SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K405
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended July 31, 1996
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- or -
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|_| EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________ to ________________
Commission Number: 0-25106
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LAKEVIEW FINANCIAL CORP.
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(Exact name of Registrant as specified in its Charter)
New Jersey 22-3334052
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1117 Main Street, Paterson, New Jersey 07503
- ---------------------------------------- --------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (201) 890-1234
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $2.00 per share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for 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 (ss.229.405 of this chapter) 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 non-affiliates of
the Registrant, based on the average bid price of the Registrant's Common Stock
as quoted on the National Association of Securities Dealers, Inc., National
Market on October 15, 1996 was $46,221,594 (1,915,921 shares at $24.125 per
share). As of October 15, 1996 there were issued and outstanding 2,265,704
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended July
31, 1996. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1996 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
Item 1. Business
Business of the Holding Company
Lakeview Financial Corporation ("Corporation") is a New Jersey corporation
organized on March 25, 1994 at the direction of Lakeview Savings Bank
("Lakeview" or the "Savings Bank") to acquire all of the common stock of
Lakeview in connection with the Savings Bank's reorganization into the holding
company form of ownership. The Holding Company reorganization was completed on
August 25, 1994. The Corporation is a unitary savings and loan holding company
which, under existing laws, generally is not restricted in the types of business
activities in which it may engage provided that the Savings Bank retains a
specified amount of its assets in housing-related investments. At the present
time, since the Corporation does not conduct any active business, the
Corporation does not intend to employ any persons other than officers but will
utilize the support staff of the Savings Bank from time to time. The Corporation
has various investments in service corporations which are incorporated under New
Jersey law. See "---- Subsidiary Activities."
Business of the Savings Bank
Lakeview Savings Bank is a New Jersey chartered stock savings bank located
in West Paterson, New Jersey. The Savings Bank was founded in 1922 as Lakeview
Building and Loan Association. The Savings Bank has been a member of the Federal
Home Loan Bank System since 1938. On May 5, 1993, the Savings Bank converted
from a New Jersey-chartered mutual savings association called Lakeview Savings
Bank, S.L.A. to a New Jersey chartered mutual savings bank, the accounts of
which are insured by the SAIF of the FDIC. On December 22, 1993, the Savings
Bank completed its conversion to the stock form of organization through the
issuance of 2,420,000 shares of Bank Common Stock for a purchase price of $10.00
per share. Subsequently, the Savings Bank Common Stock was exchanged for Holding
Company Common Stock in a reorganization.
The principal business of the Savings Bank is the acceptance of savings
deposits from the general public and the origination and purchase of mortgage
loans for the purpose of constructing, financing or refinancing one- to
four-family residences and the purchase of mortgage-backed securities. The
Savings Bank also originates home equity loans. Lakeview has eight office
locations located in Bergen and Passaic Counties, New Jersey. The Savings Bank
had various investments in service corporations which are incorporated under New
Jersey law. See "---- Subsidiary Activities".
Market Area
The Savings Bank is authorized to make real estate loans throughout the
United States. Lakeview's market area includes Passaic and Bergen Counties, both
located in Northern New Jersey. The Savings Bank's main office is located in
West Paterson, New Jersey. Paterson, the county seat of Passaic County, is home
to numerous County, State and Federal government agencies. Lakeview's Bergen
County branch office is located in Ramsey, New Jersey. Ramsey is a predominately
residential community. Passaic County and Bergen County are included in the New
York - Newark metropolitan area. Due to the proximity to New York City and
Newark, this part of northern New Jersey has historically been attractive to the
manufacturing industry. Employment is also provided by a variety of service
industries and the wholesale/retail trade.
<PAGE>
The New Jersey real estate market was generally depressed in the late
1980s and early 1990s. The market has stabilized in recent periods, but whether
such stabilization will continue is dependent upon general economic conditions,
not just in New Jersey, but in the United States as a whole. The Savings Bank's
business and operating results are significantly impacted by economic conditions
in its market and in the nation.
Lending Activities
General. Historically, the principal lending activity of the Savings Bank
has been the origination of mortgage loans for the purpose of constructing,
financing or refinancing one-to-four family residential properties. The Savings
Bank also originates commercial real estate loans, multi-family mortgage loans
and has become active in the origination of home equity and home improvement
loans since 1987.
Loan Portfolio Composition. The Savings Bank's loan portfolio composition
consists primarily of conventional fixed-rate and adjustable-rate first mortgage
loans secured by one- to four-family residences, home equity loans and, to a
lesser extent, multi-family residences and commercial real estate. As of July
31, 1996, the Savings Bank's total net portfolio of loans and mortgage-backed
securities held to maturity outstanding (the "loan portfolio") was $284.9
million, of which $124.5 million, or 43.7%, consisted of first mortgage, second
mortgage, home equity and home improvement loans secured by one- to four-family
residential dwellings. At that same date, $121.5 million, or 42.6% of the loan
and mortgage-backed securities portfolios consisted of mortgage-backed
securities held to maturity. The mortgage-backed securities portfolio as of July
31, 1996 consisted of pass-through certificates issued or guaranteed by the
Federal Home Loan Mortgage Corporation ("FHLMC"), and the Federal National
Mortgage Association ("FNMA").
Originated mortgage loans in the Savings Bank's portfolio generally
include due-on-sale clauses which provide the Savings Bank with the contractual
right to deem the loan immediately due and payable in the event that the
borrower transfers ownership of the property without the Savings Bank's consent.
2
<PAGE>
Analysis of Loan and Mortgage-Backed Securities Portfolio. Set forth below
is selected data relating to the composition of the Savings Bank's loan and
mortgage-backed securities portfolios by type of loan and type of security on
the dates indicated.
<TABLE>
<CAPTION>
At July 31,
----------------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ----------------- ---------------- --------------- -------------
$ % $ % $ % $ % $ %
------ ----- ------- ------- ------- ------- ------ ------- ------ ------
(Dollars in Thousands)
Type of Loan:
Real Estate Loans:
Construction loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential (1-4 family) ................... $ 630 .4% $ -- --% $ 190 --% $ 915 .3% $ 863 .3 %
Multi-family/commercial .................... 400 .2 -- -- 550 .2 -- -- -- --
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total construction loans ................. 1,030 .6 -- -- 740 .2 915 .3 863 .3
Residential (1-4 family)(1) .................. 84,878 47.9 76,832 42.5 79,383 25.7 84,051 26.5 84,006 29.5
Multi-Family/Commercial ...................... 20,371 11.5 19,322(1) 10.7 20,879 6.7 22,186 6.9 33,063 11.6
Commercial loans ............................. -- -- -- -- -- -- -- -- 697 .2
Home equity, second mortgage and home
improvement loans ........................... 41,421 23.3 43,842 24.2 36,223 11.7 37,221 11.7 46,705 16.4
Consumer Loans:
Passbook account loans ....................... 747 .4 522 .3 1,242 .4 1,022 .3 1,517 .5
Student loans ................................ 9 -- 7 -- 6 -- 1 -- -- --
Less:
Loans in process ............................. -- -- -- -- 191 -- 451 .1 101 --
Deferred loan origination fees and ........... 425 .2 287 .1 220 --
costs discounts, net ....................... 686 .4 578 .3
Allowance for loan losses .................... 2,493 1.4 2,638 1.5 1,714 .6 2,535 .7 3,073 1.1
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total loans, net ............................... 145,277 81.9 137,309 75.9 136,143 44.0 142,123 44.8 163,457 57.4
Mortgage-backed securities held to maturity, net 32,137 18.1 43,579 24.1 173,067 56.0 175,375 55.2 121,462 42.6
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total loans and mortgage-backed
securities, net .............................$177,414 100.0% $180,888 100.0% $309,210 100.00% $317,498 100.00% $284,919 100.00%
======= ===== ======= ===== ======= ====== ======= ====== ======= ======
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
At July 31,
------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------------- --------------- ---------------- ----------------- ----------------
$ % $ % $ % $ % $ %
-------- ----- -------- ----- -------- ----- -------- ----- -------- ------
(Dollars in Thousands)
Type of Security:
Real Estate Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1-4 family ................................ $126,929 71.6% $120,674 66.7% $116,346 37.6% $119,885 37.7% $124,467 43.7%
Multi-Family/Commercial ................... 20,771 11.7 19,322 10.7 20,879 6.7 24,488 7.7 40,170 14.1
Passbook accounts ........................... 747 .4 522 .3 1,242 .4 1,022 .3 1,517 .5
Student loans ............................... 9 -- 7 -- 6 -- 1 -- -- --
Commercial Loans:
Commercial loans ............................ -- -- -- -- -- -- -- -- 697 .2
Mortgage-backed securities, net ............... 32,137 18.1 43,579 24.1 173,067 56.0 175,375 55.2 121,462 42.6
Less:
Loans in process ............................ -- -- -- -- 191 -- 451 .1 101 --
Deferred loan origination fees and costs, net 686 .4 578 .3 425 .1 287 .1 220 --
Allowance for loan losses ................... 2,493 1.4 2,638 1.5 1,714 .6 2,535 .7 3,073 1.1
----- --- ----- --- ----- -- ----- -- ----- ---
Total loans and mortgage
-backed securities, net ................... $177,414 100.0% $180,888 100.0% $309,210 100.00% $317,498 100.00% $284,919 100.00%
======= ===== ======= ===== ======= ====== ======= ====== ======= ======
</TABLE>
- -----------------------
(1) This loan category includes a relatively small amount of loans
collateralized by mixed-use properties that are primarily residential, but
have some commercial use as well.
4
<PAGE>
One- to Four-Family Mortgage Loans. The Savings Bank offers first mortgage
loans secured by one- to four-family residences in the Savings Bank's lending
area. Typically, such residences are single family homes that serve as the
primary residence of the owner. Additionally, this loan category includes a
relatively small amount of loans collateralized by mixed use properties which
are primarily residential, but have some commercial use as well. As of July 31,
1996, $124.5 million or 43.7% of the Savings Bank's loan and mortgage-backed
securities portfolio were secured by one- to four-family residential real estate
mortgages. The Savings Bank currently offers 15 and 30 year fixed-rate mortgage
loans, 15 year balloon mortgage loans with five to seven year maturities, and
adjustable rate mortgage ("ARM") loans with one, three or five year adjustment
periods and 15 to 30 year maturities. The Savings Bank retains ARM loans, 15
year fixed-rate mortgages and balloon mortgage loans. Fixed-rate loans with more
than 15 year maturities are sold in the secondary market.
Monthly payments on balloon loans are based on a 15 year amortization
schedule. Renewal of balloon mortgage loans is based on the credit history as
well as current qualification of the borrower at time of renewal. The Savings
Bank offers balloon mortgages in an effort to make its mortgage loan portfolio
more interest rate sensitive. Interest rates charged on fixed-rate loans are
competitively priced based on the local competitive market. Loan origination
fees on these loans are generally up to 2% of the loan amount depending on the
interest rate accepted by the borrower.
Balloon loans pose a different credit risk from 15 year mortgage loans.
The balloon loans mature in five to seven years but payments are based on a
fifteen year amortization schedule. At the time of the loan's maturity, the
borrower must either pay the balloon payment or refinance the loan. If the
borrower is ineligible for refinancing at the time of loan maturity and cannot
make the large balloon payment, the loan will go into default. In the case of
standard mortgage loans, payments are spread out evenly over the term of the
loan, thereby decreasing this credit risk.
The Savings Bank currently offers ARM loans with interest rates that
adjust every one, three or five years with a maximum rate increase cap of 2% per
year, and a lifetime cap of 6%. The interest rate on these mortgages since 1985
has been the U.S. Treasury bill rate plus 3%. As of July 31, 1996, one year,
three year, and five year ARM loans originated by the Savings Bank constituted
30.1%, 46.0% and 23.9% of the originated ARM loan portfolio, respectively. ARM
loans are originated for a term of up to 30 years. The Savings Bank originates
one- to four-family residential mortgage loans in amounts up to 80% of the
appraised value of the mortgaged property. The Savings Bank retains the ARM
loans it originates for its loan portfolio.
Generally, ARM loans pose credit risks different than the risks inherent
in fixed-rate loans, primarily because as interest rates rise, the underlying
payments of the borrower rise, thereby increasing the potential for default. At
the same time, the marketability of the underlying property may be adversely
affected by higher interest rates. The Savings Bank attempts to reduce this
credit risk by qualifying ARM loan borrowers based on the first full interest
rate adjustment. The Savings Bank does not originate ARM loans which provide for
negative amortization.
The Savings Bank also offers 15 year fixed-rate mortgage loans. Interest
rates charged on fixed-rate loans are competitively priced based on FHLMC buy
rates. Loan origination fees on these loans are generally 2% of the loan amount.
The Savings Bank retains these 15 year mortgage loans for its loan portfolio.
Consumer, Home Equity, Second Mortgage and Home Improvement Loans. The
Savings Bank originates home equity, second mortgage and home improvement loans
secured by one-family residences. The Savings Bank has been especially active in
the origination of such loans since 1987. These loans
5
<PAGE>
generally are originated as adjustable rate loans which adjust monthly and have
terms of from 15 to 30 years. No loan origination fee is usually charged on
these loans. Loans made on owner-occupied, one-family residences are generally
subject to a 70% combined loan-to-value limitation, including any other
outstanding mortgages or liens, and are made at an adjustable rate of 185 points
over the prime rate. Loans on non-owner occupied properties are limited to a 65%
loan to value ratio, and are made at an adjustable rate of 210 points over the
prime rate.
Consumer loans not secured by real estate represent a small part of the
Savings Bank's lending activity. These types of consumer loans originated by the
Savings Bank are loans secured by savings deposits. Non-real estate secured
consumer loans amounted to approximately $1.5 million, or .5% of the Savings
Bank's loan and mortgage-backed securities portfolio as of July 31, 1996.
Commercial and Multi-Family Real Estate. To a lesser degree, the Savings
Bank originates multi-family real estate loans usually secured by property
located in the Savings Bank's primary lending area. To a very limited degree,
the Savings Bank originates commercial real estate loans. The Savings Bank's
commercial real estate loans are secured by such property as mixed use and
office buildings, small retail stores and industrial buildings. The Savings
Bank, in the past, originated land loans, secured by improved or unimproved
lots. In recent years, the Savings Bank has not pursued land loans, but will
consider making such loans, subject to certain underwriting considerations. The
Savings Bank's commercial and multi-family real estate loans are five or seven
year balloon mortgages with amortization periods typically of 15 years and loan
to value ratios of 80% or less.
During the early 1980's, the Savings Bank purchased participation interests
in large commercial real estate projects located outside of its market area.
Several of these loans experienced problems, and since 1989 the Savings Bank, as
a matter of policy, ceased purchasing commercial real estate loans. See
"Non-Performing Assets."
As of July 31, 1996, the Savings Bank had 158 loans secured by commercial
and multi-family real estate, totalling $40.2 million or 14.1% of the Savings
Bank's loan and mortgage-backed securities portfolio. The largest commercial
real estate loan is a loan secured by a nursing home in Dover, New Jersey with a
balance of $3.0 million on July 31, 1996. See "Business -- Loans to One
Borrower."
Loan Underwriting Risks. While commercial and multi-family real estate and
consumer loans provide benefits to the Savings Bank's asset/liability management
program and assist in reducing exposure to interest rate changes due to their
shorter terms or adjustable rates, such loans may entail significant additional
credit and interest rate risks compared to residential mortgage lending.
Commercial and multi-family real estate mortgage loans may involve large loan
balances to single borrowers or groups of related borrowers. In addition, the
payment experience on loans secured by income producing properties is typically
dependent on the successful operation of the properties and thus may be subject
to a greater extent to adverse conditions in the real estate market or in the
general economy.
Mortgage-Backed Securities Held to Maturity. The Savings Bank also
purchases mortgage-backed securities issued by GNMA, FNMA, FHLMC and private
corporations which are secured by balloon and fixed-rate mortgages. These
mortgage-backed securities consist of pass-through certificates and real estate
mortgage investment conduits ("REMICs") secured by interests in pools of
mortgages. As of July 31, 1996, these mortgage-backed securities amounted to
$121.5 million, or 42.6% of the loan and mortgage-backed securities portfolio
and are held to maturity. All of the $121.5 million of mortgage-backed
securities are of such securities whose principal and interest are directly
insured or guaranteed by GNMA, FNMA or FHLMC.
6
<PAGE>
The Bank also purchases mortgage-backed securities and CMOs issued by
government agencies, private issuers and financial institutions, some of which
are qualified under the Code as Real Estate Mortgage Investment Conduits
("REMICs"). CMOs and REMICs (collectively 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. Some CMO and REMIC instruments are
most like traditional debt instruments because they have stated principal
amounts and traditionally defined interest-rate terms. Purchasers of certain
other CMO and REMIC instruments are entitled to the excess, if any, of the
issuer's cash inflows, including reinvestment earnings, over the cash outflows
for debt service and administrative expenses. These mortgage related instruments
may include instruments designated as residual interests, which represent an
equity ownership interest in the underlying collateral, subject to the first
lien of the investors in the other classes of the CMO. Certain residual CMO
interests may be riskier than many regular CMO interests to the extent that they
could result in the loss of a portion of the original investment. Moreover, cash
flows from residual interests are very sensitive to prepayments and, thus,
contain a high degree of interest-rate risk.
At July 31, 1996, all of the Bank's investment in CMOs consisted of
regular interests. As of July 31, 1996, the Bank's CMOs did not include any
residual interests or interest-only or principal-only securities. The CMOs and
REMICS held by the Bank at July 31, 1996 consisted of floating rate and fixed
rate tranches. The interest rate of a majority of the Bank's floating-rate
securities adjusts monthly and provides the institution with net interest margin
protection in an increasing market interest rate environment. The securities are
backed by mortgages on one- to four-family residential real estate and have
contractual maturities up to 30 years. The securities are primarily PACs and
TACs (Planned and Targeted Amortization Classes) are designed to provide a
specific principal and interest cash-flow.
Private issued CMOs tend to have greater prepayment and credit risk than
those issued by government agencies or government sponsored enterprises (e.g.,
FHLMC, FNMA and GNMA) generally because they often are secured by jumbo loans
(currently, loans with an aggregate outstanding balances of greater than
$203,150). At July 31, 1996, the Bank held for maturity no privately issued
CMO's.
Loans to One Borrower. SAIF-insured savings banks are subject to certain
lending limitations to a single borrower or group of borrowers. Under current
law, the Savings Bank lending limit equals an amount equal to 15% of unimpaired
capital and unimpaired surplus on an unsecured basis and an additional amount
equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured
by readily marketable collateral. It is the Savings Bank's policy to limit loans
to a single borrower to $1,500,000. The Savings Bank's largest loan to one
borrower was a loan participation of approximately $3.0 million of a $5.0
million loan made in 1996 which was secured by a nursing home located in Dover,
New Jersey. The second largest loan to one borrower relationship is a loan
participation of approximately $2.4 million of a $5.0 million loan made in 1986
which was secured by a ski resort located in Vernon, New Jersey. The loan was
classified as substandard as of July 31, 1996. See "--Non-performing Loans and
Asset Classification."
7
<PAGE>
Loan and Mortgage-Backed Securities Maturity Tables
The following table sets forth the maturity of Lakeview Savings Bank's
loan and mortgage-backed securities held to maturity portfolio at July 31, 1996.
The table does not include prepayments or scheduled principal repayments.
Prepayments and scheduled principal repayments on loans and mortgage-backed
securities totalled $40.7 million, $36.2 million, and $45.3 million, for the
three years ended July 31, 1994, 1995, and 1996, respectively. Adjustable-rate
mortgage loans are shown as maturing based on contractual maturities.
Home Equity,
Second Mortgage
1-4 Family Multi-Family, and Home
Real Estate Commercial Improvement
Mortgage(1) Real Estate Loans (2) Total
----------- ------------- --------------- ---------
(In Thousands)
Amounts Due:
Within 3 months........ $ 387 $ 4,670 $ 2,894 $ 7,951
3 months to 1 Year..... 4,539 691 1,491 6,721
After 1 year:
1 to 3 years......... 16,363 2,105 1,128 19,596
3 to 5 years......... 34,912 8,022 6,536 49,470
5 to 10 years........ 14,502 7,886 15,009 37,397
10 to 20 years....... 65,596 5,244 18,278 89,118
Over 20 years........ 68,050 5,310 1,688 75,048
------- ------ ------ -------
Total due after one year 199,423 28,567 42,639 270,629
------- ------ ------ -------
Non-performing loans... 1,118 595 1,198 2,911
Total amount due....... $205,467 $34,523 $48,222 $288,212
======= ====== ====== -------
Less:
Allowance for loan loss 3,073
Deferred loan fees and
discounts, net........ 220
-------
Loans receivable and
mortgage-backed
securities.......... $284,919
=======
- ------------------
(1) Includes mortgage-backed securities held to maturity.
(2) Also includes passbook and student loans.
8
<PAGE>
The following table sets forth the dollar amount of all performing loans
due after July 31, 1997, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- --------
(In Thousands)
One-to-four family(1).................. $137,140 $ 62,283 $199,423
Multi-family and commercial real estate 17,194 11,373 28,567
Home equity, second mortgage and
home improvement loans (2)........... 17,105 25,534 42,639
------- ------- --------
Total................................ $171,439 $ 99,190 $270,629
======= ======= =======
- -----------------------
(1) Includes mortgage-backed securities held to maturity.
(2) Also includes passbook and student loans.
The following table sets for the contractual maturities of the Savings
Bank's mortgage-backed securities held to maturity portfolio as of July 31,
1996.
Contractual Maturities Due in Year(s) Ended July 31,
-------------------------------------------------------------------
2000 to 2007 to 2017 and
1997 1998 1999 2006 2016 Thereafter
---- ---- ---- -------- ------- ----------
(In Thousands)
$4,185 $ 0 $14,719 $50,227 $17,689 $34,642
===== == ====== ====== ====== ======
Loan Solicitation and Processing. The Savings Bank's sources of loan
applications include existing or past customers, real estate brokers,
accountants, attorneys, consultants, call-ins and walk-ins and newspaper
advertisements.
Upon receipt of any loan application from a prospective borrower, a credit
report and verifications are ordered to confirm specific information relating to
the loan applicant's employment, income and credit standing. An appraisal of the
real estate intended to secure a first mortgage proposed loan is undertaken by
an independent fee appraiser approved by the Board of Directors. In connection
with the loan approval process, the Savings Bank's loan officers analyze the
loan applications and the property involved. All loans are processed at the
Savings Bank's office by the Savings Bank's loan servicing department. The
Savings Bank originates residential first mortgage loans that conform to the
FHLMC and FNMA guidelines, so that such loans can be sold if the Savings Bank
desires to do so.
Lakeview staff underwrites all mortgage loans under guidelines and
policies issued by the Board of Directors. The Savings Bank's Loan Committee
reviews all loans and the full Board of Directors then ratifies the actions of
the staff and committee in regard to all loans except consumer loans and
passbook loans. Fixed rate loans with terms of 30 years are immediately sold
after funding to FHLMC or other private secondary mortgage market purchasers
depending on the attractiveness of the pricing.
9
<PAGE>
Loan applicants are promptly notified of the decision of the Savings Bank
by a letter setting forth the terms and conditions of the decision. If approved,
these terms and conditions include the amount of the loan, interest rate basis,
amortization term, a brief description of real estate to be mortgaged to the
Savings Bank, and the notice of requirement of insurance coverage to be
maintained to protect the Savings Bank's interest. The Savings Bank requires
title, fire and casualty insurance for all first mortgage loans, as well as an
escrow account for the payment of real estate taxes. Disability insurance is
available but not required for Lakeview loans.
Loan Originations, Purchases and Sales. The Savings Bank's activity in the
secondary mortgage market consists of the purchase of loans and mortgage-backed
securities. In fiscal 1995, the Savings Bank sold no GNMA fixed-rate
mortgage-backed securities.
The Savings Bank originates residential first mortgage loans that conform
to the FHLMC and FNMA guidelines. It is the Savings Bank's intent to retain
servicing for loans originated for sale or subsequently packaged to another
buyer. Primary markets for loans sold are FHLMC and private secondary market
purchasers. For the year ended July 31, 1996, $630,000 of loans were sold to
FHLMC.
Because the Savings Bank's savings deposits generally exceed the demand
for loans from its customers in its local market area, in addition to
originating loans for its portfolio, the Savings Bank has purchased a portion of
its real estate loan portfolio in the secondary market. The Savings Bank's
purchases in the secondary market are dependent upon the demand for mortgage
credit in the local market area and the inflow of funds from traditional
sources. Purchases of loans enable the Savings Bank to utilize available funds
more quickly and to obtain a yield higher than could generally be obtained in
the Savings Bank's primary market area. The Savings Bank purchases both
fixed-rate and adjustable mortgage-backed securities. The purchase of such
securities is part of the Savings Bank's strategy to make its overall loan
portfolio more sensitive to current market conditions and interest rates.
The Savings Bank reviews each purchased loan as if it were originating the
loan according to its own underwriting standards. All loans must be documented,
including an original appraisal that substantiates the value of the property at
the time of origination of the loan. The Savings Bank obtains from the seller a
duplicate copy of each loan file, which generally includes an executed
application, financial statements, credit reports, title insurance, real estate
tax information, appraisal and a mortgage note. The Savings Bank requires the
original note be included with its file.
10
<PAGE>
Origination, Purchase and Sale of Loans
The following table sets forth total loans and mortgage-backed securities
originated, purchased and sold during the periods indicated.
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ---------
(In Thousands)
Total gross loans and mortgage-backed
<S> <C> <C> <C> <C> <C>
securities at beginning of period ...... $169,230 $180,776 $183,831 $311,348 $320,320
======= ======= ======= ======= =======
Loans originated:
1 to 4 family residential .............. $ 15,713 $ 21,114 $ 18,560 $ 14,245 $ 10,581
Commercial real estate, other
residential .......................... 3,509(1) 3,049 1,682 5,941 9,695
Construction ........................... 585 -- 549 664 --
Consumer (2) ........................... 10,117 11,620 7,531 9,692 20,507
------- ------- ------- ------- --------
Total loans originated ................... $ 29,924 $ 35,783 $ 28,322 $ 30,542 $ 40,783
======= ======= ======= ======= =======
Loans and mortgage-backed securities
purchased:
1 to 4 family residential .............. $ -- $ 5,752 $ 1,123 $ 137 $ 2,687
Mortgage-backed securities ............. 15,981 19,237 146,941 18,762 2,773
------- ------- ------- ------- --------
Total loans and mortgage-backed
securities purchased .................. $ 15,981 $ 24,989 $148,064 $ 18,899 $ 5,460
======= ======= ======= ======= =======
Loans and mortgage-backed securities
sold:
Whole loans ............................ $ 4,487 $ 12,712 $ 5,334 $ 1,172 $ 925
Mortgage-backed securities ............. -- -- -- -- --
------- ------- ------- ------- --------
Total loans and mortgage-backed
securities held to maturity sold....... $ 4,487 $ 12,712 $ 5,334 $ 1,172 $ 925
======= ======= ======= ======= =======
Principal repayment on loan and
mortgage-backed securities ............... $ 25,644 $ 39,029 $ 40,693 $ 36,213 $ 45,347
------- ------- ------- ------- --------
Mortgage loans transferred to real
estate owned ........................... $ 4,228 $ 5,976 $ 2,842 $ 3,084 $ 332
------- ------- ------- ------- --------
Transfer of mortgage-backed securities
held to maturity to investment
securities available for sale .......... -- -- -- -- $ 31,747
------- ------- ------- ------- --------
Net loan and mortgage-backed securities
activity ............................... $ 11,546 $ 3,055 $127,517 $ 8,972 $(32,108)
======= ======= ======= ======= =======
Total gross loans and mortgage-backed
securities receivable at end of period.. $180,776 $183,831 $311,348 $320,320 $288,212
======= ======= ======= ======= =======
</TABLE>
- ----------------------
(1) The increase resulted from the reclassification of multi-use properties
from one- to four- family residential to commercial real estate.
(2) Includes home equity, home improvement and second mortgage loans.
