SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
[X] EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended July 31, 1997
--------------------------------
- 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
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Commission Number: 0-25106
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
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(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
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(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
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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. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the registrant's Common Stock on
October 14, 1997 was $68,744,280.
As of October 14, 1997 there were issued and outstanding 4,370,594 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, 1997. (Parts II and IV)
2. Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
Item 1. Business
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General
In August 1994, Lakeview Financial Corporation, a New Jersey Corporation,
(the "Company") became a unitary savings and loan holding company upon the
completion of the reorganization of Lakeview Savings Bank ("Lakeview" or the
"Savings Bank") into a holding company form of ownership. At that time, the
Company acquired all of the outstanding common stock of the Savings Bank. The
Savings Bank's common stock was originally issued in connection with the Savings
Bank's conversion from mutual to stock form in December 1993. The principal
asset of the Company consists of 100% of the issued and outstanding shares of
common stock of the Savings Bank. The Savings Bank was founded in 1922 as
Lakeview Building and Loan Association.
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.
On September 10, 1997, the Company and Westwood Financial Corporation
("Westwood"), the holding company of Westwood Savings Bank ("Westwood Bank"),
Westwood, New Jersey, signed a definitive agreement providing for the merger of
Westwood into the Holding Company and the merger of Westwood Bank into the
Savings Bank. It is anticipated that the transaction will close by approximately
March 1998 and will be accounted for under the purchase method of accounting.
Competition
The Savings Bank's primary market area consists of Bergen and Passaic
counties in northern New Jersey, and is one of many financial institutions
serving its market area. The competition for deposit products comes from other
insured financial institutions such as commercial banks, thrift institutions and
credit unions in the Savings Bank's market area. Deposit competition also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition comes from other insured financial institutions such
as commercial banks, thrift institutions and credit unions.
<PAGE>
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of the
Savings Bank's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses, loans in process, and deferred
loan origination fees and costs.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
------------ --------------- --------------- -------------- ---------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- --
TYPE OF LOAN:
Real Estate Loans:
Construction loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential (1-4 family) .....$ -- --% $ 190 --% $ 915 .6% $ 863 .5% $ -- --%
Multi-family/commercial ...... -- -- 550 -- -- -- -- -- 377 .2
-------- ----- -------- ------ -------- ------ -------- ------ -------- -----
Total construction loans ... -- -- 740 -- 915 .6 863 .5 377 .2
Residential (1-4 family) ....... 76,832 54.7 79,383 57.3 84,051 57.8 84,006 50.3 82,647 36.2
Multi-family/Commercial ........ 19,322 13.7 20,879 15.1 22,186 15.3 33,063 19.8 68,192 29.9
Commercial loans ............... -- -- -- -- -- -- 697 .4 8,982 3.9
Home equity, second mortgage
and home improvement loans .... 43,842 31.2 36,223 26.7 37,221 25.6 46,705 28.0 66,057 29.0
Consumer Loans:
Passbook account loans ......... 522 .4 1,242 .9 1,022 .7 1,517 1.0 1,914 .8
Student loans .................. 7 -- 6 -- 1 -- -- -- -- --
-------- ----- -------- ------ -------- ------ -------- ------ -------- -----
Total loans ....................$140,525 100.0% $138,473 100.00% $145,396 100.00% $166,851 100.00% $228,169 100.0%
======== ===== ======== ====== ======== ====== ======== ====== ======== =====
TYPE OF SECURITY:
Real Estate Loans
1-4 family ...................$120,674 85.9% $116,346 84.0% $119,885 82.5% $124,467 74.6% $133,852 58.7%
Multi-Family/Commercial ...... 19,322 13.7 20,879 15.1 24,488 16.8 40,170 24.1 83,421 36.6
Passbook accounts .............. 522 .4 1,242 .9 1,022 .7 1,517 .9 1,914 .8
Student loans .................. 7 -- 6 -- 1 -- -- -- -- --
Commercial Loans:
Commercial loans ............... -- -- -- -- -- -- 697 .4 8,982 3.9
-------- ----- -------- ------ -------- ------ -------- ----- ------- -----
Total loans ................... 140,525 100.0% 138,473 100.0% 145,396 100.0% 166,851 100.0% 228,169 100.0%
===== ===== ===== ===== =====
Less:
Loans in process ............... -- 191 451 101 --
Deferred loan origination fees
and costs, net................. 578 425 287 220 194
Allowance for loan losses ...... 2,638 1,714 2,535 3,073 3,411
-------- -------- -------- -------- --------
Total loans, net ...............$137,309 $136,143 $142,123 $163,457 $224,564
======== ======== ======== ======== ========
</TABLE>
2
<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 market
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. 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, 1997, one year,
three year, and five year ARM loans originated by the Savings Bank constituted
24%, 26% and 50% 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 the Federal
Home Loan Mortgage Corporation ("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.
3
<PAGE>
Multi-Family and Commercial Real Estate. The Savings Bank originates
multi-family real estate loans usually secured by property located in the
Savings Bank's primary market area. 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's multi-family and
commercial 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.
Multi-family and commercial real estate may entail significant additional
credit risks compared to one- to four family residential 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. The Savings Bank intends to increase its marketing efforts
related to these loans in fiscal 1998.
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. These loans 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. The Savings Bank intends to
increase its marketing efforts related to these loans in fiscal 1998.
Commercial Loans. On January 12, 1996, the Savings Bank granted to
Industry Mortgage Company ("IMC") a line of credit for $7 million with an
interest rate of 10%. At July 31, 1997, $6.8 million was outstanding. The
Company has a 6.02% investment in IMC. See "-- Subsidiaries".
4
<PAGE>
Loan Maturity Table
The following table sets forth the maturity of the Savings Bank's loan
portfolio at July 31, 1997. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totalled $22.4 million at July 31, 1997. Adjustable-rate mortgage loans are
shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Home Equity,
Second Mortgage
1-4 Family Multi-Family, and Home
Real Estate Commercial Improvement Commercial
Mortgage Real Estate Loans(1) Loans Total
----------- ------------ --------------- ---------- --------
(In Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C>
Within 3 months............ $ 631 $ 3,019 $ 3,813 $ 48 $ 7,511
3 months to 1 Year......... 151 717 2,047 1,377 4,292
------- ------- ------- ------ --------
782 3,736 5,860 1,425 11,803
------- ------- ------- ------ --------
After 1 year:
1 to 3 years............. 2,969 2,777 2,818 6,839 15,403
3 to 5 years............. 6,078 7,271 14,337 718 28,404
5 to 10 years............ 13,313 17,721 19,022 -- 50,056
10 to 20 years........... 29,275 26,648 25,572 -- 81,495
Over 20 years............ 30,230 10,416 362 -- 41,008
------- ------- ------- ------ --------
Total due after one year... 81,865 64,833 62,111 7,557 216,366
------- ------- ------- ------ --------
Total amount due........... $82,647 $68,569 $67,971 $8,982 $228,169
======= ======= ======= ====== ========
</TABLE>
- ----------
(1) Also includes passbook and student loans.
The following table sets forth the dollar amount of all loans due after
July 31, 1998, which have pre-determined interest rates and which have floating
or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- ---------
(In Thousands)
<S> <C> <C> <C>
One-to four family ........................ $ 46,421 $ 35,444 $ 81,865
Multi-family and commercial real estate.... 23,254 41,579 64,833
Home equity, second mortgage and
home improvement loans .................. 32,705 29,406 62,111
Commercial loans .......................... -- 7,557 7,557
-------- -------- --------
Total ................................... $102,380 $113,986 $216,366
======== ======== ========
</TABLE>
5
<PAGE>
Loan Approval Authority and Underwriting. 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 Federal National
Mortgage Association ("FNMA") guidelines, so that such loans can be sold if the
Savings Bank desires to do so.
All mortgage loans are underwritten 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.
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.
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, 1997 was $6.1
million.
Loans to One Borrower. Regulations limit loans-to-one borrowers in 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. At July 31,
1997 the Savings Bank's maximum loan-to-one borrower limit was $5.9 million and
its largest loan to one borrower was a commercial letter of credit of
approximately $6.8 million. This loan was in excess of the Savings Bank's
lending limit but was in compliance with regulations applicable at the time the
loan was originated. The second largest loan to one borrower relationship is a
loan of approximately $3.1 million secured by multi-family properties in
Passaic, New Jersey. Both of these loans were performing at July 31, 1997.
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.
6
<PAGE>
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.
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").
<TABLE>
<CAPTION>
At July 31,
-------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 family
<S> <C> <C> <C> <C> <C>
dwelling units(1) ..................... $12,373 $ 8,362 $ 3,143 $2,316 $ 3,007
All other mortgage loans ................ 1,167 566 229 101 804
------- ------- -------- ------ --------
Total ..................................... $13,540 $ 8,928 $ 3,372 $2,417 $ 3,811
======= ======= ======== ====== ========
Accruing loans which are contractually past
due 90 days or more ...................... $ -- $ -- $ -- $ -- $ --
======= ======= ======== ====== ========
Total non-accrual and accrual loans........ $13,540 $ 8,928 $ 3,372 $2,417 $ 3,811
======= ======= ======== ====== ========
Real estate owned (net of allowance)....... $ 5,752 $ 3,574 $ 3,608 $1,667 $ 1,929
======= ======= ======== ====== ========
Other non-performing assets ............... $ -- $ -- $ 850 $ 494 $ --
======= ======= ======== ====== ========
Total non-performing assets ............... $19,292 $12,501 $ 7,830 $4,578 $ 5,740
======= ======= ======== ====== ========
Total non-performing loans to
net loans ............................... 9.86% 6.56% 2.37% 1.50% 1.70%
======= ======= ======== ====== ========
Total non-performing loans to
total assets ............................ 6.53% 2.16% .80% .53% .75%
======= ======= ======== ====== ========
Total non-performing assets to total assets. 9.30% 3.02% 1.87% 1.00% 1.13%
======= ======= ======== ====== ========
</TABLE>
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(1) Includes home equity, home improvement and second mortgage loans.
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, 1997, totalled $7.3
million, or 1.4% of total assets. These loans are accruing but classified by the
Savings Bank as substandard.
For the year ended July 31, 1997, interest income amounting to
approximately $256,000, would have been recognized if interest on loans 90 days
or more in arrears had been recorded based on original contract terms.
7
<PAGE>
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that does not
currently warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
In accordance with its classification of assets policy, the Savings Bank
regularly reviews the problem assets in its portfolio to determine whether any
assets require classification in accordance with applicable regulations. On the
basis of management's review of its assets, at July 31, 1997, the Savings Bank
had classified $1.9 million as special mention, $11.6 million as substandard,
and $1.4 million as doubtful.
The following is a summary of the Savings Bank's potential problem loans
with balances in excess of $1,000,000 as of July 31, 1997. 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 $2.4
million at July 31, 1997, 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 $19.6 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. As of July
31, 1997, 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,
1997, the loan was classified substandard and continues to be monitored by
management.
8
<PAGE>
Mortgage Loans Purchased from Capital Resources. At July 31, 1997, the
Savings Bank had approximately $3.6 million of residential real estate second
mortgage loans that were acquired from Capital Resources, a now defunct mortgage
company. Of this total amount, $910,000 was classified as non-accrual loans and
$2.7 million was classified as performing loans. However, based upon
management's review, $548,000 of these performing loans were considered
potential problem loans. At July 31, 1997, the Savings Bank allocated $911,000
of the loss allowance to the mortgage loans purchased from Capital Resources.
Real Estate Owned. Real estate acquired by the Savings Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. Real estate acquired in settlement of loans is initially
recorded at fair value at the date of foreclosure establishing a new cost basis.
After foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of cost or fair value, minus estimated cost
to sell.
The Savings Bank records loans as in-substance foreclosures if the
borrower has little or no equity in the property based upon its documented
current fair value, the Savings Bank can only expect repayment of the loan to
come from the sale of the property and if the borrower has effectively abandoned
control of the collateral or has continued to retain control of the collateral
but because of the current financial status of the borrower, it is doubtful the
borrower will be able to repay the loan in the foreseeable future. There may be
significant other expenses incurred such as legal and other extraordinary
servicing costs involved with in substance foreclosures.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Savings Bank's loan portfolio. Such
evaluation, which includes a review of all loans of which full collectibility of
interest and principal may not be reasonably assured, considers the
Association's past loan 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.
The following table sets forth the allocation of the Savings Bank's
allowance for loan losses by loan category and the percent of loans in each
category to total loans receivable at the dates indicated. The portion of the
loan loss allowance allocated to each loan category does not represent the total
available for future losses that may occur within the loan category because the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio.
9
<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,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding, net of allowance ........ $ 137,309 $ 136,143 $ 142,123 $ 163,457 $ 224,564
========= ========= ========= ========= =========
Average loans outstanding ........................ $ 142,935 $ 136,165 $ 139,442 $ 155,497 $ 192,822
========= ========= ========= ========= =========
Allowance balance (at beginning of
period) ........................................ $ 2,493 $ 2,638 $ 1,714 $ 2,535 $ 3,073
Provision (credit):
Residential .................................... 1,347 1,842 1,493 384 361
Commercial real estate ......................... 673 (77) (145) 278 500
Consumer ....................................... 11 282 28 2 --
Commercial ..................................... -- -- -- -- 100
Charge-offs:
Residential .................................... (1,514) (3,069) (1,381) (418) (610)
Commercial real estate ......................... (361) -- -- -- (89)
Consumer ....................................... (11) (1) (24) (11) --
Commercial ..................................... -- -- -- -- --
Recoveries:
Residential .................................... -- 99 850 303 76
Commercial real estate ......................... -- -- -- -- --
Consumer ....................................... -- -- -- -- --
Commercial ..................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Allowance balance (at end of period) ............. $ 2,638 $ 1,714 $ 2,535 $ 3,073 $ 3,411
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of total loans outstanding, net ................ 1.92% 1.26% 1.78% 1.88% 1.52%
Net loans charged off as a percent of
average loans outstanding ...................... 1.32% 2.18% 0.40% .09% .32%
</TABLE>
<TABLE>
<CAPTION>
At or for the year ended July 31,
------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
Total real estate owned and in judgment, net of
<S> <C> <C> <C> <C> <C>
allowance ....................................... $ 5,752 $ 3,574 $ 3,608 $ 1,667 $ 1,929
========= ========= ========= ========= =========
Allowance balance - beginning .................... $ 709 $ 823 $ 188 $ -- $ --
Provision ........................................ 847 713 502 654 44
Net charge-offs .................................. (733) (1,348) (690) 654 44
--------- --------- --------- --------- ---------
Allowance balance - ending ....................... $ 823 $ 188 $ -- $ -- $ --
========= ========= ========= ========= =========
</TABLE>
10
<PAGE>
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category:
<TABLE>
<CAPTION>
At July 31,
---------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------- ------------------- ------------------- -------------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ---------- ------- ---------- -------- ---------- -------- --------- ------ ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential(1)............ $2,311 85.9% $1,458 84.0% $2,420 82.5% $2,689 74.6% $2,681 58.7%
Commercial real estate.... 325 13.7 250 15.1 106 16.8 384 24.1 630 36.6
Consumer.................. 2 .4 6 .9 9 .7 -- .9 -- .8
Commercial................ -- -- -- -- -- -- -- .4 100 3.9
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$2,638 100.0% $1,714 100.0% $2,535 100.0% $3,073 100.0% $3,411 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
(1) Includes residential construction, home equity, second mortgage and home
improvement loans.
