SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|X| EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
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- or -
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|_| EXCHANGE ACT OF 1934
For the transition period from to
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Commission Number: 0-25106
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LAKEVIEW FINANCIAL CORP.
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(Exact name of Registrant as specified in its Charter)
New Jersey 22-3334052
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1117 Main Street, Paterson, New Jersey 07503
- -------------------------------------- -------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (973) 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing price of the registrant's Common Stock
on October 13, 1998 was $38.1 million.
As of October 13, 1998 there were issued and outstanding 4,818,478
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, 1998. (Parts II and IV)
2. Portions of Proxy Statement for the 1998 Annual Meeting of Stockholders.
(Part III)
<PAGE>
Part I
Lakeview Financial Corporation (the "Company") may from time to time
make written or oral "forward-looking statements", including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this Annual Report on Form 10-K and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Business
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General
The Company, a New Jersey Corporation, is a unitary savings and loan
holding company. The principal asset of the Company consists of 100% of the
issued and outstanding shares of common stock of Lakeview Savings Bank
("Lakeview" or the "Savings Bank"). On February 27, 1998, the Company acquired
Westwood Financial Corporation ("Westwood"), the holding company of Westwood
Savings Bank ("Westwood Bank"), Westwood, New Jersey. With the completion of the
Westwood Acquisition, the Company added two additional Bergen County branches
and three additional ATM's, bringing the total branch network to ten branches
and nine ATM's. In September 1998, the Company's eleventh branch office was
opened in Fairview, Bergen County, New Jersey.
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.
<PAGE>
On October 8, 1998, the Company announced that the Company's Board of
Directors has been evaluating strategic alternatives in order to maximize
shareholder value. Included in the Company strategic alternatives is a possible
sale of the Company; however, at this time, it is not possible to determine
whether the Company will receive any expressions of interest or, if so, whether
any such expressions of interest will be acceptable or result in the Company
entering into negotiations with any potential acquirer. The Company has retained
Sandler O'Neill & Partners, L.P. to assist in its evaluation of its
alternatives. As a matter of policy, the Company does not intend to comment
publicly concerning any proposals that may be received or any possible
negotiations the Company may enter into in connection with any such proposals
until the Company determines that public disclosure would be appropriate.
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 this 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.
2
<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>
1994 1995 1996 1997 1998
------------------ ------------------- ---------------- ----------------- -------------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
(Dollars in thousands)
TYPE OF LOAN:
Real Estate Loans:
Construction loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential (1-4 family)..........$ 190 .13% $ 915 .63% $ 863 .52% $ -- --% $ 300 .10%
Multi-family/commercial........... 550 .40 -- -- -- -- 377 .16 1,797 .61
-------- ---- ------- ------ ------- ------ ------- ------- ------ -----
Total construction loans........ 740 .53 915 .63 863 .52 377 .16 2,097 .71
Residential (1-4 family)............ 79,383 57.33 84,051 57.81 84,006 50.35 82,647 36.22 99,184 33.97
Multi-family/Commercial............. 20,879 15.08 22,186 15.26 33,063 19.81 68,192 29.89 79,386 27.19
Commercial loans.................... -- -- -- -- 697 .42 8,982 3.94 14,186 4.86
Home equity, second mortgage and
home improvement loans............. 36,223 26.16 37,221 25.60 46,705 27.99 66,057 28.95 93,633 32.07
Consumer Loans:
Passbook account loans.............. 1,242 .90 1,022 .70 1,517 .91 1,914 .84 3,508 1.20
Student loans....................... 6 -- 1 -- -- -- -- -- -- --
-------- ------ ------- ------ -------- ------ ------- ------- --------- ------
Total loans.........................$138,473 100.00% $145,396 100.00% $166,851 100.00% $228,169 100.00% $291,994 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY:
Real Estate Loans
1-4 family..........................$116,346 84.02% $119,885 82.46% $124,467 74.60% $133,852 58.66% $174,191 59.66%
Multi-Family/Commercial............... 20,879 15.08 24,488 16.84 40,170 24.07 83,421 36.56 100,109 34.28
Consumer Loans:
Passbook accounts................... 1,242 .90 1,022 .70 1,517 .91 1,914 .84 3,508 1.20
Student loans....................... 6 -- 1 -- -- -- -- -- -- --
Commercial loans...................... -- -- -- -- 697 .42 8,982 3.94 14,186 4.86
-------- ------- -------- ------ ------- ------ ------- ------- ------ ------
Total loans.........................$138,473 100.00% $145,396 100.00% $166,851 100.00% $228,169 100.00% $291,994 100.00%
======= ======= ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
3
<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 the 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, 1998, one year,
three year, and five year ARM loans totaled $34.0 million or 34.2% of the one-
to four family portfolio. 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.
4
<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.
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.
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, 1998, $ 6.8 million was outstanding. To date, such loan is
not in compliance with the Savings Bank's loans to one borrower limit. In
addition, the Company has a 5.40% investment in IMC. See "-- Loans to One
Borrower."
5
<PAGE>
Loan Maturity Table
The following table sets forth the maturity of the Savings Bank's loan
portfolio at July 31, 1998. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $42.0 million during the year ended July 31, 1998. Adjustable-rate
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Home Equity,
Multi-Family Second Mortgage
1-4 Family and and Home
Real Estate Commercial Improvement Commercial
Mortgage Real Estate(2) Loans(1) Loans Total
-------- -------------- -------- ----- -----
(In thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C>
Within 3 months............... $ 842 $ 2,123 $ 5,625 $ 1,351 $ 9,941
3 months to 1 Year............ 1,275 1,671 4,793 8,910 16,649
------ ------ ------ ------ -------
2,117 3,794 10,418 10,261 26,590
After 1 year:
1 to 3 years................ 6,228 3,771 5,981 1,525 17,505
3 to 5 years................ 6,009 9,144 22,488 2,400 40,041
5 to 10 years............... 19,965 18,581 20,810 - 59,356
10 to 20 years.............. 38,896 41,094 37,144 - 117,134
Over 20 years............... 25,969 5,099 300 - 31,368
------ ------ ------ ------- -------
Total due after one year...... 97,067 77,689 86,723 3,925 265,404
------ ------ ------ ------ -------
Total amount due.............. $99,184 $81,483 $97,141 $14,186 $291,994
====== ====== ====== ====== =======
</TABLE>
(1) Also includes passbook and student loans.
(2) Also includes construction loans.
The following table sets forth the dollar amount of all loans due after
July 31, 1999, 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..................... $ 63,584 $ 33,783 $ 97,367
Multi-family and commercial real estate 21,138 56,251 77,389
Home equity, second mortgage and
home improvement loans............... 56,217 30,506 86,723
Commercial loans....................... - 3,925 3,925
-------- ------- -------
Total................................ $140,939 $124,465 $265,404
======= ======= =======
</TABLE>
6
<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, 1998 was $5.3
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,
1998, the Savings Bank's maximum loan-to-one borrower limit was $5.4 million and
its largest loans to one borrower relationship was a commercial line of credit
(the "IMC line of credit") with $6.8 million outstanding. The second largest
loans to one borrower relationships are aggregated loans of $5.5 million
outstanding, secured by multi-family properties in Englewood Cliffs and
Glenrock, New Jersey. Such loans were in compliance with regulations applicable
at the time the loans were originated. The Savings Bank is currently in the
process of remedying such non-compliance. Both loans are performing in
accordance with contractual terms.
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.
7
<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,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars In thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 family
dwelling units(1)........................ $ 8,362 $ 3,143 $ 2,316 $ 3,007 $ 1,884
All other mortgage loans................... 566 229 101 804 910
--------- --------- --------- ---------- ----------
Total........................................ $ 8,928 $ 3,372 $ 2,417 $ 3,811 $ 2,794
======== ======== ======== ========= =========
Real estate owned (net of allowance)......... $ 3,762 $ 3,608 $ 1,667 $ 1,929 $ 505
======== ======== ======== ========= =========
Other non-performing assets.................. $ -- $ 850 $ 494 $ -- $ --
======== ======== ======== ========= =========
Total non-performing assets.................. $ 12,690 $ 7,830 $ 4,578 $ 5,740 $ 3,299
======== ======== ======== ========= =========
Total non-performing loans to
net loans.................................. 6.56% 2.37% 1.48% 1.70% .97%
==== ==== ==== ==== ====
Total non-performing loans to
total assets............................... 2.16% .80% .53% .75% .47%
==== ==== ==== ==== ====
Total non-performing assets to total assets.. 3.07% 1.87% 1.00% 1.13% .56%
==== ==== ==== ==== ====
</TABLE>
- ------------------------
(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 have not been recorded as non-accrual loans as of July 31, 1998, totalled
$5.5 million, or .93% of total assets. These loans are accruing but classified
by the Savings Bank as substandard.
For the year ended July 31, 1998, interest income amounting to
approximately $242,000, would have been recognized if interest on loans 90 days
or more in arrears had been recorded based on original contract terms.
8
<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. At
July 31, 1998, the Savings Bank had classified $686,000 as special mention, $7.4
million as substandard, $678,000 as doubtful, and $38,000 as loss.
Mortgage Loans Purchased from Capital Resources. At July 31, 1998, the
Savings Bank had approximately $2.7 million of residential real estate second
mortgage loans that were acquired from Capital Resources, a now defunct mortgage
company. Of this total amount, $643,000 was classified as non-accrual loans and
$2.0 million was classified as performing loans. However, based upon
management's review, $640,000 of these performing loans were considered
potential problem loans. At July 31, 1998, the Savings Bank allocated $934,000
of the loan 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.
9
<PAGE>
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 Savings
Bank'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.
10
<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,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding, net of allowance............ $136,143 $142,123 $163,457 $224,564 $286,869
======= ======= ======= ======= =======
Average loans outstanding............................ $136,165 $139,442 $155,497 $192,822 $252,935
======= ======= ======= ======= =======
Allowance balance (at beginning of
period)............................................ $ 2,638 $ 1,714 $ 2,535 $ 3,073 $ 3,411
Acquired from Westwood............................... -- -- -- -- 428
Provision (credit):
Residential........................................ 1,842 1,493 384 361 800
Commercial real estate............................. (77) (145) 278 500 550
Consumer........................................... 282 28 2 -- --
Commercial......................................... -- -- -- 100 150
Charge-offs:
Residential........................................ (3,069) (1,381) (418) (610) (614)
Commercial real estate............................. -- -- -- (89) (373)
Consumer........................................... (1) (24) (11) -- --
Recoveries:
Residential........................................ 99 850 303 76 126
------- ------- ------- ------- --------
Allowance balance (at end of period)................. $ 1,714 $ 2,535 $ 3,073 $ 3,411 $ 4,478
======= ======= ======= ======= ========
Allowance for loan losses as a percent
of total loans outstanding, net.................... 1.26% 1.78% 1.88% 1.52% 1.56%
Net loans charged off as a percent of
average loans outstanding.......................... 2.18% .40% .08% .32% .34%
</TABLE>
<TABLE>
<CAPTION>
At or for the year ended July 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ----- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Total real estate owned, net of allowance........ $ 3,762 $3,608 $1,667 $1,929 $ 505
====== ===== ===== ===== =====
Allowance balance - beginning.................... $ 823 $ 188 $ -- $ -- $ --
Provision........................................ 713 502 654 44 58
Net charge-offs.................................. (1,348) (690) (654) (44) (58)
------ ----- ------ ------ -----
Allowance balance - ending....................... $ 188 $ -- $ -- $ -- $ --
====== ===== ====== ====== =====
</TABLE>
11
<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,
--------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------ ----------------- ----------------- ----------------- -----------------
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
------ ------- ------ -------- ------ ------ ------- ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential(1)........................ $1,458 84.02% $2,420 82.46% $2,689 74.60% $2,681 58.66% $2,880 59.66%
Multi-family/Commercial real estate... 250 15.08 106 16.84 384 24.07 630 36.56 1,348 34.28
Consumer.............................. 6 .90 9 .70 -- .91 -- .84 -- 1.20
Commercial............................ -- -- -- -- -- .42 100 3.94 250 4.86
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,714 100.00% $2,535 100.00% $3,073 100.00% $3,411 100.00% $4,478 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
</TABLE>
(1) Includes residential construction, home equity, second mortgage and home
improvement loans.
12
<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, 1998, there 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 Savings 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 Savings
Bank purchases mortgage-backed securities guaranteed by GNMA and FNMA and
participation certificates issued by the FHLMC. GNMA mortgage-backed securities
are certificates issued
13
<PAGE>
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, 1998, 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, 1998 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) and 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, 1998, the Savings Bank had CMOs with an
aggregate carrying amount (including discounts and premiums) of $43.4 million,
of which $8.6 million, or 19.8% 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.
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,
14
<PAGE>
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, 1998, the market value of the
investment securities that are held to maturity was $83.1 million and the market
value of investment securities available for sale was $37.9 million, with a cost
basis of $29.6 million.
<TABLE>
<CAPTION>
At July 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Investment Securities:
U.S. agency securities available for sale(1).. $ -- $ -- 58,045 $ 48,781 $ 2,995
U.S. agency securities held to maturity....... 61,662 55,738 40,821 42,682 81,965
Mortgage-backed securities held to
maturity..................................... 173,067 175,375 121,462 102,249 101,771
Equity securities available for sale(1)....... 11,269 8,567 12,601 41,846 21,862
Municipal bonds available for sale(1)......... -- -- 3,083 -- --
Municipal bonds held to maturity.............. -- -- -- -- 1,866
GNMA mortgage-backed securities
available for sale(1)....................... -- -- 4,684 4,192 3,352
FNMA/FHLMC CMO securities
available for sale(1)....................... -- -- 2,034 1,489 1,038
Private Issue CMO securities
available for sale(1)....................... -- -- 9,521 9,284 8,620
Equity securities restricted for sale(2)...... -- -- 7,806 -- --
Other Securities.............................. 975 -- -- -- --
------- ------- ------- ------- -------
Total Investment Securities................. 246,973 239,680 260,057 250,523 223,469
Interest-bearing deposits..................... -- 5,632 -- -- --
Federal funds sold............................ 850 -- -- -- 39,900
FHLB stock.................................... 1,856 2,587 2,587 3,550 4,626
------- ------- ------- ------- -------
Total Investments........................... $249,679 $247,899 $262,644 $254,073 $267,995
======= ======= ======= ======= =======
</TABLE>
- ---------------------
(1) Carried at market value.
(2) In 1996, equity securities restricted for sale ("IMC investment") 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.
15
<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, 1998 by contractual maturity. The
expected maturities may differ from contractual maturities due to the terms of
the securities which may have callable or prepayment obligations.