11
<PAGE>
Loan Commitments. The Savings Bank generally grants commitments to fund
real estate mortgage loans for periods of up to 90 days at a specified term and
interest rate. These are primarily for fixed-rate loans. The total amount of the
Savings Bank's commitments to originate loans as of July 31, 1996 was $13.3
million.
Loan Fees and Service Charges. The Savings Bank services all of its own
loans. The Savings Bank generally retains servicing on the loans it sells to
others. As of July 31, 1996, the Savings Bank had $13.8 million of loans
serviced for others. During the fiscal years ended July 31, 1994, 1995 and 1996,
loan fees and service charges totalled $815,000, $1,235,000 and $1,153,000.
In addition to interest earned on loans, the Savings Bank receives loan
origination and commitment fees for originating loans.
Loan origination and commitment fees are volatile sources of income. Such
fees vary with the volume and type of loans and commitments made and purchased
and with competitive conditions in mortgage markets, which in turn respond to
the demand for and availability of money. The Savings Bank has experienced a
decrease in loan fee income during periods of unusually high interest rates due
to the resulting lack of demand for mortgage loans.
The Savings Bank's loan origination fees generally up to 2% of the amount
borrowed on residential mortgages, commercial real estate, home equity and home
improvement loans, depending upon the interest rate accepted by the borrower.
The total amount of unamortized deferred loan fees as of July 31, 1996 was
$219,862.
The Savings Bank also receives other fees and charges relating to existing
loans, which include prepayment penalties, late charges, and fees collected in
connection with a change in borrower or other loan modifications. The Savings
Bank amortizes all loan origination fees net of certain loan origination costs
over the related life of the loan. These fees and charges have not constituted a
material source of income.
Non-Performing Loans and Asset Classification. The Savings Bank's
collection policy provides for a late charge to be added to the amount due when
a loan is 15 days past due. The borrower is immediately notified of the
assessment and payment is requested. Periodic contacts are made at 30 day
intervals. At 60 days past due, a letter is sent by the Savings Bank's attorney.
At 120 days, the attorney is authorized to take final action up to initiation of
foreclosure proceedings, if deemed warranted.
Loans are reviewed on a monthly basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest
is doubtful. Loans are placed on a non-accrual status when either principal or
interest is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
12
<PAGE>
The following table sets forth information with respect to the Savings
Bank's non-performing assets for the periods indicated. During the periods
indicated the Savings Bank had no restructured loans within the meaning of
Statement of Financial Accounting Standards No. 15 ("SFAS 15"). The amounts
shown are net of specific loss reserves where appropriate.
<TABLE>
<CAPTION>
At July 31,
----------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ----- ---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
<S> <C> <C> <C> <C> <C>
Construction loans ...................... $ -- $ -- $ -- $ -- $ --
Permanent loans secured by 1-4
dwelling units(1) ..................... 13,010 12,373 8,362 3,143 2,316
All other mortgage loans ................ 3,367 1,167 566 229 101
-------- -------- ------- ----- ------
Total ..................................... $ 16,377 $ 13,540 $ 8,928 $3,372 $ 2,417
======== ======== ======= ===== ======
Accruing loans which are contractually past
due 90 days or more ...................... $ -- $ -- $ -- $ -- $ --
======== ======== ======= ===== ======
Total non-accrual and accrual loans
(non-performing loans)(2) ............... $ 16,377 $ 13,540 $ 8,928 $3,372 $ 2,417
======== ======== ======= ===== ======
Real estate owned (net of allowance) ...... $ 3,525 $ 5,752 $ 3,574 $3,608 $ 1,667
======== ======== ======= ===== ======
Other non-performing assets ............... $ -- $ -- $ -- $ 850 $ 494
======== ======== ======= ===== ======
Total non-performing assets ............... $ 19,902 $ 19,292 $ 12,501 $7,830 $ 4,578
======== ======== ======= ===== ======
Total non-performing loans to
net loans ............................... 11.27% 9.86% 6.56% 2.37% 1.5%
======== ======== ======= ===== ======
Total non-performing loans to
total assets ............................ 8.25% 6.53% 2.16% .80% .53%
======== ======== ======= ===== ======
Total non-performing assets to tota1 assets 10.03% 9.30% 3.02% 1.87% 1.0%
======== ======== ======= ===== ======
</TABLE>
- ------------------------
(1) Includes home equity, home improvement and second mortgage loans.
(2) Loans delinquent for three months or more.
Management of the Savings Bank regularly reviews the loan portfolio in
order to identify potential problem loans, and classifies any potential problem
loan as a special mention, substandard, doubtful, or loss asset according to the
Department classification of asset regulations. The Savings Bank does not accrue
interest on any loan that is 90 days or more delinquent. Potential problem loans
that had not been recorded as non-accrual as of July 31, 1996, totalled $7.6
million, or 1.7% of total assets. These loans are accruing but classified by the
Savings Bank as substandard and $951,000 of the Savings Bank's general loss
allowance has been allocated to these loans.
For the years ended July 31, 1994, 1995 and 1996 additional interest
income before taxes amounting to approximately $703,000, $234,000 and $201,000,
respectively, would have been recognized if interest on loans 90 days or more in
arrears had been recorded based on original contract terms.
New Jersey and federal regulations provide for savings banks to classify
their loans and other assets as substandard, doubtful or loss assets. Assets
classified as substandard are inadequately protected by the current net worth
and paying capacity of the obligor or the pledged collateral. They are
characterized by the distinct possibility that a savings bank will sustain some
loss if the deficiencies are not corrected. Assets classified as doubtful have
all the weaknesses of those classified as substandard
13
<PAGE>
with the additional characteristic that the weaknesses make collection or
liquidation in full highly questionable and improbable. Assets classified as
loss are considered uncollectible and of such little value that their
continuance as assets without the establishment of a specific reserve is not
warranted. Assets that do not currently expose a savings association to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close attention are
designated "special mention." Special mention assets have a potential weakness
or pose an unwarranted financial risk that, if not corrected, could weaken the
asset and increase risk in the future.
New Jersey banking law requires the Board of Directors of the Savings Bank
to prepare, within 60 days after the presentation of the annual audit report to
the Board by its independent external auditor, a detailed statement of the
assets of the Savings Bank, other than loans, which in the judgment of the Board
of Directors, have a value less than the value at which they are carried on the
books of the Savings Bank. The statement shall present the value of such assets
in the judgment of the Board. The statement shall also include a list of loans
which in the judgment of the Board of Directors, are (i) loss; (ii) doubtful, or
(iii) insufficiently secured. This statement must be filed with the Department,
along with a certified copy of the audit report, within 60 days of the
completion of the audit report.
The following table sets forth the aggregate amount of the Savings Bank's
classified assets at July 31, 1995 and 1996.
At July 31,
---------------------
1995 1996
------- -------
(In Thousands)
Special mention............... $ 5,668 $ 4,073
Substandard................... 10,187 11,061
Doubtful assets............... 261 609
Loss assets................... 17 --
----- ------
Total................. $16,133 $15,743
====== ======
General loss allowance........ 2,535 3,073
Specific loss allowance....... -- --
------ ------
Total allowances..... $ 2,535 $3,073
====== =====
14
<PAGE>
The following table sets forth the type and dollar amount of the Savings
Bank's delinquent loans more than 60 days delinquent as of July 31, 1995 and
1996.
At July 31,
------------------
1995 1996
------ -------
(In Thousands)
Delinquent residential mortgage loans
(60 days or more delinquent).......... $6,217 $ 5,805
Commercial real estate loans (60 days
or more delinquent)................... 451 545
Home equity, second mortgage and
home improvement loans (60 days or
more delinquent)...................... 667 1,255
------ -----
Total.............................. $7,335 $7,605
====== =====
The following is a summary of the Savings Bank's classified assets with
balances in excess of $400,000 as of July 31, 1996. There can be no assurance
that additional reserves will not be required or additional losses will not be
incurred on these loans.
Ski Resort in Vernon, New Jersey. The outstanding loan balance of $2.397
million at July 31, 1996, represents Lakeview's 50 percent participation in a
$5.0 million loan. The loan consists of a March 1989 refinancing of a $2.3
million mortgage (originally made by Lakeview in July 1986) and an additional
$2.7 million of working capital. The loan is secured by a first lien on the ski
resort as well as all equipment and rental inventory utilized in the operation
of the premises. Another unrelated lender has a second mortgage of $19.65
million on the property. The borrower corporation and its parent corporation
filed for protection under Chapter 11 of the Bankruptcy Code on April 2, 1996.
The loan has exhibited chronic delinquency throughout its history but, as of
July 31, 1996, the loan was current as a result of payments being received from
an individual guarantor of the loan. Both the borrower corporation and its
parent corporation have experienced operating losses in recent years. As of July
31, 1996, the loan was classified substandard and continues to be monitored by
Management.
Apartment Building, Paterson, New Jersey. The outstanding loan balance of
$609,834 at July 31, 1996 is secured by a twelve unit apartment building and was
classified substandard due to its past slow pay history but remains in a
performing loan status. The loan was in the 60-89 day delinquency category on
July 31, 1996.
Mortgage Loans Purchased from Capital Resources. At July 31, 1996, the
Savings Bank had approximately $4.5 million of residential real estate second
mortgage loans that were acquired from Capital Resources, a now defunct mortgage
company. At July 31, 1996, the total balance of loans more than 120 days
delinquent was $782,523, with $563,984 classified as substandard and $218,539
classified as doubtful. As of July 31, 1996, the Savings Bank had allocated
$1,423,012 of general loss allowance reserves for losses against this portfolio.
Deposit with Nationar. On February 6, 1995, the Superintendent of Banks for
the State of New York took possession of Nationar, a state chartered trust
company. The Bank placed the deposit of
15
<PAGE>
$850,000 with Nationar on non-accrual status and charged $425,000 to other
expense, reflecting the risk of recovery of such deposit. During June 1996, a
payment of $356,418 was received in this matter.
Car Wash in Paterson, New Jersey with two stores and two residences. At
July 31, 1996, the outstanding total balance of this loan on a mixed use
building made to one borrower in 1987 was $459,936. The loan has experienced
periods of slow payment but has remained a performing asset. The Savings Bank
classified the loan as substandard at July 31, 1996, due to an inconsistent
payment history.
Allowance for Losses on Loans and Real Estate Owned. The Savings Bank's
management evaluates the need and is responsible for establishing reserves
against losses on loans and other assets each year based on estimated losses on
specific loans and on any REO or real estate held for sale or investment when a
finding is made that a loss is estimable and probable. Such evaluation includes
a review of all loans for which full collectibility may not be reasonably
assured and considers, among other matters, the estimated market value of the
underlying collateral of problem loans, prior loss experience, economic
conditions and overall portfolio quality. These provisions for losses are
charged against earnings in the year they are established. The Savings Bank
established provisions for losses on loans for the years ended July 31, 1994,
1995 and 1996 of $2.0 million, $1.8 million and $664,000, respectively. At July
31, 1996, the Savings Bank had an allowance for loan losses of $3.1 million,
which represented 1.9% of total loans and 40.4% of total loans delinquent more
than 60 days.
When REO is acquired or otherwise deemed REO, it is recorded at the lower
of the unpaid principal balance of the related loan or its fair value, less
estimated selling expenses, through the provision for real estate owned.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations.
The Savings Bank established provisions for losses on REO for the years
ended July 31, 1994, 1995 and 1996 of $713,000, $502,000, and $654,000,
respectively. At July 31, 1996, the Savings Bank had no allowance for losses on
REO. The balance of REO at July 31, 1996, was $1.7 million. From August 1, 1995
to July 31, 1996, $332,000 was transferred from mortgage loans to REO.
Management is continuing its efforts to increase earning assets through
early identification of problem assets and the work-out or disposition of
non-performing assets (including conversion of non-performing loans to real
estate owned where such course is an appropriate means of avoiding further
loss). To this end, management has hired a consultant to handle non-performing
assets. Partly as a result of these efforts, the Savings Bank's asset quality
has improved, as evidenced by the decreased level of non-performing assets,
which totalled $4.6 million at July 31, 1996, down from $7.8 million at July 31,
1995. The Savings Bank intends to continue to work to reduce non-performing
assets; however, its ability to dispose of REO at current estimated fair values
depends on market conditions, and no assurances can be made that the Savings
Bank's level of non-performing assets will continue to improve.
As a result of the declines in real estate market values and the
significant losses experienced by many financial institutions in the late 1980's
and early 1990's, there has been a greater level of scrutiny by regulatory
authorities of the loan portfolios of financial institutions nationwide,
undertaken as part of the examination of the institution by the Department, FDIC
or other federal or state regulators. Results of regulatory examinations
indicate that these regulators may be applying more conservative criteria in
evaluating real estate values, requiring significantly increased provisions for
potential loan losses and losses on REO. While the Savings Bank believes it has
established its existing allowance for loan losses in accordance with Generally
Accepted Accounting Principles ("GAAP"), there can be no assurance that
16
<PAGE>
regulators, in reviewing the Savings Bank's loan portfolio, will not request the
Savings Bank to significantly increase its allowance for loan losses, or that a
deteriorating real estate market will cause the Savings Bank to significantly
increase its allowance for loans losses, therefore negatively affecting the
Savings Bank's financial condition and earnings. The relatively large amount of
non-performing assets held by the Savings Bank increases the possibility that
its reserves may not be adequate to provide for future losses, or reductions in
the value of real estate owned.
In making loans, the Savings Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan.
During the years ended July 31, 1994, 1995 and 1996, the Savings Bank
charged-off $3.1 million, $1.4 million and $429,000 of loans receivable,
respectively, and $1.3 million, $690,000 million and $654,000 of REO,
respectively. It is the Savings Bank's policy to review its loan and REO
portfolios, in accordance with statutory classification procedures, on a
quarterly basis. Additionally, the Savings Bank maintains a program of reviewing
loan applications prior to making the loan and immediately after loans are made
in an effort to maintain loan quality.
17
<PAGE>
Analysis of the Allowances for Losses on Loans and Real Estate Owned
The following tables set forth information with respect to the Savings
Bank's allowance for loan losses and REO at the dates indicated:
<TABLE>
<CAPTION>
At or for the year ended July 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding, net of allowance $145,277 $137,309 $136,143 $142,123 $163,457
======= ======= ======= ======= =======
Average loans outstanding.............. $148,502 $142,935 $136,165 $139,442 $155,497
======= ======= ======= ======= =======
Allowance balance (at beginning of
period).............................. $ 1,782 $ 2,493 $ 2,638 $ 1,714 $ 2,535
Provision (credit):
Residential.......................... 821 1,347 1,842 1,493 384
Commercial real estate............... 541 673 (77) (145) 278
Consumer............................. (27) 11 282 28 2
Transfer to real estate owned........ (208) -- -- -- --
Charge-offs:
Residential.......................... (401) (1,514) (3,069) (1,381) (418)
Commercial real estate............... -- (361) -- -- --
Consumer............................. (15) (11) (1) (24) (11)
Recoveries:
Residential.......................... -- -- 99 850 303
Commercial Real Estate............... -- -- -- -- --
Consumer............................. -- -- -- -- --
------ ------ ------ ------ ------
Allowance balance (at end of period)... $ 2,493 $ 2,638 $ 1,714 $2,535 $ 3,073
====== ====== ====== ===== ======
Allowance for loan losses as a percent
of total loans outstanding, net...... 1.72% 1.92% 1.26% 1.78% 1.88%
Net loans charged off as a percent of
average loans outstanding............ .28% 1.32% 2.18% 0.40% .09%
</TABLE>
<TABLE>
<CAPTION>
At or for the year ended July 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Total real estate owned and in judgment, net of
<S> <C> <C> <C> <C> <C>
allowance ..................................... $ 3,525 $ 5,752 $ 3,574 $ 3,608 $ 1,667
======= ======= ======= ======= =======
Allowance balance - beginning .................. $ 605 $ 709 $ 823 $ 188 $ --
======= ======= ======= ======= =======
Provision ...................................... 201 847 713 502 654
Transfer from the allowance for loan losses .... 208 -- -- -- --
Net charge-offs ................................ (305) (733) (1,348) (690) 654
------- ------- ------- ------- -------
Allowance balance - ending ..................... $ 709 $ 823 $ 188 $ -- $ --
======= ======= ======= ======= =======
Allowance for losses on real estate owned and in
judgment to net real estate owned and in
judgment ..................................... 20.1% 14.3% 5.26% 0% 0%
======= ======= ======= ======= =======
</TABLE>
Investment Activities
Income from investment securities provides a significant source of income
for the Savings Bank. The Savings Bank maintains a portfolio of investment
securities such as U.S. government and agency securities, non-governmental
securities, and interest-bearing deposits, in addition to the Savings Bank's
mortgage-backed securities held to maturity portfolio, which is discussed above
under " -- Lending Activities -- Mortgage-Backed Securities." The amount of
short-term investments reflects management's
18
<PAGE>
response to the significantly increasing percentage of savings deposits with
short maturities. It is the intention of management to maintain shorter
maturities in the Savings Bank's investment portfolio in order to better match
the interest rate sensitivities of its assets and liabilities. However, during
periods of rapidly declining interest rates, such investments also decline at a
faster rate than does the yield on long-term investments.
Investment decisions are made within policy guidelines established by the
Board of Directors. The investment policy of the Savings Bank established by the
Board of Directors is based on its asset/liability management goals. The intent
of the policy is to establish a portfolio of high quality, diversified
investments in order to optimize net interest income within acceptable limits of
safety and liquidity.
Purchases of securities other than equity securities are generally made
with the intent of holding them to maturity. Currently, the policy is to invest
in instruments with an expected average life of five to ten years, to be held to
maturity. Investments and mortgage-backed securities held to maturity are
recorded at amortized cost. Premiums are amortized and discounts accreted on a
level yield method over the life of the investment.
The Savings Bank maintains a portfolio of investments available for sale
to enhance total return on investments and reduce interest rate and credit risk.
These investments are accounted at market value. The Savings Bank's Investment
Policy designates what securities may be maintained in this portfolio. As of
July 31, 1996, the portfolio was comprised of the stock of U.S. government
agencies and U.S. financial corporations. As of July 31, 1996, the market value
of investment securities available for sale was $90.0 million, with a cost basis
of $92.9 million.
In addition, the Savings Bank may, from time to time, maintain a portfolio
held for trading. During the fiscal year ended July 31, 1996, the portfolio held
for trading did not exceed an investment of $2.8 million. This account is
maintained to enhance total return on investments. These investments are
accounted for at market value. At July 31, 1996, the Savings Bank held no
investments for trading.
19
<PAGE>
Investment Portfolio
The following table sets forth the carrying value of the Savings Bank's
investment portfolio, short-term investments, and Federal Home Loan Bank
("FHLB") stock at the dates indicated.
<TABLE>
<CAPTION>
At July 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
------ ------- -------- -------- --------
(In Thousands)
Investment Securities:
<S> <C> <C> <C> <C> <C>
U.S. Agency Securities available for sale(1)... -- $ -- $ -- $ -- $ 58,045
U.S. Agency Securities ........................ 900 -- 61,662 55,738 40,821
Equity securities available for sale(1)........ 8,359 12,898 11,269 8,567 12,601
Municipal Bonds available for sale(1) ......... -- -- -- -- 3,083
GNMA Mortgage-backed securities
available for sale(1) ....................... -- -- -- -- 4,684
FNMA/FHLMC CMO securities
available for sale(1) ....................... -- -- -- -- 2,034
Private Issue CMO securities
available for sale(1) ....................... -- -- -- -- 9,521
Equity securities restricted for sale(2) ...... -- -- -- -- 7,806
Other Securities .............................. 16 16 975 -- --
------ ------ ------ ------ -------
Total Investment Securities ................. 9,275 12,914 73,906 64,305 138,595
Interest-bearing Deposits ..................... 99 99 -- 5,632 --
Federal Funds Sold ............................ -- -- 850 -- --
FHLB Stock .................................... 1,445 1,511 1,856 2,587 2,587
------ ------ ------ ------ -------
Total Investments ........................... $ 10,819 $ 14,524 $ 76,612 $ 72,524 $141,182
====== ====== ====== ====== =======
</TABLE>
- ---------------------
(1) Carried at market value.
(2) The equity securities are carried at cost due to a restriction on the sale
or transfer of these shares of Common Stock. See "---- Subsidiary
Activities - Branchview".
20
<PAGE>
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Savings Bank's investment
securities portfolio at July 31, 1996.
<TABLE>
<CAPTION>
After One Through After Five Through
One Year or Less Five Years Ten Years Over Ten Years Totals
------------------ ----------------- ----------------- ----------------- -----------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield(4) Value Yield Value Yield Value Yield Value Yield(4)
-------- -------- -------- ------- -------- ------- -------- ------- -------- --------
(Dollars in Thousands)
U. S. Agency Securities available
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
for sale .............................. $ -- --% $ 7,917 6.27% $25,226 7.09% $ 24,902 7.43% $ 58,045 7.11%
U.S. Agency Securities held to maturity. -- -- -- -- 18,329 7.82 22,492 7.64 40,821 7.72
Equity Securities available for sale(1). 12,601 1.70 -- -- -- -- -- -- 12,601 1.70
Equity securities held to maturity(1)(2) -- 7,806 -- -- -- -- -- 7,806 --
Municipal Bonds available for sale ..... -- -- -- -- 289 4.50 2,794 5.56 3,083 5.45
FHLB Stock(1)(3) ....................... 2,587 6.90 -- -- -- -- -- -- 2,587 6.90
GNMA Mortgage-backed securities
available for sale ................... -- -- -- -- -- -- 4,684 8.27 4,684 8.27
FNMA/FHLMC CMO's
available for sale ................... -- -- -- -- -- -- 2,034 6.57 2,034 6.57
Private issue CMO's
available for sale ................... -- -- -- -- -- -- 9,521 6.38 9,521 6.38
------ ---- ------ ---- ------ ---- ------ ---- ------- ----
Total ................................ $ 15,188 2.58% $ 15,723 6.27% $43,844 7.38% $ 66,427 7.30% $141,182 6.36%
====== ==== ====== ==== ====== ==== ====== ==== ======= ====
</TABLE>
- ------------------
(1) Equity securities and other securities have been classified as maturing in
one year or less, since they have no stated maturity.
(2) This stock has some restrictions. See "-- Subsidiary Activities -
Branchview."
(3) Represents stock in FHLB of New York.
(4) Excluding dividend yield on equity and other securities.
21
<PAGE>
Sources of Funds
General. Deposits are the major source of the Savings Bank's funds for
lending and other investment purposes. In addition to deposits, the Savings Bank
derives funds from loan and mortgage-backed securities principal repayments, and
maturities of investment securities. Loan and mortgage-backed securities
payments are a relatively stable source of funds, while deposit inflows are
significantly influenced by general interest rates and money market conditions.
Deposits. The Savings Bank offers a wide variety of deposit accounts,
although a majority of such deposits are in fixed-term, market-rate certificate
accounts. Deposit account terms vary, primarily as to the required minimum
balance amount, the amount of time that the funds must remain on deposit and the
applicable interest rate.
Fixed-term certificates have been the primary sources of new deposits for
the Savings Bank and as of July 31, 1996, such certificates represented $210.0
million or 59.1% of the Savings Bank's deposit accounts. As of July 31, 1996,
$44.0 million, or 12.4% of the Savings Bank's deposit portfolio, consisted of 13
to 30 month fixed-term, fixed-rate certificates and $106.0 million, or 29.9%,
consisted of 7 to 12 month fixed-term, fixed-rate certificates. Regular savings
and club accounts are a large source of deposit funds for the Savings Bank and
as of July 31, 1996, represented $74.6 million, or 21.0% of the deposit
portfolio.
The Savings Bank intends to continue to emphasize retail deposits,
including checking, certificates of deposit, savings accounts and Individual
Retirement Accounts ("IRAs"). The Savings Bank's deposits are typically obtained
from the area in which its offices are located. The Savings Bank relies
primarily on customer service and long standing relationships with customers to
attract and retain deposits. At July 31, 1996, the Savings Bank had jumbo
certificates deposits in excess of $100,000 of $17.5 million. The Savings Bank
had no brokered certificates of deposits as of July 31, 1996.
The Savings Bank pays interest on its certificate accounts which are
competitive in its market. Interest rates on deposits are reviewed weekly by the
Savings Bank based on a combination of factors including (i) the Savings Bank's
internal cost of funds; (ii) the rates offered by competing financial
institutions in the Savings Bank's market area; (iii) investment and lending
opportunities; and (iv) the Savings Bank's liquidity position.
22
<PAGE>
Deposit Portfolio. Deposits in the Savings Bank as of July 31, 1996, were
represented by various types of savings programs described below.
<TABLE>
<CAPTION>
Balance Average
Minimum as of Percentage of Balances For the
Category Term Interest Rate(1) Balance Amount July 31, 1996 Total Deposit Twelve Months Ended
- -------- ---- ---------------- -------------- ------------- ------------- -------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts .................. None 2.00%$ 250 $ 39,720 11.2% $ 36,812
Regular Savings and Club
Accounts ...................... None 2.40 10 74,613 21.0 73,643
Money Market Checking
Accounts ...................... None 2.55 2,500 8,830 2.5 9,103
Money Market Passbook
Accounts ...................... None 2.35 7,500 21,039 5.9 21,415
Certificates of Deposit:
Fixed Term, Fixed Rate......... 3-6 Months 3.21- 2,500 30,700 8.6 28,308
4.21
Fixed Term, Fixed Rate......... 7-12 Months 4.48- 500 106,095 29.9 116,889
4.75
Fixed Term, Fixed Rate......... 13-30 Months 4.89- 500 43,994 12.4 32,087
5.04
Fixed Term, Fixed Rate......... 31-120 Months 4.89 500 28,238 7.9 30,787
Fixed Term, Variable Rate...... 18 Months 4.21 500 1,018 .3 913
Accrued interest on deposits .. 1,106 .3 --
------- ------ -------
Total .. $ 355,353 100.00% $349,957
======= ====== =======
</TABLE>
- ------------------
(1) Current interest rate offerings as of July 31, 1996.
Time Deposits by Rate. The following table sets forth the time deposits in
the Savings Bank classified by interest rate as of the dates indicated.
<TABLE>
<CAPTION>
As of July 31,
--------------------------------------------------------
1992 1993 1994 1995 1996
--------- -------- --------- -------- ---------
(In Thousands)
Interest Rate
<C> <C> <C> <C> <C> <C>
2.00% or less.................. $ -- $ 585 $ 618 $ 18 $ 106
2.01-4.00%..................... 15,370 62,275 143,794 27,977 4,119
4.01-6.00%..................... 64,951 26,419 40,897 138,965 189,310
6.01-8.00%..................... 17,191 3,387 1,353 36,548 16,499
8.01-10.00%.................... 4,754 1,437 312 170 11
10.01-12.00%................... 8 -- -- -- --
Accrued interest on certificate
accounts..................... 768 481 421 1,030 975
------- ------ ------- ------ ------
Total........................ $103,042 $94,584 $187,395 $204,708 $211,020
======= ====== ======= ======= =======
</TABLE>
23
<PAGE>
Time Deposits Maturity Schedule. The following table sets forth the amount
and maturities of time deposits at July 31, 1996.
<TABLE>
<CAPTION>
Amount Due
--------------------------------------------------------
After After
July 31, July 31, July 31, July 31,
Interest Rate 1997 1998 1999 2000 Total
- ------------- ------ ------- ------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.00% or less........ 93 13 -- $ -- $ 106
2.01-4.00%........... 3,919 101 51 48 4,119
4.01-6.00%........... 156,493 26,542 5,559 716 189,310
6.01-8.00%........... 13,622 2,570 64 243 16,499
8.01-10.00%.......... -- -- -- 11 11
------- ------- ------ ------ --------
174,127 29,226 5,674 1,018 210,045
Accrued Interest on
Certificate Accounts 975 -- -- 975
------- ------- ------- ------ -------
Total.............. $175,102 $29,226 $ 5,674 $ 1,018 $211,020
======= ======= ======= ====== =======
</TABLE>
Certificates of Deposit with Balances Greater Than $100,000. The following
table indicates the amount of the Savings Bank's certificates of deposit of
$100,000 or more by time remaining until maturity as of July 31, 1996.
