SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 0-27010
LITTLE FALLS BANCORP, INC.
(Exact name of registrant as specified in its charter)
New Jersey 22-3402073
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
86 Main Street, Little Falls, New Jersey 07424
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 256-6100
N/A
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date August 9, 1996.
Class Outstanding
$.10 par value common stock 3,041,750 shares
LITTLE FALLS BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION OF LITTLE FALLS
BANCORP, INC.
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Materially Important Events 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES
LITTLE FALLS BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1996 1995*
ASSETS
Cash and due from banks.............................. $3,295,717 $ 2,518,055
Interest-bearing deposits in other banks............. 3,026,717 11,101,033
Federal funds sold................................... 3,000,000 39,800,000
----------- -----------
Total cash and cash equivalents................. 9,322,434 53,419,088
Investment securities held-to-maturity net
(estimated fair values $29,930,000 (1996)
and $29,856,000 (1995))............................ 30,376,334 29,999,470
Mortgage-backed securities held to maturity, net
(estimated fair values $120,140,000 (1996)
and $118,842,000 (1995))........................... 120,969,670 118,020,300
Loans receivable, net................................ 108,423,348 96,229,678
Premises and equipment, net.......................... 2,811,498 2,789,468
Investment in real estate, net....................... 541,716 546,786
Foreclosed real estate, net.......................... 1,635,606 1,500,825
Interest receivable, net............................. 1,820,049 1,717,349
Federal Home Loan Bank of New York stock, at cost.... 2,108,139 1,395,200
Excess of cost over assets acquired.................. 3,397,410 3,577,800
Other assets......................................... 825,922 1,158,999
----------- -----------
TOTAL ASSETS................................... $282,232,126 $310,354,963
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits........................................... $237,515,245 $247,851,373
Advances by borrowers for taxes.................... -- 701,773
Stock subscriptions payable........................ -- 44,831,296
Accounts payable and other liabilities............. 828,216 747,298
Dividends payable.................................. 76,044 --
----------- -----------
Total liabilities.............................. 238,419,505 $294,131,740
----------- -----------
Stockholders' Equity:
Preferred stock; 5,000,000 authorized shares;
none outstanding................................. -- --
Common stock, par value $.10; 10,000,000
authorized shares; 3,041,750 issued
and outstanding................................ . 304,175 --
Additional paid-in-capital......................... 28,978,048 --
Retained earnings.................................. 16,986,748 16,327,286
Unearned ESOP shares............................... (2,352,287) --
Minimum pension liability net of deferred taxes.... (104,063) (104,063)
----------- -----------
Total stockholders' equity..................... 43,812,621 16,223,223
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $282,232,126 $310,354,963
=========== ===========
- ---------------------
* The consolidated balance sheet at December 31, 1995 has been taken from
the audited balance sheet at that date.
See notes to unaudited consolidated financial statements.
1
LITTLE FALLS BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ------------------------
1996 1995 1996 1995
Interest income:
Loans receivable............ $2,003,363 $1,827,970 $3,908,187 $3,768,498
Mortgage backed securities.. 1,973,706 854,452 4,058,215 1,657,358
Investment securities and
other interest earning
assets.................... 693,180 478,834 1,414,642 972,638
--------- --------- --------- ---------
Total interest income... 4,670,249 3,161,256 9,381,044 6,398,494
--------- --------- --------- ---------
Interest expense:
Deposits.................... 2,751,379 2,266,535 5,663,675 4,264,916
--------- --------- --------- ---------
Net interest income .......... 1,918,870 894,721 3,717,369 2,133,578
Provision for loan losses..... -- 284,726 30,000 284,726
Net interest income after
provision for loan losses 1,918,870 609,995 3,687,369 1,848,852
Non-interest income
Income (expense) on
foreclosed real estate.... 1,882 (186) 20,659 (4,766)
Other....................... 81,532 37,429 134,840 71,720
--------- --------- --------- ---------
Total non-interest income 83,414 37,243 155,499 66,954
--------- --------- --------- ---------
Non-interest expense:
Compensation and employee
benefit 595,401 411,438 1,210,165 781,379
Occupancy, net.............. 94,592 41,585 209,833 84,725
Equipment................... 82,082 61,074 193,942 119,935
Deposit insurance premiums.. 136,234 106,500 245,439 213,000
Amortization of intangibles. 90,197 -- 180,390 --
Other....................... 298,502 374,378 614,094 515,321
--------- --------- --------- ---------
Total non-interest expense 1,297,008 994,975 2,653,863 1,714,360
--------- --------- --------- ---------
Income (loss) before
provision for income
taxes.................. 705,276 (347,737) 1,189,005 201,446
Provision (benefit) for income
taxes....................... 282,149 (121,153) 453,500 60,078
--------- --------- --------- ---------
Net income.............. 423,127 (226,584) 735,505 141,368
========= ========= ========= =========
Weighted average number of
common shares outstanding... 2,804,494 N/A 2,802,466 N/A
Earnings per share............ 0.15 N/A 0.26 N/A
See notes to unaudited consolidated financial statements.
