SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
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(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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- OR -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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SEC File Number: 0-25149
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RIDGEWOOD FINANCIAL, INC.
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(Exact name of small business issuer in its charter)
New Jersey 22-3616280
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(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
55 North Broad Street, Ridgewood, New Jersey 07450
- -------------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 445-4000
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that 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]
State issuer's revenues for its most recent fiscal year $16,518,633.
Issuer's voting stock trades on The Nasdaq Stock Market under the symbol
"RSBI". The aggregate market value of the voting stock held by non-affiliates of
the issuer, based upon the closing price of such stock as of March 25, 1999
($8.00 per share), was $10.3 million.
As of March 25, 1999, registrant had 3,180,000 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE: None.
<PAGE>
Ridgewood Financial, Inc. (the "Registrant" or the "Company") may from time
to time make written or oral "forward-looking statements", including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this annual report on Form 10-KSB and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors is not exclusive.
The Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
PART I
Item 1. Description of Business
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General
The Company is a savings bank holding company that was incorporated in July
1998 under the laws of the State of New Jersey for the purpose of acquiring all
of the issued and outstanding common stock of Ridgewood Savings Bank of New
Jersey (the "Bank"). This acquisition occurred in January 1999 at the time the
Bank simultaneously converted from a mutual to stock institution and sold all of
its outstanding capital stock to the Company, the Company made its initial
public offering of common stock and provided additional shares of common stock
to Ridgewood Financial, MHC, a mutual holding company that holds 53% of the
outstanding shares of the Company (the "Reorganization"). Because the
Reorganization was not completed until January 7, 1999, at December 31, 1998,
the Company had no assets, liabilities or equity. As a result, throughout this
report all references to operations, assets, liabilities and equity of the Bank
include those of the Company. As of December 31, 1998, the Bank had total assets
of $274.7 million, total deposits of $205.5 million, and total equity of $17.4
million or 6.3% of total assets. The only subsidiary of the Company is the Bank.
The Bank is a state-chartered stock savings bank headquartered in
Ridgewood, New Jersey. The Bank was founded in 1885 with a charter from the
state of New Jersey under the name of "The Ridgewood Building and Loan
Association" which later became a New Jersey-chartered savings bank
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<PAGE>
under the name of "Ridgewood Savings Bank of New Jersey." The Bank's deposits
are federally insured by the Savings Association Insurance Fund ("SAIF"), as
administered by the Federal Deposit Insurance Corporation ("FDIC").
The primary activity of the Company is directing and planning the
activities of the Bank, the Company's primary asset. The Company engages in no
other significant activities. As a result, references to the Company or
Registrant generally refer to the Bank, unless the context otherwise indicates.
In the discussion of regulation, except for the discussion of the regulation of
the Company, all regulations apply to the Bank rather than the Company.
The Bank is primarily engaged in attracting deposits from the general
public and using those funds to originate and sell real estate loans on one- to
four-family residences and, to a lesser extent, to originate consumer loans and
other loans for its portfolio. The Bank also purchases one- to four-family
residential loans. The Bank has offices in Ridgewood and Mahwah, New Jersey,
which are located in its primary market area of northwestern Bergen County in
the State of New Jersey.
The principal sources of funds for the Bank's lending and investing
activities are deposits, Federal Home Loan Bank (FHLB) advances, the repayment
and maturity of loans and sale, maturity, and call of securities. The principal
source of income is interest on loans and mortgage-backed and investment
securities. The Bank's principal expense is interest paid on deposits and FHLB
advances.
Market Area
The Bank's primary market area for loans and deposits is northwestern
Bergen County, New Jersey and includes the townships of Allendale, Franklin
Lakes, Glen Rock, Ho-Ho-Kus, Mahwah, Midland Park, Oakland, Paramus, Ramsey,
Ridgewood, Saddle River, Upper Saddle River, Waldwick and Wyckoff. These
townships consist primarily of single family homes. There are approximately
140,000 residents and 48,000 households within the Bank's primary market area.
This market area could be characterized as affluent.
Lending Activities
General. The Bank primarily originates one- to four-family residential real
estate loans and, to a lesser extent, commercial real estate loans, consumer
loans and other loans. Consumer loans consist of home equity and home
improvement lines of credit and loans, student loans and loans secured by
savings accounts. Commercial real estate loans consist primarily of mortgage
loans secured by small commercial office/retail space, retail businesses and
small and medium sized apartment buildings.
3
<PAGE>
Analysis of Loan Portfolio. Set forth below is selected data relating to the
composition of the Bank's loan portfolio by type of loan on the dates indicated.
Analysis of Loan Portfolio
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
------------- --------------- -------------------- ------------- ----------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- --
(Dollars in thousands)
Type of Loans:
First mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1- to 4-family.............. $ 88,936 82.23% $ 86,140 80.70% $ 90,500 82.96% $ 88,685 91.02% $79,757 90.96%
Commercial and other........ 8,032 7.43 10,313 9.66 10,613 9.73 3,170 3.25 2,732 3.12
Consumer loans:
Equity...................... 10,397 9.61 9,645 9.04 7,519 6.89 5,185 5.32 4,688 5.35
Lines of credit............. 472 0.44 134 0.13 78 0.07 78 0.08 14 0.01
Education................... 36 0.03 160 0.15 120 0.12 84 0.09 189 0.21
Loans to depositors,
secured by savings........ 260 0.24 350 0.32 256 0.23 235 0.24 304 0.35
Other....................... 25 0.02 -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------- ------ ------ ------
108,158 100.00% 106,742 100.00% 109,086 100.00% 97,437 100.00% 87,684 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------ ======
Less:
Net deferred loan fees........ 315 409 521 638 750
Allowance for loan losses..... 822 618 606 593 528
------- ------- ------- ------- ------
Total loans receivable, net..... $107,021 $105,715 $107,959 $ 96,206 $86,406
======= ======= ======= ======= ======
Loans held for sale............. $ -- $ 750 $ 3,756 $ 199 $ 504
======= ======= ======= ======= ======
</TABLE>
4
<PAGE>
Loan Maturity. The following table sets forth the maturity of the Bank's
loan portfolio at December 31, 1998. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $27.6 million for the year ended December 31, 1998. All loans
are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
1-4 Family Consumer Consumer
First Commercial Consumer Lines of Consumer Secured by
Mortgage and Other Equity Credit Education Deposits Other Total
----------- ------------ ---------- ---------- ---------- ------------ --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year.......... $ 2,840 $ 1,289 $ 32 $ 472 $ -- $ 202 $ -- $ 4,835
Over 1 to 3 years.... 3,611 2,651 167 -- -- 58 25 6,512
Over 3 to 5 years.... 3,279 53 872 -- 36 -- -- 4,240
Over 5 to 10 years... 19,380 3,617 2,198 -- -- -- -- 25,195
Over 10 to 20
years............. 19,491 213 7,128 -- -- -- -- 26,832
Over 20 years........ 40,335 209 -- -- -- -- -- 40,544
------ ------ ------ ------ ------ ------ ------ -------
Total amount due....... $88,936 $ 8,032 $10,397 $ 472 $ 36 $ 260 $ 25 $108,158
====== ====== ====== ====== ====== ====== ====== =======
Less:
Allowance for loan
losses.............. 822
Net deferred loan
fees................ 315
-------
Loans receivable,
net................. $107,021
=======
</TABLE>
The following table sets forth the dollar amount of all loans due after
December 31, 1999, which have predetermined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
First mortgage- 1 to 4 family $49,205 $36,891 $ 86,096
Commercial and other............ 6,534 209 6,743
Consumer-equity.................... 5,838 4,527 10,365
Consumer - lines of credit......... -- -- --
Consumer - education............... 36 -- 36
Consumer - loans to
depositors secured by
savings......................... 58 -- 58
Other.............................. 25 -- 25
------ ------ -------
Total............................ $61,696 $41,627 $103,323
====== ====== =======
One- to Four-Family Lending. The Bank's primary lending activity consists
of the origination of one- to four-family residential mortgage loans secured by
property located in the Bank's market area. The Bank generally originates one-
to four-family residential mortgage loans in amounts up to 80% of the lesser of
the appraised value or selling price of the mortgaged property without requiring
mortgage insurance. The Bank will originate a mortgage loan in an amount up to
90% of the lesser of the appraised value or selling price of a mortgaged
property, however, mortgage insurance for the borrower
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is required. The Bank generally originates and retains fixed rate and adjustable
rate loans for retention in its portfolio. A mortgage loan originated by the
Bank, whether fixed rate or adjustable rate, can have a term of up to 30 years.
The Bank also originates one- to four-family conforming fixed rate loans for
terms of 20 and 30 years primarily for sale in the secondary mortgage market.
These loans are sold without recourse to the Bank by the buyer and the Bank
receives a servicing fee. Servicing fee income has been immaterial during the
past five years. All other mortgage products are generally held in portfolio and
are serviced by the Bank. The Bank offers fixed rate loans with a 15 year
amortization period and a variety of adjustable rate loans. The adjustable rate
loans typically have a 15 to 30 year amortization period.
The Bank's one- to four-family residential loans (both fixed rate and
adjustable rate) are generally underwritten in accordance with Federal National
Mortgage Association ("FNMA") guidelines, regardless of whether they will be
sold in the secondary market. However, the Bank originates some shorter-term
loans and adjustable rate, large dollar amount loans that exceed FNMA
guidelines. At December 31, 1998 the Bank had 74 of these loans that totalled
$23.2 million or 26.1% of our $88.9 million portfolio of one- to four-family
first mortgage loans. While these relatively higher aggregate dollar amount
loans are generally made on the same terms and conditions as the Bank's lower
aggregate dollar amount mortgage loans, the relatively larger dollar amount of
possible loss on each loan makes these loans riskier than the Bank's other home
mortgage loans.
Substantially all of the Bank's residential mortgages include "due on sale"
clauses, which are provisions giving the Bank the right to declare a loan
immediately payable if the borrower sells or otherwise transfers an interest in
the property to a third party.
Commercial Real Estate and Other Loans. The Bank originates commercial real
estate mortgage loans and, to a much lesser extent, commercial business loans.
The Bank's commercial real estate mortgage loans are permanent loans secured by
improved property such as office buildings, retail stores, and apartment
buildings. Essentially all originated commercial real estate loans are within
the Bank's market area and all are within the State of New Jersey. As of
December 31, 1998, the Bank had 18 loans secured by commercial real estate,
totalling $8.0 million, or 7.43% of the Bank's total loan portfolio, with an
average principal balance of $446,000. The largest commercial real estate loan
had a balance of $2.3 million on December 31, 1998 and was performing in
accordance with its contractual terms. Typically, commercial real estate loans
are originated in amounts up to 70% of the appraised value of the mortgaged
property.
The Bank maintains a small number of commercial lines of credit made to
local businesses and professionals. At December 31, 1998, $472,000, or 0.4%, of
the Bank's total loan portfolio consisted of commercial lines of credit. Many of
these lines of credit are also secured by real property. Commercial real estate
and business loans generally are deemed to entail significantly greater risk
than that which is involved with single family real estate lending. The
repayment of commercial loans typically is dependent on the successful
operations and income stream of the commercial real estate and the borrower.
Such risks can be significantly affected by economic conditions. In addition,
commercial lending generally requires substantially greater oversight efforts
compared to residential real estate lending.
Consumer Loans. The Bank's consumer loan portfolio consists primarily of
home equity and home improvement loans. To a lesser extent, the Bank originates
lines of credit, student loans, loans secured by savings accounts and other
consumer loans. Consumer loans are originated in the Bank's market area and
generally have maturities of up to 15 years. As of December 31, 1998, the Bank
had 89 overdraft accounts with an available line of $256,000. For savings
account loans, the Bank will lend
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<PAGE>
up to 90% of the account balance. Student loans are originated and serviced
through the Student Loan Marketing Association (Sallie Mae), affording the Bank
the ability to offer all of the student loan programs available to students
without the burden of servicing them.
Consumer loans have a shorter term and generally provide higher interest
rates than residential loans. The consumer loan market can be helpful in
improving the spread between average loan yield and costs of funds and at the
same time improve the matching of the rate sensitive assets and liabilities.
Management is considering adding new consumer loan products, including
automobile loans and additional personal loan options.
Consumer loans entail greater risks than one-to four-family residential
mortgage loans, particularly consumer loans secured by rapidly depreciable
assets such as automobiles or loans that are unsecured. In such cases, any
repossessed collateral for a defaulted loan may not provide an adequate source
of repayment of the outstanding loan balance, since there is a greater
likelihood of damage, loss or depreciation of the underlying collateral.
Further, consumer loan collections are dependent on the borrower's continuing
financial stability, and therefore are more likely to be adversely affected by
job loss, divorce, illness or personal bankruptcy. Even for consumer loans
secured by real estate (most of the Bank's consumer loan portfolio) the risk to
the Bank is greater than that inherent in the single-family loan portfolio in
that the security for consumer loans is generally not the first lien on the
property and ultimate collection of amounts due may be dependent on whether any
value remains after collection by a holder with a higher priority than the Bank.
Finally, the application of various Federal and state laws, including Federal
and state bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans in the event of a default.
Loans to One Borrower. Under New Jersey and federal law, savings banks
have, subject to certain exemptions, lending limits to one borrower in an amount
equal to 15% of the institution's capital accounts. As of December 31, 1998 the
Bank's largest aggregation of loans to one borrower was $2.7 million, consisting
of loans secured by commercial real estate, in the Ridgewood, New Jersey area,
which was within the Bank's legal lending limit to one borrower of $2.8 million
at such date. At December 31, 1998, the loans were current.
Loan Purchases and Sales. The Bank sells most conforming fixed rate
mortgage loans it originates for 30 year and 20 year terms in the secondary
mortgage market to FNMA. The Bank originates student loans through Sallie Mae
and currently sells these loans prior to repayment. The Bank has not purchased
loans in the secondary market but may consider doing so in the future.
Loan Commitments. The Bank generally grants commitments to fund fixed and
adjustable-rate single-family mortgage loans for periods of 60 days at a
specified term and interest rate. The total amount of the Bank's commitments to
extend credit as of December 31, 1998, 1997 and 1996 was $10.4 million, $2.2
million and $937,000, respectively.
Loan Origination and Other Fees. In addition to interest earned on loans,
the Bank receives loan origination and commitment fees for originating or
purchasing loans. Loan origination fees net of certain loan origination costs
are deferred and amortized over the related life of the loan.
The Bank also receives other fees and charges relating to existing loans,
which include prepayment penalties on commercial loans, late charges, and fees
collected in connection with a change in borrower or other loan modifications.
These fees and charges have not constituted a material source of income.
7
<PAGE>
Non-performing Loans and Problem Assets
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when they are more than 90 days delinquent. Loans may be
placed on a non-accrual status at any time if, in the opinion of management, the
collection of additional interest is doubtful. Interest accrued and unpaid at
the time a loan is placed on non-accrual status is charged against interest
income. Subsequent payments are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan. At December 31, 1998, the Bank had $695,000
of loans that were held on a non-accrual basis and held no real estate owned.
The Bank has defined the population of impaired loans to be all nonaccrual
and restructured commercial loans and certain other performing loans considered
to be impaired as to principal and interest. Impaired loans are individually
assessed to determine that the loan's carrying value is not in excess of the
fair value of the collateral or the present value of the loan's expected future
cash flows. Smaller balance homogeneous loans that are collectively evaluated
for impairment, such as residential mortgage loans and installment loans, are
excluded from the impaired loan portfolio. At December 31, 1998 and 1997, the
Bank had no impaired loans.
8
<PAGE>
Non-performing Assets. The following table sets forth information with
respect to non-performing assets for the periods indicated. During the periods
indicated there were no restructured loans.
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
-------- -------- ------- ------ -------
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
First mortgage loans:
<S> <C> <C> <C> <C> <C>
1- to 4-family.................................... $ 695 $ -- $ 313 $ 397 $ 650
Commercial and other.............................. -- -- -- -- --
Consumer loans:
Equity............................................ -- -- -- -- 58
Lines of credit................................... -- -- -- -- --
Education......................................... -- -- -- 3 8
Loans to depositors,
secured by savings.............................. -- -- -- -- --
-------- -------- ---- ---- ----
Total............................................... $ 695 $ -- $ 313 $ 400 $ 716
======== ======== ==== ==== ====
Real estate owned..................................... $ -- $ -- $ -- $ -- $ --
======== ======== ==== ==== ====
Total non-performing assets........................... $ 695 $ -- $ 313 $ 400 $ 716
======== ======== ==== ==== ====
Total non-accrual loans to net loans.................. 0.65% --% 0.28% 0.41% 0.82%
======== ======== ==== ==== ====
Total non-accrual loans to total assets............... 0.25% --% 0.14% 0.22% 0.50%
======== ======== ==== ==== ====
Total non-performing assets to total assets........... 0.25% --% 0.14% 0.22% 0.50%
======== ======== ==== ==== ====
</TABLE>
9
<PAGE>
For the years ended December 31, 1998, 1997 and 1996, approximately
$17,000, $0 and $13,000, respectively of interest would have been recorded on
loans accounted for on a non-accrual basis if such loans had been current
according to the original loan agreements for the entire period. These amounts
were not included in the Bank's interest income for the respective periods. The
amount of interest income on loans accounted for on a non-accrual basis that was
included in income during the same periods was insignificant during the years
ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, the
Bank had no loans classified as troubled debt restructuring.