<TABLE>
<CAPTION>
After One Through After Five Through Over
One Year or Less Five Years Ten Years Ten Years Totals
----------------- ----------------- ------------------ ---------------- ----------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- ------ -------- ------- -------- -------- -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. agency securities available
for sale............................... $ 2,995 5.34% $ -- --% $ -- --% $ -- --% $ 2,995 5.34%
U.S. agency securities held to maturity. 3,500 5.49 1,500 6.71 22,000 7.27 54,965 7.47 81,965 7.32
Mortgage-backed securities held to
maturity............................... 8,887 6.17 25,127 5.83 13,934 6.16 53,823 6.14 101,771 6.07
Equity securities available for sale(1). 21,862 .51 -- -- -- -- -- -- 21,862 .51
Municipal bonds held to maturity........ 1,459 3.55 407 5.25 -- -- -- -- 1,866 3.92
FHLB stock(1)........................... 4,626 7.43 -- -- -- -- -- -- 4,626 7.43
GNMA mortgage-backed securities
available for sale.................... -- -- -- -- -- -- 3,352 8.26 3,352 8.26
FNMA/FHLMC CMO's
available for sale.................... -- -- -- -- -- -- 1,038 6.84 1,038 6.84
Private issue CMO's
available for sale.................... -- -- -- -- -- -- 8,620 6.36 8,620 6.36
Federal funds........................... 39,900 5.50 -- -- -- -- -- -- 39,900 5.50
------ ------- -------- -------- -------
Total................................. $83,229 4.29% $27,034 5.75% $35,934 6.74% $121,798 6.82% $267,995 5.92%
====== ==== ====== ==== ====== ==== ======= ==== ======= ====
</TABLE>
- ------------------
(1) Equity securities and other securities have been classified as maturing in
one year or less, since they have no stated maturity.
16
<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, 1998.
Deposit Portfolio. Deposits in the Savings Bank as of July 31, 1998, 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
- -------- ---- ------------- -------------- ------- -------------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW Accounts None 1.31% $ 250 $ 73,335 16.05% $ 61,072
Regular Savings and Club
Accounts None 2.24 100 93,213 20.40 82,427
Money Market Checking
Accounts None 2.35 2,500 10,763 2.36 8,805
Money Market Passbook
Accounts None 2.54 7,500 16,917 3.70 17,289
Certificates of Deposit:
Fixed Term, Fixed Rate 3-6 Months 4.51 2,500 28,324 6.20 31,592
Fixed Term, Fixed Rate 7-12 Months 5.43 500 177,910 38.94 135,921
Fixed Term, Fixed Rate 13-30 5.29 500 39,103 8.56 48,683
Months
Fixed Term, Fixed Rate 31-120 5.43 500 16,600 3.63 16,158
Months
Fixed Term, Variable Rate 18 Months 5.26 500 715 .16 742
------- ------ -------
Total $456,880 100.00% $402,689
======= ====== =======
</TABLE>
17
<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,
1998.
Certificates
Maturity Period of Deposits
- --------------- --------------
(In thousands)
Within three months................... $ 8,199
Three through six months.............. 10,454
Six through twelve months............. 10,160
Over twelve months.................... 1,786
------
$30,599
======
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 utilizes 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, 1998, the Savings Bank had
$55.0 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 utilizes 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 $62.8
million. The line of credit has a term of one year and expired in August 1998.
This program has the same collateral requirement as the Regular Advance Program.
At July 31, 1998, the Savings Bank had no borrowings 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.
18
<PAGE>
The following tables set forth certain information regarding borrowings
by the Savings Bank.
<TABLE>
<CAPTION>
As of July 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Weighted average rate paid on:
<S> <C> <C> <C> <C> <C>
FHLB advances/line of credit............................ 4.44% 5.81% 5.79% 5.53% 5.64%
Reverse Repurchase Agreements........................... -- -- 6.33 5.47 --
Line of credit.......................................... -- -- -- 8.00 8.08
ESOP.................................................... 7.54 8.96 9.12 6.16 5.93
</TABLE>
<TABLE>
<CAPTION>
During the Year Ended July 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Maximum amount of borrowings outstanding during the year:
FHLB advances/line of credit............................ $ 51,909 $ 32,000 $ 50,460 $ 68,500 $89,900
Reverse Repurchase Agreement............................ -- -- 20,000 40,000 --
Line of credit.......................................... -- -- -- 2,000 9,450
ESOP.................................................... 1,100 1,021 859 2,354 8,782
Maximum amount of short-term borrowings outstanding
at any month end with respect to:
FHLB advances/line of credit............................ $36,000 $30,500 $49,450 $67,750 $85,250
Reverse Repurchase Agreement............................ -- -- 20,000 20,000 --
Line of credit.......................................... -- -- -- 2,000 9,450
ESOP.................................................... 1,100 1,021 859 2,354 8,782
</TABLE>
Subsidiaries
Branchview, Inc. ("Branchview")
Branchview, a New Jersey corporation owned by the Company, has a 5.40%
interest in IMC. IMC is a mortgage banking company involved in the origination
and securitization of equity mortgage products. At July 31, 1998, the market
value of the IMC stock was $16.6 million with a cost basis of $7.8 million. On
October 16, 1998, IMC announced that they intend to explore financial and
strategic alternatives including the possible sale of IMC. At such date the
market value of the IMC stock decreased to $1.8 million. For further information
please refer to the Annual Report - Note 22 to the Consolidated Financial
Statements.
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, 1998, the Company
recorded net consolidated income before taxes of $62,000. During fiscal 1998,
LMD closed its Pennsylvania office and its sole office is located in New Jersey.
19
<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. The
Savings Bank dissolved the Agreement during 1998 and LCCS is currently inactive.
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.
Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Savings Bank's market risk arises primarily from interest rate
risk inherent in its lending, investment and deposit taking activities. The
Savings Bank's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Savings Bank's earnings to the extent that the interest rates borne by assets
and liabilities do not change at the same speed, to the same extent or on the
same basis. To that end, management actively monitors and manages its interest
rate risk exposure.
The principal objective of the Savings Bank's interest rate risk
management is to evaluate the interest rate risk inherent in certain balance
sheet accounts, determine the level of risk appropriate given the Savings Bank's
business strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, the Savings Bank seeks
to minimize the vulnerability of its operations to changes in interest rates.
The Savings Bank's Board of Directors reviews their interest rate risk position
quarterly. The Savings Bank's Asset/Liability Committee is comprised of the
Savings Bank's senior management under the direction of the Board of Directors,
with senior management responsible for reviewing with the Board of Directors its
activities and strategies, the effect of those strategies on the Savings Bank's
net interest margin, the market value of the portfolio and the effect that
changes in interest rates will have on the Savings Bank's portfolio and the
Savings Bank's exposure limits.
The Savings Bank utilizes the following strategies to manage interest
rate risk: (1) emphasizing the origination and retention of fixed-rate mortgage
loans having terms to maturity of not more than 15 years, adjustable-rate loans
and consumer loans consisting primarily of home equity loans and lines of
credit; (2) selling substantially all fixed-rate conforming mortgage loans with
terms of thirty years without recourse and on a servicing-retained basis; and
(3) investing primarily in adjustable-rate mortgage-backed securities, which may
generally bear lower yields as compared to longer term investments, but which
better position the Savings Bank for increases in market interest rates, and
holding the majority of these securities as available for sale. The Savings Bank
currently does not participate in hedging programs,
20
<PAGE>
interest rate swaps or other activities involving the use of off-balance sheet
derivative financial instruments, but may do so in the future to mitigate
interest rate risk.
Net Portfolio Value. The Savings Bank's interest rate sensitivity in
monitored by management through the use of the inhouse model which estimates the
change in the Savings Bank's net portfolio value ("NPV") over a range of
interest rate scenarios. The NPV is defined as the current market value of
assets, minus the current market value of liabilities, plus or minus the current
value of off-balance sheet items. The market values are estimated through two
cash flow-based valuation methodologies and an option-based valuation model: (1)
static discounted cash flow analysis, (2) an option-based pricing analysis
(modified discounted cash flow analysis to value embedded options), and (3) the
Black-Scholes model to value-off balance sheet items. The change in NPV measures
an institution's vulnerability to changes in interest rates by estimating the
change in the market value of an institution's assets, liabilities, and off-
balance sheet contracts in response to an instantaneous change in the general
level of interest rates.
The following table lists the Savings Bank's percentage changes in NPV
assuming an immediate change of plus or minus of up to 400 basis points from the
level of interest rates at July 31, 1998. As the table shows, increases in
interest rates would result in decreases in the Savings Bank's NPV, while
decreases in interest rates would result in increases in the Savings Bank's NPV.
All market risk instruments presented in this table are held to maturity or
available for sale. The Savings Bank has no trading securities.
Changes In
Market Rate
Interest Rates
In Basis NPV as a % of Portfolio
Points Net Portfolio Value Value of Assets
------------- ---------------------------------- -------------------------
Basis Points
(Rate Shock) Amount $ Change % Change NPV Ratio % Change
------------- --------- ----------- --------- ----------- --------
(Dollars in thousands)
+400 35,185 (21,352) (38) 6.68 (316)
+300 42,675 (13,862) (25) 7.90 (194)
+200 48,977 (7,560) (13) 8.85 (99)
+100 54,111 (2,426) (4) 9.57 (27)
0 56,537 - - 9.84 -
-100 60,288 3,751 7 10.29 45
-200 61,319 4,782 8 10.31 47
-300 59,870 3,333 6 9.96 12
-400 59,047 2,510 4 9.70 (14)
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Savings Bank's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being
21
<PAGE>
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly, although
the NPV measurements and net interest income models provide an indication of the
Savings Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Savings Bank's net interest
income and will differ from actual results.
The following table shows the Savings Bank's financial instruments that
are sensitive to changes in interest rates, categorized by expected maturity,
and the instruments' fair values at July 31, 1998. Market risk sensitive
instruments are generally defined as on-and-off-balance sheet derivatives and
other financial instruments.
Expected Maturity/Principal Repayment at July 31,
<TABLE>
<CAPTION>
Interest Total Fair
Rates 1999 2000 2001 2002 2003 Thereafter Balance (1) Value
-------- --------- -------- -------- --------- -------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
- -----------------------
Mortgage loans.............. 8.33% $ 21,171 $16,660 $17,413 $15,647 $14,709 $95,067 $180,667 $181,433
Home equity, second
mortgage and home
improvements loans........ 9.01% 18,468 9,803 8,568 13,126 11,195 35,981 97,141 97,553
Commercial loans............ 9.88% 10,574 1,477 266 1,375 494 -- 14,186 14,541
Mortgage-backed
securities held
to maturity............... 6.07% 9,646 15,394 24,691 6,033 12,631 33,376 101,771 101,798
Investment securities held
to maturity(1)............ 6.71% 108,773 5,697 1,533 -- -- 12,354 128,357 127,635
Securities available for
sale...................... 3.08% 26,158 1,171 1,054 948 853 7,683 37,867 37,867
Interest-bearing liabilities
- ----------------------------
NOW and money market
accounts.................. 1.38% 2,691 29,767 29,767 10,370 10,370 18,050 101,015 101,015
Savings and clubs
accounts.................. 2.24% -- 27,964 27,964 9,321 9,321 18,643 93,213 93,213
Certificates of deposits.... 5.31% 238,165 17,734 4,855 814 983 101 262,652 266,215
FHLB of New York
advances.................. 5.43% 10,000 30,000 -- -- -- 15,000 55,000 63,086
Line of credit.............. 8.25% 9,928 -- -- -- -- -- 9,928 9,928
ESOP debt................... 8.40% 314 314 314 314 314 7,213 8,783 8,783
</TABLE>
- ---------------
(1) Includes federal funds totaling $39.9 million.
Expected maturities are contractual matures adjusted for prepayments of
principal. The Savings Bank uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, call dates, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on the Savings Bank's historical
experience. The Savings Bank's average Constant Prepayment Rate ("CPR") on its
total fixed-rate portfolio is 10%, and 8% on its adjustable-rate portfolio for
interest-earning assets (excluding investment
22
<PAGE>
securities, which do not have prepayment features). For deposit liabilities, in
accordance with standard industry practice and the Savings Bank's own historical
experience, decay factors used to estimate NOW, money market accounts, and
savings accounts were 0% to 30%, 12.5% to 25% and 0% to 30%, respectively.
Employees
At July 31, 1998, the Savings Bank had 70 full-time and 42 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 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 Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the 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
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 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 Company generally is not subject to activity restrictions, provided
the Association satisfies the Qualified Thrift Lender ("QTL") test. If the
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."
Insurance of Deposit Accounts. The deposit accounts held by the Savings
Bank are insured by the SAIF to a maximum of $100,000 for each insured member
(as defined by law and regulation). Insurance of deposits may be terminated by
the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
As a member of the SAIF, the Savings Bank pays an insurance premium to
the FDIC equal to a minimum of 0.23% of its total deposits. The FDIC also
maintains another insurance fund, the Savings Bank Insurance Fund ("BIF"), which
primarily insures commercial bank deposits. In 1996, the annual insurance
premium for most BIF members was lowered to $2,000. The lower insurance premiums
for BIF members placed SAIF members at a competitive disadvantage to BIF
members.
23
<PAGE>
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. Beginning January 1,
1997, the deposit insurance assessment for most SAIF members was reduced to
.064% of deposits on an annual basis through the end of 1999. During this same
period, BIF members will be assessed approximately .013% of deposits. After
1999, assessments for BIF and SAIF members should be the same. It is expected
that these continuing assessments for both SAIF and BIF members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Savings Bank declined by approximately 70%.
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, 1998.
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.
24
<PAGE>
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.
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.
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, 1998,
the Savings Bank was in compliance with its QTL requirement.
Federal Reserve System. The Board of Governors of the 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, 1998, the Savings Bank met these reserve requirements.
Item 2. Properties and Equipment
- ----------------------------------
The Company and the Savings Bank operate from their main office and 10
branch offices. Of the total, the Savings Bank leases three branch offices and
all other branch offices are owned by the Savings Bank.
25
<PAGE>
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, 1998 (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 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Refer to Market Risk disclosure beginning on page 20.
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.
26
<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 Directors, 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, 1998 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, 1998,
together with the related notes and the independent
auditors' report of KPMG Peat Marwick LLP,
independent certified public accountants.
27
<PAGE>
(2) Schedules omitted as they are not applicable.
(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***
13 Portions of the 1998 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 October 8, 1998, the Company filed a Form 8-K reporting the
announcement of the Company's evaluation of strategic
alternatives in order to maximize shareholder value.
28
<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 21, 1998.
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 21, 1998.
By: /s/Kevin J. Coogan By:
----------------------------------- ----------------------------
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: By: /s/Anthony G. Gallo
----------------------------------- ----------------------------
Vincent A. Scola Anthony G. Gallo
Director Vice President and Chief
Financial Officer
EXHIBIT 13
<PAGE>
FOCUS '99
Selected Financial Data
The following table sets forth certain information concerning the consolidated
financial condition and operating data of Lakeview Financial Corp. and
Subsidiaries at the dates indicated:
<TABLE>
<CAPTION>
.........................................................................................July 31...........................
.................................................................1994..........1995........1996..........1997.........1998.
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, except share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:......................................
