EXHIBIT 13
[Background of the following repeated on entire page]
[STRATEGIC PLAN FOR FUTURE DIRECTION]
[Picture of a ship]
[Charting the course.]
[Picture of Sextant]
[Lakeview Financial Corp.]
[1996 Annual Report]
ABOUT THE COMPANY
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Lakeview Financial Corp. (the "Corporation") is a New Jersey corporation
organized as the Holding Company for Lakeview Savings Bank, on March 25, 1994.
The Bank converted from a Mutual Savings Bank to a publicly traded Company on
December 22, 1993.
Lakeview Savings Bank is a New Jersey chartered stock savings bank located in
Paterson, New Jersey. The Bank operates eight (8) offices located in Passaic and
Bergen Counties, New Jersey. The principal business of the Bank is the
acceptance of savings deposits from the general public and the origination and
purchase of mortgage loans for the purpose of constructing, financing or
refinancing of one-to-four family residences, multi-family buildings and the
purchase of government and agency securities. The Bank is also active in the
origination of home equity loans, and to a lesser extent, mortgages secured by
commercial properties.
Lakeview's common stock is traded over-the-counter on the NASDAQ National Market
System appearing under the symbol "LVSB". As of July 31, 1996, 2,265,704 shares
of common stock were outstanding.
CONTENTS
To our Shareholders................................................... 2
Planning For The Year 2000............................................ 4
Management's Discussion and Analysis of Financial Condition
and Results of Operation............................................ 9
Consolidated Financial Statements..................................... 14
Independent Auditors' Report.......................................... 40
Charting The Course [Picture of Ship]
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Selected Financial Data
The following table sets forth certain information concerning the consolidated
financial position and operating data of the Savings Bank at the dates
indicated:
July 31
(Dollars in Thousands)
1992 1993 1994 1995 1996
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Selected Financial Condition Data:
Assets.................................................... $198,400 $207,462 $ 413,725 $419,212 $ 457,860
Loans Receivable, Net..................................... 145,277 137,301 136,143 142,123 163,457
Mortgage-Backed securities................................ 32,137 43,579 173,067 175,375 121,462
Investments............................................... 1,015 16 62,637 55,738 40,821
Investments and Mortgage-Backed Securities held for sale... 8,359 12,898 11,269 8,567 89,967
Excess of Cost Over Fair-Value of Net Assets Acquired...... 898 825 12,817 11,497 10,176
Savings Deposits........................................... 166,668 164,130 344,915 343,489 354,247
Other Borrowings........................................... 8,500 18,500 19,021 19,859 54,721
Stockholders' equity....................................... 19,872 22,211 46,982 49,440 45,760
Selected Operating Data:
Gross Interest Income...................................... 16,469 15,179 18,947 28,430 30,972
Net Interest Income........................................ 6,795 8,025 11,212 14,892 14,423
Other Income............................................... 1,251 2,010 2,608 7,206 7,030
Net Income................................................. 1,624 2,339 4,571 6,295 6,274
Return on Average Assets................................... .84% 1.13% 1.16%' 1.50% 1.42%
Cash Dividend Per Common Share............................. N/A N/A .0625 .25 .25
Asset Quality Data:
Non-Performing Loans....................................... 16,377 13,540 8,928 3,372 2,417
Other Non-Performing....................................... N/A N/A N/A 850 494
Real Estate Owned (REO).................................... 4,234 6,575 3,762 3,608 1,667
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Total Non-Performing Assets................................ 20,611 20,115 12,690 7,830 4,578
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Non-Performing Assets to Assets Ratio...................... 10.39% 9.70% 3.07% 1.87% 1.00%
Loan Allowances............................................ 2,493 2,638 1,714 2,535 3,073
REO Allowances............................................. 709 823 188 - -
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Total Allowances........................................... $ 3,202 $3,461 $1,902 $2,535 $3,073
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Total Allowances to Non-Performing Assets
(Coverage Ratio)........................................... 15.54% 17.21% 14.99% 32.4% 67.1%
[GRAPH of ASSETS (in millions) 1992-1996 amounts are shown above in the
Selected Financial Condition Data Table]
[GRAPH of NET INCOME (in millions) 1992-1996 amounts are shown above in the
Selected Financial Condition Data Table]]
[GRAPH of NON-PERFORMING ASSETS (in millions) 1992-1996 amounts are
shown above in the Selected Financial Condition Data Table]]
1 Calculated exclusion of $1.315 million from accounting changes related to
FASB 109. 1
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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To Our Shareholders:
The past fiscal year was an exceptional one for Lakeview Financial Corp. and our
subsidiaries. Perhaps the most symbolic fact was that every goal in our Business
Plan was either met or surpassed. Our Plan calls for us to be a full provider of
financial services to our whole community; individuals, businesses and
professionals. We shall continue to work to strengthen this position in the
future.