Classified Assets. Management, in compliance with regulatory guidelines,
has instituted an internal loan review program, whereby loans are classified as
special mention, substandard, doubtful or loss. When a loan is classified as
substandard or doubtful, management is required to establish a valuation reserve
for loan losses in an amount that is deemed prudent. When management classifies
a loan as a loss asset, a reserve equal to 100% of the loan balance is required
to be established or the loan is to be charged-off. This allowance for loan
losses is composed of an allowance for both inherent risk associated with
lending activities and particular problem assets.
An asset is considered substandard if it is inadequately protected by the
paying capacity and net worth of the obligor or the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the Bank 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, highly questionable and improbable, on the
basis of currently existing facts, conditions, and values. Assets classified as
loss are those considered uncollectible and of such little value that their
continuance as assets without the establishment of a loss reserve is not
warranted. Assets which do not currently expose the insured institution to a
sufficient degree of risk to warrant classification in one of the aforementioned
categories but possess credit deficiencies or potential weaknesses are required
to be designated special mention by management. In addition, each loan that
exceeds $500,000 and each group of loans to one borrower that exceeds $500,000
is monitored more closely due to the potentially greater losses from such loans.
Management's evaluation of the classification of assets and the adequacy of
the reserve for loan losses is reviewed by the Board on a regular basis and by
the regulatory agencies as part of their examination process.
Internal Classification of Assets
At
December 31,
1998
(In thousands)
Special mention............................. $ 387
Substandard................................. 716
Doubtful ................................... --
Loss ....................................... --
------
Total.................................. $1,103
=====
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<PAGE>
Allowance for Loan Losses and REO. At least quarterly, the Bank's
management evaluates the need to establish reserves against losses on loans and
other assets based on estimated losses on specific loans and on any real estate
held for sale or investment when a finding is made that a loss is estimable and
probable. Such evaluation includes a review of all loans for which full
collectibility may not be reasonably assured and considers, among other matters,
the estimated market value of the underlying collateral of problem loans, prior
loss experience, economic conditions and overall portfolio quality. Also
considered are trends in the loan portfolio, expected future loss experience,
and industry reserve levels. Provisions for losses are charged against earnings
in the period they are established.
11
<PAGE>
The following table sets forth certain information regarding the allowance
for loan losses at or for the dates indicated.
<TABLE>
<CAPTION>
At or for years ended December 31,
1998 1997 1996 1995 1994
---------- --------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........................ $ 618 $ 606 $ 593 $ 528 $ 464
Provision for loan losses............................. 204 12 12 60 60
Charge-offs........................................... -- -- (2) -- --
Recoveries............................................ -- -- 3 5 4
------- ------- ------- ------ ------
Balance at end of period.............................. $ 822 $ 618 $ 606 $ 593 $ 528
======= ======= ======= ====== ======
Total loans receivable(1)............................. $107,021 $106,465 $111,715 $96,405 $86,910
======= ======= ======= ====== ======
Average loans outstanding(1).......................... $105,411 $109,954 $105,170 $94,040 $87,369
======= ======= ======= ====== ======
Allowance for loan losses as a
percent of total loans.............................. 0.77% 0.58% 0.54% 0.62% 0.61%
======= ======= ======= ====== ======
Net loans charged off as a
percent of average loans outstanding................ --% --% --% --% --%
======= ======= ======= ====== ======
</TABLE>
- ---------------------------------
(1) includes loans held for sale
12
<PAGE>
The following table exhibits a breakdown by loan category of the
allowance for loan losses.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------- -------------------- --------------------- --------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Loans Loans Loans Loans Loans
in Each in Each in Each in Each in Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
First mortgage -
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1- to 4-family............. $679 82.60% $499 80.70% $512 82.96% $542 91.02% $478 90.96%
Commercial and other....... 60 7.30 60 9.66 54 9.73 18 3.25 15 3.12
Consumer - equity............ 77 9.37 56 9.04 38 6.89 30 5.32 32 5.35
Consumer - lines of credit... 4 0.49 1 0.13 -- 0.07 -- 0.08 -- 0.01
Consumer - education......... -- -- 1 0.15 1 0.12 2 0.09 1 0.21
Consumer - loans
to depositors,
secured by savings......... 2 0.24 1 0.32 1 0.23 1 0.24 2 0.35
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total allowance
for loan losses....... $822 100.00% $618 100.00% $606 100.00% $593 100.00% $528 100.00%
=== ====== === ====== === ====== === ====== === ======
</TABLE>
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<PAGE>
Investment Activities
General. New Jersey-chartered savings banks have the authority to invest in
various types of liquid assets, including United States Treasury obligations,
securities of various Federal agencies, certain certificates of deposits of
insured banks and savings institutions, municipal securities, corporate debt
securities and loans to other banking institutions.
The Bank maintains liquid assets which may be invested in specified
short-term securities and certain other investments. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short-term demand for funds to be
used in the Bank's loan origination and other activities. The Bank maintains an
investment securities portfolio and a mortgage-backed securities portfolio as
part of its investment portfolio.
Investment Policies. The investment policy of the Bank, which is
established by the Board of Directors, is designed to foster earnings and
liquidity within prudent interest rate risk guidelines, while complementing the
Bank's lending activities. The policy provides for available for sale, held to
maturity, and trading classifications. However, the Bank does not currently use
a trading classification and does not anticipate doing so in the future. The
policy permits investments in high credit quality instruments with diversified
cash flows while permitting the Bank to maximize total return within the
guidelines set forth in the Bank's interest rate risk, funds and liquidity
management policy. Permitted investments include but are not limited to U. S.
government obligations, government agency or government-sponsored agency
obligations, state, county and municipal obligations, mortgage backed securities
and collateralized mortgage obligations guaranteed by government or
government-sponsored agencies, investment grade corporate debt securities, and
commercial paper. The Bank also invests in Federal Home Loan Bank overnight and
term deposits, certificates of deposit of insured banks, and federal funds, but
these instruments are not considered part of the investment portfolio.
Investment Securities. The Bank maintains a portfolio of investment
securities held to maturity. The Bank also maintains a portfolio of investment
securities available for sale to enhance total return on investments. Investment
securities available for sale are accounted at fair market value. For the year
ended December 31, 1998 the Bank sold $10.5 million of securities. As of
December 31, 1998, the market value of investment securities available for sale
was $16.9 million, with a cost basis of $16.7 million.
Mortgage-backed Securities. The Bank invests in mortgage-backed securities
to provide earnings, liquidity, cash flows, and diversification to the Bank's
overall balance sheet. These mortgage-backed securities are classified as either
available for sale or held to maturity. These securities are participation
certificates issued and guaranteed by the Government National Mortgage
Association ("GNMA") the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Association ("FHLMC") and secured by interest in
pools of mortgages. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage-backed securities secured
by single-family mortgages.
The Bank also invests in mortgage-related securities, primarily CMOs,
issued or sponsored by GNMA, FNMA, FHLMC, as well as private issuers. CMOs are a
type of debt security that aggregates pools of mortgages and mortgage-backed
securities and creates different classes of CMO securities with varying
maturities and amortization schedules as well as a residual interest with each
class having
14
<PAGE>
different risk characteristics. The cash flows from the underlying collateral
are usually divided into "tranches" or classes whereby tranches have descending
priorities with respect to the distribution of principal and interest repayment
of the underlying mortgages and mortgage backed securities as opposed to pass
through mortgage backed securities where cash flows are distributed pro rata to
all security holders. Unlike mortgage backed-securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage backed securities underlying CMOs are paid
in accordance with a predetermined priority to investors holding various
tranches of such securities or obligations. A particular tranche or class may
carry prepayment risk which may be different from that of the underlying
collateral and other tranches. CMOs attempt to moderate reinvestment risk
associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity. Management believes these securities represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.
Other Securities. Other securities used by the Company, but not necessarily
included in the investment portfolio, consist of equity securities,
interest-bearing deposits and federal funds sold. Equity securities owned
consist of 400 shares of Federal National Mortgage Association common stock
(included in the investment securities portfolio) and 19,486 shares of Federal
Home Loan Bank of New York (FHLB NY) common stock. The remaining securities
provide diversification and complement the Bank's overall investment strategy.
Investment Portfolio
The following table sets forth the carrying value of the investment
securities portfolio, and mortgage-backed securities portfolio at the dates
indicated. At December 31, 1998, the fair value of the investment securities
portfolio and mortgage-backed securities portfolio were $18.3 million and $99.8
million, respectively.
<TABLE>
<CAPTION>
At December 31,
-------------------------------
1998 1997 1996
-------- -------- ------
(In thousands)
<S> <C> <C> <C>
Investment Securities Held to Maturity:
U.S. Government Securities.............................. $ -- $ 1,771 $ 2,328
U.S. agencies........................................... 1,354 7,895 10,393
------- ------ ------
Total Investment Securities Held to Maturity.......... 1,354 9,666 12,721
Investment Securities Available for Sale:
U.S. Government Securities............................. -- 498 493
U.S. Agency Securities............................... 1,468 23,193 40,103
Municipal Securities................................... 13,901 3,241 2,599
Corporate Bonds........................................ 1,522 -- --
Equity Securities(1)................................... 30 22 16
------- --------- ---------
Total Investment Securities Available For
Sale................................................. 16,921 26,954 43,211
Mortgage-backed Securities Held to Maturity.............. 11,277 14,356 16,611
Mortgage-backed Securities Available For Sale............ 88,390 50,099 19,359
------ ------ ------
Total Investment and Mortgage-backed
Securities............................................ $117,942 $101,075 $91,902
======= ======= ======
</TABLE>
- --------------
(1) Equity securities consist of 400 shares of Federal National Mortgage
Association common stock (requirement of being a Seller-Servicer).
15
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Bank's investment and mortgage-backed securities portfolio at
December 31, 1998.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
---------------- ----------------- ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U. S. Agency Securities.. $ 58 9.38% $ 43 9.38% $ 659 9.73% $ 2,062 6.64% $ 2,822 7.46% $ 2,842
Corporate Bonds.......... -- -- 1,522 6.00 -- -- -- -- 1,522 6.00 1,522
Municipal Securities..... -- -- 1,721 3.78 721 4.73 11,459 4.94 13,901 4.79 13,901
Equity Securities(1)..... 30 4.67 -- -- -- -- -- -- 30 4.67 30
---- ---- ----- ---- ------ ---- ------ ---- ------- ---- -------
Total Investment
Securities........... 88 7.77 3,286 4.88 1,380 7.12 13,521 5.20 18,275 5.30 18,295
Mortgage-backed Securities. 708 7.00 3,900 6.98 19,887 7.62 75,172 8.14 99,667 7.99 99,799
--- ---- ----- ---- ------ ---- ------ ---- ------ ---- -------
Total Investments...... $796 7.12% $7,186 6.02% $21,267 7.59% $88,693 7.69% $117,942 7.57% $118,094
=== ==== ===== ==== ====== ==== ====== ==== ======= ==== =======
</TABLE>
- ------------------------
(1) Equity securities consist of 400 shares of Federal National Mortgage
Association common stock (requirement of being a Seller-Servicer).
16
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending and
other investment purposes. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources. In
addition to deposits and borrowings, the Bank derives funds from loan and
mortgage-backed securities principal repayments, and proceeds from the sale of
mortgage-backed securities and investment securities. Loan and mortgage-backed
securities payments are a relatively stable source of funds, while deposit
inflows are significantly influenced by general interest rates and money market
conditions. They also may be used on a longer-term basis for interest rate risk
management and general business purposes.
Deposits. The Bank offers a variety of deposit accounts, although a
majority of deposits are in fixed-term, market-rate certificate accounts.
Deposit account terms vary, primarily as to the required minimum balance amount,
the amount of time that the funds must remain on deposit and the applicable
interest rate.
Jumbo Certificates of Deposit
The following table shows the amount of the Bank's certificates of deposit
of $100,000 or more by time remaining until maturity as of December 31, 1998.
Certificates
Maturity Period of Deposit
- --------------- ----------
(In thousands)
Within three months..................... $ 4,963
Three through six months................ 5,909
Six through twelve months............... 4,573
Over twelve months...................... 1,955
------
$17,400
Borrowings. Deposits are the primary source of funds for the Bank's lending
and investment activities and for its general business purposes. The Bank, as
the need arises, relies upon advances from the FHLB NY to supplement its supply
of lendable funds and to meet deposit withdrawal requirements. Advances from the
FHLB NY are typically secured by the Bank's stock in the FHLB and a portion of
the Bank's residential mortgage loans and may be secured by other assets
(principally securities which are obligations of or guaranteed by the U.S.
Government). The Bank funds loan demand and investment opportunities out of
current loan and mortgage-backed securities repayments, investment maturities
and new deposits. However, the Bank has utilized FHLB advances to supplement
these sources and as a match against certain assets in order to better manage
interest rate risk.
17
<PAGE>
The following table sets forth information concerning FHLB advances during
the periods indicated (includes both short- and long-term advances).
At or For the Years
Ended December 31,
--------------------------------
1998 1997 1996
FHLB advances:
Average balance outstanding............. $23,596 $22,012 $32,210
Maximum amount outstanding
at any month-end during
the period.......................... 32,895 28,400 38,972
Balance outstanding at
end of period......................... 32,557 16,282 28,400
Weighted average interest
rate during the period.............. 5.66% 5.93% 5.81%
Weighted average
interest rate at
the end of the period............... 5.41% 6.00% 5.86%
Subsidiary Activity
The Bank is permitted to invest its assets in the capital stock of, or
originate secured or unsecured loans to, subsidiary corporations. The Bank does
not have any subsidiaries.
Personnel
As of December 31, 1998, the Bank had 31 full-time employees and 11
part-time employees. The employees are not represented by a collective
bargaining unit. The Bank believes its relationship with its employees to be
satisfactory.
Competition
The Bank faces strong competition in its attraction of deposits, which are
its primary source of funds for lending, and in the origination of real estate
and consumer loans. The Bank's competition for deposits and loans historically
has come from other savings institutions and commercial banks located in the
Bank's market area. The Bank also competes with mortgage banking companies for
real estate loans, and commercial banks and savings institutions for consumer
loans; and faces competition for investor funds from short-term money market
securities and corporate and government securities. The Bank's primary market
area is northwestern Bergen County, New Jersey.
Regulation of the Bank
General. As a New Jersey chartered savings bank insured by the Savings
Association Insurance Fund (the "SAIF"), the Bank is subject to extensive
regulation and examination by the New Jersey Department of Banking and Insurance
(the "Department"), the FDIC, which insures its deposits to the maximum extent
permitted by law, and to a much lesser extent, by the Federal Reserve. The
federal and state laws and regulations which are applicable to banks regulate,
among other things, the scope of their business, their investments, the reserves
required to be kept against deposits, the timing of the availability
18
<PAGE>
of deposited funds and the nature and amount of and collateral for certain
loans. The laws and regulations governing the Bank generally have been
promulgated to protect depositors and not for the purpose of protecting
stockholders. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in regulation, whether by the Department,
the FDIC or the United States Congress could have a material adverse impact on
the Company, the Bank and their operations.
New Jersey Savings Bank Law. The New Jersey Banking Act of 1948 ("Banking
Code") contains detailed provisions governing the organization, location of
offices, rights and responsibilities of directors, officers, and employees, as
well as corporate powers, savings and investment operations and other aspects of
the Bank and its affairs. The Banking Code delegates extensive rule-making power
and administrative discretion to the Department so that the supervision and
regulation of state chartered savings banks may be flexible and readily
responsive to changes in economic conditions and in savings and lending
practices.
One of the purposes of the Banking Code is to provide savings banks with
the opportunity to be fully competitive with each other and with other financial
institutions existing under other state, federal and foreign laws. To this end,
the Banking Code provides state-chartered savings banks with all of the powers
enjoyed by federal savings and loan associations, subject to regulation by the
Department. Federal law, however, generally prohibits state chartered
institutions from making new investments, loans, or becoming involved in
activities as principal and equity investments which are not permitted for
national banks. The ability of the Banking Code to provide additional operating
authority to the Bank is limited by federal law.
Insurance of Deposit Accounts. The deposit accounts held by the Bank are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). Insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. In 1996, the annual insurance premium for most BIF
members was lowered to $2,000. The lower insurance premiums for BIF members
placed SAIF members at a competitive disadvantage to BIF members.
Effective September 30, 1996, federal law was revised to mandate a one-time
special assessment on SAIF members such as the Bank of approximately 0.657% of
deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance assessment for most SAIF members was reduced to 0.064% of deposits on
an annual basis through the end of 1999. During this same period, BIF members
will be assessed approximately 0.013% of deposits. After 1999, assessments for
BIF and SAIF members should be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance assessed the Bank declined by
approximately 70%.