Certificates
Maturity Period of Deposits
- --------------- --------------
(In Thousands)
Within three months............................ $ 5,882
Three through six months....................... 4,727
Six through twelve months...................... 4,297
Over twelve months............................. 2,606
------
$17,512
======
24
<PAGE>
Savings Deposit Activity. The following table sets forth the savings
activities of the Savings Bank for the periods indicated:
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In Thousands)
Net increase (decrease) before
interest credited and acquisition
<S> <C> <C> <C> <C> <C>
of deposits ..................... $ 1,287 $ (4,614) $ (17,837) $ (14,348) $ (3,289)
Proceeds from acquisition of
deposits ........................ -- -- 191,428 -- --
Interest credited ................. 9,694 7,152 7,193 12,923 14,046
-------- -------- -------- -------- --------
Net increase (decrease) in
savings deposits ................ $ 10,981 $ 2,538 $ 180,784 $ (1,425) $ 10,757
======== ======== ======== ======== ========
</TABLE>
Borrowings. Although deposits are the Savings Bank's primary source of
funds, the Savings Bank's policy has been to utilize borrowings as an
alternative or less costly source of funds. The Savings Bank obtains advances
from the FHLB of New York. See "Regulation -- Federal Home Loan Bank System".
Such advances are made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The maximum amount that
the FHLB of New York will advance to member institutions, including the Savings
Bank, for purposes other than meeting withdrawals, fluctuates from time to time
in accordance with the policies of the FHLB of New York. The maximum amount of
FHLB of New York advances to a member institution generally is reduced by
borrowings from any other source.
The Savings Bank has in the past utilized the Regular Advance Program of
the FHLB of New York under an advances, collateral, pledge and security
agreement. The program offers a wide range of interest rates and maturities on
advances that are collateralized by various assets. At July 31, 1996, the
Savings Bank had no advances outstanding under the Regular Advance Program. The
Savings Bank will continue to use this program in the future to meet long term
operating needs.
The Savings Bank's primary method of borrowing since August 1991 is
through the FHLB Overnight Line of Credit Program. The line of credit has a
variable rate of interest and matures daily. The maximum amount that can be
borrowed under this program is approximately $42 million. The line of credit has
a term of one year and expired in August, 1996. This program has the same
collateral requirement as the Regular Advance Program. At July 31, 1996, the
line of credit had an outstanding balance of $14 million and an interest rate of
6.0%.
The Savings Bank has a blanket pledge with the FHLB of New York and has
pledged all of its stock in the FHLB, federal funds sold, U.S. agency
securities, certain qualifying loans, and mortgage-backed securities.
25
<PAGE>
The following tables set forth certain information regarding borrowings by
the Savings Bank.
<TABLE>
<CAPTION>
As of July 31,
-------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Weighted average rate paid on:
<S> <C> <C> <C> <C> <C>
FHLB advances................. 5.20% 3.13% 4.44% 5.81% 5.79%
Reverse Repurchase Agreements. -- -- -- -- 6.33%
ESOP.......................... -- -- 7.54% 8.96% 9.12%
</TABLE>
<TABLE>
<CAPTION>
During the Year Ended July 31,
-------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(In Thousands)
Maximum amount of borrowings outstanding
during the year:
<S> <C> <C> <C> <C> <C>
FHLB advances ................................ $15,775 $22,775 $51,909 $32,000 $50,460
Reverse Repurchase Agreement ................. 6,000 -- -- -- 20,000
ESOP ......................................... -- -- 1,100 1,021 859
Maximum amount of short-term borrowings
outstanding at any month end with respect to:
FHLB advances ................................ 11,700 18,500 36,000 30,500 49,450
Reverse Repurchase Agreement ................. 4,000 -- -- -- 20,000
ESOP ......................................... -- -- 1,100 1,021 859
</TABLE>
Subsidiary Activities.
General. The Corporation has two service corporations subsidiaries
incorporated under New Jersey law, Branchview, Inc. ("Branchview") and Lakeview
Mortgage Depot, Inc. ("LMD").
The Savings Bank is generally permitted by New Jersey law and the
regulations of the Department to invest an amount equal to 3% of its assets in
subsidiary service corporations. In addition to the investment limitations
imposed on New Jersey-chartered institutions by New Jersey law and regulations,
the Savings Bank, as a SAIF-insured institution, is also subject to investment
limitations imposed under FDIC regulations. The Savings Bank has three service
corporations subsidiaries incorporated under New Jersey law, LVS Corporation
("LVS"), Lakeview Investment Services, Inc. ("LISI"), and Lakeview Credit Card
Services, Inc. ("LCCS"). At July 31, 1996, LVS had no assets and no liabilities.
Branchview. Branchview was formed in 1989 for the purpose of becoming a
1/3 partner in Residential Money Center, Inc., based in Montvale, New Jersey
("RMC"). On February 6, 1995, Branchview sold its equity interest in the
mortgage banking operation of RMC, a residential mortgage company which
originates and sells mortgages in the secondary market, to an unrelated third
party for a gain of $3.8 million, of which $3.4 million was recorded as a gain
in 1995 and was reflected in other operating income. Under the terms of the sale
the balance has been deferred and will remain in escrow 18 months pending
resolution of normal contingencies. In July 1995, Branchview purchased the
26
<PAGE>
remaining interest of RMC, for $1.5 million, and became the sole owner of RMC.
RMC owned a 9.09% limited partnership interest in Industry Mortgage, Company,
L.P. ("IMC"). Prior to February 1996, Branchview was a wholly-owned subsidiary
of the Savings Bank. In February 1996, Branchview became a wholly- owned
subsidiary of the Corporation.
On June 25, 1996, IMC completed a reorganization plan whereby the limited
partners received restricted common stock in exchange for their partnership
interest in connection with a public offering of unrestricted common stock.
Immediately prior to the reorganization, Branchview purchased a limited
partner's half share interest in IMC for $4,778,000. For this acquisition, the
Savings Bank loaned to Branchview $4,000,000. As a result of the reorganization,
Branchview received 830,928 shares of restricted common stock in exchange for
its limited partnership interest. As of July 31, 1996, Branchview owns 8.87% of
IMC and the market value of such investment was approximately $19.9 million,
based on the quoted market price per share of unrestricted stock. In accordance
with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities,
due to restrictions on the sale or transfer of these shares of common stock
under Rule 144 of the 1933 Securities Act, Lakeview is required to carry the
stock at the historical basis of $7.8 million, until the restrictions are
removed, or within one year of the restriction expiring, at which time the
shares will be carried at fair value.
LISI. LISI was formed in June 1993. The purpose of the corporation is to
facilitate the licensing of representatives of the Savings Bank to sell
annuities and insurance products to Savings Bank customers. At July 31, 1996,
LISI provided fees to the Savings Bank in the amount of $7,400 and had total
assets of approximately $1,000.
LMD. LMD is a mortgage company which is 90% owed by the Corporation and
began operations in October 1995. At July 31, 1996, the Corporation had a net
loss of $124,000.
LCCS. LCCS was formed on January 17, 1996 and is a wholly owned subsidiary
of the Savings Bank. On October 1, 1996, LCCS entered into a Joint Venture
agreement with IMC Credit Card, Inc., a wholly owned subsidiary of IMC to offer
a co-branded secured credit card through a 280 broker relationship network.
Asset/Liability Management
General. The difference between an institution's interest-earning assets
and interest-bearing liabilities that mature or reprice within a specified time
period, based on certain estimates and assumptions, is called its "gap." At July
31, 1996, the Savings Bank's cumulative one-year gap as a percentage of total
assets was a negative 11.7%, making the Savings Bank vulnerable to increases in
interest rates. A negative gap position in a period of rising interest rates
generally results in a decrease in net interest income. Management of the
Savings Bank believes that interest rates may continue to rise and that this
could have a material impact on net interest income. When interest rates rise,
interest income increases may only occur through the addition of new
interest-earning assets at current rates and/or, to the extent that existing
assets can be repriced, principally through prepayment and repayment of loan
principal with reinvestment in higher rates. Because a higher volume of existing
liabilities reprice relative to the assets, interest expense increases more
rapidly than interest income. The opposite effect is realized on net interest
margin and earnings when interest rates fall. Generally, the rates paid on
existing interest-earning assets decrease more slowly than the rate on
interest-bearing liabilities due to the difference in shorter repricing terms,
with the result that net interest margin and earnings improve.
27
<PAGE>
The Savings Bank, like many other thrift institutions, is subject to
interest rate risk as a result of the difference in the maturity on
interest-bearing liabilities and interest-earning assets and the volatility of
interest rates. Because most deposit accounts react more quickly to market
interest rate movements than do traditional mortgage loans because of their
shorter terms to maturity, sharp increases in interest rates will generally
adversely affect the Savings Bank's earnings. Conversely, this mismatch will
generally benefit the Savings Bank during periods of declining or stable
interest rates. To reduce the potential volatility of the Savings Bank's
earnings, management has adopted a strategy designed to improve the match
between asset and liability maturities and rates, while maintaining an
acceptable interest rate spread. Pursuant to this strategy, the Savings Bank has
been actively originating for retention in its portfolio fixed-rate and balloon
mortgage loans with terms to maturity of five, seven and 15 years, and one,
three and five year adjustable-rate mortgage loans. At July 31, 1996,
approximately $68.8 million or 42.1% of the Savings Bank's loan portfolio
consisted of adjustable-rate loans. All 30 year fixed-rate mortgage loans
originated by the Savings Bank are sold into the secondary mortgage market. The
Savings Bank's strategy is designed to maintain a mix of adjustable-rate, and
15-year or less fixed-rate mortgage loans in its loan portfolio. In addition,
the Savings Bank has purchased five and seven year balloon mortgage-backed
securities and has increased its emphasis on making home equity loans which have
15 year terms to maturity and provide for adjustable interest rates.
Gap Analysis. As rates on sources of funds have become deregulated and
subject to competitive pressures, savings associations have become increasingly
concerned with the extent to which they are able to match maturities of
interest-earning assets and interest-bearing liabilities. Such matching is
facilitated by examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's interest rate
sensitivity gap. An asset or liability is considered to be interest rate
sensitive if it will mature or reprice within a specific time period. The
interest rate sensitivity gap is defined as the excess of interest-earning
assets maturing or repricing within a specific time period over interest-bearing
liabilities maturing or repricing within that time period.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at July 31, 1996, which are expected to
reprice or mature in each of the future time periods shown. The amount of assets
or liabilities shown which reprice or mature during a particular period were
determined in accordance with the contractual terms of the asset or liability
and assumed loan prepayments and deposit withdrawals. The Savings Bank's
analysis of its interest-rate sensitivity, which is prepared quarterly by the
Savings Bank, incorporates certain assumptions developed by the Savings Bank
based on its actual experience concerning the amortization and prepayment of
loans and other interest-earning assets and the withdrawal of deposits. For
adjustable rate loans, and adjustable rate mortgage-backed securities will
reprice at contractual repricing intervals. Fixed rate mortgage-backed
securities are assumed to have an annual prepayment rate of 8%. For fixed-rate
mortgage loans with the following interest rates, the following annual
prepayment rates are assumed: 4% for interest rates of less than 8%; 12% for
interest rates between 8.01% to 10%; 13% for interest rates between 10.01% to
12%; 12% for interest rates of greater than 12%. For other residential loans and
all non-residential loans, an annual prepayment rate of 9% was assumed. Decay
rates for NOW, money market accounts, and savings accounts were established at
17% to 37%, 14% to 17%, and 14% to 17%, respectively. These assumptions change
over time based upon the current economic outlook. Management believes that
these assumptions approximate actual experience and considers them appropriate
and reasonable. However, the interest rate sensitivity of the Savings Bank's
assets and liabilities illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions. No consideration has been provided for
the impact of future commitments and loans in process.
28
<PAGE>
<TABLE>
<CAPTION>
At July 31, 1996
------------------------------------------------------------------------------------
Three Over Ten
Less Than Months Over One Over Three Over Five Through Over
Three Through Through Through Through Twenty Twenty
Months One Year Three Years Five Years Ten Years Years Years Total
------ -------- ----------- ---------- --------- -------- ----- -----
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans and mortgage-backed
<S> <C> <C> <C> <C> <C> <C> <C> <C>
securities ...........................$ 48,673 $ 26,076 $ 53,159 $ 45,896 $ 32,540 $ 32,489 $ 460 $ 239,293
Other loans ............................ 26,446 3,301 4,455 4,895 6,724 3,053 45 48,919
Investment securities(1) ............... -- 18,821 2,000 -- 3,000 17,000 -- 40,821
Investment securities available for sale 16,126 76,429 7,806 -- -- -- -- 100,361
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-earning assets ........$ 91,245 $ 124,627 $ 67,420 $ 50,791 $ 42,264 $ 52,542 $ 505 $ 429,394
========= ========= ========= ========= ========= ========= ========= ========
Interest-bearing liabilities:
NOW and money market checking ...........$ 7,594 $ 18,156 $ 23,567 $ 6,306 $ 8,465 $ 4,649 $ 852 $ 69,589
Savings, clubs and money market passbook
accounts ............................... 5,934 12,421 17,910 11,501 14,355 9,741 2,751 74,613
Certificates of deposit ................. 62,598 107,789 35,069 4,589 -- -- -- 210,045
Advances from FHLB of New York .......... 34,000 -- -- -- -- -- -- 34,000
Reverse Repurchase Agreements ............ 20,000 -- -- -- -- -- -- 20,000
ESOP debt ............................... 721 -- -- -- -- -- -- 721
--------- --------- --------- --------- --------- --------- --------- --------
Total interest-bearing liabilities ....$ 130,847 $ 138,366 $ 76,546 $ 22,396 $ 22,820 $ 14,390 $ 3,603 $ 408,968
========= ========= ========= ========= ========= ========= ========= ========
Interest sensitivity gap .................$ (39,602) $ (13,739) $ (9,126) $ 28,395 $ 19,444 $ 38,152 $ (3,098) $ 20,426
========= ========= ========= ========= ========= ========= ========= ========
Cumulative interest rate sensitivity gap $ (39,602) $ (53,341) $ (62,467) $ (34,072) $ (14,628) $ 23,524 $ 20,426 $ 20,426
========= ========= ========= ========= ========= ========= ========= ========
Ratio of interest-earning assets to
interest-bearing liabilities ........... 69.7 % 90.1 % 88.1 % 149.1 % 185.2 % 365.1% (13.8)% 105.0%
========= ========= ========= ========= ======== ======== ======= ========
Ratio of cumulative gap to total
assets ................................. (8.6)% (11.7)% (13.6)% (7.4)% (3.2)% 5.1% 4.5 % 4.5%
========= ========= ========= ========= ======== ======== ======= ========
</TABLE>
- -------------------
(1) Includes investment in stock of Federal Home Loan Bank of New York totaling
$2.6 million.
29
<PAGE>
The table above indicates the time periods in which interest-earning
assets and interest-bearing liabilities will mature or may reprice in accordance
with their contractual terms. However, the table does not necessarily indicate
the impact of general interest rate movements on the Savings Bank's net interest
yield because the repricing of various categories of assets and liabilities is
discretionary and is subject to competitive and other pressures. As a result,
various assets and liabilities indicated as repricing within the same period may
in fact reprice at different times and at different rate levels.
Net Interest Income
The Savings Bank's earnings depend primarily on its net interest income.
Net interest income is affected by (i) the amount of interest-earning assets and
interest-bearing liabilities, (ii) rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities and (iii) the difference
("interest rate spread") between rates of interest earned on interest-earning
assets and rates paid on interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.
30
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Savings
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material differences in the information
presented.
<TABLE>
<CAPTION>
Year Ended July 31,
-----------------------------------------------------------------------------------------------
1994 1995 1996
-------------------------------- ------------------------------- -----------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- -------- ---------- ------- -------- ---------- ------- -------- ----------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable(1)............. $136,165 $11,749 8.63% $139,442 $12,509 8.97% $155,497 $14,131 9.09%
Mortgage-backed securities...... 89,630 5,514 6.15% 171,867 11,163 6.50 149,373 9,605 6.43
Investment securities(2)........ 22,152 1,367 6.17% 66,204 4,535 6.85 47,672 3,004 6.30
Investment and mortgage-backed
securities available for sale(6) 12,472 317 2.54% 8,060 223 2.77% 58,719 4,232 7.21%
------- ------ ----- ------- ------ ----- ------- ------ ----
Total interest-earning assets.. $260,419 $18,947 7.28% $385,573 $28,430 7.37% $411,261 $30,972 7.53%
======= ====== ==== ======= ====== ===== ======= ====== ====
Non-interest-earning assets...... 19,997 31,983 29,502
------- ------- -------
Total assets................... $280,416 $417,556 $440,763
======= ======= =======
Interest-bearing liabilities:
Savings accounts................ $219,233 $ 6,860 3.13% $339,945 $11,944 3.51% $349,957 $14,064 4.02%
Borrowings...................... 21,693 875 4.03% 26,902 1,595 5.93% 42,162 2,485 5.89%
------- ------ ---- ------ ------ ---- ------- ------ ----
Total interest-bearing liabilities $240,926 $ 7,735 3.21% $366,847 $13,539 3.69% $392,119 $16,549 4.22%
======= ====== ==== ======= ====== ==== ======= ====== ====
Non-interest bearing liabilities. $ 2,603 $ 2,592 % 3,026
------- ------ -------
Total liabilities............... $243,529 $369,439 $395,145
======= ======= =======
Stockholders' equity............. $ 36,887 $ 48,117 % 45,618
------- ------- -------
Total liabilities and stockholders $280,416 $417,556 $440,763
======= ======= =======
Net interest income.............. $11,212 $14,891 $14,423
====== ====== ======
Interest rate spread(3).......... 4.07% 3.68% 3.31%
==== ==== ====
Net yield on interest-earning assets(4) 4.31% 3.86% 3.51%
==== ==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.08X 1.05X 1.05X
</TABLE>
- ---------------------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions and
Federal Home Loan Bank of New York stock.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
(5) Annualized (where appropriate) for purposes of comparability with year-end
data.
(6) At market value.
31
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Savings Bank for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------------------------------------------------------
1994 vs. 1995 1995 vs. 1996
----------------------------------- ----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------- ----------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars in Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable.......... $ 283 $ 466 $ 11 $ 760 $ 1,440 $ 163 $ 19 $ 1,622
Mortgage-backed securities 5,059 308 282 5,649 (1,461) (112) (15) (1,558)
Investment securities..... 2,719 150 299 3,168 (1,269) (363) (101) (1,531)
Investment and mortgage-backed
securities available for sale (112) 28 (10) (94) 1,402 358 2,249 4,009
----- ------ ------ ----- ----- ------ ----- ------
Total interest-earning assets $7,949 $ 952 $ 582 $9,483 $ 112 $ 46 $ 2,384 $2,542
===== ====== ====== ===== ===== ====== ===== =====
Interest expense:
Savings accounts.......... $3,777 $ 843 $ 464 $5,084 $ 352 $ 1,718 $ 50 $2,120
Borrowings................ 210 411 99 720 905 (9) (5) 891
------ ------- ------- ------ ----- ------- ------ ------
Total interest-bearing liabilities $3,987 $ 1,254 $ 563 $5,804 $ 1,257 $ 1,709 $ 45 $ 3,011
===== ===== ===== ===== ===== ===== ===== ======
Net change in interest income $3,962 $ (302) $ 19 3,679 $(1,145) $(1,663) $ 2,339 $(469)
===== ==== ====== ===== ====== ======= ===== =====
</TABLE>
Competition
The Savings Bank faces strong competition in its attraction of savings
deposits, which are its primary source of funds for lending, and in the
origination of real estate loans. The Savings Bank's competition for savings
deposits and loans historically has come from other savings institutions and
commercial banks located in the Savings Bank's market area. The Savings Bank
also competes with mortgage banking companies for real estate loans, and faces
competition for investor funds from short-term money market securities and
corporate and government securities.
The Savings Bank's market area generally includes Passaic and Bergen
Counties. The Savings Bank also makes loans in all other counties in New Jersey.
The Savings Bank maintains competitive interest rates and loan fees, but
relies more on providing personalized community bank services in order to
attract and maintain customers. The Savings Bank offers all consumer banking
services such as checking accounts, certificates of deposit, retirement
accounts, consumer and mortgage loans and ancillary services such as direct
deposit and safe deposit boxes. These services help the Savings Bank compete for
deposits.
32
<PAGE>
The Savings Bank also competes with several other larger financial
institutions, headquartered outside of New Jersey, which maintain offices in the
Savings Bank's market area. These competitors may be able to offer better loan
rates from time to time due to their size, financial resources, and competitive
strategy.
REGULATION
General
The Corporation owns all of the capital stock of the Savings Bank and is a
savings and loan holding company because it has elected to be treated as a
savings and loan holding company pursuant to Section 10(l) of Home Owners Loan
Act ("HOLA"). As a savings and loan holding company, the Corporation is subject
to regulation by the Office of Thrift Supervision ("OTS"). As a company whose
stock is publicly-traded, the Corporation is also subject to the reporting,
proxy solicitation, and other regulations of the Securities and Exchange
Commission ("SEC").
The Savings Bank is a New Jersey-chartered capital stock savings bank, the
accounts of which are insured by the FDIC, and as such, is subject to the
regulation, supervision and examination of the New Jersey Department of Banking
and the FDIC.
New Jersey Law
The New Jersey Department of Banking (the "Department") regulates the
Savings Bank's internal organization as well as its deposit, lending and
investment activities. The Department must approve changes to the Savings Bank's
certificate of incorporation, the establishment or relocations of branch offices
and mergers involving the Savings Bank. In addition, the Department conducts
periodic examinations of the Savings Bank. Many of the areas regulated by the
Department are subject to similar regulation by the FDIC.
Recent federal and state legislative developments have reduced
distinctions between commercial banks and savings banks in New Jersey with
respect to lending and investment authority as well as interest rate
limitations. As federal law has expanded the authority of federally chartered
savings institutions to engage in activities previously reserved for commercial
banks, New Jersey legislation and regulations ("parity legislation") have given
New Jersey-chartered savings institutions, such as the Savings Bank, the powers
of federally chartered savings institutions, including the authority to make ARM
loans, consumer loans, second mortgage loans, checking advances and commercial
loans.
In addition, under New Jersey law, the Savings Bank has the authority to
invest the lesser of 3% of the Savings Bank's total assets or 50% of its
capital, surplus, reserves, undivided profits and capital notes in any type of
asset. The scope of this authority is, however, significantly restricted by
federal statute and regulation. See "--Restrictions on Certain Activities."
New Jersey law provides that no dividend may be paid by the Savings Bank
unless after the payment of such dividend, the capital stock of the Savings Bank
will not be impaired and either the Savings Bank will have a surplus of not less
than 50% of its capital stock, or the payment of such dividend will not reduce
the statutory surplus of the Savings Bank.
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Restrictions on Certain Activities
Section 24 of the Federal Deposit Insurance Act ("FDIA"), as amended,
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership, the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
In addition, FDIC regulations generally require an insured state bank to
obtain the FDIC's prior consent before directly, or indirectly through a
subsidiary, engaging as principal in any activity that is not permissible for a
national bank or a subsidiary of a national bank.
Insurance of Deposit Accounts
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. The
risk-related assessment program provided a transition period between the prior
flat-rate system and the final risk-related system that took effect on January
1, 1994, in accordance with the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). This risk classification is based on an
institution's capital group and supervisory subgroup assignment.
On September 30, 1996, H.R. 1362 was signed into law by the President.
Title II of H.R. 1362 is titled the Economic Growth and Paperwork Reduction Act
of 1996 (the "Act"). Among its many provisions, the Act provides for resolving
the BIF/SAIF premium disparity. Currently, most insured depository institutions
holding BIF-assessable deposits pay the statutory minimum of $2,000 for deposit
insurance on these deposits while most insured depository institutions with
SAIF-assessable deposits pay 23 basis points per $100 of these deposits for
deposit insurance. The Savings Bank currently pays an insurance premium to the
FDIC equal to 0.22% of its total deposits.
The BIF/SAIF legislation provides for a one-time assessment to
recapitalize the SAIF. The assessment will be based on the amount of
SAIF-assessable deposits held by an institution as of March 31, 1995 (with
certain exceptions). The assessment is effective on September 30, 1996 and is
payable on November 27, 1996.
The BIF/SAIF legislation does not specify an actual assessment but states
that the total assessment will be equal to the amount necessary to recapitalize
the SAIF as of October 1, 1996. A recent report of the America's Community
Bankers estimated the assessment at approximately 65.7 basis points per $100 of
SAIF-assessable deposits as of March 31, 1995. The BIF/SAIF legislation provides
that the amount of the special assessment is deductible under section 162 of the
Internal Revenue Code (the "Code") in the year in which the assessment is paid.
The BIF/SAIF legislation also provides that section 172(f) of the Code will not
apply to deductions taken under section 162 of the Code for the special
assessment. The Savings Bank has estimated the amount of the assessment to be
approximately $2.2 million before tax benefit and such amount was accrued on
September 30, 1996.
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Capital Requirements
Under FDIC regulations, state-chartered banks that are not members of the
Federal Reserve System ("state non-member banks") are required to maintain a
minimum leverage capital requirement consisting of a ratio of Tier 1 capital to
total assets of 3% if the FDIC determines that the institution is not
anticipating or experiencing significant growth and has well-diversified risk,
including no undue interest rate risk exposure, excellent asset quality, high
liquidity, good earnings and is in general a strong banking organization, rated
composite 1 under the Uniform Financial Institutions Ranking System (the CAMEL
rating system) established by the Federal Financial Institutions Examination
Council. For all but the most highly rated institutions meeting the conditions
set forth above, the minimum leverage capital ratio is 3% plus an additional
"cushion" amount of at least 100 to 200 basis points. Tier 1 capital is the sum
of common stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus) and minority investments in certain
subsidiaries, less most intangible assets. As a SAIF-insured, state-chartered
bank, the Savings Bank must currently also deduct from Tier 1 capital an amount
equal to its investments in, and extensions of credit to, subsidiaries engaged
in activities not permissible for national banks, other than subsidiaries
engaged in activities undertaken as agent for customers or in mortgage banking
activities or in subsidiary depository institutions or their holding companies.
In addition to the leverage ratio, state nonmember banks must maintain a
minimum ratio of qualifying total capital to risk-weighted assets of at least
8.0%, of which at least four percentage points must be Tier 1 capital.
Qualifying total capital consists of Tier 1 capital plus Tier 2 or supplementary
capital items which include allowances for loan losses in an amount of up to
1.25% of risk-weighted assets, cumulative preferred stock and preferred stock
with a maturity of over 20 years and certain other capital instruments. The
includable amount of Tier 2 capital cannot exceed the institution's Tier 1
capital. Qualifying total capital is further reduced by the amount of the bank's
investments in banking and finance subsidiaries that are not consolidated for
regulatory capital purposes, reciprocal cross-holdings of capital securities
issued by other banks and certain other deductions. Under the FDIC risk-weighted
system, all of a bank's balance sheet assets and the credit equivalent amounts
of certain off-balance sheet items are assigned to one of four broad risk weight
categories. The aggregate dollar amount of each category is multiplied by the
risk weight assigned to that category. The sum of these weighted valued equals
the bank's risk-weighted assets.
The Corporation evaluates various interest rate analysis scenarios based
upon various assumptions and past experience in accordance with the Joint Policy
Statement on Interest Rate Risk published by the Federal Reserve Board, the OCC,
and the FDIC in June 1996. The policy statement requires each institution to
develop internal policies and procedures for managing interest rate risk in
accordance with the principles provided in the policy statement. The regulatory
agencies examine, as part of their normal supervisory examination, the
Corporation's policies and procedures relating to interest rate risk management
to ensure that the Savings Bank's policies and procedures are consistent with
safe and sound banking practices.
