<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1996
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-24358
MLF BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact Name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-2752439
- ------------ -----------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification Number)
or organization)
TWO ALDWYN CENTER
VILLANOVA, PENNSYLVANIA 19085
- ----------------------- -----
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (610) 526-6460
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01
-----------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. (X)
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the closing prices of the registrant's common stock as
quoted on the National Association of Securities Dealers Automated Quotation
System as of June 18, 1996 was $137.5 million. For purposes of this
calculation only, affiliates are deemed to be directors, executive officers and
certain beneficial owners.
As of June 18, 1996, there were 7,273,800 shares issued and 6,246,900 shares
outstanding of the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
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<S> <C>
Documents Where Incorporated
- ----------------------------------------- ---------------------------------------
1) 1996 Annual Report Part II - Items 5, 6, 7 and 8;
Part IV - Item 14
2) Proxy Statement for 1996 Annual Meeting of Stockholders Part III - Items 10, 11, 12 and 13
</TABLE>
<PAGE> 2
MLF BANCORP, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I
------
Item 1 Business..........................................................................................1
Item 2 Properties.......................................................................................41
Item 3 Legal Proceedings................................................................................43
Item 4 Submission of Matters To A Vote of Security Holders..............................................43
PART II
-------
Item 5 Market for Registrant's Common
Equity and Related Stockholder Matters...........................................................43
Item 6 Selected Financial Data..........................................................................43
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................43
Item 8 Financial Statements & Supplementary Data........................................................44
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure...................................................................44
PART III
--------
Item 10 Directors and Executive Officers of the Registrant...............................................44
Item 11 Executive Compensation...........................................................................44
Item 12 Security Ownership of Certain Beneficial Owners and Management...................................44
Item 13 Certain Relationships and Related Transactions...................................................44
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................45
</TABLE>
<PAGE> 3
ITEM 1: BUSINESS
MLF BANCORP, INC.
MLF Bancorp, Inc. (the "Company" or "Bancorp") is a Pennsylvania corporation
organized in March 1994 by Main Line Bank (the "Bank") for the purpose of
acquiring all of the capital stock of the Bank issued in the Bank's mutual to
stock conversion which occurred on August 11, 1994. At March 31, 1996, the
only significant asset of the Company is the capital stock of the Bank. At
March 31, 1996, Bancorp had $1.8 billion of total assets, $831.0 million of
total deposits and $140.3 million of equity.
MAIN LINE BANK
The Bank is a federally-chartered stock savings bank conducting business from
its executive offices located in Villanova, Pennsylvania, 18 full service
offices located in Chester, Delaware and Montgomery Counties, Pennsylvania and
nine mortgage loan production offices which are located in eastern
Pennsylvania, southern New Jersey and northern Delaware. The Bank's market
area, which includes the affluent western suburbs of Philadelphia, has
experienced reasonable growth in total population and employment in recent
years. The Bank's deposits are insured by the Savings Association Insurance
Fund ("SAIF"), which is administered by the Federal Deposit Insurance
Corporation ("FDIC"), to the maximum extent permitted by law. The Bank is a
community oriented savings bank which has historically offered a wide variety
of savings products to its retail customers while concentrating its lending
activities on real estate loans secured by one-to-four family residential
properties, residential construction and development projects and selected
commercial properties. In addition to these traditional product lines, the
Bank is now delivering deposit and credit products to the small and commercial
business markets. The Bank, by endeavoring to become a full service community
bank, has also increased its emphasis on consumer lending.
During the year ended March 31, 1996, the Company completed its acquisition of
Hart Mortgage Co. ("Hart"), a privately-held mortgage banking company, and
Suburban Federal Savings Bank, a community bank with $66.0 million in assets
headquartered in Collingdale, Delaware County, Pennsylvania. Both acquisitions
were accounted for using the purchase method of accounting.
On April 1, 1996, the Company completed its acquisition of Philadelphia
Mortgage Corporation ("PMC"), a privately-held mortgage banking company.
1
<PAGE> 4
LENDING ACTIVITIES
GENERAL. Since fiscal 1991, the Company has organized its commercial lending
operations and developed a mortgage banking operation. Regarding the latter,
the Company shifted its lending focus from the traditional origination of
residential mortgage loans for portfolio retention to the origination of such
loans primarily for sale into the secondary market with servicing retained in
order to enhance the Company's sources of other income. This shift was also
undertaken to reduce the interest rate risk inherent in traditional long-term,
fixed-rate residential mortgage lending while enhancing the Company's sources
of non-interest income. In order to fulfill its strategy of becoming a full
service community oriented bank, management decided in fiscal 1991 to enter the
commercial business lending business and to reenergize its commercial
construction and commercial real estate lines of business. This strategy
evolved and was put in place to balance and diversify the Company's loan
portfolio as well as to serve the banking needs of small and medium-sized
businesses and the owners thereof located in the greater Philadelphia
metropolitan area.
The Company's lending operations are organized into four areas: mortgage
banking operations, real estate financing, consumer lending and commercial
business lending.
The Company's mortgage banking operation originates single-family residential
loans primarily for sale into the secondary market and to a limited degree, for
portfolio retention. The bulk of such loans are packaged and sold to either
the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National
Mortgage Association ("FNMA"). A portion of such loans are sold pursuant to
commitments to purchase obtained from investors concurrent with the origination
of the loans. During the fiscal years ended March 31, 1996 and 1995, the
Company originated $161.6 million and $303.1 million and sold $134.7 million
and $99.6 million, respectively, of first mortgage loans. In addition, as of
March 31, 1996, the Company services $2.4 billion of loans for others,
including $1.7 billion of loans as to which it has purchased mortgage servicing
rights ("PMSRs"). See "- Mortgage Banking Activities."
Real estate financing, consisting of construction lending on residential and
commercial properties and commercial and multi-family real estate lending, is a
continuation of the Company's traditional involvement in such lending
activities. However, due to the combination of deterioration in market values
due to general recessionary effects as well as asset quality issues arising
from loans originated in connection with the Company's joint venture real
estate activity in the latter part of the 1980's and early 1990's, the Company
significantly reduced its involvement in the origination of construction loans
prior to fiscal 1993. During fiscal years 1994-1996, as described under "-
Construction Lending Activities," experienced senior lending officers and
underwriting staff were hired and the underwriting policies and procedures were
substantially revised and enhanced from a risk tolerance perspective. As of
March 31, 1996, commercial/multi-family real estate and total construction
loans amounted to $245.8 million or 31.9% of the total loan portfolio, an
increase of 58.0% from March 31, 1995.
The Company's involvement in consumer lending has continued to increase
as a result of the Company's emphasis on expanding the retail franchise.
Consumer loans, which consist primarily of home equity loans, home equity lines
of credit and lines of credit amounted to $110.3 million or 14.3% of the total
2
<PAGE> 5
loan portfolio at March 31, 1996, an 18.1% increase from March 31, 1995. The
Company has also selectively entered the non-conforming as well as B & C credit
consumer markets. The development and expansion of a small business lending
program was instituted in fiscal 1996 and this line of business will receive
greater strategic emphasis as the Company grows in the ensuing years.
In conjunction with the determination to diversify its loan portfolio and
develop banking relationships with small and medium-sized businesses in the
greater Philadelphia metropolitan area, the Company began offering commercial
business loans in 1991, including lines and letters of credit, equipment loans
and term loans. Such loans comprised $69.6 million or 9.0% of the total loan
portfolio at March 31, 1996, more than double that of the March 31, 1995
portfolio. The Company expects to continue significant expansion and
diversification of this loan portfolio in fiscal 1997 and future years. The
commercial business strategy is to provide credit and non-credit services to
entities primarily within the Philadelphia metropolitan area. The achievements
to date and the future goals will be achieved through the hiring of experienced
commercial lenders, who are supported by customer service oriented assistants
and, who are focused by enhanced credit policies. In fiscal 1996 a Credit
Policy department was established to manage the loan risk analysis activities
and to provide ongoing credit policy risk management strategies. The asset
workout function of the Company in fiscal 1996 was placed under the management
of the Company's Chief Credit Policy Officer.
The Company's primary market area consists of the greater Philadelphia
metropolitan area. The Company's mortgage banking and commercial real estate
departments lend to borrowers located outside of this area, but within
approximately 100 miles of the Company's headquarters. The Company has also
extended its home equity lending activities to both the Pocono region of
Pennsylvania as well as southern and central New Jersey.
3
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LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition of
the Company's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ----------------------- ----------------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Single-family $344,713 44.74% $326,029 53.59% $106,350 36.53
Multi-family 11,348 1.47 10,812 1.78 10,297 3.54
Commercial 109,135 14.17 69,779 11.47 47,671 16.37
Construction and land:
Residential 110,693 14.37 59,112 9.72 33,794 11.61
Commercial 14,625 1.90 15,891 2.61 2,018 0.69
-------- -------- -------- -------- -------- --------
Total real estate loans 590,514 76.65 481,623 79.17 200,130 68.74
-------- -------- -------- -------- -------- --------
Other Loans:
Consumer:
Home equity loans and lines of Credit 92,139 11.96 76,393 12.56 64,417 22.12
Unsecured lines of credit 3,091 0.40 3,527 0.58 4,626 1.59
Automobile 5,926 0.77 7,710 1.27 10,189 3.50
Education (1) - - - - - -
Other 9,098 1.18 5,734 0.94 3,560 1.22
Commercial loans 69,647 9.04 33,328 5.48 8,238 2.83
-------- -------- -------- -------- -------- --------
Total other loans 179,901 23.35 126,692 20.83 91,030 31.26
-------- -------- -------- -------- -------- --------
Total loans receivable $770,415 100.00% 608,315 100.00% 291,160 100.00%
-------- ======== -------- ======== -------- ========
Less:
Loans in process (construction and land) 61,389 45,613 18,833
Deferred loan origination fees and discounts 4,111 3,578 2,029
Allowance for loan losses 13,124 9,111 7,337
-------- -------- --------
78,624 58,302 28,199
-------- -------- --------
Total loans receivable, net $691,791 $550,013 $262,961
======== ======== ========
<CAPTION>
March 31,
---------------------------------------------------
1993 1992
-------------------------- ---------------------
Amount % Amount %
------ --- ------ ---
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Single-family $136,630 44.36% $205,528 49.42%
Multi-family 14,871 4.83 20,163 4.85
Commercial 35,381 11.49 39,522 9.50
Construction and land:
Residential 27,605 8.96 47,904 11.52
Commercial 1,540 0.50 10,611 2.55
-------- -------- -------- --------
Total real estate loans 216,027 70.14 323,728 77.84
-------- -------- -------- --------
Other Loans:
Consumer:
Home equity loans and lines of Credit 66,489 21.59 61,988 14.90
Unsecured lines of credit 4,262 1.38 3,984 0.96
Automobile 11,904 3.86 12,347 2.97
Education (1) - - 4,032 0.97
Other 2,217 0.72 4,190 1.01
Commercial loans 7,114 2.31 5,598 1.35
-------- -------- -------- --------
Total other loans 91,986 29.86 92,139 22.16
-------- -------- -------- --------
Total loans receivable 308,013 100.00% 415,867 100.00%
-------- ======== -------- ========
Less:
Loans in process (construction and land) 11,229 25,726
Deferred loan origination fees and discounts 2,473 2,756
Allowance for loan losses 7,488 6,996
-------- --------
21,190 35,478
-------- --------
Total loans receivable, net $286,823 $380,389
======== ========
</TABLE>
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(1) Education loans are classified as loans receivable available for sale.
4
<PAGE> 7
CONTRACTUAL MATURITIES. The following table sets forth the scheduled
contractual maturities of the Company's loans held to maturity at March 31,
1996. Demand loans, loans having no stated schedule of repayments and no
stated maturity and overdraft loans are reported as due in one year or less.
The amounts shown for each period do not take into account loan prepayments and
normal amortization of the Company's loan portfolio held to maturity.
<TABLE>
<CAPTION>
Real Estate Loans
------------------------------------------------------------------------------
Single-family Multi-family Commercial Construction Total
------------- ------------ ---------- ------------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due in:
One year or less $999 $ - $6,046 $101,993 $109,038
After one year through five years 34,221 169 3,092 23,325 60,807
After five years 309,493 11,179 99,997 - 420,669
-------- ------- -------- -------- --------
Total(1) $344,713 $11,348 $109,135 $125,318 $590,514
======== ======= ======== ======== ========
Interest rate terms on amounts due after one year:
Fixed $145,834
Adjustable 335,642
--------
$481,476
========
<CAPTION>
Consumer and
Other Loans Total
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(In Thousands)
<S> <C> <C>
Amounts due in:
One year or less $68,230 $177,268
After one year through five years 41,294 102,101
After five years 70,377 491,046
-------- --------
Total(1) $179,901 $770,415
======== ========
Interest rate terms on amounts due after one year:
Fixed $89,452 $235,286
Adjustable 22,219 357,861
-------- --------
$111,671 $593,147
======== ========
</TABLE>
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(1) Does not include adjustments relating to loans in process, allowance for
loan losses and deferred fee income.
Scheduled contractual repayment of loans does not reflect the expected term of
the Company's loan portfolio. The expected average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give the Company the right to declare a conventional
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on existing mortgage loans are lower than
current mortgage loan rates (due to refinancings of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher-yielding loans are repaid or
refinanced at lower rates.
5
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LOAN ORIGINATION, PURCHASE AND SALES ACTIVITY. Applications for residential
mortgage, consumer and commercial business loans are taken at all of the
Company's business center locations. Applications for residential mortgage
loans are also obtained through account executives (i.e., employees and other
persons) who solicit and refer residential mortgage loan applications to the
Company. These account executives are compensated on a commission basis and
provide origination services during banking and non-banking hours.
Residential mortgage loans which conform to requirements for resale into the
secondary market are approved by the Company's mortgage loan underwriters.
Non-conforming residential mortgage and other loans are otherwise approved by
designated individuals or committees depending on loan size. In accordance
with loan policies adopted by the Board of Directors, specific approval of the
Board of Directors is not required with respect to any loans. The maximum
amount of any loan(s) to one borrower cannot exceed the lesser of $22.0 million
or 100% of the Company's regulatorily imposed loans-to-one borrower limitation
as of March 31, 1996. As of March 31, 1996, the largest loans-to-one-borrower
totaled $14.2 million and consisted of 2 commercial construction loans. These
loans are current as to payments of principal and interest and are performing
according to the terms of the loan documents as of March 31, 1996.
The Company has on occasion purchased whole loans and participation interests
therein. During the past few years, the purchases involved the acquisition of
residential whole loans. During fiscal 1994, the Company purchased a $24.7
million package of 15-year, jumbo fixed-rate, single-family mortgage loans
secured by properties located primarily in the Northeastern United States. The
Company will also consider purchasing participation interests in commercial
real estate and commercial business loans, although to date no purchases have
been made. The determination with respect to the purchase of loans (whether in
the form of whole loans or participation interests) will take into account the
Company's asset mix and whether the Company can originate the desired product
in the amounts and on the terms necessary to meet its overall asset/liability
strategy and goals. Currently, the Company only securitizes those residential
loans being sold directly to FHLMC or FNMA.
MORTGAGE BANKING ACTIVITIES. One of the primary lending activities of the
Company is the origination and sale of Conventional and Government real estate
loans secured by first liens on single family residences. The principal
purpose of the Company's mortgage banking operation is to generate non-interest
income through loan sales and servicing fees while avoiding the interest rate
risk associated with holding low interest rate, longer term fixed rate mortgage
loans in the portfolio. Loan originations are generated through a variety of
distribution channels including retail bank business centers, real estate
brokers, builders, and a small correspondent network of mortgage brokers and
mortgage bankers. On February 14, 1996 and April 1, 1996, the Company completed
its acquisitions of Hart and PMC, respectively, two prominent local mortgage
banking operations. Combined with the Company's original mortgage banking
operation, estimated annual production will be approximately $500 million with
85% of the production generated by retail channels. The Company's Pennsylvania
retail loan production offices (LPOs) are located in Rosemont, Ft. Washington,
Lancaster, Camp Hill, Easton, and State College. New Jersey's LPOs are located
in Marlton and West Trenton, and a Delaware LPO is supported in Wilmington.
6
<PAGE> 9
The Mortgage Banking Division of the Company originates conventional
FHA-insured and VA -guaranteed government loan production. The vast majority
of the product originated by the mortgage banking division qualify as
conforming loans which are eligible for sale into the secondary market via
agency or private investor relationships. For conventional residential loans,
the Company offers a variety of first-time homebuyer loans offering agency and
portfolio products for as little as a 3% down payment (FNMA 97) to the
Company's own Homeward Bound portfolio product. The conventional financing
products combined with the FHA-insured and VA guaranteed product enable the
Company to extend home ownership opportunities to a wide range of first time
homebuyers. The Mortgage Banking Division also offers alternative financing
options through its non-conforming (B through D Paper) loan unit.
The ability of the Mortgage Banking operation to originate loans is dependent
in part on prevailing interest rate levels, demographic trends, and the climate
of the local economic landscape. For fiscal 1997, the outlook is for low to
steady interest rate levels to accommodate recent sluggish economic growth.
Low interest rate levels are expected to generate adequate homebuying
opportunities and ample debt consolidation (refinance) opportunities for most
consumers. Other factors affecting origination capabilities include
competitive pricing pressures, various strategically aligned controlled
business arrangements between realtors and mortgage bankers, and the
implementation and utilization of technology.
Borrowers are generally charged an origination fee, which is a percentage of
the principal balance of the loan, as well as a document preparation fee and a
tax service fee. The Company charges its correspondents an underwriting fee,
which is a percentage of the principal balance of the loan being originated, a
tax service fee and, in some cases, a settlement fee. The various fees
received by the Company in connection with the origination of loans are
deferred and amortized as a yield adjustment over the life of the related loans
using the interest method. However, when such loans are sold, the remaining
unamortized fees (which are generally all or substantially all of such fees due
to the relatively short period during which such loans are held, if at all) are
recognized as gain or loss on sale of loans available for sale. During the
fiscal years ended March 31, 1996, 1995 and 1994, gain on sale of loans
resulting from the Mortgage Banking division's origination and sale activities
amounted to $2.1 million, $87,000 and $1.3 million, respectively.
The Company sells loans originated by it to private investors in the secondary
market or to FNMA or FHLMC with servicing rights retained. The Company's
mortgage loans sold to others generally are sold in groups through
mortgage-related securities issued by FNMA or FHLMC or on a loan-by-loan basis
to these agencies or other private investors. A period of 60 to 90 days
generally lapses between the closing of the loan by the Company and its
purchase by the investor. In the case of the loans sold through
mortgage-related securities, the loans are generally grouped in pools which are
issued as FNMA or FHLMC mortgage-backed securities, representing an undivided
interest in the loan pool. For issuing the security, FNMA or FHLMC receives an
annual guarantee fee of approximately .25% of the declining principal amount of
the loan pool. All FHA-insured or VA guaranteed mortgages are sold with the
servicing rights released to the investor.
7
<PAGE> 10
The Company currently employs forward commitments, described below, as a
hedging technique to protect the value of its mortgage production from
"pipeline risk" (the risk created by offering loan applicants agreed upon
interest rates for a future closing). The Company will also consider other
hedging techniques. Mortgages with established interest rates generally will
decrease in value during periods of increasing interest rates and increase in
value during periods of decreasing interest rates. Accordingly, fluctuations in
prevailing interest rates may result in a gain or loss to the Company as a
result of adjustments to the carrying value of loans held for sale or otherwise
on sale of loans to the extent that the Company has not obtained prior
commitments by investors to purchase such loans or otherwise hedged the value
of the loans against changes in interest rates. Pursuant to policies adopted
by Asset/Liability Management Committee ("the ALCO"), at any given time, the
Mortgage Banking division cannot have more than $20.0 million of loans which
are not covered by purchase commitments. This limit is reviewed periodically to
determine its appropriateness in light of the then existing interest rate
environment.
OTHER MORTGAGE BANKING ACTIVITIES. In 1993, the Company became involved in a
loan participation program for residential mortgage loan originators for resale
into the secondary market. The Company purchases from approved mortgage
originators single-family residential loans which already have commitments for
sale within 90 days in the secondary mortgage market to FNMA, FHLMC, Government
National Mortgage Association ("GNMA") or other private investors. The Company
obtains funding to purchase participations with pricing on the funding
established at a level necessary to create a minimum spread between the cost of
funds and the yield on the participation purchased. An independent financial
institution holds the original mortgage loan notes and other documentation as
custodian until the previously committed sale of the loans occurs. After
evaluating a potential participant in the program, if the originator appears to
be a likely candidate for approval, Company personnel will visit the originator
and review, among other things, its business organization, management, quality
control, funding sources, risk management, loan volume and historical
delinquency rate, financial condition, contingent obligations and regulatory
compliance. Upon conclusion of such review, the Company establishes a maximum
dollar amount of loans which it will be willing to purchase from the mortgage
loan originator at any given time. At March 31, 1996, the Company had extended
commitments totaling $96.0 million to 10 mortgage loan originators, and had
loan participation purchases outstanding of $51.5 million which are included in
assets available for sale.
LOAN SERVICING. The Company services residential real estate loans owned by
the Company and by others, including FNMA, FHLMC and other private mortgage
investors. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, making advances to cover delinquent
payments, making or arranging for inspections as required of mortgaged
premises, contacting delinquent mortgagors, supervising foreclosures and
property dispositions in the event of unremedied defaults and generally
administering the loans. Funds that have been escrowed by borrowers for the
payment of mortgage-related expenses, such as property taxes and hazard and
mortgage insurance premiums, are maintained in non-interest-bearing deposit
accounts at the Company. At March 31, 1996, the Company had $32.7 million
deposited in such escrow accounts.
8
<PAGE> 11
The following table presents information regarding the loans serviced by the
Company for others at the dates indicated.
<TABLE>
<CAPTION>
March 31,
----------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Loans originated by the Company
and serviced for:
FNMA $69,308 $77,942 $86,734
FHLMC 594,106 582,000 559,826
Others 69,639 74,562 69,567
--------- ---------- --------
733,053 734,504 716,127
--------- ---------- --------
Purchased mortgage loan servicing
rights serviced for:
FNMA 723,535 399,155 149,298
FHLMC 952,932 546,481 38,993
Others 2,165 2,949 3,087
--------- ---------- --------
1,678,632 948,585 191,378
--------- ---------- --------
Total loans serviced for others $2,411,685 $1,683,089 $907,505
========== ========== ========
</TABLE>
The Company receives fees for servicing mortgage loans, which generally range
from 0.25% to 0.375% per annum on the declining principal balance of fixed-rate
mortgage loans and from 0.375% to 0.5% per annum on the declining principal
balance of adjustable-rate mortgage loans. Such fees serve to compensate the
Company for the costs of performing the servicing function. Other sources of
loan servicing revenues include late charges and other ancillary fees. For
fiscal years ended March 31, 1996, 1995 and 1994, the Company earned gross fees
from loan servicing of $6.0 million, $ 3.7 million and $2.6 million,
respectively, which does not take into consideration the amortization of
mortgage servicing rights ("MSRs") as shown in the table below. The Company's
gross servicing fee income as a percent of interest income and other income was
4.7%, 4.0% and 3.7% for the same respective periods. Servicing fees are
collected by the Company out of the monthly mortgage payments made by
borrowers.
In recent years, the Company has sought to expand its mortgage servicing
portfolio through the acquisition of MSRs. During the fiscal years ended March
31, 1996, 1995 and 1994, the Company paid $12.0 million, $12.3 million and
$772,000 to acquire the servicing rights related to $858.4 million, $801.9
million and $54.3 million of loans, respectively
The amounts paid to acquire MSRs are capitalized. These amounts are then
amortized over the estimated servicing life of the loans to which they relate,
using a level yield method over the contract life of the underlying mortgage
loans and an estimated prepayment assumption. In accordance with applicable
regulatory requirements, the prepayment assumption is reviewed quarterly based
on actual prepayment experience and the amortization is adjusted if necessary.
Amortization of MSRs amounted to $3.7
9
<PAGE> 12
million, $1.5 million and $2.1 million in fiscal years ended March 31, 1996,
1995 and 1994, respectively.
As of the beginning of the current fiscal year, the Company adopted SFAS No.
122, "Accounting for Mortgage Servicing Rights," and as a result, included
$760,000 in income from mortgage banking operations. Additionally, the Company
is required to assess the fair value of these MSRs at each reporting date to
determine impairment.
The following table sets forth an analysis of the Company's MSRs during the
periods indicated.
<TABLE>
<CAPTION>
Carrying Value of MSRs
---------------------------------------
Year ended March 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Amortized cost, beginning of period $12,823 $2,042 $3,339
Acquisitions 11,985 12,316 772
Originated servicing rights 760 - -
Amortization (3,703) (1,535) (2,069)
------- ------- ------
Amortized cost, end of period $21,865 $12,823 $2,042
======= ======= ======
</TABLE>
As part of a servicer's responsibilities for investors of certain
mortgage-related securities, the Company is required to remit to the investors
the monthly principal collected and scheduled interest payments on most loans,
including those for which no interest payments have been received due to
delinquency. At March 31, 1996, the principal amount of loans serviced by the
Company for others subject to this condition aggregated $2.4 billion, of which
$10.8 million or 0.5% were more than 30 days delinquent. At March 31, 1996, the
Company had advanced principal and interest payments of $249,000 with respect
to such loans. Substantially all of these loans were sold without recourse
and are guaranteed by the FNMA or the FHLMC. The responsibility of having to
advance interest and other costs on certain loans is a normal part of servicing
and has been considered by the Company when determining the purchase price for
MSRs.
The amount, if any, by which the value of MSRs exceeds the lower of 90.0% of
determinable fair market value, 90.0% of original cost or current amortized
book value must be deducted from both assets and capital in calculating
regulatory capital. See "Regulation - The Bank - Capital Requirements."
CONSUMER LENDING ACTIVITIES. A wide variety of consumer loan products and
services are offered to accommodate customer needs within the Company's
delineated community. At March 31, 1996, $110.3 million or 14.3% of the
Company's total loan portfolio was comprised of consumer loans. While the
Company does accept applications from other areas, the majority of the loans
are from within the delineated community. Consumer loans are originated
through the Company's business centers, customer service department and
indirect sources.
10
<PAGE> 13
The largest component of the consumer loan portfolio is the home equity product
which is secured by the underlying equity in the borrower's home or second
residence. The home equity product consists of fixed rate amortizing home
equity loans and equity lines of credit with variable interest rates floating
with changes in the prime rate. The total equity portfolio amounted to $92.1
million or 12.0% of the Company's total loan portfolio, unused commitments for
the equity lines of credit totaled $55.7 million. The Company has introduced
alternative financing programs: 100% home equity products and real estate
secured B & C Credits. The combined balances of these alternative financing
programs totaled $4.5 million at March 31, 1996.
The second mortgage indirect program was started in January 1995. Loans in
this program are originated by the Company's approved originators and purchased
after loan closing. There are nine approved originators and total outstanding
loans in this portfolio were $9.5 million at March 31, 1996.
The consumer portfolio also contains small business loans. Small business
loans are originated for business purposes but are structured in accordance
with the Consumer Lending Policy with a maximum commitment amount of $300,000.
These are classified as other consumer loans on the balance sheet and totaled
$8.5 million or 7.7% of the Company's total consumer loan portfolio at March
31, 1996.
The Company originates education loans which are sold at the commencement of
the repayment period to the Student Loan Marketing Association and are
underwritten to conform to the standards of the Pennsylvania Higher Education
Assistance Agency. At March 31, 1996, the Company had $10.5 million of such
loans classified as loans available for sale.
At March 31, 1996, the Company's remaining consumer loan portfolio was
comprised of automobile loans, personal loans and other consumer products. The
total outstanding for these products was $15.0 million at March 31, 1996.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. These risks are not as prevalent in the case of the
Company's consumer loan portfolio, however, because a high percentage of the
portfolio is comprised of home equity loans and home equity lines of credit
which are secured by real estate and underwritten in a manner such that they
result in a lending risk which is substantially similar to single-family
residential loans.
MULTI-FAMILY/COMMERCIAL REAL ESTATE LENDING ACTIVITIES. The Company has
maintained an active role in commercial and multi-family lending for many years
with the majority of its portfolio secured by properties consisting primarily
of owner-occupied, multi-use commercial buildings, apartment buildings and
retail operations. The loans are originated for no more than 80% of the
appraised market value of the property, generally with a term of between five
to seven years, amortization periods of 15 to 25 years and have floating rates
of interest set at the Company's prime rate plus a margin or have fixed
interest rates indexed to U.S. Treasury securities with a constant maturity
("CMT") plus a margin. With respect to fixed-rate loans, the interest rates on
such loans generally are fixed for three to five years at which time they
reprice to the then current CMT rate plus a margin. Fees totaling 1% to 2% of
the
11
<PAGE> 14
principal balance are also charged. At March 31, 1996, commercial and
multi-family real estate loans totaled $120.5 million or 15.6% of the total
loan portfolio, a $39.9 million or 49.5% increase over the prior year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Changes in Financial Condition," incorporated by reference in Item
7 hereof. The Company expects to continue its involvement in such lending.
The Company evaluates all aspects of commercial and multi-family residential
real estate loan transactions in order to understand and mitigate risk to the
extent possible. In underwriting these loans, consideration is given to the
stability of the property's cash flow history, future operating projections,
current and projected occupancy, position in the local and regional market, as
well as location and physical condition. The Company also generally imposes a
debt coverage ratio (the ratio of net cash from operations before payment of
debt service to debt service) of not less than 115%. The underwriting analysis
also includes credit checks and a review of the financial condition of the
borrower and guarantor, if applicable. A narrative appraisal report is
prepared by either a state-certified or a Member of Appraisal Institute
appraiser commissioned or pre-approved by the Company to substantiate property
values for every commercial real estate loan transaction. These appraisal
reports are reviewed by the Company prior to the closing of the loan. The
Company also obtains recourse from the borrower or principals of the borrowers
whenever possible.
Multi-family and commercial lending entails different and significant risks
when compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrower's business. These risks can also be significantly
affected by supply and demand conditions in the local market for apartments,
offices, warehouses or other commercial space. The Company attempts to minimize
its risk exposure by limiting such lending to proven developers/owners, only
considering properties with existing operating performance which can be
analyzed, requiring conservative debt coverage ratios, and continually
monitoring the operation and physical condition of the collateral.