19
<PAGE>
Regulatory Capital Requirements. Under FDIC regulations, the Bank is
required to maintain minimum leverage capital (a ratio of Tier 1 capital to
total risk-weighted assets) of 4%. For institutions other than those most highly
rated by the FDIC, additional capital of at least 100 to 200 basis points is
required. Tier 1 capital is the sum of common stockholders' equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority investments in certain subsidiaries, less certain intangible assets,
deferred tax assets, certain identified losses and certain investments in
securities subsidiaries. As a SAIF-insured, state-chartered savings bank, the
Bank must currently also deduct from Tier 1 capital an amount equal to its
investments in, and extensions of credit to, subsidiaries engaged in certain
activities not permissible for national banks.
In addition to the leverage ratio, the Bank must maintain a ratio of
qualifying total capital to risk- weighted assets of at least 8.0%, of which at
least four percentage points must be Tier 1 capital. Qualifying total capital
consists of Tier 1 capital plus Tier 2 or supplementary capital items which
include allowances for loan losses in an amount of up to 1.25% of risk-weighted
assets, cumulative preferred stock and preferred stock with a maturity of over
20 years and certain other capital instruments. The includable amount of Tier 2
capital cannot exceed the institution's Tier 1 capital. Qualifying total capital
is further reduced by the amount of the bank's investments in banking and
finance subsidiaries that are not consolidated for regulatory capital purposes,
reciprocal cross-holdings of capital securities issued by other banks and
certain other deductions. Under the FDIC's risk-weighted system, all of a bank's
balance sheet assets and the credit equivalent amounts of certain off-balance
sheet items are assigned to risk weight categories. The aggregate dollar amount
of each category is multiplied by the risk weight assigned to that category. The
sum of these weighted values equals the bank's risk-weighted assets.
Pursuant to New Jersey banking law the minimum leverage capital for a
depository institution is a ratio of Tier 1 capital to total risk-weighted
assets of four percent. However, the Department may require a higher ratio for a
particular depository institution.
New Jersey banking law requires that a depository institution maintain
qualifying capital of at least eight percent of its risk weighted assets. At
least four percent of this qualifying capital shall be in the form of Tier 1
capital. For purposes of New Jersey banking law, risk weighted assets, Tier 1
capital, and total assets are defined in the same manner as in the FDIC
regulations.
The Bank was in compliance in both the FDIC and New Jersey capital
requirements at December, 31, 1998.
Regulatory Capital Distributions. Earnings of the Bank appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Bank on the amount of earnings
removed from the reserves for such distributions.
Dividends payable by the Bank to the Company and dividends payable by the
Company to stockholders are subject to various additional limitations imposed by
federal and state laws, regulations and policies adopted by federal and state
regulatory agencies.
Qualified Thrift Lender Test. The Bank must maintain an appropriate level
of certain investments ("Qualified Thrift Investments") and otherwise qualify as
a qualified thrift lender ("QTL"), in order to continue to enjoy full borrowing
privileges from the FHLB NY. The required percentage of Qualified Thrift
Investments is 65% of portfolio assets.
20
<PAGE>
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between the Bank and its affiliates be on
terms as favorable to the Bank as transactions with non-affiliates. In addition,
certain of these transactions are restricted to a percentage of the Bank's
capital. Collateral in specified amounts must usually be provided by affiliates
in order to receive loans from the Bank. Within certain limits, affiliates are
permitted to receive more favorable loan terms than non-affiliates.
Regulation of the Company
General. As a bank holding company, Registrant is subject to regulation and
supervision by the Board of Governors of the Federal Reserve System and by the
Department. This regulation is generally intended to ensure that the Company
limits its activities to those allowed by law and that it operates in a safe and
sound manner without endangering the financial health of its subsidiary bank.
The mutual holding company is a bank holding company and is subject to the
regulations summarized below.
Federal Law and Other Limitations. A bank holding company may not acquire
direct or indirect ownership or control of more than 5% of the voting shares of
any bank, or increase its ownership or control of any bank, without prior
approval of the Federal Reserve.
Federal law also prohibits a bank holding company, with certain exceptions,
from acquiring more than 5% of the voting shares of any company that is not a
bank and from engaging in any business other than banking or managing or
controlling banks. The Federal Reserve is authorized to approve the ownership of
shares by a bank holding company in any company, the activities of which the
Federal Reserve has determined to be so closely related to banking or to
managing or controlling banks as to be a proper incident thereto.
Regulatory Capital Requirements. The Federal Reserve has adopted capital
adequacy guidelines pursuant to which it assesses the adequacy of capital in
examining and supervising a bank holding company and in analyzing applications.
The Federal Reserve capital adequacy guidelines are similar to those imposed on
the Bank by the FDIC.
Commitments to Affiliated Depository Institutions. Under Federal Reserve
policy, the Company will be expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances when it
might not do so absent such policy. The enforceability and precise scope of this
policy is unclear. However, should the Bank require the support of additional
capital resources, it is expected that the Company will be required to respond
with any such resources available to it.
Restrictions Applicable to New Jersey-Chartered Mutual Holding Companies.
The Department is authorized to approve the reorganization of a state chartered
savings bank to a mutual savings bank holding company. The general powers of a
mutual savings bank holding company are similar to the authorized powers of New
Jersey corporations, subject to the interpretation of the Department.
Item 2. Description of Property
Properties and Equipment
The Bank's executive offices are located at 531 North Maple Avenue in
Ridgewood, New Jersey. The Bank conducts its business through three offices,
which are located in Ridgewood and Mahwah, New
21
<PAGE>
Jersey. The following table sets forth the location of each of the Bank's
offices, the year the office was acquired and the net book value of each office.
Net Book
Year Facility Value as of
Opened or Leased or December 31,
Office Location Acquired Owned 1998
- --------------- ---------------- ------- -----------
Broad Street Office
55 North Broad Street
Ridgewood, NJ 07450 1964 Leased $291,000
Mahwah Office
6 East Ramapo Avenue
Mahwah, NJ 07430 1995 Leased 237,000
Maple Avenue Office
531 North Maple Avenue
Ridgewood, NJ 07450 1995 Owned 1,093,000
---------
TOTAL $1,621,000
=========
The Broad Street office lease is dated April 6, 1975 with a term of thirty
years. The Mahwah office lease has a term of twelve years. Each lease has a
renewal option. The Bank has a limited service branch open several hours a week
that is located in a nursing home in Allendale, New Jersey.
As of December 31, 1998, the net book value of land, buildings, furniture,
and equipment owned by the Bank, less accumulated depreciation, totalled $2.2
million. The Bank has purchased a building to serve as an additional branch
office and to house administrative operations of the Bank. The Bank has
estimated that the acquisition and refurbishment costs for this purpose could
total approximately $6.2 million.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which Registrant is periodically
involved, such as claims to enforce liens, condemnation proceedings on
properties in which Registrant holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to
Registrant's business.
In the opinion of management, no material loss is expected from any of the
pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
Not Applicable.
22
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The principal trading market for the common stock of the Company is the
National Market of The Nasdaq Stock Market. There were no shares of common stock
of the Company outstanding (other than in connection with the incorporation and
related matters) on or before January 7, 1999 and there was therefore no trading
in the common stock on or before January 7, 1999. The Company has never paid a
cash dividend. The ability of the Company to pay a dividend in the future will
be impacted by the ability of the Bank to pay dividends to its sole stockholder,
the Company.
The Company is not permitted to pay dividends on its capital stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account created in connection with the reorganization of the Bank
from mutual to stock form. The Bank must maintain at all times a surplus in an
amount which is at least equal to its required capital. Dividends may be
declared by the Company and paid to stockholders only out of accumulated net
earnings after any required transfers to surplus and only if the Company's
surplus would not be reduced by the payment of the dividend.
In addition, earnings of the Company and the Bank appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Company and the Bank on the amount
of earnings deemed to be removed from the reserves for such distribution.
If, in the future, the current mutual holding company structure is
eliminated, the payment of dividends by the Company to its stockholders
(including the mutual holding company), or the possible waiver of dividends by
the mutual holding company, would result in adjustments to the exchange ratio
that stockholders of the Company would receive in connection with any
elimination of the mutual holding company structure.
The Reorganization, including the initial public offering of the common
stock of the Company, was completed on January 7, 1999. The Reorganization
resulted in the issuance of 3,180,000 shares of common stock, $0.10 par value
per share, of the Company of which 1,494,600 shares (47%) were sold at a
purchase price per share of $7.00 and 1,685,400 shares (53%) were issued to
Ridgewood Financial, MHC, resulting in gross proceeds of $10,462,200. The
1,494,600 shares constitute an amount between the midpoint and maximum of the
range registered by means of a registration statement on Form SB-2 (file no.
333-62363) that was declared effective on November 12, 1998. The Company was
assisted by Ryan, Beck & Co., Inc. on a best efforts basis. Fees and expenses to
Ryan, Beck & Co., Inc. totaled $156,000.
Total expenses were $700,000, resulting in net proceeds of $9.8 million.
Approximately half of the net proceeds, $4,893,340, was paid directly by
the Company to the Bank in return for 100,000 shares of common stock, $2.00 par
value per share, of the Bank (100% of the issued and outstanding shares of the
Bank). Of this amount, $200,000 constitutes common stock of the Bank and an
additional $4,693,340 constitutes additional paid in capital of the Bank.
In addition, $200,000 was provided to Ridgewood Financial, MHC by the Bank
in connection with the Reorganization.
23
<PAGE>
The remaining $4,906,660 of the net proceeds was retained by the Company.
Of this amount, at February 28, 1999, $552,681 was a direct payment in the form
of a loan by the Company to the Bank to fund the purchase by the employee stock
ownership plan of the Bank of 60,000 shares of the common stock of the Company.
The remaining amount, $4,353,979, was deposited by the Company into an account
at the Bank. However, additional shares may have been purchased since February
28, 1999, or will be purchased, by the employee stock ownership plan of the
Bank. Such purchases would be funded from the $4,353,979 remaining amount,
thereby reducing the remaining amount accordingly.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
General
The Bank's results of operations are primarily dependent on its net
interest income, which is the difference between the interest income earned on
assets, primarily loans, mortgage-backed securities, investments, and other
interest earning assets less the interest expense on its liabilities, primarily
deposits and borrowings. Net interest income may be affected significantly by
general economic and competitive conditions, particularly those with respect to
market interest rates, and policies of regulatory agencies. Furthermore, the
Bank's lending activity is concentrated in loans secured by real estate in the
Bank's market area and therefore the Bank's operations are affected by local
market conditions. The results of operations are also influenced by the level of
noninterest expenses, such as employees' salaries and benefits, occupancy and
equipment costs, noninterest income such as loan related fees and fees on
deposit related services, and the Bank's provision for loan losses.
Management Strategy
The Bank has historically focused on offering deposit products and
residential mortgage loans to customers in the town of Ridgewood and townships
of Allendale, Franklin Lakes, Glen Rock, Ho-Ho- Kus, Mahwah, Midland Park,
Oakland, Paramus, Ramsey, Ridgewood, Saddle River, Upper Saddle River, Waldwick
and Wyckoff, all of which are located in northwestern Bergen County. The Bank
generates net income primarily by originating and selling loans, investing in
debt and equity securities and mortgage-backed securities, attracting and
retaining deposits by paying competitive interest rates, borrowing from the
Federal Home Loan Bank of New York and maintaining a high standard of customer
service as a local community savings bank.
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services. During the past
several years, the competing financial institutions headquartered in Ridgewood
have essentially all been acquired by state-wide and regional bank and thrift
holding companies. As a result, the Bank is the only remaining local institution
headquartered and managed in Ridgewood, New Jersey. The Bank believes that its
"hometown" advantage provides an opportunity to expand its operations as the
only local, independent financial institution. The Bank also believes it has the
ability to grow as a result of the relatively high level of income and
businesses operating in its primary market area.
The Bank's strategy is to attempt to take advantage of the favorable
demographic and economic conditions in its market area by continuing to increase
in size, focus on attracting core deposits, and gradually shift its assets into
higher yielding loans. Total assets of the Bank have increased from $130.2
24
<PAGE>
million at December 31, 1993, to $274.7 million at December 31, 1998. Much of
this increase was attributable to the opening of two new branch offices in 1996.
Management believes that these two new offices, which are located in Ridgewood
and Mahwah, will help the Bank continue to meet the financial services needs of
its customers in an effective and personalized manner.
Comparison of Financial Condition at December 31, 1998 and December 31, 1997
Total assets increased by $45.6 million or 19.9% to $274.7 million at
December 31, 1998 from $229.1 million at December 31, 1997. This increase was
primarily due to an increase in available for sale mortgage-backed securities,
federal funds sold and loans receivable, offset by decreases in held to maturity
and available for sale investment securities, as well as held to maturity
mortgage-backed securities. Federal funds sold increased by $28.0 million due to
investment of initial public offering subscription deposits received related to
the stock offering. Available for sale mortgage-backed securities increased by
$38.3 million, as new purchases and reinvestment of prepayments of investment
securities were classified as available for sale, while held to maturity
mortgage-backed securities decreased by $3.1 million. Held to maturity and
available for sale investment securities decreased by $18.3 million due to sales
and redemption of callable securities. Many of the agency bonds in the
investment securities portfolio had provisions allowing for the agency to redeem
its bonds prior to the stated maturity. Due to the decline in interest rates,
many of these bonds were redeemed and the investment securities portfolio
declined. In addition, investment securities were sold to reduce the Bank's
interest rate risk. Future investment securities purchases will be classified as
available for sale which will result in the continued reduction in investment
securities held to maturity. Investment securities available for sale are not
expected to further decline as they have in the past due to the reduction in
amount in the portfolio that can be redeemed prior to stated maturity. The
portfolio of mortgage-backed securities is expected to increase due to its
current use in interest rate risk management and also as a result of the receipt
of proceeds from the offering. Loans receivable increased $1.3 million due to an
increase in mortgage loan originations resulting from higher levels of loan
refinancings during a lower interest rate environment.
The Bank's deposits, increased by $11.6 million or 6.0 % to $205.5 million
at December 31, 1998, due primarily to continued deposit growth at both of its
new branches opened in 1996. Borrowings increased $16.3 million or 100.0% to
$32.6 million at December 31, 1998 from $16.3 million at December 31, 1997 as
the Bank used borrowings to lengthen the maturities of its liabilities to reduce
interest rate risk and to generate additional income as part of its leveraging
strategy. The leveraging strategy is designed to increase net interest income by
purchasing mortgage-backed securities available for sale utilizing borrowed
funds. The increase to net interest income by this strategy will improve net
income; however, the targeted spread on this strategy results in a negative
impact to the net interest margin.
Total equity increased $228,000 to $17.4 million at December 31, 1998 due
to net income of $727,000 for 1998 offset by $514,000 of unrealized losses on
securities available for sale, net of taxes.
The Bank purchased a building in March 1999 to serve as an additional
branch office and to house administrative operations of the Bank. The Bank has
estimated that the acquisition and refurbishment costs for this purpose could
total approximately $6.2 million. The Bank could fund these costs with cash and
cash equivalents, other maturing assets, borrowings, or a combination thereof,
without reducing liquidity below required levels.
25
<PAGE>
Comparison Of Operating Results For The Years Ended December 31, 1998 and
December 31, 1997
Net Income. Net income decreased $523,000 to $727,000 for the year ended
December 31, 1998 as compared to $1,250,000 for the year ended December 31,
1997. Net income was lower primarily due to a decrease of $302,000 in net
interest income as a result of an increase in interest expense on deposits and
borrowed funds totaling $812,000, offset by an increase in interest income of
$510,000. In addition, there was an increase in loan loss provisions of $192,000
for the year ended December 31, 1998, as compared to the same period for 1997.
Further, non-interest expense increased $565,000.
Net Interest Income. Net interest income before provision for loan losses
decreased by approximately $302,000 or 5.4% to $5.2 million for the year ended
December 31, 1998. The decrease was primarily due to a decline in the average
yield on interest earning assets (on a tax equivalent basis) of 41 basis points
from 7.40% for the year ended December 31, 1997 to 6.99% for the year ended
1998. The decrease was also due to an increase in the average balances of
interest bearing liabilities of $17.9 million or 8.8% from $203.2 million to
$221.1 million, which was slightly offset by a 4 basis point decline in the
average cost of interest bearing liabilities. The average balances of interest
earning assets increased by $21.0 million or 9.8 % from $215.1 million to $236.1
million.
The Bank's interest rate spread, which is the difference between the yield
on average interest earning assets less the cost of interest bearing
liabilities, declined to 1.97 % for the year ended December 31, 1998, from 2.34
% for the year ended December 31, 1997. This was primarily attributed to
redemption of callable bonds, higher prepayments on mortgage backed securities
and loans receivable with the proceeds reinvested in lower yielding assets due
to the general decline of market interest rates for these instruments. In
addition, competitive pressure on the pricing of loans and deposits has resulted
in a smaller interest rate spread. Competitive pressure and the interest rate
environment in the future may further reduce the spread between asset yields and
the cost of funds.