Total assets..................................................$.413,725....$.419,212....$.457,860.....$505,882.....$593,856
Loans receivable, net...........................................136,143......142,123......163,457......224,564......286,869
Mortgage-backed securities held to maturity.....................173,067......175,375......121,462......102,249......101,771
Investment securities held to maturity...........................62,637.......55,738.......40,821.......42,682.......83,831
Securities available for sale....................................11,269........8,567.......89,967......105,592.......37,867
Excess of cost over fair-value of net assets acquired, net.......12,817.......11,497.......10,176........8,856.......18,643
Deposits........................................................344,915......343,489......354,247......370,787......456,880
Total borrowings.................................................19,021.......19,859.......54,721.......63,604.......73,711
Stockholders' equity.............................................46,982.......49,440.......45,760.......61,809.......56,607
Stated book value per share (1)....................................7.30.........8.51.........9.18........13.71........11.60
Tangible book value per share (1) .................................5.30.........6.53.........7.14........11.75.........7.78
Selected Operating Data:
Interest income................................................$.18,947....$..28,430....$..30,972.....$.32,842.....$.37,377
Interest expense..................................................7,735.......13,539.......16,550.......17,318.......19,802
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income..............................................11,212.......14,891.......14,422.......15,524.......17,575
Provision for loan losses.........................................2,047........1,801..........664..........961........1,500
Other income......................................................2,609........7,207........7,030........8,102.......11,812
Other expense.....................................................6,705.......10,266.......10,868.......13,155(2)....12,852
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes........................................5,069.......10,031........9,920........9,510.......15,035
Income taxes......................................................1,813........3,736........3,646........3,449........5,590
- ---------------------------------------------------------------------------------------------------------------------------
Income before accounting changes..................................3,256........6,295........6,274........6,061........9,445
Cumulative effect of accounting changes...........................1,315(3).........-............-............-............-
- ---------------------------------------------------------------------------------------------------------------------------
Net income........................................................4,571........6,295........6,274........6,061........9,445
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share (1)
Basic............................................................N/A.........1.05.........1.22.........1.48.........2.51
Diluted..........................................................N/A.........1.00.........1.14.........1.30.........2.28
Return on average assets...........................................1.16%........1.50% .......1.42% .......1.28% .......1.74%
Return on average equity..........................................12.39%.......13.08%.......13.75% ......13.09% ......17.17%
Cash dividend per common share (1)...................................02...........10...........11...........12...........19
Asset Quality Data:
Non-performing loans..........................................$...8,928....$...3,372....$...2,417.....$..3,811.....$..2,794
Other non-performing..................................................-..........850..........494............-............-
Real estate owned (REO)...........................................3,762........3,608........1,667........1,929..........505
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing assets......................................12,690........7,830........4,578........5,740........3,299
- ---------------------------------------------------------------------------------------------------------------------------
Non-performing assets to total assets..............................3.07%........1.87%........1.00% .......1.13% .........56%
Loan allowances...............................................$...1,714....$...2,535....$...3,073.....$..3,411.....$..4,478
REO allowances......................................................188............-............-............-............-
- ---------------------------------------------------------------------------------------------------------------------------
Total allowances..............................................$ ..1,902....$ ..2,535....$ ..3,073.....$..3,411.....$..4,478
- ---------------------------------------------------------------------------------------------------------------------------
Total allowances to non-performing assets.........................14.99%.......32.38%.......67.13% ......59.43% .....135.74%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Adjusted for stock dividends and splits.
(2) Includes one time SAIF assessment of $2.2 million or $1.5 million, net of
tax (Note 21).
(3) Reflects implementation of Statement of Financial Standards No. 109,
"Accounting for Income Taxes."
1
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
Management Discussion and Analysis of
Financial Condition and Results of Operation
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risks associated with the effect of opening a new
branch, the ability to control costs and expenses, and general economic
conditions. Lakeview Financial Corp. undertakes no obligation to publicly
release the results of any revisions to those forward looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
GENERAL
Lakeview Financial Corp. is organized as a unitary savings and loan holding
company and owns all of the outstanding capital stock of Lakeview Savings Bank
(collectively, the "Company", or "Lakeview"). The Company also has investments
in five subsidiaries, Branchview, Inc. ("Branchview"), Lakeview Mortgage Depot,
Inc. ("LMD"), LVS, Inc. (LVS), Lakeview Investment Services, Inc. ("LISI"), and
North Properties, Inc. ("North Properties"). Lakeview wholly owns all service
corporations, except for LMD, which is 90% owned. LISI and LVS are currently
inactive. In February 1998, the Company closed its operation of Lakeview Credit
Card Services, Inc. ("LCCS"). LCCS was formed during the 1997 fiscal year for
the purpose of issuing secured credit cards with a national mortgage company.
The alliance was unsuccessful in generating any significant revenues and
resulted in a total pretax loss for fiscal 1998 of approximately $98,000 which
was reflected in other operating expenses in fiscal 1998.
On February 27, 1998, the Company's growth was bolstered by its acquisition of
Westwood Financial Corporation and its wholly owned subsidiary, Westwood Savings
Bank (collectively, "Westwood") a $100.2 million savings institution located in
Westwood, Bergen County, New Jersey. Such acquisition was accounted for under
the purchase method of accounting and thus the common shares of Westwood were
exchanged by Lakeview for $29.25, payable in the aggregate, in the form of 50%
cash and 50% Lakeview's common stock. As a result of such exchange, the Company
issued from treasury 401,343 shares of common stock and paid $10.6 million in
cash. With the completion of the Westwood merger, the Company added two
additional Bergen County branches and three additional ATM's, bringing the total
branch network to ten branches and nine ATM's.
In September 1998, the Company's eleventh branch office was opened in Fairview,
New Jersey. The Company expects that its other operating expenses in 1999 may
increase due to the costs associated with the opening of this new branch.
In October 1998, IMC Mortgage Company, L.P. (IMC), in which the Company has an
equity investment and an unsecured line of credit, announced that they intend to
explore financial and strategic alternatives including the possible sale of IMC.
See Note 22 to the Consolidated Financial Statements.
8
<PAGE>
FOCUS '99
FINANCIAL CONDITION
The Company's total assets increased $88.0 million or 17.4%, to $593.9 million
at July 31, 1998 from $505.9 million at July 31, 1997 mainly as a result of the
Westwood acquisition, which increased assets $89.6 million, net of $10.6 million
of cash paid for the acquisition. Net loans receivable and deposits grew 27.8%
and 23.2% to $286.9 million and $456.9 million at July 31, 1998, respectively
from $224.6 million and $370.8 million at July 31, 1997, respectively. The
acquisition of Westwood contributed $40.4 million and $89.6 million toward
overall loan and deposit growth, respectively, during fiscal 1998.
Securities available for sale decreased $67.7 million, or 64.1%, to $37.9
million at July 31, 1998 from $105.6 million at July 31, 1997. The decrease was
mainly attributable to sales of $75.4 million, maturities of $46.0 million,
principal repayments of $2.1 million, and a decrease in market value (before
tax) of $14.0 million offset by purchases of $69.8 million.
Investment securities held to maturity increased $41.1 million or 96.4%, to
$83.8 million at July 31, 1998 from $42.7 million at July 31, 1997. The increase
was due to net purchases of $45.1 million, $34.4 million from the acquisition of
Westwood and was offset by $40.4 million of maturities.
Mortgage-backed securities held to maturity decreased $478,000, or .5%, to
$101.8 million at July 31, 1998, from $102.2 million at July 31, 1997. The
decrease in mortgage-backed securities resulted from principal repayments of
$23.3 million, offset by purchases of $6.0 million and $16.7 million from the
acquisition of Westwood.
Borrowings increased $3.6 million to $64.9 million at July 31, 1998 from $61.3
million at July 31, 1997. Borrowed funds are both short-term and long-term and
consist of lines of credit and Federal Home Loan Bank ("FHLB") advances.
Borrowings - ESOP increased $6.4 million to $8.8 million at July 31, 1998 from
$2.4 million at July 31, 1997. The ESOP trust purchased an additional 349,404
shares for $9.0 million. Such funds were borrowed from an unrelated third party.
See Note 15 to the Consolidated Financial Statements.
The net deferred tax liability and unrealized gain on securities available for
sale, net of tax, decreased to $17,000 and $5.3 million at July 31, 1998,
respectively, from $6.1 million and $14.5 million at July 31, 1997,
respectfully. The decrease in these accounts was primarily attributable to the
decrease in the market value of securities available for sale. The majority of
the decrease in such accounts was attributable to Branchview's investment in
Industry Mortgage Company ("IMC"), which consists of approximately 1.7 million
shares of common stock. At July 31, 1998, the market value of IMC decreased to
$16.2 million from $29.9 million at July 31, 1997. At July 31, 1998,
Branchview's cost basis of IMC was $7.8 million. As of October 16, 1998, the
market value of the IMC stock was $1.8 million.
9
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
MARKET FOR COMMON STOCK
Lakeview's common stock is traded on the Nasdaq National Market under the symbol
of "LVSB". At September 30, 1998, Lakeview had approximately 670 shareholders
(not including the number of persons or entities holding stock in nominee or
street name through various brokerage firms). As a result of continued earnings,
there has been a cash dividend since the fourth fiscal quarter in 1994. The cash
dividend paid was $.0235 in the fiscal quarters ended July and October 1994 and
January 1995; $.0258 in the fiscal quarters ended April, July and October 1995
and January 1996; $.0284 in the fiscal quarters ended April, July and October
1996; $.0313 in the fiscal quarters ended January, April, July and October 1997
and January 1998; and $.0625 in the fiscal quarters ended April and July 1998.
On November 13, 1996 and October 15, 1997, respectively, Lakeview paid a 10%
common stock dividend and a 100% stock dividend (in the form of a two for one
common stock split) to all shareholders of record on October 30, 1996 and
October 1, 1997, respectively. Cash dividends, as described above, and market
prices set forth in the table below, have been adjusted for the stock dividends
declared and paid by Lakeview.
Market prices for the quarters ended:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
...............................................1996........................1997...............................1998............
...............................................Oct...........Jan......Apr......Jul......Oct...........Jan......Apr......Jul...
High .........................................$12.44.......$.15.69...$17.13...$.17.32..$.26.75.....$.26.50...$26.57....$.29.00
Low.............................................9.21.........11.25....13.75.....13.63....16.13.......23.75....23.25......23.00
Closing .......................................11.69.........15.38....13.82.....16.50....24.75.......25.00....23.25......23.50
</TABLE>
Lakeview's ability to pay dividends to shareholders is dependent upon the
earnings from investments and dividends it receives from Lakeview Savings Bank
(the "Bank"). Accordingly, restrictions on the Bank's ability to pay cash
dividends directly affects the payment of cash dividends by the Company. The
Bank may not declare or pay a dividend if the effect would cause the Bank's
regulatory capital to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock form or the regulatory capital requirements imposed by the FDIC.
10
<PAGE>
FOCUS '99
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yields earned on assets and
average costs of liabilities for the periods indicated. Such yields and costs
are derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances.
<TABLE>
<CAPTION>
..........................................................................Years ended July 31,..................................
- --------------------------------------------------------------------------------------------------------------------------------
...................................................1996..........................1997............................1998...........
- --------------------------------------------------------------------------------------------------------------------------------
........................................................................(Dollars in thousands)
................................................Interest...Average.............Interest..Average..............Interest..Average.
.......................................Average...Income/...Yield/.....Average...Income/..Yield/......Average...Income/..Yield/..
.......................................Balance...Expense....Cost......Balance...Expense...Cost.......Balance...Expense...Cost...
- --------------------------------------------------------------------------------------------------------------------------------
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1)................$155,497...$14,131.....9.09%...$192,822...$ 16,841..8.73% .....$252,935..$22,351...8.84%
Mortgage-backed securities
held to maturity...................149,373.....9,605.....6.43.....112,464......7,319..6.51........100,263....6,443...6.43
Investment securities
and federal funds (2)...............47,672.....3,004.....6.30......44,241......3,426..7.75.........66,371....5,111...7.70
Securities availabe for
sale (3)............................58,719.....4,232.....7.21......93,307......5,256..5.63.........88,548....3,472...3.92
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets........411,261....30,972.....7.53.....442,834.....32,842..7.42........508,117...37,377...7.36
Non-interest-earning assets.............29,502.........................30,058..........................34,144...................
- --------------------------------------------------------------------------------------------------------------------------------
Total assets........................$440,763...................... $472,892........................$542,261...................
- --------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits............................$340,771...$14,064.....4.12....$345,829...$.13,988..4.04.%.....$380,710..$15,335....4.03%
Borrowings............................42,162.....2,486.....5.89......59,810......3,330..5.57.........76,107....4,467....5.87
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities........................382,933....16,550.....4.32.....405,639.....17,318..4.27........456,817...19,802....4.33
Non-interest bearing
liabilities...........................12,212.........................20,939..........................30,446...................
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities....................395,145........................426,578.........................487,263...................
Stockholders' equity....................45,618.........................46,314..........................54,998...................
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity..............$440,763.......................$472,892........................$542,261...................
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income..............................$14,422........................$.15,524.......................$17,575..........
- --------------------------------------------------------------------------------------------------------------------------------
Interest rate spread (4).....................................3.21%........................3.15%...........................3.03%.
- --------------------------------------------------------------------------------------------------------------------------------
Net yield on interest-
earning assets (5).........................................3.51%........................3.51%...........................3.46%
- --------------------------------------------------------------------------------------------------------------------------------
Ratio of average interest-
earning assets to average
interest-bearing liabilities...............................1.08x........................1.09x...........................1.11x
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average balances include non-accrual loans.
(2) Includes investment securities held to maturity, federal funds sold,
interest bearing deposits in other financial institutions and Federal Home
Loan Bank of New York stock.
(3) At market value.
(4) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
11
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company 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>
.............................................................................Years ended July 31,..............................
- ------------------------------------------------------------------------------------------------------------------------------
..............................................................1996 vs. 1997........................1997 vs. 1998...............
- ------------------------------------------------------------------------------------------------------------------------------
...........................................................Increase (Decrease)..................Increase (Decrease)
.................................................................Due to...............................Due to...................
- ------------------------------------------------------------------------------------------------------------------------------
......................................................................Rate/....................................Rate/...........
.....................................................Volume....Rate...Volume....Net.........Volume.....Rate....Volume.....Net..
