-Interest Expenses
- ---------------------
Compensation and related expenses 481,669 352,880
Occupancy 116,326 87,531
Deposit insurance 22,639 20,485
Service bureau expense 69,392 57,118
Furniture, fixtures and equipment expense 26,468 22,688
Advertising 29,479 26,383
Professional fees 73,826 64,021
Other 141,458 130,096
---------- ----------
Total non-interest expenses 961,257 761,202
---------- ----------
Income before tax provision and cumulative effect
of accounting change 604,796 503,023
Provision for income tax (Note 13) 234,439 196,238
---------- ----------
Income before cumulative effect of accounting change 370,357 306,785
Cumulative effect of accounting change, net of tax (Note 1) 8,980 -
---------- ----------
Net income $ 379,337 $ 306,785
========== ==========
Basic earnings per share (Note 1) $ .89 $ N/A
========== ==========
Diluted earnings per share (Note 1) $ .86 $ N/A
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
-------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated Employee
Additional Other Stock Held Stock Total
Common Paid-In Retained Comprehensive by Rabbi Ownership Stockholders'
Stock Capital Earnings Income Trust Plan Equity
--------- ----------- ---------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1997 $ - $ - $2,893,757 $ - $ - $ - $2,893,757
Issuance of common stock 4,754 4,415,290 - - - - 4,420,044
Stock purchased by Employee
Stock Ownership Plan - - - - - (380,350) (380,350)
Stock held by Rabbi Trust - - - - (134,650) - (134,650)
Compensation under Stock-
Based Benefit Plan - 392 - - - 21,943 22,335
Net income - - 306,785 - - - 306,785
--------- ----------- ---------- --------- --------- --------- ----------
Balance - December 31, 1998 4,754 4,415,682 3,200,542 - (134,650) (358,407) 7,127,921
Comprehensive Income
Net income 379,337
Cumulative effect of change in accounting
principle, net of taxes of $513 (Note 1) (815)
Unrealized holding losses on
available for sale securities net
of taxes of $201,075 (317,465)
Total comprehensive income 61,057
Conversion costs paid subsequent
to stock issuance (66,035) (66,035)
Compensation under Stock-Based
Benefit Plan, net of taxes of $1,062 1,530 36,088 37,618
Dividends declared ($.20 per share) (87,919) (87,919)
--------- ----------- ---------- --------- --------- --------- ----------
Balance - December 31, 1999 $ 4,754 $ 4,351,177 $3,491,960 $(318,280) $(134,650) $(322,319) $7,072,642
========= =========== ========== ========= ========= ========= ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Operating Activities
- --------------------
Net income $ 379,337 $ 306,785
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
-----------------------------------------
Net amortization of premiums and accretion of
discounts on certificates of deposit 88 3,172
Gain on sale of mortgage backed securities trading (14,933) -
Proceeds from sale of mortgage backed securities trading 1,048,335 -
Net amortization of premiums and accretion of
discounts on mortgage backed and investment securities 16,853 735
Amortization of premium on mortgage loans purchased 597 -
Loan fees deferred 54,012 99,319
Amortization of deferred loan fees (50,648) (51,630)
Non-cash compensation under Stock-Based Benefit Plans 37,618 22,335
Increase in accrued interest on loans (7,305) (14,453)
(Increase) decrease in accrued interest on investments (46,492) 5,984
Increase in accrued interest on mortgage backed securities (2,517) (876)
Provision for depreciation 46,165 28,640
Increase in deferred income taxes (28,922) (31,247)
Increase in prepaid income taxes (410) -
(Increase) decrease in prepaid expenses and
other assets (2,923) 26,581
(Decrease) increase in accrued interest payable (5,442) 1,139
Decrease in income taxes payable (7,212) (44,515)
Increase in other liabilities 173,147 131,563
------------ ------------
Net cash provided by operating activities 1,589,348 483,532
Cash Flows from Investing Activities
- ------------------------------------
Proceeds from maturing certificates of deposit 741,000 926,000
Purchases of certificates of deposit (190,000) (981,331)
Purchases of securities available for sale (4,535,874) -
Purchase of securities held to maturity - (799,250)
Purchases of mortgage backed securities held to maturity (539,642) (1,285,283)
Purchases of mortgage backed securities available for sale (2,371,480) -
Principal collected on mortgage backed securities 859,362 1,116,961
Longer term loans originated (13,034,443) (11,884,678)
Loans purchased (877,919) (302,882)
Principal collected on longer term loans 6,797,992 6,346,139
Net (increase) decrease in short-term loans (44,150) 53,108
Purchases of premises and equipment (14,992) (116,591)
Purchase of Federal Home Loan Bank stock (172,100) (46,500)
------------ ------------
Net cash used by investing activities (13,382,246) (6,974,307)
</TABLE>
F-6
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Financing Activities
- ------------------------------------
Net increase (decrease) in demand deposits,
money market, passbook accounts and advance
payments by borrowers for taxes and insurance $ (266,251) $1,588,186
Net increase in certificates of deposit 531,000 2,315,159
Net increase in Federal Home Loan Bank advances 8,900,000 -