Interest Income. Interest income increased to $16.3 million for the year
ended December 31, 1998, from $15.8 million for the year ended December 31,
1997. The increase was due to higher average balances in available for sale
securities and other interest earning assets, offset by a decrease in the
average balance of loans receivable and securities held to maturity. The
decrease in securities held to maturity was due to higher prepayments,
redemption and sales of investment securities. The increase in available for
sale securities was due to classification of reinvested funds as available for
sale as well as purchases under the leverage strategy described previously. The
average yield on interest earning assets (on a tax equivalent basis) decreased
from 7.40% for the year ended December 31, 1997, to 6.99% for the year ended
December 31, 1998, due to redemption and prepayment of higher coupon loans and
securities with reinvestment of proceeds into lower coupon instruments during a
low interest rate environment with a flat yield curve.
Interest on loans receivable decreased by $250,000 or 2.9 % to $ 8.3
million for the year ended December 31, 1998 from $ 8.6 million for the year
ended December 31, 1997. The decrease was due to a $1.6 million or a 1.5 %
decline in the average balance of loans receivable resulting from prepayments
and amortization on mortgage loans in excess of new originations. That decrease
was exacerbated by a decrease of 11 basis points in the average yield because of
lower interest rates on originated loans during the 1998 period and the
prepayment/amortization of higher rate loans.
Interest expense. Interest expense increased $812,000 to $11.1 million for
the year ended December 31, 1998. The increase was due to a $17.9 million
increase in the average balance of interest bearing liabilities partially offset
by a decrease of 4 basis points in the average cost of interest bearing
26
<PAGE>
liabilities. Interest expense on time deposits increased $560,000 due to an
increase in the average balances of time deposits of $9.7 million and an
increase in the average cost of time deposits of 1 basis point. Interest expense
on demand deposit accounts increased $57,000 due to an increase in the average
balance of $3.1 million, slightly offset by a decline in the average cost of 1
basis point. In addition, interest expense on savings deposits increased
$163,000 due to an increase in the average balance of $3.4 million to $28.7
million for the year ended December 31, 1998 from $25.3 million for the prior
year ended, as well as an increase of 20 basis points in the average cost from
3.11% for 1997 compared to 3.31% for 1998.
Provision for loan losses. The provision for loan losses for 1998 increased
$192,000, thereby increasing the allowance for loan losses to $822,000 at
December 31, 1998. This increase in the allowance reflects management's
evaluation of the inherent risk in the Bank's loan portfolio and the level of
nonperforming assets, as well as management's evaluation of the general economic
conditions in the Bank's market area, in addition to a comparison of loss
experience at the Bank and loss experience and reserve levels at peer
institutions. In addition, the allowance was increased as a result of the
changing composition of the loan portfolio with an increasing emphasis on
commercial real estate and consumer loans.
Non-interest income. Non-interest income decreased by $33,000 to $199,000
for the year ended December 31, 1998, from $232,000 for the year ended December
31, 1997. Fees and service charges increased $26,000 due to an increase in
non-customer ATM transaction fees, while gains on sales/redemption of securities
increased $5,000. These were offset by a decline in gains on loan sales of
$24,000. Other non-interest income declined by $40,000 for the year ended
December 31, 1998, primarily due to the absence of a gain on sale of other real
estate.
Non-interest expenses. Non-interest expenses increased by $565,000 to $4.2
million for the year ended December 31, 1998 from $3.7 million for the year
ended December 31, 1997. The increase was primarily due to increases of $312,000
in salaries and benefits resulting from an increase in staff, increases in
medical insurance rates, recognition of expenses for new benefit plans for
senior executives and the Board of Directors, as well as normal salary and merit
increases. Occupancy and equipment expenses increased $111,000 mostly
attributable to increases in computer service expense of $81,000 resulting from
an increase in account volumes and including $20,000 in year 2000 compliance
costs. In addition, the Bank wrote off approximately $75,000 during 1998 for
non-compliant computer equipment. Other non-interest expense increased by
$134,000 to $590,000 for the year ended December 31, 1998, from $456,000 for the
year ended December 31, 1997. This increase was due to a $20,000 increase in
consultants fees due to costs associated with strategic planning, and an
increase of $37,000 for increased legal and accounting fees resulting from the
reorganization. In addition, appraisal fees increased by $29,000 due to an
increase in loan origination volume. Noninterest expenses will likely increase
in future periods because of the costs associated with our employee stock
ownership plan, the restricted stock plan we expect to implement and the costs
of being a public company.
Income Taxes. Income taxes decreased by approximately $569,000 to $272,000
for 1998 as compared to $841,000 for 1997. The decrease was primarily due to the
decrease in income before taxes as discussed above and an increase in levels of
tax exempt securities.
27
<PAGE>
Comparsion Of Operating Results For The Years Ended December 31, 1997 and
December 31, 1996
Net Income. Net income increased $510,000 or 68.9% to $1.3 million for the
year ended December 31, 1997 as compared to $740,000 for the year ended December
31, 1996. Net income increased primarily as a result of a decrease of $534,000
in non-interest expenses. This decrease was mainly due to the absence of the
one-time SAIF Special Assessment which occurred in 1996.
Net Interest Income. Net interest income increased by $103,000 or 1.9% to
$5.5 million for the year ended December 31, 1997. The increase was primarily
due to an increase in the average balances of interest earning assets of $16.8
million or 8.5% from $198.3 million to $215.1 million, but was offset by a 15
basis point decline in the average yield on interest earning assets (on a tax
equivalent basis). The average balances of interest bearing liabilities
increased by $15.6 million or 8.3% from $187.7 million to $203.2 million, and
were subject to a slight decrease in the average cost of interest bearing
liabilities of 1 basis point from 5.07% for the year ended December 31, 1996, to
5.06% for the year ended 1997.
The Bank's interest rate spread (on a tax equivalent basis), which is the
difference between the yield on average interest earning assets less the cost of
interest bearing liabilities, declined to 2.30 % for the year ended December 31,
1997, from 2.48 % for the year ended December 31, 1996.
Interest Income. Interest income increased to $15.8 million for the year
ended December 31, 1997, from $15.0 million for the year ended December 31,
1996. The increase was due to higher average balances in loans receivable and
available for sale securities, offset by a decrease in the average balance of
held to maturity securities. The decrease in held to maturity securities was due
to higher prepayments, redemption and sales of investment securities. The
increase in available for sale securities was due to classification of
reinvested funds as available for sale. The average yield of interest earning
assets decreased from 7.55% for the year ended December 31, 1996, to 7.40% for
the year ended December 31, 1997, due to lower interest rates on such
instruments for the 1997 period as compared to 1996.
Interest on loans receivable increased by $295,000 or 3.6 % to $ 8.6
million for the year ended December 31, 1997 from $ 8.3 million for the year
ended December 31, 1996. The increase was due to a $4.6 million increase or 4.5
% in the average balance of loans receivable resulting from a net increase in
one - to four - family residential mortgage loans, due to continued acceptance
of the Bank's first time home-buyers program and marketing of loan products.
That increase was offset somewhat by a decrease of 7 basis points in the average
yield because of lower interest rates on originated loans during the 1997
period.
Interest expense. Interest expense increased $765,000 to $10.3 million for
the year ended December 31, 1997. The increase was due to a $15.6 million
increase in the average balance of interest bearing liabilities partially offset
by a decrease of 1 basis point in the average cost of interest bearing
liabilities. Interest expense on time deposits increased $1.2 million partially
offset by a $567,000 decrease in interest on borrowings. The increase was due to
increased time deposit balances primarily from the two new branches opened
during 1996. These funds were used to reduce short term borrowings in order to
lower the Bank's interest rate risk position.
28
<PAGE>
Provision for loan losses. The provision for loan losses for 1997 remained
at $12,000, thereby increasing the allowance for loan losses to $618,000 for the
year ended December 31, 1997. This increase in the allowance reflects
management's evaluation of the inherent risk in the Bank's loan portfolio, as
well as management's evaluation of the general economic conditions in the Bank's
market area.
Non-interest income. Non-interest income increased by $86,000 or 58.9% to
$232,000 for the year ended December 31, 1997, from $146,000 for the year 1996.
Fees and service charges increased $41,000 due to an increase of $14,000 in ATM
fees due to the first full year of operation in 1997, and an increase of $39,000
in checking account fees. Gains on loan sales increased by $31,000, which were
mostly offset by a decrease of $26,000 in gains on sales of securities.
Non-interest expenses. Non-interest expenses decreased by $534,000 to $3.7
million for the year ended December 31, 1997 from $4.2 million for the year
ended December 31, 1996. The decrease was primarily due to the absence of the
one-time special SAIF assessment, paid in 1996 to the FDIC by all SAIF members
to recapitalize the SAIF, which amounted to $830,000 for the Bank. In addition,
deposit insurance premiums decreased $140,000 to $110,000 for the year ended
December 31, 1997 from $250,000 for the year ended December 31, 1996, as the
FDIC lowered insurance premiums shortly following the one-time special SAIF
assessment. These decreases were partially offset by increases of $235,000 in
salaries and benefits due to the impact of a full year of operation with
increased personnel resulting from the Bank's two de-novo branches opened during
1996, as well as normal salary and merit increases. Additional increases for the
year ended December 31, 1997 in occupancy and equipment expenses of $156,000
were mostly attributable to the first full year of operation for the two
additional branch offices. Other non-interest expenses increased by $73,000 to
$456,000 for the year ended December 31, 1997, from $383,000 for the year ending
December 31, 1996, mostly attributed to an increase of $32,000 for other real
estate expense stemming from various foreclosure costs.
Income Taxes. Income taxes increased by approximately $213,000 or 33.9% to
$841,000 for 1997 as compared to $628,000 for 1996. The increase was primarily
due to the increase in income before taxes as discussed above, partially offset
by an increase in tax exempt income.
29
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ---------------------------- ---------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable, net (1).................$105,411 $ 8,312 7.89% $106,991 $ 8,562 8.00% $102,411 $ 8,267 8.07%
Securities held to maturity (2)........... 17,171 1,157 6.74 26,181 1,824 6.97 32,755 2,305 7.04
Securities available for sale (3)......... 93,482 5,922 6.33 70,563 4,862 6.89 56,097 4,002 7.13
Other interest-earning assets (4)......... 20,078 1,124 5.60 11,382 670 5.89 7,051 396 5.62
------- ------ -------- ------- -------- --------
Total interest-earning assets........... 236,142 16,515 6.99 215,117 15,918 7.40 198,314 14,970 7.55
Noninterest-earning assets................ 5,280 5,569 5,591
------- -------- --------
Total assets............................$241,422 $220,686 $203,905
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposit accounts:
DDA accounts.............................$ 13,500 252 1.87 $ 10,358 195 1.88 $ 7,170 139 1.94
Savings accounts......................... 28,671 948 3.31 25,260 785 3.11 22,218 663 2.98
Money market deposit accounts............ 4,102 123 3.00 4,051 121 2.99 4,068 122 3.00
Certificates of deposit.................. 151,232 8,441 5.58 141,564 7,881 5.57 122,001 6,726 5.51
Borrowed funds............................ 23,596 1,335 5.66 22,012 1,305 5.93 32,210 1,872 5.81
------- ------ -------- ------ -------- ------
Total interest-bearing liabilities...... 221,101 11,099 5.02 203,245 10,287 5.06 187,667 9,522 5.07
------ ------ ------
Noninterest-bearing liabilities........... 2,740 1,552 1,538
------- -------- --------
Total liabilities....................... 223,841 204,797 189,205
Total equity................................ 17,581 15,889 14,700
------- -------- --------
Total liabilities and total equity......$241,422 $220,686 $203,905
======= ======= =======
Net interest income...................... $5,416 $5,631 $ 5,448
===== ===== ======
Interest rate spread (5)................. 1.97% 2.34% 2.48%
Net interest margin (6).................. 2.29% 2.62% 2.75%
Ratio of average interest-earning assets 1.07X
to average interest-bearing liabilities.. 1.06X 1.06X
</TABLE>
- -----------------------
(1) Loans receivable, net includes non-accrual loans. Interest includes loan
origination fees, which are immaterial.
(2) Includes mortgage-backed and investment securities held to maturity. Yields
on tax exempt obligations were computed on a tax equivalent basis.
(3) Investments, mortgage-backed securities, and loans held for sale are
carried at market value. Yields on tax exempt obligations were computed on
a tax equivalent basis.
(4) Includes federal funds sold, Federal Home Loan Bank stock and
interest-earning deposits.
(5) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
30
<PAGE>
Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest-earning assets and interest-bearing liabilities and
changing volume or amount of these assets and liabilities. The following table
represents the extent to which changes in interest rates and changes in the
volume of interest-earning assets and interest-bearing liabilities have affected
the Bank's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (change in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (change in rate multiplied by prior
volume), and (iii) the net change. Changes attributable to the combined impact
of volume and rate have been allocated proportionately to the change due to
volume and the changes due to rate.
<TABLE>
<CAPTION>
Years Ended December 31, Years Ended December 31,
---------------------------- ----------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------- ----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------- ----------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net ........... $ (129) $ (121) $ (250) $ 368 $ (73) $ 295
Securities held to maturity ..... (609) (58) (667) (459) (22) (481)
Securities available for sale ... 1,480 (420) 1,060 1,000 (140) 860
Other interest earning assets ... 489 (35) 454 250 24 274
------- ------- ------- ------- ------- -------
Total ......................... $ 1,231 $ (634) $ 597 $ 1,159 $ (211) $ 948
======= ======= ======= ======= ======= =======
Interest expense:
NOW Accounts .................... $ 58 $ (1) $ 57 $ 60 $ (4) $ 56
Passbook accounts ............... 110 53 163 92 30 122
Money market accounts ........... 2 -- 2 (1) -- (1)
Certificates of deposit ......... 546 14 560 1,084 71 1,155
Borrowed funds .................. 91 (61) 30 (604) 37 (567)
------- ------- ------- ------- ------- -------
Total ......................... $ 807 $ 5 $ 812 $ 631 $ 134 $ 765
======= ======= ======= ======= ======= =======
Net change in net interest income . $ 424 $ (639) $ (215) $ 528 $ (345) $ 183
======= ======= ======= ======= ======= =======
</TABLE>
31
<PAGE>
Asset and Liability Management
The Bank, like many other financial institutions, is vulnerable to an
increase in interest rates to the extent that interest-bearing liabilities
generally mature or reprice more rapidly than interest-earning assets. The
lending activities of the Bank have historically emphasized the origination of
long-term, fixed rate loans secured by single family residences, and the primary
source of funds has been deposits with substantially shorter maturities. While
having interest-bearing liabilities that reprice more frequently than
interest-earning assets is generally beneficial to net interest income during a
period of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates.
To reduce the effect of interest rate changes on net interest income the
Bank has adopted various strategies to enable it to improve matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include: (1) purchasing investment
securities with maturities that match specific deposit maturities; (2)
emphasizing origination of shorter-term consumer loans, which in addition to
offering more rate flexibility, typically bear higher interest rates than
residential mortgage loans; (3) purchasing mortgage-backed securities to provide
monthly cash flows; and (4) originating adjustable-rate loans. Although consumer
loans inherently generally possess a higher credit risk than residential
mortgage loans, the Bank believes that its underwriting standards will minimize
this risk.
A principal part of the Bank's strategy is to manage interest rate risk and
reduce the exposure of the Bank's net interest income to changes in market
interest rates. Accordingly, the Board of Directors has established an
Asset/Liability Committee that is responsible for evaluating the interest rate
risk inherent in the Bank's assets and liabilities, determining the level of
risk that is appropriate given the Bank's business strategy, operating
environment, capital, liquidity and performance objectives, and managing this
risk consistent with the guidelines approved by the Board of Directors. The
Asset/Liability Committee consists of senior management operating under a policy
adopted by the Board of Directors and meets at least quarterly to review the
Bank's asset/liability policies and interest rate position.
Exposure to interest rate risk is actively monitored by management. The
Bank's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Bank uses the FDIC Regulatory Analysis Model to monitor its
exposure to interest rate risk, which calculates changes in market value of
portfolio equity and net income. Reports generated from assumptions provided and
modified by management are reviewed by the Asset/Liability Management Committee
and reported to the Board of Directors quarterly. The Balance Sheet Shock Report
shows the degree to which balance sheet line items and the market value of
portfolio equity are potentially affected by a 200 basis point upward and
downward parallel shift (shock) in the Treasury yield curve. An Income Shock
Report shows the degree to which income statement line items and net income are
potentially affected by a 200 basis point upward and downward parallel shift in
the Treasury yield curve. The Bank also receives reports that show the impact on
portfolio equity of upward and downward shifts in interest rates of between 0
and 400 basis points.
32
<PAGE>
The following table sets forth, as of December 31, 1998, an estimate of the
projected changes in the economic value of equity ("EVE") of instantaneous and
permanent increases and decreases in market interest rates in the amount of 100,
200, 300, and 400 basis points ("bp"). One hundred basis points equals one
percent. Dollar amounts are expressed in thousands.