Pursuant to New Jersey banking law the minimum leverage capital for a
depository institution is a ratio of Tier 1 capital to total assets of four
percent. However, the Commissioner may establish for a depository institution a
minimum ratio of Tier 1 capital to total assets of more than four percent based
on the following factors:
1. The financial history and condition of a depository institution, and
its future earnings prospects;
2. The managerial resources of the depository institution;
3. The funding and liquidity of the depository institution;
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4. The interest-rate risk exposure of the depository institution;
5. The concentration of assets of the depository institution; and/or
6. The volume of assets classified as substandard, doubtful or loss, or
subject to special mention.
New Jersey banking law requires that a depository institution maintain
qualifying capital of at least eight percent of its risk weighted assets. At
least four percent of this qualifying capital shall be in the form of Tier 1
capital. For purposes of New Jersey banking law, risk weighted assets, Tier 1
capital, and total assets are defined in the same manner as in the FDIC
regulations.
The Savings Bank was in compliance with both the FDIC and New Jersey
capital requirements at July 31, 1996.
Capital Distributions. Earnings of the Savings Bank appropriated to bad
debt reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Savings Bank on the amount of
earnings removed from the reserves for such distributions. See "Federal and
State Taxation." The Savings Bank intends to make full use of this favorable tax
treatment and does not contemplate use of any earnings in a manner which would
limit the Savings Bank's bad debt deduction or create federal tax liabilities.
Dividends payable by the Savings Bank to the Corporation and dividends
payable by the Corporation to stockholders are subject to various additional
limitations imposed by federal and state laws, regulations and policies adopted
by federal and state regulatory agencies. The Savings Bank is required by
federal law to obtain FDIC approval for the payment of dividends if the total of
all dividends declared by the Savings Bank in any year exceed the total of the
Savings Bank's net profits (as defined) for that year and the retained net
profits (as defined) for the preceding two years, less any required transfers to
surplus. Under New Jersey law, the Savings Bank may not pay dividends unless,
following payment, the capital stock of the Savings Bank would be unimpaired and
(a) the Savings Bank will have a surplus of not less than 50% of its capital
stock, or, if not, (b) the payment of such dividends will not reduce the surplus
of the Savings Bank.
If, in the opinion of the FDIC, a depository institution under its
jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which depending on the financial condition of the institution, could
include the payment of dividends), such authority may require that such
depository institution cease and desist from such practice or, as a result of an
unrelated practice, require the institution to limit dividends in the future. In
addition, the FDIC has issued a policy statement which provides that insured
institutions should generally only pay dividends out of current operating
earnings. Regulatory pressures to reclassify and charge-off loans and to
establish additional loan loss reserves could reduce current operating earnings
and affect an institution's ability to pay dividends. Finally, the regulatory
authorities have established guidelines, and under FDICIA are expected to
establish additional guidelines, with respect to the maintenance of appropriate
levels of capital by depository institutions. Compliance with the standards set
forth in such policy statements and guidelines could limit the amount of
dividends which the Corporation may pay to stockholders.
The Savings Bank's dividends will be subject to restrictions under New
Jersey Law. See "--New Jersey Law."
Under applicable regulations, the Savings Bank would be prohibited from
making any capital distributions if, after making the distribution, the Savings
Bank would have: (i) a total risk-based capital
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ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0%.
Prompt Corrective Action and Other Enforcement Mechanisms. Federal law
requires each federal banking agency to take prompt corrective action to resolve
the problems of insured depository institutions, including but not limited to
those that fall below one or more prescribed minimum capital ratios. The law
requires each federal banking agency to promulgate regulations defining the
following five categories in which an insured depository institution will be
placed, based on the level of its capital ratios: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized. In September 1992, the federal banking agencies issued uniform
final regulations implementing the prompt corrective action provisions of
federal law.
An institution that, based upon its capital levels, is classified as well
capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat an institution as critically undercapitalized unless its
capital ratio actually warrants such treatment.
In addition to restrictions and sanctions imposed under the prompt
corrective action provisions, commercial banking organizations may be subject to
potential enforcement actions by the federal regulators for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease and desist order that can be
judicially enforced, the termination of insurance of deposits (in the case of a
depository institution), the imposition of civil money penalties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders based upon a judicial determination that the
agency would be harmed if such equitable relief was not granted. The Savings
Bank is currently a well capitalized institution.
Safety and Soundness Standards. In July 1995, the federal banking agencies
adopted final guidelines establishing standards for safety and soundness. The
guidelines set forth operational and managerial standards relating to internal
controls, information systems and internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth and compensation, fees
and benefits. Guidelines for asset quality and earnings standards will be
adopted in the future. The guidelines establish the safety and soundness
standards that the agencies will use to identify and address problems at insured
depository institutions before capital becomes impaired. If an institution fails
to comply with a safety and soundness standard, the appropriate federal banking
agency may require the institution to submit a compliance plan. Failure to
submit a compliance plan or to implement an accepted plan may result in
enforcement action.
Loans to One Borrower
Generally, a savings bank may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of its unimpaired capital and
surplus. See "Business of the Savings Bank - - Lending Activities -- Loans to
One Borrower."
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Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OTS
regulations, a savings association 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. Current law
requires public disclosure of an institution's CRA rating and requires the FDIC
to provide a written evaluation of an institution's CRA performance utilizing a
four tiered descriptive rating system in lieu of the existing five-tiered
numerical rating system. The Savings Bank received a satisfactory rating (the
second highest rating available) as a result of its last evaluation in February
1996.
Federal Home Loan Bank System
The Savings Bank is a member of the FHLB of New York, which is one of 12
regional FHLBs that administers the home financing credit function of savings
associations. 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 Savings Bank is required to purchase and maintain stock
in the FHLB of New York in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. At July 31, 1996, the Savings Bank
had $2.6 million in FHLB stock, which was in compliance with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of FHLB dividends paid and could
continue to do so in the future. For the year ended July 31, 1996, dividends
paid by the FHLB of New York to the Savings Bank totalled $177,891.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
non-interest bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy the
liquidity requirements that are imposed by the Department. At July 31, 1996, the
Savings Bank's reserve requirements are satisfied by cash on hand.
State-chartered savings banks have authority to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve policy generally requires
savings banks to exhaust all reasonable alternative sources before borrowing
from the Federal Reserve System. The Savings Bank had no discount window
borrowings at July 31, 1996.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Savings Bank as
transactions with non-affiliates. In addition, certain of these transactions are
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restricted to a percentage of the Savings Bank's capital. Affiliates of the
Savings Bank include the Corporation and any company which would be under common
control with the Savings Bank.
The Savings Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities such persons control are
currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O promulgated by the Federal Reserve Board. Among other things, these
regulations require such loans to be made on terms substantially similar to
those offered to unaffiliated individuals, place limits on the amount of loans
the Savings Bank may make to such persons based, in part, on the Savings Bank's
capital position, and require certain approval procedures to be followed.
Holding Company Regulation
General. The Holding Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS will have enforcement authority
over the Holding Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the
Savings Bank and not for stockholders of the Holding Company.
QTL Test. As a unitary savings and loan holding company, the Holding
Company generally is not subject to activity restrictions, provided the Savings
Bank satisfies the QTL test. If the Holding Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Holding Company and any of
its subsidiaries (other than the Savings Bank or any other SAIF-insured savings
association) would become subject to such restrictions unless such other
associations each qualify as a QTL or were acquired in a supervisory
acquisition.
Restrictions on Acquisitions. The Holding Company must obtain approval
from the OTS before acquiring control of any other SAIF-insured association.
Such acquisitions are generally prohibited if they result in a multiple savings
and loan holding company controlling savings associations in more than one
state. However, such interstate acquisitions are permitted based on specific
state authorization or in a supervisory acquisition of a failing savings
association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control", as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
Subject to appropriate regulatory approvals, a bank holding company can
acquire control of a savings association or its holding company, and if it
controls a savings association, merge or consolidate the assets and liabilities
of the savings association with, or transfer assets and liabilities to, any
subsidiary bank which is a member of the BIF with the approval of the
appropriate federal banking agency and the Federal Reserve Board. Generally,
savings associations and savings banks can acquire or be acquired by any insured
depository institution.
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In addition, federal regulations governing conversions of mutual savings
institutions to the stock form of organization prohibit the direct or indirect
acquisition without prior OTS approval of more than 10% of any equity security
of a savings institution within three years of the savings institution's
conversion to stock form. Such acquisition may be disapproved if it is found,
among other things, that the proposed acquisition (a) would frustrate the
purposes of the provisions of the regulations regarding conversions; (b) would
be manipulative or deceptive; (c) would subvert the fairness of the conversion;
(d) would be likely to result in injury to the savings institution; (e) would
not be consistent with economical home financing; (f) would otherwise violate
law or regulation; or (g) would not contribute to the prudent deployment of the
savings institution's conversion proceeds.
Interstate Banking and Branching. In September 1994, the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act")
became law. Under the Interstate Act, beginning one year after the date of
enactment, a bank holding company that is adequately capitalized and managed may
obtain approval under the BHCA to acquire an existing bank located in another
state without regard to state law. A bank holding company would not be permitted
to make such an acquisition if, upon consummation, it would control (a) more
than 10% of the total amount of deposits of insured depository institutions in
the United States or (b) 30% or more of the deposits in the state in which the
bank is located. A state may increase or decrease the percentage of total
deposits that may be held in that state by any one bank or bank holding company
if application of such percentage does not discriminate against out-of-state
banks. An out-of-state bank holding company may not acquire a state bank in
existence for less than a minimum length of time that may be prescribed by state
law except that a state may not impose more than a five year existence
requirement.
Federal Securities Law. The Corporation is subject to filing and reporting
requirement by virtue of having its common stock registered under the Securities
Exchange Act of 1934. Furthermore, company stock held by persons who are
affiliates (generally officers, directors and principal stockholders) of the
Corporation may not be resold without registration or unless sold in accordance
with certain resale restrictions. If the Corporation meets specified current
public information requirements, each affiliate of the Corporation is able to
sell in the public market, without registration, a limited number of shares in
any three-month period.
FEDERAL AND STATE TAXATION
Recapture of Post-1987 Bad-Debt Reserves. Prior to the enactment of the
Small Business Jobs Protection Act, which was signed into law on August 21,
1996, certain thrift institutions such as the Bank were allowed deductions for
bad debts under methods more favorable than those granted to other taxpayers.
Qualified thrift institutions could compute deductions for bad debts using
either the specific charge off method of Section 166 of the Internal Revenue
Code of 1986, as amended (the "Code") or the reserve method of Section 593 of
the Code. For tax years 1995, 1994 and 1993, the Bank used the experience
method.
The Small Business Job Protection Act repealed the Code Section 593
reserve method of accounting for bad debts by thrift institutions, effective for
taxable years beginning after 1995. Thrift institutions that are treated as
small banks are allowed to utilize the experience method applicable to such
institutions, while thrift institutions that are treated as large banks are
required to use only the specific charge off method. The percentage of taxable
income method of accounting for bad debts is no longer available for any
financial institution.
The amount of the applicable excess reserves will be taken into account
ratably over a six taxable year period, beginning with the first taxable year
beginning after 1995, subject to the residential loan requirement described
below.
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A small bank, like the Bank, the amount of the institution's applicable
excess reserves generally is the excess of (i) the balances of its reserve for
losses on qualifying real property loans and its reserve for losses on
nonqualifying loans as of the close of its last taxable year beginning before
January 1, 1996, over (ii) the greater of the balance of (a) its pre-1988
reserves or (b) what the Bank's reserves would have been at the close of its
last tax year beginning before January 1, 1996, had the Bank always used the
experience method. At July 31, 1996, the Bank had $3.6 million of pre 1988
bad-debt reserves. Since the percentage of taxable income method for tax bad
debt deduction and the corresponding increase in the tax bad debt reserve in
excess of the base year have been recorded as temporary differences pursuant to
SFAS 109, this change in the tax law is not expected to have a material effect
on the Company's or the Bank's financial statements.
For taxable years that begin after December 31, 1995, and before January
1, 1998, if a thrift meets the residential loan requirement for a tax year, the
recapture of the applicable excess reserves otherwise required to be taken into
account as a Code Section 481(a) adjustment for the year will be suspended. A
thrift institution meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount.
State Taxation. The Savings Bank is also taxed under the New Jersey
Savings Institution Tax Act. This Act exempts the Savings Bank from all other
taxes imposed by the State for state income tax purposes, and from all local
taxation imposed by political subdivisions. The Savings Institutions Tax is an
excise tax upon the privilege of doing business in the State of New Jersey at
the rate of 3% per annum on net income as reported for federal income tax
purposes, with certain modifications.
The Corporation is also taxed under the New Jersey Corporation Business
Tax Act. If it meets certain tests, the Corporation would be taxed as an
investment company at an effective annual rate of approximately 2.25% of New
Jersey taxable income. If it fails to meet such tests it will be taxed at an
approximate annual rate of 9% of New Jersey taxable income.
The Savings Bank's State income tax returns have not been audited during
the past five years.
Personnel
As of July 31, 1996, the Corporation and Saving Bank had 62 full-time
employees and 39 part-time employees. The employees are not represented by a
collective bargaining unit. The Corporation and Savings Bank believe their
relationship with employees to be satisfactory.
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Executive Officers of the Registrant
The executive officers of the Corporation are as follows:
Name Ages(1) Position
- ----- ------- --------
Kevin J. Coogan 47 President and Chief Executive
Officer
Anthony G. Gallo 43 Vice President and Chief Financial Officer
Kevin M. McCloskey 38 Vice President and Chief Operating Officer
- ---------------------
(1) At July 31, 1996.
The principal occupation of each executive officer of the Corporation is
set forth below. Unless noted otherwise, each executive officer has held such
position for the past five years.
Kevin J. Coogan has been the President and Chief Executive Officer of the
Savings Bank since 1986. Mr. Coogan began his service as an officer with the
Savings Bank in 1982. Mr. Coogan has served as a director since 1987.
Kevin M. McCloskey has been employed with the Savings Bank for more than
10 years as Vice President and Chief Operating Officer. Mr. McCloskey also
serves as officer in charge of compliance with the Community Reinvestment Act.
Anthony G. Gallo has been the Chief Financial and Accounting Officer of
the Savings Bank since March 1989.
Item 2. Properties and Equipment
The Company is located and conducts the majority its business at the
Savings Bank's main office. The Savings Bank primarily conducts its business
through its office located at 1117 Main Street in Paterson, New Jersey and seven
other branch offices located in Ramsey, West Paterson, Totowa, Haledon, North
Haledon and Hawthorne, New Jersey. The Savings Bank also owns a three family
home which provides rental income and which has a parking area utilized by the
Savings Bank's employees.
The following table sets forth the location of the Savings Bank's offices
and property, the year the office or property was first acquired or rented, and
the net book value at July 31, 1996 and square footage of each office or
property.
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<TABLE>
<CAPTION>
Year Net Book Furniture & Square
Description Address Open/Acquired Value Fixtures Footage
- ----------- ------- ------------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Main Office 1117 Main Street 1945 $ 799,115 $ 61,653 13,500
Paterson, NJ
Owned
Branch Office 14-18 N. Spruce St. 1989 52,492 6,628 4,820(1)
Ramsey, NJ
Owned
Future Main 111 Genessee Avenue 1989 139,338 -- 2,400(2)
Office Expansion Paterson, NJ
Owned
Branch Office 989 McBride Avenue 1994 1,254,778 225,810 21,228
West Paterson, NJ
Owned
Branch Office 169 Union Boulevard 1994 155,255 15,263 2,300
Totowa, NJ (3)
Branch Office 325 Belmont Avenue 1994 39,900 4,407 1,500
Haledon, NJ (3)
Branch Office 33 Sicomac Road 1994 6,000 14,013 4,121
North Haledon, NJ (3)
Branch Office 396 Haledon Avenue 1994 815,936 29,740 4,950
Haledon, NJ
Owned
Branch Office 571 Lafayette Avenue 1994 488,723 11,370 3,500
Hawthorne, NJ
Owned
</TABLE>
- ----------------------------
(1) 56% of building has been leased to three commercial tenants for total
income to the Savings bank of $3,899 per month.
(2) 100% of the building on this property has been temporarily leased to three
tenants for total income to the Savings Bank of $1,735 per month.
(3) Leased facility.
The Savings Bank's accounting and record keeping departments utilize
personal computers. The Savings Bank's general ledger is on an in-house
multi-user computer. The savings, checking and lending data processing is
performed by Bisys, Cherry Hill, New Jersey. Each of the Savings Bank's tellers
and customer service stations are provided with a personal computer that is
connected to the data base at Bisys. At July 31, 1996, the net book value of the
Savings Bank's computer equipment totalled $83,000.
43
<PAGE>
As of July 31, 1996, the book value of the Savings Bank's office
properties, land, furniture, fixtures and equipment, net of accumulated
depreciation of $1.6 million, totalled $4.2 million. See Note 10 of Notes to
Consolidated Financial Statements.
Item 3. Legal Proceedings
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Information relating to the market for Registrant's common equity and
related stockholder matters appears in the Registrant's 1996 Annual Report to
Stockholders on page 10, and is incorporated herein by reference.
Item 6. Selected Financial Data
The above-captioned information appears under "Selected Financial Data" in
the Registrant's 1996 Annual Report to Stockholders on page 1, and is
incorporated herein by reference.
Item 7. Management's Discussion and Analysis or Plan of Operation
The above-captioned information appears under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Registrant's
1996 Annual Report to Stockholders on pages 9 through 13 and is incorporated
herein by reference.
Item 8. Financial Statements
The Consolidated Financial Statements of Lakeview Financial Corp. and its
subsidiaries, together with the auditors' report thereon by KPMG Peat Marwick
LLP appears in the Registrant's 1996 Annual Report to Stockholders on pages 14
through 40 and are incorporated herein by reference.
Item 9. Change In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
44
<PAGE>
PART III
Item 10. Directors and Executive Officers
- ------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance," "Proposal I - Information with
Respect to Nominees for Directors; Directors Whose Terms Continue and Executive
Officers" and "Biographical Information" in the Proxy Statement is incorporated
herein by reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information contained under the section captioned "Voting Securities
and Principal Holders Thereof" in the Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
herein by reference.
45
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
(1) Consolidated Financial Statements of the Company are incorporated by
reference to the following indicated pages of the 1996 Annual Report to
Stockholders.
PAGE
Independent Auditors' Report......................................... 40
Consolidated Balance Sheets as of
July 31, 1995 and 1996............................................. 14
Consolidated Statements of Income for the Years Ended
July 31, 1994, 1995 and 1996....................................... 15
Consolidated Statements of Cash Flows for the Years
Ended July 30, 1994, 1995 and 1996................................. 16-17
Consolidated Statements of Stockholders' Equity for the Years
Ended July 31, 1994, 1995 and 1996................................. 18-19
Notes to Consolidated Financial Statements........................... 20-39
The remaining information appearing in the Annual Report to Stockholders
is not deemed to be filed as part of this report, except as expressly provided
herein.
(2) All schedules are omitted because they are not required or applicable,
or the required information is shown in the consolidated financial statements or
the notes thereto.
46
<PAGE>
(3) Exhibits
The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Lakeview Financial Corp.*
3.2 Bylaws of Lakeview Financial Corp.*
4.0 Stock Certificate of Lakeview Financial Corp.*
10.1 Form of Lakeview Savings Bank 1993 Stock Option Plans*
10.2 Lakeview Savings Bank Management Stock Bonus Plan and Trust
Agreement*
10.3 Employment Agreements**
10.4 Supplemental Retirement Plan for Senior Officers
13.0 1996 Annual Report to Stockholders (filed herewith).
21.0 Subsidiary information is incorporated herein by reference to "Part
I - Subsidiaries."
23.0 Independent Auditors' Conent
27.0 Financial Data Schedule***
* Incorporated herein by reference into this document from the Exhibits to
Form S-4, Registration Statement, initially filed on April 13, 1994,
Registration No. 33-77646.
** Incorporated herein by reference into this document from the Form 10-K for
fiscal year ended July 31, 1994.
*** This schedule is only required to be filed via EDGAR pursuant to Item
601(c) of Regulation S-K.
(b) Reports on Form 8-K.
A Form 8-K was filed on June 20, 1996 regarding a subsidiary's
interest in a public offering of common shares by IMC.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LAKEVIEW FINANCIAL CORP.
Dated: October 29, 1996 By:/s/ Kevin J. Coogan
---------------------------
President, Chief Executive
Officer and Director
Pursuant to the requirement of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Kevin J. Coogan By: /s/ Leo J. Dean
----------------------------------- -------------------------------
Kevin J. Coogan Leo J. Dean
President, Chief Executive Officer Director
and Director
Date: October 29, 1996 Date: October 29, 1996
By: By:
--------------------------------- -------------------------------
Leo J. Costello Michael R. Rowe
Chairman of the Board Director
Date: ________ __, 1996 Date: ________ __, 1996
By: /s/ Robert J. Davenport By: /s/ Dennis D. Pedra
---------------------------- -------------------------------
Robert J. Davenport Dennis D. Pedra
Director Director
Date: October 29, 1996 Date: October 29, 1996
By: By: /s/ Anthony G. Gallo
--------------------------- -------------------------------
Vincent A. Scola Anthony G. Gallo
Director Vice President and Chief
Financial Officer
Date: ________ __, 1996 Date: October 29, 1996
EXHIBIT 13
<PAGE>
[Background of the following repeated on entire page]
[STRATEGIC PLAN FOR FUTURE DIRECTION]
[Picture of a ship]
[Charting the course.]
[Picture of Sextant]
[Lakeview Financial Corp.]
[1996 Annual Report]
<PAGE>
ABOUT THE COMPANY
- --------------------------------------------------------------------------------
Lakeview Financial Corp. (the "Corporation") is a New Jersey corporation
organized as the Holding Company for Lakeview Savings Bank, on March 25, 1994.
The Bank converted from a Mutual Savings Bank to a publicly traded Company on
December 22, 1993.
Lakeview Savings Bank is a New Jersey chartered stock savings bank located in
Paterson, New Jersey. The Bank operates eight (8) offices located in Passaic and
Bergen Counties, New Jersey. The principal business of the Bank is the
acceptance of savings deposits from the general public and the origination and
purchase of mortgage loans for the purpose of constructing, financing or
refinancing of one-to-four family residences, multi-family buildings and the
purchase of government and agency securities. The Bank is also active in the
origination of home equity loans, and to a lesser extent, mortgages secured by
commercial properties.
Lakeview's common stock is traded over-the-counter on the NASDAQ National Market
System appearing under the symbol "LVSB". As of July 31, 1996, 2,265,704 shares
of common stock were outstanding.
CONTENTS
To our Shareholders................................................... 2
Planning For The Year 2000............................................ 4
Management's Discussion and Analysis of Financial Condition
and Results of Operation............................................ 9
Consolidated Financial Statements..................................... 14
Independent Auditors' Report.......................................... 40
<PAGE>
Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
Selected Financial Data
The following table sets forth certain information concerning the consolidated
financial position and operating data of the Savings Bank at the dates
indicated:
<TABLE>
<CAPTION>
July 31
(Dollars in Thousands)
1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Assets.................................................... $198,400 $207,462 $ 413,725 $419,212 $ 457,860
Loans Receivable, Net..................................... 145,277 137,301 136,143 142,123 163,457
Mortgage-Backed securities................................ 32,137 43,579 173,067 175,375 121,462
Investments............................................... 1,015 16 62,637 55,738 40,821
Investments and Mortgage-Backed Securities held for sale... 8,359 12,898 11,269 8,567 89,967
Excess of Cost Over Fair-Value of Net Assets Acquired...... 898 825 12,817 11,497 10,176
Savings Deposits........................................... 166,668 164,130 344,915 343,489 354,247
Other Borrowings........................................... 8,500 18,500 19,021 19,859 54,721
Stockholders' equity....................................... 19,872 22,211 46,982 49,440 45,760
Selected Operating Data:
Gross Interest Income...................................... 16,469 15,179 18,947 28,430 30,972
Net Interest Income........................................ 6,795 8,025 11,212 14,892 14,423
Other Income............................................... 1,251 2,010 2,608 7,206 7,030
Net Income................................................. 1,624 2,339 4,571 6,295 6,274
Return on Average Assets................................... .84% 1.13% 1.16%' 1.50% 1.42%
Cash Dividend Per Common Share............................. N/A N/A .0625 .25 .25
Asset Quality Data:
Non-Performing Loans....................................... 16,377 13,540 8,928 3,372 2,417
Other Non-Performing....................................... N/A N/A N/A 850 494
Real Estate Owned (REO).................................... 4,234 6,575 3,762 3,608 1,667
- ------------------------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets................................ 20,611 20,115 12,690 7,830 4,578
- ------------------------------------------------------------------------------------------------------------------------------
Non-Performing Assets to Assets Ratio...................... 10.39% 9.70% 3.07% 1.87% 1.00%
Loan Allowances............................................ 2,493 2,638 1,714 2,535 3,073
REO Allowances............................................. 709 823 188 - -
- ------------------------------------------------------------------------------------------------------------------------------
Total Allowances........................................... $ 3,202 $3,461 $1,902 $2,535 $3,073
- ------------------------------------------------------------------------------------------------------------------------------
Total Allowances to Non-Performing Assets
(Coverage Ratio)........................................... 15.54% 17.21% 14.99% 32.4% 67.1%
</TABLE>
[GRAPH of ASSETS (in millions) 1992-1996 amounts are shown above in the
Selected Financial Condition Data Table]
[GRAPH of NET INCOME (in millions) 1992-1996 amounts are shown above in the
Selected Financial Condition Data Table]]
[GRAPH of NON-PERFORMING ASSETS (in millions) 1992-1996 amounts are
shown above in the Selected Financial Condition Data Table]]
1 Calculated exclusion of $1.315 million from accounting changes related to
FASB 109. 1
1
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
To Our Shareholders:
The past fiscal year was an exceptional one for Lakeview Financial Corp. and our
subsidiaries. Perhaps the most symbolic fact was that every goal in our Business
Plan was either met or surpassed. Our Plan calls for us to be a full provider of
financial services to our whole community; individuals, businesses and
professionals. We shall continue to work to strengthen this position in the
future.
"Charting the Course" is the theme that is so appropriate for this years Annual
Report, your management and directors have spent endless hours developing and
executing a Plan to bring Lakeview into the 21st Century. As you review the next
few pages of discussion you will find that the Plan is well thought out,
designed specifically for Lakeview, Charting the Course that will successfully
bring us to our destination. Quoting another banker, "If you choose to sail upon
the seas of banking, build your bank as you would your ship, strong enough to
sail safely through the heaviest seas".
Allow me to review some of the accomplishments during the year:
o During the past twelve (12) months our stock price went from $16.02 to $20.50,
an increase of 27.9%, adjusting for January's 10% stock dividend.
o Price to stated book value is 103% and the price to tangible book value is
134%.
o Loans went from $142 million to $163 million an increase of 15%, which is a
major component of our plan, to convert securities available for sale to
higher yielding loans.
o Non-performing assets decreased to $4.6 million from $7.8 million during the
past year, reaching our goal of reducing non-performing assets to 1% of
assets. This was a primary focus for management during the past twelve (12)
months.
o Reserves for loan losses now total 105.6% of nonperforming loans, a goal we
set one year ago and have successfully achieved.
o Checking and savings accounts grew 12% for the year. Providing a stable fee
based source of funds that will enhance future earnings.
o As a result of loan growth, gross interest income went from $28.4 million to
$30.9 million, an increase of 8.9%.
o Net interest spread increased to 3.89% from 3.68% a year earlier. This trend
should continue if rates remain stable and we continue to successfully grow
the loan portfolio.
o Return on assets once again was over 1% and our return on average equity was
11.43%.
2
<PAGE>
Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
Unquestionably, the most exciting business day during our fiscal year was June
25, 1996, when Industry Mortgage Company ("IMC") went public. Branchview, Inc, a
subsidiary of Lakeview Financial Corp. received 545,455 shares of common stock
of IMC in exchange for its partnership interest, coupled with an additional
investment in IMC of 285,473 shares, providing a total investment of 830,928
shares of common stock in IMC. Although it is not reflected in our current book
value the significant unrecognized gain on our investment will enhance earnings
sailing into the future.