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable...................................$3,392...$(550)..$(132)..$2,710........$5,250 ..$..198....$...62...$5,510
Mortgage-backed securities held to maturity........(2,373)....116.....(29)..(2,286).........(794).....(91)........9.....(876)
Investment securities and federal funds..............(216)....687.....(49).....422.........1,714......(19.......(10)...1,685
Securities available for sale.......................2,493....(925)...(544)...1,024..........(268)..(1,597).......81...(1,784)
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income.................................3,296....(672)...(754)...1,870.........5,902...(1,509)......142 4,535
Interest expense:
Deposits..............................................209....(282).....(3).....(76)........1,411......(58).......(6)...1,347
Borrowings..........................................1,040....(137).....(9).....844...........908......179........50....1,137
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense................................1,249....(419)....(62).....768.........2,319......121........44....2,484
- ------------------------------------------------------------------------------------------------------------------------------
Net change in net interest income....................$2,047...$(253)..$(692)..$1,102........$3,583..$(1,630)...$...98...$2,051
==============================================================================================================================
</TABLE>
RESULTS OF OPERATIONS
Net income increased $3.3 million or 55.8%, to $9.4 million for fiscal 1998 from
$6.1 million for fiscal 1997. The increase in net income was partially
attributable to a $65.3 million increase in the average balance of interest
earning assets, which was mainly due to the Westwood acquisition, and was also
due to an increase in securities gains of $3.4 million before tax.
Net income decreased $213,000 or 3.4% to $6.1 million for fiscal 1997 from $6.3
million for fiscal 1996. The decrease in net income was primarily attributable
to the SAIF assessment before taxes of $2.2 million offset by an increase of
$1.1 million in other income. See Notes 21 and 6 to the Consolidated Financial
Statements, respectively.
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 rate paid
on interest-bearing liabilities.
Net interest income increased $2.1 million or 13.2% to $17.6 million in 1998
compared to $15.5 million in 1997. The increase was primarily due to growth in
average interest-earning assets to $508.1 million in 1998 from $442.8 million in
1997, partially offset by a decrease in the interest rate spread of 3.03% in
1998 compared to 3.15% in 1997. Net interest margin decreased to 3.46% in 1998
compared to 3.51% in 1997. The majority of the increase in average interest
earning assets was the result of the Westwood acquisition.
The increase in average interest-earning assets from 1997 to 1998 of $65.3
million reflects an increase in average loans of $60.1 million and average
investment securities held to maturity of $22.1 million, offset by a decrease in
average mortgage-backed securities held to maturity and securities
12
<PAGE>
FOCUS '99
available for sale of $16.9 million. The increase in average interest-earnings
assets was partially funded by the increase in average interest-bearing
liabilities of $51.2 million. This increase in interest-bearing liabilities
reflects the increase in average borrowings of $16.3 million and average
deposits of $34.9 million in 1998, primarily due to the Westwood acquisition.
The interest rate spread declined in 1998 compared to 1997 due to a decline in
the yield on average interest-earning assets to 7.36% in 1998 from 7.42% in
1997. The cost of average interest-bearing liabilities increased to 4.33% in
1998 from 4.27% in 1997. The yield on average interest-earning assets declined
in 1998 due to a decrease in yields on securities available for sale to 3.92% in
1998 from 5.63% in 1997 and mortgage-backed securities held to maturity to 6.43%
in 1998 from 6.51% in 1997. The decline in yield of securities available for
sale was the result of lower rates of interest and dividends. Offsetting these
declines, the yield on loans receivable increased to 8.84% in 1998 from 8.73% in
1997. The increase in yield was the result of changing the mix of the loan
portfolio to higher yielding loans. The increase in the cost of funds was
affected by a 30 basis point increase in the rate paid on borrowings and offset
by a 1 basis point decrease paid on deposits.
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 from 1996 to
1997 reflects an increase in average loans of $37.3 million and average
securities available for sale of $34.6 million offset by a decrease in average
mortgage-backed and investment securities held to maturity of $40.3 million. The
increase in average interest-earning 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.
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. 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 deposits.
Provision for Loan Losses: The Company recorded a provision for loan losses of
$1.5 million in 1998 compared with $961,000 in 1997 and $664,000 in 1996. The
increase in 1998 was attributable to loan growth primarily due to the Westwood
acquisition and the continued change in the loan mix. The increase in fiscal
1997 was attributable to loan growth and the change in the mix of the loan
portfolio. Management regularly performs an analysis to identify the inherent
risks of loss in its loan portfolio. Thi 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.
The Company 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. Management continues to offer a wider variety of
loan products coupled with the continued success of changing the mix of the
products offered in the loan portfolio - from lower yielding loans (i.e., one-
to four family loans) to higher yielding loans (i.e., equity loans, multi-family
(five or more units) buildings, and commercial (non-residential) mortgages. The
Company 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.
Other Income: Total other income increased $3.7 million or 45.8% to $11.8
million for the year ended July 31, 1998 from $8.1 million for the year ended
July 31, 1997. Realized gains on investments increased $3.4 million to $8.2
million in 1998 from $4.8 million in 1997. This increase resulted from the sale
of Federal National Mortgage Association ("FNMA") stock, Student Loan Mortgage
Association ("SLMA") stock, Federal Home Loan Mortgage Corporation ("FHLMC")
stock and other equity securities during 1998 Gains on sale of loans originated
for sale increased $372,000 to $1.5 million in 1998, from $1.2 million in 1997.
The increase was mainly attributed to the operations of LMD. Loan fees and
service charges increased $294,000 to $1.5 million for the year ended July 31,
1998 from $1.2 million for the year ended July 31, 1997. The increase was due to
increases in NOW account service fees due to an increase in the deposits. The
average balance of NOW
13
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
accounts and money market deposit accounts increased $14.4 million to $69.9
million for the year ended July 31, 1998 from $55.5 million for the year ended
July 31, 1997.
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 other equity securities
during 1997. Other operating income decreased $1.9 million to $949,000 in 1997
from $2.9 million in 1996. This was mainly attributable to a decrease in other
income from Branchview of $2.4 million. In 1995, Branchview sold its majority
interest in Residential Money Center, a residential mortgage company. See Note 6
to the Consolidated Financial Statements.
Other Expenses: Total other expenses decreased $303,000 or 2.3%, to $12.9
million in 1998 from $13.2 million in 1997. The decrease in other expenses was
primarily due to a $2.2 million decrease in federal deposit insurance premiums
("SAIF recapitalization expenses") offset by increases of $907,000 in
compensation and employee benefits, $328,000 of amortization expenses and
$545,000 in other operating expenses. The decrease in SAIF recapitalization
expenses was due to a one time special assessment levied in fiscal 1997 to
recapitalized the SAIF. See Note 21 to the Consolidated Financial Statements.
Compensation and employee benefits increased $907,000 or 15.9% to $6.6 million
in 1998 from $5.7 million in 1997. The increase was mainly attributable to the
increased staff of the Company with the merger of Westwood. 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 $901,000 due to the increase of the market value of the Company's stock
and $410,000 for the hiring of eleven new employees for the Company's
subsidiary, LMD. LMD opened two additional offices during 1997 and closed one in
1998.
Net losses on real estate owned ("REO") for fiscal 1998 remained relatively
constant. REO decreased $715,000 to $206,000 in fiscal 1997 from $921,000 in
fiscal 1996. The decrease was primarily attributed to the decrease in provisions
for REO loss to $44,000 in fiscal 1997 from $655,000 in fiscal 1996. Management
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.
Amortization of the excess of cost over fair value of net assets acquired
increased $328,000 or 24.8% to $1.6 million in 1998 from $1.3 million in 1997.
The increase was mainly attributable to the goodwill associated with the
acquisition of Westwood. Amortization of the excess of cost over fair value of
net assets acquired remained constant for 1996 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds includes savings deposits, loan
repayments and prepayments, cash flow from operations and borrowings from the
FHLB. The Company uses its capital resources principally to fund loan
originations and purchases, repay maturing borrowings, investment purchases and
for short and long-term liquidity needs. The Company expects to be able to fund
or refinance, on a timely basis, its commitments and long-term liabilities. As
of July 31, 1998, the Company had commitments to fund loans of $5.3 million.
The Company'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 Company's operating, financing and investment activities during
any given period. At July 31, 1998, cash and cash equivalents totaled $48.7
million.
Net cash provided by operating activities for fiscal 1998 totaled $6.7 million,
as compared to $4.2 million for fiscal 1997 and $3.0 million for fiscal 1996.
Net cash provided by investing activities for fiscal 1998 totaled $57.3 million,
compared to cash used of $24.0 million in 1997 and $41.0 million in 1996. The
increase of $81.3 million in fiscal 1998 was mainly attributed to a net decrease
in loans receivable of $39.2 million and a net decrease in securities available
for sale of $39.8 million. The decrease of $17.0 million in fiscal 1997 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 $39.4 million, 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 financing activities for the year ended July 31, 1998 totaled
$20.7 million. This was a result of a net decrease in deposits of $4.7 million,
purchase of ESOP shares of $9.0 million and the purchase of treasury stock of
$11.4 million, offset by the exercise of stock options of $2.1 million and the
sale of common stock by the ESOP of $2.3 million.
14
<PAGE>
FOCUS '99
Net cash provided by financing activities for fiscal 1997 totaled $18.2 million.
This was 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 and ESOP shares of $447,000.
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 Company's
commitment to make loans and management's assessment of the Company's ability to
generate funds. The Company is also subject to federal regulations that impose
certain minimum capital requirements.
YEAR 2000 COMPLIANCE ISSUES
During fiscal 1998, the Company adopted a Year 2000 Compliance Plan (the "Plan")
and established a Year 2000 Compliance Committee (the "Committee"). The
objectives of the Plan and the Committee are to prepare the Company for the new
millennium. As recommended by the Federal Financial Institutions Examination
Council, the Plan encompasses the following phases: Awareness, Assessment,
Renovation, Validation and Implementation. These phases will enable the Company
to identify risks, develop an action plan, perform adequate testing and complete
certification that its processing systems will be Year 2000 ready. Execution of
the Plan is currently on target. The Company is currently in Phase 3,
Renovation, which includes code enhancements, program changes, hardware and
software upgrades and system replacements, if necessary. Concurrently, the
Company is also addressing some issues related to subsequent phases.
Prioritization of the most critical applications has been addressed, along with
contract and service agreements. The primary operating software for the Company
is obtained and maintained by an external provider of software (the "External
Provider"). The Company has maintained ongoing contact with this vendor so that
modification of the software for Year 2000 readiness is a top priority and is
expected to be accomplished, though there is no assurance, by December 31, 1998.
The Company has contacted all other material vendors and suppliers regarding
their Year 2000 state of readiness. Each of these third parties has delivered
written assurance to the Company that they expect to be Year 2000 compliant
prior to the Year 2000. The Company is in the process of contacting all material
customers and non-information technology suppliers (i.e., utility systems,
telephone systems and security systems). regarding their Year 2000 state of
readiness. The Renovation phase is targeted for completion by December 31, 1998.
The Validation phase involves testing of changes to hardware and software,
accompanied by monitoring and testing with vendors. The Validation Phase is
targeted for completion by June 30, 1999. The Implementation Phase is to certify
that systems are Year 2000 ready, along with assurances that any new systems are
compliant on a going-forward basis. The Implementation Phase is targeted for
completion by September 30, 1999.
Costs will be incurred due to the replacement of non-compliant teller hardware
and software. The Company does not anticipate that the related overall costs
will be material in any single year. In total, the Company estimates that its
cost for compliance will amount to approximately $100,000 over the two year
period from 1998-1999, of which approximately $25,000 was incurred as of July
31, 1998. No assurance can be given that the Year 2000 Compliance Plan will be
completed successfully by the Year 2000, in which event the Company could incur
significant costs. If the External Provider is unable to resolve the potential
problem in time, the Company would likely experience significant data processing
delays, mistakes or failures. These delays, mistakes or failures could have a
significant adverse impact on the financial statements of the Company.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the
companies External Provider, testing plans, and all vendors, suppliers and
customer readiness.
IMPACT OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, substantially all the assets of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
15
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
Lakeview Financial Corp. and Subsidiaries
Consolidated Balance Sheets
As of July 31, 1997 and 1998
<TABLE>
<CAPTION>
..........................................................................................1997.......................1998.........
- ----------------------------------------------------------------------------------------------------------------------------------
...................................................................................................(Dollars in thousands).........
<S> <C> <C>
Assets
Cash on hand and in banks...............................................................$...5,399.........................$..8,773
Federal Funds sold (note 12)....................................................................-...........................39,900
- ----------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents.............................................................5,399...........................48,673
Investment securities held to maturity, market value of $41,935
and $83,109 at July 31, 1997 and 1998, respectively (note 3)............................42,682...........................83,831
Securities available for sale (notes 4 and 12)............................................105,592...........................37,867
Mortgage-backed securities held to maturity, market value of $102,345
and $101,798 at July 31, 1997 and 1998, respectively (notes 5 and 12)..................102,249..........................101,771
Loans receivable, net (notes 6, 7 and 12).................................................224,564..........................286,869
Real estate owned, net (note 8).............................................................1,929..............................505
Federal Home Loan Bank of New York Stock, at cost (note 12).................................3,550............................4,626
Accrued interest receivable (note 9)........................................................3,476............................3,068
Office properties and equipment, net (note 10)..............................................4,028............................4,623
Excess of cost over fair value of net assets acquired, net (note 2).........................8,856...........................18,643
Other assets................................................................................3,557............................3,380
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets..........................................................................$.505,882.........................$593,856
==================================================================================================================================
Liabilities and Stockholders' Equity
Deposits (note 11)........................................................................370,787..........................456,880
Borrowings (note 12).......................................................................61,250...........................64,928
Borrowings - Employee Stock Ownership Plan (ESOP) (note 15) ................................2,354............................8,783
Advance payments by borrowers for taxes and insurance.......................................2,259............................2,934
Net deferred tax liability (note 13)........................................................6,094...............................17
Other liabilities...........................................................................1,329............................3,707
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities.......................................................................444,073..........................537,249
Common stock - $2.00 par value; authorized 10,000,000
shares, issued 6,441,504 shares and outstanding 4,509,054
and 4,880,268 shares at July 31, 1997 and 1998...........................................6,441...........................12,883
Additional paid-in capital.................................................................33,188...........................30,905
Retained income............................................................................28,617...........................30,500
Treasury stock at cost, 1,932,450 and 1,561,236 shares at
July 31, 1997 and 1998 (note 18).......................................................(17,358).........................(13,343)
Unrealized gain on securities available for sale, net of tax...............................14,458............................5,306
Unallocated ESOP shares....................................................................(2,407)..........................(8,893)
Unallocated Management Stock Bonus Plan (MSBP) shares......................................(1,130)............................(751)
- ----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (notes 13, 15, 17 and 18) ...................................61,809...........................56,607
Commitments and contingencies (notes 7 and 16)
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity............................................$.505,882.........................$593,856
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
FOCUS '99
Lakeview Financial Corp. and Subsidiaries
Consolidated Statemetns of Income
Years ended July 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
...................................................................................1996...........1997...........1998...