CONSTRUCTION LENDING ACTIVITIES. Substantially all of the construction loans
originated by the Company in recent periods have been for the construction of
owner-occupied, single-family dwellings in the Company's primary market area.
Such loans generally have terms not exceeding 18 months, with the ability of
the Company to extend the term up to 12 additional months, have loan-to-value
ratios of 80% or less of the appraised market value upon completion and
generally do not require the amortization of the principal during the term. The
loans are made with floating rates of interest based on the Company's prime
rate plus a margin. The Company also receives fees upon issuance of the
commitment, which generally range from 1.0% to 1.5% of the commitment. The
majority of such loans consist of loans to selected local developers with whom
the Company is familiar to build single-family dwellings on both a pre-sold or
limited speculative basis. However, the Company generally will not allow a
developer to have more than one speculative property and one model home at any
given time. The developer may qualify for additional speculative units with
the contribution of additional equity. The borrower is required to fund at
least 25% of the project costs. All other units must be pre-sold before
construction financing on those units commences. Loan proceeds are disbursed
in stages after inspections of the project indicate that such disbursements are
for costs already incurred and added to the value of the
12
<PAGE> 15
project. Only interest payments are due during the construction phase and
often the loans include a reserve for paying the stated interest due thereon.
The Company also will originate construction loans which convert upon the
completion of construction to permanent residential mortgage loans. At March
31, 1996, residential construction loans totaled $110.7 million or 14.4% of the
total loan portfolio, an increase of $51.6 million or 87.3% from March 31, 1995
primarily due to an increase in lending to local developers. Commercial
construction loans totaled $14.6 million or 1.9% of the total loan portfolio, a
decrease of $1.3 million from March 31, 1995.
Prior to making a commitment to fund a construction loan, the Company requires
an appraisal of the property by independent appraisers approved by the Board of
Directors. The Company uses MAI qualified appraisers on all of its
construction loans. Loan officers of the Company also review and inspect each
project at the commencement of construction. In addition, the project is
inspected by a salaried inspection officer of the Company prior to every
disbursement of funds during the term of the construction loan. Such
inspection includes a review for compliance with the construction plan,
including materials specifications.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction.
During the construction phase, a number of factors could result in delays and
cost overruns. If the estimate of value proves to be inaccurate, the Company
may be confronted, at or prior to the maturity of the loan, with a project,
when completed, having a value which is insufficient to assure full repayment.
The Company believes that these risks are somewhat mitigated by its experienced
senior lending personnel and its underwriting standards and procedures which
focus on the credit quality and cash flow of the sponsors and guarantors.
Equity interests of the borrowers are required for each transaction, which is
reviewed for the reasonableness of the projected costs involved. In addition, a
market analysis is conducted on each project using independent market data as
well as the knowledge and experience of the construction lending staff.
COMMERCIAL BUSINESS LENDING ACTIVITIES. Beginning in fiscal 1991, the Company
began offering commercial business loans, including working capital lines of
credit and term loans to facilitate the financing of inventory, accounts
receivable, equipment and real property. Depending on the collateral pledged
to secure the extension of credit, maximum loan to value ratios range from 50%
(if used equipment is pledged) to 100% (if deposits at the Company are
pledged). Loan terms vary from one year for lines of credit to 10 years for
equipment, real property and business acquisition loans. The interest rates on
such loans can be fixed or variable. Variable-rate loans are indexed to the
Company's prime rate, while fixed-rate loans are tied to the CMT plus a margin.
The Company also generally obtains personal guarantees from the principals of
the borrowers. At March 31, 1996, commercial business loans amounted to $69.6
million or 9.0% of the total portfolio, as compared to $33.3 million or 5.5% at
March 31, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Changes in Financial Condition,"
incorporated by reference in Item 7 hereof.
13
<PAGE> 16
ASSET QUALITY
When a borrower fails to make a required payment on a loan, the Company
attempts to cure the deficiency by contacting the borrower and seeking the
payment. Depending upon the type of loan, late notices are sent and/or
personal contacts are made. In most cases, deficiencies are cured promptly.
While the Company generally prefers to work with borrowers to resolve such
problems, when a mortgage loan becomes 90 days delinquent, the Company
institutes foreclosure or other proceedings, as necessary, to minimize any
potential loss.
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. The Company does
not accrue interest on loans past due 90 days or more. Payments received on
nonaccrual and impaired loans are applied to the outstanding principal balance.
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as other real estate owned until it
is sold. When a property is acquired, it is recorded at the lower of cost or
fair value, less estimated selling costs. Fair value is generally determined
through the use of independent appraisals. In certain cases, internal cash
flow analyses are used as the basis for fair value if such amounts are lower
than appraised values. All costs incurred in maintaining the Company's
interest in the property are capitalized between the date the loan becomes
delinquent and the date of acquisition, and any write-downs resulting at
acquisition are charged to the allowance for loan losses. After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recent Accounting Pronouncements," incorporated by
reference in Item 7 hereof.
The Company's Asset Workout Group consists of a full time employee and two
part-time employees who manage the disposition of all real estate owned
projects, and other impaired assets that are transferred to that department for
resolution. The Company has ceased its involvement in any new real estate
development activities. The transfer of a loan to the Asset Workout Group for
resolution is made when the normal payment of a loan becomes doubtful and usual
methods of collection have been exhausted and/or a loan has to be restructured
in a manner that would significantly alter the original terms of the loan
beyond what the Company would be willing to accept in a normal situation. The
Asset Workout Group reports to the Manager, Lending Division and on a quarterly
basis to the Asset Review Committee and the Board of Directors.
14
<PAGE> 17
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of the Company's non-performing assets and troubled debt
restructurings at the dates indicated.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Single-family residential $4,039 $1,670 $1,521 $2,738 $3,487
Construction 3,275 2,130 2,018 7,311 9,439
Commercial real estate 526 2,733 1,385 2,689 3,887
Consumer and other 562 224 392 795 380
------- ------ ------- ------- -------
Total non-accruing loans 8,402 6,757 5,316 13,533 17,193
------- ------ ------- ------- -------
Accruing loans greater than 90 days delinquent - 5 23 43 4
------- ------ ------- ------- -------
Total non-performing loans 8,402 6,762 5,339 13,576 17,197
------- ------ ------- ------- -------
Other real estate owned ("OREO") 2,043 1,010 3,075 3,404 3,862
Real estate held for development or resale - 1,159 3,949 7,678 15,790
------- ------ ------- ------- -------
Total non-performing assets $10,445 $8,931 $12,363 $24,658 $36,849
======= ====== ======= ======= =======
Total non-performing loans as a percentage
of gross loans receivable (1) 1.05% 1.23% 1.77% 4.25% 4.12%
======= ====== ======= ======= =======
Total non-performing assets
as a percentage of total assets 0.59% 0.57% 1.23% 3.72% 3.72%
======= ====== ======= ======= =======
</TABLE>
- ---------------
(1) Includes loans receivable and loans available for sale, less construction
and land loans in process and deferred loan origination fees and discounts.
The Company's total non-performing assets have declined from $36.8 million or
3.72% of total assets at March 31, 1992 to $10.4 million or 0.59% of total
assets at March 31, 1996. During the fiscal year ended March 31, 1996, total
non-performing assets increased by $1.5 million or 17.0% principally due to the
acquisition of $3.1 million of nonacccrual loans and $900,000 of other real
estate owned in connection with the Suburban acquisition, despite a $2.2
million decrease in nonaccruing commercial real estate loans.
The $4.0 million of non-performing single-family residential loans at March 31,
1996 consisted of 66 loans, the largest of which had a balance of $373,000.
The $3.3 million of non-accruing construction loans at March 31, 1996 consisted
of three loans, including one loan with a balance of $1.8 million. This loan
was an acquisition and development and construction loan for a commercial
development located in West Chester, PA. The underlying collateral consists of
approximately 70 acres of unimproved land zoned for multi-family and light
commercial use. The borrower has been in personal bankruptcy for approximately
two years.
15
<PAGE> 18
The $526,000 of the Company's non-performing commercial real estate loans at
March 31, 1996 consisted of five loans. The largest of these loans had a
balance of $312,000, and is secured by a restaurant/entertainment facility in
Pennsylvania.
During fiscal 1996, 1995 and 1994 approximately $1.1 million, $642,000 and
$429,000 in interest income, respectively, would have been recorded on loans
accounted for on a non-accrual basis if such loans had been current in such
periods according to their original terms and had been outstanding throughout
the period or since origination if held for part of the period. These amounts
were not included in the Company's interest income for the respective periods.
The amount of interest income on loans accounted for on a non-accrual basis and
loans greater than 90 days past due and still accruing that was included in
income during the same respective periods amounted to approximately $96,000,
$227,000 and $77,000.
OTHER CLASSIFIED ASSETS. In addition to the non-performing assets discussed
above, at March 31, 1996, the Company had classified for regulatory and
internal purposes an additional $8.6 million of assets as "substandard." Under
applicable regulations, substandard assets have one or more defined weaknesses
and are characterized by the distinct possibility that an institution will
sustain some loss if the deficiencies are not corrected. See generally " -
Allowance for Loan Losses." Of the $8.6 million of substandard assets at March
31, 1996 which were not included under non-performing assets, an aggregate of
$2.2 million were commercial real estate loans and $1.8 million were commercial
business loans.
The $2.2 million of classified commercial real estate loans not included in
non-performing assets at March 31, 1996 consisted of seven loans, one of which
had a balance over $900,000. This is a 28.6% participation in a loan which was
originated in 1976, which is secured by a motor inn and adjacent office
building located in Maryland. At December 31, 1993, the balance of the
Company's participation amounted to $1.1 million. The lead bank on the loan
was taken into receivership in 1992 and an RTC contractor is currently
servicing the loan. A telephone company, which was the office building's only
tenant, vacated the building during 1993, but has continued to make payments on
the lease which expires in 1996. The motor inn, which was renovated in 1989,
is currently experiencing a cash flow deficit. The Company's participation
interest is secured by a first lien on the property. The property was
appraised in November 1993 for approximately $11.0 million. Based on the
appraisal, the Company does not anticipate any losses on its participation.
The $1.8 million of the Company's classified commercial business loans not
included in non-performing assets at March 31, 1996 consisted of 13 first
mortgage loans to one borrower related to investment properties and one home
improvement loan. The underlying investment properties were appraised in March
1996 for approximately $2.2 million. In March 1996, the borrower entered into
a forebearance agreement with the Company
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a
level that management considers adequate to provide for potential losses based
upon an evaluation of known and inherent risks in the loan portfolio.
Management's periodic evaluation is based upon examination of the portfolio,
past loss experience, current economic conditions, the results of the most
recent regulatory examinations, and
16
<PAGE> 19
other relevant factors. While management uses the best information available
to make such evaluations, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions used in making
the evaluations.
ALLOWANCE FOR LOAN LOSSES. The following table summarizes changes in the
allowance for loan losses and other selected statistics for the periods
presented.
<TABLE>
<CAPTION>
For Year Ended March 31,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year $9,111 $7,337 $7,488 $6,996 $2,521
Charged-off loans:
Single-family residential - - - (7) (315)
Construction - (1,350) (184) (1,346) (3,283)
Commercial real estate (485) (162) (584) (1,241) (1,283)
Commercial business (422) - - - -
Consumer and other (281) (249) (550) (157) (294)
--------- --------- --------- --------- ---------
Total charged-off loans (1,188) (1,761) (1,318) (2,751) (5,175)
--------- --------- --------- --------- ---------
Recoveries on loans previously charged-off:
Commercial real estate 125 - - - -
Consumer and other 56 135 54 74 23
--------- --------- --------- --------- ---------
Total recoveries 181 135 54 74 23
--------- --------- --------- --------- ---------
Net loans charged-off (1,007) (1,626) (1,264) (2,677) (5,152)
Provisions for loan losses 4,000 3,400 1,113 3,169 9,627
Allowance acquired from Suburban 1,020 - - - -
--------- --------- --------- --------- ---------
Allowance for loan losses, end of year $13,124 $9,111 $7,337 $7,488 $6,996
========= ========= ========= ========= =========
Net loans charged-off to average
interest-earning loans (1) 0.15% 0.39% 0.41% 0.75% 1.29%
========= ========= ========= ========= =========
Allowance for loan losses to gross
loans receivable (1) 1.64% 1.56% 2.43% 2.34% 1.67%
========= ========= ========= ========= =========
Allowance for loan losses to non-performing loans 156.20% 134.74% 137.50% 55.16% 40.68%
========= ========= ========= ========= =========
Net loans charged-off to allowance for loan losses 7.67% 17.85% 17.23% 35.75% 73.64%
========= ========= ========= ========= =========
Recoveries to charge-offs 15.24% 7.67% 4.10% 2.69% 0.44%
========= ========= ========= ========= =========
</TABLE>
- ---------------
(1) Gross loans receivable and average interest-earning loans receivable
include loans receivable and loans available for sale, less construction and
land loans in process and deferred loan origination fees and discounts.
17
<PAGE> 20
The following table presents the allocation of the allowance for loan losses to
the total amount of loans in each category listed at the dates indicated.
<TABLE>
<CAPTION>
March 31,
-------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ---------------------------- -------------------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Catagory to Catagory to Catagory to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Single-family residential $1,564 44.74% $595 53.59% $322 36.53%
Multi-family residential 113 1.47 108 1.78 26 3.54
Construction 3,083 16.27 1,738 12.33 1,906 12.30
Commercial real estate 2,635 14.17 2,484 11.47 1,342 16.37
Consumer 737 14.31 370 15.35 384 28.43
Commercial business 2,011 9.04 763 5.48 223 2.83
Unallocated 2,981 --- 3,053 --- 3,134 ---
--------- -------- -------- -------- --------- ---------
Total allowance for loan losses $13,124 100.00% $9,111 100.00% $7,337 100.00%
========= ======== ======== ======== ========= =========
<CAPTION>
March 31,
-----------------------------------------------------------
1993 1992
----------------------------- ----------------------------
% of Loans % of Loans
in Each in Each
Catagory to Catagory to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Single-family residential $328 44.36% $1,025 49.42%
Multi-family residential 37 4.83 50 4.85
Construction 866 9.46 2,115 14.07
Commercial real estate 1,295 11.49 991 9.50
Consumer 398 27.55 288 20.81
Commercial business 758 2.31 254 1.35
Unallocated 3,806 --- 2,273 ---
-------- --------- -------- ---------
Total allowance for loan losses $7,488 100.00% $6,996 100.00%
======== ========= ======== =========
</TABLE>
18
<PAGE> 21
MORTGAGE-RELATED SECURITIES AND INVESTMENTS
Mortgage-Related Securities. Federally-chartered savings institutions have
authority to invest in various types of liquid assets, including United States
Treasury obligations, securities of various Federal agencies and of state and
municipal governments, certificates of deposit at federally-insured banks and
savings and loan associations, certain bankers' acceptances and Federal funds.
Subject to various restrictions, federally-chartered savings institutions may
also invest a portion of their assets in commercial paper, corporate debt
securities and mutual funds, the assets of which conform to the investments
that federally-chartered savings institutions are otherwise authorized to make
directly.
The Company's mortgage-related securities and investment portfolio is managed
by investment officers in accordance with a comprehensive written investment
policy which addresses strategies, types and levels of allowable investments
and which is reviewed and approved by the Board of Directors on an annual
basis. The management of the mortgage-related securities and investment
portfolio is set in accordance with strategies developed by the Company's ALCO.
The Company's Chief Executive Officer, the Chief Financial Officer and
portfolio manager execute the investment policy and are responsible for
informing ALCO of the types of investments available, the status and
performance of the portfolio and current market conditions. The investment
officers are authorized to: purchase or sell any securities as well as
commitments to hedge eligible investments; purchase or sell eligible
investments under repurchase or reverse repurchase agreements; execute hedging
strategies approved by ALCO; pledge securities owned as collateral for public
agency deposits or repurchase accounts or agreements; and lend securities to
approved dealers in government securities or approved commercial banks. Any
one investment officer has the authority to make investments up to 1.5% of
assets, 15% of capital or $21 million without prior approval of ALCO.
Investment officers are only authorized to purchase or sell securities in
excess of these limits when ALCO or the Board of Directors have approved an
overall portfolio strategy which results in the divestiture or the acquisition
of larger blocks of securities. Investment officers are also authorized to
invest excess liquidity in approved liquid investment vehicles. As set forth in
the current Board-approved policy statement, investments in the aggregate
cannot exceed 65% of total assets of the Company.
The Company maintains a significant portfolio of mortgage-related securities as
a means of investing in housing-related mortgage instruments without the costs
associated with originating mortgage loans for portfolio retention and with
limited credit risk of default which arises in holding a portfolio of loans to
maturity. Mortgage-related securities (which also are known as mortgage
participation certificates or pass-through certificates) represent a
participation interest in a pool of single-family or multi-family mortgages,
the principal and interest payments on which are passed from the mortgage
originators, through intermediaries (generally U.S. Government agencies and
government sponsored enterprises) that pool and repackage the participation
interests in the form of securities, to investors such as the Company. Such
U.S. Government agencies and government sponsored enterprises, which guarantee
the payment of principal and interest to investors, primarily include FHLMC,
FNMA and GNMA. The Company also invests in certain privately issued, credit
enhanced mortgage-related securities rated "AA" or better by national
securities rating agencies.
19
<PAGE> 22
Mortgage-related securities typically are issued with stated principal amounts,
and the securities are backed by pools of mortgages that have loans with
interest rates that are within a certain range and have varying maturities.
The underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well
as prepayment risk, are passed on to the certificate holder. The life of a
mortgage-related pass-through security thus approximates the life of the
underlying mortgages.
The Company's mortgage-related securities include collateralized mortgage
obligations ("CMOs"). CMOs have been developed in response to investor concerns
regarding the uncertainty of cash flows associated with the prepayment option
of the underlying mortgagor and are typically issued by governmental agencies,
governmental sponsored enterprises and special purpose entities, such as
trusts, corporations or partnerships, established by financial institutions or
other similar institutions. A CMO can be collateralized by loans or securities
which are insured or guaranteed by FNMA, FHLMC or GNMA. In contrast to
pass-through mortgage-related securities, in which cash flow is received pro
rata by all security holders, the cash flow from the mortgages underlying a CMO
is segmented and paid in accordance with a predetermined priority to investors
holding various CMO classes. By allocating the principal and interest cash
flows from the underlying collateral among the separate CMO classes, different
classes of bonds are created, each with its own stated maturity, estimated
average life, coupon rate and prepayment characteristics.
Mortgage-related securities generally yield less than the loans which underlie
such securities because of their payment guarantees or credit enhancements
which offer nominal credit risk. In addition, mortgage-related securities are
more liquid than individual mortgage loans and may be used to collateralize
certain obligations of the Company. At March 31, 1996, $520.5 million or 59.6%
of the Company's mortgage-related securities were pledged to secure various
obligations of the Company. Mortgage-related securities issued or guaranteed by
FNMA or FHLMC (except interest-only securities or the residual interests in
CMOs) are weighted at no more than 20.0% for risk-based capital purposes,
compared to a weight of 50.0% for residential loans. See "Regulation - The
Company - Capital Requirements."
The Company's mortgage-related securities are classified as either "held to
maturity" or "available for sale" based upon the Company's intent and ability
to hold such securities to maturity at the time of purchase, in accordance with
generally accepted accounting principles. The Company's mortgage-backed
securities which are classified as available for sale include shorter duration
instruments which are used to assist the Company in its management of liquidity
and interest rate risk. These securities generally have less price volatility
than securities with longer durations. Examples of these securities include
adjustable-rate instruments, instruments with balloon payment requirements and
instruments with generally higher than current market fixed interest rates. In
contrast, securities which have longer lives and are subject to greater price
volatility, such as fixed-rate securities at the current market rate, are
classified by the Company as held to maturity. As of March 31, 1996, the
Company held an aggregate of $834.7 million or 47.3% of total assets invested
in mortgage-related securities, net, of which $404.2 million was held to
maturity and $430.6 million was available for sale. The tables below present
the Company's mortgage-related securities on the basis of these
classifications. The mortgage-related securities of the Company which are held
to maturity are carried at cost, adjusted for the amortization of premiums and
the accretion of discounts using a method which approximates a level yield,
while mortgage-related securities available for sale are carried at the lower
of cost or current market value.
20
<PAGE> 23
The following table sets forth the composition of the Company's
mortgage-related securities that were available for sale at the dates
indicated.
<TABLE>
<CAPTION>
Fair Value at March 31,
----------------------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Mortgage-related securities available
for sale:
FHLMC $234,800 $203,387 $97,135
FNMA 115,518 140,374 53,223
GNMA 40,879 8,801 9,598
Privately issued 39,358 21,871 30,901
----------- ----------- -----------
Total $430,555 (1) $374,433 (1) $190,857 (1)
=========== =========== ===========
</TABLE>
- --------------
(1) Includes an unrealized gain of $778,000 at March 31, 1996 and unrealized
losses of $3.7 million and $4.3 million at March 31, 1995 and 1994,
respectively.
The following table sets forth the composition of the Company's
mortgage-related securities portfolio held to maturity at the dates indicated.
<TABLE>
<CAPTION>
Carrying Value at March 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Mortgage-related securities:
FHLMC $149,990 $194,970 $190,796
FNMA 150,286 190,085 165,928
GNMA 8,397 27,014 ------
Privately issued 1,785 2,043 2,440
--------- --------- ---------
Total mortgage-related securities 310,458 414,112 359,164
--------- --------- ---------
Collateralized mortgage obligations 93,692 55,108 55,281
--------- --------- ---------
Total mortgage-related securities, net $404,150 $469,220 $414,445
========= ========= =========
Total market value (1) $401,231 $453,455 $405,568
========= ========= =========
</TABLE>
- --------------
(1) See Note 3 of the Notes to Consolidated Financial Statements incorporated
by reference in Item 8 hereof.
At March 31, 1996, the contractual maturity of substantially all of the
Company's mortgage-related securities was in excess of ten years. The actual
maturity of a mortgage-related security is expected to be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
21
<PAGE> 24
faster than anticipated may shorten the life of the security and adversely
affect its yield to maturity. The yield is based upon the interest income and
the amortization of any premium or discount related to the mortgage-backed
security. In accordance with GAAP, premiums and discounts are amortized over
the estimated lives of the loans, which decrease and increase interest income,
respectively. The prepayment assumptions used to determine the amortization
period for premiums and discounts can significantly affect the yield of the
mortgage-related security, and these assumptions are reviewed periodically to
reflect actual prepayments. Although prepayments of underlying mortgages
depend on many factors, including the type of mortgages, the coupon rate, the
age of mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant
determinant of the rate of prepayments. During periods of falling mortgage
interest rates, if the coupon rate of the underlying mortgages exceeds the
prevailing market interest rates offered for mortgage loans, refinancing
generally increases and accelerates the prepayment of the underlying mortgages
and the related security. Under such circumstances, the Company may be subject
to reinvestment risk because to the extent that the Company's mortgage-related
securities amortize or prepay faster than anticipated, the Company may not be
able to reinvest the proceeds of such repayments and prepayments at a
comparable rate. The declining yields earned during recent periods is a direct
response to falling interest rates and accelerated prepayments. At March 31,
1996, of the $404.2 million of mortgage-related securities held to maturity, an
aggregate of $371.4 million were secured by fixed-rate mortgage loans and an
aggregate of $32.7 million were secured by adjustable-rate mortgage loans. As
of such date, of the $430.6 million of mortgage-related securities available
for sale, an aggregate of $208.4 million were secured by fixed-rate mortgage
loans and an aggregate of $222.2 million were secured by adjustable-rate
mortgage loans.
OTHER INVESTMENTS. The following table sets forth certain information relating
to the Company's investment portfolio held to maturity at the dates indicated.
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ----------------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------- --------- ------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Bank stock $18,802 $18,802 $15,997 $15,997 $13,480 $13,480
U.S. Government and agency
obligations and securities 6,000 6,004 30,000 29,157 ---- ----
Other securities 140 140 166 166 178 178
--------- --------- --------- --------- --------- ---------
Total $24,942 $24,946 $46,163 $45,320 $13,658 $13,658
========= ========= ========= ========= ========= =========
</TABLE>
22
<PAGE> 25
The following table sets forth certain information relating to the Company's
equity and other securities portfolio available for sale at the dates
indicated.
<TABLE>
<CAPTION>
Fair Market Value at March 31,
----------------------------------------
1996 1995 1994
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
FHLMC stock $5,060 $4,650 $4,950
FNMA stock 1,763 - -
U. S. Government agency notes 17,762 20,286 10,923
Asset Management Funds for
Financial Institutions, Inc. 11,826 10,951 32,005
Other 2,355 745 116
---------- --------- ---------
Total $38,766 $36,632 $47,994
========== ========= =========
</TABLE>
- ---------------
At March 31, 1996, investments in the debt and/or equity securities of any one
issuer (other than securities of the U.S. Government and U.S. Government
agencies and corporations) did not exceed more than 10.0% of the Company's
equity.
SOURCES OF FUNDS
General. The Company's principal source of funds for use in lending and for
other general business purposes has traditionally come from deposits obtained
through the Company's business centers. The Company also derives funds from
amortization and prepayments of outstanding loans and mortgage-backed
securities, from sales of loans, from maturing investment securities and from
advances from the FHLB of Pittsburgh. Loan repayments are a relatively stable
source of funds, while deposits inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources. They may also be used on a longer
term basis for general business purposes and for specific purposes as
delineated by ALCO.
Deposits. The Company's current deposit products include non-interest bearing
checking accounts, interest bearing checking accounts, passbook accounts,
money market deposit accounts and certificates of deposit ranging in terms from
14 days to 10 years. The Company's deposit products also include Individual
Retirement Account certificates ("IRA certificates").
23
<PAGE> 26
The Company's deposits are obtained primarily from residents in its primary
market area of Chester, Delaware and Montgomery Counties in Southeastern
Pennsylvania. The Company attracts deposit accounts by offering a wide variety
of deposit products, competitive interest rates, and convenient business center
locations and service hours. The Company utilizes traditional marketing
methods to attract new deposit customers, including print media and radio
advertising and direct mailings. The Company participates in the regional ATM
network known as MAC(R) and the national ATM network known as PLUS(R).
In fiscal 1995, the Company began acquiring deposits through an intermediary
(without cost). At March 31, 1996, the Company's deposits originated through
an intermediary were $22.7 million with a weighted average cost of 6.64% and an
average life of 11 months. In accordance with policies of the Company's ALCO,
any purchases of brokered deposits by the Company must be approved by a member
of ALCO and the total amount of brokered deposits held by the Company at any
time are limited to 7.5% of total deposits.
The Company has been competitive in the types of accounts and interest rates it
has offered on its deposit products but does not necessarily seek to match the
highest rates paid by competing institutions. The Company experienced increases
in both non-interest bearing checking accounts and interest bearing checking,
savings, money market and retail certificates. The increase in core deposits is
the result of the Company's relationship banking accounts and business
development activities. The Company also intends to continue its efforts to
attract certificates of deposit, including those deposits from local
municipalities. The Company intends to continue its efforts to attract
deposits as a principal source of funds for supporting its lending and
investment activities.
The following table shows the distribution of the Company's deposits by type of
deposit as of the dates indicated.
<TABLE>
<CAPTION>
March 31,
------------------------------------------------------------------------------
1996 1995 1994
-------------------- ------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and statement savings accounts $88,010 10.59% $94,649 13.74% $136,726 20.12%
Money market accounts 100,530 12.10 82,055 11.91 92,324 13.59
Certificates of deposit 506,105 60.90 417,465 60.62 354,871 52.22
NOW accounts 54,585 6.57 40,673 5.91 49,377 7.27
Non-interest-bearing deposits:
Demand deposits 49,038 5.90 33,187 4.82 24,360 3.58
Other 32,729 3.94 20,649 3.00 21,867 3.22
--------- -------- --------- -------- --------- --------
Total deposits at end of period $830,997 100.00% $688,678 100.00% $679,525 100.00%
========= ======== ========= ======== ========= ========
</TABLE>
24
<PAGE> 27
The following table presents, by various interest rate categories, the amount
of certificates of deposit at March 31, 1996 and 1995, and the amounts at March
31, 1996 which mature during the periods indicated.
<TABLE>
<CAPTION>
Certificates of Deposit March 31, Amounts at March 31, 1996 Maturing Within
- ----------------------- ----------------------------- -------------------------------------------------------------
1996 1995 One Year Two Years Three Years Thereafter
---- ---- -------- --------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
4.0% or less $10,570 $50,295 $10,320 $250 - -
4.01% to 6.0% 352,168 240,469 242,815 67,838 $ 22,051 $ 19,465
6.01% to 8.0% 136,519 116,396 59,572 31,534 7,541 37,871
8.01% to 10.0% 6,848 9,661 5,400 1,124 225 99
10.01% or more - 644 - - - -
--------- --------- --------- --------- -------- --------
Total certificate accounts $506,105 $417,465 $318,107 $100,746 $29,817 $57,435
========= ========= ========= ========= ======== ========
</TABLE>
The following table presents the average balance of each deposit type and the
average rate paid on each deposit type for the periods indicated.
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ----------------------------- -------------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Passbook and Statement
Savings Accounts $85,578 2.26% $115,840 2.38% $125,443 3.00%
Money Market Accounts 89,229 3.04 87,243 2.69 91,920 2.81
Certificates of Deposits 456,727 5.76 396,133 4.97 328,712 4.89
NOW Accounts 48,382 1.73 46,003 1.78 49,260 2.44
Non-Interest Bearing Deposits 65,494 ---- 46,448 ---- 43,459 ----
-------- -------- -------- -------- -------- --------
Total Deposits $745,410 4.26% $691,667 3.70% $638,794 3.70%
======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the net savings flows of the Company during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) before interest credited $112,073 ($14,128) $37,113
Interest credited 30,246 23,281 23,719
--------- --------- ---------
Net savings increase $142,319 $9,153 $60,832
========= ========= =========
</TABLE>
25
<PAGE> 28
The following table sets forth maturities of the Company's certificates of
deposit of $100,000 or more at March 31, 1996 by time remaining to maturity (In
thousands).
