SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1999
-------------------------------------------------
- OR -
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to SEC File Number: 0-25149
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RIDGEWOOD FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer in its charter)
New Jersey 22-3616280
- --------------------------------------------------- ---------------
(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
--------------------
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
---------------------------------------
(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 $16,926,000.
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 15, 2000 was $7.0 million. Issuer has no non-voting stock.
As of March 15, 2000, registrant had 3,180,000 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended
December 31, 1999. (Part II)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year ended December 31, 1999. (Part III)
<PAGE>
Forward-Looking Statements
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
Ridgewood Financial, Inc. is a bank holding company formed in
connection with the mutual holding company reorganization of Ridgewood Savings
Bank of New Jersey (the "Bank"), which was completed on January 7, 1999. The
Bank is a wholly owned subsidiary of the Company. In connection with the
reorganization, the Company sold 1,494,600 shares (or 47%) of its Common Stock
to the public. The remaining 1,685,400 shares (or 53%) are held by Ridgewood
Financial, MHC (the "MHC"). The MHC is owned and controlled by the depositors of
the Bank and conducts no significant operations of its own, other than holding a
majority of the Company's stock. References to the Registrant or Company used
throughout this document generally refers to the consolidated entity which
includes the main operating company, the Bank, unless the context indicates
otherwise.
1
<PAGE>
The Company provides retail banking services, with an emphasis on
one-to four-family residential mortgage loans, commercial loans and consumer
loans as well as certificates of deposit, checking accounts and savings
accounts. At December 31, 1999, the Company had total assets, deposits and
equity of $277 million, $202 million and $25 million, respectively.
The Company attracts deposits from the general public and uses these
deposits primarily to originate loans and to purchase investment,
mortgage-backed and other securities. The principal sources of funds for the
Company'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
investment and mortgage-backed securities. The principal expenses are interest
paid on deposits and FHLB advances and non-interest expenses.
Competition
The Company is one of many financial institutions serving its market
area which consists of 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. The competition for deposit products comes from other
insured financial institutions such as commercial banks, thrift institutions,
credit unions, and multi-state regional banks in the Company's market area.
Deposit competition also includes a number of insurance products sold by local
agents and investment products such as mutual funds and other securities sold by
local and regional brokers. Loan competition varies depending upon market
conditions and comes from other insured financial institutions such as
commercial banks, thrift institutions, credit unions, multi-state regional
banks, and mortgage bankers.
2
<PAGE>
Analysis of Loan Portfolio. Set forth below is selected data relating to the
composition of the Company's loan portfolio by type of loan on the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ------------------- ---------------------------------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- --
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loans:
- --------------
First mortgage loans:
One-to-four family ... $146,971 87.22 $ 88,936 82.23 $ 86,140 80.70 $ 90,500 82.96 $ 88,685 91.02
Commercial real estate 6,932 4.11 8,032 7.43 10,313 9.66 10,613 9.73 3,170 3.25
Commercial ............... 1,689 1.00 497 .46 134 .13 78 .07 78 .08
Consumer loans:
Equity ................. 12,612 7.48 10,397 9.61 9,645 9.04 7,519 6.89 5,144 5.28
Education .............. 28 .02 36 .03 160 .15 120 .12 84 .09
Loans to depositors,
secured by savings ... 214 .13 202 .19 315 .30 245 .22 235 .24
Other .................. 69 .04 58 .05 35 .02 11 .01 41 .04
------- ------ ------- ------ ------- ------ ------- ------ ------ ------
168,515 100.00% 108,158 100.00% 106,742 100.00% 109,086 100.00 % 97,437 100.00%
------- ====== ------- ====== ------- ====== ------- ====== ------ ======
Less:
Net deferred loan fees 123 315 409 521 638
Allowance for loan losses 924 822 618 606 593
-------- -------- -------- -------- --------
Total loans receivable, net $167,468 $107,021 $105,715 $107,959 $ 96,206
======== ======== ======== ======== ========
Loans held for sale $ -- $ -- $ 750 $ 3,756 $ 199
======== ======== ======== ======== ========
</TABLE>
3
<PAGE>
Loan Maturity. The following table sets forth the maturity of the
Company's loan portfolio at December 31, 1999. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totalled $38.2 million for the year ended December
31, 1999. All loans are shown as maturing based on contractual maturities.
Due Due after
within 1 through Due after
1 year 5 years 5 years Total
--------- ---------- --------- --------
(In Thousands)
Amounts Due:
One-to-four family ... $ 1,689 $ 3,648 $141,634 $146,971
Commercial real estate 723 163 6,046 6,932
Commercial ........... 728 961 -- 1,689
Consumer ............. 220 2,065 10,638 12,923
-------- -------- -------- --------
Total amount due ..... $ 3,360 $ 6,837 $158,318 $168,515
======== ======== ======== ========
The following table sets forth the dollar amount as of December 31,
1999 of all loans due after December 31, 2000, which are based upon fixed
interest rates or floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One-to-four family ... $ 80,220 $ 65,062 $145,282
Commercial real estate 6,109 100 6,209
Commercial ........... 961 -- 961
Consumer ............. 7,408 5,295 12,703
-------- -------- --------
Total .............. $ 94,698 $ 70,457 $165,155
======== ======== ========
One- to Four-Family Lending. The Registrant's primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in its market area. The Registrant 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 Registrant will originate a mortgage
loan in an amount up to 95% of the lesser of the appraised value or selling
price of a mortgaged property, however, mortgage insurance for the borrower is
required. The Registrant generally originates and retains fixed rate and
adjustable rate loans for retention in its portfolio. The Registrant offers
fixed rate loans with amortization periods ranging from 5 to 30 years and a
variety of adjustable rate loans. The adjustable rate loans typically have a 15
to 30 year amortization period. The Registrant'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. See
also, "-- Loan Purchases and Sales."
Substantially all of the Registrant's residential mortgages include
"due on sale" clauses, which are provisions giving the Registrant the right to
declare a loan immediately payable if the borrower sells or otherwise transfers
an interest in the property to a third party.
4
<PAGE>
Commercial Real Estate. The Registrant originates commercial real estate
mortgage loans and, to a much lesser extent, commercial business loans.
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
Registrant's market area and all are within the State of New Jersey. The largest
commercial real estate loan had a balance of approximately $2.0 million on
December 31, 1999 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.
Commercial Lending. The Registrant offers commercial loans for various
business purposes and such loans are generally made to small and mid-sized
companies in the Registrant's primary lending area. At December 31, 1999, the
commercial lending portfolio primarily consisted of unsecured lines of credit
totaling $715,000, or 42.3% of the total commercial loan portfolio. Other loans
in the portfolio consisted of fixed rate secured and unsecured loans with terms
not exceeding 5 years.
Commercial business loans generally involve more risk than first
mortgage loans. The repayment of commercial loans typically is dependent on the
successful operations and income stream of the business and the borrower. Such
risks can be affected by economic conditions. In addition, commercial lending
generally requires greater oversight efforts compared to first mortgage loans.
Consumer Loans. The consumer loan portfolio consists primarily of home
equity and home improvement loans. To a lesser extent, this Registrant
originates lines of credit, student loans, loans secured by savings accounts and
other consumer loans. Consumer loans are originated in the Registrant's market
area and generally have maturities of up to 15 years. As of December 31, 1999,
the Registrant had 143 overdraft accounts with available lines of credit
totalling $547,500. For savings account loans, the Registrant will lend up to
90% of the account balance. Student loans are originated and serviced through
the Student Loan Marketing Association (Sallie Mae), affording the Registrant
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 first mortgage 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.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Purchases and Sales. During fiscal 1999, the Registrant purchased
$15.2 million of fixed rate first mortgage loans. The loans are serviced by a
third party and are "nonconforming"loans in that these loans do not satisfy the
purchase requirements of FMNA. At December 31, 1999, all such loans were
performing loans and had balances not exceeding $512,000. The Registrant did not
sell any loans during fiscal 1999.
Loan Commitments. The Registrant 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 its commitments to
extend credit as of December 31, 1999 was $14.8 million.
5
<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.
The Registrant 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.
6
<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 or impaired loans. Interest income
that would have been recorded on loans accounted for on a nonaccrual basis under
the original terms of such loans was not material for the year ended December
31, 1999.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
First mortgage loans:
One to four-family .................... $ 133 $ 695 $ -- $ 313 $ 397
Commercial and other .................... -- -- -- -- --
Consumer loans .......................... -- -- -- -- 3
----------- ----------- ----- -------- --------
Total ................................... $ 133 $ 695 $ -- $ 313 $ 400
=========== =========== ===== ======== ========
Real estate owned ......................... $ -- $ -- $ -- $ -- $ --
=========== =========== ===== ======== ========
Total non-performing assets ............... $ 133 $ 695 $ -- $ 313 $ 400
=========== =========== ===== ======== ========
Total non-accrual loans to
net loans .............................. .08% .65% --% .28% .41%
=========== =========== ===== ======== ========
Total non-accrual loans
to total assets ........................ .05% .25% --% .14% .22%
=========== =========== ===== ======== ========
Total non-performing
assets to total assets ................. .05% .25% --% .14% .22%
=========== =========== ===== ======== ========
</TABLE>
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. The
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 Registrant 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.
7
<PAGE>
Management's evaluation of the classification of assets and the
adequacy of the allowance for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process.
The following table sets forth the Registrant's classified assets in
accordance with its classification system.
At
December 31,
1999
---------
(In thousands)
Special mention...................... $276
Substandard ......................... 141
Doubtful ............................ --
Loss ................................ --
----
Total .......................... $417
====
Allowance for Loan Losses and Real Estate Owned. At least quarterly, 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.