Net proceeds from stock issuance - 4,420,044
Common shares purchased under ESOP Plan - (380,350)
Common shares purchased under Rabbi Trust - (134,650)
Conversion costs paid subsequent to stock issuance (66,035) -
Dividend payment (87,919) -
----------- ----------
Net cash provided by financing activities 9,010,795 7,808,389
----------- ----------
Increase (decrease) in cash and cash equivalents (2,782,103) 1,317,614
Cash and cash equivalents at beginning of year 4,062,056 2,744,442
----------- ----------
Cash and cash equivalents at end of year $ 1,279,953 $4,062,056
=========== ==========
Reconciliation of cash and cash equivalents:
Cash $ 620,282 $ 166,446
Interest bearing accounts in other banks 1,038,521 4,833,876
----------- ----------
1,658,803 5,000,322
Less - Certificates of deposit maturing in
90 days or more included in interest
bearing accounts in other banks (378,850) (938,266)
----------- ----------
Cash and cash equivalents $ 1,279,953 $4,062,056
=========== ==========
Supplemental disclosures of cash flows information:
Cash paid during year for:
Interest $ 1,880,930 $1,749,522
Income taxes $ 278,000 $ 272,000
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-7
<PAGE>
NORTHFIELD BANCORP, INC.
------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
-------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Summary of Significant Accounting Policies
------------------------------------------
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of
Northfield Bancorp, Inc. ("the Company") and its wholly owned subsidiary,
Northfield Federal Savings Bank ("the Bank"). All intercompany accounts
and transactions have been eliminated in the accompanying consolidated
financial statements.
Business
--------
The Bank's primary business activity is the acceptance of deposits
from the general public in its market area, predominantly the Baltimore
metropolitan region, and using the proceeds for investments and loan
originations. The Bank is subject to competition from other financial
institutions. The Bank is subject to the regulations of certain federal
agencies and undergoes periodic examinations by those regulatory
authorities.
Basis of Financial Statement Presentation
-----------------------------------------
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the 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 statement of financial condition and revenues and expenses for the
period. Actual results could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan
losses. See the discussion below of the determination of that estimate.
Investments
-----------
Investments classified as available for sale are carried at fair
value. Amortization of premiums and accretion of discounts are computed
using the interest method over the life of the debt instrument. Gains and
losses on available for sale securities are determined using the specific
identification method.
F-8
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Mortgage Backed Securities
--------------------------
Mortgage backed securities classified as available for sale, including
real estate mortgage conduits, ("REMICs"), are carried at fair value.
Amortization of premiums and accretion of discounts are computed using
the interest method. Gains and losses on available for sale securities
are determined using the specific identification method. See Note 3 for
discussion of prepayment risk and recoverability of mortgage backed
securities.
At December 31, 1999, mortgage backed securities classified as held to
maturity are carried at amortized cost since management has the ability
and intention to hold them to maturity. Amortization of premiums and
accretion of discounts on purchases is computed using the interest
method.
Loans Receivable
----------------
Loans receivable that management has the intent and ability to hold
for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balance adjusted for any charge-offs, the
allowance for loan losses, and any deferred fees or costs on originated
loans.
Amortization of premiums and accretion of discounts on loan purchases
is computed using the interest method.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
loan.
An allowance for loan losses is provided through charges to income in
an amount that management believes will be adequate to absorb losses on
existing loans that may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience. The evaluations
take into consideration such factors as changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the
borrowers' ability to pay. Determining the amount of the allowance for
loan losses requires the use of estimates and assumptions. Management
believes the allowance for losses on loans
F-9
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Loans Receivable - Continued
----------------
is adequate. While management uses available information to estimate
losses on loans, future additions to the allowances may be necessary
based on changes in economic conditions, particularly in the State of
Maryland. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowances
for losses on loans. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Statement of
Financial Accounting Standards ("SFAS") No. 114, as amended by SFAS No.