Economic Value of Equity EVE as % of PV of Assets
Change ------------------------------------ ------------------------
in Rates $ Amount $ Change % Change EVE Ratio BP Change
---------- -------- -------- ------- ------------ ----------
+400 bp 8,516 (13,442) (61.2)% 3.3% (450)bp
+300 11,936 (10,022) (45.6) 4.6 (320)
+200 15,262 (6,696) (30.5) 5.7 (210)
+100 18,737 (3,221) (14.7) 6.8 (100)
0 21,958 7.8
100 23,859 1,901 8.7 8.3 50
-200 23,604 1,646 7.5 8.1 30
-300 22,880 922 4.2 7.8 --
-400 22,928 970 4.4 7.7 (10)
This table shows that the Bank's economic value of equity would decrease
with rising interest rates while decreasing, increasing or remaining the same
with falling interest rates. However, computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, loan repayments and deposit runoffs,
and may not be indicative of actual results. The computations do not reflect any
actions the Bank may undertake in response to changes in interest rates although
management cannot always predict future interest rates or their effect on the
Bank. Certain shortcomings are inherent in the method of analysis presented in
the computation of EVE. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in differing
degrees to changes in market interest rates. Additionally, certain assets, such
as adjustable rate loans, have features that restrict changes in interest rates
during the initial term and over the remaining life of the asset. Further, in
the event of a change in interest rates, prepayment and early withdrawal levels
could deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable rate debt may decrease in
the event of an interest rate increase.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, wholesale funding from
the Federal Home Loan Bank, principal and interest payments on loans, and
securities, and to a lesser extent, proceeds from the sale of loans and/or
securities. While maturities and scheduled amortization of loans and securities
provide an indication of the timing of the receipt of funds, changes in interest
rates, economic conditions, and competition strongly influence mortgage
prepayment rates and deposit flows, reducing the predictability of the timing of
sources of funds.
The primary investing activities of the Bank are the origination of one- to
four-family residential and, to a lesser extent, commercial real estate and
multi-family mortgage loans, and the purchase of mortgage-backed and
mortgage-related and debt securities. During the years ended December 31, 1998,
1997 and 1996, the Bank's disbursements for loan originations totaled $29.0
million, $14.1 million and $29.9 million, respectively. Purchases of
mortgage-backed, mortgage-related and debt securities totaled $83.1 million,
$42.4 million and $57.2 million, for years ended December 31, 1998, 1997 and
1996, respectively. These activities were funded primarily by deposits and
borrowings, principal repayments
33
<PAGE>
and prepayments on loans, mortgage-backed and mortgage-related securities, and
debt securities. In addition, sales of loans and securities available for sale
provided additional liquidity to the Bank. Loan sales totaled $771,000, $3.6
million and $750,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Proceeds from sales of available for sale securities totaled $10.5
million, $17.5 million and $15.7 million for the years ended December 31, 1998,
1997 and 1996, respectively. The Bank experienced a net increase in total
deposits of $11.6 million, $23.3 million and $23.5 million for the fiscal years
ended December 31, 1998, 1997 and 1996, respectively. Deposit flows are affected
by the level of market interest rates, as well as the interest rates and
products offered by local competitors and the Bank and other factors.
The Bank closely monitors its liquidity position on a daily basis. Excess
short-term liquidity is invested in overnight federal funds sold. On a longer
term basis, the Bank invests in various lending products, mortgage-backed and
mortgage-related and investment securities. The Bank may borrow funds from the
Federal Home Loan Bank subject to certain limitations. Based on the level of
qualifying collateral available to secure advances at December 31, 1998, the
Bank's borrowing limit from the Federal Home Loan Bank was approximately $82.4
million, with unused borrowing capacity of $49.9 million at that date. Other
sources of liquidity include borrowings under repurchase agreements and sales of
available for sale securities.
The Bank's most liquid assets are cash and cash equivalents, which include
interest-bearing deposits and short-term highly liquid investments (such as
federal funds sold) with original maturities of less than three months that are
readily convertible to known amounts of cash. The level of these assets is
dependent on the Bank's operating, financing and investing activities during any
given period. At December 31, 1998, 1997 and 1996, cash and cash equivalents
totaled $43.5 million, $15.4 million, and $6.4 million, respectively, which
amounted to 15.8%, 6.7% and 3.0% of total assets at those dates.
Loan commitments totaled $13.9 million at December 31, 1998, comprised of
$6.6 million in one- to four-family loan commitments, $110,000 in construction
loan commitments, $6.9 million in home equity loan commitments, and $256,000 in
checking line of credit loan commitments. Management of the Bank anticipates
that it will have sufficient funds available to meet its current loan
commitments.
At December 31, 1998, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $17.7 million, or 17.7% of
adjusted assets, which is above the required level of $4.0 million, or 4.0% of
adjusted assets and total risk-based capital of $18.5 million, or 18.57% of
adjusted assets, which is above the required level of $8.0 million, or 8.00%.
The liquidity of a banking institution reflects its ability to provide
funds to meet loan requests, to accommodate possible outflows in deposits, and
to take advantage of interest rate market opportunities. Funding of loan
requests, providing for liability outflows, and management of interest rate
fluctuations require continuous analysis in order to match the maturities of
specific categories of short-term loans and investments with specific types of
deposits and borrowings. Savings bank liquidity is normally considered in terms
of the nature and mix of the banking institution's sources and uses of funds.
Management is not aware of any known trends, events or uncertainties that
will have or are reasonably likely to have a material effect on the Bank's
liquidity, capital or operations nor is management is aware of any current
recommendation by regulatory authorities, which if implemented, would have such
an effect.
34
<PAGE>
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities"
(Statement No. 133). Statement No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Statement No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Initial application of
this Statement should be as of the beginning of an entity's fiscal quarter, on
that date, hedging relationships must be designated a new and documented
pursuant to the provisions of this Statement. Earlier application of all of the
provisions of Statement No. 133 is encouraged, but it is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
Statement. This Statement should not be applied retroactively to financial
statements of prior periods. The implementation of this Statement is not
expected to have a material impact on the financial condition or results of
operations of the Bank.
Year 2000 Evaluation
Rapid and accurate data processing is essential to the Bank's operations.
Many computer programs that can only distinguish the final two digits of the
year entered (a common programming practice in prior years) are expected to read
entries for the year 2000 as the year 1900 or as zero and incorrectly attempt to
compute payment, interest, delinquency and other data. The Bank has been
evaluating both information technology (computer systems) and non-information
technology systems (e.g., vault timers, electronic door lock and heating,
ventilation and air conditioning controls). The Bank has examined all of its
non-information technology systems and has either received certifications of
year 2000 compliance for systems controlled by third party providers or
determined that the systems should not be impacted by the year 2000. The Bank
expects to further test the systems it controls and receive third party
certification, where appropriate, that they will continue to function. The Bank
does not expect any material costs to address its non-information technology
systems and has not had any material costs to date. The Bank has determined that
the information technology systems it uses have substantially more year 2000
risk than the non-information technology systems it uses. The Bank has evaluated
its information technology systems risk in three areas: (1) our own computers,
(2) computers of others used by our borrowers, and (3) computers of others who
provide us with data processing.
Our own computers. We expect to spend approximately $200,000 through
December 31, 1999 to upgrade our computer system. We expect to capitalize this
cost. This upgrade is expected to eliminate the year 2000 risk in our computers.
We do not expect to have material costs to address this risk area after December
31, 1998. At December 31, 1998, $193,000 of the estimated $200,000 had been
capitalized. In addition to this $200,000, we expensed approximately $75,000
during 1998 for non- compliant computer equipment and $20,000 in year 2000
compliance costs.
Computers of others used by our borrowers. We have evaluated most of our
borrowers and do not believe that the year 2000 problem should, on an aggregate
basis, impact their ability to make payments to the Bank. We believe that most
of our residential borrowers are not dependent on their home computers for
income and that none of our commercial borrowers are so large that a year 2000
problem would render them unable to collect revenue or rent and, in turn,
continue to make loan payments to the Bank. As a result, we have not contacted
residential borrowers concerning this issue and do not consider this issue in
our residential loan underwriting process. We have begun contacting our
35
<PAGE>
commercial borrowers with loans of $250,000 or more and considering this issue
during commercial loan underwriting. At December 31, 1998 these loans
constituted $6.6 million or 82.1% of our $8.0 million commercial loan portfolio.
We do not expect any material costs to address this risk area.
Computers of others who provide us with data processing. This risk is
primarily focused on one third party service bureau that provides virtually all
of the Bank's data processing. This service bureau is not year 2000 compliant
but has advised us that it expects to be compliant before the year 2000. If this
problem is not solved before the year 2000, we would likely experience
significant delays, mistakes or failures. These delays, mistakes or failures
could have a significant impact on our financial condition and results of
operations.
Contingency Plan. We are monitoring our service bureau to evaluate whether
our data processing system will fail. We are being provided with periodic
updates on the status of testing and upgrades being made by the service bureau.
If our service bureau fails, we will attempt to locate an alternative service
bureau that is year 2000 compliant. If we are unsuccessful, we will enter
deposit and loan transactions by hand in our general ledger and compute loan
payments and deposit balances and interest with our existing computer system. We
can do this because of our relatively small number of loan and deposit accounts
and our internal bookkeeping system. Our computer systems are independently able
to generate labels and mailings for all of our customers and we periodically
test this system and print and store this material. If this labor intensive
approach is necessary, management and our employees will become much less
efficient. However, we believe that we would be able to operate in this manner
indefinitely, until our existing service bureau, or their replacement, is able
to again provide data processing services. If very few financial institution
service bureaus were operating in the year 2000, our replacement costs, assuming
we could negotiate an agreement, could be material.
Effect of Inflation and Changing Prices
The Bank's financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services.
Inflation can have a more direct impact on categories of noninterest
expenses such as salaries and wages, supplies and employee benefit costs. These
expenses normally fluctuate more in line with changes in the general price level
and are very closely monitored by management for both the effects of inflation
and increases related to such items as staffing levels, usage of supplies and
occupancy costs.
36
<PAGE>
Item 7. Financial Statements
Independent Auditors' Report
The Board of Directors
Ridgewood Financial, Inc.:
We have audited the consolidated statements of financial condition of Ridgewood
Financial, Inc. and subsidiary as of December 31, 1998 and 1997 and the related
consolidated statements of income, equity, and cash flows for each of the years
in the three-year period ended December 31, 1998. These 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ridgewood Financial,
Inc. and subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/KPMG LLP
------------------------------
KPMG LLP
Short Hills, New Jersey
January 21, 1999
37
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Assets 1998 1997
--------- ---------
<S> <C> <C>
Cash and due from banks $ 2,274 2,198
Federal funds sold 41,200 13,200
--------- ---------
Cash and cash equivalents 43,474 15,398
Investment securities:
Held to maturity (fair value of $1,374 and $9,724
at December 31, 1998 and 1997, respectively) 1,354 9,666
Available for sale 16,921 26,954
Mortgage-backed securities:
Held to maturity (fair value of $ 11,409 and $14,522
at December 31, 1998 and 1997) 11,277 14,356
Available for sale 88,390 50,099
Loans held for sale -- 750
Loans receivable, net 107,021 105,715
Accrued interest receivable 1,387 1,609
Premises and equipment, net 2,218 2,253
Federal Home Loan Bank stock, at cost 1,949 1,949
Other assets 742 316
--------- ---------
Total assets $ 274,733 229,065
========= =========
Liabilities and Equity
Deposits $ 205,529 193,889
Borrowed funds 32,557 16,282
Initial public offering subscriptions payable 17,809 --
Advances from borrowers for taxes and insurance 926 902
Accounts payable and other liabilities 490 798
--------- ---------
Total liabilities 257,311 211,871
--------- ---------
Equity:
Retained earnings 17,693 16,966
Accumulated other comprehensive income (271 228
--------- ---------
Total equity 17,422 17,194
Commitments and contingencies
Total liabilities and equity $ 274,733 229,065
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 8,312 8,562 8,267
Investment securities 286 756 1,134
Mortgage-backed securities 871 1,068 1,171
Securities available for sale 5,751 4,778 3,998
Other 1,124 670 396
-------- -------- --------
Total interest income 16,344 15,834 14,966
Interest expense:
Deposits 9,764 8,982 7,650
Borrowed funds 1,335 1,305 1,872
-------- -------- --------
Total interest expense 11,099 10,287 9,522
-------- -------- --------
Net interest income 5,245 5,547 5,444
Provision for loan losses 204 12 12
-------- -------- --------
Net interest income after
provision for loan losses 5,041 5,535 5,432
-------- -------- --------
Noninterest income:
Fees and service charges 140 114 73
Gain on sale of securities 24 19 45
Gain on sale of loans 21 45 14
Other 14 54 14
-------- ---------- --------
Total noninterest income 199 232 146
-------- ---------- --------
Noninterest expenses:
Salaries and benefits 2,238 1,926 1,691
Occupancy and equipment 1,145 1,034 878
Advertising and promotion 150 150 178
SAIF deposit insurance premium 118 110 250
SAIF assessment -- -- 830
Other expenses 590 456 383
-------- ---------- --------
Total noninterest expenses 4,241 3,676 4,210
-------- ---------- --------
Income before income taxes 999 2,091 1,368
Income taxes 272 841 628
-------- ---------- --------
Net income $ 727 1,250 740
======== ========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Consolidated Statements of Equity
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Accu-
mulated
other
compre-
Retained hensive Total
earnings income equity
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 14,976 312 15,288
------- ------- --------
Comprehensive income:
Net income 740 -- 740
Other comprehensive income - unrealized
holding losses on securities arising during
the period (net of tax of ($386)) -- (688) (688)
Less reclassification adjustment for gains
in net income (net of tax of $16) -- 29 29
--------
Total comprehensive income 81
------- ------- ========
Balance at December 31, 1996 15,716 (347) 15,369
------- ------- --------
Comprehensive income:
Net income 1,250 -- 1,250
Other comprehensive income - unrealized
holding gains on securities arising during
the period (net of tax of $317) -- 563 563
Less reclassification adjustment for gains
in net income (net of tax of $6) -- 12 12
--------
Total comprehensive income 1,825
------- ------- ========
Balance at December 31, 1997 16,966 228 17,194
------- ------- --------
Comprehensive income:
Net income 727 -- 727
Other comprehensive income - unrealized
holding losses on securities arising during
the period (net of tax of ($290)) -- (514) (514)
Less reclassification adjustment for gains
in net income (net of tax of $9) -- 15 15
--------
Total comprehensive income 228
------- ------- ========
Balance at December 31, 1998 17,693 (271) 17,422
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 727 1,250 740
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 205 199 148
Amortization of loan fees (131) (131) (174)
Premiums and discounts on mortgage-backed and
investment securities 1,146 376 194
Proceeds from loan sales 771 3,637 750
Gain on sale of loans (21) (45) (14)
Loans originated for resale -- (585) (4,293)
Disposal of premises and equipment 77 -- --
Gain on sale of securities available for sale (24) (19) (45)
Provision for loans losses 204 12 12
Deferred income tax (benefit) expense (270) 265 84
Decrease (increase) in accrued interest receivable 222 209 (347)
Decrease (increase) in other assets, net 126 (298) (57)
(Decrease) increase in other liabilities (308) (605) 1,236
-------- -------- --------
Net cash provided by (used in) operating activities 2,724 4,265 (1,766)
-------- -------- --------
Cash flows from investing activities:
Net (increase) decrease in first mortgage loans (515) 4,660 (9,257)
Net increase in consumer loans (901) (2,316) (2,390)
Purchase of mortgage-backed securities available for sale (69,435) (40,931) (15,763)
Principal collected on mortgage-backed securities 32,316 7,421 5,930
Proceeds from sales of mortgage-backed securities available for sale -- 6,320 4,967
Purchase of investment securities available for sale (13,642) (1,503) (41,447)
Proceeds from sales of securities available for sale 10,522 17,525 15,689
Maturities and calls of investment securities held to maturity 7,896 2,500 11,021
Maturities and calls of investment securities available for sale 13,200 -- --
Principal collected on investment securities 374 -- --
Purchase of premises and equipment (247) (142) (729)
Purchase of Federal Home Loan Bank stock -- -- (768)
Proceeds from collection of loan fees 36 20 56
-------- -------- --------
Net cash used in investing activities (20,396) (6,446) (32,691)
-------- -------- --------
Cash flows from financing activities:
Net increase in passbook, NOW and money market accounts 8,483 7,311 2,904
Net increase in certificates of deposit 3,157 16,027 20,629
Proceeds from borrowed funds 31,800 13,407 25,175
Repayment of borrowed funds (15,525) (25,525) (12,786)
Proceeds from initial public offering subscription payable 17,809 -- --
Net increase (decrease) in advances from
borrowers for taxes and insurance 24 (5) 77
-------- -------- --------
Net cash provided by financing activities 45,748 11,215 35,999
-------- -------- --------
Net increase in cash and cash equivalents 28,076 9,034 1,542
Cash and cash equivalents at beginning of year 15,398 6,364 4,822
-------- -------- --------
Cash and cash equivalents at end of year $ 43,474 15,398 6,364
======== ======== ========
Supplemental disclosures of cash flow information - cash payments for:
Interest on deposits and borrowed funds $ 11,096 10,386 11,185
======== ======== ========
Income taxes $ 477 233 548
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Conversion and Reorganization
On June 22, 1998, the Board of Directors of Ridgewood Savings Bank of New
Jersey (the Bank) adopted a Plan of Conversion to convert from a New
Jersey chartered mutual savings bank to a New Jersey chartered stock
savings bank. The Bank is now a wholly-owned subsidiary of Ridgewood
Financial, Inc. (the Company), a holding company formed by the Bank.