<TABLE>
<S> <C>
Three months or less $42,555
Over three months through six months 12,547
Over six months through 12 months 10,020
Over 12 months 6,309
-------
$71,431
=======
</TABLE>
Borrowings. The Company may obtain advances from the FHLB of Pittsburgh upon
the security of the common stock it owns in that bank and certain of its
residential mortgage loans and securities held to maturity, provided certain
standards related to creditworthiness have been met. Such advances are made
pursuant to several credit programs, each of which has its own interest rate
and range of maturities. Such advances are generally available to meet
seasonal and other withdrawals of deposit accounts and to permit increased
lending. In recent years, such advances were primarily used to fund the
Company's investment and loan activities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation - Results of
Operations incorporated by reference in Item 7 hereof." At March 31, 1996, the
Company had $376.0 million of advances from the FHLB of Pittsburgh. See Note 8
of the Notes to Consolidated Financial Statements incorporated by reference in
Item 8 hereof.
In recent years, the Company entered into agreements to sell securities under
terms which require it to repurchase the same securities by a specified date.
Repurchase agreements are considered borrowings which are secured by the sold
securities and generally are short-term (90 days or less) in nature. At March
31, 1996, the Company had $402.2 million of repurchase agreements outstanding.
See Note 9 of the Notes to Consolidated Financial Statements incorporated by
reference in Item 8 hereof.
26
<PAGE> 29
The following table sets forth certain information regarding borrowed funds at
or for the dates indicated:
<TABLE>
<CAPTION>
At or for the Year Ended March 31,
-----------------------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C>
FHLB of Pittsburgh advances:
Average balance outstanding $361,128 $320,572 $278,599
Maximum amount outstanding at any
month-end during the period 461,946 409,607 349,030
Balance outstanding at end of period 376,013 319,928 256,633
Weighted average interest rate
during the period 6.31% 5.64% 5.38%
Weighted average interest rate at
end of period 6.21 6.36 5.25
Repurchase agreements:
Average balance outstanding $357,064 $179,871 $15,427
Maximum amount outstanding at any
month-end during the period 406,310 394,503 20,000
Balance outstanding at end of period 402,212 390,613 162
Weighted average interest rate
during the period 6.19% 5.44% 3.07%
Weighted average interest rate at
end of period 5.65 6.18 3.75
Total borrowings
Average balance outstanding $718,192 $500,443 $294,026
Maximum amount outstanding at any
month-end during the period 779,861 710,541 368,755
Balance outstanding at end of period 778,225 710,541 256,795
Weighted average interest rate
during the period 6.25% 5.57% 5.26%
Weighted average interest rate at
end of period 5.93 6.30 5.25
</TABLE>
27
<PAGE> 30
SUBSIDIARIES
The Company maintains subsidiary service corporations in order to conduct the
orderly disposition of repossessed assets or conduct operations which
complement the Company's business. Although certain subsidiaries hold a
portion of the Company's OREO, the administrative operations have been
transferred to the Company's Asset Workout Group, primarily as a means to
reduce the operating expenses of the subsidiaries as well as to more fully
utilize the trained personnel in the Asset Workout Group. Although the Company
actively engaged in real estate development activities during the 1980's, the
Company is not currently involved in any at such time, and does not presently
intend to enter into any development projects in the future. At March 31,
1996, the Company's net investment in and advances to its subsidiaries totaled
$109,000. A brief description of the activities of the Company's subsidiaries
is set forth below.
Main Line Abstract Company. Main Line Abstract Company ("Abstract"), a
Pennsylvania corporation and first tier subsidiary of the Company, is a title
insurance agency and abstract company, which provides title services primarily
to the Company and its customers. At March 31, 1996, the Bank's equity
investment in Abstract amounted to $63,000, and Abstract had total assets of
$73,000. For the fiscal year ended March 31, 1996, Main Line Abstract had
total revenues of $180,000, and net income of $18,000.
Greene Townes Financial Corporation. Greene Townes Financial Corporation
("Greene Townes"), a first tier subsidiary of the Bank, is a Pennsylvania
corporation which holds the stock of Revest I Corporation, Revest II
Corporation and Main Line of New Jersey. The Bank's investment in and advances
to Greene Townes amounted to $29,000 at March 31, 1996.
Revest II Corporation is a Pennsylvania corporation, holding certain of the
Company's real estate owned properties. At March 31, 1996, Revest II owns
condominium and apartment units in a development project located in the
Company's primary lending area which had a carrying value of $832,000.
Main Line Financial Corporation. Main Line Financial Corporation ("Main Line
Financial"), is a Pennsylvania corporation, which, through an unaffiliated
intermediary, sells mutual funds. At March 31, 1996, the Bank's investment and
advances to in Main Line Financial amounted to $11,000.
First ML Corporation. First ML Corporation ("First ML"), a Pennsylvania
corporation and a first-tier subsidiary of the Bank, holds the stock of Main
Line of Delaware, Inc., a Delaware holding company. At March 31, 1996, the
Bank's investment and net advances in First ML amounted to $6,000.
During the year ended March 31, 1996, Gulph Towne Corporation, Devon Towne
Corporation, Old Yorkton Corporation and Main Line II of Delaware II, Inc. were
liquidated due to cessation of the companies' operations.
28
<PAGE> 31
REGULATION
Set forth below is a brief description of certain laws and regulations which
relate to the regulation of the Company and the Bank. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
THE COMPANY. The Company is a registered savings and loan holding company and
is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank
is subject to certain restrictions in its dealings with the Company and
affiliates thereof.
Federal Activities Restrictions. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings association. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings
and loan holding company of an activity constitutes a serious risk to the
financial safety, soundness or stability of its subsidiary savings institution,
the Director may impose such restrictions as deemed necessary to address such
risk, including limiting (i) payment of dividends by the savings institution;
(ii) transactions between the savings institution and its affiliates; and (iii)
any activities of the savings institution that might create a serious risk that
the liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible
business activities of unitary savings and loan holding companies, if the
savings institution subsidiary of such a holding company fails to meet a
Qualified Thrift Lender ("QTL") test, then such unitary holding company also
shall become subject to the activities restrictions applicable to multiple
savings and loan holding companies and, unless the savings institution
requalifies as a QTL within one year thereafter, shall register as, and become
subject to the restrictions applicable to, a bank holding company. See "- The
Bank - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, the Company
would thereupon become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution meets the QTL test,
as set forth below, the activities of the Company and any of its subsidiaries
(other than the Bank or other subsidiary savings institutions) would thereafter
be subject to further restrictions. Among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings and loan holding company or subsidiary thereof any
business activity, upon prior notice to, and no objection by the OTS, other
than: (i) furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust;
(vi) those activities authorized by regulation as of March 5, 1987 to be
engaged in by multiple savings and loan holding companies; or (vii) unless the
Director of the OTS by regulation
29
<PAGE> 32
prohibits or limits such activities for savings and loan holding companies,
those activities authorized by the Federal Reserve Board as permissible for
bank holding companies. The activities described in (i) through (vi) above may
only be engaged in after giving the OTS prior notice and being informed that
the OTS does not object to such activities. In addition, the activities
described in (vii) above also must be approved by the Director of the OTS prior
to being engaged in by a multiple savings and loan holding company.
Limitations on Transactions with Affiliates. Transactions between savings
institutions and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act ("FRA"). An affiliate of a savings institution is any
company or entity which controls, is controlled by or is under common control
with the savings institution. In a holding company context, the parent holding
company of a savings institution (such as the Company) and any companies which
are controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In
addition to the restrictions imposed by Sections 23A and 23B, no savings
institution may (i) loan or otherwise extend credit to an affiliate, except for
any affiliate which engages only in activities which are permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds, debentures,
notes or similar obligations of any affiliate, except for affiliates which are
subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the FRA place restrictions on loans to
executive officers, directors and principal stockholders. Under Section 22(h),
loans to a director, an executive officer and to a greater than 10% stockholder
of a savings institution (a "principal stockholder"), and certain affiliated
interests of either, may not exceed, together with all other outstanding loans
to such person and affiliated interests, the savings institution's loans to one
borrower limit (generally equal to 15% of the institution's unimpaired capital
and surplus). Section 22(h) also requires that loans to directors, executive
officers and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and also requires prior
board approval for certain loans. In addition, the aggregate amount of
extensions of credit by a savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore, Section 22(g)
places additional restrictions on loans to executive officers. At March 31,
1996, the Bank was in compliance with the above restrictions.
Restrictions on Acquisitions. Except under limited circumstances, savings and
loan holding companies are prohibited from acquiring, without prior approval of
the Director of the OTS, (i) control of any other savings institution or
savings and loan holding company or substantially all the assets thereof or
(ii) more than 5% of the voting shares of a savings institution or holding
company thereof which is not a subsidiary. Except with the prior approval of
the Director of the OTS, no director or officer of a savings and loan holding
company or person owning or controlling by proxy
30
<PAGE> 33
or otherwise more than 25% of such company's stock, may acquire control of any
savings institution, other than a subsidiary savings institution, or of any
other savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home
or branch office located in the state of the institution to be acquired as of
March 5, 1987; (ii) the acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in
which the institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or savings and
loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions).
Under applicable law, the Federal Reserve Board is authorized to approve an
application by a bank holding company to acquire control of a savings
institution. In addition, a bank holding company that controls a savings
institution may merge or consolidate the assets and liabilities of the savings
institution with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the Bank Insurance Fund ("BIF") with the approval of the
appropriate federal banking agency and the Federal Reserve Board. There have
been a number of acquisitions of savings institutions by bank holding companies
in recent years.
THE BANK. The OTS has extensive regulatory authority over the operations of
savings institutions. As part of this authority, savings institutions are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS. The investment and lending authority of savings
institutions are prescribed by federal laws and regulations and they are
prohibited from engaging in any activities not permitted by such laws and
regulations. Those laws and regulations generally are applicable to all
federally-chartered savings institutions and may also apply to state-chartered
savings institutions. Such regulation and supervision is primarily intended
for the protection of depositors.
The OTS' enforcement authority over all savings institutions and their holding
companies includes, among other things, the ability to assess civil money
penalties, to issue cease and desist or removal orders and to initiate
injunctive actions. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with the OTS. The OTS is required, except
under certain circumstances, to make public disclosure of final enforcement
actions.
Insurance of Accounts. The deposits of the Bank are insured up to $100,000 per
insured member (as defined by law and regulation) by the SAIF administered by
the FDIC and are backed by the full faith and credit of the United States
Government. As insurer, the FDIC is authorized to conduct examinations of, and
to require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to
31
<PAGE> 34
pose a serious threat to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action.
The FDIC has issued a regulation which implements a risk-based assessment
system of insurance. Under the regulation, institutions are assigned to one of
three capital groups which are based solely on the level of an institution's
capital -- "well capitalized," "adequately capitalized," and "undercapitalized"
- -- which are defined in the same manner as the regulations establishing the
prompt corrective action system under the FDIA. These three groups are then
divided into three subgroups which reflect varying levels of supervisory
concern, from those which are considered to be healthy to those which are
considered to be of substantial supervisory concern. The matrix so created
results in nine assessment risk classifications, with rates ranging from .23%
for well capitalized, healthy institutions to .31% for undercapitalized
institutions with substantial supervisory concerns. The insurance premium
applicable to the Bank as of March 31, 1996 was .23% of insured deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances which could
result in termination of the Bank's deposit insurance.
Both the SAIF and the BIF, the federal deposit insurance fund that covers the
deposits of state and national banks and certain state savings banks, are
required by law to attain and thereafter maintain a reserve ratio of 1.25% of
insured deposits. The BIF has achieved the required reserve rate, and, as
discussed below, the FDIC recently substantially reduced the average deposit
insurance premium paid by BIF-insured banks to a level substantially below the
average premium paid by savings institutions.
On November 14, 1995, the FDIC approved a final rule regarding deposit
insurance premiums. The final rule reduced deposit insurance premiums for BIF
member institutions to zero basis points (subject to a $1,000 minimum) for
institutions in the lowest risk category, while holding deposit insurance
premiums for SAIF members at their current levels (23 basis points for
institutions in the lowest risk category). The reduction was effective with
respect to the semiannual premium assessment beginning January 1, 1996.
Accordingly, in the absence of further legislative action, SAIF members such as
the Bank will be competitively disadvantaged as compared to commercial banks by
the resulting premium differential.
The U.S. House of Representatives and Senate have actively considered
legislation which would have eliminated the premium differential between
SAIF-insured institutions and BIF-insured institutions by recapitalizing the
SAIF's reserves to the required ratio. The proposed legislation would have
provided that all SAIF member institutions pay a special one-time assessment to
recapitalize the SAIF, which in the aggregate would have been sufficient to
bring the reserve ratio in the SAIF to 1.25% of insured deposits. Based on the
current level of reserves maintained by the SAIF, it was anticipated
32
<PAGE> 35
that the amount of the special assessment required to recapitalize the SAIF
would have been approximately 80 to 85 basis points of the SAIF-assessable
deposits. It was anticipated that after the recapitalization of the SAIF,
premiums paid by SAIF-insured institutions would be reduced to match those
currently being assessed BIF-insured commercial banks. The legislation also
provided for the merger of the BIF and the SAIF, with such merger being
conditioned upon the prior elimination of the thrift charter.
The legislation discussed above had been, for some time, included as part of a
fiscal 1996 federal budget bill, but was eliminated prior to the bill being
enacted on April 26, 1996. In light of the legislation's elimination and the
uncertainty of the legislative process generally, management cannot predict
whether legislation reducing SAIF premiums and/or imposing a special one-time
assessment will be adopted, or, if adopted, the amount of the assessment, if
any, that would be imposed on the Company.
If legislation were to be enacted in the future which would assess a one-time
special assessment of 85 basis points, the Company would (based upon the
Company's SAIF deposits as of March 31, 1996) incur an adverse earnings impact
of approximately $4.3 million, net of related tax benefits. In addition, the
enactment of such legislation might have the effect of immediately reducing the
Company's capital by such an amount.
Capital Requirements. Federally insured savings institutions are required to
maintain minimum levels of regulatory capital. Pursuant to the Financial
Institutions Reform Recovery and Enforcement Act of 1989 ("FIRREA"), the OTS
has established capital standards applicable to all savings institutions.
These standards generally must be as stringent as the comparable capital
requirements imposed on national banks. The OTS also is authorized to impose
capital requirements in excess of these standards on individual institutions on
a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy three
different capital requirements. Under these standards, savings institutions
must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets and "total" capital (a combination
of core and "supplementary" capital) equal to 8.0% of "risk-weighted" assets.
For purposes of the regulation, core capital generally consists of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain non-withdrawable accounts and
pledged deposits and "qualifying supervisory goodwill." Tangible capital is
given the same definition as core capital but does not include qualifying
supervisory goodwill and is reduced by the amount of all the savings
institution's intangible assets, with only a limited exception for purchased
mortgage servicing rights. Both core and tangible capital are further reduced
by an amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other
than subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). At March 31, 1996, the Bank had no subsidiaries which were
engaged in impermissible activities, and therefore did not have a deduction
from its capital calculation.
33
<PAGE> 36
A savings institution is allowed to include both core capital and supplementary
capital in the calculation of its total capital for purposes of the risk-based
capital requirements, provided that the amount of supplementary capital does
not exceed the savings institution's core capital. Supplementary capital
generally consists of hybrid capital instruments; perpetual preferred stock
which is not eligible to be included as core capital; subordinated debt and
intermediate-term preferred stock; and, subject to limitations, general
allowances for loan losses. Assets are adjusted under the risk-based
guidelines to take into account different risk characteristics, with the
categories ranging from 0% (requiring no additional capital) for assets such as
cash to 100% for repossessed assets or loans more than 90 days past due.
Single-family residential real estate loans which are not more than 90 days
past-due or non-performing and which have been made in accordance with prudent
underwriting standards are assigned a 50% level in the risk-weighing system, as
are certain privately-issued mortgage-backed securities representing indirect
ownership of such loans. Off-balance sheet items also are adjusted to take
into account certain risk characteristics.
In August 1993, the OTS and other federal banking agencies published a final
rule modifying their existing risk-based capital standards to provide for
consideration of interest rate risk when assessing capital adequacy of a bank.
Under the final rule, the OTS must explicitly include a bank's exposure to
declines in the economic value of its capital due to changes interest rates as
a factor in evaluating a bank's capital adequacy. In addition, in August 1995,
the OTS and the other federal banking agencies published a joint policy
statement for public comment that describes the process the banking agencies
will use to measure and assess the exposure of a bank's net economic value to
change in interest rates. Under the policy statement, the OTS will consider
results of supervisory and internal interest rate risk models as one factor in
evaluating capital adequacy. The OTS intends, at a future date, to incorporate
explicit minimum requirements for interest rate risk in its risk-based capital
standards through the use of a model developed from the policy statement, a
future proposed rule and the public comments received therefrom.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources" incorporated by reference in Item 7 hereof
setting forth the Bank's compliance with its capital requirements.
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
which it regulates. The federal banking agencies, including the OTS, have
adopted substantially similar regulations, which became effective December 19,
1992. Under the regulations, an institution shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio
of 5.0% or more and is not subject to any order or final capital directive to
meet and maintain a specific capital level for any capital measure, (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized," (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances), (iv) "significantly
34
<PAGE> 37
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. The FDIA and the regulations promulgated
thereunder also specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized). At March 31,
1996, the Bank was in the "well capitalized" category.
Liquidity Requirements. All savings institutions are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary
from time to time (between 4% and 10%) depending upon economic conditions and
savings flows of all savings institutions. At the present time, the required
minimum liquid asset ratio is 5%. The Bank has consistently exceeded such
regulatory liquidity requirement and, at March 31, 1996, had a liquidity ratio
of 5.6%.
Qualified Thrift Lender Test. A thrift institution is required to maintain 65%
of portfolio assets in Qualified Thrift Investments ("QTIs") on a monthly
average basis in nine out of every 12 months. Portfolio assets are defined as
total assets less intangibles, property used by a savings institution in its
business and liquidity investments in an amount not exceeding 20% of assets.
Generally, QTIs are residential housing related assets. At March 31, 1996, the
amount of the Bank's assets which were invested in QTIs was 87.6%, which
exceeded the percentage required to qualify the Bank under the QTL test. A
savings institution that does not meet the QTL test must either convert to a
bank charter or comply with the following restrictions on its operations: (i)
the institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the
institution ceases to be a QTL, it must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
Restrictions on Capital Distributions. OTS regulations govern capital
distributions by savings institutions, which include cash dividends, stock
redemptions or repurchases, cash-out mergers, interest payments on certain
convertible debt and other transactions charged to the capital account of a
savings institution to make capital distributions. Generally, the regulation
creates a safe harbor for specified levels of capital distributions from
institutions meeting at least their minimum capital requirements, so long as
such institutions notify the OTS and receive no objection to the distribution
from the OTS. Savings institutions and distributions that do not qualify for
the safe harbor are required to obtain prior OTS approval before making any
capital distributions.
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<PAGE> 38
Generally, savings institutions that before and after the proposed distribution
meet or exceed their fully phased-in capital requirements, or Tier 1
institutions, may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75%
of net income over the most recent four-quarter period. The "surplus capital
ratio" is defined to mean the percentage by which the institution's ratio of
total capital to assets exceeds the ratio of its fully phased-in capital
requirement to assets. "Fully phased-in capital requirement" is defined to
mean an institution's capital requirement under the applicable statutory and
regulatory standards on December 31, 1994, as modified to reflect any
applicable individual minimum capital requirement imposed upon the institution.
Failure to meet fully phased-in or minimum capital requirements will result in
further restrictions on capital distributions including possible prohibition
without explicit OTS approval.
In order to make distributions under these safe harbors, Tier 1 and Tier 2
institutions must submit written notice to the OTS 30 days prior to making the
distribution. The OTS may object to the distribution during that 30-day period
based on safety and soundness concerns. In addition, a Tier 1 institution
deemed to be in need of more than normal supervision by the OTS may be
downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination. The Bank currently is a Tier 1 institution for purposes of the
regulation dealing with capital distributions.
OTS regulations also prohibit the Bank from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the regulatory (or
total) capital of the Bank would be reduced below the amount required to be
maintained for the liquidation account established by it for certain depositors
in connection with its conversion from mutual to stock form.
On December 5, 1994, the OTS published a notice of proposed rule making to
amend its capital distribution regulation. Under the proposal, institutions
would only be permitted to make capital distributions that would not result in
their capital being reduced below the level required to remain "adequately
capitalized," as defined under "- Prompt Corrective Action" above. Because the
Bank is a subsidiary of a holding company, the proposal would require the Bank
to provide notice to the OTS of its intent to make a capital distribution. The
Bank does not believe that the proposal will adversely affect its ability to
make capital distributions if it is adopted substantially as proposed.
Community Reinvestment. Under the Community Reinvestment Act of 1977, as
amended ("CRA"), as implemented by OTS regulations, a savings institution has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. FIRREA amended the CRA to require public
disclosure of an institution's CRA rating and require the OTS to provide a
written evaluation of an institution's CRA performance utilizing a rating
system which identifies four levels of performance that may describe an
institution's record of meeting community
36
<PAGE> 39
needs: outstanding, satisfactory, needs to improve and substantial
noncompliance. The CRA also requires all institutions to make public
disclosure of their CRA ratings.
Policy Statement on Nationwide Branching. The OTS policy statement on
branching by federally-chartered savings institutions permits nationwide
branching to the extent allowed by federal statute. Current OTS policy
generally permits a federally-chartered savings institution to establish branch
offices outside of its home state if the institution meets the domestic
building and loan test under the Internal Revenue Code or an asset composition
test set forth in the Code, and if, with respect to each state outside of its
home state where the institution has established branches, the branches, taken
alone, also satisfy one of the two tax tests. An institution seeking to take
advantage of this authority would have to have a branching application approved
by the OTS, which would consider the regulatory capital of the institution and
its record under the CRA, as amended, among other things.
Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh,
which is one of 12 regional FHLBs that administers the home financing credit
function of savings institutions. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB System.
It makes loans to members (i.e., advances) in accordance with policies and
procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Pittsburgh in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year or 5% of its advances from the FHLB of Pittsburgh,
whichever is greater. At March 31, 1996, the Bank had $18.8 million in FHLB
stock, which was in compliance with this requirement.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time deposits. At March 31, 1996, the Bank was in compliance with
applicable requirements. However, because required reserves must be
maintained in the form of vault cash or a non-interest-bearing account at a
Federal Reserve Bank, the effect of this reserve requirement is to reduce an
institution's earning assets.
FEDERAL AND STATE TAXATION
General. The Company and the Bank are subject to the corporate tax provisions
of the Internal Revenue Code of 1986 (the "Code"), as well as certain
additional provisions of the Code which apply to thrift and other types of
financial institutions. The following discussion of tax matters is intended
only as a summary and does not purport to be a comprehensive description of the
tax rules applicable to the Company and the Bank. The Company and its
subsidiaries file a consolidated federal income tax return.
Bad Debt Reserves. The Company has established a deferred tax liability
representing the estimated taxes that would be payable in the event the Company
were to convert its charter to that of a commercial bank. When the Company
undertakes such a charter conversion, it will be required to
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<PAGE> 40
recapture and pay taxes on the approximately $17.8 million in bad debt
deductions previously taken while the Company was a "domestic building and loan
association" for tax purposes. See Note 11 of the Notes to Consolidated
Financial Statements. The Company's action is predicated on the Board of
Directors' intention to undertake such a charter conversion in the future,
among other reasons, in order to have increased regulatory flexibility to
diversify its products and services as set forth in its business plan. Because
of the significant cash flow impact of completing such a conversion (i.e., the
required payment to the IRS), and the pending legislation in congress that
could significantly reduce such payment, the Company anticipates delaying the
charter conversion until such time as the execution of its business plan would
otherwise be inhibited. The Company is currently unable to establish a
definitive time frame for this event, because various casual factors, such as
commercial loan growth, asset mix, and certain other activities, are not solely
within the Company's control. Upon a charter conversion, the Company will have
to recapture its bad debt reserves and will no longer be permitted to take
deductions for additions to such a reserve. Loan losses would then be deducted
from taxable income as they were incurred.
Prior to a charter conversion, and the recapture of its existing bad debt
reserves, the Company may continue to deduct additions to its bad debt reserves
in the same manner as it has in past years. The deduction of further additions
to the Company's bad debt reserve will result in additions to the Company's
deferred tax liability and the recognition of an income tax expense which would
offset part of the benefit of the deduction of future additions to the
Company's reserve for losses.
As a "domestic building and loan association", the Company is permitted to
establish reserves for bad debts and to make annual additions thereto which
qualify as deductions from taxable income. The bad debt deduction is generally
based on a savings institution's actual loss experience (the "Experience
Method"). In addition, provided that certain definitional tests relating to
the composition of assets and the nature of its business are met, a savings
institution may elect annually to compute its allowable addition to its bad
debt reserves for qualifying real property loans (generally loans secured by
improved real estate) by reference to a percentage of its taxable income (the
"Percentage Method").
Under the Experience Method, the deductible annual addition is the amount
necessary to increase the balance of the reserve at the close of the taxable
year to the greater of (i) the amount which bears the same ratio to loans
outstanding at the close of the taxable year as the total net bad debts
sustained during the current and five preceding taxable years bear to the sum
of the loans outstanding at the close of those six years or (ii) the balance in
the reserve account at the close of the Company's "base year", which was its
tax year ended December 31, 1987.
Under the Percentage Method, the bad debt deduction with respect to qualifying
real property loans is computed as a percentage of the Company's taxable income
before such deductions, as adjusted for certain items (such as capital gains
and the dividends received deduction). Under this method, a qualifying
institution such as the Company's generally may deduct 8% of its taxable
income. In the absence of other factors, the availability of the Percentage
Method has permitted a qualifying savings institution, such as the Company, to
be taxed at an effective federal income tax rate of 31.3%, as compared to 34%
for corporations generally.
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<PAGE> 41
Recently, there have been various legislative proposals in the U.S. Congress
which provided for the repeal of the percentage bad debt reduction provision of
the Code. The proposed legislation would have required the Company to
recapture for tax purposes (i.e. take into income) over a six-year period the
excess of the balance of its bad debt reserves as of December 31, 1995 over the
balance of such reserves as of December 31, 1987. However, under the proposed
legislation, such recapture requirements would be suspended for each of two
successive taxable years beginning January 1, 1996 in which the Company
originates a minimum amount of certain residential loans based upon the average
of the principal amounts of such loans made by the Company during its six
taxable years preceding 1996. Management currently is unable to predict
whether any legislation regarding the repeal of the bad debt reduction will be
adopted.
Minimum Tax. The Code imposes an alternative minimum tax at a rate of 20% on a
base of regular taxable income plus certain tax preferences ("alternative
minimum taxable income" or "AMTI"). The alternative minimum tax is payable to
the extent such AMTI is in excess of an exemption amount. The Code provides
that an item of tax preference is the excess of bad debt deduction allowable
for a taxable year pursuant to the percentage of taxable income method over the
amount allowable under the experience method. The other items of tax
preference that constitute AMTI include (a) tax exempt interest on newly-issued
(generally, issued on or after August 8, 1986) privately activity bonds other
than certain qualified bonds and (b) for taxable years beginning after 1989,
75% of the excess (if any) of (I) adjusted current earnings as defined in the
Code, over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses). Net operating losses can offset no more
than 90% of AMTI. Certain payments of alternative minimum tax may be used as
credits against regular tax liabilities in future years.
Audit by IRS. The Company's consolidated federal income tax returns for taxable
years through December 31, 1991 have been closed for the purpose of examination
by the IRS.
State Taxation. The Company and its non-thrift Pennsylvania subsidiaries are
subject to the Pennsylvania Corporate Net Income Tax and Capital Stock and
Franchise Tax. The Corporate Net Income Tax rate for 1996 is 9.99% and is
imposed on the Company's and its non-thrift subsidiaries unconsolidated taxable
income for federal purposes with certain adjustments. In general, the Capital
Stock Tax is a property tax imposed at the rate of 1.275% of a corporation's
capital stock value, which is determined in accordance with a fixed formula.
The Company is taxed under the Pennsylvania Mutual Thrift Institutions Tax Act
(the "MTIT"), as amended to include thrift institutions having capital stock.
Pursuant to the MTIT, the Company's tax rate is 11.5%. The MTIT exempts the
Company from all other taxes imposed by the Commonwealth of Pennsylvania for
state income tax purposes and from all local taxation imposed by political
subdivisions, except taxes on real estate and real estate transfers. The MTIT
is a tax upon net earnings, determined in accordance with generally accept
accounting principals ("GAAP") with certain adjustments. The MTIT, in
computing GAAP income, allows for the deduction of interest earned on state and
federal securities, while disallowing a percentage of a thrift's interest
expense deduction in the proportion of interest income on those securities to
the overall interest income of the Company. Net operating losses, if any,
thereafter can be carried forward three years for MTIT
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<PAGE> 42
purposes. As of March 31, 1996, the Company has net operating loss
carryforwards of approximately $3.8 million and $2.0 million for MTIT tax
purposes which will expire March 31, 1998 and 1999, respectively.
Upon conversion to a commercial bank charter, the Company will no longer be
subject to the MTIT, but will become subject to the Pennsylvania Company Shares
Tax, which is a tax on an average of the most recent six years net worth of the
Company on January 1 of each year, after exclusion of a portion of certain
government securities. The current rate applicable to the Pennsylvania Bank
Shares Tax is 1.25%.
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ITEM 2. PROPERTIES
At March 31, 1996, the Company conducted business from its executive offices
located in Villanova, Pennsylvania and 18 full service offices located in
Chester, Delaware and Montgomery Counties, Pennsylvania. See generally Note 14
of the Notes to Consolidated Financial Statements incorporated by reference in
Item 8 hereof.
The following table sets forth certain information with respect to the
Company's offices at March 31, 1996.