118 addresses the accounting by creditors for impairment of certain
loans. It is generally applicable for all loans except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, including residential mortgage loans and consumer installment
loans. It also applies to all loans that are restructured in a troubled
debt restructuring involving a modification of terms. SFAS No. 114
requires that impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. A loan is considered
impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement.
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such that
collection of interest is doubtful. When a payment is received on a loan
on non-accrual status, the amount received is allocated to principal and
interest in accordance with the contractual terms of the loan.
Premises and Equipment
----------------------
Land is carried at cost, premises and equipment are carried at cost
less accumulated depreciation. Depreciation is computed on the straight-
line method, based on the useful lives of the respective assets.
F-10
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Income Taxes
------------
Deferred income taxes are recognized for temporary differences between
the financial reporting basis and income tax basis of assets and
liabilities based on enacted tax rates expected to be in effect when such
amounts are realized or settled. Deferred tax assets are recognized only
to the extent that it is more likely than not that such amounts will be
realized based on consideration of available evidence. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date.
Statement of Cash Flows
-----------------------
In the statement of cash flows, cash and equivalents include cash and
interest bearing deposits in other banks with a maturity date of less than
ninety days.
Employee Stock Ownership Plan
-----------------------------
The Company accounts for its Employee Stock Ownership Plan ("ESOP") in
accordance with Statement of Position 93-6 of the Accounting Standards
Division of the American Institute of Certified Public Accountants (See
Note 11).
Cumulative Effect of Accounting Change
--------------------------------------
The Company implemented SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") on January 1, 1999.
In accordance with the Pronouncement's provisions, the Company
reclassified approximately $1,071,000 of mortgage backed securities from
held to maturity to trading. The Company's trading portfolio consisted of
several relatively older and smaller balance loan pools, which had market
values that exceeded carrying values. Management decided to sell the
securities at the favorable market price and simultaneously reduce the
administrative costs of the smaller pools. On January 11, 1999, the
Company sold the entire trading investment that had a carrying value of
$1,033,041 and realized a gain of $8,980 net of tax. Accordingly, the net
realized gain of $8,980 is reflected on the consolidated statements of
operations as the cumulative effect of an accounting change, net of taxes.
F-11
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 1 - Summary of Significant Accounting Policies - Continued
------------------------------------------
Cumulative Effect of Accounting Change - Continued
--------------------------------------------------
In addition, the Company reclassified $1,053,760 of mortgage backed
securities and $799,256 of investments from held to maturity to available
for sale.
On January 1, 1999, the amortized costs and fair values were as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investments $ 799,256 $ - $5,029 $ 794,227
Mortgage backed securities 1,053,760 3,701 - 1,057,461
---------- ------ ------ ----------
$1,853,016 $3,701 $5,029 $1,851,688
========== ====== ====== ==========
</TABLE>
Accordingly, the net unrealized loss of $1,328 at the date of transfer
is reflected on the consolidated statements of stockholders' equity as the
cumulative effect of a change in accounting principle, net of taxes.
Earnings Per Share
------------------
Basic earnings per share data ("EPS") is computed by dividing net
income by the weighted average number of common shares outstanding for the
appropriate period. Unearned ESOP shares are not included in outstanding
shares. Diluted EPS is computed by dividing net income by the weighted
average shares outstanding as adjusted for the dilutive effect of unvested
stock awards based on the "treasury stock" method.
Earnings per share data is not presented for the year ended December
31, 1998, since the Bank converted to stock form in November, 1998, and
such information would not be meaningful. Information relating to the
calculations of net income per share of common stock, summarized for the
twelve months ended December 31, 1999, is as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Net income before other comprehensive income $379,337
========
Weighted Average Shares
Outstanding basic EPS 427,664
Dilutive Items
Rabbi Trust shares 13,465
--------
Adjusted weighted average shares used for dilutive items 441,129
========
</TABLE>
F-12
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 2 - Investments
-----------
The amortized cost at and fair values of other investments are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Available for Sale
------------------
December 31, 1999
-----------------
Federal Home Loan Mortgage
Corporation bonds $ 748,519 $ - $ 53,988 $ 694,531
Municipal bonds 449,316 - 38,925 410,391
Corporate bonds 4,137,946 - 369,318 3,768,628
---------- ---------- -------- ----------
$5,335,781 $ - $462,231 $4,873,550
========== ========== ======== ==========
Held to Maturity
----------------
December 31, 1998
-----------------
Federal Home Loan Mortgage
Corporation bonds $ 250,000 $ - $ - $ 250,000
Municipal bonds 299,256 - 888 298,368
Corporate bonds 250,000 - 4,141 245,859
---------- ---------- -------- ----------
$ 799,256 $ - $ 5,029 $ 794,227
========== ========== ======== ==========
</TABLE>
On January 1, 1999, the Company implemented the provisions of SFAS No.