- ------------------------------------------------------------------------------------------------------------------------
................................................................................(Dollars in thousands, except share data)
<S> <C> <C> <C>
Interest income:
Loans receivable............................................................$.....14,131....$...16,841.....$....22,351
Mortgage-backed securities held to maturity........................................9,605.........7,319...........6,443
Investment securities held to maturity and federal funds...........................3,004.........3,426...........5,111
Securities available for sale......................................................4,232.........5,256...........3,472
- ------------------------------------------------------------------------------------------------------------------------
Total interest income.............................................................30,972........32,842..........37,377
- ------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits (note 11)................................................................14,064........13,988..........15,335
Borrowings.........................................................................2,486.........3,330...........4,467
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense............................................................16,550........17,318..........19,802
- ------------------------------------------------------------------------------------------------------------------------
Net interest income...............................................................14,422........15,524..........17,575
Provision for loan losses (note 7)..................................................664...........961...........1,500
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses.................................13,758........14,563..........16,075
- ------------------------------------------------------------------------------------------------------------------------
Other income:
Loan fees and service charges......................................................1,153.........1,193...........1,487
Net realized gains on sales of securities (note 4).................................2,769.........4,788...........8,191
Gains on sales of loans originated for sale..........................................247.........1,172...........1,544
Other operating income (note 6)....................................................2,861...........949.............590
- ------------------------------------------------------------------------------------------------------------------------
Total other income.................................................................7,030.........8,102..........11,812
- ------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Compensation and employee benefits (notes 14 and 15) ..............................4,649.........5,708...........6,615
Office occupancy and equipment expense (note 10) ....................................871...........932.............984
Net loss on real estate owned (note 8) ..............................................921...........206.............290
Other operating expenses...........................................................3,107.........2,770...........3,315
SAIF recapitalization assessment (note 21).............................................-.........2,219...............-
Amortization of the excess of cost over fair value of net
assets acquired (note 2)...........................................................1,320.........1,320...........1,648
- ------------------------------------------------------------------------------------------------------------------------
Total other expenses..............................................................10,868........13,155..........12,852
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes.........................................................9,920.........9,510..........15,035
- ------------------------------------------------------------------------------------------------------------------------
Income taxes (note 13)
Current............................................................................4,112.........3,836...........5,925
Deferred............................................................................(466).........(387)...........(335)
- ------------------------------------------------------------------------------------------------------------------------
Total income taxes.................................................................3,646.........3,449...........5,590
- ------------------------------------------------------------------------------------------------------------------------
Net income..................................................................$......6,274....$....6,061.....$.....9,445
Net income per common share
Basic.........................................................................$.......1.22....$.....1.49.....$......2.51
Diluted.......................................................................$.......1.14....$.....1.28.....$......2.28
Weighted average number of shares
Basic............................................................................5,122,875.....4,080,871.......3,759,797
Diluted..........................................................................5,490,546.....4,665,542.......4,135,006
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
Lakeview Finaical Corp. and Subsidiaries
Consolidated Statemetns of Cash Flows
Years ended July 31, 1996, 1997 and 1989
<TABLE>
<CAPTION>
.......................................................................................................................
...........................................................................1996...................1997.........1998....
- -----------------------------------------------------------------------------------------------------------------------
....................................................................................(Dollars in thousands).............
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..............................................................$..6,274...............$..6,061.....$..9,445
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..................1,320........1,648
Amortization of discounts and premiums, net...............................(474)..................(374)......(2,496)
Provision for loan losses and real estate owned..........................1,319..................1,005........1,558
Gain on sale of loans......................................................(10)....................(5)...........-
Net (gain) loss on sale of real estate owned...............................(26)...................(48)...........3
Net realized gains on sales of securities...............................(2,769)................(4,788)......(8,191)
Gains on sales of loans originated for sale...............................(247)................(1,172)......(1,544)
Purchases of trading securuties........................................(15,871)...............(20,776)......(25,100)
Proceeds from sale of trading securities................................16,147.................21,416........25,311
Loans originated for sale...............................................(5,930)...............(20,602)......(31,757)
Proceeds from loans originated for sale..................................6,177.................21,774........33,301
(Increase) decrease in accrued interest receivable........................(928)...................171.........1,420
Net (decrease) increase in deferred loan fees..............................(68)...................(34)............5
(Increase) decrease in other assets.......................................(507).................1,627...........353
Amortization of ESOP shares................................................313....................901...........566
Amortization of MSBP shares................................................446....................482...........638
(Decrease) increase in other liabilities................................(2,473)................(3,056)........1,208
Depreciation expense, net..................................................287....................320...........337
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities................................2,980..................4,222.........6,705
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Origination of loans...................................................(40,783)...............(78,889)......(62,354)
Principal payments on loans.............................................20,367.................19,657........41,952
Purchase of loans.......................................................(2,687)................(3,976)......(3,214)
Proceeds from the sale of loans............................................925....................410............-
Net increase in office properties and equipment...........................(171)..................(166)........(286)
Principal payments on mortgage-backed securities
held to maturity........................................................25,230.................19,382........23,304
Purchases of mortgage-backed securities
held to maturity........................................................(2,773).....................-........(5,983)
Maturities and calls of securities held to maturity.....................41,096 .................7,000........40,444
Purchase of investment securities held to maturity....................(107,027)................(8,812)......(45,123)
Proceeds from sale of securities available for sale.....................37,441..................51,894.......83,420
Purchases of securities available for sale.............................(34,163)................(34,873).....(69,821)
Proceeds from maturity of securities available for sale.................18,319...................3,000...... 45,968
Principle payments on securities available for sale......................1,534...................1,785........2,063
Purchases of Federal Home Loan Bank Stock....................................-................. ..(963)........(500)
</TABLE>
(continued)
18
<PAGE>
FOCUS '99
Lakeview Financial Corp. and Subsidiaries
Consoldiated Statements of Cash Flows
Years ended July 31, 1996, 1997 and 1998 continued
<TABLE>
<CAPTION>
...........................................................................1996..........1997..........1998.
- ------------------------------------------------------------------------------------------------------------
...............................................................................(Dollars in thousands).......
<S> <C> <C> <C>
Cash flows from investing activities, cont.:
Payment for purchase of Westwood Financial
Corporation, net of cash acquired.....................................$......-.......$......-.....$..5,724
Proceeds from sale of real estate owned....................................1,645............593........1,659
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities...................(41,047).......(23,958)......57,253
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Increase (decrease) in deposits.........................................10,757.........16,541.......(4,685)
Increase in borrowings..................................................34,863..........8,882..........107
Increase in advance payments by borrowers
for taxes and insurance....................................................211............547..........674
Purchase of treasury stock..............................................(6,685)........(6,703).....(11,389)
Exercise of stock options....................................................-..............-........2,121
Sale of common stock by ESOP.................................................-..............-........2,334
Purchase of shares by ESOP..............................................(1,616)..........(447)......(9,001)
Cash dividends paid.......................................................(582)..........(587)........(845)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities.....................36,948.........18,233......(20,684)
- ------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents....................(1,119)........(1,503).......43,274
Cash and cash equivalents at beginning of year.............................8,021..........6,902.........5,399
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year................................$..6,902.......$..5,399......$.48,673
- ------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest..................................................................16,541.........17,688........19,112
Income taxes...............................................................4,768..........1,735....... 4,714
Supplemental disclosure of noncash investing
and financing activities:
Transfer of loans receivable to real estate owned............................331............732...........295
Charge-off of loans receivable...............................................429............699...........987
Charge-off of real estate owned..............................................654.............44............58
Transfer of investment securities held to maturity
to securities available for sale..........................................80,858..............-.............-
Transfer of mortgage-backed securities held to maturity
to securities available for sale..........................................31,747..............-.............-
Transfer of restricted equity securities to securitiesavailable for sale.......-..........7,806.............-
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
Lakeview Financial Corp. and Subsidiaries
Consolidated Statemetns of Stockholders' Equity
Years ended July 31, 1996, 1997 and 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
....................................................................................Number..........................Additional
...................................................................................of common.........Common...........paid-in
....................................................................................shares............stock...........capital
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at July 31, 1995..........................................................4,804,904...........$.5,324..........$21,734
Net income................................................................................-.................-................-
Cash dividend ($.11 per share)............................................................-.................-................-
Stock dividend (10%)................................................................370,486...............532............4,158
Purchase of treasury stock.........................................................(643,982)................-................-
Common stock acquired by ESOP.............................................................-.................-................-
Amortization of ESOP shares...............................................................-.................-..............169
Amortization of MSBP shares...............................................................-.................-..............126
Change in unrealized loss on securities available for sale, net of tax....................-.................-................-
- --------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996..........................................................4,531,408...........$ 5,856..........$26,187
- --------------------------------------------------------------------------------------------------------------------------------
Net income................................................................................-.................-................-
Cash dividend ($.12 per share)............................................................-.................-................-
Stock dividend (10%)...............................................................(497,586)..............585............6,256
Purchase of treasury stock..........................................................475,232.................-................-
Common stock acquired by ESOP.............................................................-.................-................-
Amortization of ESOP shares...............................................................-.................-..............554
Amortization of MSBP shares...............................................................-.................-..............191
Change in unrealized gain on securities available for sale, net of tax....................-.................-................-
- --------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1997..........................................................4,509,054...........$..6,441........$ 33,188
- --------------------------------------------------------------------------------------------------------------------------------
Net income................................................................................-..................-...............-
Cash dividend ($.19 per share)............................................................-..................-...............-
Restatement of par value of common stock..................................................-..............6,442..........(6,442)
Purchase of treasury stock.........................................................(489,053).................-...............-
Common stock acquired by ESOP.............................................................-..................-...............-
Sale of stock by ESOP.....................................................................-..................-...............-
Amortization of ESOP shares...............................................................-..................-.............385
Amortization of MSBP shares...............................................................-..................-.............259
Change in unrealized gain on securities available for sale, net of tax....................-..................-...............-
Exercise of stock options...........................................................458,924..................-...............-
Reissuance of treasury stock in connection with acquisition.........................401,343..................-...........3,515
- --------------------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1998..........................................................4,880,268............$12,883.........$30,905
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
FOCUS '99
<TABLE>
<CAPTION>
..................................................Unrealized gain..........Unallocated........Unallocated........Total.....
.........Retained..............Treasury........(loss) on securities........... ESOP..............MSBP........stockholders'.
..........income.................stock..........available for sale...........shares.............shares..........equity.....
- ---------------------------------------------------------------------------------------------------------------------------
...(Dollars in thousands).........................................................
<S> <C> <C> <C> <C> <C> <C>
.........$ 28,982...............$ (3,970).........$....(55).................$ (835)..........$(1,740)..........$ 49,440
............6,274.......................-.................-........................ -.................-............. 6,274
.............(582)......................-.................-........................ -.................- ..............(582)
...........(4,690)......................-.................-........................ -.................- ................ -
................-..................(6,685)................-........................ -.................-.............(6,685)
................-.......................-.................-................... (1,616)................- ............(1,616)
................-.......................-.................-...................... 144.................-................313
...............-.......................-.................-........................ -...............320................446
................-.......................-............(1,830)....................... -.................-.............(1,830)
- ---------------------------------------------------------------------------------------------------------------------------
.........$ 29,984...............$ (10,665).........$.(1,885)................. $(2,307)..........$(1,420)..........$ 45,760
- ---------------------------------------------------------------------------------------------------------------------------
............6,061.......................-.................-........................ - ............... -..............6,061
.............(587)......................-.................-........................ - ............... -...............(587)
...........(6,841)......................-.................-........................ - ............... -..................-
................-..................(6,703)................-........................ -.................-.............(6,703)
................-.......................-.................-..................... (447)................-...............(447)
................-.......................-.................-...................... 347.................-................901
................-.......................-.................-........................ -...............290................481
................-.......................-............16,343.........................-.................-.............16,343
- ---------------------------------------------------------------------------------------------------------------------------
.........$ 28,617...............$ (17,358)..........$14,458.................. $(2,407) $(1,130)..........$.61,809
- ---------------------------------------------------------------------------------------------------------------------------
............9,445.......................-.................-........................ -.................-............. 9,445
.............(845)......................-.................-........................ -.................- ..............(845)
................-.......................-.................-........................ -.................-................. -
................-.................(11,389)................-........................ - ................- ...........(11,389)
................-.......................-.................-................... (9,001)................- ............(9,001)
................-.......................-.................-.....................2,334 ............... - ............ 2,334
................-.......................-.................-...................... 181 ................- .............. 566
................-.......................-.................-........................ - ..............379 .............. 638
................-.......................-............(9,152)....................... - ............... - ............(9,152)
...........(6,717)..................8,839.................-........................ - ............... -............. 2,122
................-...................6,565.................-........................ - ............... - ............10,080
- ---------------------------------------------------------------------------------------------------------------------------
..........$30,500...............$ (13,343)...........$5,306.................. $(8,893)...........$.(751)..........$ 56,607
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
Lakeview Financial Corp. and Subsidiaries
Note to Consolidated Financial Statements
July 31, 1997 and 1998
Note 1
Summary of Significant Accounting Policies
The following items comprise the significant accounting policies which Lakeview
Financial Corp. and Subsidiaries ("Lakeview") used in preparing and presenting
these consolidated financial statements:
Business:
Lakeview provides a full range of retail banking services through its branches
in Passaic and Bergen Counties, New Jersey. Lakeview is subject to competition
from other financial institutions. Lakeview is subject to the regulations of
certain regulatory agencies and undergoes periodic examinations by those
regulatory agencies.
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 (Bank), LVS, Inc. (LVS), Lakeview Investment Services Inc. (LISI), North
Properties, Inc. (North Properties), Branchview, Inc. (Branchview), and Lakeview
Credit Card Services, Inc. (LCCS), and its 90% owned subsidiary Lakeview
Mortgage Depot, Inc. (LMD). LVS, LISI and North Properties are currently
inactive. All significant inter-company accounts an transactions have been
eliminated in consolidation.
Basis of Financial Statement Presentation:
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the 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.
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and in banks and federal funds sold.
Investment 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, respectively over the estimated life of the
security using a method that approximates the level yield method.
Gains and losses on the sale of securities are based upon the amortized cost of
the security using the specific identification method.
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.
22
<PAGE>
FOCUS '99
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 impaire loan portfolio.
Income recognition policies for impaired loans are the same as non-accrual
loans. Gains and losses on loan sales are recorded using the specific
identification method.
Real Estate Owned:
Real estate owned, acquired through foreclosure or deed in lieu of foreclosure,
is carried at the lower of estimated fair value as determined by current
appraisals, 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 Loan Losses And Real Estate Owned:
The allowances for loan losses 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.
Federal Home Loan Bank of New York Stock:
The Bank, as a member of the Federal Home Loan Bank of New York ("FHLB"), is
required to hold shares of capital stock in the FHLB of New York in an amount
equal to 1% of the Bank's outstanding balance of residential mortgage loans or
5% of its outstanding advances from the FHLB of New York, whichever is greater.
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 income or expense.
Excess of Cost Over Fair Value of Net Assets Acquired:
The excess of cost over fair value of net assets acquired is amortized to
expense over the expected life of the acquired assets using the straight-line
method. Core deposit studies regarding the retention of the deposits acquired
are performed by the Bank on an annual basis. After reviewing the results of the
core deposit studies, a write-down of the core deposit premium may be recognized
if the current balance of the core deposit premium is overstated.