"Charting the Course" is the theme that is so appropriate for this years Annual
Report, your management and directors have spent endless hours developing and
executing a Plan to bring Lakeview into the 21st Century. As you review the next
few pages of discussion you will find that the Plan is well thought out,
designed specifically for Lakeview, Charting the Course that will successfully
bring us to our destination. Quoting another banker, "If you choose to sail upon
the seas of banking, build your bank as you would your ship, strong enough to
sail safely through the heaviest seas".
Allow me to review some of the accomplishments during the year:
o During the past twelve (12) months our stock price went from $16.02 to $20.50,
an increase of 27.9%, adjusting for January's 10% stock dividend.
o Price to stated book value is 103% and the price to tangible book value is
134%.
o Loans went from $142 million to $163 million an increase of 15%, which is a
major component of our plan, to convert securities available for sale to
higher yielding loans.
o Non-performing assets decreased to $4.6 million from $7.8 million during the
past year, reaching our goal of reducing non-performing assets to 1% of
assets. This was a primary focus for management during the past twelve (12)
months.
o Reserves for loan losses now total 105.6% of nonperforming loans, a goal we
set one year ago and have successfully achieved.
o Checking and savings accounts grew 12% for the year. Providing a stable fee
based source of funds that will enhance future earnings.
o As a result of loan growth, gross interest income went from $28.4 million to
$30.9 million, an increase of 8.9%.
o Net interest spread increased to 3.89% from 3.68% a year earlier. This trend
should continue if rates remain stable and we continue to successfully grow
the loan portfolio.
o Return on assets once again was over 1% and our return on average equity was
11.43%.
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Unquestionably, the most exciting business day during our fiscal year was June
25, 1996, when Industry Mortgage Company ("IMC") went public. Branchview, Inc, a
subsidiary of Lakeview Financial Corp. received 545,455 shares of common stock
of IMC in exchange for its partnership interest, coupled with an additional
investment in IMC of 285,473 shares, providing a total investment of 830,928
shares of common stock in IMC. Although it is not reflected in our current book
value the significant unrecognized gain on our investment will enhance earnings
sailing into the future.
Lakeview Mortgage Depot, Inc., a subsidiary of Lakeview Financial Corp., that
originates and sells loans in the secondary market, began operations during the
fiscal year. The forecast is that this subsidiary will be profitable during the
1996-1997 fiscal year and bring significant recurring non-interest income
cruising into future years.
Lakeview Credit Card Services, Inc., a subsidiary of Lakeview Savings Bank, will
be operational in October 1996. Your bank has entered into a joint venture with
a nationally recognized mortgage company that will market secured credit cards
through its customer base. We remain cautiously optimistic as to the results for
this year and expect to communicate our achievements in future shareholder
correspondence.
Looking ahead I am confident that our high performance goals are attainable and
that we have the right team in place that will reach them. Our outlook remains
focused on serving the needs of our whole community. At Lakeview we want to
continue to give outstanding service, polite attention and efficient delivery of
financial services to our community.
On behalf of the Board of Directors, management and employees, please accept my
deepest appreciation for the confidence in investing in Lakeview Financial Corp.
stock. Enhancing the value of your stock continues to be our PRIME INTEREST.
Very truly yours,
/s/Kevin J. Coogan
Kevin J. Coogan
President and
Chief Executive Officer
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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Strategic Plan For Future Direction
Planning for the year 2000
In our Annual Report last year we identified four primary areas of strength and
performance. They were: 1)high capital levels; 2) lending capacity; 3)improved
asset quality; and 4) operating capacity. Building on this solid foundation, a
Strategic Plan (the "Plan"), has been developed to guide Lakeview through Its
evolution from a traditional thrift (primarily lender for 1 to 4 family housing
units), to a full service community bank servicing the banking needs of both
individuals and businesses in our neighborhood area.
These expanded services include lending and providing deposit services (such as
merchant banking and business checking accounts) to retailers, professional
firms and small businesses. As a result of the continued consolidation of
commercial banks in our market area, we identify this market as being under-
served.
The emphasis of this Plan focuses on three different areas: growth and mix of
our loan portfolio, increased transaction accounts, and building equity
investments. Success in each of these areas will further enhance shareholder
value through increased earnings, franchise value and book value.
Lending
Lending activity will be concentrated on both increasing the size of our loan
portfolio as well as changing the loan mix from primarily 1 to 4 family
mortgages and equity loans, to a more balanced portfolio made up of first
mortgages, equity loans, multi-family and commercial mortgages. We believe this
strategy will take advantage of the opportunities in our market area as well as
diversify the portfolio, while enhancing interest income.