11
<PAGE>
Investment Activities and Mortgage-Backed Securities
General. 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. The amount
of short-term investments reflects management's 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
and trading 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. The Savings Bank's trading portfolio is comprised of U.S. agency
securities. As of July 31, 1997, these were no trading securities outstanding
and the available for sale portfolio was comprised of mortgage-backed
securities, U.S. agency securities, and equity securities.
Mortgage-Backed Securities. The Savings Bank's mortgage-backed securities,
or pass-through certificates, represent a participation interest in a pool of
single-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interest
in the form of securities, to investors such as the Bank. Such
quasi-governmental agencies that guarantee the payment of principal and interest
to investors include the FHLMC, Government National Mortgage Association
("GNMA"), or the Federal National Mortgage Association ("FNMA"). Pass-through
certificates typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates
and maturities that are within a specified range. The underlying pool of
mortgages can be composed of either fixed rate mortgage loans or ARM loans.
Mortgage-backed securities are generally referred to as mortgage participation
certificates or pass-through certificates. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, (i.e., fixed rate or
adjustable rate) as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Mortgage-backed securities issued by FHLMC, FNMA
and GNMA make up a majority of the pass-through market. Generally, the Bank
purchases mortgage-backed securities guaranteed by GNMA and FNMA and
participation certificates issued by the
12
<PAGE>
FHLMC. GNMA mortgage-backed securities are certificates issued and backed by the
GNMA and are secured by interests in pools of mortgages which are fully insured
by the Federal Housing Administration ("FHA") or partially guaranteed by the
Veterans' Administration ("VA"). FHLMC mortgage-backed securities are
participation certificates issued and guaranteed by the FHLMC and secured by
interests in pools of conventional mortgages originated by savings associations.
Mortgage-backed securities provide for monthly payments of principal and
interest and generally have contractual maturities ranging from five to thirty
years. However, due to expected repayment terms being significantly less than
the underlying mortgage loan pool contractual maturities, the estimated lives of
these securities could be significantly shorter.
The Savings Bank also purchases mortgage-backed securities and
collateralized mortgage obligations ("CMOs") issued by government agencies,
private issuers and financial institutions, some of which are qualified under
the Internal Revenue Code of 1986, as amended (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 instruments are most like traditional debt instruments
because they have stated principal amounts and traditionally defined
interest-rate terms. Purchasers of certain other CMO 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, 1997, the Savings Bank's investment in CMOs did not include
any residual interests or interest-only or principal-only securities. As a
matter of policy, the Savings Bank does not invest in residual interests of CMOs
or interest-only and principal-only securities. The CMOs held by the Savings
Bank at July 31, 1997 consisted of floating rate and fixed rate tranches. The
interest rate of a majority of the Savings 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
(i.e., loans with aggregate outstanding balances above the limit for purchases
by FHLMC or FNMA). At July 31, 1997, the Savings Bank had CMOs with an aggregate
carrying amount (including discounts and premiums) of $40.6 million, of which
$9.3 million, or 22.9%, were privately issued. To minimize the risk of private
issued CMOs, the Savings Bank only purchases those CMOs rated AA or better by
one of the rating agencies.
13
<PAGE>
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed and
related securities are more liquid than individual mortgage loans and may be
used to collateralize borrowings of the Savings Bank in the event that the
Savings Bank determined to utilize borrowings as a source of funds.
Mortgage-backed securities issued or guaranteed by the GNMA, FNMA or the FHLMC
(except interest-only securities or the residual interests in CMOs) are weighted
at no more than 20.0% for risk-based capital purposes, compared to a weight of
50.0% to 100.0% for residential loans.
Investment Portfolio
The following table sets forth the carrying value of the Company's
investment portfolio, short-term investments, and Federal Home Loan Bank
("FHLB") stock at the dates indicated. At July 31, 1997, the market value of the
investment securities that are held to maturity was $144.3 million and the
market value of investment securities available for sale was $105.6 million,
with a cost basis of $83.2 million.
<TABLE>
<CAPTION>
At July 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(In Thousands)
Investment Securities:
<S> <C> <C> <C> <C> <C>
U.S. agency securities available for sale(1).... $ -- $ -- $ -- $ 58,045 $ 48,781
U.S. agency securities held to maturity ........ -- 61,662 55,738 40,821 42,682
Mortgage-backed securities held to
maturity ...................................... 43,579 173,067 175,375 121,462 102,249
Equity securities available for sale(1)(2)...... 12,898 11,269 8,567 12,601 41,846
Municipal bonds available for sale(1) .......... -- -- -- 3,083 --
GNMA mortgage-backed securities
available for sale(1) ........................ -- -- -- 4,684 4,192
FNMA/FHLMC CMO securities
available for sale(1) ........................ -- -- -- 2,034 1,489
Private Issue CMO securities
available for sale(1) ........................ -- -- -- 9,521 9,284
Equity securities restricted for sale(2) ....... -- -- -- 7,806 --
Other Securities ............................... 16 975 -- -- --
-------- -------- -------- -------- --------
Total Investment Securities .................. 56,493 246,973 239,680 260,057 250,523
Interest-bearing deposits ...................... 99 -- 5,632 -- --
Federal funds sold ............................. -- 850 -- -- --
FHLB stock ..................................... 1,511 1,856 2,587 2,587 3,550
-------- -------- -------- -------- --------
Total Investments ............................ $ 58,103 $249,679 $247,899 $262,644 $254,073
======== ======== ======== ======== ========
</TABLE>
- ---------------------
(1) Carried at market value.
(2) In 1996, equity securities restricted for sale were carried at cost due to
restrictions on the sale or transfer of these securities. During the
fourth quarter ended July 31, 1997, the restrictions were changed and the
securities were reclassified to the available for sale portfolio and such
securities are carried at market value.
14
<PAGE>
The following table sets forth certain information regarding the carrying
values, weighted average yields and maturities of the Savings Bank's investment
securities portfolio at July 31, 1997 by contractural maturity. The expected
maturities may differ from contractural maturities due to the terms of the
securities which may have callable or prepayment obligations.
<TABLE>
<CAPTION>
After One Through After Five Through
One Year or Less Five Years Ten Years Over Ten Years Totals
------------------- ------------------ ------------------ ------------------- -----------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield(4) Value Yield Value Yield Value Yield Value Yield(2)
-------- -------- -------- -------- -------- -------- -------- --------- ----------------
(Dollars Thousands)
U. S. agency securities available
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
for sale .........................$ -- --% $ 2,980 5.34 $ 22,950 7.00% $ 22,851 7.34% $ 48,781 7.06%
U.S. agency securities held
to maturity....................... -- -- -- -- 9,231 7.55 33,451 7.70 42,682 7.67
Mortgage-backed securities
held to maturity ................. -- -- 39,363 6.09 17,375 6.17 45,511 6.33 102,249 6.21
Equity securities available
for sale(1)....................... 41,846 .62 -- -- -- -- -- -- 41,846 .62
FHLB stock(1) ..................... 3,550 6.25 -- -- -- -- -- -- 3,550 6.25
GNMA mortgage-backed securities
available for sale .............. -- -- -- -- -- -- 4,192 8.27 4,192 8.27
FNMA/FHLMC CMO's
available for sale .............. -- -- -- -- -- -- 1,489 4.64 1,489 4.64
Private issue CMO's
available for sale .............. -- -- -- -- -- -- 9,284 6.37 9,284 6.37
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total ...........................$ 45,396 1.06% $ 42,343 6.04% $ 49,556 6.81% $116,778 6.97 $254,073 5.73%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
- ------------------
(1) Equity securities and other securities have been classified as maturing in
one year or less, since they have no stated maturity.
(2) Excluding dividend yield on equity and other securities.
15
<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. The Savings Bank's deposits are typically obtained
from the area in which its offices are located. The Savings Bank had no brokered
certificates of deposits as of July 31, 1997.
Deposit Portfolio. Deposits in the Savings Bank as of July 31, 1997, were
represented by various types of savings programs described below.
<TABLE>
<CAPTION>
Weighted Minimum Percentage of Average
Category Term Average Rates Balance Amount Balance Total Deposits Balance
- -------- ---- ------------- -------------- ------- -------------- -------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts None 1.7% $ 250 $ 52,926 14.2% $47,464
Regular Savings and Club
Accounts None 2.4 10 75,967 20.5 74,396
Money Market Checking
Accounts None 2.4 2,500 7,871 2.1 8,032
Money Market Passbook
Accounts None 2.5 7,500 18,353 4.9 19,652
Certificates of Deposit:
Fixed Term, Fixed Rate 3-6 Months 4.7 2,500 38,250 10.3 37,527
Fixed Term, Fixed Rate 7-12 Months 5.2 500 104,560 28.2 100,153
Fixed Term, Fixed Rate 13-30 5.3 500 54,860 14.8 56,234
Months
Fixed Term, Fixed Rate 31-120 5.4 500 17,167 4.6 19,264
Months
Fixed Term, Variable Rate 18 Months 4.2 500 833 .2 918
Accrued interest on
deposits 679 .2 --
-------- ------ --------
Total $371,466 100.00% $363,640
======== ====== ========
</TABLE>
16
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
- --------------- --------------
(In Thousands)
<S> <C>
Within three months............................ $ 8,131
Three through six months....................... 6,873
Six through twelve months...................... 7,031
Over twelve months............................. 1,956
-------
$23,991
=======
</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. 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, 1997, the
Savings Bank had $39.0 million 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 $57 million. The line of credit has
a term of one year and expired in August 1997. This program has the same
collateral requirement as the Regular Advance Program. At July 31, 1997, the
Savings Bank had $20.3 million outstanding under this program.
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.
17
<PAGE>
The following tables set forth certain information regarding borrowings by
the Savings Bank.
<TABLE>
<CAPTION>
As of July 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Weighted average rate paid on:
<S> <C> <C> <C> <C> <C>
FHLB advances/line of credit.......... 3.13% 4.44% 5.81% 5.79% 5.53%
Reverse Repurchase Agreements......... -- -- -- 6.33% 5.47%
Line of credit........................ -- -- -- -- 8.00%
ESOP.................................. -- 7.54% 8.96% 9.12% 6.16%
</TABLE>
<TABLE>
<CAPTION>
During the Year Ended July 31,
---------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(In Thousands)
Maximum amount of borrowings outstanding
during the year:
<S> <C> <C> <C> <C> <C>
FHLB advances/line of credit.......... $22,775 $51,909 $32,000 $50,460 $68,500
Line of credit........................ -- -- -- -- 2,000
Reverse Repurchase Agreement.......... -- -- -- 20,000 40,000
ESOP.................................. -- 1,100 1,021 859 2,354
Maximum amount of short-term
borrowings outstanding at any month
end with respect to:
FHLB advances/line of credit.......... 18,500 36,000 30,500 49,450 67,750
Reverse Repurchase Agreement.......... -- -- -- 20,000 20,000
ESOP.................................. -- 1,100 1,021 859 2,354
Line of credit........................ -- -- -- -- 2,000
</TABLE>
Subsidiaries
Branchview, Inc. ("Branchview")
Branchview, a New Jersey corporation, owned by the Company has a 6.02%
interest in IMC. IMC is a mortgage banking company involved in the origination
and securitization of equity mortgage products. See "-- Investment Portfolio".
Lakeview Mortgage Depot, Inc. ("LMD")
LMD, a New Jersey mortgage corporation, is 90% owned by the Company and
was formed in October 1995. For the year ended July 31, 1997, the Company
recorded net consolidated income before taxes of $229,000. LMD has opened two
additional offices during the year, one in South Jersey and one in Pennsylvania.
Additional expansion is planned for New York during the 1998 fiscal year.
18
<PAGE>
Lakeview Investment Services, Inc. ("LISI")
LISI was organized by the Savings Bank to provide brokerage and insurance
services to the Savings Bank's customers, utilizing the services of Cross
Marketing, Inc., a registered broker dealer. LISI is not a significant source of
revenues or expenses.
Lakeview Credit Card Services, Inc. ("LCCS")
LCCS, a wholly owned subsidiary of the Savings Bank was formed in January
1996. On October 1, 1996, LCCS entered into a joint venture agreement with IMC
Credit Card, Inc., ("IMCC") a wholly owned subsidiary of IMC, to market secured
credit cards through IMCC's retail loan centers and correspondents. To date, no
revenues have been generated.
North Properties, Inc. ("North Properties")
North Properties, a wholly owned subsidiary of the Savings Bank, was
formed in May 1997 to hold real estate owned properties.
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, 1997, the Savings Bank's cumulative one-year gap as a percentage of total
assets was a negative 6.5%, 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.
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, 1997,
approximately $114.0 million or 52.7% 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.
19
<PAGE>
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 difference between the amount of
interest-earning assets maturing or repricing within a specific time period over
interest-bearing liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. During a period of rising interest
rates, a negative gap theoretically would tend to adversely affect net interest
income. Conversely, during a period of falling interest rates, a negative gap
position would theoretically tend to result in an increase in net interest
income. Based upon the assumptions used in the following table, at July 31,
1997, the Company's total interest-bearing liabilities maturing or repricing
within one year exceed its total interest-earning assets maturing or repricing
in the same time period by $33.3 million, representing a one-year cumulative
"gap," as a percentage of total assets of negative 6.5%. As a result, the
Company has limited vulnerability to increases in interest rates.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at July 31, 1997, 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.
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 types of security, the following annual
prepayment rates are assumed: 10% for loans secured by one- to four family, 8%
for loans secured by multi-family residential, and 8% for nonresidential and
commercial property. 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 4% to 30%, 12.5% to 25%, and
4% to 30%, 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.
20
<PAGE>
Certain shortcomings are inherent in the methods of analysis presented in
the following table setting forth the maturing and repricing of interest-earning
assets and interest-bearing liabilities. For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Also, the
interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates while interest rates on other types
of assets may lag behind changes in market rates. Additionally, certain assets,
such as adjustable-rate loans, have features which restrict changes in interest
rates both on a short-term basis and over the life of the asset. Further, in the
event of a change in interest rates, prepayment and early withdrawal levels
would likely deviate significantly from those assumed in calculating the table.