Lakeview Mortgage Depot, Inc., a subsidiary of Lakeview Financial Corp., that
originates and sells loans in the secondary market, began operations during the
fiscal year. The forecast is that this subsidiary will be profitable during the
1996-1997 fiscal year and bring significant recurring non-interest income
cruising into future years.
Lakeview Credit Card Services, Inc., a subsidiary of Lakeview Savings Bank, will
be operational in October 1996. Your bank has entered into a joint venture with
a nationally recognized mortgage company that will market secured credit cards
through its customer base. We remain cautiously optimistic as to the results for
this year and expect to communicate our achievements in future shareholder
correspondence.
Looking ahead I am confident that our high performance goals are attainable and
that we have the right team in place that will reach them. Our outlook remains
focused on serving the needs of our whole community. At Lakeview we want to
continue to give outstanding service, polite attention and efficient delivery of
financial services to our community.
On behalf of the Board of Directors, management and employees, please accept my
deepest appreciation for the confidence in investing in Lakeview Financial Corp.
stock. Enhancing the value of your stock continues to be our PRIME INTEREST.
Very truly yours,
/s/Kevin J. Coogan
Kevin J. Coogan
President and
Chief Executive Officer
3
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Strategic Plan For Future Direction
Planning for the year 2000
In our Annual Report last year we identified four primary areas of strength and
performance. They were: 1)high capital levels; 2) lending capacity; 3)improved
asset quality; and 4) operating capacity. Building on this solid foundation, a
Strategic Plan (the "Plan"), has been developed to guide Lakeview through Its
evolution from a traditional thrift (primarily lender for 1 to 4 family housing
units), to a full service community bank servicing the banking needs of both
individuals and businesses in our neighborhood area.
These expanded services include lending and providing deposit services (such as
merchant banking and business checking accounts) to retailers, professional
firms and small businesses. As a result of the continued consolidation of
commercial banks in our market area, we identify this market as being under-
served.
The emphasis of this Plan focuses on three different areas: growth and mix of
our loan portfolio, increased transaction accounts, and building equity
investments. Success in each of these areas will further enhance shareholder
value through increased earnings, franchise value and book value.
Lending
Lending activity will be concentrated on both increasing the size of our loan
portfolio as well as changing the loan mix from primarily 1 to 4 family
mortgages and equity loans, to a more balanced portfolio made up of first
mortgages, equity loans, multi-family and commercial mortgages. We believe this
strategy will take advantage of the opportunities in our market area as well as
diversify the portfolio, while enhancing interest income.
[GRAPH of NET INTEREST INCOME on a Quarterly Basis
Jul 95, Oct 95, Jan 96, Apr 96, Jul 96 amounts shown on p39 -
Note 24, Quarterly Financial Data (unaudited)(in thousands)]
4
<PAGE>
Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
During the fiscal year, total loans outstanding have increased by $21 million,
from $142 million to $163 million, a 15% increase. As a result of this loan
growth, net interest income has increased in each of the last three quarters.
This growth has been accomplished at the same time Non-Performing Assets have
declined by 41%, from $7.8 million to $4.6 million. It's important to remember
that 1 to 4 family first mortgages, and equity loans, will continue to make up
the largest part of our loan portfolio, representing approximately 70% of loans
outstanding.
Equity loans have been a key component of the bank's portfolio since first
offered in 1987. With last year's addition of a seasoned consumer loan officer,
increased marketing efforts and the introduction of a fixed rate second
mortgage, fiscal year 1996 has been our most successful year for equity lending.
Over $21.6 million of loans were approved, while outstanding balances increased
from $37.2 million to $46.7 million, an increase of $9.5 million. Equity loans
outstanding now total approximately 28% of total loans and it is expected that
this portfolio will grow to approximately 33% of total loans over the next few
years.
Lending for multi-family housing units has always been a part of the Bank's
portfolio, representing 7.85% of loans outstanding on July 31, 1996. The Plan
calls for the further expansion of this portfolio. As a result of the high
density population and housing stock of our market area, which includes a high
percentage of small multi-family dwellings, the Bank sees a significant
opportunity for portfolio growth in the areas we service and know the best.
[GRAPH of EQUITY LOANS OUTSTANDING (in millions)
amounts are shown on a Quarterly basis
Jul 95 (37,200), Oct 95 (39,464), Jan 96 (42,553),
Apr 96 (45,646), Jul 96 (46,700)]
5
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Multi-family loans outstanding have grown from $9.9 million, to $12.9 million,
an increase of $3.0 million, during the fiscal year. The Plan calls for this
portfolio to be carefully increased to approximately 15% of the loan portfolio
over the next four years.
Commercial Mortgages (non-residential) are an important part of our commitment
of changing to a full service community bank. This includes lending to the local
business community which we believe will provide opportunities for developing
and expanding transaction account relationships. Success in this area depends on
the encouragement of these relationships and developing products that address
the specific needs of these businesses. As many of the small and medium size
commercial banks are being consolidated with regional banks, opportunities in
this market area have increased significantly.
Commercial mortgages outstanding increased from $13.3 million to $19.6 million,
a $6.3 million increase for the fiscal year. To ensure quality, the commercial
lending growth will intentionally be slow and closely monitored. Commercial
lending will be primarily within our neighborhood communities to local
businesses who employ local residents. Over the next four years this portfolio
is expected to grow to 15% of the loan portfolio.
Funding Sources
The funding of the Bank's loan growth is expected to come from two primary
sources, growth in transaction accounts, i.e. "NOW' accounts and business
checking accounts, as well as a reduction of our securities available for sale
portfolio. The result of this strategy will be to increase the percentage of our
assets in higher yielding loans while reducing the percentage of assets in lower
yielding government securities. This strategy will result in increased net
interest income and core earnings.
[GRAPH of CHECKING ACCOUNTS (in millions)
amounts are shown on a Quarterly basis
Jul 95 (44,360), Oct 95 (43,940), Jan 95 (45,208),
Apr 96 (48,518), Jul 96 (48,550)]
6
<PAGE>
Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
[PICTURE IN CENTER OF PAGE WITH FOLLOWING CAPTION]
[Having built a solid foundation in the past year, management has developed an
achievable Strategic Plan that will guide Lakeview to solid success through the
year 2000 and beyond.]
The attraction of transaction accounts, which provide low cost stable funding,
has been one of the primary focuses of our Branch personnel for over two years.
During our recently completed fiscal year, 40% of our total deposit growth was
in transaction accounts. The bank has had initial success in attracting
non-interest bearing business checking accounts, and has over 575 business
accounts open at year end, totaling $5.8 million.
As of July 31, 1996, transaction accounts totaled $50 million, an increase of
12% over the prior year's total. The value of these accounts is easy to see; as
a result of these "lower interest rate" accounts, the cost of deposits was
reduced from 4.00% to 3.88% for the fiscal year.
Equity Investments
The one area that separates Lakeview from typical financial institutions is
our equity investments. These investments have ranged from stock positions in
Freddie Mac and Fannie Mae to partnerships in mortgage companies. These
investments have proven to be very valuable in enhancing both book value and
earnings. Prior successes have included substantial gains in Freddie Mac and
Fannie Mae stock, as well as last fiscal year's $3.0 million gain from the sale
of our subsidiary investment in residential Money Centers, Inc. (RMC).
Management believes that banks (like many industries) need to leverage their
talents and capabilities with others through partnerships and strategic
alliances. Lakeview currently has three such investments, each in different
stages of development and implementation. These are:
1. Industry Mortgage Company (IMC) concluded an Initial Public Offering (IPO)
in June 1996. Lakeview Financial Corp., through its subsidiary Branchview,
Inc., was one of eleven limited partners in IMC. As a
7
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
result of the IPO, the Company received 545,455 shares of the new IMC common
stock in exchange for Its partnership interest. This investment was further
increased through the purchase of an additional 285,473 shares of common stock
of IMC. As of July 31, 1996, these shares had a value in excess of $19
million. Due to a restriction on the sale or transfer of these shares of
common stock, Lakeview is required to carry the stock at the historical cost
basis of $7.8 million, until the restrictions are removed, or within one year
of the restriction expiring, at which time the shares will be carried at fair
value. The investment in IMC (whose purpose is to originate and securitize
equity mortgage products) offers opportunity for high rates of return in a
high growth industry, although there is no assurance that such high rates of
return will be attained.
2.Lakeview Mortgage Depot, Inc. (LMD), is a mortgage company which began
operations in October 1995, which is 90% owned by Lakeview Financial Corp.
Although the company had a net loss of $124,000, for the 1996 fiscal year,
they reached a "break-even" point in May 1996. It is expected, though there
is no assurance, that LMD will contribute to fiscal year 1997 earnings.
3.Lakeview Credit Card Services, Inc. (LCCS), is a newly formed company which
has entered into a Joint Venture Agreement, with a nationally known
mortgage company, to offer a co-branded secured credit card through their
280 broker relationship network. This company is wholly owned by Lakeview
Savings Bank, and is expected, though there is no assurance, to reach a
"break-even" point by early next year and contribute towards earnings in
1998.
The Plan calls for management to continue to seek opportunities in the future,
through participation in strategic alliances and partnerships in high growth
businesses.
Summary
Having built a solid foundation in the past year, management has developed an
achievable Strategic Plan that will guide Lakeview to solid success through the
year 2000 and beyond. Our focus is on building relationships with all of our
customers, providing full service to our entire neighborhood community,
including individuals, professionals and small businesses. We continue our
progress into the future with confidence, based upon the cooperation of all of
our staff members, management team, directors and stockholders.
We continue to chart our course into the future...
8
<PAGE>
Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
Management Discussion and Analysis of
Financial Condition and Results of Operation
Comparison of Financial Condition at July 31, 1996 and July 31, 1995
Total assets increased $38.7 million, or 9.2% to $457.9 million at July 31,
1996, from $419.2 million at July 31, 1995. The increase was primarily due to
increases in loans receivable, net, of $21.4 million, $81.4 million in
investment securities available for sale, $7.8 million in equity securities
restricted for sale offsetting declines in investment securities held to
maturity of $14.9 million, mortgage-backed securities held to maturity of $53.9
million, $1.9 million in real estate owned, and amortization of intangible
assets of $1.3 million from the comparison period.
Loans receivable, net increased $21.4 million, or 15.0%, to $163.5 million at
July 31, 1996, from $142.1 million at July 31, 1995. Loan originations and
purchases of loans during the fiscal year ended July 31, 1996 totaled $40.8
million and $2.7 million respectively. Offsetting originations in fiscal 1996
were a combination of principal and interest payments of $19.7 million,
reclassification of $332 thousand of loans to real estate owned ("REO"), and
$925 thousand from sale of loans.
Loans delinquent 90 days or more decreased to $2.9 million at July 31, 1996 from
$4.2 million at July 31, 1995. The decrease in loan delinquencies reflects the
Savings Bank's continued effort to resolve non-performing loans and the
stabilization of the economy and real estate values in Northern New Jersey.
Loans delinquent 90 days or more totaled 1.8% of gross loans at July 31, 1996,
compared to 3.0% at July 31, 1995.
REO, net, decreased $1.9 million, or 53.8%, to $1.7 million at July 31, 1996,
from $3.6 million at July 31, 1995. The decrease was mainly attributed to sale
of REO during the twelve months of $1.6 million, and charge offs of $654
thousand. Offsetting the decrease was $332 thousand of loans receivable were
transferred into REO.
Non-performing assets (loans 90 days or more delinquent, non-accrual loans, and
real estate owned) totaled $4.6 million or 1.0% of total assets at July 31, 1996
as compared to $7.8 million or 1.9% of total assets at July 31, 1995.
The investment securities available for sale portfolio increased $81.4 million,
or 950.2%, during the year ended July 31, 1996. The increase was mainly
attributed to the reclassification at December 31, 1995, of $81.3 million of
investment securities held to maturity and $31.5 million of mortgage-backed
securities held to maturity to investment securities available for sale. This
was done pursuant to the guidelines of the FASB Special Report for SFAS No. 115,
A Guide To Implementation Of Statement 115 On Accounting For Certain Investments
In Debt And Equity Securities. The special report provided that between November
15, 1995, but no later than December 31, 1995, an enterprise could reaccess the
classification of all securities held at that time and account for any resulting
reclassification at fair value. Reclassification from the held to maturity
category that resulted from this one time reassessment would not call into
question the intent of the enterprise to hold debt securities to maturity in the
future.
Investment securities held to maturity declined $14.9 million, or 26.7%, to
$40.8 million at July 31, 1996, from $55.7 million at July 31, 1995. The decline
was mainly attributed to the reclassification as discussed above. Offsetting the
decrease were purchases of investment securities totaling $107.0 million.
Mortgage-backed securities held to maturity decreased $53.9 million, or 30.7%,
to $121.5 million at July 31, 1996, from $175.4 million at July 31, 1995.
Purchases of $2.8 million of mortgage-backed securities were offset by principal
repayments of $25.2 million from the portfolio and the transfer discussed
previously.
Equity securities restricted for sale increased $7.8 million, or 100% to $7.8
million at July 31, 1996. In July 1995, Branchview, a subsidiary of the Savings
Bank, became the sole owner of Residential Money Center, Inc. (RMC), a
residential mortgage company in Montvale, New Jersey. RMC owned a 9.09% limited
partnership interest in Industry Mortgage Company, L.P. ("IMC"). On June 25,
1996, IMC completed a reorganization plan whereby the limited partners received
restricted common stock in exchange for their partnership interest in connection
with a public offering of unrestricted common stock. Immediately, prior to the
reorganization, Branchview purchased a limited partner's half share interest in
IMC for $4,778,000. As a result of the reorganization, Branchview received
830,928 shares of restricted common stock in exchange for its limited
partnership interest. As of July 31, 1996, Branchview owns 8.87% of IMC and the
market value of such investment was approximately $19.9 million, based on the
quoted market price per share of unrestricted stock. In accordance with SFAS
115, Accounting for Certain Investments in Debt and Equity Securities, due to
restrictions on the sale or transfer of these shares of common stock under
9
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Rule 144 of the 1933 Securities Act, Lakeview is required to carry the stock at
the historical cost basis of $7.8 million, until the restrictions are removed,
or within one year of the restriction expiring, at which time the shares will be
carried at fair value.
Excess of cost over fair value of net assets acquired decreased $1.3 million or
11.4% to $10.2 million at July 31, 1996, from $11.5 million at July 31, 1995.
The $1.3 million represents amortization during the fiscal year ended July 31,
1996.
Deposits increased $10.7 million, or 3.1%, to $354.2 million at July 31, 1996,
from $343.5 million at July 31, 1995. The increase was mainly attributed to
interest credited to deposits of $14.0 million offset by a net decrease in
deposits before interest of $3.3 million.
Borrowings increased $35.0 million, or 184.2%, to $54.0 million at July 31,
1996, from $19.0 million at July 31, 1995. The increase was used to fund the
asset growth.
Shareholders' equity decreased $3.7 million, or 7.4%, during the twelve months
ended July 31, 1996, to $45.8 million. This was primarily due to the charge to
equity of $1.8 million representing the change in unrealized losses on
securities available for sale, purchase of treasury stock of $6.7 million, and
purchase of common stock acquired by ESOP of $1.6 million. In addition, cash
dividends of $582 thousand were paid during the year ended July 31, 1996.
Offsetting declines, net income for the year ended July 31, 1996, of $6.3
million, and amortization of the employee and management stock plans of $758
thousand.
Shareholders' equity averaged $45.6 million during the twelve months ended July
31, 1996, a decrease of $2.5 million, or 5.2%, compared to $48.1 million during
the twelve months ended July 31, 1995. Book value per common share rose $1.49,
or 8.0% to $20.20 at July 31, 1996 from $18.71 at July 31, 1995.
As a result of continued earnings progress, there has been a $.0625 per share
dividend since the 3rd fiscal quarter in 1994. In addition, on January 11, 1996,
the Company declared a special 10% stock dividend on the common stock to
shareholders of record January 23, 1996. This resulted in the issuance of
227,670 shares of common stock.
The market price of the common stock was $20.50 at July 31, 1996, compared with
$16.03 the prior year end. The common stock of Lakeview Financial Corp. is
traded on the NASDAQ National Market under the symbol of LVSB. The quarterly
market price ranges per common share since conversion to a stock form of
organization are listed in the table that follows.
For the quarters ended:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Prices Oct. Jan. Apr Jul. Oct. Jan Apr. Jul.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High.................................... 15.91 13.53 14.44 16.59 17.39 17.88 19.88 21.00
Low..................................... 12.19 11.98 12.95 13.18 15.80 16.02 17.25 17.75
Closing................................. 13.02 12.95 13.98 16.03 16.25 17.25 19.63 20.50
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Comparison of Operating Results
for the Year Ended July 31, 1996 and 1995
Net Income: Net income for the year ended July 31, 1996 was $6,274,000, a
decrease of $21 thousand or .3% from net income of $6,295,000 for the fiscal
year ended July 31, 1995. The decrease in net income was due to a $469,000
decrease in net interest income, $176,000 increase in other expense, and a
$177,000 decrease in other income, which was offset by a $712,000 decrease in
provision for loan losses.
Interest Income: Total interest income increased $2.6 million or 9.1% to $31.0
million for the year ended July 31, 1996 from $28.4 million for the year ended
July 31, 1995. The increase was due primarily to growth in interest-earning
assets and an increase in the average yield on interest earning assets from
7.37% to 7.53% due to generally increased market rates of interest. Total
average interest-earning assets for the year ended July 31, 1996 increased $25.7
million or 6.6% to $411.3 million from $385.6 million for the year ended July
31, 1995. The increase in interest-earning assets was due to the increase in
loan originations and purchases for year ended July 31, 1996.
10
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Interest Expense: Total interest expense increased $3.0 million or 22.2% from
$13.5 million for the year ended July 31, 1995 to $16.5 million for the year
ended July 31, 1996. The increase was due to an increase in interest-bearing
liabilities. Total average interest bearing liabilities increased $25.3 million
or 6.9% from $366.8 million for the year ended July 31, 1995 to $392.1 million
for the year ended July 31, 1996. The increase in average interest bearing
liabilities during the year ended July 31, 1996 was coupled with an increase in
average cost for the same period. Average cost on interest bearing liabilities
increased from 3.69% for the year ended July 31, 1995 to 4.22 % for the year
ended July 31, 1996 due to generally increased market rates of interest.
Net Interest Income: Net interest income decreased 3.3% or $469 thousand to
$14.4 million for the year ended July 31, 1996, from $14.9 million for the year
ended July 31, 1995. Interest rate spread which represents the difference
between the average yield on interest earning assets and the average cost on
interest bearing liabilities was 3.68% and 3.31% for the years ended July 31,
1995 and 1996, respectively. The reduced spread was in part due to the interest
rate sensitivity of the Corporation's balance sheet as interest bearing
liabilities repriced faster than interest-carrying assets in a rising interest
rate environment.
Other Income: Total other income decreased $177 thousand or 2.7% to $7.0 million
for the year ended July 31, 1996 from $7.2 million for the year ended July 31,
1995. The Bank's realized gains on investments increased from $2.1 million for
the year ended July 31, 1995 to $2.8 million for the year ended July 31, 1996.
This increase resulted from the sale of FNMA, SLMA, FHLMC and other equity
securities during 1996. Other operating income decreased $756 thousand from $3.9
million for the year ended July 31, 1995 to $3.1 million for the year ended July
31, 1996. This was mainly attributed to a decrease of income from the
Branchview, Inc. subsidiary from $3.6 million for the year ended July 31, 1995
to $3.5 million for the year ended July 31, 1996.
Other Expense: Total other expenses increased $176 thousand or 1.6% to $10.9
million for the year ended July 31, 1996 from $10.7 million for the same period
last year. The growth was attributed to an increase in employee compensation of
$282 thousand or 6.5% to $4.6 million for the year ended July 31, 1996 from $4.4
million for the year ended July 31, 1995. The increase is mainly attributed to
the increase in subsidiary activity of Lakeview Mortgage Depot, Inc. Net losses
from REO operation increased $270 thousand or 41.7% to $921 thousand for the
year ended July 31, 1996 from $650 thousand for the year ended July 31, 1995.
The increase was mainly attributed to an increase in provisions for REO losses
of $152 thousand or 30.3% to $654 thousand for the year ended July 31, 1996,
from $502 thousand for the year ended July 31, 1995. These increases were
partially offset by a decrease in other operating expenses.
Provision for Losses on Loans: The Provision for losses on loans decreased
from $1.4 million for the year ended July 31, 1995 compared to $664 thousand for
the year ended July 31, 1996, due to a reduction in non-performing loans and
improved market conditions. Management of the Savings Bank regularly assess the
credit risk of the loan portfolio based on the information available at such
times including trends in the local real estate market and levels of the Savings
Bank's non-performing loans and assets. Additional provision for loan losses may
be required as the result of this assessment.
Comparison of Operating Results
for the Year Ended July 31, 1995 and 1994
Net Income: Net income for the year ended July 31, 1995 was $6.3 million, an
increase of $1.7 million or 37.7% from net income of $4.6 million for the fiscal
year ended July 31, 1994. The increase in net income was primarily due to a $3.7
million, or 32.8% increase in net interest income. Net income for the year ended
July 31, 1994 included $1.3 million due to the effect of a change in accounting
for income taxes as a result of the adoption of Statement of Financial
Accounting Standards No. 109.
Interest Income: Total interest income increased $9.5 million or 50.1% to $28.4
million for the year ended July 31, 1995 from $18.9 million for the year ended
July 31, 1994. The increase was due primarily to growth in interest-earning
assets and to a lesser extent, an increase in the average yield on interest
earning assets from 7.28% to 7.37%. Total average interest-earning assets for
the year ended July 31, 1995 increased $125.2 million or 48.1% to $385.6 million
from $260.4 million for the year ended July 31, 1994. The increase in
interest-eaming assets was due to the investing of the
11
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
proceeds from the Conversion and the funds received from the Acquisition in
mortgage-backed securities and investments securities.
Interest Expense: Total interest expense increased $5.8 million or 75.0% from
$7.7 million for the year ended July 31, 1994 to $13.5 million for the year
ended July 31, 1995. The increase was due to an increase in interest-bearing
liabilities. Total average interest bearing liabilities increased $125.9 million
or 52.3% from $240.9 million for the year ended July 31, 1994 to $366.8 million
for the year ended July 31, 1995. The increase in average interest bearing
liabilities during the year ended July 31, 1995 was coupled with an increase in
average cost for the same period. Average cost on interest bearing liabilities
increased from 3.21% for the year ended July 31, 1994 to 3.69% for the year
ended July 31, 1995 as market rates continued to increase through April 1995,
offset by a slight decrease in market rates subsequent to April 1995.
Net Interest Income: Net interest income increased 32.8% or $3.7 million to
$14.9 million for the year ended July 31, 1995, from $11.2 million for the year
ended July 31, 1994. The increase was due primarily to the growth of the Savings
Bank from the Conversion and the Acquisition mitigated by a decrease in interest
rate spread during the year ended July 31, 1995. Interest rate spread which
represents the difference between the average yield on interest earning assets
and the average cost on interest bearing liabilities was 3.68% and 4.07% for the
years ended July 31, 1995 and 1994, respectively.
Non-Interest Income: Total other income increased $4.6 million or 176.9% to $7.2
million for the year ended July 31, 1995 from $2.6 million for the year ended
July 31, 1994. Loan fees and service charges increased $420 thousand or 51.6% to
$1.2 million for the year ended July 31, 1995 from $815 thousand for the year
ended July 31, 1994. The increase was due to an increase in the average balance
of deposits during the year ended July 31, 1995. Additionally, the Bank's
realized gains on investments increased from $866 thousand for the year ended
July 31, 1994 to $2.1 million for the year ended July 31, 1995. This increase
resulted from the sale of FNMA stock during 1995. Other operating income
increased $2.9 million from $927 thousand for the year ended July 31, 1994 to
$3.9 million for the year ended July 31, 1995. This was due to an increase of
income from the Branchview, Inc. of $3.1 million from $488 thousand for the year
ended July 31, 1994 to $3.6 million for the year ended July 31, 1995. The
increase in income from Branchview, Inc., was due to the gain on sale of
Residential Money Centers, Inc. ("RMC").
Non-Interest Expense: Total other expenses increased $4.0 million or 59.5% to
$10.7 million for the year ended July 31, 1995 from $6.7 million for the same
period last year. Employee compensation increased $1.8 million or 71.9% to $4.4
million for the year ended July 31, 1995 from $2.5 million for the year ended
July 31, 1994. The increase was due primarily to the increase in personnel
resulting from the Acquisition. Net losses from REO operation decreased $669
thousand or 50.7% to $650 thousand for the year ended July 31, 1995 from $1.3
million for the year ended July 31, 1994, due to a stabilizing real estate
market. Office occupancy and equipment expense increased $350 thousand to $830
thousand for the year ended July 31, 1995 from $480 thousand for the year ended
July 31, 1994. The increase was due primarily to the expansion of the Savings
Bank from two branches to eight. The increase in other operating expense for the
year ended July 31, 1995 is attributable to an increase of $253 thousand of FDIC
insurance expense and an increase of $200 thousand in computer service expense
which represents a full year of insurance assessments and data processing
expenses on the deposits acquired in April 1994. An increase of $882 thousand
for the year ended July 31, 1995 represents a full year of amortization of the
deposit premium paid for the acquisition.
Provision for Losses on Loans: The Provision for losses on loans decreased
slightly from $2.0 million for the year ended July 31, 1994 compared to $1.4
million for the year ended July 31, 1995 due to improved asset quality.
Management of the Savings Bank regularly assess the credit risk of the loan
portfolio based on the information available at such times including trends in
the local real estate market and level of the Savings Bank's non-performing
loans and assets. Additional provisions for loan losses may be required as the
result of this assessment.
Income Taxes: Income before taxes and cumulative effect of accounting changes
increased $4.9 million to $10 million for the year ended July 31, 1995 from $5.1
million for the year ended July 31, 1994. Income tax expense increased $1.9
million for the year ended July 31, 1995 to $3.7 million from $1.8 million for
the same period a year earlier. The increase was due primarily to higher pre-tax
income. Income tax expense as a percentage of pre-tax income increased from
35.8% for the year ended July 31, 1994, to 37.2% for the year ended July 31,
1995. The slight increase in the percentage of tax expense is primarily due to
the higher state tax rate associated with the income from the sale of the assets
of RMC.
12
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Liquidity and Capital Resources
The Bank's primary sources of funds includes savings deposits, loan repayments
and prepayments, cash flow from operations and borrowings from the Federal Home
Loan Bank of New York ("FHLB"). The Bank uses its capital resources principally
to fund loan origination and purchases, repay maturing borrowings for
investments, and for short and long-term liquidity needs. The Bank expects to be
able to fund or refinance, on a timely basis, its commitments and long-term
liabilities.
The Bank's liquid assets consist of cash and cash equivalents, which include
investments in highly short-term investments. The level of these assets are
dependent on the Bank's operating, financing and investment activities during
any given period. At July 31, 1996, cash and cash equivalents totaled $6.9
million.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of July 31, the Bank had commitments to fund loans of
$13,295,000.
The Bank has completed the repurchase of 662,372 shares as of July 31, 1996. The
repurchased shares have been held as treasury stock and are available for
general corporate purposes.
The Bank had leverage, Tier 1 and risk-based capital ratios of 7.5%, 15.4% and
16.7%, at July 31, 1996, which exceeded the FDIC's respective minimum
requirements of 4.00%, 4.00% and 8.00% respectively.
Impact of Inflation and Changing Prices
The financial statements of the Corporation and notes there- to, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Corporation's
operations. Unlike most industrial companies. nearly all the assets and
liabilities of the Corporation are monetary in nature. As a result, interest
rates have a greater impact on the Corporation's performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the price of goods and services.
Recent Legislation
Capitalization of the Savings Association Insurance Fund.
On September 30, 1996, H.R. 1362 was signed into law by the President. Title II
of H.R. 1362 is titled the Economic Growth and Paperwork Reduction Act of 1996
(the "Act"). Among its many provisions, the Act provides for resolving the
BIF/SAIF premium disparity.