<TABLE>
<CAPTION>
Net Book
Value of Amount of
Description/Address Leased/Owned Property Deposits
------------------- ------------ -------- ---------
(In Thousands)
Executive Offices:
- ------------------
<S> <C> <C> <C>
Two Aldwyn Center Owned $3,771 $ ---
Lancaster Avenue and Rt. 320
Villanova, PA 19085
Branch Offices:
- ---------------
Two Aldwyn Center Owned --- 107,931
Lancaster Avenue and Rt. 320
Villanova, PA 19085
44 E. Lancaster Ave. Owned 362 106,342
Ardmore, PA 19003
1770 W. Dekalb Pike Leased(1) 55 14,697
Blue Bell, PA 19422
2535 West Chester Pike Leased(2) 0 16,610
Broomall, PA 19008
3001 West Chester Pike Owned 417 81,162
Broomall, PA 19008
44 N. Bryn Mawr Ave. Owned 277 56,996
Bryn Mawr, PA 19010
MacDade Blvd. & Chester Pike Owned 314 37,763
Collingdale, PA 19023
133 Lancaster Ave. Owned 592 47,004
Devon, PA 19333
5116 State Road Leased(3) 21 3,536
Drexel Hill, PA 19026
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
Net Book
Value of Amount of
Description/Address Leased/Owned Property Deposits
------------------- ------------ -------- --------
(In Thousands)
<S> <C> <C> <C>
Marchwood Shopping Center Leased(4) $26 $21,086
Exton, PA 19341
1140 West Chester Pike Owned 509 26,776
Goshen, PA 19382
Manoa Shopping Center Leased(5) 160 56,127
Havertown, PA 19083
677 DeKalb Pike Leased(6) 6 26,733
King of Prussia, PA 19406
Front and Orange Streets Owned 271 79,288
Media, PA 19063
3557 W. Chester Pike Leased(7) 37 9,601
Newtown Square, PA 19073
49 E. Lancaster Ave. Owned 1,244 26,013
Paoli, PA 19301
1141 Baltimore Pike Leased(8) 46 10,850
Springfield, PA 19064
123 W. Lancaster Ave. Owned 240 60,062
Wayne, PA 19087
33 W. Gay Street Owned 361 4,332
West Chester, PA 19380
Other Administrative Offices:
- -----------------------------
One Aldwyn Center Owned 988 38,089 (9)
Lancaster Ave. & Rt. 320
Villanova, PA 19085
--------- ----------
$9,697 $830,998
--------- ----------
</TABLE>
- ---------------
(1) Lease expiration date is May 31, 2010; the Company has three five-year
renewal options.
(2) Lease expiration date was May 31, 1996; the Company did not renew the
lease and has transferred operations to 3001 West Chester Pike, Broomall, PA.
(3) Lease expiration date is June 30, 1998; the Company has three three-year
renewal options.
(4) Lease expiration date is August 31, 1996; the Company has two five-year
renewal options.
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<PAGE> 45
(5) Lease expiration date is December 1, 2000; the Company has two five-year
renewal options.
(6) Lease expiration date is April 1, 1997; the Company has two five-year
renewal options.
(7) Lease expiration date is September 30, 1998; the Company has one five-year
renewal option.
(8) Branch opened in December 1994. Lease expiration date is July 31, 2004.
(9) Comprised of custodial accounts associated with the Company's loan servicing
for others. See "Loan Lending Activities - Loan Servicing."
ITEM 3. LEGAL PROCEEDINGS.
The Company and the Bank are involved in routine legal proceedings occurring in
the ordinary course of business which, in the aggregate, are believed by
management to be immaterial to the financial condition of the Company.
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 required herein is incorporated by reference from page 1 of the
Registrant's 1996 Annual Report to Stockholders ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page 1 of the
Registrant's 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from pages 9 to 18
of the Registrant's 1996 Annual Report.
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<PAGE> 46
ITEM 8. FINANCIAL STATEMENTS.
The information required herein is incorporated by reference from pages 19 to
38 of the Registrant's 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required herein is incorporated by reference from pages 5 to 7
of the Registrant's Proxy Statement dated June 13, 1996 ("Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from pages 7 to 10
of the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
pages 3 and 4 of the Registrant's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from
pages 13 and 14 of the Registrant's Proxy Statement.
44
<PAGE> 47
PART IV
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a)(1) The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Description Page
<S> <C> <C>
3.1 Articles of Incorporation of MLF Bancorp, Inc. (1)
3.2 Bylaws of MLF Bancorp, Inc. (1)
4 Specimen Stock Certificate of MLF Bancorp, Inc.(1)
10.1 Employee Stock Ownership Plan and Trust of MLF
Bancorp, Inc. (1) *
10.2 Employment Agreements between MLF Bancorp, Inc. and Main Line Bank and Dennis S. E-1
Marlo*
10.3 Form of Employment Agreement between MLF Bancorp, Inc.
and Robert M. Campbell, Jr., Raymond M. Kilargis
and Brian M. Hartline (1) *
10.4 1994 Stock Option Plan (2)*
10.5 1994 Recognition and Retention Plan and Trust Agreement (2)*
13 1996 Annual Report to Stockholders specified portion (p.1 and pp. 8-39) of the E-26
Registrant's Annual Report to Stockholders for the year ended March 31, 1996.
21 Subsidiaries of the Registrant - Reference is made to Item 1. "Business" for the
required information
23 Consent of Accountants E-58
27 Financial Data Schedule E-59
</TABLE>
- -------------
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-76666) filed by the Registrant with the Securities and
Exchange Commission on March 18, 1994, as amended.
(2) Incorporated by reference from the Annual Report on Form 10-K for the year
ended March 31, 1995 filed by the Registrant with the Securities and Exchange
Commission on June 29, 1995.
* Management contract or compensatory plan or arrangement.
45
<PAGE> 48
(a)(2) The following documents are filed as part of this Form 10-K and are
incorporated herein by reference from the Registrant's 1996 Annual Report.
Independent Auditors' Report.
Consolidated Statements of Operations for each of the years in the three year
period ended March 31, 1996
Consolidated Statements of Financial Condition as of March 31, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for each of the
years in the three year period ended March 31, 1996
Consolidated Statements of Cash Flows for each of the years in the three year
period ended March 31, 1996
Notes to the Consolidated Financial Statements
(a)(3) All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are omitted because they
are not applicable or the required information is included in the Consolidated
Financial Statements or notes thereto.
(b) Reports filed on Form 8-K.
None.
46
<PAGE> 49
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
MLF BANCORP, INC.
By: /s/DENNIS S. MARLO
---------------------------------------
Dennis S. Marlo
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<S> <C>
/s/DENNIS S. MARLO June 27, 1996
- -----------------------------------------
Dennis S. Marlo
President, Chief Executive Officer
and Director
(Principal Executive Officer)
/s/BRIAN M. HARTLINE June 27, 1996
- -----------------------------------------
Brian M. Hartline
Secretary, Treasurer and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
/s/JOHN R. EPPINGER June 27, 1996
- -----------------------------------------
John R. Eppinger
Chairman of the Board
</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
/s/DAVID B. HASTINGS June 27, 1996
- -----------------------------------------
David B. Hastings
Director
/s/JOHN J. LEAHY June 27, 1996
- -----------------------------------------
John J. Leahy
Director
/s/HENRY M. LUEDECKE June 27, 1996
- -----------------------------------------
Henry M. Luedecke
Director
/s/ALLAN WOOLFORD June 27, 1996
- -----------------------------------------
Allan Woolford
Director
</TABLE>
<PAGE> 1
EXHIBIT 10.2
AGREEMENT
AGREEMENT, dated this 23rd day of April 1996, between Main Line Bank (the
"Bank"), a federally chartered savings bank, and DENNIS S. MARLO (the
"Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of MLF Bancorp, Inc. (the
"Corporation") and the Bank (together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers, and the Bank currently
has an agreement with the Executive dated January 6, 1995;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS")
Regulatory Bulletin 27a, the Corporation and the Bank desire to enter into
separate agreements with the Executive with respect to his employment by each
of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Bank in the event that his employment
with the Bank is terminated under specified circumstances;
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average Annual
Compensation" for purposes of this Agreement shall be deemed to
mean the average level of compensation paid to the Executive by
the Employers or any subsidiary thereof during the most recent
five taxable years preceding the Date of Termination, including
Base Salary and bonuses under any employee benefit plans of the
Employers.
(b) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(c) CAUSE. Termination of the Executive's employment for "Cause"
shall mean termination because of personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty
involving personal profit,
<PAGE> 2
2
intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order or
material breach of any provision of this Agreement.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of
the Corporation" shall mean a change in control of a nature
that would be required to be reported in response to Item 6(e)
of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended ("Exchange Act"),
or any successor thereto, whether or not the Corporation is
registered under the Exchange Act; provided that, without
limitation, such a change in control shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; or (ii) during any
period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of
the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for
election by stockholders, of each new director was approved by
a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period.
(e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
the Executive's employment is terminated for Cause or for
Disability, the date specified in the Notice of Termination,
and (ii) if the Executive's employment is terminated for any
other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(g) DISABILITY. Termination by the Bank of the Executive's
employment based on "Disability" shall mean termination because
of any physical or mental impairment which qualifies the
Executive for disability benefits under the applicable long-
term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the
Executive for disability benefits under the Federal Social
Security System.
<PAGE> 3
3
(h) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the
Executive following a Change in Control of the Corporation
based on:
(i) Without the Executive's express written consent, a
reduction by either of the Employers in the Executive's
Base Salary as the same may be increased from time to
time or, except to the extent permitted by Section 3(b)
hereof, a reduction in the package of fringe benefits
provided to the Executive, taken as a whole;
(ii) The principal executive office of either of the
Employers is relocated outside of the Villanova,
Pennsylvania area or, without the Executive's express
written consent, either of the Employers requires the
Executive to be based anywhere other than an area in
which the Employers' principal executive office is
located, except for required travel on business of the
Employers to an extent substantially consistent with
the Executive's present business travel obligations;
(iii) Any purported termination of the Executive's employment
for Cause, Disability or Retirement which is not
effected pursuant to a Notice of Termination satisfying
the requirements of paragraph (j) below; or
(iv) The failure by the Bank to obtain the assumption of and
agreement to perform this Agreement by any successor as
contemplated in Section 9 hereof.
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Bank for any reason, including
without limitation for Cause, Disability or Retirement, or by
the Executive for any reason, including without limitation for
Good Reason, shall be communicated by written "Notice of
Termination" to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a dated notice
which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) sets forth in reasonable detail the
facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so
indicated, (iii) specifies a Date of Termination, which shall be
not less than thirty (30) nor more than ninety (90) days after
such Notice of Termination is given, except in the case of the
Bank's
<PAGE> 4
4
termination of Executive's employment for Cause, which shall be
effective immediately; and (iv) is given in the manner
specified in Section 10 hereof.
(k) RETIREMENT. "Retirement" shall mean voluntary termination by
the Executive in accordance with the Employers' retirement
policies, including early retirement, generally applicable to
their salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Bank hereby employs the Executive as President and
Chief Executive Officer and Executive hereby accepts said
employment and agrees to render such services to the
Bank on the terms and conditions set forth in this Agreement.
The term of employment under this Agreement shall be for three
years, commencing on the date of this Agreement and, upon
approval of the Board of Directors of the Bank, shall
extend for an additional year on each annual anniversary of the
date of this Agreement such that at any time the remaining term
of this Agreement shall be from two to three years. Prior to
the first annual anniversary of the date of this Agreement and
each annual anniversary thereafter, the Board of Directors of
the Bank shall consider and review (with appropriate
corporate documentation thereof, and after taking into account
all relevant factors, including the Executive's performance
hereunder) extension of the term under this Agreement, and the
term shall continue to extend each year if the Board of
Directors approves such extension unless the Executive gives
written notice to the Bank of the Executive's election
not to extend the term, with such written notice to be given
not less than thirty (30) days prior to any such anniversary
date. If the Board of Directors elects not to extend the term,
it shall give written notice of such decision to the Executive
not less than thirty (30) days prior to any such anniversary
date. If any party gives timely notice that the term will not
be extended as of any annual anniversary date, then this
Agreement shall terminate at the conclusion of its remaining
term. References herein to the term of this Agreement shall
refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Bank as may be consistent with
his titles and from time to time assigned to him by the Bank's
Board of Directors.
<PAGE> 5
5
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay Executive for his
services during the term of this Agreement at a minimum base
salary of $300,000 per year ("Base Salary"), which may be
increased from time to time in such amounts as may be
determined by the Boards of Directors of the Employers and may
not be decreased without the Executive's express written
consent. In addition to his Base Salary, the Executive shall
be entitled to receive during the term of this Agreement such
bonus payments as may be determined by the Boards of Directors
of the Employers.
(b) During the term of the Agreement, Executive shall be entitled
to participate in and receive the benefits of any pension or
other retirement benefit plan, profit sharing, stock option,
employee stock ownership, or other plans, benefits and
privileges given to employees and executives of the Employers,
to the extent commensurate with his then duties and
responsibilities, as fixed by the Boards of Directors of the
Employers. The Bank shall not make any changes in such plans,
benefits or privileges which would adversely affect Executive's
rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers of
the Bank and does not result in a proportionately greater
adverse change in the rights of or benefits to Executive as
compared with any other executive officer of the Bank. Nothing
paid to Executive under any plan or arrangement presently in
effect or made available in the future shall be deemed to be in
lieu of the salary payable to Executive pursuant to Section 3(a)
hereof.
(c) During the term of this Agreement, Executive shall be entitled
to paid annual vacation in accordance with the policies as
established from time to time by the Boards of Directors of the
Employers, which shall in no event be less than four weeks per
annum. Executive shall not be entitled to receive any
additional compensation from the Employers for failure to take
a vacation, nor shall Executive be able to accumulate unused
vacation time from one year to the next, except to the extent
authorized by the Boards of Directors of the Employers.
(d) During the term of this Agreement, the Employers shall continue
to provide the Executive with the automobile he presently
drives. The Employers shall be responsible and shall pay for
all costs of insurance coverage, repairs, maintenance and other
incidental expenses, including license, fuel and oil. The
Employers shall provide the Executive with a replacement
automobile of a similar type as selected by the
<PAGE> 6
6
Executive at approximately the time that his present automobile
reaches (3) years of age and approximately every three (3)
years thereafter, upon the same terms and conditions.
(e) During the term of this Agreement, the Employers shall pay the
Executive's annual membership dues at (1) one club of his
choice.
(f) The Employers shall provide continued medical insurance for the
benefit of the Executive and his spouse until the Executive
shall have attained the age of 66, and such insurance shall be
comparable to that which is provided to the Executive as of the
date of this Agreement notwithstanding anything to the contrary
in this Agreement.
(g) In the event of the Executive's death during the term of this
Agreement, his spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall
be paid on a monthly basis the Executive's annual compensation
from the Employer at the rate in effect at the time of the
Executive's death for a period of twenty-four (24) months from
the date of the Executive's death.
(h) The Executive's compensation, benefits and expenses shall be
paid by the Corporation and the Bank in the same proportion as
the time and services actually expended by the Executive on
behalf of each respective Employer.
4. EXPENSES. The Employers shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive
in furtherance of, or in connection with the business of the
Employers, including, but not by way of limitation, automobile
expenses described in Section 3(d) hereof, and traveling expenses,
and all reasonable entertainment expenses (whether incurred at the
Executive's residence, while traveling or otherwise), subject to
such reasonable documentation and other limitations as may be
established by the Boards of Directors of the Employers. If such
expenses are paid in the first instance by Executive, the Employers
shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Bank shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder
for any reason, including without limitation termination for
Cause, Disability or Retirement, and Executive shall have the
right, upon prior
<PAGE> 7
7
Notice of Termination, to terminate his employment hereunder
for any reason.
(b) In the event that (i) Executive's employment is terminated by
the Bank for Cause, Disability or Retirement, or (ii) Executive
terminates his employment hereunder other than for Good Reason,
Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the
applicable Date of Termination, except as provided for in
Section 3(f) in the event of termination for Disability or
Retirement.
(c) In the event that (i) Executive's employment is terminated by
the Bank for other than Cause, Disability, Retirement or the
Executive's death or (ii) such employment is terminated by the
Executive (a) due to a material breach of this Agreement by the
Bank, which breach has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the
Executive to the Employers, or (b) for Good Reason, then the
Bank shall, subject to the provisions of Section 6 hereof, if
applicable
(A) pay to the Executive, in thirty-six (36) equal monthly
installments beginning with the first business day of the
month following the Date of Termination, a cash severance
amount equal to three (3) times that portion of the
Executive's Base Salary paid by the Bank, and
(B) maintain and provide for a period ending at the earlier of
(i) the expiration of the remaining term of employment
pursuant hereto prior to the Notice of Termination or (ii)
the date of the Executive's full-time employment by another
employer (provided that the Executive is entitled under the
terms of such employment to benefits substantially similar
to those described in this subparagraph (B)), at no cost to
the Executive, the Executive's continued participation in
all group insurance, life insurance, health and accident,
disability and other employee benefit plans, programs and
arrangements offered by the Bank in which the Executive was
entitled to participate immediately prior to the Date of
Termination (other than stock option and restricted stock
plans of the Employers), provided that in the event that
the Executive's participation in any plan, program or
arrangement as provided in this subparagraph (B) is barred,
or during such period any such plan, program or arrangement
is discontinued or the benefits thereunder are materially
reduced, the Bank shall arrange to provide
<PAGE> 8
8
the Executive with benefits substantially similar to those
which the Executive was entitled to receive under such
plans, programs and arrangements immediately prior to the
Date of Termination.
(d) In the event of the failure by either of the Employers to elect
or to re-elect or to appoint or to re-appoint the Executive to
the offices of President and Chief Executive Officer of the
Employers or a material adverse change made by either of the
Employers in the Executive's functions, duties or
responsibilities as President and Chief Executive Officer of
the Employers without the Executive's express written consent,
the Executive shall be entitled to terminate his employment
hereunder and shall be entitled to the payments and benefits
provided for in Section 5(c)(A) and (B).
6. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments
and benefits pursuant to Section 5 hereof, either alone or
together with other payments and benefits which Executive has the
right to receive from the Bank, would constitute a "parachute
payment" under Section 280G of the Code, the payments and benefits
payable by the Bank pursuant to Section 5 hereof shall be reduced, in
the manner determined by the Executive, by the amount, if any, which
is the minimum necessary to result in no portion of the payments and
benefits payable by the Bank under Section 5 being non-deductible to
the Bank pursuant to Section 280G of the Code and subject to the
excise tax imposed under Section 4999 of the Code. The parties
hereto agree that the payments and benefits payable pursuant to this
Agreement to the Executive upon termination shall be limited to three
times the Executive's average annual compensation (based upon the
most recent five taxable years) in accordance with OTS Regulatory
Bulletin 27a. The determination of any reduction in the payments and
benefits to be made pursuant to Section 5 shall be based upon the
opinion of independent tax counsel selected by the Bank's independent
public accountants and paid by the Bank. Such counsel shall be
reasonably acceptable to the Bank and the Executive; shall promptly
prepare the foregoing opinion, but in no event later than thirty (30)
days from the Date of Termination; and may use such actuaries as such
counsel deems necessary or advisable for the purpose. Nothing
contained herein shall result in a reduction of any payments or
benefits to which the Executive may be entitled upon termination of
employment under any circumstances other than as specified in this
Section 6, or a reduction in the payments and benefits specified in
Section 5 below zero.
<PAGE> 9
9
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of
any benefits hereunder by seeking other employment or
otherwise, nor shall the amount of any such benefits be reduced
by any compensation earned by the Executive as a result of
employment by another employer after the Date of Termination or
otherwise.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the
Executive upon a termination of employment with the Employers
pursuant to employee benefit plans of the Employers or
otherwise.
8. WITHHOLDING. All payments required to be made by the Bank
hereunder to the Executive shall be subject to the withholding of
such amounts, if any, relating to tax and other payroll deductions
as the Bank may reasonably determine should be withheld
pursuant to any applicable law or regulation.
9. ASSIGNABILITY. The Bank may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to
any corporation, bank or other entity with or into which the Bank
may hereafter merge or consolidate or to which the Bank may transfer
all or substantially all of its assets, if in any such case said
corporation, bank or other entity shall by operation of law or
expressly in writing assume all obligations of the Bank hereunder as
fully as if it had been originally made a party hereto, but may not
otherwise assign this Agreement or its rights and obligations
hereunder. The Executive may not assign or transfer this Agreement
or any rights or obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed
by certified or registered mail, return receipt requested, postage
prepaid, addressed to the respective addresses set forth below:
To the Bank:
Chairman of the Board
Main Line Bank
Two Aldwyn Center
Lancaster Avenue and Route 320
Villanova, Pennsylvania 19085
<PAGE> 10
10
To the Corporation:
Chairman of the Board
MLF Bancorp, Inc.
Two Aldwyn Center
Lancaster Avenue and Route 320
Villanova, Pennsylvania 19085
To the Executive:
Dennis S. Marlo
208 Tinker Hill Lane
Malvern, Pennsylvania 19355
11. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or
discharge is agreed to in writing signed by the Executive and such
officer or officers as may be specifically designated by the Board of
Directors of the Bank to sign on its behalf. No waiver by any party
hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time.
12. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the
United States where applicable and otherwise by the substantive laws
of the Commonwealth of Pennsylvania.
13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Bank to create a trust of any kind to fund any
benefits which may be payable hereunder, and to the extent that the
Executive acquires a right to receive benefits from the Bank
hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Bank.
14. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement.
15. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full
force and effect.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
<PAGE> 11
11
17. REGULATORY ACTIONS. The following provisions shall be applicable to
the parties to the extent that they are required to be included
in employment agreements between a savings association and its
employees pursuant to Section 563.39(b) of the Regulations Applicable
to all Associations, 12 C.F.R. Section 563.39(b), or any successor
thereto, and shall be controlling in the event of a conflict with any
other provision of this Agreement, including without limitation
Section 5 hereof.
(a) If Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's
affairs pursuant to notice served under Section 8(e)(3) or
Section 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")(12
U.S.C. Section Section 1818(e)(3) and 1818(g)(1)), the Bank's
obligations under this Agreement shall be suspended as of the
date of service, unless stayed by appropriate proceedings. If
the charges in the notice are dismissed, the Bank may, in its
discretion: (i) pay Executive all or part of the compensation
withheld while its obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(b) If Executive is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8(e)(4) or Section
8(g)(1) of the FDIA (12 U.S.C. Section Section 1818(e)(4) and
(g)(1)), all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order, but vested
rights of the Executive and the Bank as of the date of
termination shall not be affected.
(c) If the Bank is in default, as defined in Section 3(x)(1) of
the FDIA (12 U.S.C. Section 1813(x)(1)), all obligations under
this Agreement shall terminate as of the date of default, but
vested rights of the Executive and the Bank as of the date of
termination shall not be affected.
(d) All obligations under this Agreement shall be terminated
pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the extent
that it is determined that continuation of the Agreement for the
continued operation of the Employer is necessary): (i) by the
Director of the OTS, or his/her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") or Resolution
Trust Corporation enters into an agreement to provide assistance
to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. Section 1823(c)); or (ii)
by the Director of the OTS, or his/her designee, at the time the
Director or his/her designee approves a supervisory merger to
resolve
<PAGE> 12
12
problems related to operation of the Bank or when the
Bank is determined by the Director of the OTS to be in
an unsafe or unsound condition, but vested rights of the
Executive and the Bank as of the date of termination
shall not be affected.
18. REGULATORY PROHIBITION. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive
pursuant to this Agreement, or otherwise, are subject to and
conditioned upon their compliance with Section 18(k) of the FDIA (12
U.S.C. Section 1828(k)) and any regulations promulgated thereunder.
19. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Bank and the Executive with respect to the matters
agreed to herein. All prior agreements between the Bank and the
Executive with respect to the matters agreed to herein, including
without limitation the Agreement between the Bank and the Executive
dated January 6, 1995, are hereby superseded and shall have no force
or effect. Notwithstanding the foregoing, nothing contained in this
Agreement shall affect the agreement of even date being entered into
between the Corporation and the Executive.
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: MAIN LINE BANK
/s/ Lynn Robinson /s/ John R. Eppinger
- -------------------------- By: -------------------------
John R. Eppinger
Chairman of the Board
EXECUTIVE
/s/ Dennis S. Marlo
By: -------------------------
Dennis S. Marlo
<PAGE> 13
AGREEMENT
AGREEMENT, dated this 23rd day of April 1996, between MLF Bancorp, Inc.
(the "Corporation") and DENNIS S. MARLO (the "Executive").
WITNESSETH
WHEREAS, the Executive is presently an officer of the Corporation and
Main Line Bank (the "Bank") (together, the "Employers");
WHEREAS, the Employers desire to be ensured of the Executive's continued
active participation in the business of the Employers, and the Bank
currently has an agreement with the Executive dated January 6, 1995, which is
being concurrently amended;
WHEREAS, in accordance with Office of Thrift Supervision ("OTS")
Regulatory Bulletin 27a, the Corporation and the Bank desire to enter
into separate agreements with the Executive with respect to his employment by
each of the Employers; and
WHEREAS, in order to induce the Executive to remain in the employ of the
Employers and in consideration of the Executive's agreeing to remain in the
employ of the Employers, the parties desire to specify the severance benefits
which shall be due the Executive by the Corporation in the event that his
employment with the Corporation is terminated under specified circumstances;
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings
set forth below for the purposes of this Agreement:
(a) AVERAGE ANNUAL COMPENSATION. The Executive's "Average Annual
Compensation" for purposes of this Agreement shall be deemed to
mean the average level of compensation paid to the Executive by
the Employers or any subsidiary thereof during the most recent
five taxable years preceding the Date of Termination, including
Base Salary and bonuses under any employee benefit plans of the
Employers.
(b) BASE SALARY. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(c) CAUSE. Termination of the Executive's employment for "Cause"
shall mean termination because of personal dishonesty,
incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform
stated duties, willful violation of any law,
<PAGE> 14
2
rule or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order or material breach of
any provision of this Agreement.
(d) CHANGE IN CONTROL OF THE CORPORATION. "Change in Control of
the Corporation" shall mean a change in control of a nature
that would be required to be reported in response to Item 6(e)
of Schedule 14A of Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended ("Exchange Act"),
or any successor thereto, whether or not the Corporation is
registered under the Exchange Act; provided that, without
limitation, such a change in control shall be deemed to have
occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Corporation
representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; or (ii) during any
period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of
the Corporation cease for any reason to constitute at least a
majority thereof unless the election, or the nomination for
election by stockholders, of each new director was approved by
a vote of at least two-thirds of the directors then still in
office who were directors at the beginning of the period.
(e) CODE. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(f) DATE OF TERMINATION. "Date of Termination" shall mean (i) if
the Executive's employment is terminated for Cause or for
Disability, the date specified in the Notice of Termination,
and (ii) if the Executive's employment is terminated for any
other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(g) DISABILITY. Termination by the Corporation of the Executive's
employment based on "Disability" shall mean termination because
of any physical or mental impairment which qualifies the
Executive for disability benefits under the applicable long-
term disability plan maintained by the Employers or any
subsidiary or, if no such plan applies, which would qualify the
Executive for disability benefits under the Federal Social
Security System.
(h) GOOD REASON. Termination by the Executive of the Executive's
employment for "Good Reason" shall mean termination by the
Executive following a Change in Control of the Corporation
based on:
<PAGE> 15
3
(i) Without the Executive's express written consent, a
reduction by either of the Employers in the Executive's
Base Salary as the same may be increased from time to
time or, except to the extent permitted by Section 3(b)
hereof, a reduction in the package of fringe benefits
provided to the Executive, taken as a whole;
(ii) The principal executive office of either of the
Employers is relocated outside of the Villanova,
Pennsylvania area or, without the Executive's express
written consent, either of the Employers requires the
Executive to be based anywhere other than an area in
which the Employers' principal executive office is
located, except for required travel on business of the
Employers to an extent substantially consistent with
the Executive's present business travel obligations;
(iii) Any purported termination of the Executive's employment
for Cause, Disability or Retirement which is not
effected pursuant to a Notice of Termination satisfying
the requirements of paragraph (j) below; or
(iv) The failure by the Corporation to obtain the assumption
of and agreement to perform this Agreement by any
successor as contemplated in Section 9 hereof.
(i) IRS. IRS shall mean the Internal Revenue Service.
(j) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Corporation for any reason,
including without limitation for Cause, Disability or
Retirement, or by the Executive for any reason, including
without limitation for Good Reason, shall be communicated by
written "Notice of Termination" to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall
mean a dated notice which (i) indicates the specific
termination provision in this Agreement relied upon, (ii) sets
forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Executive's employment
under the provision so indicated, (iii) specifies a Date of
Termination, which shall be not less than thirty (30) nor more
than ninety (90) days after such Notice of Termination is
given, except in the case of the Corporation's termination of
Executive's employment for Cause, which shall be effective
immediately; and (iv) is given in the manner specified in
Section 10 hereof.
<PAGE> 16
4
(k) RETIREMENT. "Retirement" shall mean voluntary termination by
the Executive in accordance with the Employers' retirement
policies, including early retirement, generally applicable to
their salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Corporation hereby employs the Executive as President and
Chief Executive Officer and Executive hereby accepts said
employment and agrees to render such services to the
Corporation on the terms and conditions set forth in this
Agreement. The term of employment under this Agreement shall
be for three years, commencing on the date of this Agreement
and, upon approval of the Board of Directors of the
Corporation, shall extend for an additional year on each annual
anniversary of the date of this Agreement such that at any time
the remaining term of this Agreement shall be from two to three
years. Prior to the first annual anniversary of the date of
this Agreement and each annual anniversary thereafter, the
Board of Directors of the Corporation shall consider and review
(with appropriate corporate documentation thereof, and after
taking into account all relevant factors, including the
Executive's performance hereunder) extension of the term under
this Agreement, and the term shall continue to extend each year
if the Board of Directors approves such extension unless the
Executive gives written notice to the Corporation of the
Executive's election not to extend the term, with such written
notice to be given not less than thirty (30) days prior to any
such anniversary date. If the Board of Directors elects not to
extend the term, it shall give written notice of such decision
to the Executive not less than thirty (30) days prior to any
such anniversary date. If any party gives timely notice that
the term will not be extended as of any annual anniversary
date, then this Agreement shall terminate at the conclusion of
its remaining term. References herein to the term of this
Agreement shall refer both to the initial term and successive
terms.
(b) During the term of this Agreement, the Executive shall perform
such executive services for the Corporation as may be
consistent with his titles and from time to time assigned to
him by the Corporation's Board of Directors.