Finally, the ability of many borrowers to make scheduled payments on their
adjustable-rate loans may decrease in the event of an interest rate increase. As
a result, the actual effect of changing interest rates may differ from that
presented in the following table.
21
<PAGE>
<TABLE>
<CAPTION>
At July 31, 1997
--------------------------------------------------------------------------------------------
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:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans ........................$ 6,320 $ 13,699 $ 26,470 $ 56,843 $ 36,483 $ 9,522 $ 26 $ 149,363
Home equity, second mortgage and
consumer loans ....................... 32,657 1,528 4,602 13,498 10,079 3,628 21 66,013
Commercial loans ...................... 8,982 -- -- -- -- -- -- 8,982
Mortgage-backed securities held-to
maturities........................... 16,376 17,259 19,994 23,434 17,969 7,004 213 102,249
Investment securities(1) .............. 25,900 11,780 8,552 -- -- -- -- 46,232
Investment securities available for
sale(2).............................. 57,266 32,160 5,929 1,049 2,813 5,279 1,096 105,592
--------- --------- -------- --------- --------- -------- ------- ---------
$ 147,501 $ 76,426 $ 65,547 $ 94,824 $ 67,344 $ 25,433 $ 1,356 $ 478,431
Interest-bearing liabilities:
NOW and money market accounts .........$ -- $ 4,588 $ 27,416 $ 34,987 $ 12,159 $ -- $ -- $ 79,150
Savings and clubs accounts ............ -- -- 22,790 37,983 15,193 -- -- 75,966
Certificates of deposits .............. 59,138 129,894 24,042 2,463 134 -- -- 215,671
FHLB of New York advances ............. 39,000 -- -- -- -- -- -- 39,000
FHLB of New York line of credit ....... 20,250 -- -- -- -- -- -- 20,250
Line of credit ........................ 2,000 -- -- -- -- -- -- 2,000
ESOP debt ............................. 2,354 -- -- -- -- -- -- 2,354
--------- --------- -------- --------- --------- -------- ------- ---------
$ 122,742 $ 134,482 $ 74,248 $ 75,433 $ 27,486 $ -- $ -- $ 434,391
Interest sensitivity gap ..............$ 24,759 $ (58,056) $ (8,701) $ 19,391 $ 39,858 $ 25,433 $ 1,356 $ 44,040
Cumulative interest sensitivity gap ...$ 24,759 $ (33,297) $(41,998) $ (22,607) $ 17,251 $ 42,684 $44,040 $ 44,040
Ratio of interest-earning assets to
interest-bearing liabilities ........ 120.2% 56.8 % 88.3 % 125.7 % 245.0 % --% --% 110.1%
Ratio of cumulative gap to total
assets .............................. 4.9% (6.5)% (8.3)% (4.4)% 3.4 % 8.4% 8.7% 8.7%
</TABLE>
- -------------------
(1) Includes investment in stock of Federal Home Loan Bank of New York
totaling $3.6 million.
(2) Includes equity securities.
22
<PAGE>
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.
23
<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,
-------------------------------------------------------------------------------------------------
1995 1996 1997
------------------------------ -------------------------------- -----------------------------
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)............. $139,442 $12,509 8.97% $155,497 $14,131 9.09% $192,822 $16,841 8.73%
Mortgage-backed securities...... 171,867 11,163 6.50 149,373 9,605 6.43 112,464 7,319 6.51
Investment securities(2)........ 66,204 4,535 6.85 47,672 3,004 6.30 44,241 3,426 7.75
Investment and mortgage-backed
securities available for sale
(6)........................... 8,060 223 2.77 58,719 4,232 7.21 93,307 5,256 5.63
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning assets.. $385,573 $28,430 7.37% $411,261 $30,972 7.53% $442,834 $32,842 7.42%
======= ====== ===== ======= ====== ==== ======= ====== ====
Non-interest-earning assets...... 31,983 29,502 30,058
-------- -------- --------
Total assets................... $417,556 $440,763 $472,892
======== ======== ========
Interest-bearing liabilities:
Deposit accounts................ $330,542 $11,944 3.61% $340,771 $14,064 4.12% $345,829 $13,987 4.04%
Borrowings...................... 26,902 1,595 5.93 42,162 2,485 5.89 59,810 3,331 5.57
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities................... $357,444 $13,539 3.79% $382,933 $16,549 4.32% $405,639 $17,318 4.27%
======== ======= ==== ======== ======= ==== ======== ======= ====
Non-interest bearing liabilities. $ 11,995 $ 12,212 $ 20,939
-------- --------- ---------
Total liabilities............... $369,439 $ 395,145 $426,578
======== ========= ========
Stockholders' equity............. $ 48,117 $ 45,618 $ 46,314
-------- --------- ---------
Total liabilities and
stockholders................... $417,556 $ 440,763 $472,892
======== ========= ========
Net interest income.............. $14,891 $14,423 $15,524
======= ======= =======
Interest rate spread(3).......... 3.58% 3.21% 3.15%
==== ==== ====
Net yield on interest-earning
assets(4)...................... 3.86% 3.51% 3.51%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities............ 1.08X 1.08X 1.09X
==== ==== ====
</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.
24
<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,
----------------------------------------------------------------------------------------
1995 vs. 1996 1996 vs. 1997
--------------------------------------- --------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
--------------------------------------- --------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- -------- --------- ------- --------- --------- --------- -----------
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable ......... $ 1,440 $ 163 $ 19 $ 1,622 $ 3,392 $ (550) $ (132) $ 2,710
Mortgage-backed securities (1,461) (112) 15 (1,558) (2,373) 116 (29) (2,286)
Investment securities .... (1,269) (363) 101 (1,531) (216) 687 (49) 422
Investment and mortgage-
backed securities
available for sa1e ..... 1,402 358 2,249 4,009 2,493 (925) (544) 1,024
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning
assets ................ $ 112 $ 46 $ 2,384 $ 2,542 $ 3,296 $ (672) $ (754) $ 1,870
======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
Savings accounts ......... $ 370 $ 1,698 $ 52 $ 2,120 $ 209 $ (282) $ (4) $ (77)
Borrowings ............... 904 (9) (5) 890 1,040 (137) (57) 846
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ........... $ 1,274 $ 1,689 $ 47 $ 3,010 $ 1,249 $ (419) $ (61) $ 769
======= ======= ======= ======= ======= ======= ======= =======
Net change in interest
income .................. $(1,162) $(1,643) $ 2,337 $ (468) $ 2,047 $ (253) $ (693) $ 1,101
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Employees
At July 31, 1997, the Savings Bank had 69 full-time and 36 part-time
employees. None of the Savings Bank's employees are represented by a collective
bargaining group. The Savings Bank believes that its relationship with its
employees is good.
REGULATION
Set forth below is a brief description of certain laws which related to
the regulation of the Holding Company and the Savings Bank. The description does
not purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
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 has enforcement authority over
the Holding Company and its non-savings association subsidiaries, should such
subsidiaries be formed, which also permits the OTS to restrict or prohibit
activities that are determined
25
<PAGE>
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
Association and not for the benefit of stockholders of the Holding Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Holding Company generally is not subject to activity restrictions,
provided the Association satisfies the Qualified Thrift Lender ("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 Association or any other SAIF-insured savings association) would
become subject to restrictions applicable to bank holding companies unless such
other associations each also qualify as a QTL and were acquired in a supervisory
acquisition. See "-- Regulation of the Savings Bank - Qualified Thrift Lender
Test."
Regulation of the Savings Bank
Insurance of Deposit Accounts. The Savings Bank's deposit accounts are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation). Insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator. The FDIC may also prohibit an insured
depository institution from engaging in any activity the FDIC determines to pose
a serious threat to the SAIF.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory subgroup assignment.
In addition, the FDIC is authorized to increase deposit insurance rates on a
semi-annual basis if it determines that such action is necessary to cause the
balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments on SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison,
prior to September 30, 1996, members of the Bank Insurance Fund ("BIF"),
predominantly commercial banks, were required to pay substantially lower, or
virtually no, federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Savings Bank of
approximately .657% of deposits held on March 31, 1995. The Savings Bank
recorded a $2.2 million pre-tax expense for this assessment at September 30,
1996. Beginning January 1, 1997, deposit insurance assessments for SAIF members
were reduced to approximately .064% of deposits on an annual basis; this rate
may continue through the end of 1999. During this same period, BIF members are
expected to be assessed approximately .013% of deposits. Thereafter, assessments
for BIF and SAIF members should be the same and the SAIF and BIF may be merged.
It is expected that these continuing assessments for both SAIF and BIF members
will be used to repay outstanding Financing Corporation bond obligations. As a
result of these changes, beginning January 1, 1997, the rate of deposit
insurance assessed the Savings Bank declined by approximately 70% from rates in
effect prior to September 30, 1996.
26
<PAGE>
Capital Requirements. Under FDIC regulations, the Savings Bank is required
to maintain a minimum leverage capital requirement consisting of a ratio of Tier
1 capital to total risk-weighted assets of 4%. For institutions other than those
most highly rated by the FDIC, an additional "cushion" of at least 100 to 200
basis points is required. Tier 1 capital is the sum of common stockholders'
equity, noncumulative perpetual preferred stock (including any related surplus)
and minority investments in certain subsidiaries, less certain intangible
assets, deferred tax assets, certain identified losses and certain investments
in securities subsidiaries. As a SAIF-insured, state-chartered 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 certain
activities not permissible for national banks.
In addition to the leverage ratio, the Savings Bank 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 risk weight categories. The
aggregate dollar amount of each category is multiplied by the risk weight
assigned to that category. The sum of these weighted values equals the bank's
risk-weighted assets.
Pursuant to New Jersey banking law the minimum leverage capital for a
depository institution is a ratio of Tier 1 capital to total risk-weighted
assets of four percent. However, the Commissioner of the Department may require
a higher ratio for a particular depository institution.
New Jersey banking law requires that a depository institution maintain
qualifying capital of at least eight percent of its risk weighted assets. At
least four percent of this qualifying capital shall be in the form of Tier 1
capital. For purposes of New Jersey banking law, risk weighted assets, Tier 1
capital, and total assets are defined in the same manner as in the FDIC
regulations.
The Savings Bank was in compliance with both the FDIC and New Jersey
capital requirements at July 31, 1997.
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.
Dividends payable by the Savings Bank to the Company and dividends payable
by the Company to stockholders are subject to various additional limitations
imposed by federal and state laws, regulations and policies adopted by federal
and state regulatory agencies. 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.
27
<PAGE>
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 ratio of less than 8.0%; (ii) a
Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of
less than 4.0%, unless a higher ratio is required by the Commissioner of the
Department.
New Jersey banking regulations require that a depository institution
maintain qualifying capital of at least 8% of its risk weighted assets. At least
4% 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, 1997.
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 institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. The FHLB of New York is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. The FHLB of New York 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.
Qualified Thrift Lender Test. The Savings Bank must maintain an
appropriate level of certain investments ("Qualified Thrift Investments") and
otherwise qualify as a "Qualified Thrift Lender" ("QTL"), in order to continue
to enjoy full borrowing privileges from the FHLB of New York. The required
percentage of Qualified Thrift Investments is 65% of portfolio assets. In
addition, savings banks may include shares of stock of the Federal Home Loan
Banks, FNMA and FHLMC as qualifying QTL assets. Compliance with the QTL test is
measured on a monthly basis in nine out of every 12 months. As of July 31, 1997,
the Savings Bank was in compliance with its QTL requirement.
Federal Reserve System. The FRB 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 FRB may be used to satisfy the liquidity
requirements that are imposed by the NJDB. At July 31, 1997, the Savings Bank
met these reserve requirements.
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, 1997.
28
<PAGE>
Item 2. Properties and Equipment
- ----------------------------------
The Company and the Savings Bank operate from their main office and 7
branch offices. The Savings Bank leases three branch offices. The remainder of
the branch offices are owned by the Savings Bank.
Item 3. Legal Proceedings
- --------------------------
There are various claims and lawsuits in which the Company or the Savings
Bank are periodically involved, such as claims to enforce liens, condemnation
proceedings on properties in which the Savings Bank holds security interests,
claims involving the making and servicing of real property loans, and other
issues incident to the Savings Bank's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained in the section captioned "Market For Common
Stock" in the Management Discussion and Analysis of Financial Condition and
Results of Operations of the Company's Annual Report to Shareholders for fiscal
year ended July 31, 1997 (the "Annual Report") is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the section captioned "Selected Financial
Data" of the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 8. Financial Statements
- -----------------------------
The Company's financial statements listed under Item 14 are incorporated
herein by reference.
Item 9. Change In and Disagreements with Accountants on Accounting and Financial
- --------------------------------------------------------------------------------
Disclosure
- ----------
Not applicable.
29
<PAGE>
PART III
Item 10. Directors and Executive Officers
- ------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance," "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, 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 "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation
of which may at a subsequent date result in a change in control of
the Registrant.
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.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as part
of this report.
(1) The consolidated balance sheets of Lakeview Financial Corp.
and subsidiaries as of July 31, 1997 and 1996 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, 1997, together with the related notes
and the independent auditors' report of KPMG Peat Marwick LLP,
independent certified public accountants.
(2) Schedules omitted as they are not applicable.
30
<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 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***
11 Statement re Computation of Earnings Per Share
13 Portions of the 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See - "Part I - Business").
23 Independent Auditors' Consent
27 Financial Data Schedule (electronic filing only)
* Incorporated herein by reference to the registration statement on Form S-4
(File No. 33-77646).
** Incorporated herein by reference to the Form 10-K for fiscal year ended
July 31, 1994.
*** Incorporated herein by reference to the Form 10-K for fiscal year ended
July 31, 1996.
(b) On September 10, 1997, the Company filed a Form 8-K reporting the
announcement of the definitive merger agreement with Westwood
Financial Corporation.
31
<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 as of October 28, 1997.
LAKEVIEW FINANCIAL CORP.
By: /s/ Kevin J. Coogan
-------------------------------------
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 as of October 28, 1997.