[GRAPH of NET INTEREST INCOME on a Quarterly Basis
Jul 95, Oct 95, Jan 96, Apr 96, Jul 96 amounts shown on p39 -
Note 24, Quarterly Financial Data (unaudited)(in thousands)]
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During the fiscal year, total loans outstanding have increased by $21 million,
from $142 million to $163 million, a 15% increase. As a result of this loan
growth, net interest income has increased in each of the last three quarters.
This growth has been accomplished at the same time Non-Performing Assets have
declined by 41%, from $7.8 million to $4.6 million. It's important to remember
that 1 to 4 family first mortgages, and equity loans, will continue to make up
the largest part of our loan portfolio, representing approximately 70% of loans
outstanding.
Equity loans have been a key component of the bank's portfolio since first
offered in 1987. With last year's addition of a seasoned consumer loan officer,
increased marketing efforts and the introduction of a fixed rate second
mortgage, fiscal year 1996 has been our most successful year for equity lending.
Over $21.6 million of loans were approved, while outstanding balances increased
from $37.2 million to $46.7 million, an increase of $9.5 million. Equity loans
outstanding now total approximately 28% of total loans and it is expected that
this portfolio will grow to approximately 33% of total loans over the next few
years.
Lending for multi-family housing units has always been a part of the Bank's
portfolio, representing 7.85% of loans outstanding on July 31, 1996. The Plan
calls for the further expansion of this portfolio. As a result of the high
density population and housing stock of our market area, which includes a high
percentage of small multi-family dwellings, the Bank sees a significant
opportunity for portfolio growth in the areas we service and know the best.
[GRAPH of EQUITY LOANS OUTSTANDING (in millions)
amounts are shown on a Quarterly basis
Jul 95 (37,200), Oct 95 (39,464), Jan 96 (42,553),
Apr 96 (45,646), Jul 96 (46,700)]
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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Multi-family loans outstanding have grown from $9.9 million, to $12.9 million,
an increase of $3.0 million, during the fiscal year. The Plan calls for this
portfolio to be carefully increased to approximately 15% of the loan portfolio
over the next four years.
Commercial Mortgages (non-residential) are an important part of our commitment
of changing to a full service community bank. This includes lending to the local
business community which we believe will provide opportunities for developing
and expanding transaction account relationships. Success in this area depends on
the encouragement of these relationships and developing products that address
the specific needs of these businesses. As many of the small and medium size
commercial banks are being consolidated with regional banks, opportunities in
this market area have increased significantly.
Commercial mortgages outstanding increased from $13.3 million to $19.6 million,
a $6.3 million increase for the fiscal year. To ensure quality, the commercial
lending growth will intentionally be slow and closely monitored. Commercial
lending will be primarily within our neighborhood communities to local
businesses who employ local residents. Over the next four years this portfolio
is expected to grow to 15% of the loan portfolio.
Funding Sources
The funding of the Bank's loan growth is expected to come from two primary
sources, growth in transaction accounts, i.e. "NOW' accounts and business
checking accounts, as well as a reduction of our securities available for sale
portfolio. The result of this strategy will be to increase the percentage of our
assets in higher yielding loans while reducing the percentage of assets in lower
yielding government securities. This strategy will result in increased net
interest income and core earnings.
[GRAPH of CHECKING ACCOUNTS (in millions)
amounts are shown on a Quarterly basis
Jul 95 (44,360), Oct 95 (43,940), Jan 95 (45,208),
Apr 96 (48,518), Jul 96 (48,550)]
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[PICTURE IN CENTER OF PAGE WITH FOLLOWING CAPTION]
[Having built a solid foundation in the past year, management has developed an
achievable Strategic Plan that will guide Lakeview to solid success through the
year 2000 and beyond.]
The attraction of transaction accounts, which provide low cost stable funding,
has been one of the primary focuses of our Branch personnel for over two years.
During our recently completed fiscal year, 40% of our total deposit growth was
in transaction accounts. The bank has had initial success in attracting
non-interest bearing business checking accounts, and has over 575 business
accounts open at year end, totaling $5.8 million.
As of July 31, 1996, transaction accounts totaled $50 million, an increase of
12% over the prior year's total. The value of these accounts is easy to see; as
a result of these "lower interest rate" accounts, the cost of deposits was
reduced from 4.00% to 3.88% for the fiscal year.
Equity Investments
The one area that separates Lakeview from typical financial institutions is
our equity investments. These investments have ranged from stock positions in
Freddie Mac and Fannie Mae to partnerships in mortgage companies. These
investments have proven to be very valuable in enhancing both book value and
earnings. Prior successes have included substantial gains in Freddie Mac and
Fannie Mae stock, as well as last fiscal year's $3.0 million gain from the sale
of our subsidiary investment in residential Money Centers, Inc. (RMC).