133 and reclassified the entire balance of investments from held to
maturity to available for sale (See Note 1).
No gains or losses were realized during the years ended December 31,
1999 and 1998.
The scheduled maturities of other investments at December 31, 1999:
Carrying
Cost
--------
Due after five years through ten years $ 369,125
Due after ten years 4,504,425
----------
$4,873,550
==========
F-13
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 3 - Mortgage Backed Securities Available for Sale
---------------------------------------------
Mortgage backed securities classified as available for sale at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
GNMA participating certificates $1,861,296 $ - $31,313 $1,829,983
FNMA participating certificates 737,961 - 16,667 721,294
---------- ---------- ------- ----------
$2,599,257 $ - $47,980 $2,551,277
========== ========== ======= ==========
</TABLE>
No gains or losses were realized during the years ended December 31,
1999 and 1998.
Note 4 - Mortgage Backed Securities Held to Maturity
-------------------------------------------
The amortized cost and fair value of mortgage backed securities held
to maturity are as follows as of December 31, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
December 31, 1999
----------------------------------------------
<S> <C> <C> <C> <C>
GNMA participating certificates $ 524,188 $ - $54,866 $ 469,322
========== ========== ======= ==========
December 31, 1998
----------------------------------------------
GNMA participating certificates $1,125,497 $37,469 $ - $1,162,966
FNMA participating certificates 534,884 12,123 - 547,007
FHLMC participating certificates 462,209 12,896 - 475,105
---------- ---------- ------- ----------
$2,122,590 $62,488 $ - $2,185,078
========== ========== ======= ==========
</TABLE>
On January 1, 1999, the Company implemented the provisions of SFAS No.
133 and reclassified $1,053,760 and $1,033,041 of the mortgage backed
securities portfolio to available for sale and trading, respectively.
(See Note 1)
F-14
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 5 - Loans Receivable
----------------
Loans receivable at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
One to four family residential mortgage loans $39,464,486 $31,332,202
Land 172,698 123,442
Construction loans 2,207,784 3,663,490
Commercial real estate loans 1,960,896 2,477,792
Commercial loan collateralized by lease
finance receivables 698,107 643,217
Home equity line of credit loans 134,281 124,849
Loans secured by deposits 108,044 73,326
Premiums 14,614 -
----------- -----------
44,760,910 38,438,318
Less
----
Undisbursed portion of loans in process (1,402,261) (2,223,105)
Deferred loan origination fees (319,486) (316,122)
Allowance for losses on loans (182,951) (197,435)
----------- -----------
(1,904,698) (2,736,662)
----------- -----------
$42,856,212 $35,701,656
=========== ===========
</TABLE>
Residential lending is generally considered to involve less risk than
other forms of lending, although payment experience on these loans is
dependent to some extent on economic and market conditions in the Bank's
lending area. Commercial and construction loan repayments are generally
dependent on the operations of the related properties or the financial
condition of its borrower or guarantor. Accordingly, repayment of such
loans can be more susceptible to adverse conditions in the real estate
market and the regional economy.
A substantial portion of the Bank's loans receivable are mortgage
loans secured by residential and commercial real estate properties located
in the State of Maryland. Loans are extended only after evaluation by
management of customers' creditworthiness and other relevant factors on a
case-by-case basis. The Bank generally does not lend more than 90% of the
appraised value of a property and requires private mortgage insurance on
residential mortgages with loan-to-value ratios in excess of 80%. In
addition, the Bank generally obtains personal guarantees of repayment from
borrowers and/or others for construction, commercial and multifamily
residential loans and disburses the proceeds of construction and similar
loans only as work progresses on the related projects.
F-15
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 5 - Loans Receivable - Continued
----------------
The commercial loan collateralized by lease finance receivables
represents a loan to a leasing company collateralized by leases receivable
to individuals and businesses secured by personal property and is
primarily dependent upon the financial condition of the borrower and
lessors for repayment.