By: /s/ Kevin J. Coogan By: /s/ Leo J. Dean
------------------------------------- -----------------------------------
Kevin J. Coogan Leo J. Dean
President, Chief Executive Officer Director
and Director
By: /s/ Leo J. Costello By: /s/ Michael R. Rowe
------------------------------------- ----------------------------------
Leo J. Costello Michael R. Rowe
Chairman of the Board Director
By: /s/ Robert J. Davenport By: /s/ Dennis D. Pedra
------------------------------------- ----------------------------------
Robert J. Davenport Dennis D. Pedra
Director Director
By: /s/ Vincent A. Scola By: /s/ Anthony G. Gallo
------------------------------------- ----------------------------------
Vincent A. Scola Anthony G. Gallo
Director Vice President and Chief
Financial Officer
EXHIBIT 11
<PAGE>
Statement re Computation of Earnings Per Share
<TABLE>
<CAPTION>
Year Ended
July 31, 1997
-------------
<S> <C>
Net income $6,061,011
==========
Weighted average shares outstanding 4,414,742
Common stock equivalents due to dilutive effect on stock options 656,702
----------
Total weighted average common shares and equivalents outstanding 5,071,444
==========
Primary earnings per share $ 1.20
==========
Total weighted average common shares and equivalents outstanding
for fully diluted computation 5,084,462
==========
Fully diluted earnings per share $ 1.19
==========
</TABLE>
EXHIBIT 13
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
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)
1993 1994 1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Assets............................................................ $207,462 $413,725 $419,212 $457,860 $505,882
Loans Receivable, Net............................................. 137,301 136,143 142,123 163,457 224,564
Mortgage-Backed Securities Held to Maturity....................... 43,579 173,067 175,375 121,462 102,249
Investment Securities Held to Maturity............................ 16 62,637 55,738 40,821 42,682
Investment Securities Available For Sale................. ........ 12,898 11,269 8,567 89,967 105,592
Excess of Cost Over Fair-Value of Net Assets Acquired, Net........ 825 12,817 11,497 10,176 8,856
Deposits.......................................................... 164,130 344,915 343,489 354,247 370,787
Borrowings........................................................ 18,500 19,021 19,859 54,721 63,604
Stockholders' Equity ............................................. 22,211 46,982 49,440 45,760 61,809
Stated Book Value Per Share ...................................... N/A 7.30 8.51 9.18 13.71
Tangible Book Value Per Share .................................... N/A 5.30 6.53 7.14 11.75
Selected Operating Data:
Gross Interest Income............................................. 15,179 18,947 28,430 30,972 32,842
Net Interest Income............................................... 8,025 11,212 14,892 14,423 15,524
Other Income...................................................... 2,010 2,608 7,206 7,030 8,102
Net Income........................................................ 2,339 4,571 6,295 6,274 6,061
Net Income Per Share.............................................. N/A N/A 1.01 1.13 1.20
Return on Average Assets.......................................... 1.13% 1.16% 1.50% 1.42% 1.28%
Cash Dividend Per Common Share.................................... N/A .031 .125 .125 .125
Asset Quality Data:
Non-Performing Loans.............................................. 13,540 8,928 3,372 2,417 3,811
Other Non-Performing.............................................. - - 850 494 -
Real Estate Owned (REO)........................................... 6,575 3,762 3,608 1,667 1,929
- ----------------------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets ...................................... 20,115 12,690 7,830 4,578 5,740
- ----------------------------------------------------------------------------------------------------------------------------
Non-Performing Assets to Assets Ratio............................. 9.70% 3.70% 1.87% 1.00% 1.13%
Loan Allowance.................................................... 2,638 1,714 2,535 3,073 3,411
REO Allowance..................................................... 823 188 - - -
- ----------------------------------------------------------------------------------------------------------------------------
Total Allowances................................................. $ 3,461 $ 1,902 $ 2,535 $ 3,073 $ 3,411
- ----------------------------------------------------------------------------------------------------------------------------
Total Allowances to Non-Performing Assets (Coverage Ratio)....... 17.21% 14.99% 32.4 67.1% 59.4%
</TABLE>
1
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
Management Discussion and Analysis of Financial Condition and Results of
Operation
FINANCIAL CONDITION
Total assets increased $48.0 million or 10.5%, to $505.9 million at July 31,
1997 from $457.9 million at July 31, 1996. The increase in assets primarily
reflects the Company's deployment of proceeds into the loan portfolio, from
principal repayments of mortgage-backed securities held to maturity,
increased deposits levels and increased borrowings. Before the effect of
unrealized gains or losses on securities available for sale, shareholders
equity decreased $200,000 or .4% to $47.4 million at July 31, 1997 from
$47.6 million at July 31, 1996.
Loans receivable, net increased $61.1 million, or 37.4%, to $224.6 million
at July 31, 1997, from $163.5 million at July 31, 1996. Approximately $35.5
million of this increase was in multi-family loans, $19.4 million in home
equity, second mortgage and home improvement loans, $8.4 million in
commercial business loans offset by a decrease of $1.4 million in
residential loans, as a result of scheduled repayments. The increase was the
result of the concerted efforts of a seasoned branch staff, a recently hired
business development officer in July 1996 and specialized lending officers
and senior management. It is Management's intention to continue to increase
the loan portfolio by changing the mix of the Savings Bank's loan portfolio
- from lower yielding loans (i.e., one- to four family loans) to higher
yielding loans (i.e., equity loans, multi-family (five (5) or more units)
buildings, and commercial (non-residential) mortgages.
Loans delinquent 90 days or more increased $900,000 or 31.0% to $3.8
million, or at July 31, 1997 from $2.9 million at July 31, 1996. The
increase is primarily due to loan growth and the change in the mix of the
loan portfolio.
REO, net, increased $263,000, or 15.8%, to $1.9 million at July 31, 1997,
from $1.7 million at July 31, 1996. The increase was mainly attributed to
$732,000 of loans receivable being transferred into REO offset by $545,000
of sales and $44,000 of charge-offs.
Investment securities available for sale portfolio increased $15.6 million,
or 17.4%, to $105.6 million at July 31, 1997 from $90.0 million at July 31,
1996. The increase was mainly attributable to purchases of $34.9 million and
an increase in market value (before tax) of $25.5 million (of which $22.1
million reflects the reclassification of the equity securities portfolio,
originally carried at cost) offset by sales of $47.7 million, maturities of
$3.0 million, and principal repayments of $1.8 million. In addition, $7.8
million of equity securities restricted for sale were carried at cost in
1996 due to certain restrictions on the sale of these securities. However,
during the fourth quarter of 1997, the equity securities were reclassified
as available for sale since these restrictions will expire within the next
twelve months. See footnote 7 to the consolidated financial statements.
Investment securities held to maturity increased $1.9 million or 4.6%, to
$42.7 million at July 31, 1997 from $40.8 million at July 31, 1996. The
increase was due to net purchases of $8.8 million offset by $7.0 million of
maturities.
Mortgage-backed securities held to maturity decreased $19.3 million, or
15.8%, to $102.2 million at July 31, 1997, from $121.5 million at July 31,
1996. The decrease in mortgage-backed securities resulted from principal
repayments of $19.4 million.
Deposits, after interest credited, increased $16.6 million or 4.7%, to
$370.8 million at July 31, 1997 from $354.2 million at July 31, 1996. Now
accounts and money market deposits increased $9.6 million or 13.7% during
the fiscal year ended July 31, 1997. Of theses accounts, growth occurred
primarily in demand deposits and business accounts due to Management's
concerted efforts in 1997 to increase these accounts. However, there were no
promotional rates offered on these accounts. Savings deposits increased $1.4
million or 1.8% during the fiscal year ended July 31, 1997. The average cost
of these deposits remained unchanged at 2.38% for July 31, 1997 and 1996.
Certificates of deposit increased $5.7 million or 2.7% to $215.7 million at
July 31, 1997, compared to $210.0 million at July 31, 1996. The cost of
certificates of deposits increased six (6) basis points to 5.17% at July 31,
1997 from 5.11% at July 31, 1996.
<PAGE>
Borrowings increased $8.9 million, or 16.9%, to $61.3 million at July 31,
1997, from $52.4 million at July 31, 1996. The increase included a $19.0
million increase in advances from the Federal Home Loan Bank of New York
("FHLB"), $8.3 million increase in a FHLB line of credit offset by a
decrease of $18.4 million in reverse repurchase agreement borrowings.
Net deferred tax liability increased $6.1 million or 100% at July 31, 1997.
The increase was primarily attributable to the $7.4 million deferred tax
liability related to the unrealized gain on the available for sale
portfolio.
On September 10, 1997, the Company and Westwood Financial Corporation
("Westwood"), the holding company of Westwood Savings Bank ("Westwood
Bank"), Westwood, New Jersey, signed a definitive agreement providing for
the merger of Westwood into the Holding Company and the merger of Westwood
Bank into the Savings Bank. It is anticipated that the transaction will
close by approximately March 1998 and will be accounted for under the
purchase method of accounting.
9
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
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MARKET FOR COMMON STOCK
The common stock of Lakeview Financial Corp. is traded on the Nasdaq
National Market under the symbol of "LVSB". On October 15, 1997, the Company
paid to all shareholders of record on October 1, 1997 a two for one common
stock split. The information below reflects the two for one stock split.
As a result of continued earnings, there has been a $.0625 per share
dividend since the 3rd fiscal quarter in 1994. On November 13, 1996, the
Company paid a 10% common stock dividend to all shareholders of record on
October 30, 1996. This resulted in the issuance of an additional 497,586
shares of common stock.
The Company's ability to pay dividends to shareholders is dependent upon the
earnings from investments and dividends it receives from the Savings Bank.
Accordingly, restrictions on the Savings Bank ability to pay cash dividends
directly affect the payment of cash dividends by the Company. The Savings
Bank may not declare or pay a dividend if the effect would cause the Savings
Bank's regulatory capital to be reduced below the amount required for the
liquidation account established in connection with the Savings Bank's
conversion from mutual to stock form or the regulatory capital requirements
imposed by the FDIC.
For the quarters ended:
1995 1996 1997
- --------------------------------------------------------------------------------
Prices ........... Oct. Jan. Apr. Jul. Oct. Jan. Apr. Jul.
High ............. 7.91 8.13 9.04 9.55 12.44 15.69 17.13 17.32
Low .............. 7.18 7.28 7.84 8.07 9.21 11.25 13.75 13.63
Closing .......... 7.39 7.84 8.92 9.32 11.69 15.38 13.82 16.50
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net income decreased $234,000 or 3.7%, to $6.1 million at July 31, 1997 from
$6.3 million at July 31, 1996. The decrease in net income was primarily
attributable to the SAIF special assessment before taxes of $2.2 million
offset by increases of $1.1 million in net interest income and $1.1 million
in other income.
Net income remained unchanged at $6.3 million for the years ended July 31,
1996 and 1995.
Net Interest Income: Net interest income is the most significant component
of the Company's income from operations. Net interest income is the
difference between interest received on interest-earning assets (primarily
loans and investment securities) and interest paid on interest-bearing
liabilities (primarily deposits and borrowed funds). Net interest income
depends on the volume and rate earned on interest-earning assets and the
volume and interest rate paid on interest liabilities.
Net interest income increased $1.1 million or 7.6% to $15.5 million in 1997
compared to $14.4 million in 1996. The increase was primarily due to growth
in average interest-earning assets to $442.8 million in 1997 from $411.3
million in 1996, partially offset by a decrease in the interest rate spread
of 3.15% in 1997 compared to 3.21% in 1996. However, the decline in the
interest rate spread in 1997 did not affect net interest margin. Net
interest margin was 3.51% in 1997 and 1996.
The increase in average interest-earning assets of $31.6 million reflects an
increase in average loans of $37.3 million and average investments and
mortgage-backed securities available for sale of $34.6 million offset by a
decrease in average mortgage- backed securities and investment securities
held to maturity of $40.4 million. The increase in average interest-
earnings assets was partially funded by the increase in average interest-
bearing liabilities of $22.7 million. This increase in interest-bearing
liabilities reflects the increase in borrowings and deposits in 1997.
10
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
The interest rate spread declined in 1997 compared to 1996 due to a decline
in the yield on average interest earning assets to 7.42% in 1997 from 7.53%
in 1996 offset by a decrease in the cost of average interest- bearing
liabilities to 4.27% in 1997 from 4.32% in 1996.
The yield on average interest-earning assets declined in 1997 due to a
decrease in yields on loans to 8.73% in 1997 from 9.09% in 1996 and
investment and mortgage-backed securities available for sale to 5.63% in
1997 from 7.21% in 1996. As general market rates were relatively stable in
1997 and 1996, the decline in the yield of loans reflects the impact of
increased competition for new loan originations. The decline in yield of
investment and mortgage-backed securities available for sale was the result
of lower rates of interest and dividends.
The decrease in the cost of funds was affected by a 32 basis point decrease
in the rate paid on borrowings and a 8 basis point decrease paid on money
market and checking accounts.
Net interest income decreased $469,000 or 3.1% to $14.4 million in 1996 from
$14.9 million in 1995. The decrease was primarily due to the increase in
interest-bearing liabilities to $382.9 million in 1996 from $357.4 million
in 1995 coupled with a decrease in the interest rate spread to 3.21% in 1996
from 3.58% in 1995. The decline in the interest rate spread had a
corresponding impact on the net interest margin which declined 35 basis
points to 3.51% in 1996.
The increase in average interest-bearing liabilities of $25.5 million in
1996 reflects an increase in average savings accounts of $10.2 million and
average borrowings of $15.3 million. The increase in average
interest-earnings assets of $25.7 million was funded by the increase in
average interest-bearing liabilities. This increase in average
interest-earning assets reflects the increase in average loan receivables of
$16.1 million, average investment and mortgage-backed securities available
for sale of $50.7 million offset by a decrease of average mortgage-backed
and investment securities of $41.0 million.
The interest rate spread declined in 1996 compared to 1995 due to an
increase in the cost of average interest bearing-liabilities to 4.32% in
1996 from 3.79% in 1995, offset by an increase in the yield on average
interest-earning assets to 7.53% in 1996 from 7.37% in 1995. The cost of
average interest-bearing liabilities increased in 1996 primarily due to the
higher volume and higher rates paid on savings accounts, offset by the lower
cost of funds on borrowings.
The yield on average interest-earning assets increased in 1996 by 16 basis
points primarily due to the higher rates on new loan originations compared
to the rates on loans repaid and the higher volume coupled with the higher
rates paid on investment and mortgage-backed securities available for sale.
Provision for Losses on Loans: The Company recorded a provision for loan
losses of $961,000 in 1997 compared with $664,000 in 1996 and $1.4 million
in 1995. The increase in 1997 was attributable to loan growth and the change
in the mix of the loan portfolio. The decrease in 1996 was attributable to a
$955,000 decrease in the nonperforming loans portfolio and improved market
conditions.