The following table sets forth certain information regarding the
allowance for loan losses at or for the dates indicated.
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans receivable ....... $ 167,468 $ 107,021 $ 106,465(1) $ 111,715(1) $ 96,405(1)
========= ========= ========= ========= =========
Average loans outstanding .... $ 134,034 $ 105,411 $ 109,954(1) $ 105,170(1) $ 94,040(1)
========= ========= ========= ========= =========
Balance at beginning of period $ 822 $ 618 $ 606 $ 593 $ 528
Provision for loan losses .... 102 204 12 12 60
Charge-offs .................. -- -- -- (2) --
Recoveries ................... -- -- -- 3 5
--------- --------- --------- --------- ---------
Balance at end of period ..... $ 924 $ 822 $ 618 $ 606 $ 593
========= ========= ========= ========= =========
Allowance for loan losses as a
percent of total loans ..... .55% .77% .58% .54% .62%
========= ========= ========= ========= =========
</TABLE>
- ------------
(1) Includes loans held for sale
8
<PAGE>
The following table exhibits a breakdown by loan category of the
allowance for loan losses.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ---------------------- ------------------ ------------------- ------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First mortgage -
One-to-four family........$807 87.22% $679 82.23% $499 80.70% $512 82.96% $542 91.02%
Commercial real estate.... 38 4.11 60 7.43 60 9.66 54 9.73 18 3.25
Commercial.................. 9 1.00 4 .46 1 .13 -- .07 -- .08
Consumer loans:
Equity...................... 69 7.48 77 9.61 56 9.04 38 6.89 30 5.28
Education................... -- .02 -- .03 1 .15 1 .12 2 .09
Loans to depositors,
secured by savings........ 1 .13 2 .19 1 .30 1 .22 1 .24
Other....................... -- .04 -- .05 -- .02 -- .01 -- .04
--- ------- --- ------- --- ------ --- ------ --- ------
Total allowance
for loan losses......$924 100.00% $822 100.00% $618 100.00% $606 100.00% $593 100.00%
=== ======= === ====== === ====== === ====== === ======
</TABLE>
9
<PAGE>
Investment Activities
The Registrant is required under federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and certain other investments. The level of liquid assets varies
depending upon several factors, including: (i) the yields on investment
alternatives, (ii) management's judgment as to the attractiveness of the yields
then available in relation to other opportunities, (iii) expectation of future
yield levels, and (iv) management's projections as to the short-term demand for
funds to be used in loan origination and other activities. Investment
securities, including mortgage-backed securities, are classified at the time of
purchase, based upon management's intentions and abilities, as securities held
to maturity or securities available for sale. Debt securities acquired with the
intent and ability to hold to maturity are classified as held to maturity and
are stated at cost and adjusted for amortization of premium and accretion of
discount, which are computed using the level yield method and recognized as
adjustments of interest income. All other debt securities are classified as
available for sale to serve principally as a source of liquidity.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require the Registrant to
categorize securities as "held to maturity," "available for sale" or "trading."
As of December 31, 1999, Registrant had securities classified as "held to
maturity" and "available for sale" in the amount of $18.2 million and $67.7
million, respectively and had no securities classified as "trading." Securities
classified as "available for sale" are reported for financial reporting purposes
at the fair market value with net changes in the market value from period to
period included as a separate component of stockholders' equity, net of income
taxes. At December 31, 1999, the Registrant's securities available for sale had
an amortized cost of $70.9 million and market value of $67.7 million (unrealized
loss of $3.2 million). The changes in market value in the Registrant's available
for sale portfolio reflect normal market conditions and vary, either positively
or negatively, based primarily on changes in general levels of market interest
rates relative to the yields of the portfolio. Changes in the market value of
securities available for sale do not affect the Company's income. In addition,
changes in the market value of securities available for sale do not affect the
Bank's regulatory capital requirements or its loan-to-one borrower limit.
At December 31, 1999, the Registrant's investment portfolio policy
allowed investments in instruments such as: (i) U.S. Treasury obligations, (ii)
U.S. federal agency or federally sponsored agency obligations, (iii) local
municipal obligations, (iv) mortgage-backed securities, (v) banker's
acceptances, (vi) certificates of deposit, and (vii) investment grade corporate
bonds, and commercial paper. The board of directors may authorize additional
investments.
As a source of liquidity and to supplement Registrant's lending
activities, the Registrant has invested in residential mortgage-backed
securities. Mortgage-backed securities can serve as collateral for borrowings
and, through repayments, as a source of liquidity. Mortgage-backed securities
represent a participation interest in a pool of single-family or other type of
mortgages. Principal and interest payments are passed from the mortgage
originators, through intermediaries (generally quasi-governmental agencies) that
pool and repackage the participation interests in the form of securities, to
investors, like us. The quasi-governmental agencies guarantee the payment of
principal and interest to investors and include the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and
Federal National Mortgage Association ("FNMA").
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
10
<PAGE>
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by FHLMC, GNMA, and FNMA make up a majority of
the pass-through certificates market.
The Registrant also invests in mortgage-related securities, primarily
collateralized mortgage obligations ("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 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.
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,
------------------------------
1999 1998 1997
-------- --------- --------
(In thousands)
Investment Securities Held to Maturity:
U.S. Government Securities ................... $ -- $ -- $ 1,771
U.S. Agency Securities ....................... 860 1,354 7,895
-------- -------- --------
Total Investment Securities Held to Maturity 860 1,354 9,666
-------- -------- --------
Investment Securities Available for Sale:
U.S. Government Securities .................. 2,000 -- 498
U.S. Agency Securities ...................... 7,299 1,468 23,193
Municipal Securities ........................ 23,256 13,901 3,241
Corporate Bonds ............................. 6,921 1,522 --
FNMA Common Stock ........................... -- 30 22
-------- -------- --------
Total Investment Securities Available For
Sale ...................................... 39,476 16,921 26,954
-------- -------- --------
Mortgage-backed Securities Held to Maturity ... 17,340 11,277 14,356
-------- -------- --------
Mortgage-backed Securities Available For Sale . 28,265 88,390 50,099
-------- -------- --------
Total Investment and Mortgage-backed
Securities ................................. $ 85,941 $117,942 $101,075
======== ======== ========
11
<PAGE>
Investment Portfolio Maturities. The following table sets forth certain
information regarding the carrying values, weighted average yields and
maturities of the Registrant's investment and mortgage-backed securities
portfolio at December 31, 1999. The following table does not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
<TABLE>
<CAPTION>
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
----------------- ----------------- ----------------- ------------------- -------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value
------ -------- -------- -------- -------- ------- -------- -------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. government securities... $ 2,000 5.50% $ -- -- % $ -- --% $ -- --% $ 2,000 5.50% $ 2,000
U. S. agency securities...... -- -- 6,221 6.35 -- -- 1,938 6.10 8,159 6.29 8,146
Municipal securities(2)...... 40 5.46 2,341 5.34 2,116 5.77 18,759 6.50 23,256 6.32 23,256
Corporate bonds.............. -- -- 6,921 6.37 -- -- -- -- 6,921 6.37 6,921
Mortgage-backed securities... 140 6.58 3,941 6.53 21,278 6.58 20,246 6.30 45,605 6.45 45,353
--- ----- ------ ------ ------ ------
Total.................... $ 2,180 5.57% $ 19,424 6.27% $23,394 6.51% $40,943 6.38% $85,941 6.37% $ 85,676
====== ==== ======= ==== ======= ==== ======= ==== ======= ==== =======
</TABLE>
- -------------------
(1) Average yields are calculated on a yield-to-maturity basis.
(2) Average yields on municipal securities are generally tax-exempt and
calculated on a tax-equivalent basis using a statutory federal income tax
rate of 34%.
12
<PAGE>
Sources of Funds
General. Deposits are the major source of the Registrant'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 Registrant 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 Registrant's certificates
of deposit of $100,000 or more by time remaining until maturity as of December
31, 1999.
Certificates
Maturity Period of Deposit
--------------- ----------
(In thousands)
Within three months $6,849
Three through six months 2,401
Six through twelve months 3,307
Over twelve months 6,283
-----
$ 18,840
========
Borrowings. Deposits are the primary source of funds for the
Registrant's lending and investment activities and for its general business
purposes. The Registrant, as the need arises, relies upon advances from the FHLB
of New York ( the "FHLB") to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB are typically secured by
the Registrant's stock in the FHLB and a portion of the Registrant'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 Registrant funds
loan demand and investment opportunities out of current loan and mortgage-backed
securities repayments, investment maturities and new deposits. However, the
Registrant has utilized FHLB advances to supplement these sources and as a match
against certain assets in order to better manage interest rate risk.
13
<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,
-----------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
FHLB advances:
Average balance outstanding $44,427 $23,596 $22,012
Maximum amount outstanding
at any month-end during
the period ............ 52,331 32,895 28,400
Balance outstanding at
end of period ........... 48,678 32,557 16,282
Weighted average interest
rate during the period 5.50% 5.66% 5.93%
Weighted average
interest rate at
the end of the period . 5.55% 5.41% 6.00%
Return On Equity And Assets Ratios
At Or For The Years
Ended December 31,
-------------------------------------------
1999 1998 1997
--------------- ---------- --------
Equity to Asset Ratio 8.89 6.34 7.51
Return on Average Equity 1.27 4.14 7.87
Return on Average Assets .12% .30% .57%
Dividend Payout Ratio -- -- --
Asset/Liability Management
The Registrant has established an asset/liability committee which
consists of its senior management and several non-employee directors. The
committee is responsible for and evaluates the interest rate risk inherent in
the Registrant's assets and liabilities, determines the level of risk that is
appropriate given the Registrant's business strategy, operating environment,
capital, liquidity and performance objectives, and manages this risk consistent
with the guidelines approved by the Board of Directors. The committee operates
under a policy adopted by the Board of Directors and meets at least quarterly to
review its asset/liability policies and interest rate position of the
Registrant.