The Company is a savings bank holding company that was incorporated in
July 1998 under the laws of the State of New Jersey for the purpose of
acquiring all of the issued and outstanding common stock of the Bank.
This acquisition occurred in January 1999, at the time the Bank
simultaneously converted from a mutual to stock institution and sold all
of its outstanding capital stock to the Company. The Company made its
initial public offering of common stock and provided additional shares of
common stock to Ridgewood Financial, MHC, a mutual holding company that
holds 53% of the outstanding shares of the Company. Because the
reorganization and conversion was not completed until January 7, 1999, at
December 31, 1998, the Company had no assets, liabilities or equity. As a
result, throughout this report all references to operations, assets,
liabilities and equity of the Bank include those of the Company.
The reorganization and conversion, including the initial public offering
of the common stock of the Company, was completed on January 7, 1999,
resulting in the issuance of 3,180,000 shares of common stock, $0.10 par
value per share, of the Company of which 1,494,600 shares (47%) were sold
at a purchase price per share of $7.00 and 1,685,400 shares (53%) were
issued to Ridgewood Financial, MHC, resulting in gross proceeds of $10.5
million. Total expenses were approximately $700,000, resulting in net
proceeds of $9.8 million.
Approximately half of the net proceeds were paid directly by the Company
to the Bank in return for 100,000 shares of common stock, $2.00 par value
per share, of the Bank (100% of the issued and outstanding shares of the
Bank). In addition, $200,000 was provided to Ridgewood Financial, MHC by
the Bank. The remaining net proceeds were retained by the Company.
Concurrent with the conversion and reorganization, the Company
established an Employee Stock Ownership Plan (ESOP) and a Restricted
Stock Plan (RRP) for the benefit of employees and directors. The ESOP
will purchase 8% of the number of shares sold in the offering, in the
open market, using a loan from the Company. The RRP will be submitted for
stockholder approval. If implemented, the RRP would purchase up to 4% of
the number of shares sold in the offering. In addition, a stock option
plan will be submitted for stockholders' approval. If implemented, up to
10% of the number of shares sold in the offering would be reserved for
issuance through exercise of options for common stock.
As part of the conversion, 5,000,000 shares of preferred stock at no par
value were authorized; however, none were issued. Included in the Bank's
financial statements at December 31, 1998 was $17.8 million of
subscriptions payable related to the offering.
Upon a complete liquidation of the Bank after the conversion, the
Company, as holder of the Bank's common stock would be entitled to any
assets remaining upon a liquidation of the Bank. Each depositor would not
have a claim in the assets of the Bank. However, upon a complete
liquidation of the MHC after the conversion, each depositor would have a
claim up to the pro rata value of his or her accounts, in the assets of
the MHC remaining after the claims of the creditors of the MHC are
satisfied. Depositors who have liquidation rights in the Bank immediately
prior to the conversion will continue to have such rights in the MHC
after the conversion for so long as they maintain deposit accounts in the
Bank after the conversion.
42
(Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Costs incurred that were directly associated with the conversion were
deferred as of December 31, 1998 and were deducted from the proceeds of
the shares sold in the conversion in January 1999.
(2) Summary of Significant Accounting Policies
Business Activities
The sole operations of the Company is the Bank. The Bank grants
residential, commercial and consumer loans to, and accepts deposits from,
customers from three branches located in northeastern New Jersey. The
Bank is subject to the regulations of certain federal and state agencies
and undergoes periodic examinations by those regulatory authorities. The
Bank operates in one segment, community banking.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and include the accounts of
Ridgewood Financial, Inc. and its wholly-owned subsidiary, Ridgewood
Savings Bank of New Jersey. All significant intercompany transactions
have been eliminated. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
statement of financial condition and revenues and expenses for the
period. Actual results could differ significantly from these estimates.
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for
loan losses and the valuation of real estate acquired in connection with
foreclosures or in settlement of loans. In connection with the
determination of the allowance for loans losses and valuation of real
estate owned, management generally obtains independent appraisals for
significant properties.
In June 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June
15, 1999. Initial application of this Statement should be as of the
beginning of an entity's fiscal quarter. On that date, hedging
relationships must be designated as new and documented pursuant to the
provisions of this Statement. Earlier application of all of the
provisions of SFAS No. 133 is encouraged, but it is permitted only as of
the beginning of any fiscal quarter that begins after issuance of this
Statement. This Statement should not be applied retroactively to
financial statements of prior periods. The Bank does not believe that
implementation of SFAS No. 133 will have a material impact on its
financial condition or results of operations
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and due from banks and federal funds sold.
43
(Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Investment Securities
Management determines the appropriate classification of securities as
either held to maturity or available for sale at the purchase date. Debt
securities that management has the ability and intent to hold to maturity
are classified as held to maturity and carried at cost, adjusted for
amortization of premiums and accretion of discounts. Other securities are
classified as available for sale and are carried at fair value.
Unrealized gains and losses on securities available for sale are
recognized as a component of other comprehensive income, net of income
taxes, which is included in equity. Premiums and discounts are amortized
using the level yield method. The cost of securities sold is recognized
using the specific identification method.
Mortgage-backed Securities
Management determines the appropriate classification of mortgage-backed
securities as either held to maturity or available for sale at the
purchase date. Mortgage-backed securities represent participating
interests in pools of long-term first mortgage loans originated and
serviced by third parties. Mortgage-backed securities that management has
the intent and ability to hold to maturity are classified as held to
maturity and carried at unpaid principal balances, adjusted for
unamortized premiums and unearned discounts. All other mortgage-backed
securities are classified as available for sale and are carried at fair
value. Unrealized gains and losses on mortgage-backed securities
available for sale are recognized as a component of other comprehensive
income, net of income taxes, which is included in equity. Premiums and
discount are amortized using the level yield method. The cost of
securities sold is determined using the specific identification method.
Loans Held for Sale
Loans originated and held for sale are carried at the lower of cost or
fair value determined on an aggregate basis. Net unrealized losses are
recognized in a valuation allowance through charges to income. Gains and
losses on the sale of loans held for sale are determined using the
specific identification method.
The Bank recognizes separate assets for the rights to service for others
mortgage loans that have been acquired through purchase or origination.
These rights are amortized over the estimated net servicing life of the
loans and are evaluated for impairment based on their fair value on a
quarterly basis. The fair value of the rights is estimated using the
present value of future cash flows and assumptions regarding prepayment
estimates, cost of servicing, discount rates and loan terms. Any
impairments to the value of the rights are recognized as a direct effect
to amortization.
Loans Receivable
Loans receivable are stated at unpaid principal balances less the
allowance for loans losses and net deferred loan origination fees.
Interest income on loans is accrued and credited to interest income as
earned. Loan origination and commitment fees are deferred and amortized
as a yield adjustment over the lives of the related loans using the
interest method.
The allowance for loan losses is increased by charges to income through a
provision for loan losses and decreased by charge-offs, net of
recoveries. Management's periodic evaluation of the adequacy of the
allowance is based on the Bank's past loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral and
current economic conditions.
44
(Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions in the Bank's market area. In addition, various
regulatory agencies, as an integral part of their routine examination
process, periodically review the Bank's allowance for loan losses. Such
agencies may require the Bank to recognize additions to the allowance
based on their judgments about information available to them at the time
of their examination.
Loans are placed on nonaccrual status when a loan is specifically
determined to be impaired based on management's periodic evaluation. Any
unpaid interest previously accrued on those loans is reversed from
income. Interest income generally is not recognized on specific
nonaccrual loans unless the likelihood of further loss is remote and only
to the extent of interest payments received.
The Bank has defined the population of impaired loans to be all
nonaccrual and restructured commercial loans, and certain other
performing loans considered to be impaired as to principal and interest.
Impaired loans are individually assessed to determine that the loan's
carrying value is not in excess of the fair value of the collateral or
the present value of the loan's expected future cash flows. Smaller
balance homogeneous loans that are collectively evaluated for impairment,
such as residential mortgage loans and installment loans, are excluded
from the impaired loan portfolio. At December 31, 1998 and 1997, the Bank
has no impaired loans.
Premises and Equipment
Premises and equipment, including leasehold improvements, are recorded at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets.
Foreclosed Real Estate
Real estate properties acquired through foreclosure are initially
recorded at the lower of amortized cost or estimated fair value, less
estimated costs to sell at the date of foreclosure. Costs relating to
development and improvements of property are capitalized, whereas costs
relating to the holding of property are expensed.
Valuations are periodically performed by management, and an allowance for
losses is established by a charge to operations if the carrying value of
a property exceeds its estimated fair value, less estimated costs to
sell.
Comprehensive Income
Effective January 1, 1998, the Bank adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and presentation of comprehensive income and its components
in a full set of financial statements. Under SFAS No. 130, comprehensive
income is segregated into net income and other comprehensive income.
Other comprehensive income includes items previously recorded directly to
equity, such as unrealized gains and losses on securities available for
sale.
Comprehensive income is presented in the consolidated statements of
equity. SFAS No. 130 requires only additional disclosures and does not
affect the Bank's financial position or results of operations. Prior year
consolidated financial statements have been reclassified to conform to
the requirements of SFAS No. 130.
45
(Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Income Taxes
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Employee Benefit Plans
Effective January 1, 1998, the Bank adopted the provisions of SFAS No.
132, "Employers Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 revises employers' disclosures about pensions and
other postretirement benefit plans. SFAS No. 132 revises disclosures only
and does not affect the Bank's financial position or results of
operations. Prior year consolidated financial statement disclosures have
been revised to conform to the requirements of SFAS No. 132.
Reclassifications
Certain reclassifications have been made to the 1996 and 1997
consolidated financial statements to conform to the 1998 presentation.
(3) Investment Securities
At December 31, 1998 and 1997, securities held to maturity consist of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S agencies $ 1,354 20 -- 1,374
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S Government and
federal agencies $ 9,666 62 (4) 9,724
=============== =============== =============== ===============
</TABLE>
At December 31, 1998, securities of $1.4 million were pledged as
collateral.
46
(Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
At December 31, 1998 and 1997, securities available for sale consist of
the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- -------- --------- ----------
<S> <C> <C> <C> <C>
Municipal securities $ 13,747 335 (181) 13,901
Corporate bonds 1,516 6 -- 1,522
U. S. agencies 1,467 1 -- 1,468
Equity securities 8 22 -- 30
------- ----- ------ --------
$ 16,738 364 (181) 16,921
======= ===== ====== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
----------- -------- --------- ----------
<S> <C> <C> <C> <C>
U.S Government and
federal agencies $ 23,697 28 (34) 23,691
Municipal securities 3,091 150 -- 3,241
Equity securities 8 14 -- 22
------- ----- ------- --------
$ 26,796 192 (34) 26,954
======= ===== ======= ========
</TABLE>
The following is a summary of maturities of debt securities as of
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
-------------------------------------------------------------------
Securities held Securities available
to maturity for sale
--------------------------- ------------------------------
Amortized Fair Amortized Fair
cost value cost value
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
Amounts maturing in:
One year or less $ 58 58 -- --
After one year through five
years 43 43 3,243 3,243
After five years through
ten years 659 675 718 721
After ten years 594 598 12,769 12,927
------- ------ ------ -------
$ 1,354 1,374 16,730 16,891
======= ====== ====== =======
</TABLE>
47
(Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investment securities available for sale and the
realized gross gains and losses from those sales are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------------
1998 1997 1996
--------------- --------------- -------------
<S> <C> <C> <C>
Proceeds from sales $ 10,522 17,525 15,689
=============== ============ =============
Gross realized gains $ 24 11 20
=============== ============ =============
</TABLE>
(4) Mortgage-backed Securities
At December 31, 1998 and 1997, mortgage-backed securities held to
maturity consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
GNMA $ 2,378 36 -- 2,414
FHLMC 2,333 22 (3) 2,352
FNMA 6,566 85 (8) 6,643
------- ------- ------- -------
$11,277 143 (11) 11,409
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
GNMA $ 3,138 64 (8) 3,194
FHLMC 2,902 34 (5) 2,931
FNMA 8,316 97 (16) 8,397
------- ------- ------- -------
$14,356 195 (29) 14,522
======= ======= ======= =======
</TABLE>
At December 31, 1998, securities of $800,000 were pledged as collateral.
48
(Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
At December 31, 1998 and 1997, mortgage-backed securities available for
sale consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
GNMA $ 3,845 16 (11) 3,850
FHLMC 36,415 324 (509) 36,231
FNMA 48,737 125 (553) 48,309
------- ------- ------- -------
$88,997 465 (1,073) 88,390
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
GNMA $ 1,348 10 -- 1,358
FHLMC 25,567 165 (70) 25,662
FNMA 22,987 142 (50) 23,079
------- ------- ------- -------
$49,902 317 (120) 50,099
======= ======= ======= =======
</TABLE>
At December 31, 1998, securities of $11.6 million were pledged as
collateral.
The following is a summary of maturities of mortgage-backed securities as
of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
-------------------------------------------------------------------
Securities held Securities available
to maturity for sale
-------------------------------- ---------------------------------
Amortized Fair Amortized Fair
cost value cost value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Amounts maturing in:
One year or less $ -- -- 709 708
After one year through five
years -- -- 3,882 3,900
After five years through
ten years 1,223 1,247 18,693 18,664
After ten years 10,054 10,162 65,713 65,118
--------- -------- -------- --------
$ 11,277 11,409 88,997 88,390
========= ======== ======== ========
</TABLE>
49 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations without call
or prepayment penalties.
Proceeds from sales of mortgage-backed securities available for sale and
the realized gross gains and losses from those sales are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31
-------------------------
1997 1996
--------- --------
<S> <C> <C>
Proceeds from sales $ 6,320 4,967
========= ========
Gross realized gains 8 31
Gross realized losses -- (6)
--------- --------
$ 8 25
========= ========
</TABLE>
There were no sales of mortgage-backed securities available for sale
during 1998.
(5) Loans
The following is a summary of loans as December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
First mortgage loans:
Secured by one- to four-family residence $ 88,936 86,140
Secured by other property 8,032 10,313
------- -------
Total first mortgage loans 96,968 96,453
Consumer loans:
Equity 10,397 9,645
Lines of credit 472 134
Education 36 160
Loans to depositors, secured by savings 260 350
Other 25 --
------- -------
Total consumer loans 11,190 10,289
------- -------
Less:
Net deferred loan fees 315 409
Allowance for loan losses 822 618
------- -------
$ 107,021 105,715
======= =======
Loans held for sale $ -- 750
======= =======
</TABLE>
50 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Activity in the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ----------------
<S> <C> <C> <C>
Balance at beginning of period $ 618 606 593
Provision charged to income 204 12 12
Charge-offs -- -- (2)
Recoveries -- -- 3
----- ------ ------
Balance at end of period $ 822 618 606
===== ====== ======
</TABLE>
The balance of nonaccrual loans for which interest income has been
reduced totals approximately $695,000 and $0 at December 31, 1998 and
1997, respectively. Interest income that would have been recorded under
the original terms of such loans approximated $17,000, $0 and $13,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. There
were no commitments to lend additional funds to borrowers whose loans
were classified as nonaccrual.
(6) Premises and Equipment
Premises and equipment at December 31, 1998 and 1997 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Land $ 527 527
Building and improvements 607 607
Leasehold improvements 798 787
Furniture, fixtures and equipment 1,055 1,090
--------- ---------
2,987 3,011
Less accumulated depreciation 769 758
--------- ---------
$ 2,218 2,253
========= =========
</TABLE>
(7) Federal Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank System, is required
to maintain an investment in capital stock of the Federal Home Loan Bank
of New York (FHLB). The FHLB of New York paid dividends at an effective
rate of 7.2%, 6.6% and 7.6% for the years ended December 31, 1998, 1997
and 1996, respectively.
51 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(8) Deposits
Deposits at December 31, 1998 and 1997 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
----------------------------- -------------------------------
Weighted Weighted
average average
Amount rate Amount rate
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Passbook $ 31,555 3.01% $ 27,136 3.01%
NOW accounts 15,512 1.83 12,320 1.84
Money market 4,504 3.00 3,632 2.98
Certificate of deposits 153,958 5.50 150,801 5.66
------- ---- ------- ----
$205,529 $193,889
======= =======
</TABLE>
The aggregate amount of certificate of deposit accounts with a minimum
denomination of $100,000 was approximately $17.4 million and $15.6
million at December 31, 1998 and 1997, respectively.