The BIF/SAIF legislation provides for a one-time assessment to recapitalize the
SAIF. The assessment will be based on the amount of SAIF-assessable deposits
held by an institution as of March 31, 1995 (with certain exceptions). The
assessment is effective on September 30, 1996 and is payable on the later of
1996, October 1, 1996 or such date within 60 days as the FDIC shall decide. The
FDIC has made the special assessment payable by November 27, 1996.
The BIF/SAIF legislation does not specify an actual assessment but states that
the total assessment will be equal to the amount necessary to recapitalize the
SAIF as of October 1, 1996. A recent report of the America's Community Bankers
estimated the assessment at approximately 65.7 basis points per $100 of
SAIF-assessable deposits as of March 31, 1995.
The BIF/SAIF legislation provides that the amount of the special assessment is
deductible under section 162 of the Internal Revenue Code (the "Code") in the
year in which the assessment is paid. The BIF/SAIF legislation also provides
that section 172 (f) of the Code will not apply to deductions taken under
section 162 of the Code for the special assessment. The Savings Bank has
estimated the amount of assessment to be approximately $2.2 million, before tax
benefit, and such amount was accrued on September 30, 1996.
Certain portions of this document concerning future performance,
developments or events, concerning growth in lending and equity investments, and
any other guidance on future periods, constitute forward-looking statements,
which are subject to a number of risks and uncertainties including interest rate
fluctuations and government and regulatory actions which might cause actual
results to differ materially from stated expectations.
13
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Consolidated Balance Sheets
July 31, 1995 and 1996
<TABLE>
<CAPTION>
1995 1996
- ------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash on hand and in banks............................................. $ 8,021,666 $ 6,902,040
Investment securities held to maturity, market value of
$55,457,430 and $40,083,449 at July 31, 1995 and 1996,
respectively (note 4)................................................. 55,737,605 40,821,195
Investment securities available for sale (note 5)..................... 8,567,375 89,967,424
Equity securities restricted, market value of $19,942,272
at July 31, 1996 (note 7)............................................. - 7,806,358
Mortgage-backed securities held to maturity, market value of
$173,500,278 and $119,471,910 at July 31, 1995 and 1996,
respectively (notes 6 and 13)......................................... 175,375,296 121,461,936
Loans receivable, net (notes 8 and 13)................................ 142,122,945 163,457,374
Real estate owned, net (note 9)....................................... 3,608,392 1,666,533
Investments required by law - stock in the Federal Home
Loan Bank of New York, at cost (note 13).............................. 2,587,400 2,587,400
Accrued interest receivable (note 10)................................. 2,718,349 3,646,512
Office properties and equipment, net (note 11)........................ 4,299,594 4,182,639
Excess of cost over fair value of net assets acquired,
net (note 3).......................................................... 11,496,712 10,176,424
Other assets (note 14)................................................ 4,676,663 5,184,150
- -----------------------------------------------------------------------------------------------------------------
Total assets........................................................ $419,211,997 $457,859,985
- -----------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits (note 12)..................................................... 343,489,328 354,246,770
Borrowings (note 13)................................................... 19,000,000 54,000,000
ESOP debt (note 16).................................................... 858,929 721,429
Advance payments by borrowers for taxes and insurance.................. 1,501,453 1,711,930
Other liabilities...................................................... 4,922,053 1,420,176
- -----------------------------------------------------------------------------------------------------------------
Total liabilities..................................................... 369,771,763 412,100,305
- -----------------------------------------------------------------------------------------------------------------
Common stock - $2.00 par value; authorized 10,000,000
shares, issued 2,928,076 shares and outstanding 2,265,704
shares at July 31, 1996................................................ 5,323,920 5,856,152
Additional paid-in capital............................................. 21,733,849 26,186,632
Retained income substantially restricted............................... 28,982,735 29,984,480
Unrealized losses on securities available for sale, net of tax......... (55,054) (1,884,921)
Treasury stock at cost, 662,372 shares................................. (3,970,106) (10,655,120)
Unallocated ESOP shares................................................ (834,910) (2,306,895)
Unallocated MSBP shares................................................ (1,740,200) (1,420,648)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (notes 2, 14, 16, 18, and 19)............... 49,440,234 45,759,680
Total liabilities and stockholders' equity............................ $419,211,997 $457,859,985
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
14
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Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Income
Years ended July 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income:
<S> <C> <C> <C>
Loans receivable................................................................ $ 11,749,136 $ 12,509,446 $ 14,131,327
Mortgage-backed securities...................................................... 5,513,480 11,162,655 9,604,671
Investment securities, held to maturity and Federal funds....................... 1,366,865 4,535,201 3,004,345
Investment securities available for sale........................................ 317,353 222,924 4,232,012
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income......................................................... 18,946,834 28,430,226 30,972,355
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on Deposits (note 12).................................................. 6,859,922 11,943,596 14,064,295
Interest on borrowings.......................................................... 874,711 1,594,984 2,485,475
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense........................................................ 7,734,633 13,538,580 16,549,770
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income ............................................................ 11,212,201 14,891,646 14,422,585
Provision for losses on loans (note 8).......................................... 2,047,121 1,376,404 13,221
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans......................... 9,165,080 13,515,242 13,758,364
- -----------------------------------------------------------------------------------------------------------------------------------
Other income:
Loan fees and service charges................................................... 814,956 1,235,073 1,153,266
Net realized gains on sales of investment securities
available for sale ............................................................. 866,399 2,107,244 2,768,781
Other operating income (note 7)................................................. 927,021 3,864,028 3,107,539
- -----------------------------------------------------------------------------------------------------------------------------------
Total other income.............................................................. 2,608,376 7,206,345 7,029,586
- -----------------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Compensation and employee benefits (notes 15 and 16)........................ 2,540,536 4,366,722 4,648,774
Office occupancy and equipment expense....................................... 479,497 829,861 871,113
Net loss on real estate owned activities (note 9).......................... 1,319,692 650,194 920,917
Other operating expenses....................................................... 1,926,816 3,524,382 3,106,738
Amortization of the excess of cost over fair value of net
assets acquired................................................................. 438,288 1,320,288 1,320,288
- -----------------------------------------------------------------------------------------------------------------------------------
Total other expenses............................................................ 6,704,829 10,691,447 10,867,830
- -----------------------------------------------------------------------------------------------------------------------------------
Income before Federal and state income tax and
cumulative effect of accounting change.......................................... 5,068,627 10,030,140 9,920,120
- -----------------------------------------------------------------------------------------------------------------------------------
Federal and state income tax expense (note 14):
Current......................................................................... 942,978 3,889,513 4,112,206
Deferred........................................................................ 869,693 (154,000) (466,000)
- -----------------------------------------------------------------------------------------------------------------------------------
1,812,671 3,735,513 3,646,206
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change....................... 3,255,956 6,294,627 6,273,914
Cumulative effect of accounting change (note 14)............................... 1,315,011 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income...................................................................... $ 4,570,967 $ 6,294,627 $ 6,273,914
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share....................................................... N/A $ 2.21 $ 2.48
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
15
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income....................................................... $ 4,570,967 $ 6,294,627 $ 6,273,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of the excess of cost over fair
value of net assets acquired..................................... 438,288 1,320,288 1,320,288
Amortization of discounts and premiums, net................... (130,276) (259,384) (473,518)
Provision for losses on loans and real estate owned............ 2,760,441 2,303,781 1,318,710
Gain on sale of loans............................................ (54,428) (6,040) (9,598)
Net realized gains on investment securities
available for sale............................................... (866,399) (2,107,244) (2,768,781)
Net loss (gain) on sale of real estate owned.................. 228,344 (223,884) (26,043)
(Increase) decrease in accrued interest receivable............. (1,643,413) 2,695 (928,163)
Net decrease in deferred loan fees............................... (153,386) (137,479) (67,691)
Decrease in other assets......................................... (1,241,786) (1,654,851) (507,487)
Amortization of ESOP shares...................................... 116,000 297,881 312,708
Amortization of MSBP shares...................................... 217,000 505,454 445,564
Increase (decrease) in other liabilities........................ 92,640 3,556,573 (2,473,471)
Depreciation, net................................................ 122,051 264,081 288,225
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities........................ 4,456,043 10,156,498 2,704,657
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans............................................ (30,842,434) (31,274,312) (40,782,321)
Principal payments on loans...................................... 23,302,088 19,582,717 20,366,983
Purchase of loans................................................ (1,122,754) (136,946) (2,686,962)
Proceeds from the sale of loans.................................. 5,334,175 1,171,675 924,888
Net increase in office properties and equipment............ (3,039,776) (402,733) (171,270)
Principal payments on mortgage-backed securities............. 17,391,871 16,629,760 25,230,317
Purchases of mortgage-backed securities
held to maturity................................................. (146,941,142) (18,762,454) (2,773,214)
Maturities of investment securities held to maturity........ -- 10,975,000 41,096,117
Purchase of investment securities held to maturity........... (62,631,562) (4,057,500) (107,027,312)
Proceeds from sale of investment securities
available for sale............................................... 3,891,839 20,864,634 53,587,858
Purchases of investment securities available for sale........... (1,379,904) (16,141,726) (50,034,792)
Proceeds from maturity of investment securities
available for sale............................................... -- -- 18,319,150
Principle payments on investment securities
available for sale.............................................. -- -- 1,534,201
Increase in Federal Home Loan Bank stock......................... (345,300) (731,100) --
</TABLE>
16
(continued)
<PAGE>
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- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 1994, 1995 and 1996 continued
<TABLE>
<CAPTION>
1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities, cont.:
<S> <C> <C> <C>
Net decrease in certificates of deposit.......................... 99,000 -- --
Proceeds from sale of real estate owned.......................... 4,078,047 2,771,608 1,644,527
Premium on deposit acquisition................................... (12,430,000) -- --
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by, investing activities............. (204,635,852) 488,623 (40,771,830)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits.............................. (10,643,875) (1,425,210) 10,757,443
Proceeds from acquisition of deposits............................ 191,428,005 -- --
Net increase in borrowings....................................... 521,429 837,500 34,862,500
Net increase in advance payments by borrowers
for taxes and insurance.......................................... 10,172 61,161 210,477
Proceeds from stock offering..................................... 23,319,374 -- --
Purchase of treasury stock....................................... -- (3,970,106) (6,685,014)
Purchase of shares by ESOP....................................... (1,100,000) -- (1,615,985)
Purchase of shares by MSBP....................................... (2,200,00) -- --
Dividends paid................................................... (151,250) (615,430) (581,874)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities.............. 201,183,855 (5,112,085) 36,947,547
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents................. 1,004,046 5,533,036 (1,119,626)
Cash and cash equivalents at beginning of year................... 1,484,584 2,488,630 8,021,666
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year.........................$ 2,488,630 $ 8,021,666 $ 6,902,040
- -------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest......................................................... 7,785,386 12,923,418 14,055,717
Income Taxes..................................................... 625,000 3,995,000 4,767,992
Supplemental disclosure of noncash investing
and financing activities:
Transfer of loans receivable to real estate owned................ 2,842,067 3,084,247 331,114
Transfer of investment securities held to maturity to
investments securities available for sale........................ -- 11,579,750 80,858,447
Transfer of Federal Funds Deposit to Loans....................... -- 850,000 --
Transfer of mortgage-backed securities held to maturity
to investment securities available for sale...................... -- -- 31,746,557
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended July 31, 1994, 1995 and 1996
<TABLE>
<CAPTION>
Common Stock
- -------------------------------------------------------------------------------------------------------------------
Number Additional
of Dollar Paid-in
shares amount capital
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1993............................................. $ - $ -- $ --
- -
Net proceeds of stock offering (note 2).............................. 2,420,000 4,840,000 18,479,374
Common stock acquired by ESOP and
MSBP (note 2)........................................................ - -- --
Amortization of ESOP shares.......................................... - -- 32,000
Amortization of MSBP shares.......................................... - -- 63,000
Dividends paid....................................................... - -- --
Net income........................................................... - -- --
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994............................................. 2,420,000 4,840,000 18,574,374
- -------------------------------------------------------------------------------------------------------------------
Amortization of ESOP shares.......................................... - -- 116,791
Amortization of MSBP shares.......................................... - -- 199,654
Net income........................................................... - -- --
Cash dividend ($0.25 per common share)............................... - -- --
Purchase of treasury stock........................................... (259,508) -- --
Stock dividend....................................................... 241,960 483,920 2,843,030
Cumulative effect of accounting change -
Adoption of FASB 115, net of tax (note 1)............................ - -- --
Change in unrealized loss on
securities available for sale, net of tax............................ - -- --
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995............................................. $2,402,452 $ 5,323,920 $21,733,849
- -------------------------------------------------------------------------------------------------------------------
Common stock acquired by ESOP........................................ - -- --
Amortization of ESOP shares.......................................... - -- 168,708
Amortization of MSBP shares.......................................... - -- 126,012
Net income........................................................... - -- --
Cash dividend ($0.25 per common share)............................... - -- --
Purchase of treasury stock........................................... (321,991) -- --
Stock dividend distribution.......................................... 185,243 532,232 4,158,063
Change in unrealized loss on securities available for sale,
net of tax........................................................... - -- --
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996............................................. $2,265,704 $ 5,856,152 $26,186,632
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized loss on Total
Treasury Retained Unallocated shares securities available Stockholders'
stock income ESOP MSBP for sale, net of tax Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- $ 22,210,771 $ - $ - $ - $ 22,210,771
- - - - - 23,319,374
- - (1,100,000) (2,200,000) - (3,300,000)
- - 84,000 - - 116,000
- - - 154,000 - 217,000
- (151,250) - - - (151,250)
4,570,967 - - - 4,570,967
- ------------------------------------------------------------------------------------------------------------------------------------
- $ 26,630,488 $ (1,016,000) $ (2,046,000) - $ 46,982,862
- ------------------------------------------------------------------------------------------------------------------------------------
- - 181,090 - - 297,881
- - - 305,800 - 505,454
- 6,294,627 - - - 6,294,627
- (615,430) - - - (615,430)
(3,970,106) - - - - (3,970,106)
- (3,326,950) - - - -
- - - - 198,920 198,920
- - - - (253,974) (253,974)
- ------------------------------------------------------------------------------------------------------------------------------------
($3,970,106) $ 28,982,735 ($ 834,910) ($1,740,200) ($ 55,054) $49,440,234
- ------------------------------------------------------------------------------------------------------------------------------------
- - (1,615,985) - - (1,615,985)
- - 144,000 - - 312,708
- - - 319,552 - 445,564
- 6,273,914 - - - 6,273,914
- (581,874) - - - (581,874)
(6,685,014) - - - (6,685,014
- (4,690,295) - - - -
- - - - (1,829,867) (1,829,867)
- ------------------------------------------------------------------------------------------------------------------------------------
($10,655,120) $ 29,984,480 ($ 2,306,895) ($ 1,420,648) ($ 1,884,921) $ 45,759,680
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE>
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1995 and 1996
Notel
Summary of Significant Accounting Policies
The following items comprise the significant accounting policies which
Lakeview Financial Corp. and subsidiaries (the Bank) followed in preparing
and presenting these consolidated financial statements:
Business:
The Bank provides a full range of retail banking services through its
branches in Passaic and Bergen Counties, New Jersey. The Bank is subject to
competition from other financial institutions. The Bank is subject to the
regulations of certain regulatory agencies and undergoes periodic
examinations by those regulatory agencies. 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 dates of the
consolidated balance sheets, and revenues and expenses for the years then
ended. Actual results could differ significantly from those estimates and
assumptions.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for losses on
loans and the valuation of real estate acquired in connection with
foreclosures or in settlement of loans. It is management's judgment that the
allowance for loan and real estate losses are adequate to provide for
potential loan and real estate losses.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
Lakeview Financial Corp. and its wholly owned subsidiaries, Lakeview
Savings Bank (LSB), LVS, Inc. (LVS), Lakeview Investment Services, Inc.
(LISI), Branchview, Inc. (Branchview), and Lakeview Mortgage Depot, Inc.
(LMD).
In May 1993, Lakeview Savings Bank, SLA converted from a state-chartered
savings and loan association to a statechartered savings bank. In connection
with the conversion, the Bank changed its name from Lakeview Savings Bank,
SLA and subsidiaries to Lakeview Savings Bank and subsidiaries.
On August 25, 1994, the Bank completed a reorganization into a holding
company form of ownership, and the Bank became a wholly-owned subsidiary of
Lakeview Financial Corp. The stockholders of the Bank exchanged their shares
of the Bank for the same number of shares of Lakeview Financial Corp.
Investment Securities
and Mortgage-Backed Securities
Effective August 1, 1994, the Bank adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt or
Equity Securities". Under SFAS 115, the Bank is required to report debt,
readily-marketable equity and mortgage-backed securities in one of the following
categories (i) "held-to-maturity" (management has a positive intent and ability
to hold to maturity) which are to be reported at amortized cost; (ii) "trading"
(held for current resale) which are to be reported at fair value with unrealized
gains and losses included in earnings and (iii) "available-for-sale (all other
debt, readily marketable equity and mortgage-backed securities) which are to be
reported at fair value, with unrealized gains and losses excluded from earnings
and reported, net of income tax, as a separate component of equity. The adoption
of SFAS 115 resulted in a net increase of $198,920 to stockholders' equity.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
"Special Report - A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt Equity Securities," which provided transition
guidance permitting an enterprise to reassess the appropriateness of the
classifications of all its securities before December 31, 1995. The Savings Bank
reassessed its classifications, and on December 31, 1995, transferred $112.6
million in amortized cost of investment and mortgage-backed securities from held
to maturity to the available for sale classification. The related net unrealized
gain after tax effect as of the date of transfer was $157,000.
Premiums and discounts on debt and mortgage-backed securities are amortized to
expense and accreted to income over the estimated life of the respective
security using a method that approximates the level yield method.
Gains and losses on the sale of securities available for sale are based upon the
amortized cost of the security using the specific identification method.
Office Properties and Equipment
Premises, furniture and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization charges are
computed using the straight-line method. Premises, furniture and equipment are
depreciated over the estimated useful life of the assets, except for leasehold
improvements, which are amortized over the term of the lease or the estimated
useful life of the asset, if shorter. Estimated useful lives are ten to forty
years for premises, and three to ten years for furniture and equipment.
Expenditures for maintenance and repairs are expensed as incurred. The costs of
major renewals and improvements are capitalized. Premises and major items of
furniture and equipment are removed from the property accounts upon
20
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Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
disposition at their carrying amount, and gains or losses on such transactions
are included in other non-interest income or expense.
Income Taxes
The Bank files a consolidated federal income tax return. In accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109), deferred income tax expense or benefit is determined by
recognizing deferred tax assets and liabilities for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The realization of deferred
tax assets is assessed and a valuation allowance provided, when necessary, for
that portion of the asset which is not likely to be realized. Management
believes, based upon current facts, that it is more likely than not there will
be sufficient taxable income in future years to realize the deferred tax assets.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that includes the enactment date.
Loans
Loans are stated at principal amounts outstanding, net of unearned discount and
net deferred loan origination fees and costs. Interest income on loans is
accrued and credited to interest income as earned.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net fee or cost is recognized in interest income using the
level-yield method over the contractual life of the specifically identified
loans or recognized as the loans are sold or prepaid. Discounts and premiums
relating to mortgage loans purchased are deferred and accreted or amortized to
income using straight-line method over the life of the loan or ten years,
whichever is shorter.
Loans are generally placed on nonaccrual status when a loan becomes more than 90
days past due or it appears that interest is uncollectible. Previously accrued
and unpaid interest is reversed when a loan is placed on nonaccrual status.
Interest income on nonaccrual loans is recognized only in the period in which it
is ultimately collected. After principal and interest payments have been brought
current and future collectibility is reasonably assured, loans are returned to
accrual status.
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114), and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS
118") were adopted prospectively by the Bank on January 1, 1995. These
statements address the accounting for impaired loans and specify how allowances
for loan losses related to these impaired loans should be determined. The
adoption of these statements did not affect the level of the overall allowance
or the operating results. Income recognition and charge-off policies were not
changed as a result of SFAS 114 and SFAS 118. The Savings Bank defines the
population of impaired loans to be all non-accrual commercial real estate,
multi-family and land loans. Impaired loans are individually assessed to
determine that the loan's carrying value is not in excess of the fair value of
the collateral or the present value of the loan's expected future cash flows.
Smaller balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and installment loans, are
specifically excluded from the impaired loan portfolio. There were $645,184 of
impaired loans requiring no valuation allowance at July 31, 1996, as defined by
SFAS 114 and SFAS 118.
Real Estate Owned
Real estate owned, acquired or deemed acquired through foreclosure or deed in
lieu of foreclosure, is carried at the lower of estimated fair value less
estimated disposition costs or the balance of the loan on the property at date
of acquisition. Costs relating to the development and improvement of property
are capitalized, whereas those relating to holding property are charged to
expense. Losses are charged to operations as incurred or when it is determined
that the investment in real estate owned is greater than its estimated net
realizable value.
Allowances For Losses On Loans And Real Estate Owned
The allowances for losses on loans and real estate owned are based on
management's evaluations of the adequacy of the allowances based on the Bank's
past loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral, and current economic conditions. Additions are made
to the allowance through periodic provisions which are charged to earnings. All
losses of principal are charged to the allowance when the loss actually occurs
or when a determination is made that a loss is probable. Subsequent recoveries,
if any, are added back to the allowance.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and in banks, and Federal funds sold with a maturity of three months or
less.
Earnings Per Share
Income per common share is calculated by dividing net income, by the average
number of shares of common stock
21
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
and average number of common stock equivalents outstanding during the period.
The weighted average number of shares outstanding during the year ended July 31,
1996 used in the earnings per share calculation was 2,527,172. Per share data
has been adjusted to reflect the 10% stock dividend paid during 1995 and 1996.
Reclassification's
Certain reclassification's have been made to the 1994 and 1995 amounts to
conform to the 1996 presentation.
Note 2
Conversion from Mutual
to Stock Form of Ownership
On December 22, 1993, the Bank completed its conversion from a state chartered
mutual savings bank to a state chartered stock savings bank. The Bank issued
2,420,000 shares at $10 per share for a total of $24,200,000. The net proceeds
of the stock offering, after reflecting offering expenses of $880,626, were
$23,319,374. The proceeds were added to the Bank's general funds to be used for
general corporate purposes.
As part of the reorganization to the stock form of ownership, the Lakeview
Savings Bank Employee Stock Ownership Plan (ESOP) purchased 110,000 shares of
the Bank's common stock at $10 per share, or $1,100,000, which was funded by a
loan from an unaffiliated lender. The Bank intends to make discretionary cash
contributions to the ESOP sufficient to service the amount borrowed.
Additionally, the Lakeview Savings Bank Management Stock Bonus Plan (MSBP)
purchased 220,000 shares at $10 per share totaling $2,200,000. The funds used to
acquire the MSBP shares were contributed by the Bank. The Bank has allocated 66%
of the shares to directors, officers and other key employees of the Bank (see
Note 16).
Note 3
Excess of Cost Over Fair Value
of Net Assets Acquired, Net
On December 31, 1989, the Bank acquired a savings and loan association. The
acquisition has been accounted for as a purchase and, accordingly, all assets
and liabilities acquired were adjusted to and recorded at their fair values as
of December 31, 1989. The excess of cost over fair value of net assets acquired
(goodwill) amounted to $1,084,373 and was allocated to core deposit value to be
amortized on a straightline basis over 15 years. Total amortization charged to
date amount to $475,949, at July 31, 1996.
On April 22, 1994, the Bank acquired certain assets and assumed certain
liabilities of Prospect Park Federal Savings Bank, a failed savings bank, from
the Resolution Trust Corporation. The excess of cost over the fair value of the
assets and liabilities acquired amounted to $12,430,000 and is being amortized
on a straight-line basis over ten years. Total amortization charged to date
amounts to $2,862,000 at July 31, 1996.
Note 4
Investment Securities Held to Maturity
The amortized cost and estimated market values of investment securities held to
maturity as of July 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------------
July 31, 1995:
<S> <C> <C> <C> <C>
FHLB structured notes........................... $ 36,960,980 $ 74,895 ($ 262,500) $ 36,773,375
FHLMC structured notes.......................... 8,000,000 11,250 (116,250) 7,895,000
FNMA structured notes........................... 10,776,625 81,805 (69,375) 10,789,055
- ----------------------------------------------------------------------------------------------------------------------------------
$ 55,737,605 $ 167,950 ($ 448,125) $55,457,430
- ----------------------------------------------------------------------------------------------------------------------------------
July 31, 1996:
FHLB obligations................................ $ 20,741,938 $8,062 ($ 518,850) $20,231,150
FHLMC obligations............................... 14,079,257 115,743 (264,225) 13,930,775
FNMA obligations................................ 6,000,000 0 (78,476) 5,921,524
- ----------------------------------------------------------------------------------------------------------------------------------
$ 40,821,195 $ 123,805 ($ 861,551) $40,083,449
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The yield on the structured notes increases periodically over the contractual
five or ten-year term of the security. However, the issuer has the option to
repay these securities as the yield adjusts. As of July 31, 1996, the Bank had
no structured notes in its held to maturity portfolio.
22
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The amortized cost and estimated market values of investment securities
held to maturity at July 31, 1996, by contractual maturity, are shown
below:
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less..................................................... $ - $ -
Due after one year through five years....................................... - -
Due after five years through ten years...................................... 18,329,257 18,298,489
Due after ten years......................................................... 22,491,938 21,784,960
- ----------------------------------------------------------------------------------------------------------------------------------
$40,821,195 $40,083,449
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 5
Investments Available for Sale
The amortized cost and estimated market values of investments
available for sale at July 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ------------------------------------------------------------------------------------------------------------------------------------
July 31, 1995:
<S> <C> <C> <C> <C>
SLMA stock................................................... $ 4,689,121 - ($ 379,121) $ 4,310,000
Equity Securities............................................ 3.964,250 293,125 - 4,257,375
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8,653,371 $293,125 ($ 379,121) $8,567,375
- ------------------------------------------------------------------------------------------------------------------------------------
July 31, 1996:
U.S. Agency Securities....................................... $59,899,079 - ($1,853,868) $58,045,211
GNMA MBS..................................................... 4,520,361 163,406 - 4,683,767
FNMA\FHLMC REMICS............................................ 1,994,239 41,499 (2,067) 2,033,671
Private issue REMICS......................................... 9,999,368 (477,784) 9,521,584
Municipal Bonds.............................................. 3,229,386 (146,776) 3,082,610
FNMA Stock................................................... 8,999,430 (172,930) 8,826,500
Equity Securities............................................ 4,269,830 121,670 (617,419) 3,774,081
- ------------------------------------------------------------------------------------------------------------------------------------
$ 92,911,693 $326,575 ($3,270,844) $89,967,424
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market values of investments available for
sale at July 31, 1996, by contractual maturities are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 13,269,260 $12,600,580
Due after one year through five years 8,000,000 7,917,328
Due after five years through ten years 26,224,929 25,514,693
Due after ten years 45,417,504 43,934,823
- ----------------------------------------------------------------------------------------------------------------------------------
$ 92,911,693 $89,967,424
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
23
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Equity securities have been classified as maturing in one year or less, since
they have no stated maturity.
During the years ended July 31, 1994, 1995 and 1996, proceeds from sale of
securities available for sale of $3,891,839, $20,864,634, and $53,587,858,
respectively, were received, resulting in gross gains of $866,399, $2,107,244
and $2,768,781, respectively.