The Registrant is vulnerable to an increase in interest rates to the
extent that its interest-bearing liabilities mature or reprice more rapidly than
its interest-earning assets. The Registrant's lending activities have
historically emphasized the origination of long-term, adjustable rate and fixed
rate loans secured by single-family residences. The primary source of funds has
been deposits with substantially shorter
14
<PAGE>
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, this type of 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 Registrant has adopted various strategies to enable management to improve
the matching of interest-earning asset maturities to interest-bearing liability
maturities. Its objective is to maintain a consistent level of profitability
within acceptable risk tolerances across a broad range of potential interest
rate environments. The principal elements of these strategies include seeking
to:
o originate adjustable-rate loans;
o the extent that market conditions permit, originate shorter-term consumer
loans, which in addition to offering more rate flexibility, typically bear
higher interest rates than residential mortgage loans;
o purchase mortgage-backed securities to provide monthly cash flows; and
o purchase investment securities with maturities that match specific deposit
maturities.
Net Portfolio Value
The Registrant uses the FDIC Regulatory Analysis Model to monitor its
exposure to interest rate risk, which calculates changes in net portfolio value.
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 Interest Rate Sensitivity of Net Portfolio Value
Report shows the degree to which balance sheet line items and net portfolio
value are potentially affected by a 100 to 300 basis point upward and downward
parallel shift (shock) in the Treasury yield curve.
15
<PAGE>
The following table sets forth, as of December 31, 1999, 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, and 300 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
-------- -------- -------- ---------- ----------- ----------
(Dollars in thousands)
+300 bp 9,609 (15,571) (61.8) 3.8 (533) bp
+200 14,582 (10,598) (42.1) 5.6 (352)
+100 19,681 (5,499) (21.8) 7.4 (178)
Unchanged 25,180 -- -- 9.2 --
-100 30,094 4,914 19.5 10.6 149
-200 33,420 8,240 32.7 11.6 237
-300 35,500 10,320 40.1 12.0 281
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, prepayments and deposit run-offs and should not be relied upon
as indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features which restrict changes in interest rates on a
short term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.
16
<PAGE>
Average Balance Sheet
The following table sets forth information relating to our consolidated average
balance sheet and reflects the average yield on assets and average costs of
liabilities at and for the periods indicated. Such yields and costs are derived
by dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily average balances has caused any material differences
in the information presented.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- --------- ------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable, net (1) $134,034 $ 9,935 7.41% $105,411 $ 8,312 7.89% $106,991 $ 8,562 8.00%
Securities held to maturity (2) 14,374 905 6.30 17,171 1,157 6.74 26,181 1,824 6.97
Securities available for sale (3) 87,834 5,376 6.12 93,482 5,922 6.33 70,563 4,862 6.89
Other interest-earning assets (4) 21,900 1,159 5.29 20,078 1,124 5.60 11,382 670 5.89
------- ------ ------- ------ ------- ------
Total interest-earning assets 258,142 17,375 6.73 236,142 16,515 6.99 215,117 15,918 7.40
Noninterest-earning assets 8,769 5,280 5,569
------- ------- -------
Total assets $266,911 $241,422 $220,686
======= ======= =======
INTEREST-BEARING LIABILITIES:
Deposit accounts:
NOW accounts $ 16,250 281 1.73 $ 13,500 252 1.87 $ 10,358 195 1.88
Passbook accounts 30,679 980 3.19 28,671 948 3.31 25,260 785 3.11
Money market deposit accounts 4,288 126 2.94 4,102 123 3.00 4,051 121 2.99
Certificates of deposit 144,196 7,457 5.17 151,232 8,441 5.58 141,564 7,881 5.57
Borrowed funds 44,427 2,445 5.50 23,596 1,335 5.66 22,012 1,305 5.93
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities 239,840 11,289 4.71 221,101 11,099 5.02 203,245 10,287 5.06
------ ------ ------
Noninterest-bearing liabilities 2,736 2,740 1,552
------- ------- -------
Total liabilities 242,576 223,841 204,797
Total equity 24,335 17,581 15,889
------- ------- -------
Total liabilities and total equity $266,911 $241,422 $220,686
======= ======= =======
Net interest income
(tax equivalent basis) $6,086 $5,416 $5,631
===== ===== =====
Interest rate spread (5) 2.02% 1.97% 2.34%
Net interest margin (6) 2.36% 2.29% 2.62%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.08X 1.07X 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.
(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, at 34%.
(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.
17
<PAGE>
Volume/Rate Table
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 our 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,
----------------------------- --------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- --------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net ......... $ 2,153 $ (530) $ 1,623 $ (129) $ (121) $ (250)
Securities held to maturity ... (180) (72) (252) (609) (58) (667)
Securities available for sale . (353) (193) (546) 1,480 (420) 1,060
Other interest earning assets . 99 (64) 35 489 (35) 454
------- ------- ------- ------- ------- -------
Total ....................... $ 1,719 $ (859) $ 860 $ 1,231 $ (634) $ 597
======= ======= ======= ======= ======= =======
Interest expense:
NOW Accounts .................. $ 49 $ (20) $ 29 $ 58 $ (1) $ 57
Passbook accounts ............. 66 (34) 32 110 53 163
Money market accounts ......... 12 (9) 3 2 -- 2
Certificates of deposit ....... (382) (602) (984) 546 14 560
Borrowed funds ................ 1,149 (39) 1,110 91 (61) 30
------- ------- ------- ------- ------- -------
Total ....................... $ 894 $ (704) $ 190 $ 807 $ 5 $ 812
======= ======= ======= ======= ======= =======
Net change in net interest income $ 825 $ (155) $ 670 $ 424 $ (639) $ (215)
======= ======= ======= ======= ======= =======
</TABLE>
Personnel
As of December 31, 1999, the Registrant had 33 full-time employees and
12 part-time employees. The employees are not represented by a collective
bargaining unit. The Registrant believes its relationship with its employees to
be satisfactory.
Regulation
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
18
<PAGE>
Regulation of the Company
General. As a bank holding company, the Company is subject to
regulation and supervision by the Board of Governors of the Federal Reserve
System (the "Federal Reserve") and by the New Jersey Department of Banking and
Insurance Department (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.
Financial Modernization Legislation. On November 12, 1999, President
Clinton signed into law the Gramm-Leach-Bliley Act (the "GLB Act") which will,
effective March 11, 2000, permit qualifying bank holding companies to become
financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in nature.
The GLB Act defines "financial in nature" to include securities underwriting,
dealing and market making; sponsoring mutual funds and investment companies;
insurance underwriting and agency; merchant banking activities; and activities
that the Board has determined to be closely related to banking. A bank holding
company may elect to be treated as a financial holding company only if all
depository institution subsidiaries of the holding company have at least a
satisfactory rating under the Community Reinvestment Act and are and continue to
be well-capitalized and well-managed.
The GLB Act also authorizes national banks to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company and any activity that is determined to be financial in nature or
incidental to a financial activity, except insurance underwriting, real estate
development, real estate investment (except as otherwise permitted by law),
insurance company portfolio investments and merchant banking activities. The
authority of a national bank to invest in a financial subsidiary is subject to a
number of conditions, including, among other things, requirements that the bank
must be well-managed and well-capitalized (after deducting from capital the
bank's outstanding investments in financial subsidiaries). The GLB Act further
provides that a state bank may invest in financial subsidiaries, assuming the
requisite investment authority under state law, subject to the same conditions
that apply to national bank investments in financial subsidiaries.
In addition, the GLB Act enacts a number of consumer protections,
including provisions intended to protect privacy of bank customers' financial
information and provisions requiring disclosure of ATM fees imposed by banks on
customers of other banks.
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 principal exceptions to this prohibition involve
certain non-bank activities that, by statute or by FRB regulation or order, have
been identified as activities closely related to the business of banking or
managing or controlling banks. The GLB Act greatly expanded the scope of
business activities permissible for bank holding companies by authorizing
"financial holding companies." Effective March 11, 2000, the GLB Act will permit
a bank holding company, upon classification as a financial holding company and
assuming such holding company's subsidiary banks meet
19
<PAGE>
certain requirements, to engage in a broad variety of activities "financial" in
nature. See "-- Financial Modernization Legislation."
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.
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 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.
20
<PAGE>
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.
The Bank is required to pay insurance premiums based on a percentage of
its insured deposits to the FDIC for insurance of its deposits by the SAIF. The
FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. The FDIC has set the deposit
insurance assessment rates for SAIF-member institutions for the first six months
of 2000 at 0% to .027% of insured deposits on an annualized basis, with the
assessment rate for most savings institutions set at 0%.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payments on bonds issued by the Financing Corporation
("FICO"), an agency of the Federal government established to recapitalize the
predecessor to the SAIF. These assessments will continue until the FICO bonds
mature in 2017.
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 3%. 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 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 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. 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,
21
<PAGE>
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, 1999.
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. Under New Jersey law, the Bank may not pay
dividends unless, following payment, the capital stock of the Savings Bank would
be unimpaired and (a) the Bank will have a surplus of not less than 50% of its
capital stock, or, if not, (b) the payment of such dividends will not reduce the
surplus of the Bank. Under applicable regulations, the Bank would be prohibited
from making any capital distributions if, after making the distribution, the
Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a
Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of
less than 4.0%, unless a higher ratio is required by the Department.