The following is a summary of the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1997 $215,500
Provision for losses on loans -
Charge-offs (18,065)
--------
Balance at December 31, 1998 197,435
Provision for losses on loans -
Charge-offs (14,484)
--------
Balance at December 31, 1999 $182,951
========
</TABLE>
A loan is considered impaired when it is probable that the Bank will
be unable to collect all amounts due according to the contractual terms of
the loan agreement. The Bank did not have any impaired loans at December
31, 1999 and 1998.
The Bank had no non-accrual loans that were not subject to SFAS No.
114.
The following table presents a summary of the activity with respect to
loans to directors and officers for the years ended December 31, 1999 and
1998, respectively.
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balance outstanding - beginning of year $ 505,596 $ 728,439
New loans 148,000 18,546
Principal repayments (152,043) (241,389)
--------- ---------
Balance outstanding - end of year $ 501,553 $ 505,596
========= =========
</TABLE>
F-16
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 5 - Loans Receivable - Continued
----------------
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers. Mortgage loan commitments, exclusive of loans in process not
reflected in the accompanying statements at December 31, 1999, approximate
$1,238,800. These commitments are for mortgage loans with fixed rates
between 7.25% and 8.5% at December 31, 1999. At December 31, 1999, the
Bank did not have any non-recourse leasing loan commitments.
The credit risk involved in these financial instruments is essentially
the same as that involved in extending loan facilities to customers. No
amount has been recognized in the statement of financial condition at
December 31, 1999, as a liability for credit loss.
Mortgage loans serviced for others are not included in the
accompanying consolidated statements of financial condition. The unpaid
principal balances of these loans at December 31, 1999 and 1998,
respectively, were $790,345 and $826,514.
Custodial escrow balances maintained in connection with the foregoing
loan servicing were approximately $22,000 and $18,000 at December 31, 1999
and 1998, respectively.
Note 6 - Premises and Equipment
----------------------
Premises and equipment at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998 Useful Lives
---------- ---------- -------------
<S> <C> <C> <C>
Land $ 15,000 $ 15,000 -
Office building and improvements 107,347 109,297 5 to 35 years
Furniture, fixtures and equipment 259,783 285,547 5 to 15 years
--------- ---------
382,130 409,844
Less - accumulated depreciation (284,977) (281,519)
--------- ---------
$ 97,153 $ 128,325
========= =========
</TABLE>
F-17
<PAGE>
NORTHFIELD BANCORP, INC.
- -------------------------
AND SUBSIDIARY
- ---------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 6 - Premises and Equipment - Continued
----------------------
The Bank has entered into long-term lease agreements for the premises
of its main and administrative offices. Rental expense under the
agreements for the properties for the years ended December 31, 1999 and
1998 were $57,303 and $48,835, respectively. At December 31, 1999, the
minimum rental commitments under noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
<S> <C>
2000 $ 57,695
2001 48,962
2002 42,000
2003 28,000
--------
$176,657
========
</TABLE>
Note 7 - Investment in Federal Home Loan Bank of Atlanta Stock
-----------------------------------------------------
The Bank is required to maintain an investment in the stock of the
Federal Home Loan Bank of Atlanta ("FHLB") in an amount equal to at least
1% of the unpaid principal balances of the Bank's residential mortgage
loans or 1/20 of its outstanding advances from the FHLB, whichever is
greater. Purchases and sales of stock are made directly with the FHLB at
par value.
Note 8 - Deposit Accounts
----------------
Deposit accounts at December 31, 1999 and 1998 consist of the
following:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
Amount % Amount %
----------- ------- ----------- -------
<S> <C> <C> <C> <C>
Demand and NOW accounts including
non-interest bearing deposits of
$570,560 in 1999 and $715,785
in 1998 $ 2,710,885 7.41% $ 2,894,912 7.95%
Money markets 8,191,133 22.38 8,199,757 22.51
Passbook savings 2,736,225 7.47 2,901,060 7.96
Certificates of deposit 22,954,581 62.71 22,423,581 61.54
----------- ------ ----------- ------
36,592,824 99.97 36,419,310 99.96
Accrued interest on deposits 10,034 .03 15,476 .04
----------- ------ ----------- ------
$36,602,858 100.00% $36,434,786 100.00%
=========== ====== =========== ======
</TABLE>
F-18
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
- --------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 8 - Deposit Accounts - Continued
----------------
Certificates of deposit mature as follows at December 31:
<TABLE>
<S> <C>
2000 $12,852,856
2001 4,515,131
2002 2,959,889
2003 938,500
2004 1,204,817
2005 & Thereafter 483,388
-----------
Total $22,954,581
===========
</TABLE>
Interest expense on deposits is summarized as follows for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998
---------- -----------
<S> <C> <C>
NOW accounts $ 41,841 $ 57,696
Money markets 272,789 322,038
Savings 76,571 93,461
Certificates of deposit 1,308,040 1,275,630
---------- -----------
$1,699,241 $ 1,748,825
========== ===========
</TABLE>
The Bank had deposits of $100,000 or more of approximately $5,351,995
and $3,451,755 at December 31, 1999 and 1998, respectively.