<PAGE> 17
5
3. COMPENSATION AND BENEFITS.
(a) The Employers shall compensate and pay Executive for his
services during the term of this Agreement at a minimum base
salary of $300,000 per year ("Base Salary"), which may be
increased from time to time in such amounts as may be
determined by the Boards of Directors of the Employers and may
not be decreased without the Executive's express written
consent. In addition to his Base Salary, the Executive shall
be entitled to receive during the term of this Agreement such
bonus payments as may be determined by the Boards of Directors
of the Employers.
(b) During the term of the Agreement, Executive shall be entitled
to participate in and receive the benefits of any pension or
other retirement benefit plan, profit sharing, stock option,
employee stock ownership, or other plans, benefits and
privileges given to employees and executives of the Employers,
to the extent commensurate with his then duties and
responsibilities, as fixed by the Boards of Directors of the
Employers. The Corporation shall not make any changes in such
plans, benefits or privileges which would adversely affect
Executive's rights or benefits thereunder, unless such change
occurs pursuant to a program applicable to all executive
officers of the Corporation and does not result in a
proportionately greater adverse change in the rights of or
benefits to Executive as compared with any other executive
officer of the Corporation. Nothing paid to Executive under
any plan or arrangement presently in effect or made available
in the future shall be deemed to be in lieu of the salary
payable to Executive pursuant to Section 3(a) hereof.
(c) During the term of this Agreement, Executive shall be entitled
to paid annual vacation in accordance with the policies as
established from time to time by the Boards of Directors of the
Employers, which shall in no event be less than four weeks per
annum. Executive shall not be entitled to receive any
additional compensation from the Employers for failure to take
a vacation, nor shall Executive be able to accumulate unused
vacation time from one year to the next, except to the extent
authorized by the Boards of Directors of the Employers.
(d) During the term of this Agreement, the Employers shall continue
to provide the Executive with the automobile he presently
drives. The Employers shall be responsible and shall pay for
all costs of insurance coverage, repairs, maintenance and other
incidental expenses, including license, fuel and oil. The
Employers shall provide the Executive with a replacement
automobile of a similar type as selected by the
<PAGE> 18
6
Executive at approximately the time that his present automobile
reaches (3) years of age and approximately every three (3)
years thereafter, upon the same terms and conditions.
(e) During the term of this Agreement, the Employers shall pay the
Executive's annual membership dues at (1) one club of his
choice.
(f) The Employers shall provide continued medical insurance for the
benefit of the Executive and his spouse until the Executive
shall have attained the age of 66, and such insurance shall be
comparable to that which is provided to the Executive as of the
date of this Agreement notwithstanding anything to the contrary
in this Agreement.
(g) In the event of the Executive's death during the term of this
Agreement, his spouse, estate, legal representative or named
beneficiaries (as directed by the Executive in writing) shall
be paid on a monthly basis the Executive's annual compensation
from the Employer at the rate in effect at the time of the
Executive's death for a period of twenty-four (24) months from
the date of the Executive's death.
(h) The Executive's compensation, benefits and expenses shall be
paid by the Corporation and the Bank in the same proportion as
the time and services actually expended by the Executive on
behalf of each respective Employer.
4. EXPENSES. The Employers shall reimburse Executive or otherwise
provide for or pay for all reasonable expenses incurred by Executive
in furtherance of, or in connection with the business of the
Employers, including, but not by way of limitation, automobile
expenses described in Section 3(d) hereof, and traveling expenses,
and all reasonable entertainment expenses (whether incurred at the
Executive's residence, while traveling or otherwise), subject to
such reasonable documentation and other limitations as may be
established by the Boards of Directors of the Employers. If such
expenses are paid in the first instance by Executive, the Employers
shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Corporation shall have the right, at any time upon prior
Notice of Termination, to terminate the Executive's employment
hereunder for any reason, including without limitation
termination for Cause, Disability or Retirement, and Executive
shall have the right, upon prior
<PAGE> 19
7
Notice of Termination, to terminate his employment hereunder
for any reason.
(b) In the event that (i) Executive's employment is terminated by
the Corporation for Cause, Disability or Retirement, or (ii)
Executive terminates his employment hereunder other than for
Good Reason, Executive shall have no right pursuant to this
Agreement to compensation or other benefits for any period
after the applicable Date of Termination, except as provided
for in Section 3(f) in the event of termination for Disability
or Retirement.
(c) In the event that (i) Executive's employment is terminated by
the Corporation for other than Cause, Disability, Retirement or
the Executive's death or (ii) such employment is terminated by
the Executive (a) due to a material breach of this Agreement by
the Corporation, which breach has not been cured within fifteen
(15) days after a written notice of non-compliance has been
given by the Executive to the Employers, or (b) for Good
Reason, then the Corporation shall
(A) pay to the Executive, in thirty-six (36) equal monthly
installments beginning with the first business day of the
month following the Date of Termination, a cash severance
amount equal to three (3) times that portion of the
Executive's Base Salary paid by the Corporation, and
(B) maintain and provide for a period ending at the earlier of
(i) the expiration of the remaining term of employment
pursuant hereto prior to the Notice of Termination or (ii)
the date of the Executive's full-time employment by
another employer (provided that the Executive is entitled
under the terms of such employment to benefits
substantially similar to those described in this
subparagraph (B)), at no cost to the Executive, the
Executive's continued participation in all group
insurance, life insurance, health and accident, disability
and other employee benefit plans, programs and
arrangements offered by the Corporation in which the
Executive was entitled to participate immediately prior to
the Date of Termination (other than stock option and
restricted stock plans of the Employers), provided that in
the event that the Executive's participation in any plan,
program or arrangement as provided in this subparagraph
(B) is barred, or during such period any such plan,
program or arrangement is discontinued or the benefits
thereunder are materially reduced, the Corporation shall
arrange to provide the
<PAGE> 20
8
Executive with benefits substantially similar to those
which the Executive was entitled to receive under such
plans, programs and arrangements immediately prior to the
Date of Termination.
(d) In the event of the failure by either of the Employers to elect
or to re-elect or to appoint or to re-appoint the Executive to
the offices of President and Chief Executive Officer of the
Employers or a material adverse change made by either of the
Employers in the Executive's functions, duties or
responsibilities as President and Chief Executive Officer of
the Employers without the Executive's express written consent,
the Executive shall be entitled to terminate his employment
hereunder and shall be entitled to the payments and benefits
provided for in Section 5(c)(A) and (B).
6. PAYMENT OF ADDITIONAL BENEFITS UNDER CERTAIN CIRCUMSTANCES.
(a) If the payments and benefits pursuant to Section 5 hereof,
either alone or together with other payments and benefits which
Executive has the right to receive from the Employers
(including, without limitation, the payments and benefits which
Executive would have the right to receive from the Bank pursuant
to Section 5 of the Agreement between the Bank and Executive
dated April 23, 1996 ("Bank Agreement"), before giving effect to
any reduction in such amounts pursuant to Section 6 of the Bank
Agreement), would constitute a "parachute payment" as defined in
Section 280G(b)(2) of the Code (the "Initial Parachute Payment,"
which includes the amounts paid pursuant to clause (A) below),
then the Corporation shall pay to the Executive, in thirty-six
(36) equal monthly installments beginning with the first
business day of the month following the Date of Termination, a
cash amount equal to the sum of the following:
(A) the amount by which the payments and benefits that
would have otherwise been paid by the Bank to the
Executive pursuant to Section 5 of the Bank Agreement
are reduced by the provisions of Section 6 of the Bank
Agreement;
(B) twenty (20) percent (or such other percentage equal
to the tax rate imposed by Section 4999 of the Code)
of the amount by which the Initial Parachute Payment
exceeds the Executive's "base amount" from the
Employers, as defined in Section 280G(b)(3) of the
Code, with the
<PAGE> 21
9
difference between the Initial Parachute Payment and
the Executive's base amount being hereinafter
referred to as the "Initial Excess Parachute
Payment";
(C) such additional amount (tax allowance) as may be
necessary to compensate the Executive for the payment
by the Executive of state and federal income and
excise taxes on the payment provided under clause (B)
above and on any payments under this clause (C). In
computing such tax allowance, the payment to be made
under clause (B) above shall be multiplied by the
"gross up percentage" ("GUP"). The GUP shall be
determined as follows:
Tax Rate
GUP = ---------------
1- Tax Rate
The Tax Rate for purposes of computing the GUP shall
be the highest marginal federal and state income and
employment-related tax rate, including any applicable
excise tax rate, applicable to the Executive in the
year in which the payment under clause (B) above is
made.
(b) Notwithstanding the foregoing, if it shall subsequently be
determined in a final judicial determination or a final
administrative settlement to which the Executive is a party
that the actual excess parachute payment as defined in Section
280G(b)(1) of the Code is different from the Initial Excess
Parachute Payment (such different amount being hereafter
referred to as the "Determinative Excess Parachute Payment"),
then the Corporation's independent tax counsel or accountants
shall determine the amount (the "Adjustment Amount") which
either the Executive must pay to the Corporation or the
Corporation must pay to the Executive in order to put the
Executive (or the Corporation, as the case may be) in the same
position the Executive (or the Corporation, as the case may be)
would have been if the Initial Excess Parachute Payment had
been equal to the Determinative Excess Parachute Payment. In
determining the Adjustment Amount, the independent tax counsel
or accountants shall take into account any and all taxes
(including any penalties and interest) paid by or for the
Executive or refunded to the Executive or for the Executive's
benefit. As soon as practicable after the Adjustment Amount
has been so determined, the Corporation shall
<PAGE> 22
10
pay the Adjustment Amount to the Executive or the Executive
shall repay the Adjustment Amount to the Corporation, as the
case may be.
(c) In each calendar year that the Executive receives payments of
benefits under this Section 6, the Executive shall report on
his state and federal income tax returns such information as is
consistent with the determination made by the independent tax
counsel or accountants of the Corporation as described above.
The Corporation shall indemnify and hold the Executive harmless
from any and all losses, costs and expenses (including without
limitation, reasonable attorneys' fees, interest, fines and
penalties) which the Executive incurs as a result of so
reporting such information. Executive shall promptly notify
the Corporation in writing whenever the Executive receives
notice of the institution of a judicial or administrative
proceeding, formal or informal, in which the federal tax
treatment under Section 4999 of the Code of any amount paid or
payable under this Section 6 is being reviewed or is in
dispute. The Corporation shall assume control at its expense
over all legal and accounting matters pertaining to such
federal tax treatment (except to the extent necessary or
appropriate for the Executive to resolve any such proceeding
with respect to any matter unrelated to amounts paid or payable
pursuant to this Section 6) and the Executive shall cooperate
fully with the Corporation in any such proceeding. The
Executive shall not enter into any compromise or settlement or
otherwise prejudice any rights the Corporation may have in
connection therewith without the prior consent of the
Corporation.
7. MITIGATION; EXCLUSIVITY OF BENEFITS.
(a) The Executive shall not be required to mitigate the amount of
any benefits hereunder by seeking other employment or
otherwise, nor shall the amount of any such benefits be reduced
by any compensation earned by the Executive as a result of
employment by another employer after the Date of Termination or
otherwise.
(b) The specific arrangements referred to herein are not intended
to exclude any other benefits which may be available to the
Executive upon a termination of employment with the Employers
pursuant to employee benefit plans of the Employers or
otherwise.
8. WITHHOLDING. All payments required to be made by the Corporation
hereunder to the Executive shall be subject to the withholding of
such amounts, if any, relating to tax and other payroll deductions
as the
<PAGE> 23
11
Corporation may reasonably determine should be withheld pursuant to
any applicable law or regulation.
9. ASSIGNABILITY. The Corporation may assign this Agreement and its
rights and obligations hereunder in whole, but not in part, to any
corporation, bank or other entity with or into which the Corporation
may hereafter merge or consolidate or to which the Corporation may
transfer all or substantially all of its assets, if in any such case
said corporation, bank or other entity shall by operation of law or
expressly in writing assume all obligations of the Corporation
hereunder as fully as if it had been originally made a party hereto,
but may not otherwise assign this Agreement or its rights and
obligations hereunder. The Executive may not assign or transfer
this Agreement or any rights or obligations hereunder.
10. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing
and shall be deemed to have been duly given when delivered or mailed
by certified or registered mail, return receipt requested, postage
prepaid, addressed to the respective addresses set forth below:
To the Corporation:
Chairman of the Board
MLF Bancorp, Inc.
Two Aldwyn Center
Lancaster Avenue and Route 320
Villanova, Pennsylvania 19085
To the Bank:
Chairman of the Board
Main Line Bank
Two Aldwyn Center
Lancaster Avenue and Route 320
Villanova, Pennsylvania 19085
To the Executive:
Dennis S. Marlo
208 Tinker Hill Lane
Malvern, Pennsylvania 19355
11. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge
is agreed to in writing signed by the Executive and such officer or
officers as may be specifically designated by the Board of Directors
of the Corporation to sign on its behalf. No waiver by any party
hereto at any time of any breach by any
<PAGE> 24
12
other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
12. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the
United States where applicable and otherwise by the substantive laws
of the Commonwealth of Pennsylvania.
13. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Corporation to create a trust of any kind to fund any
benefits which may be payable hereunder, and to the extent that the
Executive acquires a right to receive benefits from the Corporation
hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Corporation.
14. HEADINGS. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning
or interpretation of this Agreement.
15. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which shall remain in full
force and effect.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but
all of which together will constitute one and the same instrument.
17. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
between the Corporation and the Executive with respect to the
matters agreed to herein. All prior agreements between the
Corporation and the Executive with respect to the matters agreed to
herein are hereby superseded and shall have no force or effect.
Notwithstanding the foregoing, nothing contained in this Agreement
shall affect the agreement of even date being entered into between
the Bank and the Executive.
<PAGE> 25
13
IN WITNESS WHEREOF, this Agreement has been executed as of the date first
above written.
Attest: MLF BANCORP, INC.
/s/ Lynn Robinson /s/ John R. Eppinger
- -------------------------- By: ---------------------------
John R. Eppinger
Chairman of the Board
EXECUTIVE
/s/ Dennis S. Marlo
By: ---------------------------
Dennis S. Marlo
<PAGE> 1
EXHIBIT 13
MLF BANCORP, INC. AND SUBSIDIARIES
FIVE YEAR REVIEW OF SELECTED FINANCIAL DATA AND
PRICE PER SHARE OF COMMON STOCK
<TABLE>
<CAPTION>
Dollars in Thousands, except for percentages
- --------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED MARCH 31, 1996 1995 1994 1993 1992
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Total Assets $1,765,812 $1,563,452 $1,001,037 $989,308 $989,528
- --------------------------------------------------------------------------------------------------------------------
Loans Receivable, Net 691,791 550,013 268,335 290,380 380,389
- --------------------------------------------------------------------------------------------------------------------
Investments and Mortgage-Related
Securities, Net 429,092 515,383 428,103 418,064 241,805
- --------------------------------------------------------------------------------------------------------------------
Assets Available for Sale 564,354 436,332 264,724 230,660 289,372
- --------------------------------------------------------------------------------------------------------------------
Deposit Accounts 830,997 688,678 679,525 618,693 652,162
- --------------------------------------------------------------------------------------------------------------------
Borrowings 778,225 710,541 256,795 304,881 275,534
- --------------------------------------------------------------------------------------------------------------------
Equity 140,337 141,300 53,978 57,056 47,122
- --------------------------------------------------------------------------------------------------------------------
Nonperforming Assets 10,445 8,931 12,360 24,658 36,849
====================================================================================================================
Net Interest Income 43,762 36,749 22,820 25,014 22,228
- --------------------------------------------------------------------------------------------------------------------
Provision for Loan Losses 4,000 3,400 1,113 3,169 9,627
- --------------------------------------------------------------------------------------------------------------------
Other Income 7,269 3,412 8,616 7,196 10,214
- --------------------------------------------------------------------------------------------------------------------
Operating Expenses 29,139 23,093 21,000 20,253 19,045
- --------------------------------------------------------------------------------------------------------------------
Net Income 11,620 8,694 1,862 7,488 545
====================================================================================================================
Net Interest Margin 2.79% 2.90% 2.39% 2.74% 2.45%
- --------------------------------------------------------------------------------------------------------------------
Operating Expenses as a Percent of
Average Assets 1.79 1.76 2.10 2.14 1.96
- --------------------------------------------------------------------------------------------------------------------
Return on Average Assets 0.71 0.66 0.19 0.79 0.06
- --------------------------------------------------------------------------------------------------------------------
Return of Average Equity 7.88 8.22 3.17 14.81 1.05
====================================================================================================================
Nonperforming Assets as a Percent of
Total Assets (1) 0.59 0.57 1.23 2.49 3.72
- --------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses as a Percent of
Nonperforming Loans (1) 156.20 134.74 137.50 55.16 40.68
====================================================================================================================
</TABLE>
(1) Asset Quality Ratios are end-of-period ratios. With the exception of
end-of-period ratios, all ratios are based on average daily balances during the
indicated periods.
The following table shows market price information for the Company's Common
Stock.
The prices set forth below represent the high, low and closing prices on the
NASDAQ National Market System during the periods indicated.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PRICE PER SHARE
====================================================================================================================
QUARTERLY PERIOD ENDED HIGH LOW CLOSE
====================================================================================================================
<S> <C> <C> <C>
September 30, 1994 $16.75 $15.25 $15.88
- --------------------------------------------------------------------------------------------------------------------
December 31, 1994 16.00 12.25 13.50
- --------------------------------------------------------------------------------------------------------------------
March 31, 1995 16.13 13.38 16.00
- --------------------------------------------------------------------------------------------------------------------
June 30, 1995 19.63 15.75 19.25
- --------------------------------------------------------------------------------------------------------------------
September 30, 1995 23.88 19.00 23.13
- --------------------------------------------------------------------------------------------------------------------
December 31, 1995 24.63 21.00 22.25
- --------------------------------------------------------------------------------------------------------------------
March 31, 1996 24.75 21.75 23.88
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
One
<PAGE> 2
FINANCIAL
TABLE OF CONTENTS
<TABLE>
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS Nine
INDEPENDENT AUDITORS' REPORT Nineteen
CONSOLIDATED FINANCIAL STATEMENTS Twenty
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Twenty-six
DIRECTORS, OFFICERS AND SHAREHOLDER INFORMATION Inside back cover
</TABLE>
Eight
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
MLF Bancorp, Inc. (the "Bancorp" or "Company") is the holding company of its
wholly-owned subsidiary, Main Line Bank (the "Bank"). The Bancorp, through its
subsidiary, provides commercial, mortgage and consumer banking services through
an 18 branch network in the Philadelphia metropolitan area and nine mortgage
loan production offices which are located in eastern Pennsylvania, southern New
Jersey and northern Delaware.
The Bank's conversion to a federally chartered stock savings bank was
completed on August 11, 1994 (the "Conversion"). The Conversion has been
accounted for in a manner similar to a pooling of interests. Accordingly, the
Bank's assets, liabilities and equity continue to be reflected based on their
historical amounts.
The following discussion provides an overview of the general business,
financial condition and results of operations of the Company, and should be
read in conjunction with the Company's consolidated financial statements
presented elsewhere herein. Accordingly, the discussion below with respect to
results of operations relates primarily to the Bank, and the financial data for
the period prior to the Conversion reflects financial data of the Bank. For
purposes of this discussion, MLF Bancorp, Inc. including its wholly-owned
subsidiaries, will be referred to as the Company.
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between interest income on
interest-earning assets, principally loans, mortgage-related securities and
investments, and interest expense on interest-bearing liabilities, which
principally consist of deposits and borrowings. The Company's net income is
also affected by its provision for loan losses, as well as the level of its
other income, including mortgage banking income, net gains or losses on sale of
assets available for sale and its operating expenses, such as compensation and
employee benefits, net occupancy expense, federal deposit insurance and
miscellaneous other expenses, and income taxes.
During the year ended March 31, 1996, the Company completed its acquisition of
Hart Mortgage Co., ("Hart") a privately-held mortgage banking company, and
Suburban Federal Savings Bank ("Suburban") a $66.0 million in assets community
bank headquartered in Collingdale, Delaware County, Pennsylvania. Both
acquisitions were accounted for using the purchase method of accounting. These
acquisitions were completed during the fourth fiscal quarter of 1996, and as
such, the effect on the Company's results of operations was not material.
On April 1, 1996, the Company completed its acquisition of Philadelphia
Mortgage Corporation ("PMC"), a privately-held mortgage banking company.
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability management
function is to maximize the Company's net interest margin while maintaining a
level of risk appropriate given the Company's business focus, operating
environment, capital and liquidity requirements and performance objectives,
establish prudent asset concentration guidelines and manage the risk consistent
with Board of Directors approved guidelines. Through such management, the
Company seeks to reduce the vulnerability of its operations to changes in
interest rates and to manage the ratio of interest-rate sensitive assets to
interest-rate sensitive liabilities within specified maturities or repricing
dates. The Company's actions in this regard are taken under the guidance of
the Asset/Liability Management Committee ("ALCO"), which is chaired by the
Chief Executive Officer and comprised principally by members of the Company's
senior management. The ALCO meets twice a month to review, among other things,
the sensitivity of the Company's asset and liabilities to interest rate
changes, the book and market values of assets and liabilities, unrealized gains
and losses, purchase and sale activity and maturities of investments and
borrowings. In connection therewith, the ALCO generally reviews the Company's
liquidity, cash flow needs, maturities of investments, deposits and borrowings
and current market conditions and interest rates. A pricing subcommittee meets
weekly to make pricing and funding decisions with respect to the Company's
retail deposits and selected consumer loans.
The Company's primary ALCO monitoring tool is asset/liability simulation
models, which are prepared on a quarterly basis and are designed to capture the
dynamics of balance sheet, rate and spread movements and to quantify variations
in net interest income under different interest rate environments. The Company
also utilizes market-value analysis, which addresses the change in equity value
arising from movements in interest rates. The market value of equity is
estimated by valuing the Company's assets and liabilities. The extent to which
assets have gained or lost value in relation to the gains or losses of
liabilities determines the appreciation or depreciation in equity on a
market-value basis. Market value analysis is intended to evaluate the impact
of immediate and sustained interest-rate shifts of the current yield curve upon
the market value of the current balance sheet.
Nine
<PAGE> 4
A more conventional but limited ALCO monitoring tool involves an analysis of
the extent to which assets and liabilities are "interest rate sensitive" and
measuring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity "gap" is defined as the difference between interest-earning assets
and interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive
gap would tend to affect net interest income adversely. While a conventional
gap measure may be useful, it is limited in its ability to predict trends in
future earnings. It makes no presumptions about changes in prepayment
tendencies, deposit or loan maturity preferences or repricing time lags that
may occur in response to a change in the interest rate environment.
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's total assets increased by $202.4 million or 12.9% at
March 31, 1996 compared to March 31, 1995. The increase is primarily due to an
increase in loans receivable, including loans available for sale of $211.5
million or 36.8%, offset slightly by an aggregate decrease in investments,
mortgage-related securities and mortgage-related, debt and equity securities
available for sale of $28.0 million or 3.0%. The asset growth was funded
primarily through a growth in deposits of $142.3 million, or 20.7%, and to a
lesser extent, growth in borrowed money of $67.7 million or 9.5%.
CASH AND INVESTMENTS. Cash and investments decreased $17.9 million or 27.1%
from $66.2 million at March 31, 1995 to $48.3 million at March 31, 1996. The
decrease was primarily the result of two U.S. Government agency step-up bonds
and one debenture totaling $30.0 million being called, which were only
partially offset through additional investment purchases.
MORTGAGE-RELATED SECURITIES AND MORTGAGE-RELATED, DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE. Mortgage-related securities and mortgage-related, debt and
equity securities available for sale decreased $6.8 million or 0.8% to $873.5
million at March 31, 1996 from $880.3 million at March 31, 1995, as repayments
and sales occurred at a rate faster than the purchases of such securities. In
November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities" which permitted a one-time
transfer of securities up to December 31, 1995. In December 1995, in
accordance with provisions in that Special Report, the Bank transferred $56.8
million of mortgage-related securities to mortgage-related, debt and equity
securities available for sale.
LOANS AVAILABLE-FOR-SALE AND LOANS RECEIVABLE, NET. Aggregate loans receivable
(loans receivable, net and loans available for sale) totaled $786.8 million at
March 31, 1996, an increase of $211.5 million or 36.8% from $575.3 million at
March 31, 1995, due to a $141.8 million or 25.8% increase in loans receivable,
net and a $69.8 million increase in loans available for sale. Of the $141.8
million increase in loans receivable, net, approximately 41.0% or $57.6 million
were related to the Suburban acquisition. Also contributing to the increase
was: a $39.9 million or 49.5% increase in commercial and multi-family real
estate loans (primarily secured by office buildings, healthcare facilities and
retail/apartment complexes, all of which are located in the Company's lending
area); a $51.6 million or 87.3% increase in gross residential construction
loans, as the Company became more involved in construction of residential
projects in its primary lending area; a $16.9 million or 18.1% increase in
consumer loans, as the Company continues its expansion in the equity loan
market; and a $36.3 million or 108.9% increase in commercial business loans
(primarily 5 loans accounting for 66% of the increase).
NON-PERFORMING ASSETS. The Company's total non-performing assets increased by
$1.5 million or 17.0% from $8.9 million or 0.6% of total assets at March 31,
1995 to $10.4 million or 0.6% of total assets at March 31, 1996. At March 31,
1996, the Company's nonperforming loans totaled $8.4 million compared to $6.8
million at March 31, 1995. The primary reason for the $1.6 million or 24.3%
increase over March 31, 1995, was due to the acquisition of $3.1 million of
nonaccrual loans in connection with the Suburban acquisition, which caused
single family and construction nonperforming loans to increase by $1.3 million
and $1.8 million, respectively, over March 31, 1995 balances, despite a $2.2
million decrease in nonaccruing commercial real estate loans.
Other real estate owned, net increased to $2.0 million (comprised of 12
properties) as of March 31, 1996 as compared to $1.0 million as of March 31,
1995, primarily due to the acquisition of Suburban's other real estate owned,
which had a carrying value of $900,000 (comprised of five properties) at March
31, 1996.
At March 31, 1996, the Company's allowance for loan losses amounted to $13.1
million (including a $754,000 specific allowance on two commercial construction
loans and one residential project construction loan) or 156.2% of
non-performing loans and 1.6% of gross loans receivable. At March 31, 1995,
the Company's allowance for loan losses was $9.1 million (which included a
$475,000 specific allowance on two commercial real estate loans and one
residential project construction loan) or 134.7% of non-performing loans and
1.6% of gross loans receivable.
Total charge-offs were $1.2 million and $1.8 million for the years ended March
31, 1996 and 1995, respectively.
Ten
<PAGE> 5
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights increased $9.0 million or
70.5% from $12.8 million at March 31, 1995 to $21.9 million at March 31, 1996.
The increase was due to purchases of mortgage servicing rights of $12.0 million
and originated mortgage servicing rights of $760,000 offset by amortization of
$3.7 million during the year. As of the beginning of the current fiscal year,
the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights,"
and as a result, included $760,000 in income from mortgage banking operations.
DEPOSITS. Deposits increased by $142.3 million or 20.7% from $688.7 million
at March 31, 1995 to $831.0 million at March 31, 1996. Interest and
noninterest-bearing checking accounts and certificates of deposit increased by
$32.4 million or 26.4%, $27.9 million or 51.9%, and $88.6 million or 21.2%,
respectively. During the fiscal year, the Company increased its deposits
through the Suburban acquisition and the purchase of an Individual Retirement
Account portfolio, which had balances of $59.1 million and $30.0 million,
respectively, at the dates of acquisition.
BORROWINGS. Total borrowings increased by $67.7 million or 9.5% to $778.2
million at March 31, 1996 from $710.5 million at March 31, 1995. The Company's
borrowings are primarily comprised of advances from the Federal Home Loan Bank
("FHLB") and repurchase agreements. Repurchase agreements are commitments the
Company enters into to sell securities under terms which require it to
repurchase the same securities by a specified date. Such agreements represent
a competitive cost funding source for the Company; however, the Company is
subject to the risk that the lender may default at maturity and not return the
collateral. The repurchase agreements are primarily comprised of various
Federal Home Loan Mortgage Corporation ("FHLMC") and large, established
investment brokerage institution repurchase agreements and had a weighted
average maturity of approximately 13 months and a weighted average interest
rate of 5.66% at March 31, 1996, compared to 60 days and 6.18%, respectively,
at March 31, 1995.
FHLB advances increased $56.1 million or 17.5% from $319.9 million at March 31,
1995 to $376.0 million at March 31, 1996. At March 31, 1996, FHLB advances had
a weighted average maturity of approximately 18 months and a weighted average
interest rate of 6.21%, compared to 18 months and 6.36% at March 31, 1995. The
overall increase in borrowings was primarily used to fund the Company's
increased lending activities during the year.
EQUITY. At March 31, 1996, total equity was $140.3 million or 7.9% of total
assets, compared to $141.3 million or 9.0% of total assets at March 31, 1995.
Total equity decreased by $963,000 during the year ended March 31, 1996
primarily due to the repurchase of 683,500 shares or 10.0% of the Company's
outstanding common stock at an aggregate cost of $15.0 million, and dividends
paid to common shareholders totaling $3.2 million, which was partially offset
by net income of $11.6 million for the year, and the $2.2 million of
amortization related to stock benefit plans. The Company's market value
position related to its mortgage-related, debt and equity securities classified
as assets available for sale, net of income taxes, went from an unrealized loss
of $3.2 million at March 31, 1995 to an unrealized gain of $120,000 at March
31, 1996, favorably effecting equity by $3.3 million.
Eleven
<PAGE> 6
The following table sets forth, for the periods and at the date
indicated, information regarding the Company's average balance sheet.
Information is based on average daily balances during the periods presented.