Management regularly performs an analysis to identify the inherent risks of
loss in its loan portfolio. This evaluation includes evaluations of
concentrations of credit, past loss experience, current economic conditions,
amount and composition of the loan portfolio (including loans being
specifically monitored by management), estimated fair value of underlying
collateral, loan commitments outstanding, delinquencies, and other
information available at such times. Additionally, in July 1997, the Savings
Bank hired a loan workout officer to focus on Management's continued efforts
to reduce the risk of the loan portfolio.
The Savings Bank will continue to monitor its allowance for loan losses and
make future adjustments to the allowance through the provision for loan
losses as economic conditions dictate. As discussed previously, it is
Management's intention to continue to increase the loan portfolio by
changing the mix of the Savings Bank's loan portfolio - from lower yielding
loans (i.e., one- to four family loans) to higher yielding loans (i.e.,
equity loans, multi-family (five (5) or more units) buildings, and
commercial (non-residential) mortgages. Although the Savings Bank maintains
its allowance for loan losses at a level that it considers to be adequate to
provide for the inherent risk of loss in its loan portfolio, there can be no
assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods
due to the higher degree of credit risk which might result from the change
in the mix of the loan portfolio.
<PAGE>
Other Income: Total other income increased $1.1 million or 15.3% to $8.1
million for the year ended July 31, 1997 from $7.0 million for the year
ended July 31, 1996. Realized gains on investments increased $2.0 million to
$4.8 million in 1997 from $2.8 million in 1996. This increase resulted from
the sale of Federal National Mortgage Association ("FNMA"), Student Loan
Mortgage Association ("SLMA"), Federal Home Loan
11
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[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
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Mortgage Corporation ("FHLMC") and other equity securities during 1997.
Other operating income decreased $1.0 million to $2.1 million in 1997 from
$3.1 million in 1996. This was mainly attributable to a decrease of other
income from Branchview, Inc. of $2.4 million offset by an increase of income
from subsidiary activity of Lakeview Mortgage Depot, Inc. ("LMD") of $1.1
million due to increased lending. In 1995, Branchview sold its majority
interest in Residential Money Center, a residential mortgage company. See
footnote 7 to the consolidated financial statements.
Total other income decreased $177,000 or 2.5% to $7.0 million for the year
ended July 31, 1996 from $7.2 million for the year ended July 31, 1995. The
Savings Bank's realized gains on investments increased $662,000 to $2.8
million in 1996 from $2.1 million in 1995. This increase resulted from the
sale of FNMA, SLMA, FHLMC and other equity securities during 1996. Other
operating income decreased $756,000 to $3.1 million in 1996 from $3.9
million in 1995. This was mainly attributed to a decrease of income from the
Branchview, Inc. subsidiary from $2.5 million in 1996 from $3.6 million in
1995.
Other Expenses: Total other expenses increased $2.3 million or 21.0%, to
$13.2 million in 1997 from $10.9 million in 1996. The increase was primarily
the result of a $2.2 million special assessment required to recapitalize the
Savings Association Insurance Fund ("SAIF"). On September 30, 1996, the
President signed into law legislation which included the recapitalization of
SAIF by a one time charge to SAIF-insured institutions of 65.7 basis points
per $100 of insurable deposits as of March 31, 1995. Future deposit expense
will be lower as a result of this one-time charge. The legislation also
provides that the Savings Bank will pay, in addition to the normal deposit
insurance premium as a member of the SAIF, an annual amount equal to
approximately 6.4 basis points of outstanding SAIF deposits toward the
retirement of the Financing Corporation Bonds ("Fico Bonds") issued in the
1980's to assist in the recovery of the savings and loan industry. Members
of the Bank Insurance Fund ("BIF"), by contrast, will pay, in addition to
their normal deposit insurance premium, approximately 1.3 basis points
toward the retirement of the Fico Bonds. Beginning no later than January 1,
2000, the rate paid to retire the Fico Bonds will be equal for members of
the BIF and the SAIF. The Act also provides for the merging of the BIF and
the SAIF by January 1, 1999 provided there are no financial institutions
still chartered as savings associations at that tin, Should the insurance
funds be merged before January 1, 2000, the rate paid by all members of this
new fund to retire the Fico Bonds would be equal.
Compensation and employee benefits increased $1.1 million or 22.8% to $5.7
in 1997 from $4.6 million in 1996. The increase was mainly attributable to
the amortization of the ESOP of $390,000 due to the increase of the market
value o the Company's stock and $410,000 for the hiring of eleven new staff
persons for the Company's subsidiary, LMD. LMD opened two additional offices
during the year.
Net losses from REO operation decreased $715,000 or 77.64X to $206,000 in
1997 from $921,000 in 1996. The decrease primarily attributed to the
decrease in provisions of REO lot to $44,000 in 1997 from $655,000 in 1996.
Management of the Savings Bank regularly assesses the value of the REO
portfolio based on available information at such times including trends in
local real estate markets and appraisals. Additional provisions for REO
losses may be required as the result of this assessment.
A great deal of information has been disseminated about the global computer
year 2000. Many computer programs that can only distinguish the final two
digits of the year entered common programming practice in earlier years) are
expect to read entries for the year 2000 as the year 1900 and compute
payment, interest or delinquency based on the wrong date or are expected to
be unable to compute payment, interest or delinquency. Rapid and accurate
data processing is essential to the operation of the Savings Bank. Date
processing is also essential to most other financial institutions and many
other companies. All of the material data processing the Savings Bank that
could be affected by this problem is provided by a third party service
bureau. The service bureau of the Savings Bank has advised the Savings Bank
that it expects to be year 2000 compliant prior to December 31, 1999.
However, if the service bureau is unable to resolve potential problem in
time, the Savings Bank would likely experience significant data processing
delays, mistakes or failures. These delays, mistakes or failures could have
a significant adverse impact on the financial condition and result operation
of the Savings Bank.
12
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
Total other expenses increased $176,000 or 1.6%, to $10.9 million in 1996
from $10.7 million in 1995. The increase was primarily attributable to an
increase in employee compensation of $282,000 to $4.6 million in 1996 from
$4.4 million in 1995. The increase was mainly attributed to the increased
staffing of LMD which was formed in October of 1995. Net losses from REO
operation increased $271,000 to $921,000 in 1996 from $650,000 in 1995. The
increase was mainly attributed to an increase in provisions for REO losses
of $152,000 to $654,000 in 1996 from $502,000 in 1995, which was partially
offset by a decrease in other operating expenses of $400,000 in 1996.
Liquidity and Capital Resources
The Savings Bank's primary sources of funds includes savings deposits, loan
repayments and prepayments, cash flow from operations and borrowings from
the FHLB. The Savings Bank uses its capital resources principally to fund
loan origination and purchases, repay maturing borrowings and for
investments, and for short and long-term liquidity needs. The Savings Bank
expects to be able to fund or refinance, on a timely basis, its commitments
and long-term liabilities. As of July 31, 1997, the Savings Bank had
commitments to fund loans of $6,104,000.
The Savings 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 Savings Bank's operating, financing and
investment activities during any given period. At July 31, 1997, cash and
cash equivalents totaled $5.4 million.
Net cash provided by operating activities for fiscal 1997 totaled $3.6
million, as compared to $2.7 million for fiscal 1996. Net cash provided by
operating activities for fiscal 1996 totaled $2.7 million, as compared to
$10.2 million for fiscal 1995.
Net cash used in investing activities for fiscal 1997 totaled $23.3 million,
a decrease from fiscal 1996 of $17.5 million. The decrease was primarily
attributable to an increase in 1996 of net purchases of investment and
mortgage-backed securities of $20.0 million, offset by cash used for net
loan originations and purchases of loans of $42.2 million and investment in
FHLB stock of $1.0 million, and net proceeds from the sale of investment and
mortgage-backed securities of $40.0 million.
Net cash used in investing activities for fiscal 1996 totaled $40.8 million,
an increase from fiscal 1995 of $41.3 million. The increase was primarily
attributable to an increase in 1995 of $9.5 million in net proceeds from the
sale of available for sale investment securities, cash used for net loan
originations and purchases of loans of $12.0 million and net purchases of
investment and mortgage-backed securities of $20.0 million.
Net cash provided by financing activities for the year ended July 31, 1997
totaled $18.7 million. This is a result of a net increase in deposits of
$16.5 million and an increase in net borrowings of $8.9 million, offset by
the purchase of treasury stock of $6.7 million.
Net cash provided by financing activities for fiscal 1996 totaled $36.9
million. This is a result of a net increase in deposits of $10.8 million,
and an increase in net borrowings of $34.9 million offset by the purchase of
treasury stock of $6.7 million and ESOP shares of $1.6 million.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity relating to
the savings and loan industry, and similar matters. Management monitors
projected liquidity needs and determines the level desirable, based in part
on the Savings Bank's commitment to make loans and management's assessment
of the Savings Bank's ability to generate funds. The Savings Bank is also
subject to federal regulations that impose certain minimum capital
requirements.
Impact of Inflation and Changing Prices
Unlike most industrial companies, substantially all the assets of the
Company are monetary in nature. As a result, interest rates have a greater
impact on the Company'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.
13
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[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
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Lakeview Financial Corp. and Subsidiaries
Consolidated Balance Sheets
July 31, 1996 and 1997
<TABLE>
<CAPTION>
1996 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash on hand and in banks................................................... $ 6,902,040 $ 5,399,466
Investment securities held to maturity, market value of
$40,083,449 and $41,934,692 at July 31, 1996 and 1997,
respectively (note 4)....................................................... 40,821,195 42,681,799
Investment securities available for sale (note 5) .......................... 89,967,424 105,592,249
Equity securities restricted for sale, market value of $19,942,272
at July 31, 1996 (note 7) .................................................. 7,806,358 -
Mortgage-backed securities held to maturity, market value of
$119,471,910 and $102,343,945 at July 31, 1996 and 1997,
respectively (notes 6 and 13) .............................................. 121,461,936 102,248,545
Loans receivable, net (notes 8 and 13)...................................... 163,457,374 224,563,595
Real estate owned, net (note 9)............................................. 1,666,553 1,929,447
Investments required by law - stock in the Federal Home
Loan Bank of New York, at cost (note 13) ................................... 2,587,400 3,550,000
Accrued interest receivable (note 10)....................................... 3,646,512 3,475,581
Office properties and equipment, net (note 11).............................. 4,182,639 4,027,940
Excess of cost over fair value of net assets acquired, net (note 3)......... 10,176,424 8,856,136
Other assets................................................................. 5,184,150 3,557,442
- -----------------------------------------------------------------------------------------------------------------
Total assets................................................................ $457,859,985 $505,882,200
- -----------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders, Equity
Deposits (note 12).......................................................... 354,246,770 370,787,103
Borrowings (note 13)........................................................ 52,384,015 61,250,000
Borrowings - ESOP (note 16)................................................. 2,337,414 2,353,825
Advance payments by borrowers for taxes and insurance....................... 1,711,930 2,259,134
Net deferred tax liability (note 14)........................................ - 6,094,000
Other liabilities........................................................... 1,420,176 1,329,003
- -----------------------------------------------------------------------------------------------------------------
Total liabilities........................................................... 412,100,305 444,073,065
Common stock - $2.00 par value; authorized 10,000,000
shares, issued 6,441,504 shares and outstanding 4,531,408 and 4,509,054
shares at July 31, 1996 and 1997............................................ 5,856,152 6,441,504
Additional paid-in capital.................................................. 26,186,632 33,188,027
Retained income substantially restricted.................................... 29,186,632 28,617,200
Unrealized (loss) gain on securities available for sale, net of tax......... (1,884,921) 14,457,898
Treasury stock at cost, 1,457,218 and 1,932,450 shares at
July 31, 1996 and 1997...................................................... (10,655,120) (17,357,996)
Unallocated ESOP shares..................................................... (2,306,895) (2,407,250)
Unallocated MSBP shares..................................................... (1,420,648) (1,130,248)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (notes 2, 14, 16, and 18)........................ 45,759,680 61,809,135
Commitments and contingencies (notes 8 and 17)..............................
- -----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity ................................. $457,859,985 $505,882,200