2
LITTLE FALLS BANCORP, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
---------------------
1996 1995
-------- --------
Cash flows from operating activities:
Net income....................................... $735,505 $141,368
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation................................... 73,830 46,243
Provision for loan losses...................... 30,000 284,726
Amortization of intangibles.................... 180,390 --
Amortization (accretion) of deferred fees,
premiums and discounts, net................... 40,350 32,650
Amortization of unearned ESOP shares........... 85,777 --
Gain on sale of foreclosed real estate......... (31,249) --
Decrease (increase) in other assets............ (89,553) (244,538)
(Increase) decrease in interest receivable, net (102,700) 100,567
Increase (decrease) in interest payable........ 159,713 95,477
Increase (decrease) in accounts payable and
other liabilities............................. 89,005 201,802
----------- -----------
Net cash provided by operating activities.... 1,171,068 658,295
----------- -----------
Cash flows from investing activities:
Purchase of mortgage-backed securities held
to maturity................................... (16,073,205) (13,215,144)
Principal collections on mortgage-backed
securities held to maturity 13,030,948 2,374,173
Net (increase) decrease in loans receivable.... (12,514,725) 1,502,033
Maturity of investments held to maturity....... 5,000,000 7,000,000
Purchase of investments held to maturity....... (5,342,000) --
Purchases of premises and equipment............ (90,790) (79,166)
Proceeds from sale of foreclosed real estate... 205,196 123,659
Redemption (purchases) of Federal Home Loan Bank
of New York stock............................. (712,939) 116,100
Net cash provided by (used in) operating
activities................................. (16,497,515) (2,178,345)
Cash flows from financing activities:
Net increase (decrease) in deposits............. (7,636,383) 10,847,235
Increase (decrease) in advances from borrowers.. (709,860) 52,573
Refund of oversubscribed stock subscription..... (19,706,653) --
Costs of issuance of common stock............... (717,311) --
----------- -----------
Net cash provided by (used in) financing
activities.................................. (28,770,207) 10,899,808
Increase (decrease) in cash and cash
equivalents (44,096,654) 9,379,758
Cash and cash equivalents:
Beginning of period.............................. 53,419,088 4,065,128
----------- -----------
End of period.................................... $ 9,322,434 $ 13,444,886
=========== ==========
Supplemental disclosures:
Cash paid during the year for:
Interest......................................... $ 5,503,962 $ 4,264,916
Income taxes..................................... 223,000 54,839
Loans receivable transferred to foreclosed real
estate 308,728 237,690
Issuance of common stock:
Deposits used for stock purchase................. 2,859,458 --
Stock subscriptions used for stock purchase...... 25,124,642 --
Deferred costs................................... (422,630) --
See notes to unaudited consolidated financial statements.