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, 1999 the
Bank's loans-to-one borrower limitations was $3.5 million.
Item 2. Description of Property
- -------------------------------
The Registrant's executive offices are located at 531 North Maple
Avenue in Ridgewood, New Jersey. The Registrant conducts its business through
three offices, which are located in Ridgewood and Mahwah, New Jersey. The
following table sets forth the location of each of the Registrant's offices and
the year the office was acquired or leased.
22
<PAGE>
Year Facility
Opened or Leased or
Office Location Acquired Owned
- --------------- -------- -----
Broad Street Office
55 North Broad Street
Ridgewood, NJ 1964 Leased
Mahwah Office
6 East Ramapo Avenue
Mahwah, NJ 1995 Leased
Maple Avenue Office
531 North Maple Avenue
Ridgewood, NJ 1995 Owned
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 Registrant has a limited service branch which is opened
several hours a week that is located in a nursing home in Allendale, New Jersey.
The Registrant plans to open its fourth branch and new headquarters in
April 2000. The office is to be located at 1124 East Ridgewood Avenue,
Ridgewood, New Jersey. The property was acquired in 1999.
(b) Investment Policies. See "Item 1. Business" above for a general
description of the Registrant's investment policies and any regulatory or Board
of Director's percentage of assets limitations regarding certain investments.
The Registrant's investments are primarily to produce income, and to a lesser
extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate.
See "Item 1. Business - Lending Activities and - Regulation," and "Item 2.
Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1.
Business - Lending Activities and - Regulation.
(3) Investments in Securities of or Interests in Persons
Primarily Engaged in Real Estate Activities. See "Item 1. Business - Lending
Activities and - Regulation.
(c) Description of Real Estate and Operating Data. Not applicable.
23
<PAGE>
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.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" of the Company's Annual Report to stockholders for the fiscal year
ended December 31, 1999 (the "Annual Report") is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants On Accounting and
- -------------------------------------------------------------------------
Financial Disclosure.
- ---------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
- --------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
- ---------------------------------------
The information required under this item is incorporated herein by
reference to the Proxy Statement for the 2000 Annual Meeting (the "Proxy
Statement") contained under the sections captioned "Section 16(a) Beneficial
Ownership Reporting Compliance," "Proposal I - Election of Directors," and "-
Biographical Information."
24
<PAGE>
Item 10. Executive Compensation
- --------------------------------
The information required by this item is incorporated by reference to
the Proxy Statement contained under the section captioned "Director and
Executive Officer Compensation."
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
(b) Security Ownership of Management
The information required by items (a) and (b) is incorporated
herein by reference to the Proxy Statement contained under
the sections captioned "Principal Holders" and "Proposal I -
Election of Directors."
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a
change in control of the Company.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 13. Exhibits, Lists and Reports on Form 8-K
- -------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) The consolidated statements of financial condition of Ridgewood
Financial, Inc. and subsidiary as of December 31, 1999 and 1998 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years then ended, together with the related notes and the
independent auditors' report of KPMG LLP, independent certified public
accountants for the year ended December 31, 1999.
(2) Schedules omitted as they are not applicable.
25
<PAGE>
3. The following exhibits are included in this Report or incorporated
herein by reference:
<TABLE>
<CAPTION>
<S> <C>
(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 Susan E. Naruk*
10.2 Employment Agreement with Nelson Fiordalisi*
10.3 Employment Agreement with John Scognamiglio*
10.4 Employment Agreement with Jean Miller*
10.5 Supplemental Executive Retirement Plan*
13 Portions of the Annual Report to Shareholders
21 Subsidiaries of the Registrant (See Item 1 -- Description of Business-- General)
23 Consent of KPMG LLP
27 Financial Data Schedule (electronic filing only)
(b) The Registrant did not file any reports on Form 8-K
during the quarter ended December 31, 1999.
</TABLE>
- -----------------
* 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.
26
<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 24, 2000 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 24, 2000.
<TABLE>
<CAPTION>
<S> <C>
/s/Susan E. Naruk /s/John Scognamiglio
- ------------------------------------------ --------------------------------------------
Susan E. Naruk John Scognamiglio
President, Chief Executive Officer, Senior Vice President and Chief
and Director Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
/s/Nelson Fiordalisi /s/Bernard J. Hoogland
- ------------------------------------------ --------------------------------------------
Nelson Fiordalisi Bernard J. Hoogland
Executive Vice President, Chief Operating Director
Officer, and Director
/s/Michael W. Azzara /s/John Kandravy
- ------------------------------------------ --------------------------------------------
Michael W. Azzara John Kandravy
Director Director
/s/Jerome Goodman /s/Robert S. Monteith
- ------------------------------------------ --------------------------------------------
Jerome Goodman Robert S. Monteith
Director Director
/s/John J. Repetto /s/Paul W. Thornwall
- ------------------------------------------ --------------------------------------------
John J. Repetto Paul W. Thornwall
Director Director
</TABLE>
EXHIBIT 13
<PAGE>
Ridgewood Financial, Inc.
Corporate Profile
On January 7, 1999, our wholly owned subsidiary, Ridgewood Savings Bank
of New Jersey, completed its mutual holding company reorganization and we became
its parent holding company. Ridgewood Financial, MHC, which is owned and
controlled by the depositors of Ridgewood Savings, was also formed as the bank's
mutual holding company. Ridgewood Financial MHC conducts no significant business
or operations of its own other than holding a majority of our outstanding common
stock.
As part of the reorganization, we completed a minority stock offering
and sold 1,494,600 shares of our common stock to the public. We raised
approximately $9.8 million in net proceeds which was added to our net worth.
Ridgewood Financial, MHC was issued 1,685,400 shares.
We currently conduct our business through the Bank with three full
service offices located in Ridgewood and Mahwah and a mini-branch in the
Allendale Community for Mature Living in Allendale, New Jersey. Our fourth
branch, which will also be our new headquarters, will be opened in April 2000 in
the former MacHugh's retail store on East Ridgewood Avenue. We offer a broad
range of deposits and loan products to individuals, families and small
businesses. At December 31, 1999, we had assets of $276.8 million, deposits of
$201.9 million, and stockholder's equity of $24.6 million.
Stock Market Information
Our common stock began trading on the NASDAQ National Market under the
trading symbol of "RSBI"on January 8, 1999. The following table reflects high
and low bid quotations. The quotations reflect inter-dealer prices, without
retail mark-up, mark-down, or commission, and may not represent actual
transactions.
Dividends
Date High ($) Low ($) Declared($)
---- -------- ------- -----------
January 8, 1999 to March 31, 1999............ 11.88 7.88 --
April 1, 1999 to June 30, 1999............... 8.44 6.75 --
July 1, 1999 to September 30, 1999........... 7.00 6.38 --
October 1, 1999 to December 31, 1999 1999.... 7.00 5.50 --
The number of shareholders of record of common shares of the record
date of March 15, 2000, was approximately 800. This does not reflect the number
of persons or entities who held stock in nominee or "street" name through
various brokerage firms. At March 15, 2000, there were 3,180,000 common shares
outstanding. We may not declare or pay a cash dividend on any of our shares if
the effect of the declaration or payment of dividends would cause our regulatory
capital to be reduced below (1) the amount required for the liquidation account
established in connection with the reorganization, or (2) the regulatory capital
requirements imposed by our federal and state regulators.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes", "anticipates", "contemplates", "expects", and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, risks associated with the
ability to control costs and expenses, year 2000 issues and general economic
conditions. We undertake no obligation to publicly release the results of any
revisions to those forward looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Overview
On January 7, 1999, our wholly owned subsidiary, Ridgewood Savings Bank
of New Jersey ("Ridgewood Savings"), completed its mutual holding company
reorganization and we became its parent holding company. Ridgewood Financial,
MHC, which is owned and controlled by the depositors of Ridgewood Savings, was
also formed as the bank's mutual holding company. Ridgewood Financial MHC
conducts no significant business or operations of its own other than holding a
majority of our outstanding common stock.
As part of the reorganization, we completed a minority stock offering
and sold 1,494,600 shares of our common stock to the public. We raised
approximately $9.8 million in net proceeds which was added to our net worth.
Ridgewood Financial, MHC was issued 1,685,400 shares.
We currently conduct our business through Ridgewood Savings with three
full service offices located in Ridgewood and Mahwah and a mini-branch in the
Allendale Community for Mature Living in Allendale, New Jersey. We plan to open
our fourth branch, which will also be our new headquarters, in April 2000. We
expect that our non-interest expense in fiscal 2000 will increase due to the
costs associated with opening a new branch.
References in this discussion to "we," "us," and "our," refer
collectively to Ridgewood Financial, Inc. and Ridgewood Savings Bank of New
Jersey.
Financial Condition
At December 31, 1999, our total assets remained relatively unchanged at
$276.8 million from $274.7 million at December 31, 1998. However the components
of our total assets changed as follows.
Federal funds sold decreased $37.3 million, or 90.5 %, to $3.9 million
at December 31, 1999 from $41.2 million at December 31, 1998. At December 31,
1998, federal funds sold included our minority stock offering subscriptions
totaling $17.8 million. Of this amount, due to the oversubscription of the stock
offering in January 1999, we refunded $8.0 million to subscribers of our
minority stock offering. Of the remaining funds, we used $28.3 million of the
funds to originate loans and $1.0 million of such funds to renovate our new
headquarters.