Deposit Insurance Reform. Currently, there are two deposit insurance
funds maintained by the Federal Deposit Insurance Corporation ("FDIC"),
the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund
("SAIF"). The Bank's deposits are insured by SAIF.
Note 9 - Borrowings
----------
Federal Home Loan Bank advances at December 31, 1999 consist of short-
term fixed and adjustable rate advances bearing interest at 4.55% to 6.26%
per annum and a long-term fixed rate advance bearing interest at 5.26% per
annum.
F-19
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 9 - Borrowings - Continued
----------
The Bank's stock in Federal Home Loan Bank of Atlanta is pledged as
security for the loan and under a blanket floating lien security
agreement with the Federal Home Loan Bank of Atlanta, the Bank is
required to maintain as collateral for its advances, qualified home
mortgage loans in an amount equal to 175% of the advances.
Aggregate maturities required on Federal Home Loan Bank advances at
December 31, 1999 are as follows:
December 31, 2000 $5,900,000
December 31, 2009 3,000,000
---------
$8,900,000
=========
Unused advances on the short-term borrowings above totalled
$5,840,000 at December 31, 1999.
Note 10- Employee Benefit Plan
---------------------
The Bank has a 401(k) Plan which required until March 31, 1998,
under certain conditions, a contribution of up to 5% of eligible
employees' total compensation. The total expense related to this Plan
for the years ended December 31, 1999 and 1998 was $2,600 and $5,126,
respectively.
Note 11- Common Stock and Stock Benefit Plans
------------------------------------
On November 12, 1998, the Bank converted from a federally chartered
mutual savings bank to a federally chartered stock savings bank.
Simultaneously, the Bank consummated the formation of a new holding
company, Northfield Bancorp, Inc., of which the Bank is a wholly owned
subsidiary. In connection with the conversion, the Company issued
475,442 shares of its common stock, par value $.01 per share (the
"Common Stock") for gross proceeds of $4,754,420 and net proceeds of
$4,420,044, of which $2,210,022 was contributed to the Bank in exchange
for all of its outstanding common stock.
F-20
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 11- Common Stock and Stock Benefit Plans - Continued
------------------------------------
At the time of the Conversion, the Bank established a liquidation
account in the amount of $3,086,506, an amount equal to the Bank's
retained earnings as of June 30, 1998. The liquidation account is
maintained for the benefit of eligible savings account holders who
maintained their savings accounts in the Bank after the Conversion. In
the event of a complete liquidation (and only in such event), each
eligible savings account holder would be entitled to receive a
liquidation distribution from the liquidation account in an amount
equal to the account holder's then interest in the liquidation account
before any liquidation distribution may be made with respect to capital
stock.
The Company has no significant source of income other than
dividends from the Bank. As a result, the Company's dividends will
depend primarily upon receipt of dividends from the Bank.
OTS regulations limit the payment of dividends and other capital
distributions by the Bank. The Bank is able to pay dividends during a
calendar year without regulatory approval to the extent of the greater
of (i) an amount which will reduce by one-half its surplus capital
ratio at the beginning of the year plus all its net income determined
on the basis of generally accepted accounting principles for that
calendar year, or (ii) 75% of net income for the last four calendar
quarters.
The Bank is restricted in paying dividends on its stock to the
greater of the restrictions described in the preceding paragraph, or an
amount that would reduce its retained earnings below its regulatory
capital requirement, the accumulated bad debt deduction, or the
liquidation account described above.
At the time of conversion, the Bank established an Employee Stock
Ownership Plan ("ESOP"), and acquired 38,035 shares of the common
stock. The ESOP borrowed funds used to acquire the shares from the
Company with a direct loan from the Company requiring annual payments
of $29,258.