Note 6
Mortgage-backed Securities Held to Maturity
The amortized cost and estimated market values of mortgage-backed securities
held to maturity at July 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------------
July 31, 1995:
<S> <C> <C> <C> <C>
GNMA...................................................... $ 5,183,091 $245,752 $ - $ 5,428,843
FHLMC..................................................... 57,167,299 456,105 (519,100) 57,104,304
FNMA...................................................... 47,540,422 201,718 (623,001) 47,119,139
REMICs.................................................... 48,887,166 216,859 (1,394,830) 47,709,195
Other..................................................... 16,597,318 11,359 (469,880) 16,138,797
- ----------------------------------------------------------------------------------------------------------------------------------
$175,375,296 $1,131,793 ($3,006,811) $173,500,278
- ----------------------------------------------------------------------------------------------------------------------------------
July 31, 1996:
FHLMC..................................................... $ 47,954,027 $ 130,680 $ (944,332) $ 47,140,375
FNMA...................................................... 38,922,756 253,491 (584,785) 38,591,462
FNMA/FHLMC/REMICS......................................... 34,585,153 265,693 (1,110,773) 33,740,073
- ----------------------------------------------------------------------------------------------------------------------------------
$121,461,936 $649,864 ($2,639,890) $119,471,910
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and market value of mortgage-backed securities held to
maturity at July 31, 1996, are shown below. The expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalties.
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less................................................ $ 4,184,585 $ 4,157,764
Due after one year through five years.................................. 45,466,530 44,332,136
Due after five years through ten years................................. 20,470,754 20,178,036
Due after ten years.................................................... 51,340,067 50,803,974
- ----------------------------------------------------------------------------------------------------------------------------------
$121,461,936 $119,471,910
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
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- --------------------------------------------------------------------------------
Note 7
Investments Held By Subsidiary
On February 6, 1995, Branchview Inc., a subsidiary of the Savings Bank sold the
majority of its equity interest in Residential Money Centers ("RMC"), a
residential mortgage company which originates mortgages and sells them in the
secondary market, to an unrelated third party for a gain of $3.8 million, of
which $3.4 million was recorded as a gain in 1995 and is reflected in other
operating income. Under the terms of the sale, the balance has been deferred and
will remain in escrow for 18 months pending resolution of normal contingencies.
In July 1995, Branchview purchased the remaining partnership interest of RMC,
for $1.5 million, and became the sole owner of RMC. RMC's only remaining asset
was a 9.09% limited partnership interest in Industry Mortgage Company, L.P.
("IMC").
IMC is a specialized consumer finance company engaged in purchasing,
originating, servicing and selling home equity loans secured primarily by first
liens on one-to-four family residential properties.
On June 25, 1996, IMC completed a reorganization plan whereby the limited
partners received restricted common stock in exchange for their partnership
interest in connection with a public offering of unrestricted common stock.
Immediately prior to the reorganization, Branchview purchased a limited
partner's half share interest in IMC for $4,778,000. As a result of the
reorganization, Branchview received 830,928 shares of restricted common stock in
exchange for its limited partnership interest. The offering price of the common
stock was $18.00 per share.
Upon completion of the public offering, IMC had outstanding an aggregate of
11,065,092 shares of common stock. Of these shares, the 3,100,000 shares sold in
the public offering will be freely tradable without restriction or further
registration under the Securities Act. The remaining 7,965,092 shares held by
existing stockholders of IMC (including Branchview) are "restricted securities"
within the meaning of Rule 144. None of the restricted shares of common stock
have been held for more than two years by stockholders who are not affiliates of
the Company and will be eligible for sale in the public market upon the
expiration of the restrictions in reliance on Rule 144(k) under the Securities
Act.
In general, under Rule 144 the Securities Act as currently in effect, a person,
including an affiliate, may sell an amount of restricted securities which were
last purchased from the issuer or an affiliate of the issuer a minimum of two
years prior to such sale, such that, within any three-month period, such
person's sales do not exceed the greater of 1% of the then outstanding shares of
the Company's common stock, or the average weekly trading volume in the Common
Stock on Nasdaq during the four calendar weeks preceding the date on which
notice of such sale is filed under Rule 144(k) of the Securities Act, or if no
such notice is required, the date of receipt of the order to execute the
transaction. In addition, under Rule 144(k), a stockholder who is not deemed an
affiliate, and has not been an affiliate for at least three months prior to the
sale, is entitled to sell restricted securities which were last purchased from
the issuer or an affiliate of the issuer a minimum of at least 3 years prior to
such sale without complying with the foregoing requirements. In calculating the
two and three year holding periods described above, a holder of restricted
securities can include the holding of a prior owner who was no an affiliate.
Notwithstanding the limitations on sale described above, otherwise restricted
securities may be sold at any time through an effective registration statement
pursuant to the Securities Act.
As of July 31, 1996, the carrying value of Branchview's investment in IMC is
$7,806,000 represented by the 830,928 shares of restricted common stock of IMC.
Although the investment in IMC is represented by equity securities, it is
carried at cost because the restriction period is in excess of one year. The
market value of such investment at July 31, 1996, based on the quoted market
price per share of the unrestricted common stock is $19.9 million. Included in
other income in 1996 is approximately $2.3 million representing the Bank's share
of partnership earnings in IMC prior to its reorganization.
Note 8
Loans Receivable, Net
A comparative summary of loans receivable at July 31, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Loan balances by type:
<S> <C> <C>
Real estate loans.................................................... $142,043,522 $163,279,564
Construction loans................................................... 915,000 762,715
Consumer loans....................................................... 1,136,811 1,517,033
Other................................................................ 850,000 1,191,082
- -----------------------------------------------------------------------------------------------------------------------------------
144,945,333 166,750,394
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Less:
<S> <C> <C>
Allowance for loan losses............................................ 2,534,836 3,073,158
Deferred loan fees................................................... 287,552 219,862
- -----------------------------------------------------------------------------------------------------------------------------------
$142,122,945 $163,457,374
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank serviced loans for others in the approximate amount of $17,142,812,
$17,927,900 and $13,792,727 at July 31, 1994, 1995 and 1996, respectively.
Servicing income earned in the year ended July 31, 1994, 1995, and 1996 amounted
to $21,530, $15,211, and $42,173, respectively.
A comparative summary of non-accrual loans at July 31, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
No. Amount No. Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate and other loans..................................................... 56 $ 4,222,259 40 $2,910,953
Percent of real estate and other loans.......................................... 3.0% 1.8%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
An analysis of the allowance for loan losses for the years ended July 31, 1994,
1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year.................................................... $2,638,365 $1,713,590 $2,534,836
Provision charged to operations................................................. 2,047,121 1,376,404 664,221
Charge-offs..................................................................... (3,070,734) (1,405,037) (429,341)
Recoveries...................................................................... 98,838 849,879 303,442
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year.......................................................... $1,713,590 $2,534,836 $3,073,158
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Included in loans is a secured loan amounting to $2.4 million, which was on
non-accrual during a portion of fiscal 1996. In 1996, the Bank signed an
agreement with the guarantor of the loan ("Forbearance Agreement") whereby all
past-due principal and interest was brought current and principal and interest
payments were prepaid through the date of the loan, December 16, 1996. The
Forbearance Agreement provides the guarantor an option to extend the due date of
the loan to December 16, 1997, with approvals of the participating banks
including the Bank. If the option is granted, the guarantor must prepay all
interest and principal to such due date.
For the years ended July 31, 1994, 1995 and 1996, additional interest income
before taxes amounting to approximately $703,000, $234,000 and $201,000,
respectively, would have been recognized if interest on loans three months or
more in arrears had been recorded based on original terms. At July 31, 1996,
there were no commitments to lend additional funds to borrowers whose loans are
classified as nonperforming.
The Bank uses the same credit policies and collateral requirements in making
commitments and conditional obligations as it does for on-balance-sheet loans.
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the borrower. Collateral held varies but primarily includes residential
properties. Outstanding loan commitments, primarily fixed-rate loans, at July
31, 1995 and 1996 amounted to $2,274,900 and $13,295,000, respectively.
26
<PAGE>
Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
Note 9
Real Estate Owned, Net
Activity in the allowance for losses on real estate owned for the years ended
July 31, 1994, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year.............................................. $823,125 $ 188,119 $ -
Provision for losses...................................................... 713,320 502,377 654,489
Charge-offs, net ......................................................... (1,348,326) (690,496) (654,489)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year.................................................... $188,119 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Net loss on real estate owned activities for the years ended
July 31, 1994, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for real estate owned losses.................................... $713,320 $ 502,377 $ 654,489
Net loss on sale of real estate owned and
related expenses.......................................................... 606,372 147,817 266,428
- -----------------------------------------------------------------------------------------------------------------------
$ 1,319,692 $ 650,194 $ 920,917
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 10
Accrued Interest Receivable
Accrued interest receivable for the years ended July 31, 1995 and 1996,
respectively, are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment securities held to maturity.......................................... $ 894,180 $1,021,063
Investment securities available for sale........................................ $ 25,249 $ 961,514
Mortgage-backed securities...................................................... 987,697 668,487
Loans receivable................................................................ 811,223 995,448
- -----------------------------------------------------------------------------------------------------------------------
$ 2,718,349 $3,646,512
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 11
Office Properties and Equipment, net
Office properties and equipment, net, at July 31, 1995 and 1996
consists of the following:
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------------------------------------------------------
Cost:
<S> <C> <C>
Land............................................................................ $ 793,158 $ 793,158
Parking lot improvements........................................................ 26,913 26,913
Building and building improvements.............................................. 3,513,101 3,600,269
Furniture and equipment......................................................... 1,234,000 1,290,631
Automobiles..................................................................... 75,165 102,636
- -----------------------------------------------------------------------------------------------------------------------
5,642,337 5,813,607
- -----------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation................................................... 1,342,743 1,630,968
- -----------------------------------------------------------------------------------------------------------------------
$ 4,299,594 $4,182,639
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-interest expense includes rentals for premises and equipment of $73,000,
$156,000 and $177,000 for the years ended July 31, 1994, 1995 and 1996
respectively.
27
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Note 12
Deposits
Deposit balances at July 31. 1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
Interest Weighted Interest Weighted
Rate average Rate average
Ranges rate Amount % Ranges rate Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
NOW accounts and money
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
market deposits....................0 - 2.85 2.10% $ 66,225,465 19.3 0 - 2.85 1.86% $ 69,588,989 19.6
Savings deposits...................0 - 2.85 2.39% 73,586,111 21.4 0 - 2.85 2.38% 74,612,769 21.1
Certificates of deposit............2 - 10 5.27% 203,677,752 59.3 0 - 8 5.11% 210,045,012 59.3
- -----------------------------------------------------------------------------------------------------------------------------------
$343,489,328 100.0 $ 354,246,770 100.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Certificates of deposit greater than $100,000 total approximately
$14,310,083 and $17,512,390 at July 31, 1995 and 1996, respectively.
The contractual maturities of certificates of deposit at July 31, 1995
and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year................................................................... $163,745 $ 170,389
One to three years................................................................ 33,282 35,069
Thereafter........................................................................ 6,651 4,587
- -----------------------------------------------------------------------------------------------------------------------------------
$203,678 $ 210,045
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest expense on deposits for the years ended July 31, 1994, 1995 and
1996 consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Certificates of deposit........................................... $ 4,962,138 $ 8,429,880 $10,880,983
Passbook and club accounts........................................ 1,425,258 2,695,257 2,384,500
NOW and money market accounts..................................... 472,526 818,459 798,812
- -----------------------------------------------------------------------------------------------------------------------------------
$ 6,859,922 $11,943,596 $14,064,295
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 13
Borrowings
Borrowings at July 31, 1995 and 1996 consists of the following:
<TABLE>
<CAPTION>
Interest
1995 1996 Rate Maturity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHLB of New York Advance $19,000,000 - 6.13% Aug. 1, 1995
FHLB of New York Advance - $10,000,000 5.44% Aug.22,1996
FHLB of New York Advance - $10,000,000 5.44% Aug.26,1996
FHLB of New York Line of Credit - $14,000,000 6.00% Aug. 1, 1996
Reverse Repurchase Agreement - $20,000,000 5.60% Aug. 8, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
$19,000,000 $54,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
The line of credit and advances from the Federal Home Loan Bank of New York
("FHLB") are secured by stock in the FHLB of New York and a blanket pledge over
the Bank's Agency securities, qualifying loans and mortgage-backed securities.
At July 31, 1996, the Bank had a credit line available of $41,961,400, from the
Federal Home Loan Bank of New York.
At July 31, 1996, the Savings Bank had entered into repurchase agreements with 1
major national broker/dealer which totaled $20 million. During the years ended
July 31, 1995 and 1996, the maximum month-end balance of the repurchase
agreements was $0 and $20 million, respectively. The average amount of
repurchase agreements held during the years ended July 31, 1995 and 1996 was $0
and $5.1 million, respectively. Interest paid on secured borrowings in fiscal
1995 and 1996 was $0 and $282,124, respectively.
Note 14
Federal and State Income Taxes
As discussed in note 1, the Bank adopted SFAS 109 as of August 1, 1993. The
cumulative effect of this change in accounting for income taxes of $1,315,011 is
reported separately in the consolidated statement of income for the year ended
July 31, 1994.
Income tax expense (benefit) for the years ended July 31, 1994, 1995 and 1996 is
comprised of the following:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal............................................................ $ 809,121 $3,377,513 $3,582,788
State.............................................................. 133,857 512,000 529,418
- -----------------------------------------------------------------------------------------------------------------------------------
$942,978 $3,889,513 $4,112,206
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal............................................................ 806,436 (141,000 (428,000)
State.............................................................. 63,257 (13,000) (38,000)
- -----------------------------------------------------------------------------------------------------------------------------------
869,693 (154,000) (466,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Total income tax expense........................................... $1,812,671 $3,735,513 $3,646,206
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
If certain conditions are met, savings and loan associations are allowed a
special bad debt deduction in determining income for tax purposes, based on
specified experience formulas or a percentage of taxable income before such
deduction. The Bank used the experience method in 1995. It is anticipated that
the experience method will be used in preparing the 1996 tax return.
On August 21, 1996 legislation was signed into law which repealed the percentage
of taxable income method for tax bad debt deduction. The repeal is effective for
the Bank's taxable year beginning August 1, 1996. In addition, the legislation
requires the Company to include in taxable income its tax bad debt reserves in
excess of its base year reserves over a six, seven, or eight year period
depending upon the attainment of certain loan origination levels.
Since the percentage of taxable income method for tax bad debt deduction and the
corresponding increase in the tax bad debt reserve in excess of the base year
have been recorded as temporary differences pursuant to SFAS 109, this change in
the tax law is not expected to have a material effect on the Company's statement
of operations.
Retained income at July 31, 1996 includes approximately $3,600,000 for which no
provision for income tax has been made. This amount represents an allocation of
income to bad debt deductions for tax purposes only. Reduction of amounts so
allocated by other than tax bad debt losses or recomputation of bad debt
deductions resulting from an operating loss carryback to prior years will create
income for tax purposes only, which will be subject to the then current
corporate income tax rate.
29
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
A reconciliation of expected income tax expense (computed by multiplying the
U.S. Federal corporate income tax rate of 34% to income before income taxes) and
total income tax expense for the years ended July 31, 1994, 1995 and 1996 is as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected income tax expense............................................. $1,723,333 $3,410,248 $3,372,841
Dividends received deduction............................................ (77,512) (52,263) (88,246)
State income taxes, net of Federal tax benefit.......................... 130,095 337,920 324,336
Amortization of goodwill and other, net................................. 36,755 39,608 37,275
- -----------------------------------------------------------------------------------------------------------------------------------
Total income tax expense................................................ $1,812,671 $3,735,513 $3,646,206
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset at July 31, 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
Deferred tax assets:
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses............................................... $938,000 $1,059,000
Loan fees............................................................... 106,000 81,000
Uncollected interest.................................................... 54,000 93,000
Accrued bonus........................................................... 65,000 65,000
Goodwill................................................................ 189,000 344,000
Unrealized loss or securities available for sale........................ 31,000 1,059,348
Other................................................................... 129,000 239,000
- -----------------------------------------------------------------------------------------------------------------------------------
........................................................................ $1,512,000 $2,940,348
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Intangible assets....................................................... 245,000 225,000
Depreciation............................................................ 117,000 85,000
Other................................................................... 67,000 53,000
- -----------------------------------------------------------------------------------------------------------------------------------
429,000 363,000
- -----------------------------------------------------------------------------------------------------------------------------------
Net deferred asset...................................................... $1,083,000 $2,577,348
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Management believes, based upon current facts, that it is more likely than not
that there will be sufficient taxable income in future years to realize the net
deferred tax asset. However there can be no assurances about the levels of
future earnings.
30
<PAGE>
Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
Note 15
Employee Benefit Plan
The Bank has in effect a noncontributory defined benefit plan covering
substantially all of its employees upon their becoming eligible. The benefits
are based on years of service and compensation. Total pension expense (income)
was $35,276, ($14,488) and ($52,664) for the years ended July 31, 1994, 1995 and
1996, respectively.
Net pension cost for the years ended July 31, 1994, 1995 and 1996 includes the
following:
<TABLE>
<CAPTION>
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period........................ $ 53,235 $39,095 $ 36,915
Interest cost on projected benefit obligation........................... 37,699 35,103 38,638
Return on plan assets................................................... (445,761) (98,518) (83,128)
Net amortization and deferral loss...................................... 390,103 9,832 (45,089)
- -----------------------------------------------------------------------------------------------------------------------------------
Total pension cost (benefit)............................................ $ 35,276 ($ 14,488) ($52,664)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the plan's funded status at July 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of obligations - accumulated benefit
obligation, including vested benefits of $372,867 and $519,641
<S> <C> <C>
at July 31, 1995 and 1996, respectively......................................... $ 458,188 $527,475
Projected benefit obligation.................................................... 608,112 569,452
Plan assets at fair value....................................................... 1,210,917 1,223,715
Plan assets in excess of projected benefit obligation........................... 602,805 654,263
Unrecognized net transition obligation.......................................... (76,711) (68,187)
Unrecognized prior service cost................................................. - (40,748)
Unrecognized deferred loss...................................................... (530,649) (497,219)
- -----------------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost............................................................ ($4,555) $48,109
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 6.50% in fiscal 1995 and 1996. The
assumed long-term rate of return on plan assets was 7.25% in both years, and the
assumed rate of increase in future compensation levels was 5.5% in both years.
Supplemental Executive Retirement Plan ("SERP")
During fiscal year 1996, the Bank implemented a Supplemental Executive
Retirement Plan ("SERP"), which provides a post-employment supplemental
retirement benefit to the eligible participant's Pension Plans Annual Benefit.
The SERP is not a tax-qualified employee benefit plan. The SERP expense was
$84,006, for the year ended July 31, 1996.
31
<PAGE>
[Picture of Sextant] LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Note 16
Stock Benefit Plans
Stock Option Plan
The Bank has adopted a stock option and incentive plan (Option Plan). Pursuant
to the Option Plan, stock options of 439,200 common shares, adjusted for stock
dividends, may be granted to directors and officers of the Bank. Options granted
under the Option Plan may be either options that qualify as Incentive Stock
Options as defined in Section 422 of the Internal Revenue Code of 1986 (the
Code), as amended, or options that do not qualify.
Exercise prices of the options range from $8.26 to $16.02 per share. All options
have been adjusted to reflect stock dividends. At July 31, 1996, 418,157 granted
qualified stock options were outstanding, and none of the stock options granted
were exercised during this period.
Employee Stock Ownership Plan
The Bank has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed one year of service with the Bank
and having attained age 2 1. The ESOP Trust purchased 1 10,000 shares of common
stock in the Bank's initial public offering with proceeds from a loan from an
unaffiliated lender. On July 31, 1996 the ESOP Trust purchased an additional
84,744 shares for $1,615,985. The Bank makes cash contributions to the ESOP on
an annual basis sufficient to enable the ESOP to make the required loan payments
to the unaffiliated lender. Dividends declared on ESOP shares are used to
purchase additional common shares of the Bank, for inclusion in the Plan, as
Plan assets.
The note payable referred to above bears interest at Federal funds plus 3.25%,
with interest payable quarterly and principal payable in equal annual
installments over eight years. The loan is secured by the shares of the stock
purchased.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
The Bank accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as deferred ESOP
shares in the statement of financial position. As shares are released from
collateral, the Bank reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations.
Management Stock Bonus Plans
The Bank has adopted MSBPs for directors and management to enable the Bank to
attract and retain experienced and capable personnel in key positions of
responsibility. A total of 220,000 shares of restricted stock were purchased on
the conversion date. Allocated restricted stock is payable over a five-year
vesting period, at 20% per year, beginning in the year of the award. The Bank
will recognize compensation expense in the amount of the fair market value of
the common stock at the grant date, pro rata over the years during which the
shares are payable and recorded as an addition to stockholders' equity equal to
the compensation expense recorded. Compensation expense attributable to the
MSBPs amounted to $154,000, $305,800 and $319,552 in 1994, 1995 and 1996,
respectively. The shares are entitled to all voting and other stockholder
rights, except that the shares, while restricted, cannot be sold, pledged or
otherwise disposed of, and are required to be held in escrow.
If a holder of restricted stock under the MSBPs terminated employment for
reasons other than death, disability, retirement following five years of service
or change of control in the Bank, such employee forfeits all rights to any
allocated shares which are still restricted. If termination is caused by death,
disability, retirement or change in control of the Bank, all allocated shares
become unrestricted.
Note 17
Commitments and Contingencies
At July 31, 1996, the Bank was obligated under noncancelable operating leases
for premises and equipment as follows (in thousands):
- --------------------------------------------------------------------------------
1997............................................$137,311
1998.............................................124,459
1999.............................................116,985
2000..............................................94,560
Thereafter........................................94,560
- --------------------------------------------------------------------------------
In the normal course of business, there are various outstanding legal
proceedings and claims. In the opinion of management, after consultation with
legal counsel, the disposition of such legal proceedings and claims will not
materially affect the Bank's consolidated financial position, results of
operations or liquidity.
32
<PAGE>
Charting The Course [Picture of Ship]
- --------------------------------------------------------------------------------
Note 18
Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of July 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of July 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
Tier 1 leverage ratios as set forth in the table below. There are no conditions
or events since that notification that Management believes have changed the
Bank's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
Required To be well capitalized
for capital under prompt corrective
Actual adequacy purposes action provision
- -----------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
As of July 31, 1996:
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets)...............$41,540,507 19.3% $17,211,156 8.0% $ 21,513,945 10.0%
Tier I capital (to risk-weighted assets)...............33,200,112 15.4% 8,605,578 4.0% 12,908,367 6.0%
Tier 1 capital (to average assets).....................33,200,112 7.5% 17,630,520 4.0% 22,038,150 5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
As of July 31, 1995:
Total capital (to risk-weighted assets)................49,400,232 25.5% 15,495,517 8.0% 19,369,396 10.0%
Tier 1 capital (to risk-weighted assets)...............37,875,170 19.6% 7,747,758 4.0% 11,621,637 6.0%
Tier 1 capital (to average assets).....................37,875,170 9.1% 16,702,240 4.0% 20,877,800 5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Note 19
Stock Repurchase Program
On October 28, 1994 the Bank announced that the Board of Directors had approved
a 5% stock repurchase program. On April 10, 1995 the Company announced that the
Board of Directors had approved a 10% stock repurchase program. On November 30,
1995, March 25, 1996, and July 29, 1996, the Company announced that the Board of
Directors had approved additional 5% stock repurchase programs. On January 9,
1995 and January 2, 1996, the Company announced that the Board of Directors had
approved an additional 10% stock dividend of its outstanding common stock. The
repurchased shares have been held as treasury stock and are available for
general corporate purposes. The Bank has completed the repurchase of 662,372
shares of common stock as of July 31, 1996.
Note 20
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. Such estimates do not include any premium or
discount that could result from offering for sale at one time the Bank's entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
assumptions, many of which involve circumstances outside the control of
management. Because of the uncertainties surrounding these factors and
assumptions, the reported fair values represent estimates only and, therefore,
cannot be compared to the historical accounting model. Changes in assumptions or
methodologies could significantly affect the estimates of fair value.
Fair value estimates presented are based on financial instruments both on- and
off-balance-sheet, and no attempt has been made to estimate the value of
anticipated future business, and the value of assets and liabilities that are
not considered financial instruments. In addition, the tax consequences related
to the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in any of the
estimates. The fair value information supplements the basic financial statements
and other traditional financial data presented throughout the financial
statements, and the aggregate fair value of financial instruments presented does
not represent the underlying value of the Bank taken as a whole and should not
be compared with the fair value of other financial institutions, which may
differ depending on the assumptions used and the valuation techniques employed.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments at July 31, 1995 and 1996:
Financial Assets
The carrying amount of cash and cash equivalents is considered to approximate
fair value. The fair values of securities held for sale and investment
securities are based on quoted market prices. The fair values of equity
securities restricted is based on the quoted market price of unrestricted shares
without discount for the restriction. The fair value of loans represents the
present value of the estimated future cash flows discounted at estimates of
market interest rates adjusted for criteria discussed above. Fair value of
significant nonperforming loans is generally based on the estimated cash flows
which are discounted employing a rate that incorporates the risk associated with
such cash flows. The fair value of the FHLB stock is the same as its carrying
value.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand are considered to
approximate fair value. The fair value of fixed maturity deposits was estimated
by discounting estimated future cash flows using rates currently offered for
deposit products with similar maturities. Long-term borrowing fair values are
discounted using rates available on borrowings with similar terms and
maturities.
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Off-balance-sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar arrangements.
The carrying amounts and related fair values at July 31, 1995 and 1996 are as
follows:
<TABLE>
<CAPTION>
Carrying amount Fair value
- -----------------------------------------------------------------------------------------------------------------------------------
1995:
Financial assets:
<S> <C> <C>
Cash and cash equivalents........................................... $ 8,021,666 $ 8,021,666
Investment securities............................................... 55,737,605 55,457,430
Investments held for sale........................................... 8,567,375 8,567,375
Mortgage-backed securities.......................................... 175,375,296 173,500,278
Loans receivable, net............................................... 142,122,945 145,896,430
Federal Home Loan Bank of New York stock............................ 2,587,400 2,587,400
Financial liabilities:
Deposits............................................................ 343,489,328 344,688,499
Borrowings.......................................................... 19,000,000 19,000,000
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1996:
Financial assets:
Cash and cash equivalents........................................... $ 6,902,040 $ 6,902,040
Investment securities held to maturity.............................. 40,821,195 40,083,449
Investments available for sale...................................... 89,967,424 89,967,424
Mortgage-backed securities held to maturity......................... 121,461,936 119,471,910
Equity securities restricted........................................ 7,806,358 19,942,272
Loans receivable, net............................................... 163,457,374 163,873,689
Federal Home Loan Bank of New York stock............................ 2,587,400 2,587,400
Financial liabilities:
Deposits............................................................ 354,246,770 355,068,772
Borrowings.......................................................... 54,000,000 54,000,000
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</TABLE>
35
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[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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Note 21
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" (SFAS 122), was issued by the Financial Accounting Standards
Board (FASB) in May 1995. SFAS 122 amends certain provisions of SFAS 65 to
eliminate the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. SFAS 122 generally would require a
mortgage banking enterprise that purchases or originates loans to allocate the
cost of acquiring those loans to the mortgage servicing rights and the loans
based on their relative fair values if it is practicable to estimate those fair
values.
Any costs allocated to mortgage servicing rights should be recognized as
separate asset and amortized in proportion to and over the period of estimated
net servicing income and should be evaluated for impairment based on their fair
value. SFAS 122 is effective for fiscal years beginning after December 15, 1995.
Management has determined that the adoption of SFAS 122 will not have a material
impact on the Bank's consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). This statement establishes financial accounting and
reporting standards for stock-based employees compensation plans. SFAS 123
encourages all entities to adopt the "fair value base method" of accounting for
employee stock compensation plans. However, SFAS 123 also allows an entity to
continue to measure compensation cost under such plans using the "intrinsic
value based method." Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, usually the vesting period. Fair value is determined
using an option pricing model that takes into account the stock price at the
grant date, the exercise price, the expected life of the option, the volatility
of the underlying stock and the expected dividends on it, and the risk-free
interest rate over the expected life of the option. Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock. Most stock plans have no intrinsic
value at date of grant, and under previous accounting guidance, no compensation
cost was to be recognized.