4
<PAGE>
Loans receivable, net grew $60.5 million, or 56.5%, to $167.5 million
at December 31, 1999 from $107.0 million at December 31, 1998. The growth in our
loan portfolio was primarily due to our one-to-four family loan portfolio. At
December 31, 1999, our one-to-four family loan portfolio grew $58.1 million to
$147.0 million from $88.9 million at December 31, 1998. Of this increase, our
fixed rate one-to four family loans increased approximately $31.0 million (of
which $15.2 million was purchased during our second quarter) and our
adjustable-rate one-to-four family loans increased approximately $28.0 million.
In addition to our purchase of one-to-four family loans, such loans increased
due to a lower rate environment. The increased capital from our minority stock
offering gives us the ability to increase our loan growth and to originate a
larger volume of loans.
During 1999, in conjunction with our asset/liability management
strategy, we took advantage of the generally lower interest rate environment and
decreased our available for sale mortgage backed securities portfolio $59.4
million. The net funds received from sales and maturities from this portfolio
were reinvested into higher yielding investment securities and mortgaged-backed
securities and adjustable rate one-to-four family mortgage loans. Investment
securities available for sale increased $22.6 million, to $39.5 million at
December 31, 1999 from $16.9 million at December 31, 1998 and held to maturity
mortgage backed securities increased $6.1 million to $17.3 million at December
31, 1999 from $11.3 million at December 31, 1998. See also Non-Interest Income
discussion below.
At December 31, 1999 our borrowed funds increased $16.2 million to
$48.7 million from $32.6 million at December 31, 1998. Of such borrowings, $13.2
million were used for the purchase of our one-to-four family loans and $3.0
million of such funds were used to purchase our new headquarters.
Our net worth increased $7.2 million to $24.6 million at December 31,
1999 from $17.4 million at December 31, 1998. The increase reflects $9.8 million
of net proceeds from our stock offering and $309,000 of net income for the year,
which was partially offset by an increase of $1.7 million in accumulated other
comprehensive loss and $913,000 due to the implementation of our employee stock
ownership plan.
The increase in other comprehensive accumulated loss resulted from the
fluctuation in market value of our investment in available for sale securities.
Because of interest rate volatility, accumulated other comprehensive loss and
shareholders' equity could materially fluctuate for each interim period and
year-end period. The decrease in market value of the investment securities
available for sale is considered temporary in nature and will not affect our net
income unless the securities are sold. We plan to hold these securities until
maturity or until the market values of these securities increase. Accordingly,
we do not expect, though there is no assurance, that our investment in these
securities will affect net income in future periods. See Notes 3 and 4 to our
consolidated financial statements.
Analysis of Net Interest Income
Our results of operations are primarily dependent on our net interest
income, which is the difference between the interest income earned on our
assets, primarily loans and investments, and the interest expense on our
liabilities, primarily deposits and borrowings. Net interest income may be
affected significantly by general economic and competitive conditions and
policies of regulatory agencies, particularly those with respect to market
interest rates. The results of our operations are also influenced by the level
of non-interest expenses, such as employee salaries and benefits and other
income, such as loan-related fees, and gains and losses on the sale of
securities and loans.
5
<PAGE>
Net Income. Net income for the year ended December 31, 1999 decreased
$418,000, or 57.5%, to $309,000 from $727,000 for the year ended December 31,
1998. Pre-tax income decreased $1.0 million in 1999 as a result of a $1.1
million net loss recognized on the sale of mortgaged-backed securities available
for sale.
Net Interest Income. Net interest income (on a tax equivalent basis)
before provision for loan losses increased $670,000, or 12.4%, for the year
ended December 31, 1999 to $6.1 million from $5.4 million for the year ended
December 31, 1998. The increase was primarily due to the increase in average
loans of $28.6 million coupled with a 31 basis point decrease in average cost of
funds to 4.71% for 1999 from 5.02 % for 1998. Offsetting the increase in net
interest income was a 26 basis point decline in the yield on average interest
earning assets to 6.73% for 1999 from 6.99% for 1998. The yield on average
interest-earning assets declined in 1999 due to a 48 basis point decrease in
yields on loans receivable to 7.41% for 1999 from 7.89% for 1998. Such decrease
in loan yields was the result of lower interest rates on originated loans as
well as the prepayment and amortization of higher rate loans.
Provision for loan losses. For the year ended December 31, 1999, the
provision for loan losses decreased $102,000, as a result of non-performing
loans decreasing $562,000 from fiscal 1998. During 1999, such loans were
reclassified to the current loans status. Management continually evaluates the
adequacy of the allowance for loan losses, which encompasses the overall risk
characteristics of the various portfolio segments, past experience with losses,
the impact of economic conditions on borrowers and other relevant factors which
may come to the attention of management. Although we maintain our allowance for
loan losses at a level that we consider to be adequate to provide for the
inherent risk of loss in our loan portfolio, there can be no assurance that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in future periods.
Non-interest income. Total non-interest income for the year ended
December 31, 1999 decreased $1.1 million to a total non-interest net loss of
$904,000 from total non-interest income of $199,000 for the year ended December
31, 1998. Such loss was due to the recognition of a loss of $1.1 million on
available for sale mortgage-backed securities (collateralized mortgage
obligations) portfolio. Due to low yields on these securities and the high
levels of prepayments, we decided in the second quarter of 1999 to liquidate
this portfolio. The sale of these securities was consummated in July 1999.
Non-interest expenses. Total non-interest expenses remained relatively
unchanged to $4.5 million for the year ended December 31, 1999 from $4.2 million
for the year ended December 31, 1998. There were also no material changes in the
components which comprised non-interest expense.
Income taxes. We recognized an income tax benefit of $319,000 for the
year ended December 31, 1999 as opposed to income tax expense of $272,000 for
the year ended December 31, 1998. The tax benefit in 1999 was primarily the
result of our increased levels of tax exempt securities coupled with a $1.0
million decline in net income. See Note 11 to our consolidated financial
statements.
Year 2000
We rely on computers to conduct our business and information systems
processing. Industry experts were concerned that on January 1, 2000, some
computers might not be able to interpret the new year properly, causing computer
malfunctions. Some banking industry experts remain concerned that some computers
may not be able to interpret additional dates in the year 2000 properly. We have
operated and evaluated our computer operating systems following January 1, 2000
and have not identified any errors or experienced any computer system
malfunctions. We will continue to monitor our
6
<PAGE>
information systems to assess whether our systems are at risk of misinterpreting
any future dates and will develop, if needed, appropriate contingency plans to
prevent any potential system malfunction or correct any system failures. We have
not been informed of any such problem experienced by our vendors or our
customers.
However, it is too soon to conclude that there will not be any problems
arising from the Year 2000 problem. We will continue to monitor our significant
vendors of goods and services and customers with respect to any Year 2000
problems they may encounter, as those issues may effect our ability to continue
operations, or might adversely affect our financial position, results of
operations and cash flows. At this time, we do not believe that these potential
problems will materially impact the ability to continue our operations or effect
our financial statements. However, any delays, mistakes, or failures could have
a significant impact on our financial condition and profitability.
Liquidity And Capital Resources
Our primary sources of funds include savings, deposits, loan repayments
and prepayments, cash flow from operations and borrowed funds, primarily FHLB
advances. We use our capital resources principally to fund loan origination and
purchases, repay maturing borrowings, purchase investments, and for short-term
liquidity needs. We expect to be able to fund or refinance, on a timely basis,
our commitments and long-term liabilities. As of December 31, 1999, we had
commitments to extend credit of $14.8 million. Certificate of deposit accounts
scheduled to mature in less than one year from December 31, 1999 totaled $96.5
million. We expect that we will retain a majority of maturing certificate
accounts.
Our liquid assets consist of cash and cash equivalents, which include
investments in highly short-term investments. The level of these assets are
dependent on our operating, financing and investment activities during any given
period. At December 31, 1999, cash and cash equivalents total $10.5 million. In
connection with our new headquarters, at December 31, 1999 we have estimated
future capital expenditures of approximately $1.3 million to complete the
renovation.
Net cash provided by our operating activities (the cash effects of
transactions that enter into our determination of net income -- e.g., non-cash
items, amortization and depreciation, premiums and discounts on mortgage-backed
and investment securities, loss (gain ) on sale of securities available for sale
and provision for loan losses) for the year ended December 31, 1999 was $3.4
million, an increase of $700,000 from December 31, 1998.
Net cash used in our investing activities (i.e., cash receipts,
primarily from our investment securities and mortgage-backed securities
portfolios and our loan portfolio) for the year ended December 31, 1999 totaled
$40.1 million, an increase of $19.7 million from December 31, 1998. The increase
was primarily attributable to our use of $59.0 million in cash to fund the
increase in loan originations, primarily one-to-four family mortgage loans, the
use of $5.1 million was used primarily to construct and fully equip our new
headquarters, offset by net cash received of $44.4 million due to the net sales
and maturities of investment and mortgage-backed securities.
Net cash provided by our financing activities (i.e., cash receipts
primarily from net increases in deposits and borrowed funds ) for the year ended
December 31, 1999 totaled $3.7 million, which was the result of our receipt of
$16.2 million in borrowings, offset by a $3.6 million decrease in deposits, and
$8.0 million in oversubscription refunds to subscribers in our minority stock
offering.. During 1999, we
7
<PAGE>
used borrowed funds to fund our loan growth, and may continue to do so in the
future depending on market conditions, the pricing of deposit products and the
pricing of borrowed funds.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, and similar matters. Management
monitors projected liquidity needs and determines the level desirable, based in
part on our commitment to make loans and our ability to generate funds. We are
also subject to federal regulations that impose certain minimum capital
requirements.