Stock Option Plans:
Lakeview applies the "intrinsic value based method" as described in Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
compensation. Accordingly, no compensation cost has been recognized for the
stock option plans.
Income Taxes:
Lakeview 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 assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to be settled (see Note 13).
Net Income Per Share:
Basic net income per share is computed based upon income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. Diluted net income per share is calculated based on net income
available to common stockholders divided by the average weighted shares
outstanding including common stock equivalents utilizing the treasury stock
method.
The following reconciles the weighted average number of common shares
outstanding used to calculate basic and diluted net income per share. The
weighted average number of shares has been adjusted for all stock dividends and
splits.
23
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
<TABLE>
<CAPTION>
........................................... ...1996..............1997..................1998..
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted Average Number of Common Shares
Outstanding - Basic.........................5,122,875...........4,080,871...........3,759,797
Effect of Dilutive Securities:
Qualified Stock Options.......................199,291.............320,020.............117,678
Non-Qualified Stock Options...................103,986.............203,952.............252,332
MSBP Shares....................................64,394..............50,699...............5,199
Weighted Average Number of Common Shares
Outstanding - Diluted.......................5,490,546.......... 4,665,542.......... 4,135,006
- ------------------------------------------------------------------------------------------------
</TABLE>
Reclassifications:
Certain reclassifications have been made to the 1996 and 1997 amounts to conform
to the 1998 presentation.
Note 2
Acquisitions:
On February 27, 1998, Lakeview acquired Westwood Financial Corporation
("Westwood"), a New Jersey Savings Bank, in a transaction accounted for under
the purchase method of accounting. At February 27, 1998, Westwood had total
assets of $100.2 million (primarily investments of $34.4 million,
mortgage-backed securities of $16.7 million and loans of $40.4 million) and
deposits and stockholder's equity of $89.6 million and $8.1 million,
respectively. Lakeview paid $10.6 million in cash and issued 401,343 shares of
stock for a value of $10.1 million resulting in goodwill of $10.4 million.
Goodwill is being amortized on a straight-line basis over a 15 year period.
Total amortization charged to date amounts to $289,000 for the year ended July
31, 1998. The July 31, 1998 consolidated financial statements of Lakeview
include the assets, liabilities and results of operations of Westwood since the
acquisition date.
The following supplemental schedule presents the pro forma results of operations
for 1997 and 1998 as though the companies had combined at the beginning of 1997
and 1998, after giving effect to certain adjustments, including amortization of
goodwill. The pro forma results of operations do not necessarily reflect the
results of operations that would have occurred had Lakeview and Westwood
constituted a single entity during such periods.
...................................................Years ended July 31,......
................................................1997.................1998....
- -----------------------------------------------------------------------------
......................................................(Unaudited)............
........................................(Dollars in thousands except share data)
Net interest income............................$18,092..............$.18,824
Net income...................................... 5,475.................9,122
Earnings per share
Basic .......................................$ 1.16..............$ 2.21
Diluted......................................$ 1.03..............$ 2.02
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
net assets acquired amounted to $12.4 million and is being amortized on a
straight-line basis over ten years. Total amortization charged to date amounts
to $5.4 million at July 31, 1998. The Bank also had a core deposit premium of
$1.1 million from a prior acquisition which i being amortized on a straight line
basis over 15 years, which has total amortization of $621,000 at July 31, 1998.
24
<PAGE>
FOCUS '99
Note 3
Investment Securities Held to Maturity:
The amortized cost and estimated market values of investment securities held to
maturity as of July 31, 1997 and 1998 are as follows (in thousands)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ----------------------------------------------------------------------------------------
<S> <C> <C> > <C> <C>
July 31, 1997:
FHLB structured notes............$22,574........$.......2........$..(562)........$22,014
FHLMC structured notes............14,108...............11...........(173)........ 13,946
FNMA structured notes..............6,000...............21............(46)........ 5,975
- ----------------------------------------------------------------------------------------
.................................$42,682........$......34........$..(781)........ 41,935
- ----------------------------------------------------------------------------------------
July 31, 1998:
FHLB structured notes............$44,122........$.....134........$..(480)........$43,776
FHLMC structured notes............31,830..............161...........(512)........ 31,479
FFCB structured notes..............1,000................3..............- ........ 1,003
US treasury structured notes.........500................2..............- ........ 502
Municipal bonds....................1,866................4..............- ........ 1,870
FNMA structured notes..............4,513................-............(34)........ 4,479
---------------------------------------------------------------------------------------
.................................$83,831........$.....304........$(1,026)........$83,109
---------------------------------------------------------------------------------------
</TABLE>
The yield on the structured notes increases periodically over the five or ten
year term of the security. However, the issuer has the option to repay these
securities as the yield adjusts.
The amortized cost and estimated market values of investment securities held to
maturity at July 31, 1998, by contractual maturity, are shown below (in
thousands): Estimated
<TABLE>
<CAPTION>
Estimated
Amortized market
cost value
- --------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.........................$..4,959..........$.4,962
Due after one year through five years..............1,907............1,918
Due after five years through ten years............22,000...........22,174
Due after ten years...............................54,965...........54,055
- --------------------------------------------------------------------------
................................................$.83,831..........$83,109
- --------------------------------------------------------------------------
</TABLE>
25
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
Note 4
Securities Available for Sale:
The amortized cost and estimated market values of securities available for sale
at July 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
July 31, 1997:
U.S. Agency Securities...................$ 48,931....$......9.......$(159).....$ 48,781
GNMA Mortgage-backed Securities ...........3,980.........212...........-...... 4,192
FNMA/FHLMC/REMICs...........................1,440..........55..........(6)........1,489
Private Issue REMICs........................9,378...........-.........(94)........9,282
Equity Securities..........................19,406......22,700........(260).......41,846
- ---------------------------------------------------------------------------------------
.........................................$.83,135......22,976.......$(519).....$105,592
- ---------------------------------------------------------------------------------------
July 31, 1998:
U.S. Agency Securities...................$..3,000.....$.....-..... $..(5)......$ 2,995
GNMA Mortgage-backed Securities.............3,177.........175...........-.........3,352
FNMA/FHLMC/REMICs.............................980..........58...........-.........1,038
Private issue REMICs........................8,639..........11.........(30)........8,620
Equity Securities..........................13,787.......8,410........(335)...... 21,862
- ---------------------------------------------------------------------------------------
.........................................$.29,583.....$.8,654.......$(370)......$37,867
- ---------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated market values of debt securities available for
sale at July 31, 1998, by contractual maturity, are shown below (in thousands):
Estimated
Amortized market
cost value
- ----------------------------------------------------------------------
Due in one year or less.................. $..3,000.....$..2,995..
Due after ten years............................12,796.......13,010....
.............................................$.15,796.....$.16,000....
- ----------------------------------------------------------------------
During the years ended July 31, 1996, 1997, and 1998, proceeds from sale of
securities available for sale amounted to $37.4 million, $51.9 million, and
$83.4 million, respectively, resulting in gross gains of $2.5 million, $4.1
million, and $8.0 million, respectively.
During the years ended July 31, 1996, 1997, and 1998, proceeds from sale of
trading securities amounted to $16.1 million, $21.4 million, and $25.3 million,
respectively, resulting in gross gains of $276,000, $640,000 and $211,000,
respectively.
26
<PAGE>
FOCUS '99
Note 5
Mortgage-Backed Securities Held to Maturity
The amortized cost and estimated market values of mortgage-backed securities
held to maturity at July 31, 1997 and 1998 are as follows (in thousands):
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ------------------------------------------------------------------------
July 31, 1997:
FHLMC...................$.40,306......$....424......$...(396)...$.40,334
FNMA......................32,149...........558..........(156).....32,551
FNMA/FHLMC/REMICs.........29,794...........285..........(619).....29,460
- ------------------------------------------------------------------------
........................$102,249......$..1,267......$.(1,171)...$102,345
- ------------------------------------------------------------------------
July 31, 1998:
GNMA ...................$..7,122......$....153......$......-...... 7,275
FHLMC.....................34,001...........351..........(126).....34,226
FNMA......................26,843...........276...........(31).....27,088
FNMA/FHLMC/REMICs.........33,805...........246..........(842).....33,209
- ------------------------------------------------------------------------
........................$101,771......$..1,026......$...(999)...$101,798
- ------------------------------------------------------------------------
The amortized cost and market value of mortgage-backed securities held to
maturity at July 31, 1998, are shown below by contractual maturity. The expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without penalties (in
thousands).
Estimated
Amortized market
cost value
- -----------------------------------------------------------------------------
Due in one year or less..........................$...8,887.......$.....11,914
Due after one year through five years...............25,127.............22,145
Due after five years through ten years..............13,934.............13,934
Due after ten years.................................53,823.............53,805
- -----------------------------------------------------------------------------
.................................................$.101,771.......$....101,798
- -----------------------------------------------------------------------------
Note 6
Investments Held By Subsidiary
On February 6, 1995, Branchview 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 owned 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 $4.8 million. 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. Included in other income in 1996 is approximately
$2.3 million representing Lakeview's share of partnership earnings in IMC prior
to its reorganization.
27
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
On February 13, 1997, IMC paid a 2 for 1 stock split raising Branchview's share
total to 1,661,856 shares at July 31, 1997, with a then current price of $18 per
share for a total market value of $29.9 million. During 1997, Lakeview purchased
an additional 40,000 shares of IMC stock for $586,000. 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 th offering (July 23, 1997). No restricted
shareholder was 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 $8.4 million into Securities Available for Sale with a market
value of $30.6 million.
At July 31, 1998, the market value of the IMC stock, based on the quoted market
price per share, was $16.6 million, resulting in an unrealized gain, net of tax,
of $5.3 million, which is included in Stockholders' Equity.
On January 12, 1996, Lakeview granted a unsecured line of credit to IMC for $7
million with an interest rate of 10%. As of July 31, 1998, $6.8 million was
outstanding. For the fiscal year ended July 31, 1998, interest income on this
line of credit amounted to $689,000. Note 7 Loans Receivable, Net
Note 7
Loans Receivable, Net
A comparative summary of loans receivable at July 31, 1997 and 1998 is as
follows (in thousands):
1997 1998
- -----------------------------------------------------------
Loan balances by type:
Real estate.......................$216,896.........$272,203
Construction...........................377............2,097
Consumer.............................1,914............3,508
Commercial...........................8,982...........14,186
- -----------------------------------------------------------
...................................228,169..........291,994
- -----------------------------------------------------------
Less:
Allowance for loan losses............3,411............4,478
Loans in process.........................-..............448
Net deferred loan fees.................194..............199
- -----------------------------------------------------------
..................................$224,564.........$286,869
- -----------------------------------------------------------
The Bank serviced loans for others in the approximate amount of $13.8 million,
$14.5 million and $11.3 million at July 31, 1996, 1997 and 1998, respectively.
A comparative summary of non-accrual loans at July 31, 1997 and 1998 is as
follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
- ------------------------------------------------------------------------------------
No. Amount No. Amount
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-accrual loans.......................................46....$3,811....39....$2,794
Percentage of non-accrual loans to total loans, net..............1.7%............1.0%
- ------------------------------------------------------------------------------------
</TABLE>
An analysis of the allowance for loan losses for the years ended of July 31,
1996, 1997 and 1998 is as follows (in thousands):
- --------------------------------------------------------------------------------
Balance at beginning of year.......................$2,535.....$3,073....$3,411..
Provision for loan losses.............................664........961.....1,500..
Charge-offs..........................................(429)......(699).....(987).
Recoveries............................................303.........76.......126..
Acquired from Westwood..................................-..........-.......428..
- --------------------------------------------------------------------------------
Balance at end of year.............................$3,073.....$3,411....$4,478..
- --------------------------------------------------------------------------------
28
<PAGE>
FOCUS '99
For the years ended July 31, 1996, 1997 and 1998, additional interest income
before taxes amounting to approximately $201,000, $256,000, and $242,000,
respectively, would have been recognized if interest on non-accrual loans had
been recorded based on original terms. The Bank had $650,000 and $910,000 of
impaired loans at July 31, 1997 and 1998, respectively. These loans had an
allowance for loan loss of $76,000 and $168,000, at July 31, 1997 and 1998,
respectively. The average balance of the impaired loans for 1996, 1997 and 1998
was $574,000, $471,000 and $558,000, respectively. Interest income recognized on
the impaired loans for 1996, 1997 and 1998 amounted to $25,000, $38,000 and $0,
respectively. 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, at July 31, 1997 and 1998 amounted to
$6.1 million and $5.3 million, respectively. At July 31, 1998, adjustable rate
loan commitments amounted to $4.7 million and fixed rate loan commitment
amounted to $669,000.
Note 8
Real Estate Owned, Net
Activity in the allowance for losses on real estate owned for the years ended
July 31, 1996, 1997 and 1998 is as follows (in thousands):
1996 1997 1998
- --------------------------------------------------------------------------------
Balance at beginning of year................$....-.......$....-......$....-.....
Provision charged to operations................654...........44..........58.....
Charge-offs, net..............................(654).........(44)........(58)....
- --------------------------------------------------------------------------------
Balance at end of year......................$....-.......$....-......$....-.....
- --------------------------------------------------------------------------------
Net loss on real estate owned activities for the years ended July 31, 1996, 1997
and 1998 consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for real estate owned losses......................$654.........$.44........$..58..
Net loss on sale of real estate owned and related expenses...267..........162..........232..
- --------------------------------------------------------------------------------------------
............................................................$921.........$206........$ 290..
- --------------------------------------------------------------------------------------------
</TABLE>
Note 9
Accrued Interest Receivable
1997 1998
- --------------------------------------------------------------------------------
Investment securities held to maturity...............$..908.......$..681........
Securities available for sale...........................630..........107........
Mortgage-backed securities held to maturity.............555..........546........
Loans receivable, net.................................1,383........1,734........
- --------------------------------------------------------------------------------
.....................................................$3,476.......$3,068........
- --------------------------------------------------------------------------------
29
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
Note 10
Office Properties and Equipment, net
Office properties and equipment, net, at July 31, 1997 and 1998 consists of the
following (in thousands):
1997 1998
- --------------------------------------------------------------------------------
Land.............................................$..793.........$..926..........
Building and building improvements................3,636..........4,156..........
Furniture and equipment.............................986..........1,246..........
Automobiles..........................................99............101..........
- --------------------------------------------------------------------------------
..................................................5,514..........6,429..........
- --------------------------------------------------------------------------------
Less accumulated depreciation.....................1,486..........1,806..........
- --------------------------------------------------------------------------------
.................................................$4,028.........$4,623.........
- --------------------------------------------------------------------------------
Office occupancy and equipment expense includes rentals for premises and
equipment of $177,000, $187,000 and $199,000 for the years ended July 31, 1996,
1997 and 1998, respectively.