<TABLE>
<CAPTION> Year Ended March 31,
At March 31, -----------------------------------------------------------------------------------------
1996 1996 1995 1994
------------ ----------------------------- -------------------------- -----------------------------
Average Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------ ----------------------------- -------------------------- -----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable:
Mortgage loans:
Residential(1) 7.68% $366,363 $29,303 8.00% $208,126 $16,164 7.77% $148,446 $11,620 7.83%
Commercial 8.79 100,801 9,318 9.24 71,694 6,590 9.19 48,367 4,421 9.14
Construction loans 10.73 37,455 4,883 13.04 16,522 2,028 12.27 11,336 1,028 9.07
Other:
Consumer loans:
Home equity loans
and lines of credit 9.38 82,715 7,689 9.30 71,863 6,306 8.78 66,437 5,378 8.09
Unsecured lines
of credit 11.85 3,282 399 12.16 3,854 414 10.74 4,173 396 9.49
Automobile 8.29 6,648 544 8.18 8,990 742 8.25 10,876 999 9.19
Other(1) 9.41 15,763 1,501 9.52 10,082 797 7.91 7,546 665 8.81
Commercial business 7.83 49,133 3,966 8.07 21,333 1,671 7.83 7,564 740 9.78
---- ------ ----- ------ ----- ------ ------
Total loans receivable 8.34 662,160 57,603 8.70 412,464 34,712 8.42 304,745 25,247 8.28
------- ------
Mortgage-related
securities(1) 7.06 821,436 57,216 6.97 753,745 49,058 6.51 598,345 33,723 5.64
Investment securities(1) 6.31 77,199 5,098 6.60 89,501 5,671 6.34 44,770 2,549 5.69
Other interest-earning
assets 5.20 8,283 504 6.08 13,608 792 5.82 7,330 380 5.18
----- --- ------- ------ ----- ------
Total interest-earning
assets 7.64% 1,569,078 $120,421 7.67% 1,269,318 $90,233 7.11% 955,190 $61,899 6.48%
==== ======== ==== ======= ==== ====== ====
Noninterest-earning assets 59,059 41,267 46,259
------ ------ ------
Total assets $1,628,137 $1,310,585 $1,001,449
========= ========= =========
Interest-bearing
liabilities:
Deposits 4.25% $745,410 $31,785 4.26% $691,667 $25,626 3.70% $638,794 $23,616 3.70%
FHLB advances 6.21 361,128 22,775 6.31 320,572 18,078 5.64 278,599 14,990 5.38
Other borrowings 5.65 357,064 22,099 6.19 179,871 9,780 5.44 15,427 473 3.07
--------- -------- -------- ------- -------- ------
Total interest-bearing
liabilities 5.06% 1,463,602 $76,659 5.24% 1,192,110 $53,484 4.49% 932,820 $39,079 4.19%
==== ======= ==== ======= ==== ======= ====
Noninterest-bearing
liabilities 17,163 12,666 9,861
-------- -------- --------
Total liabilities 1,480,765 1,204,776 942,681
Equity 147,372 105,809 58,768
--------- -------- --------
Total liabilities and
equity $1,628,137 $1,310,585 $1,001,449
========= ========== ==========
Net interest-earning assets $ 105,476 $ 77,208 $ 22,370
========= ======== ========
Net interest
income/interest
rate spread 2.58% $43,762 2.43% $ 36,749 2.62% $22,820% 2.29%
==== ======= ==== ======= ===== ====== ====
Net yield on
interest-earning
assets(2) 2.79% 2.90% 2.39%
==== ===== ====
Ratio of interest-earning
assets to interest-bearing
liabilities 107.21% 106.48% 102.40%
====== ====== ======
</TABLE>
- ---------------
(1) Includes assets available for sale.
(2) Net interest income divided by interest-earning assets.
Twelve
<PAGE> 7
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Company's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in
rate and volume. The combined effect of changes in both rate and volume has
been allocated proportionately to the change due to rate and the change due to
volume.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
---------------------------------- -----------------------------------
Increase Increase
(Decrease) Due To (Decrease) Due to
------------------ Total -------------------
Increase Total Increase
Rate Volume (Decrease) Rate Volume (Decrease)
----- ---------- ---------- ------ -------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earnings assets:
Loans receivable:
Mortgage loans:
Residential(1) $598 $12,541 $13,139 $ 39 $ 4,505 $ 4,544
Commercial 22 2,706 2,728 24 2,145 2,169
Construction 257 2,598 2,855 435 565 1,000
Consumer loans:
Home equity loans and lines of credit 444 939 1,383 472 456 928
Unsecured lines of credit 56 (71) (15) 21 (3) 18
Automobile (21) (177) (198) (94) (163) (257)
Other(1) 216 488 704 5 127 132
Commercial loans 31 2,264 2,295 25 906 931
----- ------- -------- ------ ------- --------
Total loans receivable 1,603 21,288 22,891 927 8,538 9,465
Mortgage-related securities(1) 4,456 3,702 8,158 5,731 9,604 15,335
Investment securities(1) 313 (886) (573) 317 2,805 3,122
Other interest-earning assets 58 (346) (288) 53 359 412
------ ------- -------- ------ ------- --------
Total interest-earning assets 6,430 23,758 30,188 7,028 21,306 28,334
------ ------- -------- ------ ------- --------
Interest-bearing liabilities:
Deposits 3,561 2,598 6,159 52 1,958 2,010
FHLB advances 2,510 2,187 4,697 749 2,339 3,088
Other borrowings 2,652 9,667 12,319 931 8,376 9,307
------ ------- -------- ------ ------- --------
Total interest-bearing liabilities 8,723 14,452 23,175 1,732 12,673 14,405
------ ------- -------- ------ ------- --------
Increase (decrease) in net interest income $(2,293) $ 9,306 $ 7,013 $5,296 $ 8,633 $ 13,929
======== ======= ======= ====== ======= ========
</TABLE>
- -------------
(1) Includes assets available for sale.
NET INCOME. The Company reported net income of $11.6 million or $1.82 per
fully diluted share for the year ended March 31, 1996, compared to net income
of $8.7 million or $0.97 per fully diluted share for the year ended March 31,
1995. (Per share amounts for the year ended March 31, 1995 are computed from
August 11, 1994 , the date the Company completed its initial public offering.)
The $2.9 million or 33.7% increase is primarily attributable to a $6.4 million
or 19.2% increase in net interest income after provision for loan losses and a
$3.9 million or 113.0% increase in other income, which was partially offset by
a $6.0 million or 26.2% increase in operating expenses and a $1.3 million or
26.1% increase in provision for income taxes.
The Company reported net income of $8.7 million for the year ended March 31,
1995, compared to net income of $1.9 million for the year ended March 31, 1994.
The $6.8 million or 366.9% increase is primarily attributable to an $11.6
million or 53.6% increase in net interest income after provision for loan
losses and a $2.5 million or 33.3% decrease in the provision for income taxes,
which was partially offset by a $5.2 million or 60.4% decrease in other income
and a $2.1 million or 10.0% increase in operating expenses.
Thirteen
<PAGE> 8
NET INTEREST INCOME. Net interest income before provision for loan losses
amounted to $43.8 million during the year ended March 31, 1996, a $7.0 million
19.1% increase over the comparable period in 1995. During the 1996 period, a
$30.2 million or 33.5% increase in total interest income more than offset a
$23.2 million or 43.3% increase in total interest expense. Net interest income
before provision for loan losses amounted to $36.7 million during the year
ended March 31, 1995, a $13.9 million or 61.0% increase over the comparable
period in 1994. During the 1995 period, a $28.3 million or 45.8% increase in
total interest income more than offset a $14.4 million or 36.9% increase in
total interest expense.
The $30.2 million increase in total interest income during the year ended March
31, 1996 over the prior comparable period was primarily due to a $20.2 million
or 60.2% increase in interest income earned on loans receivable and an
aggregate $12.4 million or 23.9% increase in interest income earned on
mortgage-related debt and equity securities and assets available for sale. This
increase was caused by a $249.7 million or 60.5% increase in the average
balance of total loans receivable (including assets available for sale), and a
$67.7 million or 9.0% increase in the average balance of total mortgage-related
securities (including assets available for sale), coupled with rate increases
in yields earned on the total loans receivable portfolio and the aggregate
mortgage-related securities portfolio of 28 and 46 basis points, respectively
(with 100 basis points equaling 1.0%). The increase in the average loans
receivable balance was the combination of residential real estate loans, which
increased by $125.0 million or 76.0%, and commercial and residential
construction loans, which are principally adjustable rate loans.
The $28.3 million increase in total interest income during the year ended March
31, 1995 over the prior comparable period was primarily due to an $11.2 million
or 50.3% increase in interest income earned on loans receivable and an
aggregate $14.8 million or 40.1% increase in interest income earned on
mortgage-related securities. This increase was caused by a $107.7 million or
35.3% increase in the average balance of total loans receivable, and a $155.4
million or 26.0% increase in the average balance of total mortgage-related
securities, coupled with an 87 basis point increase in yield earned on the
aggregate mortgage-related securities portfolio. The increase in the loans
receivable balance was primarily adjustable-rate residential loans where the
majority of the originated loan production was placed in the Bank's
held-to-maturity loan portfolio instead of being sold in the secondary market.
Because adjustable-rate loans generally earn lower yields than fixed-rate
loans, the adjustable-rate product favorably impacts the Bank's interest rate
sensitive assets, but causes a negative effect on the overall mortgage loan
yield compared to fixed-rate loans. Adjustable-rate loans were preferred by
borrowers since there was a general upward trend in interest rates during the
1994 fiscal year which reduced the refinancing volume compared to the prior
year. Additionally, interest income on investments increased $1.9 million or
82.9% due to a $44.7 million or 100.0% increase in the average balance and a 65
basis point increase in yield earned.
Total interest expense increased by $23.2 million or 43.3% for the year ended
March 31, 1996 over the prior comparable period. The increase in interest
expense is principally attributable to a $12.6 million increase in interest
expense on other borrowed money, principally reverse repurchase agreements, due
primarily to a $177.2 million or 98.5% increase in the average balance, and to
a lesser extent, an increase in the yield paid. Additionally, the increase in
total interest expense was caused by a $6.2 million or 24.0% increase in
interest expense on deposits as the average balance of deposits increased by
$100.2 million and the yield paid increased by 29 basis points, and a $4.7
million or 26.0% increase in interest expense on FHLB advances. The change was
caused primarily by a 67 basis point increase in the interest rate, and to a
lesser extent, a $40.5 million increase in the average balance. In the fourth
quarter of fiscal 1996, the Company prepaid approximately $20.0 million in FHLB
advances, extending the maturity by approximately two years and reducing its
cost of funds by approximately 225 basis points.
Total interest expense increased by $14.4 million or 36.9% for the year ended
March 31, 1995 over the prior comparable period. The increase in interest
expense is principally attributable to a $12.4 million increase in interest
expense on borrowed money, principally reverse repurchase agreements and FHLB
advances, primarily due to a $188.3 million or 64.0% increase in the aggregate
average balance, and to a lesser extent, a 46 basis point increase in yield
paid. Additionally, the increase in total interest expense was caused by a
$2.0 million or 8.5% increase in interest expense on deposits as the average
balance of deposits increased by $52.9 million, but the average interest rate
paid thereon remained constant during the comparative periods.
PROVISION FOR LOAN LOSSES. The Company establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed to be appropriate based upon an assessment of
prior loss experience, the volume and type of lending presently being conducted
by the Company, industry standards, past due loans, economic conditions in the
Company's market area generally and other factors related to the collectibility
of the Company's loan portfolio. For the year ended March 31, 1996, the
provision for loan losses amounted to $4.0 million, an increase of $600,000 or
17.7% from the comparable 1995 period. For the year ended March 31, 1995, the
provision for loan losses amounted to $3.4 million, an increase of $2.3 million
or 205.5% from the comparable 1994 period. The increased provision during the
year ended March 31, 1996 is a result of the growth in the Company's loan
receivable portfolio. At March 31, 1996, the allowance for loan losses
amounted to 156.2% of total non-performing loans and 1.6% of gross loans
receivable, as compared to 134.7% and 1.6%, respectively at March 31, 1995.
Although management utilizes its best judgment in providing for possible
losses, there can be no assurance that the Company will not have to increase
its provisions for loan losses in the future as a result of future increases in
non-performing loans or for other reasons, which could adversely affect the
Company's results of operations. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Company's provision for loan losses and the carrying
Fourteen
<PAGE> 9
value of its other non-performing assets based on their judgments about
information available to them at the time of their examination. The Company
was last examined by the Office of Thrift Supervision ("OTS") as of December
31, 1994. The Company was not required to increase its provision for loan
losses or adjust the carrying value of its other non-performing assets as a
result of such examination.
OTHER INCOME. Total other income more than doubled to $7.3 million for the
year ended March 31, 1996 as compared to $3.4 million for the comparable
period in 1995. The $3.9 million increase is primarily attributable to gains
on sales of mortgage-related and equity securities of $255,000 in the current
period compared to a $2.0 million net loss recognized in 1995, and a $2.3
million improvement in income from mortgage banking operations. The increase
was due primarily to the Company's adoption of SFAS No. 122, as discussed
above, in the amount of $760,000. Also, the Company sold a higher percentage
of originated loans, servicing released, in the secondary market, compared to
the prior year, thus resulting in increased gains. Partially offsetting these
gains was a $514,000 increase in loss on sale of other real estate owned.
Total other income decreased $5.2 million or 60.4% to $3.4 million for the
year ended March 31, 1995 from the comparable prior year. During the 1995
period, the Company recognized a $2.0 million net loss on the sale of assets
available for sale, compared to a net gain of $3.4 million during the prior
comparable year and a $611,000 net gain on other real estate activities (gains
on sale of other real estate owned and real estate held for development or
resale), compared to a $2.6 million net gain on other real estate activities
during the prior comparable year. The overall net loss on the sale of assets
available for sale in fiscal 1995 is mainly attributable to the sale of
approximately $78.6 million of mortgage-related and debt securities at a net
loss of $2.1 million. The Company used the proceeds from these asset sales to
purchase higher yielding, adjustable-rate mortgage-related securities in order
to enhance the yield on the Company's available for sale portfolio. The $2.0
million decline in net gains on other real estate activities from fiscal 1994
was primarily the result of reduced real estate sales activity in the 1995
fiscal year. Offsetting such declines in fiscal 1995 was income from mortgage
banking operations, which increased by $745,000 or 53.0% to $2.2 million at
March 31, 1995.
OPERATING EXPENSES. For the year ended March 31, 1996, operating expenses
totaled $29.1 million, an increase of $6.0 million or 26.2% over the prior
comparable period. Compensation and employee benefits increased by $1.8 million
or 15.2% from $12.1 million for the year ended March 31, 1995 to $13.9 million
for the year ended March 31, 1996. The change was attributable primarily to
increases in expenses related to stock benefit plans, the addition of personnel
from the Suburban and Hart operations since acquisition, and new business
center openings. Advertising expense increased by $1.1 million to $1.9 million
at March 31, 1996 due to increased emphasis in various consumer and commercial
product campaigns and de novo business center openings. The Company's
continued expansion of its business center network and acquisitions was the
primary reason for the $993,000 or 30.9% increase in net occupancy costs, which
totaled $4.2 million for the year ended March 31, 1996. Operationg expenses
also increased due to amortization of goodwill and other intangible assets
related to the purchases of a certificate of deposit portfolio and the Suburban
and Hart acquisitions in the current year. Included in the overall $1.2
million increase in other operating expenses is a $462,000 prepayment penalty
related to the debt restructuring discussed above, and various other expenses
related to the Suburban and Hart operations since acquisition, as well as a
full year of expenses related to being a publicly held company.
Operating expenses totaled $23.1 million for the year ended March 31, 1995, an
increase of $2.1 million or 10.0% over the prior comparable period. The
increase over the prior fiscal year was primarily due to a $1.5 million or
14.6% increase in compensation and employee benefits expense related to general
salary increases, stock benefit programs, and certain organizational
restructuring charges. Also reflected in the increase in total operating
expenses was a $360,000 or 12.6% increase in net occupancy costs associated
with the Company's improvements of its administrative facilities.
INCOME TAXES. Income tax expense totaled $6.3 million or 35.1% of pre-tax
earnings compared to $5.0 million or 36.0% of pre-tax earnings for the year
ended March 31, 1995, a $1.3 million or 26.1% increase primarily attributable
to additional pre-tax earnings during the year.
The Company incurred income tax expense of $5.0 million or 36% of pre-tax
earnings, during the year ended March 31, 1995, compared to $7.5 million during
fiscal 1994. The primary reason for the $2.5 million decrease was the
establishment of an additional deferred tax liability of $3.3 million during
fiscal 1994, which was done in anticipation of the Company's intention to
convert its charter to that of a commercial bank. The Company's action is
predicated on the Board of Directors' intention to undertake such a charter
conversion in the future, among other reasons, in order to have increased
regulatory flexibility to diversify its products and services as set forth in
its business plan. When the Company undertakes such a conversion, it will be
required to recapture and pay taxes on the approximately $17.8 million in bad
debt deductions previously taken. Because of the significant cash flow impact
of completing such a conversion (i.e., the required payment to the Internal
Revenue Service), and the pending legislation in Congress that could
significantly reduce such payment, the Company anticipates delaying the charter
conversion until such time as the execution of its business plan would
otherwise be inhibited. The Company is currently unable to establish a
definitive time frame for this event, because various causal factors, such as
commercial loan growth, asset mix, and certain other activities, are not solely
within the Company's control. Should the factors upon which the Board of
Directors based its intention to undertake such a charter conversion change in
such a manner that the expected benefits are no longer desirable, achievable or
necessary to accomplish the Company's business plan, the decision to complete
the charter conversion may be reconsidered.
Fifteen
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, repayments,
prepayments and maturities of outstanding loans and mortgage-related
securities, sales of assets available for sale, maturities of investment
securities and other short-term investments, and funds provided from
operations. While scheduled loan and mortgage-related securities repayments
and maturing investment securities and short-term investments are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by the movement of interest rates in general, economic conditions
and competition. The Company manages the pricing of its deposits to maintain a
deposit balance deemed appropriate and desirable. Although the Company's
deposits represent approximately 51.1% of its total liabilities at March 31,
1996, the Company has also utilized other borrowing sources, namely FHLB
advances and reverse repurchase agreements, which in the aggregate represent
approximately 47.9% of total liabilities at March 31, 1996. In addition to its
ability to obtain advances from the FHLB under several different credit
programs, the Company has established a line of credit with the FHLB, in an
amount not to exceed 10% of total assets and subject to certain conditions,
including the holding of a pre-determined amount of FHLB stock as collateral.
This line of credit is used from time to time for liquidity purposes. As an
additional source of funds, the Company has access to the Federal Reserve Bank
discount window.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as FHLB
overnight deposits. On a longer-term basis, the Company maintains a strategy
of investing in various mortgage-related securities and lending products.
During the year ended March 31, 1996, the Bank used its sources of funds to
primarily fund loan commitments and maintain a substantial portfolio of
mortgage-related securities, and to meet its ongoing commitments to pay
maturing savings certificates and savings withdrawals. At March 31, 1996, the
total approved loan commitments outstanding amounted to $41.5 million. At the
same date, commitments under unused lines and letters of credit amounted to
$77.7 million and the unadvanced portion of construction loans approximated
$61.4 million. Certificates of deposit scheduled to mature in one year or less
at March 31, 1996 totaled $318.1 million. Management of the Company believes
that the Company has adequate resources, including principal prepayments and
repayments of loans and mortgage-related securities, to fund all of its
commitments to the extent required. In addition, although the Company has
extended commitments to fund loans or lines and letters of credit,
historically, the Company has not been required to fund all of its outstanding
commitments. Management believes that a significant portion of maturing
deposits will remain with the Company.
The Company is required by the OTS to maintain average daily balances of
liquid assets and short-term liquid assets (as defined) in amounts equal to 5%
and 1%, respectively, of net withdrawable deposits and borrowings payable in
one year or less to assure its ability to meet demand for withdrawals and
repayment of short-term borrowings. The liquidity requirements may vary from
time to time at the direction of the OTS depending upon economic conditions and
deposit flows. The Company generally maintains a liquidity ratio of between 5%
and 7% of its net withdrawable deposits and borrowings payable in one year or
less. The Company's average monthly liquidity ratio and short-term liquid
assets for March 1996 was 5.6% and 2.9%, respectively.
CAPITAL RESOURCES. The OTS requires that the Company meet minimum regulatory
tangible, core and risk-based capital requirements. At March 31, 1996, the
Company exceeded all regulatory capital requirements. The following table sets
forth the Company's compliance with each of the regulatory capital requirements
at March 31, 1996.
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
----------- ----------- -----------
<S> <C> <C> <C>
Total Regulatory Capital $ 131,881 131,881 143,547
Minimum Required Regulatory Capital 26,461 52,960 75,011
----------- ---------- ----------
Excess Regulatory Capital $ 105,420 78,921 68,536
=========== ========== ==========
Regulatory Capital as a
Percentage of Assets (1) 7.48 % 7.48 % 15.31 %
Minimum Capital Required as a
Percentage of Assets 1.50 3.00 8.00
----------- ---------- ----------
Excess Regulatory Capital as a
Percentage of Assets 5.98 % 4.48 % 7.31 %
=========== ========== ===========
</TABLE>
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $1.8 billion. Risk-based capital is computed as a percentage of
total risk-weighted assets of $938 million.
Bancorp, as a separately incorporated holding company, does not have any
significant operations other than serving as sole stockholder of the Bank. On
an unconsolidated basis, Bancorp does not have paid employees. The Bancorp's
assets primarily consist of its investment in the Bank and has no material
sources of income other than the earnings of the Bank. The only expenses
incurred by Bancorp relate to its reporting obligations under the Securities
and Exchange Act of 1934, and related expenses as a publicly traded company.
Bancorp will be directly reimbursed by the Bank for all such expenses.
Management believes that Bancorp currently has adequate liquidity available to
respond to its obligations as the Bancorp itself engages only in limited
business operations independent of the Bank and its subsidiaries and therefore,
does not require a substantial amount of liquid assets. Under applicable
federal regulations, the Bank may pay dividends within certain limits and only
after notice to the OTS. See Note 17 of the Notes to Consolidated Financial
Statements.
Sixteen
<PAGE> 11
PROPOSED DEPOSIT INSURANCE PREMIUMS. Deposits of the Bank are currently
insured by the Savings Association Insurance Fund ("SAIF"). The Federal
Deposit Insurance Corporation ("FDIC") has established a new assessment rate
schedule with a premium range between 0 to 31 basis points for Bank Insurance
Fund ("BIF") insured institutions while retaining the existing assessment rate
of 23 to 31 basis points applicable to SAIF member institutions. In announcing
this premium reduction for BIF-insured institutions retroactive to May 1995,
the FDIC noted that the premium differential may have adverse competitive
consequences for SAIF members, such as the Bank, including lesser earnings as
compared to BIF-insured institutions and possible impaired ability to raise
funds in the capital markets.
Several alternatives to mitigate the effect of the BIF/SAIF premium disparity
have been suggested by the Administration, by members of Congress and by
industry groups. One such proposal included in the Balanced Budget Act of 1995
is that all SAIF-insured institutions pay a one-time charge of approximately
$0.85 for every $100 of assessable deposits as of March 31, 1996. If such
option were to be effected, the Company would recognize a one-time charge of
approximately $0.71 per share, after taxes. Such a special assessment for
SAIF-insured institutions will facilitate the recapitalization of the SAIF and
permit a reduction in future SAIF premiums which then will be comparable to the
recently announced assessment rates for BIF-insured institutions. However,
there can be no assurance that any of these alternatives to mitigate the
pending effect of the BIF/SAIF premium disparity will be enacted as proposed.
The Balanced Budget Act of 1995 was vetoed by the President for reasons
unrelated to the recapitalization of the SAIF.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles ("GAAP") which require the measurement of financial
position and operating results principally in terms of historical dollars,
without considering changes in the relative purchasing power of money over time
due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Bancorp's assets and liabilities
are critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
122, "Accounting for Mortgage Servicing Rights." This standard requires an
entity to recognize a separate asset for the right to service mortgage loans
for others regardless of how such servicing rights were acquired. Additionally,
an entity such as the Company is required to assess the fair value of these
assets at each reporting date to determine impairment. The Company adopted this
standard during the current fiscal year and included $760,000 in other income
from mortgage banking operations as a result of the adoption of SFAS 122.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes accounting and reporting standards for
stock-based employee compensation plans. In general, this statement requires a
fair value based method of accounting for stock-based awards or similar equity
instruments and encourages all entities to adopt this method of accounting for
all employee stock compensation plans. In the event that fair value accounting
is not adopted, SFAS 123 requires proforma disclosure of net income and
earnings per share as if fair value accounting had been adopted. The Company
does not anticipate adopting the fair value accounting option of SFAS 123, and
will instead provide the required proforma disclosures, as permitted starting
in fiscal 1997.
Seventeen
<PAGE> 12
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for the
years ended March 31, 1996 and 1995 (dollars in thousands, except per share
data):
<TABLE>
<CAPTION>
Quarters ended
--------------------------------------------------------------------------------------------
Year ended March 31, 1996 Year ended March 31, 1995
--------------------------------------------- ------------------------------------------
Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 28,984 $ 29,898 $ 29,706 $ 31,833 $ 16,810 $ 20,599 $ 24,863 $ 27,961
Interest expense 18,456 19,288 19,099 19,816 9,681 11,613 14,971 17,219
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 10,528 10,610 10,607 12,017 7,129 8,986 9,892 10,742
Provision for
loan losses 1,000 1,000 1,000 1,000 500 500 1,100 1,300
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
loan losses 9,528 9,610 9,607 11,017 6,629 8,486 8,792 9,442
Other income (expense) 1,164 1,914 1,755 2,436 843 1,345 1,427 (203)
Operating expenses 6,423 6,490 6,657 9,569 5,449 5,569 6,151 5,924
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,269 5,034 4,705 3,884 2,023 4,262 4,068 3,315
Income taxes 1,548 1,964 1,641 1,119 719 1,565 1,383 1,307
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,721 $ 3,070 $ 3,064 $ 2,765 $ 1,304 $ 2,697 $ 2,685 $ 2,008
====================================================================================================================================
Earnings per common and
common equivalent share $ 0.42 $ 0.46 $ 0.48 $ 0.45 N/A $ 0.26 $ 0.39 $ 0.32
====================================================================================================================================
Earnings per common share -
assuming full dilution $ 0.42 $ 0.46 $ 0.48 $ 0.46 N/A $ 0.26 $ 0.39 $ 0.32
====================================================================================================================================
</TABLE>
Earnings per share are not calculated until August 11, 1994, the date of the
Company's IPO.
For the fourth fiscal quarter ended March 31, 1996, interest income and net
interest income after provision for loan losses was increased by $3.9 million
quarter of fiscal 1995. The increase is primarily attributable to the growth
in average earning assets of approximately $166 million, coupled with an
improvement in the net interest spread from the fourth fiscal quarter of fiscal
1995.
Non-interest expenses increased by $3.6 million to $9.6 million for the quarter
ended March 31, 1996. Higher operating costs were incurred primarily as a
result of the Suburban and Hart acquisitions, specifically compensation and
occupancy expenses. Goodwill amortization also increased, due to the
aforementioned acquisitions as well as the purchase of a deposit portfolio in
fiscal 1996.
Eighteen
<PAGE> 13
MLF BANCORP, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MLF Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of MLF Bancorp, Inc. and subsidiaries (the "Company") as of March 31, 1996 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flow for each of the years in the three-year
period ended March 31, 1996. 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
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 MLF Bancorp, Inc.
and subsidiaries as of March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1996, in conformity with general accepted accounting
principles.
As described in notes 1 and 11 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, effective April 1, 1992.
/s/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
April 24, 1996
[KPMG PEAT MARWICK LLP LOGO]
Nineteen
<PAGE> 14
MLF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
March 31, 1996 and 1995 March 31,
(Dollars in Thousands, except share and per share data) -------------------------
Assets 1996 1995
-------------------------
<S> <C> <C>
Cash (including interest-bearing deposits of $11,283 and $3,248
at March 31, 1996 and 1995, respectively) $ 23,323 $ 20,007
Assets available for sale:
Mortgage-related, debt and equity securities 469,321 411,065
Loans 95,033 25,267
Investments (market value $24,946 and $45,320
at March 31, 1996 and 1995, respectively) 24,942 46,163
Mortgage-related securities (market value $401,231 and $453,455
at March 31, 1996 and 1995, respectively) 404,150 469,220
Loans receivable, net of allowance for loan loss
($13,124 and $9,111 at March 31, 1996 and 1995, respectively) 691,791 550,013
Accrued income receivable 12,085 10,684
Other real estate owned, net 2,043 1,010
Premises and equipment, at cost less accumulated depreciation
($13,774 and $11,704 at March 31, 1996 and 1995, respectively) 14,343 13,671
Mortgage servicing rights 21,865 12,823
Goodwill and other intangible assets 3,499 670
Other assets 3,417 2,859
----------- ------------
Total assets $ 1,765,812 $ 1,563,452
=========== ============
Liabilities and Equity
Deposits $ 830,997 $ 688,678
Advances from Federal Home Loan Bank 376,013 319,928
Securities sold under agreements to repurchase 402,212 390,613
Advance payments by borrowers for taxes and insurance 3,533 3,987
Accrued interest payable 5,371 3,832
Other liabilities 7,349 15,114
----------- ------------
Total liabilities $ 1,625,475 $ 1,422,152
Commitments and contingencies
Stockholders' Equity:
Preferred stock, no par value, authorized 5,000,000 shares;
no shares issued and outstanding - -
Common stock, $0.01 par value, authorized 30,000,000 shares;
7,273,800 shares issued 73 73
Additional paid-in capital 95,977 95,541
Common stock acquired by stock benefit plans (8,888) (10,632)
Treasury stock, at cost; 1,026,900 and 363,000 shares
at March 31, 1996 and 1995, respectively (20,531) (5,648)
Unrealized gain (loss) on mortgage-related, debt and equity
securities available for sale 120 (3,200)
Retained earnings 73,586 65,166
----------- ------------
Total stockholders' equity 140,337 141,300
----------- ------------
Total liabilities and stockholders' equity $ 1,765,812 $ 1,563,452
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
Twenty
<PAGE> 15
MLF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years ended March 31, 1996, 1995, and 1994
(Dollars in Thousands, except share and per share data) Year ended March 31,
---------------------------------
1996 1995 1994
----------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 53,678 $ 33,512 $ 22,298
Mortgage-related securities 31,585 29,340 24,206
Investments 2,136 4,180 2,285
Assets available for sale 32,518 22,409 12,730
Interest-bearing deposits 504 792 380
--------- -------- ---------
Total interest income 120,421 90,233 61,899
--------- -------- ---------
Interest expense:
Deposits 31,785 25,626 23,616
FHLB advances 22,775 18,078 14,990
Other borrowings 22,099 9,780 473
--------- -------- ---------
Total interest expense 76,659 53,484 39,079
--------- -------- ---------
Net interest income 43,762 36,749 22,820
Provision for loan losses 4,000 3,400 1,113
--------- -------- ---------
Net interest income after provision
for loan losses 39,762 33,349 21,707
--------- -------- ---------
Other income:
Retail fees and charges 1,551 1,615 1,339
Mortgage banking operations 4,420 2,151 1,406
Net gain (loss) on sale of:
Mortgage-related, debt and equity securities available
for sale 255 (2,059) 2,057
Other real estate owned (515) (1) 329
Real estate held for development
or resale 614 612 2,305
Rental income 583 676 691
Other 361 418 489
--------- -------- ---------
Total other income 7,269 3,412 8,616
--------- -------- ---------
</TABLE>
MLF BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Operations, Continued
Year ended March 31,
(Dollars in Thousands, except share and per share data) ---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Operating expenses:
General and administrative:
Compensation and employee
benefits $ 13,892 $ 12,059 $ 10,526
Advertising 1,939 850 889
Data processing 1,538 1,337 1,290
Federal insurance premiums 1,549 1,749 1,712
Amortization of goodwill and other intangible assets 1,412 368 368
Net occupancy costs 4,211 3,218 2,858
Professional fees 693 796 1,072
Other 3,905 2,716 2,285
----------- ---------- --------
Total operating expenses 29,139 23,093 21,000
----------- ---------- --------
Income before income taxes 17,892 13,668 9,323
Income taxes 6,272 4,974 7,461
----------- ---------- --------
Net income $ 11,620 $ 8,694 $ 1,862
=========== =========== ========
Earnings per common and common equivalent share $ 1.83 $ 0.97 (a) N/A
=========== =========== ========
Earnings per common and common equivalent share
assuming full dilution $ 1.82 $ 0.97 (a) N/A
=========== =========== ========
Weighted average number of shares outstanding - primary 6,347,679 6,728,481 N/A
=========== =========== ========
Weighted average number of shares outstanding - fully diluted 6,393,297 6,728,481 N/A
=========== =========== ========
</TABLE>
(a) Earnings per share is calculated since August 11, 1994, the date of the
initial public offering
See accompanying notes to consolidated financial statements.