8
<PAGE>
[LOGO New Jersey Headquarters
KPMG] 150 John F. Kennedy Parkway
Short Hills, N.J. 07078
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, 1999 and 1998, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/KPMG LLP
January 24, 2000
[LOGO] KMPG LLP. KPMG LLP, A U.S. limited liability partnership is
a member of KPMG International, a Swiss association.
9
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Assets 1999 1998
---------------- ----------------
<S> <C> <C>
Cash and due from banks $ 6,553 2,274
Federal funds sold 3,900 41,200
---------------- ----------------
Cash and cash equivalents 10,453 43,474
Investment securities (note 3):
Held to maturity (fair value approximates $847 and $1,374
at December 31, 1999 and 1998, respectively) 860 1,354
Available for sale 39,476 16,921
Mortgage-backed securities (notes 4 and 9):
Held to maturity (fair value approximates $17,088 and $11,409
at December 31, 1999 and 1998) 17,340 11,277
Available for sale 28,265 88,390
Loans receivable, net of allowance for loan losses of $924 in
1999 and $822 in 1998 (notes 5 and 9) 167,468 107,021
Accrued interest receivable 1,733 1,387
Premises and equipment, net (note 6) 7,099 2,218
Federal Home Loan Bank stock, at cost (notes 7 and 9) 2,622 1,949
Other assets (note 11) 1,530 742
---------------- ----------------
Total assets $ 276,846 274,733
================ ================
Liabilities and Shareholders' Equity
Liabilities:
Deposits (note 8):
Interest bearing $ 195,467 201,424
Non-interest bearing 6,470 4,105
---------------- ----------------
Total deposits 201,937 205,529
Borrowed funds (note 9) 48,678 32,557
Initial public offering subscriptions payable -- 17,809
Advances from borrowers for taxes and insurance 1,247 926
Accounts payable and other liabilities (note 10) 369 490
---------------- ----------------
Total liabilities 252,231 257,311
---------------- ----------------
Shareholders' equity (note 15):
Preferred stock, no par value. Authorized 5,000,000 shares;
none issued and outstanding -- --
Common stock, par value $.10. Authorized 10,000,000 shares;
3,180,000 shares issued and outstanding in 1999 and
none in 1998 318 --
Additional paid-in capital 9,428 --
Retained earnings 17,802 17,693
Unallocated common stock held by employee stock
ownership plan (913) --
Accumulated other comprehensive loss (2,020) (271)
---------------- ----------------
Total shareholders' equity 24,615 17,422
Commitments and contingencies (note 12)
---------------- ----------------
Total liabilities and shareholders' equity $ 276,846 274,733
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1999, 1998
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Interest income:
Loans receivable (note 5) $ 9,935 8,312
Investment securities held to maturity 46 286
Investment securities available for sale:
Taxable 527 587
Tax-exempt 1,190 333
Mortgage-backed securities held to maturity 859 871
Mortgage-backed securities available for sale 3,046 4,831
Interest on federal funds sold and other short-term
investments and dividends on FHLB stock (note 7) 1,159 1,124
---------------- ----------------
Total interest income 16,762 16,344
---------------- ----------------
Interest expense:
Deposits (note 8) 8,844 9,764
Borrowed funds (note 9) 2,445 1,335
---------------- ----------------
Total interest expense 11,289 11,099
---------------- ----------------
Net interest income before pro-
vision for loan losses 5,473 5,245
Provision for loan losses (note 5) 102 204
---------------- ----------------
Net interest income 5,371 5,041
---------------- ----------------
Non-interest income (loss):
Fees and service charges 157 140
(Loss) gain on sale of securities (notes 3 and 4) (1,068) 24
Gain on sale of loans -- 21
Other 7 14
---------------- ----------------
Total non-interest (loss) income (904) 199
---------------- ----------------
Non-interest expense:
Salaries and benefits (note 10) 2,364 2,238
Occupancy and equipment (notes 6 and 12) 1,217 1,145
Advertising and promotion 130 150
SAIF deposit insurance premium 119 118
Other expenses 647 590
---------------- ----------------
Total non-interest expense 4,477 4,241
---------------- ----------------
(Loss) income before income taxes (10) 999
Income tax (benefit) expense (note 11) (319) 272
---------------- ----------------
Net income $ 309 727
================ ================
Earnings per common share:
Basic $ 0.10 --
Diluted 0.10 --
================ ================
Weighted average shares outstanding:
Basic $ 3,092,645 --
Diluted 3,092,645 --
================ ================
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
Accu-
Unallocated mulated
Shares common other
of Additional stock compre-
common Common paid-in Retained held by hensive Total
stock stock capital earnings the ESOP income (loss) equity
--------- -------- ----------- ------------ -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 -- $ -- -- 16,966 -- 228 17,194
--------- -------- ----------- ------------ ----------- ----------- ------------
Comprehensive income (loss):
Net income 727 -- 727
Other comprehensive loss -
unrealized holding losses
on securities arising
during the period (net of
benefit 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
--------- -------- ----------- ------------ ----------- ----------- ------------
Comprehensive income (loss):
Net income 309 309
Other comprehensive loss -
unrealized holding losses on
securities arising during the
period (net of benefit
of $(1,367)) (2,433) (2,433)
Less reclassification adjustment
for losses in net income
(net of benefit of $384) 684 684
------------
Total comprehensive loss (1,440)
------------
Net proceeds from common
stock offering (net of
expenses of $700) 3,180 318 9,433 9,751
Capitalization of
Mutual Holding Company (200) (200)
Unallocated common stock
acquired by the ESOP -- (968) (968)
Allocation of ESOP stock -- (5) 55 50
--------- -------- ----------- ------------ ----------- ----------- ------------
Balance at December 31, 1999 3,180 $ 318 9,428 17,802 (913) (2,020) 24,615
========= ======== =========== ============ =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999 and 1998
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 309 727
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 212 205
Amortization of loan fees (231) (131)
Premiums and discounts on mortgage-backed and
investment securities 3,245 1,146
Proceeds from loan sales -- 771
Gain on sale of loans -- (21)
Loans originated for resale -- --
Disposal of premises and equipment -- 77
Loss (gain) on sale of securities available for sale 1,068 (24)
Provision for loans losses 102 204
Increase in deferred taxes (1,063) (270)
(Increase) decrease in accrued interest receivable (346) 222
Decrease in other assets, net 275 126
Decrease in other liabilities (123) (308)
-------------- ---------------
Net cash provided by operating activities 3,448 2,724
-------------- ---------------
Cash flows from investing activities:
Net increase in first mortgage loans (45,295) (1,416)
Purchase of first mortgage loans (15,180) --
Purchase of mortgage-backed securities held to maturity (8,247) --
Purchase of mortgage-backed securities available for sale (969) (69,435)
Principal collected on mortgage-backed securities 27,200 32,316
Proceeds from sales of mortgage-backed securities available
for sale 34,344 --
Purchase of investment securities available for sale (30,305) (13,642)
Proceeds from sales of securities available for sale 3,674 10,522
Maturities and calls of investment securities held to maturity -- 7,896
Maturities and calls of investment securities available for sale -- 13,200
Principal collected on investment securities 332 374
Purchase of premises and equipment (5,093) (247)
Purchase of Federal Home Loan Bank stock (673) --
Proceeds from collection of loan fees 40 36
Allocation of employee stock ownership shares 50 --
-------------- ---------------
Net cash used in investing activities (40,122) (20,396)
-------------- ---------------
</TABLE>
13 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1999 and 1998
(In Thousands)
<TABLE>
<CAPTION>
1999 1998
-------------- -----------
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits $ (3,592) 11,640
Proceeds from borrowed funds 16,150 31,800
Repayment of borrowed funds -- (15,525)
Net increase in advances from borrowers for
taxes and insurance 321 24
(Decrease) increase in initial public offering subscription
payable (17,809) 17,809
Net proceeds from initial public offering 9,751 --
Purchase of employee stock ownership plan stock (968) --
Capitalization of mutual holding company (200) --
-------------- ---------------
Net cash provided by financing activities 3,653 45,748
-------------- ---------------
Net (decrease) increase in cash and cash
equivalents (33,021) 28,076
Cash and cash equivalents at beginning of year 43,474 15,398
-------------- ---------------
Cash and cash equivalents at end of year $ 10,453 43,474
============== ===============
Supplemental disclosures of cash flow information - cash payments for:
Interest on deposits and borrowed funds $ 11,302 11,096
============== ===============
Income taxes $ 124 477
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(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 that 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 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 may be submitted for stockholder approval at a
later date. If implemented, the RRP would purchase up to 4% of the number
of shares sold in the offering. In addition, a stock option plan may be
submitted for stockholders' approval in the future. 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.
15 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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 are conducted by 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, which is 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 loan losses and valuation of real
estate owned, management generally obtains independent appraisals for
significant properties.
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.
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.
16 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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, adjusted for any
prepayments. 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 and Allowance for Loan Losses
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.
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.
17 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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, 1999 and 1998, the Bank
has no impaired loans.
Premises and Equipment
Land is carried at cost. Premises and equipment, including leasehold
improvements, are carried at cost less accumulated depreciation computed
on the straight-line method over the estimated useful lives of the
assets. Estimated useful lives are 40 years for premises and 3 to 10
years for furniture and equipment. Leasehold improvements are depreciable
over the term of the leases.
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. Estimated fair value
is derived from independent appraisals. 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
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
changes in shareholders' equity.
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.