3
LITTLE FALLS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the three month and
six month periods ended June 30, 1996 include the accounts of Little Falls
Bancorp, Inc. (the "Company") and its subsidiary, Little Falls Bank (the
"Bank") which, as discussed in Note 3, became the wholly owned subsidiary
of the Company on January 5, 1996. The Company's business is conducted
principally through the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include
all information necessary for a complete presentation of consolidated
financial condition, results of operations, and cash flows in conformity
with generally accepted accounting principles. However, all adjustments,
consisting of normal recurring accruals, which, in the opinion of
management, are necessary for a fair presentation of the consolidated
financial statements have been included. The results of operations for the
period ended June 30, 1996 are not necessarily indicative of the results
which may be expected for the entire fiscal year or any other period.
NOTE 3 - CONVERSION FROM MUTUAL SAVINGS BANK TO STOCK SAVINGS BANK AND
FORMATION OF SAVINGS AND LOAN HOLDING COMPANY
On January 5, 1996, the Bank consummated its conversion from a federally
chartered mutual savings bank to a stock savings bank pursuant to a Plan
of Conversion (the "Conversion") via the issuance of common stock. In
connection with the Conversion, the Company sold 3,041,750 shares of
common stock which, after giving effect to offering expenses of $1.1
million and 243,340 shares issued to the Bank's Employee Stock Ownership
Plan ("ESOP"), resulted in net proceeds of $26.8 million. Pursuant to the
Conversion, the Bank transferred all of its outstanding shares to a newly
organized holding company, Little Falls Bancorp, Inc., in exchange for 50%
of the net proceeds.
Upon consummation of the Conversion, the preexisting liquidation rights of
the depositors of the Bank were unchanged. Specifically, such rights were
retained and will be accounted for by the Bank for the benefit of such
depositors in proportion to their liquidation interests as of the
eligibility and supplemental eligibility record dates as required by
Office of Thrift Supervision ("OTS") regulations.
NOTE 4 - EARNINGS PER SHARE
Earnings per share for the three and six month periods ended June 30, 1996
are calculated by dividing the net earnings for the periods from April 1,
1996 and January 1, 1996 (the beginning of the Company's fiscal year) to
June 30, 1996 of $423,000 and $736,000, respectively, by the weighted
average number of shares outstanding during these same periods (as if the
Conversion had taken place on January 1, 1996) of 2,804,494 and 2,802,466
shares, respectively. The weighted average number of common shares
outstanding is adjusted for the unallocated portion
4
of shares held by the ESOP. Earnings per share is not presented for the
1995 period as the Bank was a mutual savings bank at that time and no
common stock was outstanding.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, the Bank adopted FASB Statement Nos. 114,
"Accounting by Creditors for Impairment of a Loan" and 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
The provision of these statements are applicable to all loans,
uncollateralized as well as collateralized, except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment and loans that are measured at fair value or at the lower of
cost or fair value. Additionally, such provisions apply to all loans that
are renegotiated in troubled debt restructurings involving a modification
of terms.
Statement No. 114 requires that impaired loans be measured based on the
present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent, except that loans renegotiated as part of a troubled
debt restructuring subsequent to the adoption of Statement Nos. 114 and
118 must be measured for impairment by discounting the total expected cash
flow under the renegotiated terms at each loan's original effective
interest rate.
A loan evaluated for impairment pursuant to Statement No. 114 is deemed to
be impaired when, based on current information and events, it is probable
that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. An insignificant payment delay,
which is defined by the Bank as up to ninety days, will not cause a loan
to be classified as impaired. A loan is not impaired during the period of
delay in payment if the Bank expects to collect all amounts due, including
interest accrued at the contractual interest rate for the period of delay.
Thus, a demand loan or other loan with no stated maturity is not impaired
if the Bank expects to collect all amounts due, including interest accrued
at the contractual interest rate, during the period the loan is
outstanding. All loans identified as impaired are evaluated independently.
The Bank does not aggregate such loans for evaluation purposes.
The adoption of Statement Nos. 114 and 118 did not have a material advers
impact on financial condition or operations.