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
14 See accompanying notes to consolidated financial statements.
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
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Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Income
Years ended July 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable ............................................................... $ 12,509,446 $ 14,131,327 $ 16,841,183
Mortgage-backed securities ..................................................... 11,162,655 9,604,671 7,319,449
Investment securities, held to maturity and Federal funds ...................... 4,535,201 3,004,345 3,425,496
Investment securities available for sale ....................................... 222,924 4,232,012 5,255,997
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income .......................................................... 28,430,226 30,972,355 32,842,125
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits (note 12) ................................................. 11,943,596 14,064,295 13,987,512
Interest on borrowings ......................................................... 1,594,984 2,485,475 3,330,542
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense ......................................................... 13,538,580 16,549,770 17,318,054
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income ............................................................ 14,891,646 14,422,585 15,524,071
Provision for losses on loans (note 8).......................................... 1,376,404 664,221 961,217
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans......................... 13,515,242 13,758,364 14,562,854
- ------------------------------------------------------------------------------------------------------------------------------
Other income:
Loan fees and service charges .................................................. 1,235,073 1,153,266 1,192,971
Net realized gains on sales of investment securities
available for sale and trading securities ...................................... 2,107,244 2,768,781 4,787,866
Other operating income (note 7) ................................................ 3,864,028 3,107,539 2,120,763
- ------------------------------------------------------------------------------------------------------------------------------
Total other income ............................................................. 7,206,345 7,029,586 8,101,600
- ------------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Compensation and employee benefits (notes 15 and 16)............................ 4,366,722 4,648,774 5,707,554
Office occupancy and equipment expense (note 11) ............................... 829,861 871,113 932,128
Net loss on real estate owned activities (note 9)............................... 650,194 920,917 206,369
Other operating expenses ....................................................... 3,524,382 3,106,738 2,769,553
SAIF recapitalization assessment (note 22) ..................................... - - 2,218,674
Amortization of the excess of cost over fair value of net
assets acquired ................................................................ 1,320,288 1,320,288 1,320,288
- ------------------------------------------------------------------------------------------------------------------------------
Total other expenses............................................................ 10,691,447 10,867,830 13,154,566
- ------------------------------------------------------------------------------------------------------------------------------
Income before federal and state income tax ..................................... 10,030,140 9,920,120 9,509,888
- ------------------------------------------------------------------------------------------------------------------------------
Federal and state income tax expense (benefit) (note 14):
Current ........................................................................ 3,889,513 4,112,206 3,835,877
Deferred........................................................................ (154,000) (466,000) (387,000)
- ------------------------------------------------------------------------------------------------------------------------------
Total federal and state income tax ............................................. 3,735,513 3,646,206 3,448,877
- ------------------------------------------------------------------------------------------------------------------------------
Net income ..................................................................... $ 6,294,627 $ 6,273,914 $ 6,061,011
- ------------------------------------------------------------------------------------------------------------------------------
Earnings per common share
(reflects two for one stock split) ............................................. $ 1.01 $ 1.13 $ 1.20
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
15
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[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
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Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 6,294,627 $ 6,273,914 $ 6,061,011
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................................................ 1,320,288 1,320,288 1,320,288
Amortization of discounts and premiums, net................................. (259,384) (473,518) (374,070)
Provision for losses on loans and real estate............................... 2,303,781 1,318,710 1,005,000
Gain on sale of loans....................................................... (6,040) (9,598) (5,104)
Net realized gains on investment securities
available for sale and trading securities................................... (2,107,244) (2,768,781) (4,787,866)
Net gain on sale of real estate owned....................................... (223,884) (26,043) (47,612)
(Decrease) increase in accrued interest receivable.......................... 2,695 (928,163) 170,931
Net decrease in deferred loan fees.......................................... (137,479) (67,691) (33,646)
(Increase) decrease in other assets......................................... (1,654,851) (507,487) 1,626,708
Amortization of ESOP shares................................................. 297,881 312,708 900,638
Amortization of MSBP shares................................................. 505,454 445,564 481,731
Increase (decrease) in other liabilities.................................... 3,556,573 (2,473,471) (3,055,672)
Depreciation, net........................................................... 264,081 288,225 320,279
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities................................... 10,156,498 2,704,657 3,582,616
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans....................................................... (31,274,312) (40,782,321) (81,639,026)
Principal payments on loans................................................. 19,582,717 20,366,983 22,406,474
Purchase of loans........................................................... (136,946) (2,686,962) (3,975,546)
Proceeds from the sale of loans............................................. 1,171,675 924,888 409,900
Net increase in office properties and equipment............................. (402,733) (171,270) (165,580)
Principal payments on mortgage-backed securities held to maturity........... 16,629,760 25,230,317 19,381,231
Purchases of mortgage-backed securities
held to maturity............................................................ (18,762,454) (2,773,214) -
Maturities of investment securities held to maturity........................ 10,975,000 41,096,117 7,000,000
Purchase of investment securities held to maturity.......................... (4,057,500) (107,027,312) (8,811,748)
Proceeds from sale of investment securities
available for sale.......................................................... 20,864,634 37,440,781 51,894,066
Purchases of investment securities available for sale....................... (16,141,726) (34,163,638) (34,873,300)
Proceeds from maturity of investment securities
available for sale.......................................................... - 18,319,150 3,000,000
Principle payments on investment securities
available for sale.......................................................... - 1,534,201 1,784,698
</TABLE>
(continued)
16
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 1995, 1996 and 1997 continued
<TABLE>
<CAPTION>
1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities, cont.:
Proceeds from sale of trading securities.................................... - 16,147,077 21,416,368
Purchases of trading securities............................................. - (15,871,424) (20,776,177)
Increase in Federal Home Loan Bank stock.................................... (731,100) - (962,600)
Proceeds from sale of real estate owned..................................... 2,771,608 1,644,527 592,862
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities......................... 488,623 (40,771,830) (23,318,378)
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net decrease (increase) in deposits......................................... (1,425,210) 10,757,443 16,540,333
Net increase in borrowings.................................................. 837,500 34,862,500 8,882,396
Net increase in advance payments by borrowers
for taxes and insurance..................................................... 61,161 210,477 547,204
Proceeds from stock offering................................................ - - -
Purchase of treasury stock.................................................. (3,970,106) (6,685,014) (6,702,876)
Purchase of shares by ESOP.................................................. - (1,615,985) (446,881)
Dividends paid.............................................................. (615,430) (581,874) (586,988)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities......................... (5,112,085) 36,947,547 18,233,188
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents............................ 5,533,036 (1,119,626) (1,502,574)
Cash and cash equivalents at beginning of year.............................. 2,488,630 8,021,666 6,902,040
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year.................................... $ 8,021,666 $ 6,902,040 $ 5,399,466
- ----------------------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest.................................................................... 12,923,418 14,055,717 14,372,086
Income taxes................................................................ 3,995,000 4,767,992 1,735,153
Supplemental disclosure of noncash investing
and financing activities:
Transfer of loans receivable to real estate owned....................... 3,084,247 331,114 732,276
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 -
Transfer of restricted equity securities to investment securities
available for sale........................................................ - - 7,806,358
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended July 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
Common stock
- -----------------------------------------------------------------------------------------------------------------------------
Number Additional
of Dollar Paid-in
shares amount capital
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at July 31, 1994.................................................... 4,840,000 $ 4,840,000 $18,574,374
Amortization of ESOP shares................................................. - - 116,791
Amortization of MSBP shares................................................. - - 199,654
Net income.................................................................. - - -
Cash dividend............................................................... - - -
Purchase of treasury stock.................................................. (519,016) - -
Stock dividend.............................................................. 483,920 483,920 2,843,030
Cumulative effect of accounting change -
Adoption of FASB 115, net of tax (see note 1)............................... - - -
Change in unrealized loss on securities available for sale, net of tax...... - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995.................................................... 4,804,904 $ 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............................................................... - - -
Purchase of treasury stock.................................................. (643,982) - -
Stock dividend distribution................................................. 370,486 532,232 4,158,063
Change in unrealized loss on securities available for sale, net of tax...... - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996.................................................... 4,531,408 $5,856,152 $26,186,632
- -----------------------------------------------------------------------------------------------------------------------------
Common stock acquired by ESOP............................................... - - -
Amortization of ESOP shares................................................. - - 554,113
Amortization of MSBP........................................................ - - 191,331
Net income.................................................................. - - -
Purchase of treasury stock.................................................. 475,232 - -
Stock dividend.............................................................. (497,586) 585,352 6,255,951
Change in unrealized gain on securities available for sale, net of tax...... - - -
- -----------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997.................................................... 4,509,054 $6,441,504 $33,188,027
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Net unrealized gain Total
Treasury Retained Unallocated shares (loss) on securities stockholders'
stock income ESOP MSBP available for sale equity
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- $ 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
- --------------------------------------------------------------------------------------------------------
- - (446,881) - - (446,881)
- - 346,526 - - 900,639
- - - 290,400 - 481,731
- 6,061,011 - - - 6,061,011
- (586,988) - - - (586,988)
(6,702,876) - - - - (6,702,876)
- (6,841,303) - - - -
- - - - 16,342,819 16,342,819
- --------------------------------------------------------------------------------------------------------
($17,357,996) $28,617,200 ($2,407,250) ($1,130,248) $14,457,898 $61,809,135
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1996 and 1997
Note 1
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 loan
losses 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), Lakeview Credit Card Services, Inc. (LCCS),
and Lakeview Mortgage Depot, Inc. (LMD).
On August 25, 1994, LSB completed a reorganization into a holding company
form of ownership, and LSB became a wholly-owned subsidiary of Lakeview
Financial Corp. The stockholders of LSB exchanged their shares of LSB for
the same number of shares of Lakeview Financial Corp.
Investment Securities and Mortgage-Backed Securities:
The Bank classifies 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.
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," within which there was
offered transition guidance permitting an enterprise to reassess the
appropriateness of the classifications of all of its securities before
December 31, 1995. The Bank reassessed its classifications, and on December
31, 1995, transferred $112.6 million in amortized cost of investment and
mortgage-backed securities to the available for sale classification. The
related net unrealized gain after tax effect as of the date of transfer was
$157,000
Premiums and discounts on debt and mortgage-backed securities are amortized
to expense and accreted to income over the estimated life of the respective
security using a method that approximates the level yield method.
Gains and losses on the sale of securities available for sale are based upon
the amortized cost of the security using the specific identification method.
<PAGE>
Office Properties and Equipment:
Premises, furniture and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization charges are
computed using the straight-line method. Premises, furniture and equipment
are depreciated over the estimated useful life of the assets, except for
leasehold improvements, which are amortized over the term of the lease or
the estimated useful life of the asset, if shorter. Estimated useful lives
are ten to forty years for premises, and three to ten years for furniture
and equipment.
Expenditures for maintenance and repairs are expensed as incurred. The costs
of major renewals and improvements are capitalized. Premises and major items
of furniture and equipment are removed from the property accounts upon
disposition at their carrying amount, and gains or losses on such
transactions are included in other non-interest income or expense.
Income Taxes:
The Bank accounts for income taxes through recognition of deferred tax
liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of
20
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to be settled (see note 14).
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.
Certain direct costs associated with the loan origination process are netted
against origination fees received, with the net resulting amount accreted
over the estimated lives of the loan using the level-yield method as an
adjustment to the loan's yield.
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.
The Bank accounts for impaired loans in accordance with 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".
The 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.
Real Estate Owned:
Real estate owned, 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 allowances through periodic provisions
which are charged to earnings. All losses of principal are charged to the
allowances 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 allowances.
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand and in banks.
Earnings Per Share:
Income per common share is calculated by dividing net income, by the average
number of shares of common stock and average number of common stock
equivalents outstanding during the period. The weighted average number of
shares outstanding during the year ended July 31, 1997 used in the earnings
per share calculation was 5,071,444. As shares from the Bank's ESOP are
released from collateral, they become outstanding for earnings per share
computations. Per share data has been adjusted to reflect the 10% stock
dividends paid during 1995, 1996 and 1997. On September 4, 1997, Lakeview
Financial Corp. declared a two for one stock split payable on October 15,
1997, to stockholders of record as of October 1, 1997. Share data has been
adjusted to reflect the stock split.
Reclassifications:
Certain reclassifications have been made to the 1995 and 1996 amounts to
conform to the 1997 presentation.
<PAGE>
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.
21
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
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 16j.
Note 3
Excess of Cost Over Fair Value of Net Assets Acquired, Net:
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 asset 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 $4,110,000 at July 31 1997. The Bank also has a
core deposit premium of $536,136 from a prior acquisition which is being
amortized on a straight line basis over 15 years, which has total
amortization charged to date of $548,237, at July 31, 1997.
Note 4
Investment Securities Held to Maturity:
The amortized cost and estimated market values of investment securities held
to maturity as of July 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 - (78,476) 5,921,524
- ----------------------------------------------------------------------------------------------------------------------------------
$40,821,195 $ 123,805 ($861,551) $40,083,449
- ----------------------------------------------------------------------------------------------------------------------------------
July 31, 1997:
FHLB obligations....................................................... $22,574,313 $ 1,845 ($561,798) $22,014,360
FHLMC obligations...................................................... 14,107,486 11,398 (173,195) 13,945,689
FNMA obligations....................................................... 6,000,000 20,800 (46,157) 5,974,643
- ----------------------------------------------------------------------------------------------------------------------------------
$42,681,799 $ 34,043 ($781,150) $41,934,692
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The yield on the obligations 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.
The amortized cost and estimated market values of investment securities held
to maturity at July 31, 1997, 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...................................... 9,230,917 9,155,930
Due after ten years......................................................... 33,450,882 32,778,762
- -----------------------------------------------------------------------------------------------------------
$42,681,799 $41,934,692
- -----------------------------------------------------------------------------------------------------------
</TABLE>
22
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- --------------------------------------------------------------------------------
Note 5
Investments Available for Sale
The amortized cost and estimated market values of investments available for
sale at July 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Equity Securities.................................................... 13,269,260 121,670 (790,349) 12,600,581
- ------------------------------------------------------------------------------------------------------------------------------------
$92,911,693 $ 326,575 $(3,270,844) $ 89,967,424
- ------------------------------------------------------------------------------------------------------------------------------------
July 31, 1997:
U.S. Agency Securities............................................... $48,931,454 $ 8,843 ($ 159,450) $ 48,780,847
GNMA MBS............................................................. 3,979,652 212,005 - 4,191,657
FNMA\FHLMC REMICS.................................................... 1,440,104 54,970 (6,093) 1,488,981
Private issue REMICS................................................. 9,377,799 - (93,881) 9,283,918
Equity Securities.................................................... 19,406,190 22,699,555 (258,899) 41,846,846
- ------------------------------------------------------------------------------------------------------------------------------------
$83,135,199 $22,975,373 ($ 518,323) $105,592,249
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market values of debt investments available
for sale at July 31, 1997, by contractual maturities 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................................ 3,000,000 2,980,449
Due after five years through ten years............................... 22,954,704 22,950,348
Due after ten years.................................................. 37,774,305 37,814,606
- ----------------------------------------------------------------------------------------------------------
$ 63,729,009 $ 63,745,403
- ----------------------------------------------------------------------------------------------------------
</TABLE>
During the years ended July 31, 1995, 1996, and 1997, proceeds from sale of
securities available for sale of $20,864,634, $37,440,781, and $51,894,066,
respectively, were received, resulting in gross gains of $2,107,244,
$2,493,128, and $4,147,674, respectively.
During the years ended July 31, 1995, 1996, and 1997, proceeds from sale of
trading securities of $0, $16,147,077, and $21,416,368, respectively, were
received, resulting in gross gains of $0, $275,653, and $640,192,
respectively.
23
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
Note 6
Mortgage-backed Securities Held to Maturity
The amortized cost and estimated market values of mortgage-backed securities
held to maturity as of July 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
- -------------------------------------------------------------------------------------------------------------------------------
July 31, 1997:
FHLMC........................................................... $40,305,745 $ 423,638 $ (395,976) $ 40,333,407
FNMA............................................................ 32,149,057 558,347 (156,021) 32,551,383
FNMA/FHLMC/REMICS............................................... 29,793,743 284,807 (619,395) 29,459,155
- -------------------------------------------------------------------------------------------------------------------------------
$102,248,545 $1,266,792 ($1,171,392) $102,343,945
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and market value of mortgage-backed securities held to
maturity at July 31, 1997, are shown below by contractual maturity. The
expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
<S> <C> <C>
Due in one year or less.........................................$ - $ -
Due after one year through five years........................... 39,363,174 39,032,002
Due after five years through ten years.......................... 17,374,783 17,471,249
Due after ten years............................................. 45,510,588 45,840,694
- -------------------------------------------------------------------------------------------------------------------------------
$102,248,545 $102,343,945
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
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- --------------------------------------------------------------------------------
Note 7 Investments Held By Subsidiary
On February 6, 1995, Branchview Inc., a subsidiary of the Savings Bank sold
a majority of the assets of Residential Money Centers ("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 is reflected in other
operating income. In July 1995, Branchview purchased the remaining
partnership interest of RMC, for $1.5 million, and became the sole owner of
RMC. RMC owns 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.
As of July 31, 1996, the carrying value of Branchview's investment in IMC
was $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 at July 31, 1996 was 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
was $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.