18 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Employee Stock Ownership Plan
An ESOP was established January 1, 1998 for the exclusive benefit of
participating employees of the Bank. Participating employees are
employees who have completed one year of service with the Bank and have
attained the age of 21. Upon completion of the Plan of Reorganization and
Stock Issuance, the ESOP acquired 8% of the total shares (119,568 shares)
issued in the subscription offering. The purchase was funded through a
loan obtained from the Company. The loan is expected to be repaid over a
term of ten years at an annual interest rate equal to the prevailing
prime interest rate. The loan is secured by the shares purchased and
earnings of the ESOP assets.
When a principal payment is made on the loan, the pro rata number of
shares is allocated to the eligible employees in accordance with the
provisions of the ESOP. During 1999, 5,854 of the 119,568 shares were
allocated. In addition, 6,250 shares were allocated in 1998 based on a
cash contribution to the Plan. The outstanding principal balance of the
ESOP loan is treated as a reduction in shareholders' equity. ESOP shares
scheduled to be released at the ESOP's year end are included as shares
outstanding for calculation of earnings per share on a pro rata basis
throughout the year.
Dividends on unallocated shares used to pay debt service are reported as
a reduction of debt or of accrued interest payable. Dividends on
allocated shares are charged to retained earnings. The Company did not
declare any dividends during 1999. The Company recognizes compensation
cost equal to the fair value of the shares committed to be released.
During 1999, the Company recognized compensation expense of $50,000. The
fair value of unearned ESOP shares at December 31, 1999 is $591,000.
Earnings Per Common Share
Basic earnings per share represents income available to common
shareholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. ESOP shares scheduled
to be released at the ESOP's year end are included as shares outstanding
for calculation of earnings per share on a pro rata basis throughout the
year. Earnings per share are not reported for the year ended December 31,
1998 as there were no shares outstanding.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. The statement requires
that an entity recognize all derivatives as either assets or liabilities
in the balance sheet and measure those instruments at fair value. In June
1999, the FASB issued SFAS No. 137, an amendment of SFAS No. 133 which
defers the effective date to periods beginning after June 15, 2000. The
Company does not expect the adoption of SFAS No. 133 to have a material
impact on its consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 1998 consolidated
financial statements to conform to the 1999 presentation.
19 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(3) Investment Securities
At December 31, 1999 and 1998, securities held to maturity consist of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S agencies $ 860 -- (13) 847
=============== =============== =============== ===============
</TABLE>
<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>
At December 31, 1999, none of these securities were pledged as
collateral.
At December 31, 1999 and 1998, securities available for sale consist of
the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
-------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Municipal securities $ 25,842 -- (2,586) 23,256
Corporate bonds 7,044 -- (123) 6,921
U.S. treasuries 2,001 -- (1) 2,000
U. S. agencies 7,410 9 (120) 7,299
--------------- --------------- --------------- ---------------
$ 42,297 9 (2,830) 39,476
=============== =============== =============== ===============
</TABLE>
<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>
20 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
At December 31, 1999, securities of $846,998 were pledged for municipal
deposits.
The following is a summary of maturities of debt securities as of
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
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 $ -- -- 2,041 2,040
After one year through five
years 403 394 15,386 15,079
After five years through
ten years -- -- 2,245 2,116
After ten years 457 453 22,625 20,241
--------------- --------------- --------------- ---------------
$ 860 847 42,297 39,476
=============== =============== =============== ===============
</TABLE>
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
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Proceeds from sales $ 3,674 10,522
=============== ===============
Gross realized gains $ 39 24
=============== ===============
</TABLE>
(4) Mortgage-backed Securities
At December 31, 1999 and 1998, mortgage-backed securities held to
maturity consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
GNMA $ 3,319 17 (40) 3,296
FHLMC 1,931 5 (44) 1,892
FNMA 12,090 16 (206) 11,900
--------------- --------------- --------------- ---------------
$ 17,340 38 (290) 17,088
=============== =============== =============== ===============
</TABLE>
21 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
<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>
At December 31, 1999, securities of $8.7 million were pledged as
collateral.
At December 31, 1999 and 1998, mortgage-backed securities available for
sale consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
GNMA $ 608 -- -- 608
FHLMC 14,144 20 (137) 14,027
FNMA 13,848 15 (233) 13,630
--------------- --------------- --------------- ---------------
$ 28,600 35 (370) 28,265
=============== =============== =============== ===============
</TABLE>
<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 36,415 325 (509) 36,231
FNMA 48,737 125 (553) 48,309
--------------- --------------- --------------- ---------------
$ 88,997 466 (1,073) 88,390
=============== =============== =============== ===============
</TABLE>
At December 31, 1999, securities of $18.4 million were pledged as
collateral.
22 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The following is a summary of maturities of mortgage-backed securities as
of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Mortgage-backed Mortgage-backed
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 $ -- -- 139 140
After one year through five
years 938 915 3,036 3,003
After five years through
ten years 2,381 2,328 19,175 18,897
After ten years 14,021 13,845 6,250 6,225
--------------- --------------- --------------- ---------------
$ 17,340 17,088 28,600 28,265
=============== =============== =============== ===============
</TABLE>
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
-----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Proceeds from sales $ 34,344 --
================== ==================
Gross realized gains $ -- --
================== ==================
Gross realized losses $ (1,107) --
================== ==================
</TABLE>
There were no sales of mortgage-backed securities available for sale
during 1998.
23 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(5) Loans
The following is a summary of loans at December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
First mortgage loans:
Secured by one- to four-family residences $ 146,971 88,936
Secured by other property 6,932 8,032
--------------- ---------------
Total first mortgage loans 153,903 96,968
--------------- ---------------
Commercial loans 1,689 497
--------------- ---------------
Consumer loans:
Equity 12,612 10,397
Education 28 36
Loans to depositors, secured by savings 214 202
Other 69 58
--------------- ---------------
Total consumer loans 12,923 10,693
--------------- ---------------
Less:
Net deferred loan fees 123 315
Allowance for loan losses 924 822
--------------- ---------------
$ 167,468 107,021
=============== ===============
</TABLE>
Loans serviced for others amounted to $4,669,000 at December 31, 1999 and
$5,171,000 at December 31, 1998.
Activity in the allowance for loan losses for the years ended December
31, 1999 and 1998 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Balance at beginning of year $ 822 618
Provision charged to income 102 204
--------------- ---------------
Balance at end of year $ 924 822
=============== ===============
</TABLE>
The balance of nonaccrual loans for which interest income has been
reduced totals approximately $133,000 and $695,000 at December 31, 1999
and 1998, respectively. Interest income that would have been recorded
under the original terms of such loans approximated $8,000 and $17,000,
for the years ended December 31, 1999 and 1998, respectively. There were
no commitments to lend additional funds to borrowers whose loans were
classified as nonaccrual.
24 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(6) Premises and Equipment
Premises and equipment at December 31, 1999 and 1998 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Land $ 1,052 527
Building and improvements 5,128 607
Leasehold improvements 800 798
Furniture, fixtures and equipment 1,100 1,055
--------------- ---------------
8,080 2,987
Less accumulated depreciation 981 769
--------------- ---------------
$ 7,099 2,218
=============== ===============
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998
amounted to $212,000 and $205,000, respectively.
(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 paid dividends at an effective rate of 6.81%
and 7.20% for the years ended December 31, 1999 and 1998, respectively.
(8) Deposits
Deposits at December 31, 1999 and 1998 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------- --------------------------------
Weighted Weighted
Amount average rate Amount average rate
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Non-interest bearing $ 6,470 --% 4,105 --%
NOW accounts 12,582 2.22 11,407 1.83
Passbook 32,893 3.24 31,555 3.01
Money market 4,202 2.91 4,504 3.00
Certificates of deposit 145,790 5.21 153,958 5.50
--------------- =============== --------------- ===============
$ 201,937 $ 205,529
=============== ===============
</TABLE>
25 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The aggregate amount of certificate of deposit accounts with a minimum
denomination of $100,000 was approximately $18.8 million and $17.4
million at December 31, 1999 and 1998, respectively.
At December 31, 1999 and 1998, scheduled maturities of certificates of
deposit are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
One year or less $ 96,488 127,031
One year to two years 43,066 22,162
Two years to three years 3,731 4,765
Three years to four years 2,443 --
Five years or more 62 --
--------------- ---------------
$ 145,790 153,958
=============== ===============
</TABLE>
Interest expense on deposits for the years ended December 31, 1999 and
1998 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
NOW accounts $ 281 252
Passbook 980 948
Money market 126 123
Certificates of deposit 7,457 8,441
--------------- ---------------
$ 8,844 9,764
=============== ===============
</TABLE>
(9) Borrowed Funds
Borrowed funds at December 31, 1999 and 1998 are summarized as follows :
(in thousands):
1999 1998
--------------- -------------
Advances from the FHLB $ 48,678 32,557
=============== =============
26 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Pursuant to collateral agreements with the FHLB, advances are secured by
all stock in the FHLB, mortgage-backed securities and qualifying first
mortgage loans. Advances at December 31, 1999 have maturity dates as
follows (in thousands):
2000 $ 5,650
2001 2,000
2002 4,200
2003 5,500
2004 3,000
2005 2,000
2006 503
2008 16,000
2009 9,825
------------
$ 48,678
============
The interest rates on advances ranged from 4.65% to 6.76% and from 4.65%
to 6.76% at December 31, 1999 and 1998, respectively. The weighted
average interest rate on FHLB advances at December 31, 1999 and 1998 was
5.55%, and 5.41%, 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.
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 of Directors
(Board) upon retirement then 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 service as of the retirement date. The DRP is unfunded.