The ESOP holds the common stock in a Trust for allocation among
participating employees.
All employees of the Bank who have completed one year of service
and attained the age of 21 are eligible to participate. Participants
will become 100% vested in their accounts after five years of service,
commencing after January 1, 1998, or earlier upon death, disability or
retirement.
F-21
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 11- Common Stock and Stock Benefit Plans - Continued
------------------------------------
The ESOP is funded by contributions made by the Bank in cash or
common stock and dividends on the shares held in the Trust. The Bank
recognizes compensation expense as shares are committed for release
from collateral at their current market price. Dividends on allocated
shares are recorded as a reduction of retained earnings and dividends
on unallocated shares are recorded as a reduction of debt. Compensation
cost for the year ended December 31, 1999 was $42,380.
The ESOP shares as of December 31, 1999 were as follows:
Allocated shares 5,806
Shares earned, but unallocated --
Unearned shares 32,229
The fair value of the unearned shares was $382,719 at December 31,
1999.
During the year ended December 31, 1997, the Bank entered into a
non-qualified Deferred Compensation ("Rabbi Trust") agreement with all
of its current directors. The Bank recognized compensation expense,
under this agreement, during the years ended December 31, 1999 and 1998
of $107,747 and $69,150, respectively. Liability under this Agreement
is being accrued by charges to operating expense during the term of
employment. On November 12, 1998, the Trustees of the Deferred
Compensation Plan acquired 13,465 shares of the Company's common stock.
Note 12- Retained Earnings
-----------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
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.
F-22
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 12- Retained Earnings - Continued
-----------------
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the
Office of Thrift Supervision has categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table. There have been no conditions or events
since that notification that management believes have changed the
Bank's category.
The following table presents the Bank's capital position based on
the financial statements.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- --------------------
Amount % Amount % Amount %
---------- ----- ---------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
------------------
Tangible (1) $5,300,053 9.8% $ 808,432 1.5% $ N/A N/A%
Tier I capital (2) 5,300,053 18.6% N/A N/A% 1,713,180 6.0%
Core (1) 5,300,053 9.8% 2,155,818 4.0% 2,694,773 5.0%
Risk-weighted (2) 5,483,004 19.2% 2,284,240 8.0% 2,855,300 10.0%
December 31, 1998
-----------------
Tangible (1) $4,918,487 11.0% $ 670,342 1.5% $ N/A N/A%
Tier I capital (2) 4,918,487 22.2% N/A N/A% 1,330,440 6.0%
Core (1) 4,918,487 11.0% 1,340,684 3.0% 2,234,473 5.0%
Risk-weighted (2) 5,115,922 23.1% 1,773,920 8.0% 2,217,400 10.0%
</TABLE>
(1) To adjusted total assets
(2) To risk-weighted assets.
F-23
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 13- Income Taxes
------------
The income tax provision consists of the following for the years
ended December 31:
1999 1998
---- ----
Current expense $269,317 $227,485
Deferred expense (benefit) (28,922) (31,247)
--------- ---------
Total tax expense $240,395 $196,238
========= =========
Of the $240,395 income tax provision in 1999, $5,956 is the tax
effect of the expense recorded because of the cumulative change in
accounting principle for the adoption of SFAS No. 133 (See Note 1).
The income tax provision is reconciled to the amount computed to
the statutory federal income tax rate as follows for December 31:
1999 1998
---------------- ----------------
Amount Rate Amount Rate
-------- ------ -------- ------
Statutory federal income tax rate $210,709 34.00% $171,028 34.00%
State tax net of federal income tax benefit 29,189 4.71 23,743 4.72
Other 497 .01 1,467 .29
-------- ------ -------- ------
$240,395 38.72% $196,238 39.01%
======== ====== ======== ======
The tax effects of temporary differences between financial
reporting basis and income tax basis of assets and liabilities are as
follows at December 31:
1999 1998
---- ----
Deferred Tax Assets:
Deferred loan origination fees $ - $ 12,787
Deferred compensation 117,696 73,695
Unrealized loss on investment securities 232,420 32,160
Allowance for loan losses 70,656 76,249
--------- ---------
420,772 194,891
Deferred Tax Liabilities:
Federal Home Loan Bank of Atlanta stock dividend (32,595) (32,595)
Depreciation (2,650) (2,650)
Excess of tax bad debt reserve over base year (26,377) (39,567)
Conversion from accrual to cash method
of accounting (72,442) (62,553)
--------- ---------
(134,064) (137,365)
--------- ---------
Net deferred tax assets $ 286,708 $ 57,526
========= =========
F-24
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 13- Income Taxes - Continued
------------
The Bank was allowed a special bad debt deduction limited generally
to 8% of otherwise taxable income for the year beginning December 1,
1987 through December 31, 1995. Beginning January 1, 1996 the
percentage of taxable income method of computing the Bank's tax bad
debt deduction is no longer allowed and the amount by which the tax
reserve for bad debts exceeds such amount at December 31, 1987 must be
recaptured over a six year period. A tax liability has been established
for the recapture. If the amounts which qualified as deductions for
federal income tax purposes prior to December 31, 1987 are later used
for purposes other than to absorb loan losses, including distributions
in liquidations, they will be subject to federal income tax at the then
current corporate rate. Retained earnings at December 31, 1999 and 1998
include $577,687, for which no provision for federal income tax has
been provided. The unrecorded deferred income tax liability on the
above amount was approximately $223,875.