At December 31, 1998 and 1997, scheduled maturities of certificates of
deposit are as follows (in thousands):
1998 1997
-------- --------
One year or less $ 127,031 95,800
One year to three years 22,162 50,878
Three years or more 4,765 4,123
-------- --------
$ 153,958 150,801
======== ========
Interest expense on deposits for the years ended December 31, 1998, 1997
and 1996 is summarized as follows (in thousands):
1998 1997 1996
------- -------- -------
Passbook $ 948 785 663
NOW accounts 252 195 139
Money market 123 121 122
Certificate of deposits 8,441 7,881 6,726
------- -------- -------
$ 9,764 8,982 7,650
======= ======== =======
52 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(9) Borrowed Funds
Borrowed funds at December 31, 1998 and 1997 are summarized as follows
(in thousands):
1998 1997
-------- --------
Advances from the FHLB $ 32,557 16,282
======== ========
Pursuant to collateral agreements with the FHLB, advances are secured by
all stock in the FHLB and qualifying first mortgage loans. Advances at
December 31, 1998 have maturity dates as follows (in thousands):
2000 $ 2,500
2001 2,000
2002 4,000
2003 5,500
2005 2,000
2006 557
2008 16,000
-----------
$ 32,557
===========
The interest rates on advances ranged from 4.65% to 6.76% and from 5.30%
to 6.85% at December 31, 1998 and 1997, respectively. The weighted
average interest rate on FHLB advances at December 31, 1998 and 1997 was
5.41%, and 6.00%, respectively.
(10) Employee Retirement Plans
Pension Plan
The Bank has a defined benefit pension plan covering substantially all
employees. The benefits are computed using an average of the employee's
compensation for the highest five years during the last ten years of
employment. The Bank funds an amount equal to the maximum allowable
deduction for tax purposes as reported by the Bank's actuary. Plan assets
consist primarily of mutual funds.
Supplemental Executive Retirement Plan
In 1998, the Bank established a supplemental executive retirement plan
(SERP) for the benefit of its senior officers. The SERP provides that the
participant may receive additional retirement income in addition to
benefits payable under the Bank's defined benefit pension plan. Benefits
are calculated as 60% of final average earnings upon retirement at age
65, reduced by benefits payable under the Bank's defined benefit pension
plan and Social Security benefits. Benefits payable prior to age 65 will
be reduced by 1% per month of early retirement. The SERP is unfunded.
53 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Directors Consultant and Retirement Plan
In 1998, the Bank established a directors consultant and retirement plan
(DRP) which provides retirement benefits to directors following
retirement after age 60 and completion of at least 10 years of service.
If a director becomes a consulting director to the Board upon retirement
then they will receive a monthly payment equal to between 50% and 80% of
the Board fee in effect at the date of retirement for a period of 120
months, such level of benefits is based upon years of service as of the
retirement date. The DRP is unfunded.
The following table shows the funded status of the Bank's defined benefit
plan, SERP and DRP and the amount reported in the consolidated statements
of financial condition at December 31, 1998 and 1997 (in thousands):
1998 1997
---------- ---------
Change in benefit obligation
Benefit obligation at beginning of year $ 707 501
Benefit obligation related to past service
liability on new plans 821 --
Service cost 123 67
Interest cost 78 42
Benefits paid (83) (1)
Actuarial loss 2 98
---------- ---------
Benefit obligation at end of year 1,648 707
---------- ---------
Change in plan assets
Fair value of plan asset at beginning of year 730 549
Actual return on plan assets 87 92
Employer contributions 21 90
Benefits paid (83) (1)
---------- ---------
Fair value of plan assets at end of year 755 730
---------- ---------
Funded status (893) 23
Unrecognized gain (32) --
Unrecognized past service liability 773 --
Other 6 12
---------- ---------
(Accrued pension liability) net pension asset $ (146) 35
========== =========
54 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Weighted average assumptions used to develop the net periodic pension costs
are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Discount rate 6.8% 7.5% 7.5%
Expected long-term rate of
return on assets 8.0 8.0 8.0
Rate of increase in compensation
levels 4.5 5.5 5.5
=============== =============== ===============
</TABLE>
Listed below are the components of pension expense for the years ended
December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Service cost $ 123 67 66
Interest cost 78 42 37
Expected return on plan
assets (53) (47) (47)
Unrecognized past service
liability 54 -- --
Other components -- 6 3
--------------- --------------- ---------------
Net periodic pension cost $ 202 68 59
=============== =============== ===============
</TABLE>
Profit-sharing Plan
The Bank has a 401(k) profit-sharing plan covering substantially all
employees. The plan provides for the Bank to match 50% of an employee's
contribution up to 4% of an individual's salary. Contributions to the
plan for the years ended December 31, 1998, 1997 and 1996 were
approximately $22,000, $20,000 and $19,000, respectively.
(11) Income Taxes
Under tax law that existed prior to 1996, the Bank was generally allowed
a special bad debt deduction in determining income for tax purposes. The
deduction was based on either a specified experience formula or a
percentage of taxable income before such deduction. The experience method
was used in preparing the income tax return for 1995. Legislation was
enacted in August 1996 which repealed for tax purposes the percentage of
taxable income bad debt reserve method. As a result, the Bank will use a
specific experience formula to compute its bad debt deduction for 1997
and 1998. The legislation also requires the Bank to recapture its
post-1987 net additions to its tax bad debt reserves for which the Bank
has accrued a deferred liability.
55 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Income tax expense for the years ended December 31, 1998, 1997 and 1996
is summarized as follows (in thousands):
1998 1997 1996
--------------- --------------- -------------
Current: $
Federal 495 532 500
State 47 44 44
--------- ---------- -----------
$ 542 576 544
========= ========== ===========
Deferred: $
Federal (252) 243 77
State (18) 22 7
--------- ---------- -----------
$ (270) 265 84
========= ========== ===========
Total: $
Federal 243 775 577
State 29 66 51
--------- ---------- -----------
$ 272 841 628
========= ========== ===========
Total income tax expense differed from the amounts computed by applying
the U.S. federal income tax rates of 34% to income before income taxes as
a result of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ----------- -----------
<S> <C> <C> <C>
Expected income tax expense $
at federal tax rate 340 711 465
Increase (decrease) in taxes
resulting from:
State income tax, net of
federal income tax effect 19 44 33
Tax-exempt interest (113) (48) --
Tax bad debt reserve -- -- 136
Other, net 26 134 (6)
---------- ----------- -----------
$ 272 841 628
========== =========== ===========
</TABLE>
56 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Total income tax expense for the years ended December 31, 1998, 1997 and
1996 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Income tax expense from operations $ 272 841 628
Accumulated other comprehensive
income - unrealized (loss) gain on
securities available for sale (281) 323 (372)
--------------- --------------- ---------------
$ (9) 1,164 256
=============== =============== ===============
</TABLE>
The following are the significant components of the net deferred tax asset
(liability) at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Components of deferred tax asset:
Provision for loan losses - book $ 296 222
Loan fees 77 85
Interest reserves 6 --
Amortization of premiums and discounts
on investment securities and mortgage-
backed securities 224 185
Accrued SERP 24 --
Other 45 --
Unrealized losses on available-for-sale
securities 153 --
--------------- ---------------
Total deferred tax asset 825 492
--------------- ---------------
Components of deferred tax liability:
Depreciation (40) (36)
Provision for loan losses - tax (360) (432)
Other (14) (37)
Unrealized gains on available-for-sale securities -- (128)
--------------- ---------------
Total deferred tax liability (414) (633)
--------------- ---------------
Net deferred tax asset (liability) 411 (141)
=============== ===============
Net state deferred tax asset (liability) 23 (12)
Net federal deferred tax asset (liability) 388 (129)
--------------- ---------------
$ 411 (141)
=============== ===============
</TABLE>
57 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Management has determined that it is more likely than not that it will
realize the deferred tax asset based upon the nature and timing of the
items listed above. There can be no assurances, however, that there will
be no significant differences in the future between taxable income and
pretax book income if circumstances change. In order to fully realize the
net deferred tax asset, the Bank will need to generate future taxable
income. Management has projected that the Bank will generate sufficient
taxable income to utilize the net deferred tax asset; however, there can
be no assurance as to such levels of taxable income generated.
Retained earnings at December 31, 1998 includes approximately $3.1
million for which no provision for income taxes has been made. This
amount represents an allocation of income to bad debt deductions for tax
purposes only. Events that would result in taxation of these reserves
include failure to qualify as a bank for tax purposes; distributions in
complete or partial liquidation; stock redemptions; and excess
distributions to shareholders. Management is not aware of the occurrence
of any such events. At December 31, 1998, the Bank has an unrecognized
tax liability of $1.1 million with respect to this reserve.
(12) Related-party Transactions
At December 31, 1998 and 1997, the executive officers and directors have
approximately $94,000 and $121,000, respectively, in outstanding
residential first mortgage and consumer loans. Lending transactions with
related parties are on the same terms as those prevailing at the time for
comparable transactions with outside customers. Activity in the related
party loan balance for the year ended December 31, 1998 is as follows (in
thousands).
Beginning balance $ 121
Additional borrowings --
Repayments 27
---------------
Ending balance $ 94
===============
(13) Commitments, Contingencies and Concentrations of Credit Risk
In the ordinary course of business, the Bank has various outstanding
commitments that are not reflected in the accompanying consolidated
financial statements. The principal commitments of the Bank are outlined
in the following section.
Lease Commitments
At December 31, 1998, the Bank is obligated under a noncancelable
operating lease expiring in February 2005 for its office and drive-in
facilities in Ridgewood, New Jersey. The lease contains escalation
clauses providing for increased rentals based upon increases in the
consumer price index and an option to renew for an additional ten years.
In addition, the Bank leases a facility in Mahwah, New Jersey, under a
noncancelable operating lease expiring in November 2007. The lease
contains an option to renew for an additional eight years. Net rent
expense exclusive of real estate taxes under the operating leases,
included in occupancy and equipment expense, was approximately $166,000,
$161,000 and $154,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
58 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The projected minimum rental payments under the terms of the leases,
exclusive of the renewal options, are as follows (in thousands):
December 31,
1998
---------------
1999 $ 155
2000 155
2001 155
2002 155
2003 155
2004 and thereafter 781
---------------
$ 1,556
===============
Real estate taxes, insurance and maintenance expenses are generally
obligations of the Bank and, accordingly, are not included as part of
rental payments.
Financial Instruments with Off-balance-sheet Risk
The Bank maintains its cash and cash equivalents in bank deposit
accounts, the balances of which, at times, may exceed federally insured
limits. Additionally, the Bank is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments primarily
consist of commitments to extend credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of
the amounts recognized in the statements of financial condition.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit
is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount and type
of collateral obtained by the Bank upon extension of credit varies and is
based on management's credit evaluation of the counterparty/customer.
59 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Loan Commitments
At December 31, 1998, the Bank has outstanding firm commitments to
originate loans as follows (in thousands):
Fixed Variable
rate rate Total
------------ ------------ --------
First mortgage loans $ 7,274 2,194 9,468
Consumer and other loans 297 653 950
------------ ------------ --------
$ 7,571 2,847 10,418
============ ============ ========
Litigation
In the normal course of business, the Bank may be a party to various
outstanding legal proceedings and claims. In the opinion of management,
the consolidated financial position of the Bank will not be materially
affected by the outcome of such legal proceedings and claims.
Concentrations of Credit Risk
A substantial portion of the Bank's loans are one- to four-family
residential first mortgage loans secured by real estate located in New
Jersey. Accordingly, the collectibility of a substantial portion of the
Bank's loan portfolio is susceptible to changes in real estate market
conditions.
(14) Recapitalization of Savings Institution Insurance Fund (SAIF)
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on SAIF member institutions,
including the Bank, to recapitalize the SAIF and spread the obligations
for payment of Financing Corporation (FICO) bonds across all SAIF and
Bank Insurance Fund (BIF) members. The Federal Deposit Insurance
Corporation (FDIC) special assessment levied amounted to 65.7 basis
points on SAIF assessable deposits held as of March 31, 1995. The special
assessment was recognized in 1996 and was tax deductible. The Bank took a
charge of $830,000, before tax-effect, as a result of the FDIC special
assessment. This legislation will eliminate the substantial disparity
between the amount that BIF and SAIF member institutions had been paying
for deposit insurance premiums.
(15) Regulatory Matters
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 1998, the Bank
is required to maintain (a) a minimum leverage ratio of Tier 1 capital to
total adjusted assets of 4.0%, and (b) minimum ratios of Tier 1 and total
capital to risk-weighted assets of 4.0% and 8.0%, respectively.
60 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on the institution's financial
statements. The regulations establish a framework for the classification
of savings institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized,
and critically undercapitalized. Generally, an institution is considered
well capitalized if it has a leverage (Tier 1) capital ratio of at least
5.0%; a Tier 1 risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to quantitative judgments by the FDIC
about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1998, the Bank meets all
capital adequacy requirements to which it is subject. Further, the most
recent FDIC notification categorized the Bank as a well-capitalized
institution under the prompt corrective action regulations. There have
been no conditions or events since that notification that management
believes have changed the Bank's capital classification.
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 1998 and 1997, compared to the FDIC minimum
capital adequacy requirements and the FDIC requirements for
classification as a well-capitalized institution (in thousands).
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------ ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk-
weighted assets) $ 18,522 18.57 $ 7,977 8.00 $ 9,972 10.00
Tier 1 (capital to risk-
weighted assets) 17,690 17.74 3,989 4.00 5,983 6.00
Tier 1 capital (to average
assets) 17,690 6.88 10,286 4.00 12,858 5.00
As of December 31, 1997:
Total capital (to risk-
weighted assets) 17,579 20.42 6,888 8.00 8,610 10.00
Tier 1 (capital to risk-
weighted assets) 16,692 19.70 3,444 4.00 5,166 6.00
Tier 1 capital (to average
assets) 16,692 7.59 8,942 4.00 11,178 5.00
=========== ============ ============ =========== ============ ============
</TABLE>
61 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(16) Fair Values of Financial Instruments
The following methods and assumptions were used by the Bank in estimating
its fair value disclosure for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the consolidated statements of financial
condition for these assets approximate their fair value.
Investment Securities (Including Mortgage-backed Securities)
Fair values for investment securities are based on quoted market prices.
Loans
Fair values are estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk
characteristics.
Deposits
The fair values disclosed for demand deposits are, by definition, equal
to the amount payable on demand at the reporting date. The fair value for
certificates of deposit is estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates of deposit to a schedule of aggregate contractual maturities
on such time deposits.
Borrowed Funds
The fair value of borrowed funds is estimated using a discounted cash
flow calculation that applies interest rates currently being offered.
FHLB Stock
The fair value of FHLB stock approximates carrying value.
Off-Balance-Sheet Commitments
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar arrangements and is not
included in the table since it is not significant.
62 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The estimated fair values of the Bank's financial instruments at December
31, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ---------------------------------
Carrying Fair Carrying Fair
amount value amount value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 43,474 43,474 15,398 15,398
Investment securities - HTM 1,354 1,374 9,666 9,724
Investment securities - AFS 16,921 16,921 26,954 26,954
Mortgage-backed securities -
HTM 11,277 11,409 14,356 14,522
Mortgage-backed securities -
AFS 88,390 88,390 50,099 50,099
Loans held for sale -- -- 750 750
Loans receivable, net 107,021 113,380 105,715 108,227
FHLB stock 1,949 1,949 1,949 1,949
Liabilities:
Deposits 205,529 206,077 193,889 192,776
Borrowed funds 32,557 33,989 16,282 16,300
=============== =============== =============== ===============
</TABLE>
The carrying amounts in the preceding table are included in the
consolidated statements of financial condition under the applicable
captions.
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Bank's entire
holdings of a particular financial instrument. Because no market
exists for a significant portion of the Bank's financial instruments,
fair value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-balance-sheet financial
instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. The tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the
estimates.
63
<PAGE>
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
The following table sets forth information with respect to our
directors and executive officers.
Age at Current
December 31, Director Term
Directors 1998 Position Since Expires(1)
- ------------------- ------------- ------------------------- --------- ---------
Susan E. Naruk 45 Director, President and 1991 2000
Chief Executive Officer
Nelson Fiordalisi 51 Director, Executive Vice 1987 2002
President and Chief
Operating Officer
Michael W. Azzara 51 Director 1989 2000
Jerome Goodman 62 Director 1989 2000
Bernard J. Hoogland 55 Director 1992 2002
John Kandravy 63 Director 1995 2002
Robert S. Monteith 74 Director 1981 2001
John J. Repetto 74 Director 1975 2001
Paul W. Thornwall 58 Director 1995 2001
John Scognamiglio 43 Senior Vice President and N/A N/A
Chief Financial Officer
Jean M. Miller 52 Senior Vice President and N/A N/A
Chief Lending Officer
All directors of the Bank became directors of the Company upon its
incorporation in July 1998. All executive officers of the Company obtained their
positions following the incorporation of the Company in July 1998. The business
experience for the past five years of each of the directors and executive
officers of the Company is as follows:
Michael W. Azzara has been a member of the Bank's Board of Directors since
1989. Mr. Azzara is the President of The Valley Hospital and the Valley Health
System, Inc., both in Ridgewood, New Jersey. He is also a member of the board of
directors of Princeton Insurance Co. and Health Care Insurance Co.