The accounting requirements of this statement are effective for transactions
entered into in fiscal years that begin after December 15, 1995. The Bank
intends to continue accounting for compensation cost under the intrinsic value
based method and will provide pro forma disclosures for all awards granted after
July 31, 1996. Such disclosures include net income and earnings per share as if
the fair value based method of accounting has been applied.
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" SFAS 125).
SFAS 125 amends portions of SFAS 115, amends and extends to all servicing assets
and liabilities the accounting standards for mortgages servicing rights now in
SFAS 65, and supercedes SFAS 122. The
36
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statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Those standards are based upon consistent application of a financial components
approach that focuses on control. The statement also defines accounting
treatment for servicing assets and other retained interest in the assets that
are transferred. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. The adoption of the statement is not expected to
have a material effect on the Bank's financial condition or results of
operation.
Note 22
Subsequent Event (Unaudited)
Recapitalization of the Savings Association Insurance Fund ("SAIF") and its
Impact on Insurance Premiums
On September 30, 1996 the President signed into law the Deposit Insurance Funds
Act of 1996 (the Act). Among other provisions, the Act empowers the FDIC to
impose a special assessment on deposits of institutions insured by the Savings
Association Insurance Fund (SAIF) including the Bank. This special assessment,
which is based on deposits at March 31, 1995, is intended to recapitalize the
SAIF.
Based on information issued by the FDIC, the special assessment is expected to
be 65.7 basis points per $100 of insured deposits and was accrued by the Bank on
September 30, 1996. The amount of the assessment is expected to approximate $2.2
million before tax benefit and is payable on November 27, 1996.
It is expected that annual insurance premium rates will be reduced for
institutions in the lowest risk category, including the Bank, to a level which
approximates those paid by institutions insured by the Bank Insurance Fund
(BIF). In addition to the annual insurance premiums, the Bank will be assessed
approximately 6.5 basis points on eligible deposits to cover FICO obligations
beginning on January 1, 1997. The Bank paid insurance premiums to the FDIC of
$794,011 during fiscal 1996.
Note 23
Parent Company Only
At fiscal year end 1996, Lakeview Financial Corp. (Parent only), which was
formed in August 1994, had three subsidiaries: Lakeview Savings Bank,
Branchview, Inc., and Lakeview Mortgage Depot, Inc. The earnings of the
subsidiaries are recognized by the Parent Company using the equity method of
accounting. Accordingly, earnings of the subsidiaries are recorded as increases
in the Parent Company's investment in the subsidiaries and dividends paid reduce
the Parent Company's investment in the subsidiaries. The following information
should be read in conjunction with other Notes to the Consolidated Financial
Statements.
37
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[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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Condensed financial statements of the Parent Company only are presented below.
Condensed Balance Sheet
<TABLE>
<CAPTION>
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash on hand and in banks....................................................... 152,855 244,371
Investments in subsidiaries..................................................... 49,291,953 45,515,234
Other assets.................................................................... - 75
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets.................................................................... $ 49,444,808 $ 45,759,680
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Liabilities and Stockholders' Equity
Liabilities..................................................................... 4,574 -
Stockholders' equity............................................................ 49,440,234 45,759,680
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Total liabilities and Stockholders' equity...................................... 49,444,808 45,759,680
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Statement of Income
Equity in earnings of subsidiaries.............................................. $ 6,279,834 $ 6,310,835
Interest income................................................................. 16,127 -
Securities gains................................................................ 20,709 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total income.................................................................... 6,316,670 6,310,835
Total other expenses............................................................ 17,431 34,957
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Net income before taxes......................................................... 6,299,239 6,275,878
Taxes expense................................................................... 4,612 1,964
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Net income...................................................................... $ 6,294,627 $ 6,273,914
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Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income..................................................................... $ 6,294,627 $ 6,273,914
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in earnings of subsidiaries............................................. (6,279,834) (6,310,835)
Investment in subsidiaries..................................................... 99,997 (250,180)
Change in other assets......................................................... - (75)
Change in other liabilities.................................................... 4,574 (4,574)
Dividends from subsidiaries.................................................... 4,619,027 7,650,154
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activity........................................ 4,738,391 7,358,404
Cash flows from financing activities:
Purchase of treasury stock..................................................... (3,970,106) (6,685,014)
Dividend paid.................................................................. (615,430) (581,874)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities.......................................... (4,585,536) (7,266,888)
Net change in cash and cash equivalents......................................... 152,855 91,516
Cash and cash equivalents at beginning of period................................ - 152,855
Cash and cash equivalents at end of period...................................... $152,855 $ 244,371
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</TABLE>
38
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Charting The Course [Picture of Ship]
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Note 24
Quarterly Financial Data (Unaudited)
The following table contains quarterly financial data for the years ended July
31, 1995 and 1996 (dollars in thousands)-
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended July 31, 1995 Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Interest Income........................... $ 6,968 $7,094 $ 7,060 $ 7,308 $ 28,430
Total Interest Expense.......................... 3,053 3,278 3,394 3,814 13,539
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision
for Loan Losses................................. 3,915 3,816 3,666 3,494 14,891
Provision for Loan Losses....................... 121 443 651 161 1,376
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses................................. 3,794 3,373 3,015 3,333 13,515
Total Other Income.............................. 668 769 5,001 769 7,207
Total Other Expense............................. 2,678 2,490 2,875 2,648 10,691
Net Income Before Taxes......................... 1,784 1,652 5,141 1,454 10,031
Federal and State Income Taxes.................. 626 542 2,070 498 3,736
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income...................................... $ 1,158 $1,110 $ 3,071 $ 956 $ 6,295
- -----------------------------------------------------------------------------------------------------------------------------------
................................................ First Second Third Fourth
Year Ended July 31, 1996........................ Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income........................... $ 7,482 $7,533 $ 7,697 $ 8,260 $ 30,972
Total Interest Expense.......................... 4,078 4,024 4,151 4,297 16,550
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision
for Loan Losses................................. 3,404 3,509 3,546 3,963 14,422
Provision for Loan Losses....................... 184 175 184 121 664
Net Interest Income After Provision
for Loan Losses................................. 3,220 3,334 3,362 3,842 13,758
Total Other Income.............................. 968 1,708 1,697 2,657 7,030
Total Other Expense............................. 2,648 2,679 2,616 2,925 10,868
Net Income Before Taxes......................... 1,540 2,363 2,443 3,574 9,920
Federal and State Income Taxes.................. 519 863 936 1,328 3,646
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income...................................... $ 1,021 $ 1,500 $ 1,507 $ 2,246 $ 6,274
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
[Picture of Sextant]
LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Independent Auditors' Report
[KPMG Peat Marwick LLP Letterhead]
The Board of Directors and Stockholders
Lakeview Financial Corp. and Subsidiaries
Paterson, New Jersey:
We have audited the accompanying consolidated balance sheets of Lakeview
Financial Corp. and subsidiaries as of July 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended July 31, 1996. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
manage-ment, 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 Lakeview Financial
Corp. and subsidiaries as of July 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended July 31, 1996 in conformity with generally accepted accounting principles.
As discussed in notes 1 and 14 to the consolidated financial statements, as of
August 1, 1993 the Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," and as of August 1,
1994, Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
/s/KPMG Peat Marwick LLP
Short Hills, New Jersey
September 5, 1996
40
<PAGE>
Lakeview Financial Corp. CORPORATE
and Subsidiaries INFORMATION
DIRECTORS TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
Leo J. Costello 10 Commerce Drive
Chairman of the Board Cranford, NJ 07016
Kevin J. Coogan
Robert J. Davenport CORPORATE ADDRESS
Leo J. Dean 1117 Main Street
Dennis D. Pedra Paterson, NJ 07503
Michael R. Rowe
Vincent A. Scola SHAREHOLDER INFORMATION
Sandy L. Coulthart
Corporate Administrator
FINANCIAL INFORMATION
Anthony G. Gallo
OFFICERS Chief Financial Officer
Kevin J. Coogan MARKET INFORMATION
President/CEO NASDAQ National Marketing System
Kevin M. McCloskey CORPORATE SYMBOL "LVSB"
Vice President/COO
Anthony G. Gallo COUNSEL
Vice President/CFO Salvatore Borrelli, Esq.
989 McBride Avenue
Annette Barrone West Paterson, NJ 07424
Vice President/Treasurer
WASHINGTON COUNSEL
Helen Saco Malizia, Spidi, Sloane & Fisch, P.C.
Vice President/Secretary One Franklin Square
1301 K Street, N.W.
Jeanine Kachele Suite 700 East
Vice President/Branch Manager Washington, D.C. 20005
Robert Campbell
Assistant Comptroller INDEPENDENT AUDITORS
KPMG Peat Marwick, LLP
Mary Requena 150 John F. Kennedy Parkway
Assistant Secretary/Trearurer Short Hills, NJ 07078
- --------------------------------------------------------------------------------
10-K INFORMATION A copy of the Corporation's Annual Report on Form 10-K for the
fiscal year ended July 31, 1996 as filed with the Securities and Exchange
Commission will be furnished without charge to Stockholders as of the record
date upon written request to the Secretary.
Lakeview Financial Corp., 989 McBride Avenue, West Paterson, NJ 07424.
<PAGE>
[The following at bottom of page]
[Charting the course. Picture of Ship]
[Lakeview Financial Corp. - 989 McBride Avenue - West Paterson, NJ 07424
(201) 890-1234]
[Design: Studio Inc/Printing: Millburn Press]
EXHIBIT 10.4
<PAGE>
LAKEVIEW SAVINGS BANK
SUPPLEMENTAL RETIREMENT PLAN
FOR SENIOR OFFICERS
WHEREAS, Lakeview Savings Bank ("Bank") wishes to reward the years of
extensive service provided by its Senior Officers and to retain the best talent
available to serve the Bank and its Board of Directors, and
WHEREAS, it is deemed advisable and in the best interests of the Bank to
offer such Senior Officers with additional financial incentives in the form of
deferred compensation to encourage such continued participation and service to
the Bank,
NOW THEREFORE, BE IT RESOLVED that the Lakeview Savings Bank Supplemental
Retirement Plan for Senior Officers ("Supplemental Plan"), be adopted and
implemented effective April 1, 1996, as follows:
ARTICLE I
DEFINITIONS
The following words and phrases as used herein shall, for the purpose of
this Plan and any subsequent amendment thereof, have the following meanings
unless a different meaning is plainly required by the content, except to the
extent that such terms which are not defined herein shall be defined under the
Pension Plan:
1.1 "Bank" means Lakeview Savings Bank, West Paterson, New Jersey, or any
successor thereto.
1.2 "Beneficiary" shall mean the Participant's surviving spouse, if any,
the Participant's named beneficiary as reflected on the records of the Bank, or
the Participant's estate, in descending order of priority.
1.3 "Board" means the Board of Directors of the Bank, as constituted from
time to time and successors thereto.
1.4 "Change in Control" means (i) the execution of an agreement for the
sale of all, or a material portion, of the assets of the Bank or the
Corporation; (ii) the execution of an agreement for a merger or recapitalization
of the Bank or the Corporation or any merger or recapitalization whereby the
Bank or the Corporation is not the surviving entity; (iii) a change of control
of the Bank or the Corporation, as otherwise defined or determined by the New
Jersey Department of Banking or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Bank or the
Corporation by any person, trust, entity or group. The term "person" means an
<PAGE>
individual other than the Participant, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
1.5 "Committee" means the Executive Committee of the Board of the Bank.
1.6 "Corporation" means any parent bank holding company or savings and
loan holding company of the Bank, and any successor thereto.
1.7 "Director" means a member of the Board of the Bank.
1.8 "Disability" (total and permanent disability) means a mental or
physical disability which prevents the Participant from performing the normal
duties of his or her position with the Bank. Such disability must have prevented
the Participant from performing his or her duties for at least six months, and a
physician satisfactory to both the Participant and the Bank must certify that
the Participant is disabled from performing his or her normal duties with the
Bank.
1.9 "Early Retirement Date" shall mean the first day of the calendar month
following attainment of not less than age 55 of the Participant or thereafter
whereby the Participant retires as an employee of the Bank following completion
of not less than twenty (20) years of service with the Bank, except as otherwise
provided at Section 2.3 herein.
1.10 "Effective Date" means April 1, 1996.
1.11 "Participant" means a senior officer of the Bank as determined by
action of the Board and as named at Attachment A hereto, as may be amended from
time to time. Such participation shall continue as long as such Participant
fulfills all requirements for participation subject to the right of termination,
amendment and modification of the Plan hereinafter set forth.
1.12 "Pension Plan" means the tax-qualified defined benefit plan sponsored
by the Bank for the benefit of the Bank's employees in effect as of the
Effective Date.
1.13 "Plan" means the Lakeview Savings Bank Supplemental Retirement Plan
for Senior Officers, as herein set forth, as amended from time to time.
1.14 "Retirement Date" means the first day of the calendar month following
attainment of age 62 of the Participant or thereafter whereby the Participant
retires as an employee of the Bank, following completion of not less than
twenty-eight (28) years of service with the Bank.
1.15 "Service" means all years of service as an employee of the Bank and
all predecessor and successor entities.
2
<PAGE>
ARTICLE II
BENEFITS
2.1 Retirement. Upon a Participant's termination from service as an
employee of the Bank on or after the Retirement Date or the Early Retirement
Date, the Bank shall pay to the participant a pension benefit in an amount
approved by the Board and set forth herein at Article II, Section 2.4,
commencing on the first business day of the calendar month commencing on or
after the Retirement Date or the Early Retirement Date. Except as provided at
Article II, Section 2.2, 2.3 and 2.5 herein, upon a Participant's termination
from service as an employee of the Bank prior to the Retirement Date or the
Early Retirement Date, the Bank shall have no financial obligations to the
Participant under the Plan.
2.2 Disability. In the event of the Disability of the Participant, the
Participant will be entitled to a pension benefit equal to 100% of the amount
specified at Article II, Section 2.4, payable on the first day of the month
following certification of such Disability without regard to any other
provisions herein to the contrary.
2.3 Change in Control. All benefits payable, or that would become payable
if the Participant were to retire prior to such Change in Control, shall remain
payable thereafter. Upon termination of service following a Change in Control,
all benefits shall be deemed payable immediately in accordance with Article II,
Section 2.4; provided that if the Participant is not yet age 55 as of such date
of termination of service and has not yet completed at least 20 Years of Service
with the Bank, such Participant shall nevertheless be deemed to be not less than
age 55 as of the date of such termination and have completed not less than 20
Years of Service with the Bank following a Change of Control for purposes of
calculation of benefits payable in accordance with Section 2.4 herein, and
further that it shall be assumed that benefits payable under the Pension Plan
shall be paid as of the date of termination of service, or as of the date of
such Change of Control (if later), in order to calculate benefits payable
hereunder. Actual Years of Service for benefits calculation purposes following a
Change in Control shall include all years of service remaining under any
employment agreement between the Participant and the Bank.
2.4 Benefit Payments. The Participant shall be eligible to receive benefit
payments under the Plan, as follows:
a. Benefits payable hereunder shall be calculated in the same manner as
benefits payable under the Pension Plan, except however notwithstanding anything
herein or in the Pension Plan to the contrary, in calculation of such benefits
payable, (i) Final Average Compensation shall not be limited by the provisions
of Section 401(a)(17)(B) of the Internal Revenue Code ("Code"), and (ii) the
maximum annual pension benefit payable shall not be limited by Sections
415(b)(1)(A) or 415(e) of the Code. Benefits payable hereunder shall be reduced
to the extent of benefits payable under the Pension Plan.
b. Notwithstanding any provisions of the Pension Plan to the contrary,
benefits payable prior to the Retirement Date shall be reduced at the rate of
2.5% per year (and 0.20833% per month) for each year (or full month) that the
Participant commences receipt of such benefits prior to attainment of age 62.
3
<PAGE>
c. Benefits payable hereunder are exclusive of any benefits received under
the Federal Social Security Act or any income tax liabilities of the Participant
or Beneficiary.
d. Benefits payable hereunder shall be paid in the same manner and at the
same frequency as benefits payable under the Pension Plan.
2.5 Benefit Payments Following Death. A Participant receiving benefits in
accordance with Article II, Sections 2.1, 2.2 or 2.3 shall, upon death, continue
to have the balance of any such payments due be paid to the Participant's
Beneficiary in the same manner as benefits payable in accordance with the
provisions of the Pension Plan. Upon the death of a Participant after attainment
of the Retirement Date or Early Retirement Date but prior to the commencement of
benefit payments, benefits payable in accordance with Section 2.4 herein shall
be immediately and 100% payable to the Beneficiary in the same manner as
benefits payable under the Pension Plan.
ARTICLE III
INSURANCE
3.1 Ownership of Insurance. The Bank, in its sole discretion, may elect to
purchase one or more life insurance policies on the lives of Participants in
order to provide funds to the Bank to pay part or all of the benefits accrued
under this Plan. All rights and incidents of ownership in any life insurance
policy that the Bank may purchase insuring the life of the Participant
(including any right to proceeds payable thereunder) shall belong exclusively to
the Bank or its designated Trust, and neither the Participant, nor any
beneficiary or other person claiming under or through him or her shall have any
rights, title or interest in or to any such insurance policy. The Participant
shall not have any power to transfer, assign, hypothecate or otherwise encumber
in advance any of the benefits payable thereunder, nor shall any benefits be
subject to seizure for the benefit of any debts or judgments, or be transferable
by operation of law in the event of bankruptcy, insolvency or otherwise. Any
life insurance policy purchased pursuant hereto and any proceeds payable
thereunder shall remain subject to the claims of the Bank's general creditors.
3.2 Physical Examination. As a condition of becoming or remaining covered
under this Plan, the Participant, as may be requested by the Bank from time to
time shall take a physical examination by a physician approved by an insurance
carrier. The cost of the examination shall not be borne by the Participant. The
report of such examination shall be transmitted directly from the physician to
the insurance carrier designated by the Bank to establish certain costs
associated with obtaining insurance coverages as may be deemed necessary under
this Plan. Such examination shall remain confidential among the Participant, the
physician and the insurance carrier and shall not be made available to the Bank
in any form or manner.
3.3 Death of Participant. Upon the death of the Participant, the proceeds
derived from any such insurance policy held by the Bank or any related Trust, if
any, shall be paid to the Bank or its designated Trust.
4
<PAGE>
ARTICLE IV
TRUST
4.1 Trust. Except as may be specifically provided, nothing contained in
this Plan and no action taken pursuant to the provisions of this Plan shall
create or be construed to create a trust of any kind, or a fiduciary
relationship between the Bank and the Participant or any other person. Any funds
which may be invested under the provisions of this Plan shall continue for all
purposes to be a part of the general funds of the Bank. No person other than the
Bank shall by virtue of the provisions of this Plan have any interest in such
funds. The Bank shall not be under any obligation to use such funds solely to
provide benefits hereunder, and no representations have been made to a
Participant that such funds can or will be used only to provide benefits
hereunder. To the extent that any person acquires a right to receive payments
from the Bank under the Plan, such rights shall be no greater than the right of
any unsecured general creditor of the Bank.
In order to facilitate the accumulation of funds necessary to meet the
costs of the Bank under this Plan (including the provision of funds necessary to
pay premiums with respect to any life insurance policies purchase pursuant to
Article III above and to pay benefits to the extent that the cash value and/or
proceeds of any such policies are not adequate to make payments to a Participant
or his or her beneficiary as and when the same are due under the Plan), the Bank
may enter into a Trust Agreement. The Bank, in its discretion, may elect to
place any life insurance policies purchased pursuant to Article III above into
the Trust. In addition, such sums shall be placed in said Trust as may from time
to time be approved by the Board of Directors, in its sole discretion. To the
extent that the assets of said Trust and/or the proceeds of any life insurance
policy purchased pursuant to Article III are not sufficient to pay benefits
accrued under this Plan, such payments shall be made from the general assets of
the Bank.
ARTICLE V
VESTING
5.1 Vesting. All benefits under this Plan are deemed non-vested and
forfeitable prior to the Retirement Date or Early Retirement Date. All benefits
payable hereunder shall be deemed 100% earned and non-forfeitable by the
Participant and his or her Beneficiary as of the Retirement Date or Early
Retirement Date. Notwithstanding the foregoing, all benefits payable hereunder
shall be deemed 100% earned and non-forfeitable by the Participant and his or
her Beneficiary upon the death or the Disability of the Participant, or upon
termination of employment following a Change in Control of the Bank. No benefits
shall be deemed payable hereunder for any time period prior to termination of
employment prior to the Retirement Date or Early Retirement Date, except in the
event of death, Disability or termination of employment following a Change in
Control of the Bank, in which case such benefits shall be immediately payable as
of such date of termination of employment.
5
<PAGE>
ARTICLE VI
TERMINATION
6.1 Termination. All rights of the Participant hereunder shall terminate
immediately upon the Participant ceasing to be in the active service of the Bank
prior to the time that the benefits payable under the Plan shall be deemed to be
100% earned and non-forfeitable. A leave of absence approved by the Board shall
not constitute a cessation of service within the meaning of this paragraph,
within the sole discretion of the Committee.
ARTICLE VII
FORFEITURE OR SUSPENSION OF BENEFITS
7.1 Forfeiture or Suspension of Benefits. Notwithstanding any other
provision of this Plan to the contrary, benefits shall be forfeited or suspended
during any period of paid service with the Bank following the commencement of
benefit payments, within the sole discretion of the Committee.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Other Benefits. Nothing in this Plan shall diminish or impair the
Participant's eligibility, participation or benefit entitlement under any other
benefit, insurance or compensation plan or agreement of the Bank now or
hereinafter in effect. Upon termination of service after the Retirement Date or
Early Retirement Date, Disability, or termination of employment following a
Change in Control, a Participant will continue to be eligible to participate in
the Bank's group medical insurance programs on the same basis as such
Participant and dependents were enrolled in such programs prior to such
termination. Upon death, the Participant's spouse and dependents will remain
eligible to participate in such programs.
8.2 No Effect on Employment. This Plan shall not be deemed to give any
Participant or other person in the employ or service of the Bank any right to be
retained in the employment or service of the Bank, or to interfere with the
right of the Bank to terminate any Participant or such other person at any time
and to treat him or her without regard to the effect which such treatment mights
have upon him or her as a Participant in this Plan.
8.3 Legally Binding. The rights, privileges, benefits and obligations
under this Plan are intended to be legal obligations of the Bank and binding
upon the Bank, its successors and assigns.
8.4 Modification. The Bank, by action of the Board, reserves the exclusive
right to amend, modify, or terminate this Plan. Any such termination,
modification or amendment shall not terminate or diminish any rights or benefits
accrued by any Participant prior thereto. The Bank shall give thirty (30) days'
notice in writing to any Participant prior to the effective date of any such
amendment, modification or termination of this Plan. Notwithstanding the
foregoing, in no event shall such benefits payable to a Participant under the
Plan be reduced below those provided for in Section 2.4 herein. In the event
that the Plan benefits payable
6
<PAGE>
under Section 2.4 of the Plan are reduced or the Plan is terminated, a
Participant shall be immediately 100% vested in all benefits calculated in
accordance with Section 2.4 as of the date of such Plan amendment or Plan
termination without regard to such Plan amendment or Plan termination.
8.5 Arbitration. Any controversy or claim arising out of or relating to
any contract or the breach thereof shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association,
with such arbitration hearing to be held at the offices of the American
Arbitration Association ("AAA") unless otherwise mutually agreed to by the
Participant and the Bank, and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
8.6 Limitation. No rights of any Participant are assignable by any
Participant, in whole or in part, either by voluntary or involuntary act or by
operation of law. Rights of Participants hereunder are not subject to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance or garnishment by creditors of the Participant or a Beneficiary.
Such rights are not subject to the debts, contracts, liabilities, engagements,
or torts of any Participant or his or her Beneficiary. No Participant shall have
any right under this Plan or any Trust referred to in Article IV or against any
assets held or acquired pursuant thereto other than the rights of a general,
unsecured creditor of the Bank pursuant to the unsecured promise of the Bank to
pay the benefits accrued hereunder in accordance with the terms of this Plan.
The Bank has no obligation under this Plan to fund or otherwise secure its
obligations to render payments hereunder to Participants. No Participant shall
have any voice in the use, disposition, or investment of any asset acquired or
set aside by the Bank to provide benefits under this Plan.
8.7 ERISA and IRC Disclaimer. It is intended that the Plan be neither an
"employee welfare benefit plan" nor an "employee pension benefit plan" for
purposes of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Further, it is intended that the Plan will not cause the interest of
a Participant under the Plan to be includable in the gross income of such
Participant or a Beneficiary prior to the actual receipt of a payment under the
Plan for purposes of the Internal Revenue Code of 1986, as amended ("IRC"). No
representation is made to any Participant to the effect that any insurance
policies purchased by the Bank or assets of any Trust established pursuant to
this Plan will be used solely to provide benefits under this Plan or in any way
shall constitute security for the payment of such benefits. Benefits payable
under this Plan are not in any way limited to or governed by the proceeds of any
such insurance policies or the assets of any such Trust. No Participant in the
Plan has any preferred claim against the proceeds of any such insurance policies
or the assets of any such Trust.
8.8 Conduct of Participants. Notwithstanding anything contained to the
contrary, no payment of any then unpaid benefits shall be made and all rights
under the Plan payable to a Participant, or any other person, to receive
payments thereof shall be forfeited if the Participant shall engage in any
activity or conduct which in the opinion the Board of the Bank is inimical to
the best interests of the Bank.
8.9 Incompetency. If the Bank shall find that any person to whom any
payment is payable under the Plan is deemed unable to care for his or her
personal affairs because of illness or accident, or is a minor, any payment due
(unless a prior claim therefor shall have been made
7
<PAGE>
by a duly appointed guardian, committee or other legal representative) may be
paid to the spouse, a child, a parent, or a brother or sister, or to any person
deemed by the Bank to have incurred expense for such person otherwise entitled
to payment, in such manner and proportions as the Committee, in its sole
discretion, may determine. Any such payments shall constitute a complete
discharge of the liabilities of the Bank under the Plan.
8.10 Construction. The Committee shall have full power and authority to
interpret, construe and administer this Plan and the Committee's interpretations
and construction thereof, and actions thereunder, shall be binding and
conclusive on all persons for all purposes. Directors of the Bank and members of
the Committee shall not be liable to any person for any action taken or omitted
in connection with the interpretation and administration of this Plan unless
attributable to his or her own willful, gross misconduct or intentional lack of
good faith.
8.11 Plan Administration. The Board of the Bank shall administer the Plan;
provided, however, that the Board may appoint an administrative committee
("Committee") to provide administrative services or perform duties required by
this Plan. The Committee shall have only the authority granted to it by the
Board.
8.12 Governing Law. This Plan shall be construed in accordance with and
governed by the laws of the State of New Jersey, except to the extent that
Federal law shall be deemed to apply. No payments of benefits shall be made
hereunder if the Board of the Bank, or counsel retained thereby, shall determine
that such payments shall be in violation of applicable regulations, or likely
result in imposition of regulatory action, by the New Jersey Department of
Banking, the Federal Deposit Insurance Corporation or other appropriate banking
regulatory agencies.
8.13 Successors and Assigns. The Plan shall be binding upon any successor
or successors of the Bank, and unless clearly inapplicable, reference herein to
the Bank shall be deemed to include any successor or successors of the Bank.
8.14 Sole Agreement. The Plan expresses, embodies, and supersedes all
previous agreements, understandings, and commitments, whether written or oral,
between the Bank and any Participants and Beneficiaries hereto with respect to
the subject matter hereof.
8
EXHIBIT 23
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Lakeview Financial Corp.:
We consent to incorporation by reference in the Registration Statement on Form
S-8 of Lakeview Financial Corp. relating to the 1993 Stock Option Plan (Plan A,
Plan B and Plan C) of our report dated September 5, 1996, relating to the
consolidated balance sheets of Lakeview Financial Corp. and subsidiaries as of
July 31, 1996 and 1995 and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended July 31, 1996, which report is included in the July 31,
1996 Annual Report on Form 10-K of Lakeview Financial Corp.
Our report refers to a change in the method of accounting for income taxes in
1994 and a change in the accounting for certain investments in debt and equity
securities in 1995.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
October 23, 1996
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