27 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 1,648 707
Benefit obligation related to past service liability on new plans -- 821
Service cost 172 123
Interest cost 108 78
Benefits paid (84) (83)
Actuarial (gain) loss (291) 2
--------------- ---------------
Benefit obligation at end of year 1,553 1,648
--------------- ---------------
Change in plan assets:
Fair value of plan assets at beginning of year 755 730
Actual return on plan assets 133 87
Employer contributions 67 21
Benefits paid (84) (83)
--------------- ---------------
Fair value of plan assets at end of year 871 755
--------------- ---------------
Funded status (682) (893)
Unrecognized gain (426) (32)
Unrecognized past service liability 699 773
Other 34 6
--------------- ---------------
Accrued pension liability $ (375) (146)
=============== ===============
</TABLE>
Weighted average assumptions used to develop the net periodic pension
costs are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Discount rate 8.0% 6.8%
Expected long-term rate of return
on assets 8.0 8.0
Rate of increase in compensation
levels 5.5 4.5
=============== ===============
</TABLE>
28 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Listed below are the components of pension expense for the years ended
December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Service cost $ 172 123
Interest cost 108 78
Expected return on plan
assets (63) (53)
Unrecognized past service
liability 74 54
Other components 6 --
--------------- ---------------
Net periodic pension
cost $ 297 202
=============== ===============
</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, 1999 and 1998 were approximately
$23,000 and $22,000, respectively.
(11) Income Taxes
Income tax expense (benefit) for the years ended December 31, 1999 and
1998 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Current:
Federal $ (258) 495
State 19 47
--------------- ---------------
$ (239) 542
=============== ===============
</TABLE>
29 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Deferred:
Federal $ (77) (252)
State (3) (18)
--------------- ---------------
(80) (270)
--------------- ---------------
Total:
Federal (335) 243
State 16 29
--------------- ---------------
$ (319) 272
=============== ===============
</TABLE>
Total income tax expense (benefit) 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>
1999 1998
--------------- ---------------
<S> <C> <C>
Expected income tax (benefit) expense
at federal tax rate $ (3) 340
(Decrease) increase in taxes
resulting from:
State income tax, net of
federal income tax effect 11 19
Tax-exempt interest (406) (113)
Disallowed interest expense 77 --
Other, net 2 26
--------------- ---------------
$ (319) 272
=============== ===============
</TABLE>
Total income tax expense (benefit) for the years ended December 31, 1999
and 1998 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Income tax expense (benefit) from operations $ (319) 272
Accumulated other comprehensive
income - unrealized loss on securities
available for sale (983) (281)
--------------- ---------------
$ (1,302) (9)
=============== ===============
</TABLE>
30 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The following are the significant components of the net deferred tax
asset at December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Components of deferred tax asset:
Provision for loan losses - book $ 333 296
Loan fees 50 77
Interest reserves 3 6
Amortization of premiums and discounts on investment
securities and mortgage-backed securities 199 224
Accrued SERP 61 24
Other 92 45
Unrealized losses on available-for-sale securities 1,136 153
--------------- ---------------
Total deferred tax asset 1,874 825
--------------- ---------------
Components of deferred tax liability:
Depreciation (55) (40)
Provision for loan losses - tax (288) (360)
Deferred loan cost (47) --
Other (10) (14)
--------------- ---------------
Total deferred tax liability (400) (414)
--------------- ---------------
Net deferred tax asset $ 1,474 411
=============== ===============
Net state deferred tax asset 80 23
Net federal deferred tax asset 1,394 388
--------------- ---------------
$ 1,474 411
=============== ===============
</TABLE>
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, 1999 include 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, 1999, the Bank has an
unrecognized tax liability of $1.1 million with respect to this
reserve.
31 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(12) 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, 1999, 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 $187,000
and $166,000 for the years ended December 31, 1999 and 1998,
respectively.
The projected minimum rental payments under the terms of the leases,
exclusive of the renewal options, as of December 31, 1999 are as follows:
2000 $ 155,000
2001 155,000
2002 155,000
2003 155,000
2004 155,000
2005 and thereafter 627,000
---------------
$ 1,402,000
===============
Real estate taxes, insurance and maintenance expenses are generally
obligations of the Bank and, accordingly, are not included as part of
rental payments.
At December 31, 1999, the Bank is obligated to third-party contractors in
the amount of $846,000 to complete renovations of premises acquired
during 1999.
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 consolidated 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
32 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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.
Loan Commitments
At December 31, 1999, the Bank has outstanding firm commitments to
originate loans as follows (in thousands):
<TABLE>
<CAPTION>
Fixed Variable
rate rate Total
--------------- --------------- ---------------
<S> <C> <C> <C>
First mortgage loans $ 40 2,382 2,422
Consumer and other loans 76 494 570
Commercial and construction -- 2,914 2,914
--------------- --------------- ---------------
$ 116 5,790 5,906
=============== =============== ===============
Commitments under home equity
lines of credit $ 8,392
Commitments under overdraft lines
of credit 478
------------------
$ 8,870
==================
</TABLE>
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.
(13) Minimum Regulatory Capital Requirements
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the Federal Deposit
Insurance Corporation (FDIC). Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's and Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Bank must meet specific capital
guidelines that involve quantitative measures of its assets, liabilities
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
33 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Quantitative measures established by regulation to ensure capital
adequacy require the Company and Bank to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined) and of
Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999 and 1998, that the Company and Bank met
all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, an
institution must maintain minimum total risk-based, Tier 1 risk-based and
Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since the notification that management believes have
changed the Bank's category. The Company's and Bank's actual capital
amounts and ratios as of December 31, 1999 and 1998 are also presented in
the table.
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------------ ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------------ ------------ ----------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital (to risk-
weighted assets):
Consolidated $ 27,560 20.70 $ 10,158 8.00 $ 12,698 10.00
Bank 23,574 18.57 10,156 8.00 12,696 10.00
Tier 1 capital (to risk-
weighted assets):
Consolidated 26,636 20.98 5,079 4.00 7,619 6.00
Bank 22,650 17.84 5,078 4.00 7,617 6.00
Tier 1 capital (to average
assets):
Consolidated 26,636 9.98 10,676 4.00 13,346 5.00
Bank 22,650 8.59 10,547 4.00 13,184 5.00
As of December 31, 1998:
Total capital (to risk-
weighted assets):
Consolidated -- -- -- -- -- --
Bank 18,522 18.57 7,977 8.00 9,972 10.00
Tier 1 capital (to risk-
weighted assets):
Consolidated -- -- -- -- -- --
Bank 17,690 17.74 3,989 4.00 5,983 6.00
Tier 1 capital (to average
assets):
Consolidated -- -- -- -- -- --
Bank 17,690 6.88 10,286 4.00 12,858 5.00
=========== ============ ============ =========== ============ ============
</TABLE>
34 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(14) 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.
35 (Continued)
<PAGE>
RIDGEWOOD FINANCIAL, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The estimated fair values of the Bank's financial instruments at December
31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------------------- ---------------------------------
Carrying Fair Carrying Fair
amount value amount value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 10,453 10,453 43,474 43,474
Investment securities - HTM 860 847 1,354 1,374
Investment securities - AFS 39,476 39,476 16,921 16,921
Mortgage-backed securities -
HTM 17,340 17,088 11,277 11,409
Mortgage-backed securities -
AFS 28,265 28,265 88,390 88,390
Loans receivable, net 167,468 165,619 107,021 113,380
FHLB stock 2,622 2,622 1,949 1,949
Liabilities:
Deposits 201,937 199,732 205,529 206,077
Borrowed funds 48,678 48,343 32,557 33,989
=============== =============== =============== ===============
</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.
36
EXHIBIT 23
<PAGE>
Independent Accountant's Consent
The Board of Directors
Ridgewood Financial, Inc.:
We consent to incorporation by reference in the previously filed Registration
Statement on Form S-8 File No. 333-71725 of Ridgewood Financial, Inc. of our
report dated January 24, 2000, relating to the consolidated statements of
financial condition of Ridgewood Financial, Inc. and subsidiary as of December
31, 1999 and 1998, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for the years then ended, which report
appears in the December 31, 1999 Annual Report on Form 10-KSB of Ridgewood
Financial, Inc.
/s/KPMG LLP
-----------------------
KPMG LLP
Short Hills, New Jersey
March 24, 2000
<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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,713
<INT-BEARING-DEPOSITS> 4,839
<FED-FUNDS-SOLD> 3,900
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,741
<INVESTMENTS-CARRYING> 85,941
<INVESTMENTS-MARKET> 85,676
<LOANS> 168,392
<ALLOWANCE> 924
<TOTAL-ASSETS> 276,846
<DEPOSITS> 201,937
<SHORT-TERM> 5,650
<LIABILITIES-OTHER> 1,616
<LONG-TERM> 43,028
0
0
<COMMON> 318
<OTHER-SE> 24,297
<TOTAL-LIABILITIES-AND-EQUITY> 276,846
<INTEREST-LOAN> 9,935
<INTEREST-INVEST> 5,668
<INTEREST-OTHER> 1,159
<INTEREST-TOTAL> 16,762
<INTEREST-DEPOSIT> 8,844
<INTEREST-EXPENSE> 11,289
<INTEREST-INCOME-NET> 5,473
<LOAN-LOSSES> 102
<SECURITIES-GAINS> (1,068)
<EXPENSE-OTHER> 4,477
<INCOME-PRETAX> (10)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 309
<EPS-BASIC> .10
<EPS-DILUTED> .10
<YIELD-ACTUAL> 2.36
<LOANS-NON> 133
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 822
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 924
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