64
<PAGE>
Nelson Fiordalisi has been a member of the Bank's Board of Directors since
1987 and employed by the Bank since 1986. Mr. Fiordalisi is the Executive Vice
President and Chief Operating Officer of the Bank. He is a trustee, past
president and co-founder of the Ho-Ho-Kus Education Foundation, a member of the
Ho-Ho-Kus 300th Anniversary Committee, the Ho-Ho-Kus Chamber of Commerce, and
the Financial Managers Society.
Jerome Goodman has been a member of the Bank's Board of Directors since
1989. Mr. Goodman is a Certified Public Accountant and a Partner of Flackman,
Goodman & Potter PA in Ridgewood, New Jersey.
Bernard J. Hoogland has been a member of the Bank's Board of Directors
since 1992. Mr. Hoogland is the Vice President of Ridgewood Associates, a
securities firm in Paramus, New Jersey.
John Kandravy has been a member of the Bank's Board of Directors since
1995. Mr. Kandravy is an attorney and a Partner of Shanley & Fisher, P.C. in
Morristown, New Jersey. He is a trustee and a Vice Chairman of The Valley
Hospital, a trustee of Valley Health System, Inc., and The Forum School, trustee
and the President of The Forum School Foundation, and a trustee of Children's
Aid and Family Services, Inc.
Robert S. Monteith has been a member of the Bank's Board of Directors since
1981. Mr. Monteith is the past President of the Bank and is now retired. He is a
member of the board of associates of Sacred Heart Hospital, Allentown,
Pennsylvania.
Susan E. Naruk has been a member of the Bank's Board of Directors since
1991. Ms. Naruk has been the President and Chief Executive Officer of the Bank
since 1991. Previously, she was a senior vice president with Warwick Savings
Bank. Ms. Naruk began her banking career as a lending officer in the national
banking group of Citibank, N.A. and served as a vice president and team leader
in corporate banking for Chase Manhattan Bank, N.A. She is a member of the board
of directors of the YWCA of Bergen County, a trustee and the First Vice
President of the Western Bergen Mental Health Care, a trustee of the Bankers
Cooperative Group and a member of the board of governors of the New Jersey
League of Community and Savings Bankers. She is a past President of the Northern
New Jersey Savings League.
John J. Repetto has been a member of the Bank's Board of Directors since
1975. Mr. Repetto is the Real Estate Manager for Marron Enterprises in
Ho-Ho-Kus, New Jersey.
Paul W. Thornwall has been a member of the Bank's Board of Directors since
1995. Mr. Thornwall is an attorney and owner of the Thornwall Law Firm in Glen
Rock, New Jersey. He is the past president of the Ridgewood Rotary Club.
John Scognamiglio is a Senior Vice President and the Chief Financial
Officer of the Bank, where he has been employed since 1992. Mr. Scognamiglio is
a member of St. Mary's Parish Council and the Financial Managers Society.
Jean M. Miller is a Senior Vice President and the Chief Lending Officer of
the Bank, where she has been employed since 1992. Ms. Miller is a member of the
International Credit Council and the Ridgewood Chamber of Commerce.
65
<PAGE>
Meetings and Committees of the Board of Directors
During the year ended December 31, 1998, the board of directors of the
Company held one regular meeting and one special meeting.
The board of directors conducts its business through meetings of the board
and through activities of its committees. During the year ended December 31,
1998, the board of directors of the Company held one regular meeting and one
special meeting and the board of directors of the Bank held 12 regular meetings
and two special meetings. No director attended fewer than 75% of the total
meetings of the board of directors and committees on which such director served
during the year ended December 31, 1998. The Company has standing nominating,
audit and personnel committees. The Company and the Bank have other committees.
The nominating committee consists of Directors Monteith, Naruk, Repetto and
Thornwall. The committee presents its recommendations of nominees for Directors
to the full Board for nomination. The Committee met once during the year ended
December 31, 1998.
The audit committee consists of Directors Goodman, Monteith and Thornwall.
The audit committee meets at least semi-annually and meets with the Company's
independent certified public accountants to review the results of the annual
audit and other related matters. The audit committee met four times during the
year ended December 31, 1998.
The personnel (compensation) committee consists of Directors Azzara,
Hoogland, Naruk and Thornwall. The committee meets at least annually to review
the performance and remuneration of the officers and employees of the Bank. The
committee met three times during the year ended December 31, 1998.
Item 10. Executive Compensation
Director Compensation
During 1998 each non-management director was paid a fee of $1,350 for each
Board meeting attended and each Director Emeritus was paid $500 per Board
meeting attended. At the discretion of the Board of Directors, the position of
Director Emeritus is filled by former directors who have retired and no longer
serve as a director because they are no longer willing or able to attend
meetings on the basis expected by the members of the Board of Directors of the
Bank. A Director Emeritus is not engaged to work on specific projects but, more
generally, to provide advice due to their extensive experience. Each
non-management director member of the loan review committee and the property
inspection committee was paid $50 per respective committee meeting attended.
Directors are not paid a fee for attending any other committee meetings and are
not paid a fee for attending the Company Board meetings. The total fees paid to
the directors for the year ended December 31, 1998 were approximately $195,000
consisting of $142,000 in Board fees, $40,000 in life/health insurance and
$13,000 to the loan committee members.
Directors Consultant and Retirement Plan ("DRP"). The DRP provides
retirement benefits to directors following retirement after age 60 and
completion of at least 10 years of service. If a director agrees to become a
consulting director to our board upon retirement, he or she will receive a
monthly payment equal to between 50% and 80% of the Board fee in effect at the
date of retirement for a period of 120 months; such level of benefits is based
upon years of prior service as of the retirement date (i.e.,
66
<PAGE>
50% with 10-15 years, 60% with up to 20 years, 70% with up to 25 years and 80%
with more than 25 years of service). Benefits under our DRP will begin upon a
director's retirement. In the event there is a change in control, all directors
will be presumed to have not less than 10 years of service and each director
will receive a lump sum payment equal to the present value of future benefits
payable.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires the Company's officers and
directors, and persons who own more than ten percent of the Common Stock, to
file reports of ownership and changes in ownership of the Common Stock, on Forms
3, 4 and 5, with the Securities and Exchange Commission ("SEC") and to provide
copies of those Forms 3, 4 and 5 to the Company. The Company is not aware of any
beneficial owner, as defined under Section 16(a), of more than ten percent of
its Common Stock at December 31, 1998.
Based upon a review of the copies of the forms furnished to the Company, or
written representations from certain reporting persons that no Forms 5 were
required, the Company believes that all Section 16(a) filing requirements
applicable to its officers and directors were complied with during the 1998
fiscal year.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer, chief
operating officer and chief financial officer for the three years ended December
31, 1998.
67
<PAGE>
Annual Compensation
------------------------------------------
Other Annual All other
Name and Principal Position Compensation Compensation
- ---------------------------
Year Salary Bonus (1) (2)
---- ------ ----- ----- ----
Susan E. Naruk, President 1998 $163,461 $25,500 $ -- $3,200
and Chief Executive Officer 1997 155,000 25,000 -- 3,661
1996 125,000 20,000 -- 2,946
Nelson Fiordalisi, Executive 1998 117,447 15,500 -- 2,692
Vice President and Chief 1997 108,450 15,000 -- 2,501
Operating Officer 1996 93,000 12,000 -- 2,116
John Scognamiglio, Senior 1998 95,885 13,500 -- 2,197
Vice President and Chief 1997 88,000 13,000 -- 2,029
Financial Officer 1996 82,700 11,000 -- 1,883
- --------------------
(1) The Bank provides an automobile and group term life for certain
officers. The value of these benefits do not exceed the lesser of
$50,000 or 10% of total salary and bonus.
(2) Consists of company contributions and matching contributions under the
401(k) plan. Additionally, the individual participates in a defined
benefit pension plan whereby a benefit of up to 33-1/3% of final
average earnings is payable at age 65 with 10 or more years of service.
Also, each individual participates in the SERP Plan. See
"--Supplemental Executive Retirement Plan".
Employment Agreements. The Bank has an employment agreement with President
Naruk. Ms. Naruk's base salary under the employment agreement is $157,500. The
employment agreement has a term of three years. The agreement is terminable by
us for "just cause" as defined in the agreement. If we terminate Ms. Naruk
without just cause, Ms. Naruk will be entitled to a continuation of her salary
from the date of termination through the remaining term of the agreement. The
employment agreement contains a provision stating that in the event of the
termination of employment in connection with any change in control of us, Ms.
Naruk will be paid a lump sum amount equal to 2.999 times her five year average
annual taxable cash compensation. If a payment had been made under the agreement
as of December 31, 1998, the payment would have equaled approximately $365,000.
The aggregate payment that would have been made to Ms. Naruk would be an expense
to us, thereby reducing our net income and our capital by that amount. The
agreement may be renewed annually by our board of directors upon a determination
of satisfactory performance within the board's sole discretion. If Ms. Naruk
shall become disabled during the term of the agreement, she shall continue to
receive payment of 100% of the base salary for a period of 6 months and 50% of
such base salary for an additional six months. Such payments shall be reduced by
any other benefit payments made under other disability programs in effect for
our employees. Similar agreements have been implemented for our other senior
officers including Mr. Nelson Fiordalisi, Executive Vice President and Mr. John
Scognamiglio, Senior Vice President. Payment to each such individual upon a
change in control is limited to 200% of the average annual compensation over the
prior 36 month taxable compensation period. As of December 31, 1998, payment to
Mr. Fiordalisi and to Mr. Scognamiglio would have been $243,000 and $203,000,
respectively, had there been a change in control as of that date.
68
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Persons and groups owning in excess of 5% of the Common Stock are required
to file certain reports regarding such ownership pursuant to the Securities
Exchange Act of 1934, as amended ("1934 Act"). The following table sets forth,
as of February 28, 1999, certain information as to those persons who were
beneficial owners of more than 5% of the outstanding shares of Common Stock and
as to the Common Stock beneficially owned by certain executive officers and
directors of the Company individually and all executive officers and directors
as a group. Management knows of no persons, other than those set forth below,
who owned more than 5% of the outstanding shares of Common Stock at February 28,
1999.
Percent of Shares
Amount and Nature of of Common Stock
Name and Address of Beneficial Owner Beneficial Ownership(1) Outstanding
- ------------------------------------ ----------------------- ---------------
Ridgewood Financial, MHC 1,685,400 53.0%
Susan E. Naruk 28,571 (2)
Nelson Fiordalisi 28,571(3) (2)
Michael W. Azzara 3,300 (2)
Jerome Goodman 28,571 (2)
Bernard J. Hoogland 1,980 (2)
John Kandravy 3,000 (2)
Robert S. Monteith 1,000 (2)
John J. Repetto 1,428 (2)
Paul W. Thornwall 5,239 (2)
John Scognamiglio 27,873 (2)
All Directors and Executive Officers
as a Group (11 Persons) 142,599(3) 4.5%
- ------------------------------
(1) Includes shares of Common Stock held directly as well as by spouses or
minor children, in trust and other indirect ownership, over which shares
the individuals effectively exercise sole or shared voting and investment
power, unless otherwise indicated.
(2) Less than 1%.
(3) Includes 500 shares in the name of a partnership for which Mr. Fiordalisi
is a principal but for which he disclaims beneficial ownership.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
Transactions with Management and Others
No directors, executive officers or immediate family members of such
individuals were engaged in transactions with the Company or any subsidiary
involving more than $60,000 (other than through a loan) during the year ended
December 31, 1998. Furthermore, the Bank had no "interlocking" relationships in
which (i) any executive officer is a member of the board of directors or of
another entity, one of whose executive officers are a member of the Company's
board of directors, or where (ii) any executive officer is a member of the
compensation committee of another entity, one of whose executive officers is a
member of the Company's board of directors.
69
<PAGE>
The Bank has followed the policy of offering residential mortgage loans for
the financing of personal residences, share loans, and consumer loans to its
officers, directors and employees. Loans are made in the ordinary course of
business and also made on substantially the same terms and conditions, including
interest rate and collateral, as those of comparable transactions prevailing at
the time with other persons, and do not include more than the normal risk of
collectibility or present other unfavorable features.
Item 13. Exhibits, Lists and Reports on Form 8-K
- -------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the reports of independent
accountants of Registrant are included in this filing under Item 7.
Independent Auditors' Reports.
Consolidated Statements of Financial Condition at December 31, 1998 and
1997.
Consolidated Statements of Income for each of the two years in the
period ended December 31, 1998.
Consolidated Statements of Equity for each of the two years in the
period ended December 31, 1998.
Consolidated Statements of Cash Flows for each of the two years in the
period ended December 31, 1998.
Notes to Consolidated Financial Statements.
2. Except for Exhibit 27, which is provided is the submission
to the Commission, no financial statement schedules are required.
3. The following exhibits are included in this Report or
incorporated herein by reference: (a) List of Exhibits:
3(i) Certificate of Incorporation of Ridgewood Financial,
Inc.*
3(ii) Bylaws of Ridgewood Financial, Inc.*
10.1 Employment Agreement with S. Naruk*
10.2 Employment Agreement with N. Fiordalisi*
10.3 Employment Agreement with J. Scognamiglio*
70
<PAGE>
10.4 Employment Agreement with J. Miller*
10.5 Supplemental Executive Retirement Plan*
21 Subsidiaries of the Registrant
23 Consent of KPMG LLP
27 Financial Data Schedule
(b) The Registrant did not file any reports on Form 8-K during the quarter
ended December 31, 1998.
* Incorporated by reference to the identically numbered exhibit of the
Registration Statement on Form SB-2 (File No. 333-62363) filed with the
Commission on August 27, 1998.
71
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed as of March 29, 1999 on its
behalf by the undersigned, thereunto duly authorized.
Ridgewood Financial, Inc.
By: /s/ Susan E. Naruk
----------------------------------------
Susan E. Naruk
President and Chief
Executive Officer
(duly authorized representative)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated as of March 29, 1999.
/s/ John Scognamiglio /s/ Susan E. Naruk
- ------------------------------------- ------------------------------------
John Scognamiglio Susan E. Naruk
Senior Vice President and Chief President, Chief Executive Officer,
Financial Officer and Director
(principal financial and accounting (principal executive officer)
officer)
/s/ Nelson Fiordalisi /s/ Bernard J. Hoogland
- ------------------------------------- ------------------------------------
Nelson Fiordalisi Bernard J. Hoogland
Senior Vice President, Chief Operating Director
Officer, and Director
- ------------------------------------- ------------------------------------
Michael W. Azzara John Kandravy
Director Director
/s/ Jerome Goodman
- ------------------------------------- ------------------------------------
Jerome Goodman Robert S. Monteith
Director Director
/s/ John J. Repetto /s/ Paul W. Thornwall
- ------------------------------------- ------------------------------------
John J. Repetto Paul W. Thornwall
Director Director
EXHIBIT 21
SUBSIDIARIES OF RIDGEWOOD FINANCIAL, INC.
Subsidiary % of Ownership State of Incorporation
- ---------- -------------- ----------------------
Ridgewood Savings Bank
of New Jersey 100 New Jersey
EXHIBIT 23
<PAGE>
Independent Auditors' Consent
The Board of Directors
Ridgewood Financial, Inc.:
We consent to incorporation by reference in the Registration Statement on Form
S-8 of Ridgewood Financial, Inc. of our report dated January 21, 1999, relating
to the consolidated statements of financial condition of Ridgewood Financial,
Inc. and subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, equity, and cash flows for each of the years
in the three-year period ended December 31, 1998, which report appears in the
December 31, 1998 Annual Report on Form 10-KSB of Ridgewood Financial, Inc.
/s/KPMG LLP
KPMG LLP
Short Hills, New Jersey
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,784
<INT-BEARING-DEPOSITS> 490
<FED-FUNDS-SOLD> 41,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 105,311
<INVESTMENTS-CARRYING> 117,942
<INVESTMENTS-MARKET> 118,094
<LOANS> 108,158
<ALLOWANCE> 822
<TOTAL-ASSETS> 274,733
<DEPOSITS> 205,529
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,416
<LONG-TERM> 32,557
0
0
<COMMON> 0
<OTHER-SE> 17,422
<TOTAL-LIABILITIES-AND-EQUITY> 274,733
<INTEREST-LOAN> 8,312
<INTEREST-INVEST> 6,908
<INTEREST-OTHER> 1,124
<INTEREST-TOTAL> 16,344
<INTEREST-DEPOSIT> 9,764
<INTEREST-EXPENSE> 11,099
<INTEREST-INCOME-NET> 5,245
<LOAN-LOSSES> 204
<SECURITIES-GAINS> 24
<EXPENSE-OTHER> 4,241
<INCOME-PRETAX> 999
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 727
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 2.29
<LOANS-NON> 695
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 618
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 822
<ALLOWANCE-DOMESTIC> 822
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