Note 14- Disclosures About Fair Value of Financial Instruments
-----------------------------------------------------
The estimated fair values of the Bank's financial instruments are
summarized below. The fair values of a significant portion of these
financial instruments are estimates derived using present value
techniques prescribed by the FASB and may not be indicative of the net
realizable or liquidation values. Also, the calculation of estimated
fair values is based on market conditions at a specific point in time
and may not reflect current or future fair values.
The carrying amount is a reasonable estimate of fair value for
interest bearing deposits in other banks due to the short-term nature
of that investment. Fair value is based upon net asset values for
investment securities. Bid prices published in financial newspapers for
mortgage backed securities were used to estimate fair value for these
investments. The carrying amount of Federal Home Loan Bank of Atlanta
stock is a reasonable estimate of fair value. Loans receivable were
discounted using a single discount rate, comparing the current rates at
which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities, except for adjustable
rate mortgages which were considered to be at market rates. These rates
were used for each aggregated category of loans as reported on the
Office of Thrift Supervision Quarterly Report. The fair value of demand
deposits, savings accounts and money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed-
maturity certificates of deposit is estimated using the rates currently
offered on deposits of similar remaining maturities.
F-25
<PAGE>
NORTHFIELD BANCORP, INC.
- ------------------------
AND SUBSIDIARY
--------------
Baltimore, Maryland
- -------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Note 14- Disclosures About Fair Value of Financial Instruments - Continued
-----------------------------------------------------
December 31, 1999
--------------------
Carrying Estimated
Amount Fair Value
-------- ----------
(Amounts in Thousands)
Financial Assets
----------------
Interest bearing deposits
in other banks $ 1,039 $ 1,039
Investments 4,874 4,874
Mortgage backed securities available for sale 2,551 2,551
Mortgage backed securities held to maturity 524 469
Loans receivable 42,856 40,137
Federal Home Loan Bank of Atlanta stock 445 445
Financial Liabilities
---------------------
Savings $ 2,736 $ 2,736
NOW and money market deposit accounts 10,902 10,902
Certificates of deposit 22,955 22,980
Advance payment by borrowers for expenses 554 554
Borrowings 8,900 8,603
F-26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 620
<INT-BEARING-DEPOSITS> 1,039
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,425
<INVESTMENTS-CARRYING> 524
<INVESTMENTS-MARKET> 469
<LOANS> 42,856
<ALLOWANCE> 183
<TOTAL-ASSETS> 53,580
<DEPOSITS> 36,602
<SHORT-TERM> 5,900
<LIABILITIES-OTHER> 1,002
<LONG-TERM> 3,000
0
0
<COMMON> 5
<OTHER-SE> 7,068
<TOTAL-LIABILITIES-AND-EQUITY> 53,580
<INTEREST-LOAN> 2,979
<INTEREST-INVEST> 493
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,472
<INTEREST-DEPOSIT> 1,699
<INTEREST-EXPENSE> 1,935
<INTEREST-INCOME-NET> 1,537
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 961
<INCOME-PRETAX> 605
<INCOME-PRE-EXTRAORDINARY> 370
<EXTRAORDINARY> 0
<CHANGES> 9
<NET-INCOME> 379
<EPS-BASIC> .89
<EPS-DILUTED> .86
<YIELD-ACTUAL> 3.18
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 197
<CHARGE-OFFS> 14
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 183
<ALLOWANCE-DOMESTIC> 183
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