Payments received on impaired loans are applied first to interest
receivable and then to principal.
5
LITTLE FALLS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a New Jersey corporation organized in August 1995 at the
direction of the Board of Directors of the Bank to acquire all of the capital
stock of the Bank issued in the Conversion. The Company is a unitary savings and
loan holding company which, under existing laws, generally is not restricted in
the types of business activities in which it may engage provided that the Bank
retains a specified amount of its assets in housing-related investments.
The Bank is a federally chartered stock savings bank headquartered in
Little Falls, New Jersey. The Bank was founded in 1887 and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") and the
Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products. It is the Bank's intent to remain an independent
community savings bank serving the local banking needs of its community.
The Bank attracts deposits from the general public and has historically
used such deposits primarily to originate loans secured by first mortgages on
owner-occupied one- to four-family residences in its market area and to purchase
mortgage-backed securities. The Bank also originates a limited number of
commercial real estate, residential construction, and consumer loans, which
mainly consist of home equity lines of credit.
The largest components of the Bank's net income are net interest income,
which is the difference between interest income and interest expense, and
noninterest income derived primarily from fees. Consequently, the Bank's
earnings are dependent on its ability to originate loans, net interest income,
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Bank's net income is also affected by its provision for loan
losses and foreclosed real estate as well as the amount of non-interest
expenses, such as compensation and benefit expense, occupancy and equipment
expense and deposit insurance premium expenses. Earnings of the Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities. The current disparity in premiums paid by Bank
Insurance Fund ("BIF") and SAIF insured institutions may also adversely impact
the Bank in the future. See "Item 5" herein.
Comparison of Financial Condition
Total assets decreased by $28.1 million to $282.2 million at June 30, 1996
from $310.3 million at December 31, 1995. Net loans increased by $12.2 million
due to loan originations of $16.8 million offset by loan repayments.
Mortgage-backed securities increased by $2.9 million due to the purchase of
$16.0 million of mortgage-backed securities, of which $10.1 million were
adjustable rate securities. Total cash and cash equivalents decreased by $44.1
million due to the $16.8 million of loans originated, the $16.0 million
mortgage-backed securities purchased and the refund of $19.7 million of
over-subscribed stock subscriptions.
Total deposits decreased by $10.3 million, due in part to $2.8 million
being used for the purchase of stock in the Conversion. In addition, the
decrease was also the result of the Bank's strategy to lower
6
its cost of deposits. This strategy resulted in a decrease of the weighted
average rate on total deposits from 4.73% on December 31, 1996 to 4.57% on June
30, 1996.
Total stockholders' equity increased by $27.6 million primarily due to the
completion of the Conversion and, to a much lesser extent, earnings during the
six month period. Stockholders' equity will be reduced to the extent stock is
purchased pursuant to the Company's 5% stock repurchase program and pursuant to
a recently adopted Management Stock Bonus Plan ("MSBP"). See "Item 5 - Other
Materially Important Events -- Stock Repurchase Plan" and "-- Comparison of
Earnings for the Three and Six Months Ended June 30, 1996 and 1995 -
Non-interest Expense."
Non-performing Assets
The following table sets forth information regarding non-performing loans
and real estate owned. During the periods indicated, the Bank had no
restructured loans within the meaning of SFAS No. 15.
At At
June 30, 1996 December 31, 1995
(Dollars in Thousands)
Total non-performing loans $ 2,782 $ 2,447
Real estate owned 1,636 1,501
----- -----
Total non-performing assets $ 4,418 $ 3,948
====== ======
Total non-performing loans to net loans 2.57% 2.54%
====== ======
Total non-performing loans to total assets 0.99% 0.79%
====== ======
Total non-performing assets to total assets 1.57% 1.26%
====== ======
After increasing by $518,000 to $4.5 million during the quarter ended
March 31, 1996, non-performing assets decreased to $4.4 million at June 30,
1996, an increase of $470,000 as compared to December 31, 1995. The increase was
due in most part to an increase in 1-4 family loans becoming 90 days or more
delinquent, partially offset by the sale of two properties previously classified
as foreclosed real estate.