Note 11
Deposits
Deposit balances at July 31, 1997 and 1998 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1998
- -------------------------------------------------------------------------------------------------------------
Interest Weighted % Interest Weighted %
Rate average of Rate average of
Ranges rate Amount Total Ranges rate Amount Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts, DDA and
money market deposits.........0-2.35%...1.67%...$.79,150....21.35.......0-2.35%...1.38%....$101,015.....22.11
Savings deposits..............0-2.55....2.38......75,966....20.48.......0-2.85%...2.24.......93,213.....20.40
Certificates of deposit....2.40-8.15....5.17.....215,671....58.17....2.40-8.15....5.31......262,652 57.49
- -------------------------------------------------------------------------------------------------------------
................................................$370,787...100.00..........................$456,880....100.00
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Certificates of deposit greater than $100,000 total approximately $24.0 million
and $30.6 million at July 31, 1997 and 1998, respectively.
The contractual maturities of certificates of deposit at July 31, 1997 and 1998
are as follows (in thousands):
1997 1998
- --------------------------------------------------------------------------------
Within one year............................$189,026.......$239,069..............
One to two years.............................18,836.........17,474..............
Two to three years............................5,208..........4,595..............
Three to four years...........................2,155............554..............
Four to five years..............................306............859..............
Thereafter......................................140............101..............
- --------------------------------------------------------------------------------
...........................................$215,671.......$262,652..............
- --------------------------------------------------------------------------------
30
<PAGE>
FOCUS '99
Interest expense on deposits for the years ended July 31, 1996, 1997 and 1998
consists of the following (in thousands):
1996 1997 1998
- --------------------------------------------------------------------------------
Certificates of deposit...................$10,881......$10,909.....$12,103......
Passbook and club accounts..................2,385........2,262.......2,322......
NOW and money market accounts.................798..........817.........910......
- --------------------------------------------------------------------------------
..........................................$14,064......$13,988.....$15,335......
- --------------------------------------------------------------------------------
Note 12
Borrowings
Borrowings at July 31, 1997 and 1998 consist of the following (in thousands):
Interest
1997 1998 Rate Maturity
- --------------------------------------------------------------------------------
FHLB of New York Advance..........$17,000...$......-......5.85%.....Aug. 7, 1997
FHLB of New York Advance...........22,000..........-......6.00.....Sept. 2, 1997
FHLB of New York Line of Credit....20,250..........-......6.13......Aug. 1, 1997
Line of Credit......................2,000..........-......8.00......Aug. 1, 1996
FHLB of New York Advance................-.....10,000......5.96......Nov.25, 1998
FHLB of New York Advance................-.....10,000......5.43......Nov.17, 2000
FHLB of New York Advance................-.....20,000......5.40......Nov.17, 2000
FHLB of New York Advance................-......5,000......5.33..... June 1, 2005
FHLB of New York Advance................-.....10,000......5.01....March 17, 2008
Lines of Credit.........................-......9,928......8.25......Aug. 3, 1998
- --------------------------------------------------------------------------------
..................................$61,250....$64,928............................
- --------------------------------------------------------------------------------
The 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.
At July 31, 1998, Lakeview had a line of credit with one major national
broker/dealer and one commercial bank which totaled $8.6 million and $1.3
million, respectively. During the years ended July 31, 1997 and 1998, the
maximum month-end balance of the lines of credits were $2.0 million and $10.7
million, respectively. The average amounts outstanding under the lines of credit
during July 31, 1997 and 1998 were $506,000 and $7.0 million. Interest paid on
the lines of credit in fiscal 1997 and 1998 was $48,000 and $565,000,
respectively.
Note 13
Income Taxes
Income tax expense for the years ended July 31, 1996, 1997 and 1998 is comprised
of the following (in thousands):
1996 1997 1998
- --------------------------------------------------------------------------------
Current:
Federal............................$3,583.........$3,467........$5,437..........
State.................................529............369...........488.........
- --------------------------------------------------------------------------------
...................................$4,112.........$3,836........$5,925.........
- --------------------------------------------------------------------------------
Deferred:
Federal..............................(438)..........(355).........(307).........
State.................................(38)...........(32)..........(28)........
- --------------------------------------------------------------------------------
.....................................(466)..........(387).........(335)........
- --------------------------------------------------------------------------------
Total income tax expense...........$3,646.........$3,449........$5,590..........
- --------------------------------------------------------------------------------
31
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
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.
Lakeview prepares and files its tax return on a calendar year basis. Lakeview
used the experience method in preparing their Federal Income Tax return for
calendar year 1995 and 1994. The tax bad debt reserve method was repealed for
tax years beginning after 1995. Lakeview must instead use the direct charge-off
method to compute its bad debt deduction.
Upon repeal, Lakeview 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 bases) over a six-year period.
Lakeview has not recognized a deferred tax liability of approximately $1.3
million 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 Lakeview expects that charges to the bad debt reserves,
other than the losses on loans or recomputation of bad debt deductions resulting
from operating loss carrybacks to prior years, would result in taxable income.
Lakeview 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, 1996, 1997 and 1998 is as
follows (in thousands):
1996 1997 1998
- --------------------------------------------------------------------------------
Expected income tax expense........................$3,373......$3,233....$5,112.
Dividends received deduction..........................(88)........(56)......(58
State income taxes, net of Federal tax benefit........324.........222.......304.
Amortization of the excess of cost over fair
value of net assets acquired ..........................37..........50.......121.
Other...................................................-...........-.......111.
- --------------------------------------------------------------------------------
Total income tax expense...........................$3,646......$3,449....$5,590.
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax asset (liability) at July 31, 1997 and 1998 are as follows
(in thousands):
1997 1998
- --------------------------------------------------------------------------------
Deferred tax assets:
Premium on deposits.....................................$.....-.........$...419
Management stock bonus plan.................................172.............131
Allowance for loan losses.................................1,210...........1,599
Loan fees....................................................70..............72
Uncollected interest........................................111.............161
Accrued bonus................................................76..............76
Excess of cost over fair value of net assets acquired.......485.............636
Supplemental Executive Retirement Plan expense...............65.............135
Other........................................................26..............22
- --------------------------------------------------------------------------------
....................................................... $ 2,215.........$.3,251
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Intangible assets............................................193............167
Depreciation expense..........................................94.............82
Unrealized gain on securities available for sale...........7,999..........2,977
Other.........................................................23.............42
- --------------------------------------------------------------------------------
...........................................................8,309..........3,268
Net deferred liability..................................$.(6,094).......$...(17)
- --------------------------------------------------------------------------------
Management believes, based upon current facts, that it is more likely than not
that there will be sufficient taxable income in future years to realize the
deferred tax assets. However, there can be no assurances about the levels of
future earnings.
32
<PAGE>
FOCUS '99
Note 14
Employee Benefit Plans
Defined Benefit Plan
Lakeview has in effect a noncontributory defined benefit plan covering
substantially all of its employees upon their becoming eligible. The benefits
are based on years of service and compensation. Net pension benefit for the
years ended July 31, 1996, 1997 and 1998 includes the following (in thousands):
1996 1997 1998
- --------------------------------------------------------------------------------
Service cost - benefits earned during the period.....$..37....$..62.....$..69
Interest cost on projected benefit obligation...........38.......46........56
Return (loss) on plan assets...........................(83)....(414)......582
Net amortization and deferral..........................(45).....296......(741)
- --------------------------------------------------------------------------------
Total pension benefit................................$.(53)...$.(10)....$.(34)
- --------------------------------------------------------------------------------
The following table sets forth the plan's funded status at July 31, 1997 and
1998 (in thousands):
1997 1998
- --------------------------------------------------------------------------------
Actuarial present value of obligations - accumulated benefit
obligation, including vested benefits of $641 and $771
at July 31, 1997 and 1998, respectively.......................$...675....$..855
Projected benefit obligation......................................731.......935
Plan assets at fair value (primarily equities)..................1,608.......980
Plan assets in excess of projected benefit obligation.............877........45
Unrecognized net transition obligation............................(60)......(51)
Unrecognized prior service cost...................................(37)......(34)
Unrecognized deferred (gain)loss.................................(722) .....132
- --------------------------------------------------------------------------------
Prepaid pension cost..........................................$....58....$...92
- --------------------------------------------------------------------------------
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 6.50% in fiscal 1997 and 6.00% in
fiscal 1998. The assumed long-term rate of return on plan assets was 7.25% in
fiscal 1997 and 1998, and the assumed rate of increase in future compensation
levels was 5.50% in fiscal 1997 and 5.00% in fiscal 1998.
Supplemental Executive Retirement Plan
During fiscal year 1996, Lakeview 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 $84,000,
$97,000 and $195,000 for the years ended July 31, 1996, 1997 and 1998.
33
<PAGE>
LAKEVIEW FINANCIAL CORP 1998 ANNUAL REPORT
Note 15
Stock Benefit Plans
Stock Option Plan:
At July 31, 1998, Lakeview has a stock-based compensation plan, which is
described below. Lakeview applies APB Opinion No. 25 and related interpretations
in accounting for its plan. Accordingly, no compensation cost is recognized for
its stock option plan. Had compensation cost for Lakeview's stock option plans
been determined consistent with Statement of Financial Accounting Standards No.
123 "Stock Based Compensation," (SFAS 123) Lakeview's net income and net income
per share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share amounts):
............................................1996............1997...........1998
- --------------------------------------------------------------------------------
Net Income................As reported ....$6,274......... $6,061........$9,445
..........................Pro forma........5,951............5,941.........9,445
Basic net income..........As reported.......1.22.............1.49..........2.51
..........................Pro forma.........1.16.............1.46..........2.51
Diluted net income........As reported ......1.14.............1.28..........2.28
..........................Pro forma.........1.08.............1.27....... 2.28
The fair value of each option 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
.75% for both years; expected volatility of 20% for both years; risk-free
interest rates of 5.48% and 6.34%. The effects of applying SFAS 123 on the pro
forma net income may not be representative of the effect on the pro forma income
for future years.
Lakeview adopted a stock option and incentive plan (Option Plan). Pursuant to
the Option Plan, stock options 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 $3.76 to $14.75 per share. All options
have been adjusted to reflect stock dividends and splits. At July 31, 1998,
501,024 stock options were outstanding, and 458,924 stock options were exercised
during this period.
A summary of the status of Lakeview's stock option plans as of July 31, 1996,
1997, and 1998, and changes during the years then ended is presented below:
.................................................Shares under....Weighted - avg.
....................................................option.......exercise price
- --------------------------------------------------------------------------------
Outstanding at July 31, 1995..........................723,928........$...3.96
Grant in fiscal year ended July 31, 1996..............196,020............7.28
- --------------------------------------------------------------------------------
Outstanding at July 31, 1996..........................919,948............4.67
Grant in fiscal year ended July 31, 1997...............40,000...........12.33
- --------------------------------------------------------------------------------
Outstanding at July 31, 1997..........................959,948............4.99
Exercised in fiscal year ended July 31, 1998..........458,924............4.58
- --------------------------------------------------------------------------------
Outstanding at July 31, 1998..........................501,024........$...5.37
- --------------------------------------------------------------------------------
34
<PAGE>
FOCUS '99
The following table summarizes information about stock options outstanding at
July 31, 1998.
<TABLE>
<CAPTION>
..........Range of............Number..............Weighted.............Weighted...............Number...............Weighted
..........exercise..........of options........average remaining.........average.............of options..............average
...........prices...........outstanding.......contractual life......exercise price..........excercised..........exercise price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
......$.........3.76.........289,894..............5.4 years..............$.3.76...............354,174...............$.3.76
................5.64..........39,930..............6.3 years................5.64................39,930.................5.64
................7.28.........145,200..............7.4 years................7.28................50,820.................7.28
.......12.06 - 14.75..........26,000..............8.5 years...............12.27................14,000................12.06
- ------------------------------------------------------------------------------------------------------------------------------
.............................501,024.....................................$ 5.37...............458,924...............$.4.58
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The purpose of the Stock Option Plan is to provide additional incentive to
certain officers, directors and key employees by facilitating their purchase of
a stock interest in Lakeview. The Stock Option Plan provides for a term of ten
years, after which no awards may be made, unless earlier terminated by the Board
of Directors pursuant to the Stock Option Plan. Options become immediately
vested in the event of death, disability or a "change-in-control" of Lakeview or
the Bank.
Employee Stock Ownership Plan ("ESOP"):
Lakeview 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 Lakeview'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 $1.6 million. During the fiscal year ended July 31,
1997, the ESOP Trust purchased an additiona 15,000 shares for $447,000. During
the fiscal year ended July 31, 1998, the ESOP Trust purchased an additional
349,404 shares for $9 million.
The ESOP debt as of July 31, 1997 and 1998 was $2.4 million and $8.8 million,
respectively, and bears an interest rate equal to the prime rate less .10%, as
published in the Wall Street Journal. Lakeview makes cash contributions to the
ESOP on an annual basis sufficient to enable the ESOP to make the required debt
payments to the unaffiliated lender. Dividends declared on ESOP shares are used
to purchase additional common shares of Lakeview, for inclusion in the Plan, as
Plan assets.
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.
Lakeview accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as unallocated ESOP
shares in the Consolidated Balance Sheets. As shares are released from
collateral, Lakeview reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for net income per share
computations.
Lakeview recognized $313,000, $901,000 and $566,000 in compensation expense for
the years ended July 31, 1996, 1997, and 1998, respectively. Lakeview allocated
32,303, 35,649 and 16,757 shares for the years ended July 31, 1996, 1997 and
1998. The ESOP has 548,255 shares remaining at July 31, 1998 with a fair market
value of $12.9 million.
Management Stock Bonus Plans ("MSBP"):
Lakeview adopted the 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 585,640 shares of restricted stock were purchased on
December 22, 1993, Lakeview's initial public offering, as adjusted for stock
dividends and splits. 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 are recorded as a contra equity accoun excluded from stockholders'
equity. Lakeview recognizes compensation expense in the amount of the cost of
the common stock at the acquisition 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 $320,000, $290,000
and $379,000 in 1996, 1997 and 1998, 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. Lakeview has 199,807 shares remaining at July 31, 1998,
190,147 of which are unallocated.
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 Lakeview or 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 Lakeview or the Bank, all
allocated shares become unrestricted.
35
<PAGE>
LAKEVIEW FINANCIAL CORP. 1998 ANNUAL REPORT
Note 16
Commitments and Contingencies
At July 31, 1998, the Bank was obligated under non-cancelable operating leases
for premises and equipment as follows (in thousands):
- ------------------------------------------------------------
1999....................................................$252
2000.................................................... 229
2001.................................................... 217
2002.................................................... 882
2003.................................................... 41
- ------------------------------------------------------------
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 Lakeview's consolidated financial position.
Note 17
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, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of July 31, 1998, 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 following
table (dollars in thousands).