Twenty-one
<PAGE> 16
MLF BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
Common
stock
Additional acquired by
Common paid-in stock benefit Treasury
stock capital plans stock
------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at March 31, 1993 $ - - - -
Net unrealized loss on mortgage-
related, debt and equity securities
available for sale, net of taxes - - - -
Net income - - - -
-------- ------ ------- -------
Balance at March 31, 1994 $ - - - -
Common stock issued 73 95,499 - -
Common stock acquired by stock
benefit plans - - (11,446) -
ESOP stock committed to be released - - 441 -
Excess of fair value above cost of
stock benefit plans - 42 - -
RRP stock amortization - - 373 -
Net unrealized loss on mortgage-
related, debt and equity securities
available for sale, net of taxes - - - -
Purchase of treasury stock - - - (5,648)
Net income - - - -
-------- ------ ------- -------
Balance at March 31, 1995 $ 73 95,541 (10,632) (5,648)
ESOP stock committed to be released - - 915 -
Excess of fair value above cost of
stock benefit plans - 436 - -
RRP stock amortization - - 829 -
Net unrealized gain on mortgage-
related, debt and equity securities
available for sale, net of taxes - - - -
Exercise of stock options - - - 152
Purchase of treasury stock - - - (15,035)
Dividends paid - - - -
Net income - - - -
-------- ------ ------- -------
Balance at March 31, 1996 $ 73 95,977 (8,888) (20,531)
======== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Unrealized gain (loss)
on mortgage-
related, debt and
equity securities Total
available for sale Retained stockholders'
(net of taxes) earnings equity
---------------------------------------------------------
<S> <C> <C> <C>
Balance at March 31, 1993 2,446 54,610 57,056
Net unrealized loss on mortgage-
related, debt and equity securities
available for sale, net of taxes (4,940) - (4,940)
Net income - 1,862 1,862
------ ------ -------
Balance at March 31, 1994 (2,494) 56,472 53,978
Common stock issued - - 95,572
Common stock acquired by stock
benefit plans - - (11,446)
ESOP stock committed to be released - - 441
Excess of fair value above cost of
stock benefit plans - - 42
RRP stock amortization - - 373
Net unrealized loss on mortgage-
related, debt and equity securities
available for sale, net of taxes (706) - (706)
Purchase of treasury stock - - (5,648)
Net income - 8,694 8,694
------ ------ -------
Balance at March 31, 1995 (3,200) 65,166 141,300
ESOP stock committed to be released - - 915
Excess of fair value above cost of
stock benefit plans - - 436
RRP stock amortization - - 829
Net unrealized gain on mortgage-
related, debt and equity securities
available for sale, net of taxes 3,320 - 3,320
Exercise of stock options - (6) 146
Purchase of treasury stock - - (15,035)
Dividends paid - (3,194) (3,194)
Net income - 11,620 11,620
------ ------ -------
Balance at March 31, 1996 120 73,586 140,337
====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
Twenty-two
<PAGE> 17
MLF BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Year ended March 31,
(Dollars in Thousands) ---------------------------------------------
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Net cash flows from operating activities:
Net income $ 11,620 $ 8,694 $ 1,862
---------- -------- ---------
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of:
Goodwill and other intangible assets $ 1,412 $ 368 $ 368
Deferred loan
origination fees (2,345) (1,308) (775)
Premiums and discounts on
loans, mortgage-related
securities, investments,
and assets available for sale 1,063 3,199 6,378
Mortgage servicing rights 3,703 1,535 2,069
Common stock acquired by
stock benefit plans 2,326 856 -
Provision for loan losses 4,000 3,400 1,113
Net (gain) loss on sales of:
Mortgage-related, debt and equity
securities available for sale (255) 2,059 (2,057)
Loans available for sale (2,129) (87) (1,346)
Real estate held for development
or resale and other real estate owned (99) (611) (2,634)
Depreciation and amortization of
premises and equipment 2,156 1,616 1,335
Increase/decrease in:
Loans available for sale (67,637) 6,183 (1,502)
Accrued income receivable (1,401) (4,636) 141
Deferred income taxes (4,554) (1,222) 3,396
Other assets (1,717) 913 618
Accrued interest payable 1,539 2,345 (103)
Other liabilities (5,467) 8,967 3,737
---------- -------- ---------
Total adjustments (69,405) 23,577 10,738
---------- -------- ---------
Net cash (used) provided by operating activities (57,785) 32,271 12,600
---------- -------- ---------
</TABLE>
MLF BANCORP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows, Continued
Year ended March 31,
(Dollars in Thousands) ------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities:
Net (increase) decrease in loans receivable $ (144,510) $ (289,673) $ 18,565
Proceeds from sales of:
FHLB stock 12,907 16,382 6,873
Mortgage-related, debt and equity securities
available for sale 100,801 76,541 157,222
Proceeds from maturities, calls or repayments of:
Mortgage-related securities 56,735 62,708 274,310
Mortgage-related, debt and equity securities
available for sale 87,333 53,118 69,236
Investments 30,000 - -
Purchases and originations of:
Investments (21,681) (48,887) (5,817)
Mortgage-related securities (49,834) (120,268) (290,325)
Mortgage-related, debt and equity securities
available for sale (183,458) (305,517) (265,608)
Mortgage servicing rights (12,745) (12,316) (772)
Dispositions of real estate held for
development or resale, net 1,773 3,402 6,034
Net (increase) decrease in other real estate owned (801) 255 708
Proceeds from sale of other real estate owned 330 2,338 3,092
Excess of liabilities assumed over assets acquired (3,148) - -
Purchases of premises and equipment (2,828) (2,377) (1,253)
-------------- ---------- ---------
Net cash used in investing activities (129,126) (564,294) (27,735)
-------------- ---------- ---------
</TABLE>
(Continued)
Twenty-three
<PAGE> 18
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows, Continued
Year ended March 31,
(Dollars in Thousands) ---------------------------------------
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 112,301 $ 9,153 $ 60,832
Proceeds from deposits purchased 28,925 - -
Dividends paid (3,194) - -
Proceeds from securities sold under
agreements to repurchase 2,445,548 1,791,246 98,854
Payments of securities sold under
agreements to repurchase (2,433,949) (1,400,795) (118,135)
Proceeds from FHLB advances 4,165,625 1,040,855 248,983
Payments of FHLB advances and other (4,109,540) (977,560) (277,788)
Net (decrease) increase in advance payments
by borrowers for taxes and insurance (454) 2,453 (1,376)
Net proceeds from issuance of common stock - 95,572 -
Common stock acquired by stock benefit plans, net - (11,446) -
Purchase of treasury stock (15,035) (5,648) -
-------------- ---------- ---------
Net cash provided by financing activities 190,227 543,830 11,370
-------------- ---------- ---------
Net increase (decrease) in cash and cash equivalents $ 3,316 $ 11,807 $ (3,765)
Cash and cash equivalents:
Beginning of period 20,007 8,200 11,965
----------- -------- ----------
End of period $ 23,323 $ 20,007 $ 8,200
=========== ======== ==========
Supplemental disclosure:
Cash payments for interest $ 75,120 $ 51,139 $ 39,176
Cash payments (refunds) for income taxes 14,498 (700) 773
Net cash paid for companies acquired 3,200 - -
Transfer of mortgage-related securities
to mortgage-related, debt and equity
securities available for sale 56,828 - -
Transfer of investments to mortgage-
related, debt and equity securities
available for sale - - 102
Transfer of loans receivable into other real estate owned 1,077 529 3,142
Net unrealized gain (loss) on
mortgage-related, debt and equity
securities available for sale 5,576 (1,055) (8,533)
Tax effect on unrealized gain (loss) on
mortgage-related, debt and equity
securities available for sale 2,256 (349) (3,593)
</TABLE>
See accompanying notes to consolidated financial statements.
Twenty-four
<PAGE> 19
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On January 19, 1994, the Board of Directors of Main Line Bank (the
"Bank") adopted a Plan of Conversion to convert from a federally
chartered mutual savings bank to a federally chartered stock savings
bank with the concurrent formation of MLF Bancorp, Inc. (the
"Bancorp"), a unitary savings and loan holding company (the
"Conversion"). The Conversion was completed on August 11, 1994
whereby Bancorp issued 7,273,800 shares of its common stock in a
public offering to the Bank's eligible depositors and borrowers and
the MLF Bancorp Employee Stock Ownership Plan (the "ESOP") and
resulted in proceeds to Bancorp of $95,572,000, net of $2,624,000 of
costs associated with the Conversion.
BUSINESS
Bancorp's principal subsidiary, Main Line Bank, is a
federally-chartered stock savings bank conducting business from its
branch bank system located in Chester, Delaware, and Montgomery
Counties, Pennsylvania. The Bank is subject to competition from other
financial institutions and other companies which provide financial
services. The Bank and Bancorp are subject to the regulations of
certain federal agencies and undergo periodic examinations by those
regulatory authorities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bancorp,
the Bank and the Bank's wholly-owned subsidiaries (collectively
referred to as the "Company"). All significant intercompany
transactions have been eliminated in consolidation. Additionally,
certain reclassifications have been made in order to conform with the
current year's presentation. The accompanying consolidated financial
statements have been prepared on an accrual basis.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. 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 those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses, the valuation of other real estate owned, and the
valuation of deferred tax assets as well as the effect of prepayments
on mortgage servicing rights and premiums and discounts associated
with investments and mortgage-related securities. Management believes
that the allowance for loan losses, and the valuations of other real
estate owned and deferred tax assets are adequate, and that the effect
of prepayments on mortgage servicing rights and premiums and discounts
associated with investments and mortgage-related securities has been
adequately evaluated. Various regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses, and valuation of other real estate owned.
CASH
For purposes of the statement of cash flows, cash and cash equivalents
include cash and interest-bearing deposits. The Company maintains
cash deposits in other depository institutions which occasionally
exceed the amount of deposit insurance available. Management
periodically assesses the financial condition of these institutions.
The Company is required to maintain certain daily reserve balances in
accordance with Federal Reserve Board requirements. Aggregate
reserves (in the form of vault cash) were maintained to satisfy
federal regulatory requirements at March 31, 1996.
ASSETS AVAILABLE FOR SALE
Included in assets available for sale are any investments, loans,
debt, and/or mortgage-related securities which the Company believes
may be involved in interest rate risk, liquidity, or other
asset/liability management decisions which might reasonably result in
such assets not being held until maturity.
Investments, (including marketable equity securities) debt and/or
mortgage-related securities available for sale are carried at fair
value with net unrealized gains and losses included, net of income
taxes, in stockholders' equity.
During the years ended March 31, 1996 and 1995, the Company originated
certain short-term fixed and adjustable rate single family residential
mortgages specifically for inclusion in its portfolio. The Company
periodically reevaluates its policy and revises it as deemed
necessary.
Loans available for sale are accounted for at the lower of cost or
market which is determined on an aggregate basis, with depreciation,
if any, recorded in the statement of operations. Realized gains and
losses on assets available for sale are computed using the specific
identification method.
INVESTMENTS AND MORTGAGE-RELATED SECURITIES
Investments and mortgage-related securities, including equity
securities which are not readily marketable, are stated at cost,
adjusted for the amortization of premiums and the accretion of
discounts using a method which approximates level yield, because
management has the ability and the intent to hold such securities
until maturity. The Company is required to maintain stock in the
Federal Home Loan Bank of Pittsburgh ("FHLB") in an amount of 5% of
total borrowings from the FHLB. Such stock is carried by the Company
at cost.
Twenty-five
<PAGE> 20
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
LOANS RECEIVABLE
Loans held to maturity are stated at the amount of the unpaid
principal balance net of loan origination fees and certain direct
origination costs. These fees and costs are deferred and amortized
over the contractual life of the related loans using a level yield
method over the period to maturity.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the loan portfolio.
Management believes that the allowance for loan losses is adequate.
Management's periodic evaluation is based upon analysis of the
portfolio, past loss experience, current economic conditions, and
other relevant factors. While management uses the best information
available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially
from the assumptions used in making the evaluation. In addition,
various regulatory agencies as an integral part of their examination
process, periodically review the allowance for loan losses. Such
agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgments of information
which is available to them at the time of their examination.
ACCRUED INTEREST
Interest on loans is credited to income as it is earned. Generally,
interest income is not accrued for loans delinquent 90 days or
greater. Payments received on nonaccrual and impaired loans are
applied to the outstanding principal balance. The Company does not
recognize interest on impaired loans.
OTHER REAL ESTATE OWNED, NET
Real estate acquired through foreclosure is classified as other real
estate owned. Other real estate owned is carried at the lower of cost
or fair value, less estimated selling costs.
Fair value is generally determined through the use of independent
appraisals. In certain cases, internal cash flow analyses are used as
the basis for fair value, if such amounts are lower than the appraised
values.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost. Depreciation and
amortization are generally computed on the straight-line method. The
estimated useful lives used to compute depreciation and amortization
are 40 to 50 years for buildings and 3 to 10 years for furniture and
equipment. The cost of maintenance and repairs is charged to expense
as incurred. Significant renewals and betterments are capitalized.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights represent the carrying value of the rights
to service mortgage loans for others. The mortgage servicing rights
are amortized against loan servicing fee income on an accelerated
basis in proportion to, and over the period of, estimated net future
loan servicing fee income, which periods initially do not exceed seven
years. Service fee income is recognized when the related loan
payments are collected. Management on a quarterly basis evaluates and
makes necessary adjustments to the remaining balances of mortgage
servicing rights, if the fair value of the disaggregated servicing
rights indicate that the carrying value is not considered recoverable.
Assumptions utilized in the quarterly evaluations are based on
current prepayment and investor rates of return provided by an
independent investment advisor.
Effective April 1, 1995, the Company adopted SFAS No. 122 "Accounting
for Mortgage Servicing Rights." This standard prospectively requires
the Bank, which services mortgage loans for others in return for a
servicing fee, to recognize these servicing rights as assets,
regardless of how such assets were acquired. Additionally, the
Company is required to assess the fair value of these assets at each
reporting date to determine impairment. As a result of the adoption
of SFAS 122, the Company included $760,000 in income from mortgage
banking operations for the year ended March 31, 1996.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, which represents the excess cost over fair value of assets
acquired and liabilities assumed, is being amortized to expense using
the straight-line method over periods not exceeding 15 years. Other
intangibles consisted of core deposit premium and are amortized over
the weighted average rate of maturity not to exceed 2 years.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income
tax return. The Company has adopted SFAS 109 "Accounting for Income
Taxes" effective April 1, 1992. Deferred tax assets and liabilities
are recognized for the future consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, as well as operating
loss and tax credit carryforwards. Deferred tax assets are recognized
for future deductible temporary differences and tax loss and credit
carryforwards if their realization is "more likely than not."
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.
Twenty-six
<PAGE> 21
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995, and 1994
(2) INVESTMENTS
Investments at March 31, 1996 and 1995 consisted of the following:
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
value gains losses value
-------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities:
Federal Home Loan Bank stock $ 18,802 - - $ 18,802
Other 140 - - 140
Debt securities:
U.S. government agency notes 6,000 $ 4 - 6,004
--------- --- ---- --------
$ 24,942 $ 4 - $ 24,946
========= === ==== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995
-------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
value gains losses value
-------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities:
Federal Home Loan Bank stock $ 15,997 - - 15,997
Other 166 - - 166
Debt securities:
U.S. government agency notes 30,000 - $ (843) 29,157
--------- --- ------ --------
$ 46,163 - $ (843) $ 45,320
========= === ====== ========
</TABLE>
Proceeds from the sales of investment securities during the years
ended March 31, 1996, 1995 and 1994 were $12,907,000, $16,382,000 and
$6,873,000, respectively. Such proceeds resulted from the mandatory
redemption of FHLB stock. No gains or losses were realized on those
sales.
As of March 31, 1996, the debt security totalling $2,000,000 has a
scheduled maturity date within one year, and the debt security
totalling $4,000,000 has a scheduled maturity date greater than 5
years but within 10 years.
The FHLB maintains a blanket lien on investment securities as
collateral for borrowings from the FHLB.
Accrued interest receivable on investment securities was $240,000 and
$828,000 at March 31, 1996 and 1995, respectively.
(3) MORTGAGE-RELATED SECURITIES
Mortgage-related securities at March 31, 1996 and 1995 consisted of
the following:
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1996
----------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
value gains losses value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 149,990 $ 762 $ 1,950 $ 148,802
Federal National Mortgage
Association (FNMA) 150,286 1,501 1,670 150,117
Government National Mortgage
Association (GNMA) 8,397 189 - 8,586
Privately issued 1,785 - 50 1,735
Collateralized mortgage obligations 93,692 - 1,701 91,991
------------ ------- ------- ---------
$ 404,150 $ 2,452 $ 5,371 $ 401,231
============ ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995
----------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
value gains losses value
----------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 194,970 $ 9 $ 6,837 $ 188,142
Federal National Mortgage
Association (FNMA) 190,085 - 5,865 184,220
Government National Mortgage
Association (GNMA) 27,014 40 103 26,951
Privately issued 2,043 - 91 1,952
Collateralized mortgage obligations 55,108 - 2,918 52,190
------------ ---- -------- ---------
$ 469,220 $ 49 $ 15,814 $ 453,455
============ ==== ======== =========
</TABLE>
There were no sales of mortgage-related securities during the years
ended March 31, 1996, 1995 and 1994. In December 1995, the Company
transferred $56.8 million of mortgage-related securities to
mortgage-related, debt and equity securities available for sale. This
transfer was in accordance with a special reassessment provision
contained within a Special Report issued by the Financial Accounting
Standards Board ("FASB").
Certain mortgage-related securities are pledged to secure financings
as described in notes 8 and 9. Privately issued mortgage-backed
securities are rated AA or better by bond rating agencies. The loans
which collateralize the mortgage-related securities are geographically
disbursed throughout the United States.
Collateralized mortgage obligations totaling $78,384,000 and
$55,108,000 were pledged as additional collateral for municipal jumbo
certificate deposits at March 31, 1996 and 1995, respectively.
Accrued interest receivable on mortgage-related securities was
$2,916,000 and $3,464,000 at March 31, 1996 and 1995, respectively.
Twenty-seven
<PAGE> 22
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995, and 1994
(4) ASSETS AVAILABLE FOR SALE
Assets available for sale at March 31, 1996 and 1995 consisted of the
following:
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1996
-------------------------------------------------------------
Gross Gross Carrying
unrealized unrealized (fair)
Cost gains losses value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-related, debt and equity securities:
Mortgage-related securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 234,905 $ 1,768 $ 1,873 $ 234,800
Federal National Mortgage
Association (FNMA) 114,260 1,683 425 115,518
Government National Mortgage
Association (GNMA) 41,236 4 361 40,879
Privately-issued 39,376 387 405 39,358
Debt securities:
Asset Management Funds for
Financial Institutions, Inc. 12,242 - 416 11,826
U.S. Government agency debentures 18,084 - 322 17,762
Equity securities:
FHLMC preferred stock 5,000 60 - 5,060
FNMA stock 1,750 13 - 1,763
Other equity securities 2,256 99 - 2,355
--------------- ------- ------- ---------
$ 469,109 $ 4,014 $ 3,802 $ 469,321
=============== ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995
-------------------------------------------------------------
Gross Gross Carrying
unrealized unrealized (fair)
Cost gains losses value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-related, debt and equity securities:
Mortgage-related securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 205,354 $ 651 $ 2,618 $ 203,387
Federal National Mortgage
Association (FNMA) 141,627 338 1,591 140,374
Government National Mortgage
Association (GNMA) 9,075 - 274 8,801
Privately-issued 22,071 - 200 21,871
Debt securities:
Asset Management Funds for
Financial Institutions, Inc. 11,496 - 545 10,951
U.S. Government agency debentures 21,136 7 857 20,286
Equity securities:
FHLMC preferred stock 5,000 - 350 4,650
FNMA stock - - - -
Other equity securities 671 74 - 745
--------------- ------- ------- ---------
$ 416,430 $ 1,070 $ 6,435 $ 411,065
=============== ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1996
-----------------------------------------------------
Gross Gross
Carrying unrealized unrealized Fair
value gains losses value
-----------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable:
Residential mortgage loans $ 84,501 - - $ 84,501
Consumer-education loans 10,532 - - 10,532
-------- ---- ---- --------
$ 95,033 - - $ 95,033
======== ==== ==== ========
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995
-----------------------------------------------------
Gross Gross
Carrying unrealized unrealized Fair
value gains losses value
-----------------------------------------------------
<S> <C> <C> <C> <C>
Loans receivable:
Residential mortgage loans $ 17,624 - - $ 17,624
Consumer-education loans 7,643 - - 7,643
-------- --- --- --------
$ 25,267 - - $ 25,267
======== === === ========
</TABLE>
Proceeds from sales of assets available for sale during the year ended
March 31, 1996 were $719,430,000. Gross gains of $6,291,000 and gross
losses of $4,811,000 were realized on those sales.
Proceeds from sales of assets available for sale during the year ended
March 31, 1995 were $284,773,000. Gross gains of $5,098,000 and gross
losses of $7,070,000 were realized on those sales.
Proceeds from sales of assets available for sale during the year ended
March 31, 1994 were $584,596,000. Gross gains of $12,526,000 and
gross losses of $9,123,000 were realized on those sales.
As of March 31, 1996, the U.S. government agency debt securities have
scheduled maturities of $13,000,000 due after one year but within five
years and $5,084,000 due after five years but within ten years.
Accrued interest receivable on assets available for sale was
$4,290,000 and $3,275,000 at March 31, 1996 and 1995, respectively.
Twenty-eight
<PAGE> 23
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(5) LOANS RECEIVABLE
Loans receivable at March 31, 1996 and 1995 consisted of the
following:
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31,
--------------------
1996 1995
--------------------
<S> <C> <C>
Real estate loans:
One- to four-family $ 344,713 $ 326,029
Construction and land:
Residential 110,693 59,112
Commercial 14,625 15,891
Commercial real estate 109,135 69,779
Multi-family 11,348 10,812
--------- ---------
Total real estate loans 590,514 481,623
--------- ---------
Other loans:
Consumer:
Home equity and equity lines of credit 92,139 76,393
Unsecured lines of credit 3,091 3,527
Automobile 5,926 7,710
Other 9,098 5,734
Commercial 69,647 33,328
--------- ---------
Total other loans 179,901 126,692
--------- ---------
770,415 608,315
Loans in process (construction loans) (61,389) (45,613)
Deferred loan fees (4,111) (3,578)
Allowance for loan losses (13,124) (9,111)
--------- ---------
$ 691,791 $ 550,013
========= =========
</TABLE>
Included in loans receivable are loans past due 90 days or more in the
amounts of $8,402,000, $6,762,000 and $5,339,000 at March 31, 1996,
1995 and 1994, respectively. Interest income that would have been
recognized on these nonaccrual loans had they been current in
accordance with their original terms is $1,081,000, $642,000 and
$429,000, respectively. Interest income that was recognized on these
nonaccrual loans is $96,000, $227,000 and $77,000, respectively.
The Company is principally a local lender and, therefore, has a
significant concentration of loans to borrowers who reside in and/or
which are collateralized by real estate located in the suburban
Philadelphia area. In addition, the Company has a concentration of
residential and commercial construction real estate loans to five
local real estate developers totaling approximately $12,500,000 in
additional commitments outstanding and approximately $34,272,000 in
outstanding balances at March 31, 1996.
Activity in the allowance for loan losses for the years ended March
31, 1996, 1995 and 1994 consisted of the following:
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31,
-------------------------
1996 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 9,111 $ 7,337 $ 7,488
Provision for loan losses 4,000 3,400 1,113
Charge-offs (1,188) (1,761) (1,318)
Recoveries 181 135 54
Allowance acquired from Suburban 1,020 - -
--------------------------------------------------------------
Balance, end of year $ 13,124 $ 9,111 $ 7,337
==============================================================
</TABLE>
As of March 31, 1996 and 1995, the recorded investment in the loans
for which impairment has been recognized in accordance with SFAS 114
is $452,000 and $3,704,000, respectively. The average investment in
such impaired loans was $770,000, $4,715,000, and $3,927,000 for the
years ended March 31, 1996, 1995 and 1994, respectively. There is no
allowance for loan losses pertaining to these impaired loans because
the Company provided and charged-off $346,000 and $1,425,000 of such
loans during the years ended March 31, 1996 and 1995, respectively.
The aggregate amount of loans by the Company to its directors and
executive officers, including loans to related persons and entities,
was $674,000 and $601,000 at March 31, 1996 and 1995, respectively. As
of March 31, 1996 and 1995, two directors and four of the Company's
directors and executive officers had mortgage loans outstanding
totaling $356,000 and $254,000, respectively, with preferential
interest rate terms. These loans are charged a variable rate of
interest based on the Company's cost of deposits plus 1%. At March 31,
1996, the interest rate charged on these mortgage loans was 5.25%.
These loans were originated prior to August 1989, and therefore are
not subject to the restrictions on director and officer loans imposed
by the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA").
An analysis of the activity of loans to directors and executive
officers follows:
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------
1996 1995
------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 601 $ 946
Increase due to change in qualifying officers 118 -
New loans and line of credit advances 111 114
Repayments (156) (459)
------------------------------------------------------------------------------------
Balance, end of year $ 674 $ 601
====================================================================================
</TABLE>
Accrued interest receivable on loans receivable was $4,639,000 and
$3,117,000 at March 31, 1996 and 1995, respectively.
Twenty-nine
<PAGE> 24
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(6) MORTGAGE SERVICING ACTIVITIES
During the years ended March 31, 1996, 1995, and 1994, the Company
purchased the servicing rights of whole loans with balances of
$858,398,000, $801,920,000, and $54,287,000, respectively. A summary
of mortgage servicing rights activity follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------
1996 1995 1994
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 12,823 $ 2,042 $ 3,339
Acquisitions 11,985 12,316 772
Originated servicing rights 760 - -
Amortization (3,703) (1,535) (2,069)
-------------------------------------------------------------------------------------------------------------
Balance, end of year $ 21,865 $ 12,823 $ 2,042
=============================================================================================================
</TABLE>
The Company services real estate loans for investors which are not
included in the consolidated financial statements. The total amount
of such loans serviced for others was approximately $2,411,685,000,
$1,683,089,000, and $907,505,000, at March 31, 1996, 1995, and 1994
respectively.
The Company is required to remit to investors the monthly principal
collected and scheduled interest payments on most mortgages, including
those for which no interest payments have been received due to
delinquency. As of March 31, 1996 and 1995, approximately $249,000
and $191,000, respectively, had been advanced on delinquent serviced
loans. Substantially all of these loans were sold without recourse
and are guaranteed by FHLMC or FNMA.
(7) DEPOSITS
The major types of savings deposits by weighted interest rates,
amounts, and the percentages of such types to total savings deposits
are as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1996 March 31, 1995
------------------------------ -------------------------------------
Weighted Weighted
interest % of interest % of
rate Amount total rate Amount total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits 0% $ 81,767 9.84% 0% $ 53,836 7.82%
Money market deposits and
NOW accounts 2.62 155,115 18.67 2.68 122,728 17.82
Passbook and statement
savings accounts 2.22 88,011 10.59 2.42 94,649 13.74
----------------------------------------------------------------------------------------------------------------
1.85 324,893 39.10 2.06 271,213 39.38
Certificates of deposit 5.80 506,104 60.90 5.63 417,465 60.62
----------------------------------------------------------------------------------------------------------------
4.25% $830,997 100.00% 4.22% $ 688,678 100.00%
================================================================================================================
</TABLE>
A summary of certificates by maturity is as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31,
----------------------
1996 1995
------------------------------------------------------------------
<S> <C> <C>
Within one year $ 318,107 $ 225,184
One to two years 100,745 97,283
Two to three years 29,817 43,820
Three to four years 32,046 17,187
Four to five years 19,132 31,153
Thereafter 6,257 2,838
------------------------------------------------------------------
$ 506,104 $ 417,465
==================================================================
</TABLE>
Interest expense on savings deposits is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-------------------------------
1996 1995 1994
----------------------------------------------------------------------------
<S> <C> <C> <C>
Money market deposits and NOW accounts $ 3,548 3,165 3,783
Passbook and statement savings accounts 1,933 2,752 3,760
Certificate accounts 26,304 19,709 16,073
----------------------------------------------------------------------------
$ 31,785 25,626 23,616
============================================================================
</TABLE>
Included in deposits as of March 31, 1996 and 1995 are deposits
greater than $100,000 of approximately $151,243,000 and $104,444,000,
respectively.