Comparison of Earnings for the Three and Six Months Ended June 30, 1996 and 1995
Net Income. Net income for the three and six months ended June 30, 1996
increased $650,000 and $594,000, respectively to $423,000 and $736,000,
respectively, when compared to the same periods ended June 30, 1995. The
increases were due in most part to an increase in net interest income before the
provision for loan losses of $1.0 million and $1.6 million for the three and six
months ended June 30, 1996, as compared to the same periods in 1995. In
addition, the provision for loan losses of $285,000 in 1995, was much lower in
1996 and the Company recorded a nonrecurring expense of $195,000 in 1995 in
connection with the implementation of a directors' medical plan. These
non-recurring items were offset somewhat by increases of $302,000 and $940,000
of non-interest expenses for the three and six months ended June 30, 1996, as
compared to the same periods in 1995.
Total Interest Income. Interest income increased by $1.5 million and $3.0
million for the three and six months ended June 30, 1996. These increases were
due to the increase of the average balances of interest earning assets of $74.5
million and $71.5 million for the three months and six months ended June 30,
1996, as compared to the same periods in 1995. The primary reasons for the
increased average balances of interest earning assets were the receipt of $50.8
million from the purchase of three branches and their deposits in December 1995
and the receipt of $26.8 million of net proceeds from the Bank's Conversion on
January 5, 1996.
7
For the three months ended June 30, 1996, the average rate earned on
interest earning assets increased by 44 basis points to 6.97% from 6.53% for the
same period of 1995. The increase is due in part to the origination of $12.7
million in loans at an average coupon rate of approximately 7.03%, and the
purchase of $6.0 million of mortgage-backed securities with a weighted average
coupon of 6.75%. For the six months ended June 30, 1996 the average rate earned
on interest earning assets increased 12 basis points to 6.86% from 6.74% at June
30, 1995.
Total Interest Expense. Interest expense increased $485,000, or 21.4% and
$1.4 million or 32.8% for the three and six month periods ended June 30, 1996,
respectively, as compared to the same periods ended June 30, 1995. These
increases were primarily due to the increase in the average balances of deposits
of $55.2 million and $61.8 million, respectively. Deposits increased due to the
purchase of three branches and their deposits of $54.1 million in December 1995.
The average rate paid on deposits decreased to 4.63% and 4.72% from 4.95% and
4.79%, respectively, for the three and six months ended June 30, 1996, as
compared to the same periods ended June 30, 1995.
Net Interest Income. Net interest income increased $1.0 million or 114.5%
and $1.6 million or 74.2% for the three and six month periods ended June 30,
1996, respectively, as compared to the same periods ended June 30, 1995. These
increases were due to the investment of $26.3 million received from the
Conversion in loans, investment and mortgage-backed securities, as well as a
decrease in the average rate paid on savings, as described earlier. In addition,
the net interest rate spread, (the difference between the rate earned on
interest earning assets and the rate paid on interest bearing liabilities)
increased by 76 and 19 basis points for the three and six month periods ended
June 30, 1996, respectively, as compared to the three and six month periods
ended June 30, 1995, due to factors described earlier.
Provisions for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the potential losses that may be
incurred in the Bank's loan portfolio. Such evaluation, which includes a review
of certain loans of which full collectibility of interest and principal may not
be reasonably assured, considers the 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 provision for loan losses decreased $285,000
and $255,000 during the three and six month periods, respectively. The primary
cause for the decreases was the decision by the Bank's management during 1995,
to establish an increased general reserve for portfolio losses based on an
assessment of the risks inherent in the loan portfolio and trends in the local
and national economics.