On February 13, 1997, IMC paid a 2 for 1 stock dividend raising Branchview's
share total to 1,661,856 shares at July 31, 1997, with a current price of
$18 per share for a total market value of $29,913,408. On April 23, 1997,
IMC completed a secondary offering of which Branchview purchased no
additional shares of their stock. However, during the year Lakeview
purchased an additional 40,000 shares of IMC stock for $585,600. The
underwriters of the secondary public offering requested a lock up period
which stated that no restricted shareholders may dispose of any shares under
SEC Rule 144 for 90 days following the closing date of the offering. No
restricted shareholder is permitted to dispose of more than 8% of that
shareholder's holdings of common stock in any calendar month, essentially
eliminating restrictions on the sale of stock beyond one year. As a result
of the change in the restriction, at July 31, 1997, Lakeview transferred the
IMC shares of stock with a cost of $8,391,958 into the Investment Securities
Available for Sale category at a market value of $30,633,408, resulting in
an unrealized gain net of tax, of $14,319,872, which is included in
stockholders' equity.
On January 12, 1996, Lakeview granted a line of credit to IMC for $7 million
with an interest rate of 10%. As of July 31, 1997, $6.8 million was
outstanding. For the fiscal year ended July 31, 1997, interest income on
this line of credit amounted to $269,444.
Note 8
Loans Receivable, Net
A comparative summary of loans receivable at July 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loan balances by type:
Real estate loans.......................................................... $163,279,564 $216,895,904
Construction loans......................................................... 762,715 377,120
Consumer loans............................................................. 1,517,033 1,913,722
Other...................................................................... 1,191,082 8,982,009
- ----------------------------------------------------------------------------------------------------------------
166,750,394 228,168,755
- ----------------------------------------------------------------------------------------------------------------
Less:
Allowance for loan losses................................................... 3,073,158 3,411,461
Deferred loan fees.......................................................... 219,862 193,699
- ----------------------------------------------------------------------------------------------------------------
$163,457,374 $224,563,595
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
The Bank serviced loans for others in the approximate amount of $17,927,900,
$13,792,727 and $11,781,761 at July 31, 1995, 1996 and 1997, respectively.
A comparative summary of non-accrual loans at July 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
No. Amount No. Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate and other loans ................................................ 40 $2,910,953 46 $3,810,868
Percent of real estate and other loans...................................... 1.8% 1.7%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
An analysis of the allowance for loan losses for the years ended July 31,
1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year................................................ $1,713,590 $2,534,836 $3,073,158
Provision charged to operations ............................................ 1,376,404 664,221 961,217
Charge-offs ................................................................ (1,405,337) (429,341) (699,263)
Recoveries.................................................................. 849,879 303,442 76,349
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of year...................................................... $2,534,836 $3,073,158 $3,411,461
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
For the years ended July 31, 1995, 1996 and 1997, additional interest income
before taxes amounting to approximately $234,000, $201,000, and $256,000,
respectively, would have been recognized if interest on non-accrual loans
had been recorded based on original terms. The Bank had $645,184 and
$650,172 of impaired loans at July 31, 1996, and 1997 as defined by SPAS 114
and SPAS 118.
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, 1996 and 1997 amounted to
$13,295,000 and $6,104,000, respectively.
26
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
Note 9
Real Estate Owned, Net
Activity in the allowance for losses on real estate owned for the years
ended July 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year................................................ $ 188,119 $ - $ -
Provision for losses........................................................ 502,377 654,489 43,783
Charge-offs, net............................................................ (690,496) (654,489) (43,783)
- ---------------------------------------------------------------------------------------------------------------------
Balance at end of year...................................................... $ - $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Net loss on real estate owned activities for the years ended July 31, 1995,
1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for real estate owned losses...................................... $ 502,377 $ 654,489 $ 43,783
Net loss on sale of real estate owned and related expenses.................. 147,817 266,428 162,586
- ---------------------------------------------------------------------------------------------------------------------
$ 650,194 $ 920,917 $206,369
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 10
Accrued Interest Receivable
Accrued interest receivable at July 31, 1996 and 1997, is summarized as
follows:
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment securities held to maturity...................................... $ 1,021,063 $ 908,118
Investment securities available for sale.................................... 961,514 629,695
Mortgage-backed securities held to maturity................................. 668,487 554,498
Loans receivable............................................................ 995,448 1,383,270
- ---------------------------------------------------------------------------------------------------------------------
$ 3,646,512 $3,475,581
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 11
Office Properties and Equipment, net
Office properties and equipment, net, at July 31, 1996 and 1997 consists of
the following:
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cost:
Land....................................................................... $ 793,158 $ 793,158
Parking lot improvements.................................................... 26,913 26,913
Building and building improvements.......................................... 3,600,269 3,609,574
Furniture and equipment..................................................... 1,290,631 985,907
Automobiles................................................................. 102,636 99,036
- ---------------------------------------------------------------------------------------------------------------------
5,813,607 5,514,588
- ---------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation............................................... 1,630,968 1,486,648
- ---------------------------------------------------------------------------------------------------------------------
$ 4,182,639 $4,027,940
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Office occupancy and equipment expense includes rentals for premises and
equipment of $156,000, $177,000 and $187,000 for the years ended July 31,
1995, 1996 and 1997 respectively.
27
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
Note 12
Deposits
Deposit balances at July 31, 1996 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997
- -----------------------------------------------------------------------------------------------------------------------
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>
market deposits........... O - 2.85 1.86% $ 69,588,989 19.6 0 - 2.35 1.67% $ 79,149,736 21.3
Savings deposits.......... 0 - 2.85 2.38% 74,612,769 21.1 0 - 2.55 2.38% 75,966,675 20.5
Certificates of deposit... 0 - 8 5.11% 210,045,012 59.3 0 - 8 5.17% 215,670,692 58.2
- -----------------------------------------------------------------------------------------------------------------------
$354,246,770 100.0 $370,787,103 100.0
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Certificates of deposit greater than $100,000 total approximately
$17,512,390 and $23,990,768 at July 31, 1996 and 1997, respectively.
The contractual maturities of certificates of deposit at July 31, 1996 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year............................................................. $170,389 $189,026
One to three years.......................................................... 35,069 24,046
Thereafter.................................................................. 4,587 2,599
- -------------------------------------------------------------------------------------------------------------------
$210,045 $215,671
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
lnterest expense on deposits for the years ended July 31, 1995, 1996 and
1997 consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Certificates of deposit.................................................. $ 8,429,880 $10,880,983 $10,908,550
Passbook and club accounts............................................... 2,695,257 2,384,500 2,262,469
NOW and money market accounts ........................................... 818,459 798,812 816,493
- -------------------------------------------------------------------------------------------------------------------
$11,943,596 $14,064,295 $13,987,512
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
Note 13
Borrowings
Borrowings at July 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
Interest
1996 1997 Rate Maturity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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................................. 18,384,015 - 5.60% Aug. 8, 1996
FHLB of New York Advance..................................... - $ 17,000,000 5.85% Aug. 7, 1997
FHLB of New York Advance..................................... - 22,000,000 6.00% Sept. 2, 1997
FHLB of New York Line of Credit.............................. - 20,250,000 6.13% Aug. 1, 1997
Line of Credit............................................... - 2,000,000 8.00% Aug. 1, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
$ 52,384,015 $ 61,250,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 Banks agency securities, qualifying loans and mortgage-backed
securities. At July 31, 1997, the Bank had a credit line available of
$57,000,000, from the Federal Home Loan Bank of New York.
At July 31, 1997, the Savings Bank had entered into a line of credit with 1
major national broker/dealer which totaled $2 million. During the years
ended July 31, 1996 and 1997, the maximum month-end balance of the line of
credit was $0 and $2 million, respectively. The average amount of the line
of credit during the years ended July 31, 1996 and 1997 was $0 and $506,000.
Interest paid on the line of credit in the fiscal 1996 and 1997 was $0 and
$47,556, respectively.
Note 14
Federal and State Income Taxes
Income tax expense (benefit) for the years ended July 31, 1995, 1996 and
1997 is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal..................................................................... $3,377,513 $ 3,582,788 $3,467,327
State....................................................................... 512,000 529,418 368,550
- ------------------------------------------------------------------------------------------------------------------------------------
$3,889,513 $ 4,112,206 3,835,877
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal..................................................................... (141,000) (428,000) (355,000)
State....................................................................... (13,000) (38,000) (32,000)
- ------------------------------------------------------------------------------------------------------------------------------------
(154,000) (466,000) (387,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Total income tax expense.................................................... $3,735,513 $3,646,206 $3,448,877
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
If certain conditions were met, under tax law that existed prior to 1996,
thrift institutions, in determining taxable income, were allowed a special
bad debt deduction based on a percentage of taxable income before such
deduction. The Bank prepares and files its tax return on a calendar year
basis. The Bank used the experience method in preparing the Federal income
tax return for calendar year 1995 and 1994. The tax bad debt reserve method
was repealed for tax
29
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
years beginning after 1995. As a result, the Bank may no longer use the
percentage of taxable income reserve method. A small thrift (one with $500
million or less in assets) is allowed to use either the specific charge-off
method or the "bank" experience method of Section 585 of the Internal
Revenue Code to compute its bad debt deduction.
Upon repeal, the Bank is generally required to recapture into income the
portion of its bad debt reserve (other than supplemental reserves) that
exceeds its base year (December 31, 1987) reserves. The recapture amount
generally will be taken into income ratably (on a straight-line basis) over
a six-year period. If the Bank meets the residential loan requirement for a
tax year beginning in 1996 or 1997, the recapture of the reserves will be
suspended for such tax year. Thus, the recapture can potentially be deferred
for up to two years.
The Bank has not recognized a deferred tax liability of approximately
$1,246,000 for bad debt reserves for tax purposes which arose in tax years
beginning before December 31, 1987 (i.e., base year). A deferred tax
liability will be recognized if the Bank expects that charges to the bad
debt reserves, other than the losses on loans or recomputations of bad debt
deductions resulting from operating loss carrybacks to prior years, would
result in taxable income. The Bank does not anticipate any such recognition
in the foreseeable future.
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, 1995, 1996 and
1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected income tax expense................................................. $3,410,248 $3,372,841 $3,233,362
Dividends received deduction................................................ (52,263) (88,246) (56,711)
State income taxes, net of Federal tax benefit.............................. 377,920 324,336 222,123
Amortization of goodwill and other, net..................................... 39,608 37,275 50,103
- ------------------------------------------------------------------------------------------------------------------------------------
Total income tax expense.................................................... $3,735,513 $3,646,206 $3,448,877
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset (liability) at July 31, 1996 and 1997 are
as follows:
<TABLE>
<CAPTION>
1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Management recognition plan................................................. $ 216,000 $ 172,000
Allowance for loan losses................................................... 1,059,000 1,210,000
Loan fees................................................................... 81,000 70,000
Uncollected interest........................................................ 93,000 111,000
Accrued bonus............................................................... 65,000 76,000
Goodwill ................................................................... 344,000 485,000
Unrealized loss or securities available for sale............................ 1,059,348 -
SERP expense................................................................ 23,000 65,000
Other....................................................................... - 26,000
- ------------------------------------------------------------------------------------------------------------------------------------
$2,940,348 $2,215,000
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Intangible assets........................................................... 225,000 193,000
Depreciation................................................................ 85,000 94,000
Other....................................................................... 53,000 23,000
Unrealized gain on securities available for sale............................. - 7,999,000
- ------------------------------------------------------------------------------------------------------------------------------------
363,000 8,309,000
Net deferred asset (liability).............................................. $2,577,348 $ (6,094,000)
- ------------------------------------------------------------------------------------------------------------------------------------
</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 deferred tax assets. However there can be no assurance about the levels
of future earnings.
30
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
Note 15
Employee Benefit Plans
Defined 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.
Net pension cost (benefit) for the years ended July 31, 1995, 1996 and 1997
includes the following:
<TABLE>
<CAPTION>
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the period............................ $ 39,095 $ 36,915 $ 62,077
Interest cost on projected benefit obligation............................... 35,103 38,638 46,041
Return on plan assets....................................................... (98,518) (83,128) (414,414)
Net amortization and deferral............................................... 9,832 (45,089) 296,313
- ------------------------------------------------------------------------------------------------------------------------------------
Total pension benefit....................................................... ($14,488) ($ 52,664) ($ 9,983)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth the plan's funded status at July 31, 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of obligations - accumulated benefit
obligation, including vested benefits of $519,641 and $640,793
at July 31, 1996 and 1997, respectively .................................... $ 527,475 $ 675,093
Projected benefit obligation................................................ 569,452 730,831
- ------------------------------------------------------------------------------------------------------------------------------------
Plan assets at fair value .................................................. 1,223,715 1,608,409
- ------------------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation....................... $ 654,263 $ 877,578
Unrecognized net transition obligation...................................... (68,187) (59,663)
Unrecognized prior service cost............................................. (40,748) 37,613)
Unrecognized deferred loss.................................................. (497,219) (722,210)
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost........................................................ $ 48,109 $ 58,092
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 6.5% in fiscal 1996 and 1997.
The assumed long-term rate of return on plan assets was 7.25% in fiscal 1996
and 1997, and the assumed rate of increase in future compensation levels was
5.5% in fiscal 1996 and 1997.
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 participant's Pension Plans Annual Benefit. The
SERP is not a tax-qualified employee benefit plan. The SERP expense was
$84,006 and $97,392 for the years ended July 31,1996 and 1997.
31
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
Note 16
Stock Benefit Plans
Stock Option Plan:
At July 31, 1997, the company has a stock-based compensation plan, which is
described below. The Company applies APB Opinion No. 25 and related
interpretations in accounting for its plan. Accordingly, no compensation
cost is recognized for its fixed stock option plan. Had compensation cost
for the Company's fixed stock option plan been determined consistent with
SPAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income..............................As reported.................. $ 6,274 $6,061
Pro forma.................... 5,951 5,941
Primary earnings per share..............As reported.................. 1.13 1.20
Pro forma.................... 1.07 1.17
Fully diluted earnings per share........As reported.................. 1.13 1.20
Pro forma.................... 1.07 1.17
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1997, respectively; dividend yield
of 0.75 percent for all years; expected volatility of 20 percent; risk-free
interest rates of 5.48 percent and 6.34 percent. The effects of applying
SPAS 123 on the pro forma net income may not be representative of the effect
on the pro forma income for future years.
The Bank adopted a stock option and incentive plan (Option Plan). Pursuant
to the Option Plan, stock options of 959,948 common shares, adjusted for
stock dividends and stock split 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 $7.28 to $14.75 per share. All
options have been adjusted to reflect stock dividends and stock split. At
July 31, 1997, 959,948 granted qualified stock options were outstanding, and
none of the stock options granted were exercised during this period.