Thirty
<PAGE> 25
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(8) ADVANCES FROM FEDERAL HOME LOAN BANK
Under the terms of its collateral agreement with the FHLB, the Company
maintains otherwise unencumbered qualifying assets in an amount at
least as much as its advances from the FHLB. The Company's FHLB stock
is also pledged to secure these advances. At March 31, 1996 and 1995
such advances mature as follows (dollars in thousands):
<TABLE>
<CAPTION>
Weighted Weighted
average March 31, average March 31
Due by March 31, interest rate 1996 interest rate 1995
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 - % $ - 5.82 % $160,847
1997 6.01 229,513 6.88 110,000
1998 6.53 77,000 6.69 37,000
1999 6.07 17,750 - -
2000 5.81 27,000 5.00 81
2001 - - - -
Thereafter 7.45 24,750 7.95 12,000
------------------------------------------------------------------------
6.21 % $ 376,013 6.36 % $319,928
========================================================================
</TABLE>
The Company has an available line of credit ("Flexline") for borrowing
from the FHLB not to exceed 10% of total assets, of which $0 and
$30,000,000 were outstanding at March 31, 1996 and 1995, respectively.
The Flexline commitment was executed in December 1991 and expires in
September 1996.
The Company has entered into a warehouse loan participation program
for residential mortgage loan originations. Funds to purchase these
single-family residential loans are obtained from an available line of
credit from the FHLB totaling $96,000,000 at March 31, 1996, of which
$51,513,000 and $10,494,000 was outstanding at March 31, 1996 and
1995, respectively. This line of credit commitment expires in March
1997. The rate paid is determined by a daily variable advance rate in
effect at the FHLB and was 5.92% at March 31, 1996.
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company entered into sales of securities under agreements to
repurchase (the Agreements), which are treated as financings. The
obligation to repurchase securities sold is reflected as a liability
in the consolidated statements of financial condition. The dollar
amount of securities underlying the Agreements remains in the
respective asset accounts as mortgage-related securities although the
securities underlying the Agreements are delivered to the broker who
arranged the transactions. The Agreements call for the repurchase of
the identical securities.
Information relating to the Agreements as of March 31, 1996 and 1995
is summarized as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
March 31, 1996
---------------------------------------------------------------------
Loan Asset Asset Weighted
maturity carrying market Loan average
Asset date value value amount loan rate
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FNMA and FHLMC certificates Overnight $ 33,489 $ 33,318 $ 30,019 4.75 %
FNMA and FHLMC certificates Within 30 days 114,347 114,824 111,605 5.34
FNMA and FHLMC certificates From 31-90 days 42,636 42,022 38,945 5.86
FNMA, FHLMC and GNMA certificates Over 90 days 251,594 251,952 221,643 5.90
------------------------------------------------------------------------------------------------------------
$ 442,066 $ 442,116 $ 402,212 5.65 %
============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
March 31, 1995
---------------------------------------------------------------------
Loan Asset Asset Weighted
maturity carrying market Loan average
Asset date value value amount loan rate
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FNMA and FHLMC certificates Within 30 days $ 350,665 344,408 330,919 6.05 %
FNMA and FHLMC certificates From 31-90 days 32,525 32,638 31,048 6.07
FHLMC certificates Over 90 days 31,489 30,716 28,646 7.78
------------------------------------------------------------------------------------------------------------
$ 414,679 407,762 390,613 6.18 %
============================================================================================================
</TABLE>
The maximum amount outstanding at any month-end of the Agreements
during fiscal years 1996 and 1995 was $406,310,000 and $394,503,000,
respectively. The average amount of outstanding Agreements during
fiscal years 1996 and 1995 was $357,064,000 and $161,777,000,
respectively.
Thirty-one
<PAGE> 26
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for
the Company's financial instruments whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. The
fair values may not represent actual values of the financial
instruments that could have been realized as of year end or that will
be realized in the future.
CASH AND CASH EQUIVALENTS: For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
INVESTMENTS AND MORTGAGE-RELATED SECURITIES AND ASSETS AVAILABLE FOR
SALE: The fair value of investments and mortgage-related securities
is estimated based on bid prices published in financial newspapers or
bid quotations received from securities dealers. The carrying amounts
of stocks with no stated maturity approximate fair value because
shares may be redeemed at par. The fair value of loans available for
sale is estimated based on forward commitments to sell.
LOANS RECEIVABLE: The fair value of performing loans receivable is
estimated by discounting future cash flows using rates as of March 31,
1996 and 1995 for which similar loans would be made to borrowers with
similar credit history and maturities.
The fair value for nonperforming loans was derived through a
discounted cash flow analysis, which includes the opportunity costs of
carrying a nonperforming asset. Estimated discount rates were based
on the probability of loss and the expected time to recovery. Loans
with a higher probability of loss were assigned higher risk premiums
and were discounted over longer periods of time, resulting in lower
values.
DEPOSIT LIABILITIES: The fair value of deposits with no stated
maturity, such as noninterest-bearing deposits, savings and NOW
accounts, and money market and checking accounts is equal to the
amount payable on demand as of March 31, 1996 and 1995. The fair
value of certificates of deposit is based on the present value of
contractual cash flows. The discount rates used to compute present
values are estimated using the rates currently offered for deposits of
similar maturities in the Company's marketplace.
BORROWED FUNDS: Rates available to the Company for debt with similar
terms and remaining maturities at the dates presented are used to
estimate the fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The
Company does not normally charge fees for commitments to extend
credit. Interest rates on commitments to extend credit are normally
committed for periods of less than one month. Fees charged on standby
letters of credit and other financial guarantees are deemed to be
immaterial and these guarantees are expected to be settled at face
amount or expire unused. It is impracticable to assign any fair value
to these commitments.
The carrying amount and estimated fair value of the Company's
financial instruments are as follows:
(Dollars in Thousands)
<TABLE>
<CAPTION>
=======================================================================================
March 31,
----------------------------------------
1996 1995
------------------ --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 23,323 $ 23,323 $ 20,007 $ 20,007
Investments and mortgage-related
securities 429,092 426,177 515,383 498,775
Assets available for sale 564,354 564,354 436,332 436,332
Loans receivable, net 691,791 678,726 550,013 539,765
Financial liabilities:
Deposits 830,997 839,329 688,678 688,608
Borrowed funds 778,225 777,226 710,541 708,987
=======================================================================================
</TABLE>
Thirty-two
<PAGE> 27
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(11) INCOME TAXES
On December 29, 1995, the Company acquired Suburban in a tax-free
acquisition. As a result of this acquisition, the Company was able to
record a net deferred tax asset of approximately $1,622,000, primarily
due to unrecorded net operating loss benefits of Suburban. As part of
the acquisition, the Company has established a deferred tax liability
for Suburban's entire tax bad debt reserves. The amount of such
reserves were approximately $3,175,000.
For federal tax purposes, the Company has approximately $4,613,000 of
net operating loss carryforwards as of March 31, 1996. The net
operating loss will expire March 31, 2010 if not utilized.
For state tax purposes, the Company has approximately $5,795,000 and
$4,391,000 of net operating loss carryforwards as of March 31, 1996
and 1995, respectively. $3,780,000 of the net operating loss
carryforward will expire March 31, 1998 if not utilized, while
$2,015,000 will expire March 31, 1999 if not utilized.
Income tax expense (benefit) for the years ended March 31, 1996, 1995,
and 1994 is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Year ended March
------------------------
1996 1995 1994
-------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 7,812 6,018 3,835
State - 178 230
-------------------------------------------------------------
7,812 6,196 4,065
-------------------------------------------------------------
Deferred:
Federal (1,396) (1,220) 3,176
State (144) (2) 220
-------------------------------------------------------------
(1,540) (1,222) 3,396
-------------------------------------------------------------
$ 6,272 4,974 7,461
=============================================================
</TABLE>
The significant components of deferred income tax expense (benefit)
attributable to income for the years ended March 31, 1996, 1995 and
1994 are as follows (Dollars in Thousands):
<TABLE>
<CAPTION>
Year ended March 31,
-----------------------------
1996 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax expense (benefit)
(exclusive of the effects of
the components listed below) $ (840) (895) 3,176
Decrease in beginning of year balance of the
valuation allowance for deferred tax assets (700) (700) -
Adjustment to deferred tax assets and
liabilities for change in tax rates - 68 -
State tax net operating loss utilization - 305 220
----------------------------------------------------------------------------------------
$ (1,540) (1,222) 3,396
========================================================================================
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
March 31, 1996 and 1995, in accordance with SFAS 109, are presented
below (dollars in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------------
1996 1995
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Uncollected interest $ 267 111
Deferred loan fees 272 68
Employee benefits 974 670
Unearned fees - 61
Net unrealized loss on mortgage-related, debt and equity securities - 487
REO rental income - 105
Real estate valuation allowance 578 121
Book bad debt reserves 4,330 3,023
Tax basis in excess of book basis - investment in stock 187 -
Tax basis in excess of book basis for investment in subsidiaries - 698
Purchased mortgage servicing rights 923 82
Other reserves 367 -
Federal tax net operating loss carryforwards 1,614 -
State tax net operating loss carryforwards 452 307
---------------------------------------------------------------------------------------------------
Total gross deferred tax assets 9,964 5,733
Less valuation allowance - (700)
---------------------------------------------------------------------------------------------------
Net deferred tax assets 9,964 5,033
---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Tax bad debt reserve recapture (6,212) (4,553)
Prepaid expenses (599) (312)
Loss on mortgages sold (956) (1,060)
Depreciation (254) (136)
Deferred Income (231) -
Deferred loan costs (264) (271)
Net unrealized gain of mortgage-related, debt and equity securities (70) -
Originated mortgage servicing rights (262) -
IRC Sec. 475 mark-to-market items (192) (383)
---------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (9,040) (6,715)
---------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 924 (1,682)
===================================================================================================
</TABLE>
The effective income tax rates of 35%, 36%, and 80%, for the years
ended March 31, 1996, 1995, and 1994, respectively, equal or exceed
the applicable statutory federal income tax rate of 35%, 35% and 34%,
respectively.
Thirty-three
<PAGE> 28
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(11) CONTINUED
The reasons for these differences for the years ended March 31, 1996,
1995, and 1994 are as follows:
<TABLE>
<CAPTION>
Dollars in Thousands
---------------------------------------------------------------
YEAR ENDED MARCH 31,
--------------------------
1996 1995 1994
===============================================================
<S> <C> <C> <C>
Computed expected
tax expense $6,262 $4,784 $3,170
---------------------------------------------------------------
Increase (decrease) resulting from:
Decrease in valuation allowance
for deferred tax assets (700) (700) --
---------------------------------------------------------------
Change in federal
income tax rates -- 68 --
---------------------------------------------------------------
Tax-exempt income (584) (360) (206)
---------------------------------------------------------------
State tax expense,
net of Federal benefit (144) 113 372
---------------------------------------------------------------
Subsidiary related items 1,007 888 723
---------------------------------------------------------------
Recapture of tax bad
debt reserves -- -- 3,268
---------------------------------------------------------------
Non-deductible ESOP
amortization expense 169 -- --
---------------------------------------------------------------
Other, net 262 181 134
---------------------------------------------------------------
Income tax expense $6,272 $4,874 $7,461
===============================================================
</TABLE>
The valuation allowance represents management's estimate of the
portion of its deferred tax assets that may not be realized. The
March 31, 1995 valuation allowance of $700,000 relates to the
realization of benefits for investment in subsidiaries. The reduction
in the valuation allowance for deferred tax assets is due to the
liquidation of various subsidiaries during the year.
In order to fully realize the net deferred tax asset at March 31, 1996
and 1995, the Company will need to generate future taxable income.
Based upon the Company's tax history and the anticipated level of
future taxable income, management of the Company believes the existing
net deductible temporary differences will, more likely than not,
reverse in future periods in which the Company generates net taxable
income. There can be no assurance, however, that the Company will
generate any earnings or any specific level of continuing earnings.
The Company had current taxes payable of $1,485,000 and $6,247,000 as
of March 31, 1996 and March 31, 1995, respectively.
In accordance with SFAS No. 109, the Company has established a
deferred tax liability representing the estimated taxes that would be
payable in the event of the conversion of the Company's charter to
that of a commercial bank, based on the intent of the Company's Board
of Directors to accomplish such a charter conversion. If the Bank
were to convert to a commerical bank charter, it would be required to
recapture and pay taxes on approximately $17,750,000 in bad debt
deductions previously taken while the Company was a "domestic building
and loan association" for tax purposes.
(12) EMPLOYEE BENEFITS
During the year ended March 31, 1995, the Company restructured its
defined benefit Pension Plan ("Pension Plan"). Prior to August 1,
1994, the Company participated in a multi-employer Pension Plan.
Actuarial valuations were not computed separately for the Company and
consequently, information required by SFAS No. 87 Is not available for
the years ending March 31, 1994.
Beginning on August 1, 1994, the Company withdrew from this
multi-employer Pension Plan and started a single-employer Pension
Plan. Employees hired by the Company on or after August 1, 1993 are
not currently eligible to participate in the new Pension Plan. Each
active participant was given the option to transfer their accrued
benefit as of this date to the new pension plan or leave it in the
multi-employer Pension Plan. For those electing to transfer their
benefits, additional benefits would accrue under the new Pension Plan
for future service. Assets accumulated for the past and future
benefits of those transferring benefits were calculated and a schedule
determined for transfer into the new Pension Plan.
The Pension Plan provides retirement benefits based on years of
service and average compensation during the years of plan
participation. The Company's funding policy is to contribute an
amount which meets the minimum funding requirements of ERISA and which
can be deducted for Federal Income Tax purposes. The methods and
assumptions used to determine the Pension Plan contribution may differ
from those used for financial reporting purposes.
The following table sets forth the Company's plan accumulated funded
status for the years ended March 31, 1996 and 1995 and the amounts
recognized in the consolidated balance sheet as of March 31, 1996 and
1995:
<TABLE>
<CAPTION>
Dollars in Thousands
----------------------------------------------------------------------------------------
March 31,
------------------------------
1996 1995
----------------------------------------------------------------------------------------
<S> <C> <C>
Projected benefit obligation:
Accumulated benefit obligation:
Vested benefits $ 1,512 $ 1,110
Nonvested benefits - -
----------------------------------------------------------------------------------------
Accumulated benefit obligation total 1,512 1,110
Effect of projected future compensation levels 150 54
----------------------------------------------------------------------------------------
Projected benefit obligation total 1,662 1,164
Plan assets at fair value 2,836 2,490
----------------------------------------------------------------------------------------
Projected plan assets in excess of
benefit obligation 1,174 1,326
Unrecognized transition asset 1,493 1,594
Unrecognized loss (41) (6)
----------------------------------------------------------------------------------------
Accrued pension cost included on
consolidated balance sheet $ 278 $ 262
========================================================================================
</TABLE>
Thirty-four
<PAGE> 29
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(12) CONTINUED
Net pension cost for the years ended March 31, 1996 and 1995 includes
the following components:
<TABLE>
<CAPTION>
Dollars in Thousands
----------------------------------------------------------------
Year ended March 31,
--------------------
1996 1995
----------------------------------------------------------------
<S> <C> <C>
Service cost $ 217 $ 154
Interest cost 99 51
Actual return on plan assets (383) (125)
Amortization of transition asset (101) (68)
Asset gain 184 -
----------------------------------------------------------------
Net pension cost $ 16 $ 12
================================================================
</TABLE>
In determining the estimated costs of the Pension Plan, the weighted
average discount rate used was 8.00% and the weighted average rate of
increase in compensation levels was 5.50% compounded annually for the
years ended March 31, 1996 and 1995. The weighted average expected
long-term rate of return on Pension Plan assets used in determining
net periodic pension cost was 8.00%. The Pension Plan's assets
consist primarily of bond and stock funds administered by an
independent bank plus the value of future transfers from the prior
plan.
Pension expense for the year ended March 31, 1994 was $164,000.
COMMON STOCK ACQUIRED BY THE EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
In connection with the Conversion, the Company established the ESOP
for the benefit of eligible employees. The Company purchased 509,166
shares of common stock on behalf of the ESOP in the Conversion, of
which, as of March 31, 1996, 100,778 shares were committed to be
released and allocated to participants. The Company accounts for its
ESOP in accordance with Statement of Position 93-6, "Employers'
Accounting For Employee Stock Ownership Plans" which requires the
Company to recognize compensation expense equal to the fair value of
the ESOP shares during the periods in which they become committed to
be released. To the extent that the fair value of ESOP shares differs
from the cost of such shares, this differential will be charged or
credited to equity. Management expects the recorded amount of expense
to fluctuate as continuing adjustments are made to reflect changes in
the fair value of the ESOP shares. The Company recorded compensation
and employee benefit expense related to the ESOP of $1.4 million and
$483,000 for the years ended March 31, 1996 and 1995, respectively.
COMMON STOCK ACQUIRED BY THE RECOGNITION AND RETENTION PLAN AND TRUST
("RRP")
An aggregate of 188,700 shares, net of forfeitures, have been awarded
to the Company's Board of Directors and executive officers as of March
31, 1996, subject to vesting and other provisions of the RRP.
At March 31, 1996, the deferred cost of unearned RRP shares totaled
$3,369,000 and is recorded as a charge against stockholders' equity.
Compensation expense will be recognized ratably over the five year
vesting period only for those shares awarded. The Company recorded
compensation and employee benefit expense related to the RRP of
$829,000 and $373,000 for the years ended March 31, 1996 and 1995,
respectively.
STOCK OPTION PLAN
Common stock totalling 727,380 shares has been reserved for issuance
for the Option Plan. An aggregate of 593,700 stock options, net of
forfeitures, have been granted and are exercisable to the Bank's
executive officers, non-employee directors, and other key employees
through March 31, 1996, subject to vesting and other provisions of the
Option Plan. The exercise price per share ranges from $14.94 to
$23.63, and has a weighted average per share exercise price of $15.16.
Such options were dilutive during the year ended March 31, 1996, and
affected earnings per share by $0.01. During the year ended March 31,
1996, 45,500 options were granted and 9,800 options were exercised at
an exercise price of $14.94.
(13) COMMITMENTS AND CONTINGENCIES
As of March 31, 1996, the Company is committed to the funding of
residential and commercial construction loans of approximately
$1,000,000 with an average interest rate of 8.56%, first mortgage
loans of approximately $29,852,000 with an average interest rate of
7.29%, and consumer and other loans of approximately $10,628,000 with
an average interest rate of 9.17%. Approximately $27,074,000 is
committed to fixed rate loans and $14,406,000 committed to variable
rate loans. These commitments are generally outstanding for 45 days.
As of March 31, 1996, the Company is committed to purchase
mortgage-related securities totaling $15,030,000 with a weighted
average interest rate of 5.67% and investment securities totaling
$5,000,000 with a weighted average interest rate of 7.07%.
The Company has commitments outstanding of $51,080,000 at March 31,
1996 to sell fixed rate mortgage loans and $7,649,000 of
adjustable-rate mortgage loans.
Thirty-five
<PAGE> 30
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, and 1994
(13) CONTINUED
The Company had the following off-balance-sheet financial instruments
as follows:
<TABLE>
<CAPTION>
Dollars in Thousands
----------------------------------------------------------------------------------------------------
March 31
-----------------------
1996 1995
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Amounts representing credit risk:
Secured consumer lines of credit $ 55,727 $ 49,813
Unsecured consumer lines of credit 9,917 9,713
Commercial lines of credit 11,939 5,411
Commercial letters of credit 163 329
Notional or contract amounts of off-balance-sheet financial instruments
not constituting credit risk:
Forward committments to sell in the secondary market $ 58,729 $ 15,833
====================================================================================================
</TABLE>
In the past, the Company pooled and sold with recourse certain
mortgage-backed securities through federal agencies which were
collateralized substantially by residential mortgage loans. At March
31, 1996 and 1995, the remaining outstanding balance subject to
recourse was $3,316,000 and $3,711,000 respectively.
The Company is party to certain claims and litigation arising in the
ordinary course of business. In the opinion of management, the
resolution of such claims and litigation will not materially affect
the Company's consolidated financial position or results of
operations.
DERIVATIVE FINANCIAL INSTRUMENTS
The Bank has limited involvement with derivative financial
instruments and does not use them for trading purposes. Derivatives,
such as forward committments to sell in the secondary market, are
primarily used to manage well-defined interest rate risks.
In the ordinary course of business, the Bank may expose a portion
of its available for sale mortgage loan portfolio, including its
pipeline, to interest rate risk, as volume and market conditions
warrant. This exposure represents those loans which have closed or
are expected to close which are not hedged at a given point in time.
At March 31, 1996, the Company's exposure is $3.7 million and the
maximum exposure position authorized by the Company is $20.0 million.
The Company produces a daily exposure report summarizing the exposure
which is reviewed and to the extent considered necessary by
management, adjustments are made.
(14) PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following at March 31,
1996 and 1995:
<TABLE>
<CAPTION>
Dollars in Thousands
-------------------------------------------------------------
March 31,
-----------------------
1996 1995
-------------------------------------------------------------
<S> <C> <C>
Premises owned $ 11,778 $ 11,248
Furniture and fixtures 13,271 11,442
Leasehold improvements 3,068 2,685
Accumulated depreciation (13,774) (11,704)
-------------------------------------------------------------
$ 14,343 $ 13,671
=============================================================
</TABLE>
The Company has entered into operating leases for several of its
branch facilities. The minimum annual rental payments under these
leases at March 31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Minimum
lease
Year payments
-------------------------------------------------------
<S> <C>
1997 $ 822
1998 714
1999 502
2000 356
2001 and after 1,860
=======================================================
</TABLE>
Rent expense under these leases was $487,000, $248,000 and $206,000
for the years ended March 31, 1996, 1995 and 1994, respectively.
The Company has executed various operating leases covering portions of
its buildings with various unrelated lessees. Annual minimum lease
payments to be received by the Company are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Minimum
lease
Year payments
---------------------------------------------------------
<S> <C>
1997 $ 375
1998 143
1999 87
2000 23
2001 and after 580
=========================================================
</TABLE>
Thirty-six
<PAGE> 31
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(15) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of MLF Bancorp, Inc. (parent company)
are shown below. The parent company has no significant operating
activities.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
=========================================================================
March 31,
--------------------------
Assets 1996 1995
-------------------------------------------------------------------------
<S> <C> <C>
Cash $ 282 $ 414
Equity securities available for sale 2,355 745
Investment in subsidiaries 137,347 141,949
Other assets 528 1
-------------------------------------------------------------------------
Total assets $ 140,512 $ 143,109
=========================================================================
Liabilities and Equity
-------------------------------------------------------------------------
Other liabilities $ 175 $ 1,809
-------------------------------------------------------------------------
Total liabilities 175 1,809
-------------------------------------------------------------------------
Stockholders' equity 140,337 141,300
-------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 140,512 $ 143,109
=========================================================================
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
==================================================================================================================
Period from
For the August 11, 1994
year ended to
March 31, 1996 March 31, 1995
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Dividends from subsidiaries $ 21,201 $ 6,000
Gain on sales of equity securities available for sale 197 -
Other 54 95
------------------------------------------------------------------------------------------------------------------
Total income 21,452 6,095
Expenses:
Compensation and employee benefits 10 16
Professional fees 389 86
Other 240 17
------------------------------------------------------------------------------------------------------------------
Total expenses 639 119
------------------------------------------------------------------------------------------------------------------
Income before (return of) equity in undistributed
income of subsidiaries and income tax benefit 20,813 5,976
Income tax benefit (124) -
------------------------------------------------------------------------------------------------------------------
Income before (return of) equity in undistributed
income of subsidiaries 20,937 5,976
(Return of) equity in undistributed income of subsidiaries (9,317) 517
------------------------------------------------------------------------------------------------------------------
Net income $ 11,620 $ 6,493
==================================================================================================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
<TABLE>
<CAPTION>
=============================================================================================
Period from
For the year August 11, 1994
ended to
March 31, 1996 March 31, 1995
---------------------------------------------------------------------------------------------
<S> <C> <C>
Operating activities:
Net income $ 11,620 $ 6,493
Adjustments to reconcile net
income to net cash provided by
operating activities:
Return of (equity in) income of subsidiaries 9,317 (517)
Amortization of common stock acquired
by stock benefit plans 2,326 856
Net gain on sale of equity securities
available for sale (197) -
Increase in investment in subsidiaries (22,596) -
(Decrease) increase in liabilities (1,634) 1,809
Increase in other assets (527) (1)
---------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (1,691) 8,640
Investing activities:
Purchase of common stock of subsidiaries - (91,959)
Purchase of assets available for sale (2,890) (745)
Proceeds from sales of assets available for sale 1,477 -
Dividends received from subsidiaries 21,201 6,000
---------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities 19,788 (86,704)
Financing activities:
Net proceeds from issuance of common stock - 95,572
Common stock acquired by stock benefit plans - (11,446)
Purchase of treasury stock (15,035) (5,648)
Dividends paid (3,194)
---------------------------------------------------------------------------------------------
Net cash (used) provided by financing activities (18,229) 78,478
---------------------------------------------------------------------------------------------
Net (decrease) increase in cash (132) 414
---------------------------------------------------------------------------------------------
Cash, beginning of period 414 -
---------------------------------------------------------------------------------------------
Cash, end of period $ 282 $ 414
=============================================================================================
</TABLE>
Thirty-seven
<PAGE> 32
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(16) BUSINESS COMBINATIONS
During the year ended March 31, 1996, the Company completed its
acquisition of Hart Mortgage Co., A privately-held mortgage banking
company, and Suburban, a $66.0 Million in assets community bank
headquartered in Collingdale, Delaware County, Pennsylvania. Both
acquisitions were accounted for using the purchase method of
accounting. These acquisitions were completed during the fourth
fiscal quarter of 1996, and as such, the effect on the Company's
results of operations was not material.
On April 1, 1996, the Company completed its acquisition of
Philadelphia Mortgage Corporation, ("PMC") a privately held mortgage
banking company.
(17) REGULATORY MATTERS
Retained earnings are substantially restricted in connection with
regulations related to the insurance of savings accounts, which
require the Company to maintain certain statutory reserves.
On January 19, 1994, the Board of Directors of the Company adopted a
Plan of Conversion to convert from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank with
the concurrent formation of a holding company, which was consumated on
August 11, 1994. At the date of the Conversion, the Company
established a liquidation account in an amount equal to its retained
income as of March 31, 1994. The liquidation account will be
maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Company after the Conversion. The
liquidation account will be reduced annually to the extent that
eligible account holders have reduced their qualifying deposits as of
each anniversary date. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the
event of a complete liquidation of the Company, each eligible account
holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any
of its share of common stock if the effect thereof would cause equity
to be reduced below applicable regulatory capital maintenance
requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Under the Office of Thrift Supervison capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 3.0% of adjusted total
assets, and "risk-based" capital equal to 8.0% of risk-weighted
assets. At March 31, 1996, the Bank was in compliance with all such
requirements and is deemed a "well-capitalized" institution for
regulatory purposes.
(18) SUBSEQUENT EVENT
On May 21, 1996, the Board of Directors of the Company declared a cash
dividend of $0.19 per common share payable on June 25, 1996 to
stockholders of record on June 6, 1996.
Thirty-eight
<PAGE> 1
EXHIBIT 23
[KPMG PEAT MARWICK LLP LETTERHEAD]
The Board of Directors
of MLF Bancorp, Inc.
We consent to incorporation by reference in the registration statement (No.
33-96708) on Form S-8 of MLF Bancorp, Inc. of our report dated April 24, 1996,
relating to the consolidated statements of financial condition of MLF Bancorp,
Inc. and subsidiaries as of March 31, 1996, and 1995, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended March 31, 1996,
which report appears in the March 31, 1996 annual report on Form 10-K of MLF
Bancorp, Inc.
/s/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
June 24, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 12,040
<INT-BEARING-DEPOSITS> 11,283
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 469,321
<INVESTMENTS-CARRYING> 429,092
<INVESTMENTS-MARKET> 426,177
<LOANS> 773,700
<ALLOWANCE> 13,124
<TOTAL-ASSETS> 1,765,812
<DEPOSITS> 830,997
<SHORT-TERM> 410,082
<LIABILITIES-OTHER> 16,253
<LONG-TERM> 368,143
0
0
<COMMON> 73
<OTHER-SE> 140,264
<TOTAL-LIABILITIES-AND-EQUITY> 1,765,812
<INTEREST-LOAN> 57,604
<INTEREST-INVEST> 62,313
<INTEREST-OTHER> 504
<INTEREST-TOTAL> 120,421
<INTEREST-DEPOSIT> 31,785
<INTEREST-EXPENSE> 76,659
<INTEREST-INCOME-NET> 43,762
<LOAN-LOSSES> 4,000
<SECURITIES-GAINS> 255
<EXPENSE-OTHER> 29,139
<INCOME-PRETAX> 17,892
<INCOME-PRE-EXTRAORDINARY> 17,892
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,620
<EPS-PRIMARY> 1.83
<EPS-DILUTED> 1.82
<YIELD-ACTUAL> 2.79
<LOANS-NON> 8,402
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,593
<ALLOWANCE-OPEN> 9,111
<CHARGE-OFFS> 1,188
<RECOVERIES> 181
<ALLOWANCE-CLOSE> 13,124<F1>
<ALLOWANCE-DOMESTIC> 10,143
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,981
<FN>
<F1>Includes provision of $4,000 and $1,020 allowance acquired in acquisition.
</FN>
</TABLE>