As a result of the declines in regional real estate market values and the
significant losses experienced by many financial institutions, there has been a
greater level of scrutiny by regulatory authorities of the loan portfolios of
financial institutions undertaken as part of the examination of the institution
by the FDIC, OTS or other federal or state regulators. Results of recent
examinations indicate that these regulators may be applying more conservative
criteria in evaluating real estate market values, requiring significantly
increased provisions for potential loan losses. While the Bank believes it has
established an adequate allowance for loan losses, there can be no assurance
that regulators, in reviewing the Bank's loan portfolio, will not request the
Bank to significantly increase its allowance for loan losses, thereby negatively
affecting the Bank's financial condition and earnings or that the Bank may not
have to increase its level of loan loss allowance in the future.
Management will continue to review its loan portfolio to determine the
extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
8
An analysis of the allowance for loan losses follows:
Quarter Ended June 30
1996 1995
(In thousands)
Balance - beginning $931 $ 912
Provisions charged to operations -- 285
Loans charged off, net of recoveries -- (182)
--- -----
Balance-ending.................. $931 $1,015
=== =====
Impaired loans and related amounts recorded in the allowance for loan
losses at June 30, 1996 are summarized as follows (in thousands):
Recorded investment in impaired loans:
With recorded allowances............ $1,368
Without recorded allowances......... 242
-----
Total impaired loans.............. 1,610
Related allowance for loan losses. 200
-----
Net impaired loans................ $1,410
=====
Non-interest Income. Non-interest income increased by $46,000 and $89,000
for the three and six month periods ended June 30, 1996, as compared to the same
periods ended June 30, 1995. The increases were due to an increase in service
fees charged, due in most part to the increase in deposits and branches
resulting from the purchase of three branches and their deposits in December,
1995, and the $31,000 gain on the sales of properties formerly classified as
foreclosed real estate.
Non-interest Expense. Non-interest expense increased $302,000 and $940,000
for the three and six months ended June 30, 1996, as compared to the three and
six months ended June 30, 1995 for a number of reasons. Compensation and
employee benefits increased by $184,000 and $249,000, respectively, due in part
to additional employees resulting from the purchase of three branch offices in
December, 1995 and the adoption of an employee stock ownership plan in
connection with the Bank's mutual to stock conversion ("ESOP"). The Company had
initially expended $134,000 for the first quarter of fiscal 1996. This amount
has been restated to $45,000 for the three months ended March 31, 1995 due to
the Company's evaluation of the terms of the ESOP and the loan. The ESOP
expense, as restated, was $41,000 and $86,000 for the three and six months ended
June 30, 1996. The acquisition of the branch offices also caused increases in
occupancy and equipment expenses, as well as the amortization of goodwill and
deposit insurance premiums during these periods. In addition, for the six months
ended June 30, 1996, a portion of the increase was due to one time costs
associated with new services offered by the Bank. The 1996 increases were
partially offset by a nonrecurring 1995 expense of $195,000 for the
implementation of a directors' medical plan, which was recorded during the three
months ended June 30, 1995. Effective on or about August 31, 1996, the Bank will
close its Frenchtown office. Some operating efficiencies are expected.
On July 9, 1996, the stockholders of the Company approved the MSBP and a
Stock Option Plan. The MSBP will, subject to regulatory non-objection, purchase
up to 121,670 shares of Common Stock to be awarded to key employees and
directors of the Bank. Such shares will be expensed at fair market value at 20%
per year beginning July 1997. The Company expects the MSBP to increase
compensation expense over such periods.
9
Income Tax Expense. Income tax expense increased $403,000 and $393,000,
respectively for the three and six month periods ended June 30, 1996, as
compared to the same periods one year ago due to the increase of pre-tax income
for the same periods.