<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, 1997:
Total capital (to risk-weighted assets)....$45,129....17.0%....$21,246....8.0%.....$26,557....10.0%
Tier 1 capital (to risk-weighted assets)....36,121....13.6......10,623....4.0.......15,934.....6.0
Tier 1 capital (to average assets)..........36,121.....7.6......19,108....4.0.......23,885.....5.0
- ----------------------------------------------------------------------------------------------------
As of July 31, 1998:
Total capital (to risk-weighted assets)....$51,418....15.0%....$27,416....8.0%.....$34,270....10.0%
Tier 1 capital (to risk-weighted assets)....31,651.....9.2......13,708....4.0.......20,562.....6.0
Tier 1 capital (to average assets)..........31,651.....5.8......21,888....4.0.......27,360.....5.0
- ----------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
FOCUS '99
Note 18
Stock Repurchase Program
Lakeview 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. Lakeview has completed the
repurchase of 489,053 shares totaling $11.4 million for the year ended July 31,
1998.
Note 19
Fair Value of Financial Instruments
Statement of Accounting Standards No. 107, "Disclosure about Fair Value of
Financial Instruments" (SFAS 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
instruments. Such estimates do not include any premium or discount that could
result from offering for sale at one time Lakeview'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 Lakeview 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, 1997 and 1998:
Financial Assets:
The carrying amount of cash and cash equivalents is considered to approximate
fair value. The fair values of securities available for sale, mortgage-backed
securities held to maturity and investment securities held to maturity 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. For short-term borrowings, the
carrying amounts are considered to approximate fair value. Long-term borrowings
fair values are discounted using rates available on borrowings with similar
terms and maturities.
37
<PAGE>
LAKEVIEW FINANCIAL CORP. 1998 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, 1997 and 1998 are as
follows (in thousands):
Carrying amount Fair value
- --------------------------------------------------------------------------------
1997:
Financial assets:
Cash and cash equivalents............................$...5,399.........$..5,399.
Investment securities held to maturity..................42,682...........41,935
Securities available for sale..........................105,592..........105,592
Mortgage-backed securities held to maturity............102,249..........102,345
Loans receivable, net..................................224,564..........229,260
Federal Home Loan Bank of New York stock.................3,550............3,550
Financial liabilities:
Deposits...............................................370,787..........374,661
Borrowings..............................................63,604...........63,60
1998:
Financial assets:
Cash and cash equivalents............................$..48,673.........$.48,673
Investment securities held to maturity..................83,831...........83,109
Securities available for sale...........................37,867...........37,867
Mortgage-backed securities held to maturity............101,771..........101,798
Loans receivable, net..................................286,869..........293,526
Federal Home Loan Bank of New York stock.................4,626............4,626
Financial liabilities:
Deposits...............................................456,880..........460,443
Borrowings..............................................73,711...........81,796
Note 20
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) establishes standards for reporting and displaying of
comprehensive income and its components in a full set of general purpose
financial statements. Under SFAS 130, comprehensive income is divided into net
income and other comprehensive income. Other comprehensive income includes items
previously recorded directly in equity, such as unrealized gains or losses on
securities available for sale. Prior period financial statements need to be
reclassified to reflect the applications of the provisions of SFAS 130. SFAS 130
is effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS 130 is not expected to have a material impact on Lakeview's financial
statement presentation.
Statement of Financial Accounting Standards No. 132, "Employers Disclosures
about Pensions and Other Post-retirement Benefits" (SFAS 132), revises
employers' disclosures about pension and other post-retirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other post-retirement benefits to
the extent practicable, requires additional information in changes in the
benefit obligations and fair value of plan asset that will facilitate financial
analysis and eliminates certain required disclosures of previous accounting
pronouncements. SFAS 132 is effective for fiscal years beginning after December
15, 1997. Restatement of disclosures for earlier periods is required unless the
information is not readily available. The adoption of SFAS 132 is not expected
to have a significant impact on Lakeview's financial statement presentation or
footnote disclosure.
38
<PAGE>
FOCUS '99
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133) establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. Initial
application of SFAS 133 should be as of the beginning of an entity's fiscal
quarter; on that date, hedging relationships must be designated anew and
documented pursuant to the provisions of this statement. Earlier application of
all of the provisions of SFAS 133 is encouraged, but it is permitted only as of
the beginning of any fiscal quarter that begins after issuance of the statement.
This statement should not be applied retroactively to financial statements of
prior periods. Lakeview has not determined the impact, if any, SFAS 133 will
have on Lakeview's consolidated financial statements.
Note 21
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
Bank paid $794,000, $582,000 and $255,000 in Federal deposit insurance premiums
for the fiscal years ended July 31, 1996, 1997 and 1998, respectively.
Note 22
Subsequent Event
Lakeview, including its subsidiary Branchview, Inc., has an equity investment
with a cost basis of $8.4 million in IMC Mortgage Company, L.P. (IMC). In
addition, Lakeview has an unsecured line of credit to IMC for $7 million as of
July 31, 1998 (see Note 6).
IMC reached an agreement on October 15, 1998 for a $33 million standby revolving
credit facility with a lender and certain affiliates of the lender. The facility
is available to provide working capital for a period of up to 90 days, during
which time IMC intends to explore financial and strategic alternatives including
the possible sale of IMC. The terms of the new facility result in a substantial
dilution of existing common stockholders' equity equating to a minimum of 40%,
up to a maximum of 90%, on a fully diluted basis, depending on when, or whether,
a change of control transaction occurs, as described below. Lakeview's equity
investment in IMC represents approximately 5.5% of IMC's outstanding common
shares. IMC has also entered into intercreditor arrangements with its three
largest warehouse and residual certificate lenders which have agreed to a
"standstill" keeping their facilities in place for up to 90 days in order for
IMC to explore its financial alternatives. In addition, IMC has entered into a
forbearance and intercreditor agreement with respect to its $95 million
revolving bank credit facility, which has matured by its terms. That agreement
provides that the lender will take no collection action fo 45 days, extending
for an additional 45 days (to a total of 90 days) if a letter of intent to
effectuate a change of control has been entered into by IMC during the initial
45-day period.
In view of, among other things, reductions in available cash and credit
resources, IMC has retained an investment banker to advise it as to financial
and strategic alternatives. IMC is actively working with the investment banker
to seek a long-term investor in IMC or a sale or similar transaction resulting
in a change of control of IMC.
In light of, among other things, the factors noted above, IMC does not expect to
meet earnings expectations for the quarter ended September 30, 1998, and
presently anticipates the possibility of a third quarter loss.
As of October 16, 1998, the market value of the IMC stock held by Lakeview,
based on the quoted market price per share, was $1.8 million, resulting in an
unrealized loss, net of tax, of $4.0 million.
Management of Lakeview cannot presently predict what effect the actions of IMC,
as described above, will have on the collectibility of the outstanding line of
credit and recoverability of their equity investment.
Note 23
Parent Company Only
At fiscal year end 1998, Lakeview Financial Corp. (Parent) had three active
subsidiaries: Lakeview Savings Bank, Branchview, Inc., and Lakeview Mortgage
Depot, Inc. The earnings of the subsidiaries are recognized by the Parent using
the equity method of accounting. Accordingly, earnings of the subsidiaries are
recorded as increases in the Parent's investment in the subsidiaries and
dividends paid reduce the Parent's investment in the subsidiaries. The following
information should be read in conjunctio with other Notes to the Consolidated
Financial Statements.
39
<PAGE>
LAKEVIEW FINANCIAL CORP. 1998 ANNUAL REPORT
<TABLE>
<CAPTION>
1997 1998
------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Condensed Financial Statements (Parent Only)...............................................................
Condensed Balance Sheets...................................................................................
Assets.....................................................................................................
Cash on hand and in banks.......................................................$.....168.....$........107
Investments in subsidiaries........................................................63,456...........60,227
Securities available for sale.........................................................720............1,390
Excess of cost over fair value of assets acquired, net..................................-.............(990)
Other assets..........................................................................297..............357
- ------------------------------------------------------------------------------------------------------------
Total assets....................................................................$..64,641.....$.....61,091
- ------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Borrowings..........................................................................2,000........... 4,307
Other liabilities.....................................................................832........ .....177
Stockholders' equity...............................................................61,809....... ...56,607
- ------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity......................................$..64,641.... $ ....61,091
- ------------------------------------------------------------------------------------------------------------
Condensed Statements of Income.....................................1996..............1997............1998..
Dividends from subsidiaries......................................$..7,651.......$....5,551....$......8,700
Other income............................................................-...............13...............6
- ------------------------------------------------------------------------------------------------------------
Total income........................................................7,651............5,564...........8,706
Interest expense........................................................-...............47.............459
Amortization of excess cost over fair value of net
assets acquired, net....................................................-................-.............(28)
Other expense..........................................................35...............61..............86
- ------------------------------------------------------------------------------------------------------------
Total expense..........................................................35..............108.............517
Income before income taxes and equity of undistributed
income of subsidiaries..............................................7,616............5,456.......... 8,189
Income tax expense (benefit)............................................2..............(12)............. -
Equity in undistributed income (loss) of subsidiaries..............(1,340).............593...........1,256
- ------------------------------------------------------------------------------------------------------------
Net income.......................................................$..6,274.......$....6,061....$......9,445
- ------------------------------------------------------------------------------------------------------------
Condensed Statement of Cash Flows....................................1996.............1997............1998
Cash flows from operating activities:
Net income....................................................$..6,274.......$....6,061....$......9,445
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (income) loss from subsidiary............1,340.............(593).........(1,256)
(Decrease) increase in investment in subsidiaries.................(250)............(150)............150
Amortization of excess of cost over fair value of.
assets acquired, net.................................................-................-.............(28)
Increase in other assets.............................................-.............(351)............(60)
(Increase) decrease in other liabilities............................(5).............832............(655)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activity..........................7,359............5,799......... 7,596
- ------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Payment for purchase of Westwood Financial
Corporation, net of cash acquired....................................- ...............-...........1,148
Purchase of securities available for sale............................-.............(585).........(1,000)
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities................................-.............(585)............148
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid...............................................(582)............(587)...........(845)
Purchase of treasury stock......................................(6,685)..........(6,703).........(11,389)
Exercise of stock options............................................-................-............2,122
Increase in borrowings...............................................-............2,000............2,307
- ------------------------------------------------------------------------------------------------------------
Net cash used in financing activities..............................(7,267)..........(5,290)..........(7,805)
- ------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents................................92..............(76).............(61)
Cash and cash equivalents at beginning of period......................152..............244..............168
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period......................$.....244.......$......168.....$........107
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FOCUS '99
Note 24
Quarterly Financial Data (Unaudited)
The following table contains quarterly financial data for the years ended July
31, 1997 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
.........................................................First.........Second.........Third ........Fourth
Year Ended July 31, 1997............................... Quarter........Quarter........Quarter.......Quarter......Total..
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income........................................$.8,058........$.7,983........$..8,372......$..8,429.....$32,842
Interest Expense.........................................4,209..........4,357...........4,312.........4,440..... 17,318
- -----------------------------------------------------------------------------------------------------------------------
Net Interest Income......................................3,849..........3,626...........4,060.........3,989..... 15,524
Provision for Loan Losses..................................105............256.............300...........300........ 961
- -----------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses..........................................3,744..........3,370...........3,760.........3,689..... 14,563
Other Income.............................................1,614..........3,166.............972.........2,350...... 8,102
Other Expense............................................4,801..........2,649...........2,847.........2,858..... 13,155
Income Before Income Taxes.................................557..........3,887...........1,885.........3,181...... 9,510
Income Taxes...............................................211..........1,417.............546.........1,275...... 3,449
- -----------------------------------------------------------------------------------------------------------------------
Net Income.............................................$...346........$.2,470........$..1,339.......$.1,906.....$ 6,061
Net Income Per Share:
Basic...............................................$..0.08........$..0.60........$...0.33.......$..0.48.....$ 1.49
Diluted.............................................$..0.05........$..0.52........$...0.29.......$..0.42.....$ 1.28
</TABLE>
<TABLE>
<CAPTION>
........................................................First.........Second...........Third.............Fourth
Year Ended July 31, 1998.............................. Quarter........Quarter..........Quarter..........Quarter.......Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Income........................................$.8,971........$8,683`........$...9,645..........$.10,078...$..37,377
Interest Expense.........................................4,636..........4,664............5,084.............5,418......19,802
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income......................................4,335..........4,019............4,561.............4,661......17,575
Provision for Loan Losses..................................301............300..............449...............450.......1,500
- ----------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses..........................................4,034..........3,719............4,112.............4,211......16,075
Other Income...............................................745..........3,371............3,587.............4,109......11,812
Other Expense............................................2,823..........3,027............3,133.............3,869......12,852
Income Before Income Taxes...............................1,956..........4,063............4,566.............4,450......15,035
Income Taxes...............................................690..........1,515............1,524.............1,861.......5,590
- ----------------------------------------------------------------------------------------------------------------------------
Net Income.............................................$.1,266.......$..2,548........$...3,042...........$.2,589...$...9,445
- ----------------------------------------------------------------------------------------------------------------------------
Net Income Per Share:
Basic...............................................$..0.28.......$...0.75........$....0.83...........$..0.65...$....2.51
Diluted.............................................$..0.29.......$...0.63........$....0.75...........$..0.61...$....2.28
</TABLE>
41
<PAGE>
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 2, 1998, except as to Note 22,
which is as of October 16, 1998, relating to the consolidated balance sheets of
Lakeview Financial Corp. and subsidiaries as of July 31, 1998 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, 1998, which report
is included in the July 31, 1998 Annual Report on Form 10-K of Lakeview
Financial Corp.
/s/KPMG Peat Marwick LLP
---------------------------
KPMG Peat Marwick LLP
Short Hills, New Jersey
October 20, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 8,772,953
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 39,900,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,866,893
<INVESTMENTS-CARRYING> 190,227,429
<INVESTMENTS-MARKET> 0
<LOANS> 291,346,585
<ALLOWANCE> 4,477,623
<TOTAL-ASSETS> 593,855,835
<DEPOSITS> 456,879,600
<SHORT-TERM> 73,710,789
<LIABILITIES-OTHER> 6,658,297
<LONG-TERM> 0
0
0
<COMMON> 12,883,008
<OTHER-SE> 43,724,141
<TOTAL-LIABILITIES-AND-EQUITY> 593,855,835
<INTEREST-LOAN> 22,350,877
<INTEREST-INVEST> 15,026,711
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 37,377,588
<INTEREST-DEPOSIT> 15,335,400
<INTEREST-EXPENSE> 19,802,205
<INTEREST-INCOME-NET> 17,575,383
<LOAN-LOSSES> 1,500,217
<SECURITIES-GAINS> 8,191,405
<EXPENSE-OTHER> 12,851,602
<INCOME-PRETAX> 15,035,084
<INCOME-PRE-EXTRAORDINARY> 9,444,931
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,444,931
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.28
<YIELD-ACTUAL> 3.03
<LOANS-NON> 2,793,522
<LOANS-PAST> 2,793,522
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,411,462
<CHARGE-OFFS> 986,510
<RECOVERIES> 125,955
<ALLOWANCE-CLOSE> 4,477,623
<ALLOWANCE-DOMESTIC> 4,477,623
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