A summary of the status of the Company's stock option plan as of July 31,
1995, 1996, and 1997, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
Shares under Weighted - avg.
option exercise price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at July 31, 1994.............................. 644,068 $ 3.76
Grant in fiscal year ended July 31, 1995.................. 79,860 5.64
Expired unexercised in fiscal year ended July 31, 1995 ... 0 0.00
Outstanding at July 31, 1995.............................. 723,928 3.96
- ---------------------------------------------------------------------------------------------------
Grant in fiscal year ended July 31, 1996.................. 196,020 7.28
Expired unexercised in fiscal year ended July 31, 1996 ... 0 0.00
Outstanding at July 31, 1996.............................. 919,948 4.67
- ---------------------------------------------------------------------------------------------------
Grant in fiscal year ended July 31, 1997.................. 40,000 12.33
Expired unexercised in fiscal year ended July 31, 1997 ... 0 0.00
Outstanding at July 31, 1997.............................. 959,948 $ 4.99
- ---------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at July 31, 1997. No stock options were exercised during 1996 and 1997.
<TABLE>
<CAPTION>
Number Weighted Weighted
Exercise outstanding average remaining average
Prices 7131/97 contractual life exercise price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 3.76 644,068 6.4 years $ 3.76
5.64 79,860 7.3 years 5.64
7.28 196,020 8.4 years 7.28
12.07 - 14.75 40,000 9.5 years 12.33
- --------------------------------------------------------------------------------
959,948 $ 4.99
- --------------------------------------------------------------------------------
</TABLE>
Employee Stock Ownership Plan:
The Bank established 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 21. The ESOP Trust purchased 110,000
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. During the fiscal year
ended July 31, 1997, the ESOP Trust purchased an additional 15,000 shares
for $446,881.
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 ESOP loan is a reverse repurchase agreement, with interest payable
monthly and principal payable equal to the shares allocated.
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 adopted an MSBP 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 December 22, 1993, 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 MSBP shares purchased in the conversion initially
were recorded as a contra equity account excluded from stock-
holders'equity. The Bank recognizes 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. Compensation expense attributable to the MSBPs
amounted to $305,800, $319,522 and $290,400 in 1995, 1996 and 1997,
respectively. The shares are entitled to all voting and other stockholder
rights, except that the shares, while restricted, cannot be sold, pledged or
otherwise disposed of, and are required to be held in escrow.
If a holder of restricted stock under the MSBP terminates employment for
reasons other than death, disability, or retirement following five years of
service or change of control in the Bank, such employee forfeits all rights
to any allocated shares which are still restricted. If termination is caused
by death, disability, retirement or change in control of the Bank, all
allocated shares become unrestricted.
33
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
Note 17
Commitments and Contingencies
At July 31, 1997, the Bank was obligated under non-cancelable operating
leases for premises and equipment as follows (in thousands):
- ----------------------------------------------
1998............................$ 137,312
1999............................ 116,985
2000............................ 94,560
2001............................ 94,560
Thereafter...................... 39,400
- ----------------------------------------------
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.
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 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 judgments 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. Total and Tier I
capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of July 31, 1997, that the Bank meets all capital
adequacy requirements to which it is subject.
As of July 31, 1997, 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 I leverage ratios as set forth in the table below. There
are no conditions or events since that notification that management believes
have changed the institution'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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of July 31, 1996:
Total capital (to risk-weighted assets)................. $ 41,540,507 19.3% $ 17,211,156 8.0% $ 21,513,945 10.0%
Tier 1 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, 1997:
Total capital (to risk-weighted assets)................. $ 45,129,304 17.0% $ 21,245,864 8.0% $ 26,557,330 10.0%
Tier 1 capital (to risk-weighted assets)................ 36,120,761 13.6% 10,622,932 4.0% 15,934,398 6.0%
Tier 1 capital (to average assets)...................... 36,120,761 7.6% 19,107,837 4.0% 23,884,796 5.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
Note 19
Stock Repurchase Program
Lakeview Financial Corp. has repurchased shares beginning on October 28,
1994, under its stock repurchase programs. The repurchased shares have been
held as treasury stock and are available for general corporate purposes. The
Bank has completed the repurchase of 1,932,450 shares as of July 31, 1997.
Note 20
Fair Value of Financial Instruments
Accounting Standards No. 107, "Disclosure about Fair Value of Financial
Instruments" (SEAS 107), requires disclosures of information about the fair
value of all 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, 1996 and 1997:
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 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.
35
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
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, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
Carrying amount Fair value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1996:
Financial assets:
Cash and cash equivalents................................................... $ 6,902,040 $ 6,902,040
Investment securities held to maturity...................................... 40,821,195 40,083,449
Investment securities 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 ................................................................. 54,721,429 54,721,429
- ------------------------------------------------------------------------------------------------------------------------------------
1997:
Financial assets:
Cash and cash equivalents................................................... $ 5,399,466 $ 5,399,466
Investment securities held to maturity...................................... 42,681,799 41,934,692
Investment securities available for sale ................................... 105,592,249 105,592,249
Mortgage-backed securities held to maturity................................ 102,248,545 102,343,945
Loans receivable, net....................................................... 224,563,595 229,260,441
Federal Home Loan Bank of New York stock.................................... 3,550,000 3,550,000
Financial liabilities:
Deposits ................................................................... 370,787,103 374,661,012
Borrowings.................................................................. 63,603,825 63,603,825
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 21
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or
potential common stock. SFAS 128 replaces the presentation of primary EPS
with a presentation of basic EPS and requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted and requires
restatement of all prior-period EPS data presented. If the Bank had adopted
SFAS 128 basic EPS would have been $1.00, $1.13, and $1.20 for 1995, 1996,
and 1997, respectively. Dilluted EPS would have been the same as the
earnings per share reported.
36
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income ("SFAS 130") establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses,
gains, and losses) in a full set of general - purpose financial statements.
SFAS 130 requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid in capital in the equity section
of a statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required.
Management has not yet determined the impact of the adoption on its
reporting of operations.
Note 22
Savings Association Insurance Fund "SAIF' Recapitalization Assessment
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposes a
special one-time assessment on SAIF member institutions, including the Bank,
to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a
special assessment of 65.7 basis points on SAIF assessable deposits held as
of March 31, 1995, payable November 27, 1996. The special assessment was
recognized as an expense on September 30, 1996 and is tax deductible. The
Bank incurred a pre tax charge of $2.2 million in 1997 as a result of the
FDIC special assessment.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning
January 1, 1997, BIF deposits will be assessed for FICO payments at a rate
of 20% of the rate assessed on SAIF deposits. BIF deposits will be assessed
a FICO payment of 1.3 basis points, while SAIF deposits will pay an
estimated 6.5 basis points on the FICO bonds. Full pro rata sharing of the
FICO payments between BIF and SAIF will be merged on January 1, 1999
provided no savings associations remain as of that time.
As a result of the Funds Act, and recently passed legislation, SAIF
assessments were lowered to 0 to 27 basis points effective January 1, 1997,
a range comparable to that of BIF members. However, SAIF members will
continue to make the higher FICO payments described above. Management cannot
predict the level of FDIC insurance on whether the SAIF will eventually be
merged. The Bank paid $375,529, $794,011 and $581,768 in Federal deposit
insurance premiums for the fiscal years ended July 31, 1995, 1996 and 1997,
respectively.
Note 23
Subsequent Event
On September 10, 1997, Lakeview signed a definitive agreement providing for
the merger of Lakeview and Westwood Corporation ("Westwood"), the holding
company of Westwood Savings Bank, a New Jersey Savings Bank with total
assets of $111 million located in Westwood New Jersey, into Lakeview.
Lakeview will acquire 100% of the outstanding stock of Westwood. Shares of
Westwood Common Stock will be exchanged for $29.25, payable in the aggregate
in the form of 50% cash and 50% Lakeview Common Stock. The number of shares
of Lakeview Common Stock to be exchanged for Westwood Common Stock will be
determined based upon the average market price of Lakeview Common Stock
during the 15 trading days one week prior to the closing date. The
transaction is subject to certain contingencies including satisfaction of
State and Federal regulatory approvals, approval by the shareholders of
Westwood and receipt of a fairness opinion by Westwood. It is anticipated
that the transaction will occur in the first calendar quarter of 1998. The
transaction is expected to be accounted for under the purchase method.
Note 24
Parent Company Only
At fiscal year end 1997, 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
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Condensed Statement of Financials (Parent Company Only)
Condensed Balance Sheet 1996 1997
----------------------------------------------------
<S> <C> <C>
Assets
Cash on hand and in banks................................................... $ 244,371 $ 167,943
Investments in subsidiaries................................................. 45,515,234 51,973,415
Investment securities available for sale.................................... - 720,000
Other assets................................................................ 75 297,128
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets................................................................ $45,759,680 $53,158,486
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Borrowings.................................................................. - 2,000,000
Other Liabilities........................................................... - 832,306
Stockholders' equity........................................................ 45,759,680 50,326,180
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and Stockholders' equity.................................. $45,759,680 $53,158,486
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Income
Year ended July 31, 1995, 1996, and 1997 1995 1996 1997
----------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiary................................................... $ 4,619,027 $ 7,650,404 $ 5,550,807
Other income................................................................ 36,836 - 13,384
- ----------------------------------------------------------------------------------------------------------------------------------
Total income................................................................ 4,655,863 7,650,404 5,564,191
Interest expense............................................................ - - 47,556
Other expense............................................................... 17,431 34,957 60,846
- ----------------------------------------------------------------------------------------------------------------------------------
Total expense............................................................... 17,431 34,957 108,402
Net income before taxes..................................................... 4,638,432 7,615,447 5,455,789
Taxes expense............................................................... 4,612 1,964 (11,674)
- ------------------------------------------------------------------------------------------------------------------------------------
Undistributed income (loss) of subsidiary................................... 1,660,807 (1,339,569) 593,548
- ----------------------------------------------------------------------------------------------------------------------------------
Net income................................................................. . $ 6,294,627 $ 6,273,914 $ 6,061,011
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Year ended July 31, 1995, 1996 and 1997 1995 1996 1997
----------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................................. $ 6,294,627 $ 6,273,914 $ 6,061,011
Adjustments to reconcile net income to net cash
provided by operating activities
Undistributed (income) loss from subsidiary................................. (1,660,807) 1,339,569 (593,548)
Investment in subsidiaries.................................................. 99,997 (250,180) (150,000)
Change in other assets...................................................... - (75) (350,733)
Change in other liabilities................................................. 4,574 (4,824) 832,306
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activity..................................... 4,738,391 7,358,404 5,799,036
- ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of treasury stock.................................................. (3,970,106) (6,685,014) (6,702,876)
Purchase of investment securities available for sale........................ - - (585,600)
Dividend paid............................................................... (615,430) (581,874) (586,988)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities....................................... (4,585,536) (7,266,888) (7,875,464)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in borrowings...................................................... - - 2,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities................................... - - 2,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents..................................... 152,855 91,516 (76,428)
Cash and cash equivalents at beginning of period............................ - 152,855 244,371
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period.................................. $ 152,855 $ 244,371 $ 167,943
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
Building Value GRAPHICS OMITTED [CUBE [$]]
- --------------------------------------------------------------------------------
Note 25
Quarterly Financial Data (Unaudited)
The following table contains quarterly financial data for the years ended
July 31, 1996 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended July 31, 1996 Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share restated for stock split........ $ 0.19 $ 0.29 $ 0.30 $ 0.35 $ 1.13
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended July 31, 1997 Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Interest Income.............................. $ 8,058 $7,983 .$ 8,372 $ 8,429 $ 32,842
Total Interest Expense............................. 4,209 4,357 4,312 4,440 17,318
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision
for Loan Losses.................................... 3,849 3,626 4,060 3,989 15,524
Provision for Loan Losses.......................... 105 256 300 300 961
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses.................................... 3,744 3,370 3,760 3,689 14,563
Total Other Income................................. 1,614 3,166 972 2,350 8,102
Total Other Expense................................ 4,801 2,649 2,847 2,858 13,155
Net Income Before Taxes............................ 557 3,887 1,885 3,181 9,510
Federal and State Income Taxes..................... 211 1,417 546 1,275 3,449
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income......................................... $ 346 $2,470 $ 1,339 $ 1,906 $ 6,061
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings per share restated for stock split........ $ 0.06 $ 0.48 $ 0.27 $ 0.39 $ 1.20
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
[L, F, C CUBES GRAPHICS OMITTED] LAKEVIEW FINANCIAL CORP. 1997 ANNUAL REPORT
----------------------------------------------------------------------------
Independent Auditors' Report
[KPMG LOGO] KPMG Peat Marwick LLP
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, 1996 and 1997, 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, 1997.
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 management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lakeview
Financial Corp. and subsidiaries as of July 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in
the three-year period ended July 31, 1997 in conformity with generally
accepted accounting principles.
/s/KPMG Peat Marwick LLP
Short Hills, New Jersey
September 4, 1997, except as to note 23,
which is as of September 10, 1997.
40
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 4, 1997, relating to the
consolidated balance sheets of Lakeview Financial Corp. and subsidiaries as of
July 31, 1997 and 1996 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, 1997, which report is included in the July 31,
1997 Annual Report on Form 10-K of Lakeview Financial Corp.
/s/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
October 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 5,399,466
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 105,592,249
<INVESTMENTS-CARRYING> 148,480,344
<INVESTMENTS-MARKET> 144,278,637
<LOANS> 227,975,057
<ALLOWANCE> 3,411,462
<TOTAL-ASSETS> 505,882,200
<DEPOSITS> 370,787,103
<SHORT-TERM> 63,603,825
<LIABILITIES-OTHER> 9,682,137
<LONG-TERM> 0
0
0
<COMMON> 6,441,504
<OTHER-SE> 55,367,631
<TOTAL-LIABILITIES-AND-EQUITY> 505,882,200
<INTEREST-LOAN> 16,841,183
<INTEREST-INVEST> 16,000,942
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 32,842,125
<INTEREST-DEPOSIT> 13,987,512
<INTEREST-EXPENSE> 17,318,054
<INTEREST-INCOME-NET> 15,524,071
<LOAN-LOSSES> 961,217
<SECURITIES-GAINS> 4,787,866
<EXPENSE-OTHER> 13,154,566
<INCOME-PRETAX> 9,509,888
<INCOME-PRE-EXTRAORDINARY> 6,061,011
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,061,011
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 3.31
<LOANS-NON> 3,810,869
<LOANS-PAST> 3,810,869
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,073,158
<CHARGE-OFFS> 699,263
<RECOVERIES> 76,349
<ALLOWANCE-CLOSE> 3,411,462
<ALLOWANCE-DOMESTIC> 3,411,462
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