Liquidity and Capital Resources
On June 30, 1996, the Bank was in compliance with its three regulatory
capital requirements as follows:
Amount Percent
(Dollars in thousands)
Tangible capital............................ $25,631 9.20%
Tangible capital requirement................ 4,181 1.50%
------ -----
Excess over requirement..................... $21,450 7.10%
====== =====
Core capital................................ $25,631 9.20%
Core capital requirement.................... 8,362 3.00%
------ -----
Excess over requirement..................... $17,269 6.20%
====== =====
Risk based capital.......................... $26,020 29.65%
Risk based capital requirement.............. 7,022 8.00%
------ -----
Excess over requirement..................... $18,998 21.65%
====== =====
Management believes that under current regulations, the Bank will continue
to meet its minimum capital requirements in the foreseeable future. Events
beyond the control of the Bank, such as increased interest rates or a downturn
in the economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
The Bank's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost effective
manner. The Bank's primary sources of funds are deposits and scheduled
amortization and prepayment of loan and mortgage-backed principal. During the
past several years, the Bank has used such funds primarily to fund maturing time
deposits, pay savings withdrawals, fund lending commitments, purchase new
investments, and increase liquidity. The Bank is currently able to fund its
operations internally. Additionally, sources of funds include the ability to
utilize Federal Home Loan Bank of New York advances and the ability to borrow
against mortgage-backed and investment securities. As of June 30, 1996, the Bank
had no such borrowed funds. Loan payments, maturing investments and
mortgage-backed security prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. As of June 30, 1996, the Bank had mortgage commitments
to fund loans of $4.9 million. Also, at June 30, 1996, there were commitments on
unused lines of credit relating to home equity loans of $2.3 million.
Certificates of deposit scheduled to mature in one year or less at June 30, 1996
totaled $100.2 million. Based on historical deposit withdrawals and outflows,
and on internal monthly deposit reports monitored by management, management
believes that a majority of such deposits will remain with the Bank. As a
result, no adverse liquidity effects are expected. Note, however, that purchases
of common stock of the Company pursuant to the repurchase plan and MSBP will
require additional liquidity. Management is currently evaluating its options on
these matters.
10
The Bank is required under federal regulations to maintain certain
specified levels of "liquid investments," which include certain United States
government obligations and other approved investments.
Current regulations require the Bank to maintain liquid assets of not less than
5% of its net withdrawable accounts plus short term borrowings. Short term
liquid assets must consist of not less than 1% of such accounts and borrowings,
which amount is also included within the 5% requirement. Those levels may be
changed from time to time by the regulators to reflect current economic
conditions. The Bank has maintained liquidity in excess of regulatory
requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
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 prices of
goods and services.
11
Key Operating Ratios
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
1996(1) 1995(1) 1996(1) 1995(1)
------- ------- ------- -------
Earnings per common share (2)(3) $0.15 N/A $0.26 N/A
Return on average assets........ 0.60% (0.34)% 0.51% 0.20%
Return on average equity........ 3.88% (4.32)% 3.39% 2.42%
Interest rate spread............ 2.34% 1.58% 2.14% 1.95%
Net interest margin............. 2.86% 1.91% 2.72% 2.25%
Noninterest expense to average assets 1.82% 1.56% 1.83% 1.55%
Net charge-offs to average outstanding
loans......................... -- 0.19% 0.03% 0.47%
At June 30, At June 30,
1996 1995
(Dollars in Thousands)
Nonaccrual and 90 days past due loans......... $ 2,782 $ 3,503
Repossessed real estate....................... 1,636 1,879
----- -----
Total nonperforming assets.................. $ 4,418 $ 5,382
===== =====
Allowance for credit losses to nonperforming
assets 21.07% 18.86%
Nonperforming loans to total loans............ 2.57% 3.78%
Nonperforming assets to total assets.......... 1.57% 2.63%
Tangible book value per share................. 13.29% N/A (2)
- ----------------
(1) The ratios for the three- and six-month periods are annualized.
(2) There were no shares outstanding prior to the completion of the Company's
initial public offering on January 5, 1996.
(3) The average number of shares outstanding during the three and six months
ended June 30, 1996 was 2,804,494 and 2,802,466, respectively.
(4) The number of shares issued and outstanding as of June 30, 1996,
was 3,041,750.
12
LITTLE FALLS BANCORP, INC. AND SUBSIDIARY
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank was engaged in any legal proceeding
of a material nature at June 30, 1996. From time to time, the
Company is a party to legal proceedings in the ordinary course of
business wherein it enforces its security interest in loans.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Stock Repurchase Plan. On July 10, 1996 the Company announced today
that the Company has received the necessary regulatory authorization
to initiate a 5% stock repurchase program. The Company intends to
repurchase up to 5% of its 3,041,750 outstanding shares of common
stock. The repurchases will be made in open-market transactions,
subject to the availability of stock, market conditions, the trading
price of the stock and the Company's financial performance.
Repurchased shares will be held as treasury shares and will be
utilized for general corporate purposes, including the issuances of
shares in connection with the exercise of stock options awarded
under the Company's stock benefit plans approved by shareholders on
July 9, 1996.
Potential One-Time Assessment. Current regulations require the Bank
to pay an insurance premium to the Federal Deposit Insurance
Corporation ("FDIC") between .23% to .31% of its total deposits. In
August, 1995, the FDIC announced that it will lower the insurance
premium for members of the BIF, primarily commercial banks, to a
range of between 0.04% and 0.31% of deposits, with the result that
most commercial banks will pay the lowest rate of 0.04%. This
reduction in insurance premiums for BIF members could place SAIF
members, primarily savings associations, such as the Bank, at a
material competitive disadvantage to BIF members and, for the
reasons set forth below, could have a material adverse effect on the
results of operations and financial condition of the Bank in future
periods.
The disparity in insurance premiums between those required for the
Bank and BIF members could allow BIF members to attract and retain
deposits at a lower effective cost than that possible for the Bank
and put competitive pressure on the Bank to raise its interest rates
paid on deposits thus increasing its cost of funds and possibly
reducing net interest income. The resultant competitive disadvantage
could result in the Bank losing
13
deposits to BIF members who have a lower cost of funds and are
therefore able to pay higher rates of interest on deposits. Although
the Bank has other sources of funds, these other sources may have
higher costs than those of deposits.
Several alternatives to mitigate the effect of the BIF/SAIF
insurance premium disparity have recently been proposed by the U.S.
Congress, federal regulators, industry lobbyists and the
Administration. One plan that has gained support of several sponsors
would require all SAIF member institutions, including the Bank, to
pay a one-time fee of up to 85 basis points on the amount of
deposits held by the member institution to recapitalize the SAIF. If
this proposal is enacted by Congress, the effect would be to
immediately reduce the capital of the SAIF-member institutions by
the amount of the fee, and such amount would be immediately charged
to earnings, unless the institutions are permitted to amortize the
expense of the fee over a period of years. Management of the Bank is
unable to predict whether this proposal or any similar proposal will
be enacted or whether ongoing SAIF premiums will be reduced to a
level equal to that of BIF premiums.
Recent Legislation - Recapture of Post-1987 Bad-Debt Reserves. On
August 2, 1996, both the U.S. House of Representatives and the U.S.
Senate passed the Small Business Job Protection Act of 1996. This
bill will, if signed by the President, among other things, equalize
the taxation of thrifts and banks. Previously, thrifts had been able
to deduct a portion of their bad-debt reserves set aside to cover
potential loan losses ("bad-debt reserves"). Furthermore, the bill
will repeal current law mandating recapture of thrifts' bad debt
reserves if they convert to banks. Bad debt reserves set aside
through 1987 will not be taxed, however, any reserves taken since
January 1, 1988 will be taxed over a six year period beginning in
1997. Institutions can delay these taxes for two years if they meet
a residential-lending test. At December 31, 1995, the Bank had $1.5
million of post 1987 bad-debt reserves. Any recapture of the Bank's
bad-debt reserves may have an adverse effect on net income. The Bank
is currently evaluating this legislation to determine the effect on
the Bank's financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
14
LITTLE FALLS BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements 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.
LITTLE FALLS BANCORP, INC.
Date: August 12, 1996 By: /s/ John P. Pullara
John P. Pullara
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1996 By: /s/ Richard Capone
Richard Capone
Senior Vice President and
Chief Financial Officer
(Principal Officer)