Management believes that banks (like many industries) need to leverage their
talents and capabilities with others through partnerships and strategic
alliances. Lakeview currently has three such investments, each in different
stages of development and implementation. These are:
1. Industry Mortgage Company (IMC) concluded an Initial Public Offering (IPO)
in June 1996. Lakeview Financial Corp., through its subsidiary Branchview,
Inc., was one of eleven limited partners in IMC. As a
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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result of the IPO, the Company received 545,455 shares of the new IMC common
stock in exchange for Its partnership interest. This investment was further
increased through the purchase of an additional 285,473 shares of common stock
of IMC. As of July 31, 1996, these shares had a value in excess of $19
million. Due to a restriction on the sale or transfer of these shares of
common stock, Lakeview is required to carry the stock at the historical cost
basis of $7.8 million, until the restrictions are removed, or within one year
of the restriction expiring, at which time the shares will be carried at fair
value. The investment in IMC (whose purpose is to originate and securitize
equity mortgage products) offers opportunity for high rates of return in a
high growth industry, although there is no assurance that such high rates of
return will be attained.
2.Lakeview Mortgage Depot, Inc. (LMD), is a mortgage company which began
operations in October 1995, which is 90% owned by Lakeview Financial Corp.
Although the company had a net loss of $124,000, for the 1996 fiscal year,
they reached a "break-even" point in May 1996. It is expected, though there
is no assurance, that LMD will contribute to fiscal year 1997 earnings.
3.Lakeview Credit Card Services, Inc. (LCCS), is a newly formed company which
has entered into a Joint Venture Agreement, with a nationally known
mortgage company, to offer a co-branded secured credit card through their
280 broker relationship network. This company is wholly owned by Lakeview
Savings Bank, and is expected, though there is no assurance, to reach a
"break-even" point by early next year and contribute towards earnings in
1998.
The Plan calls for management to continue to seek opportunities in the future,
through participation in strategic alliances and partnerships in high growth
businesses.
Summary
Having built a solid foundation in the past year, management has developed an
achievable Strategic Plan that will guide Lakeview to solid success through the
year 2000 and beyond. Our focus is on building relationships with all of our
customers, providing full service to our entire neighborhood community,
including individuals, professionals and small businesses. We continue our
progress into the future with confidence, based upon the cooperation of all of
our staff members, management team, directors and stockholders.
We continue to chart our course into the future...
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Management Discussion and Analysis of
Financial Condition and Results of Operation
Comparison of Financial Condition at July 31, 1996 and July 31, 1995
Total assets increased $38.7 million, or 9.2% to $457.9 million at July 31,
1996, from $419.2 million at July 31, 1995. The increase was primarily due to
increases in loans receivable, net, of $21.4 million, $81.4 million in
investment securities available for sale, $7.8 million in equity securities
restricted for sale offsetting declines in investment securities held to
maturity of $14.9 million, mortgage-backed securities held to maturity of $53.9
million, $1.9 million in real estate owned, and amortization of intangible
assets of $1.3 million from the comparison period.
Loans receivable, net increased $21.4 million, or 15.0%, to $163.5 million at
July 31, 1996, from $142.1 million at July 31, 1995. Loan originations and
purchases of loans during the fiscal year ended July 31, 1996 totaled $40.8
million and $2.7 million respectively. Offsetting originations in fiscal 1996
were a combination of principal and interest payments of $19.7 million,
reclassification of $332 thousand of loans to real estate owned ("REO"), and
$925 thousand from sale of loans.
Loans delinquent 90 days or more decreased to $2.9 million at July 31, 1996 from
$4.2 million at July 31, 1995. The decrease in loan delinquencies reflects the
Savings Bank's continued effort to resolve non-performing loans and the
stabilization of the economy and real estate values in Northern New Jersey.
Loans delinquent 90 days or more totaled 1.8% of gross loans at July 31, 1996,
compared to 3.0% at July 31, 1995.
REO, net, decreased $1.9 million, or 53.8%, to $1.7 million at July 31, 1996,
from $3.6 million at July 31, 1995. The decrease was mainly attributed to sale
of REO during the twelve months of $1.6 million, and charge offs of $654
thousand. Offsetting the decrease was $332 thousand of loans receivable were
transferred into REO.
Non-performing assets (loans 90 days or more delinquent, non-accrual loans, and
real estate owned) totaled $4.6 million or 1.0% of total assets at July 31, 1996
as compared to $7.8 million or 1.9% of total assets at July 31, 1995.
The investment securities available for sale portfolio increased $81.4 million,
or 950.2%, during the year ended July 31, 1996. The increase was mainly
attributed to the reclassification at December 31, 1995, of $81.3 million of
investment securities held to maturity and $31.5 million of mortgage-backed
securities held to maturity to investment securities available for sale. This
was done pursuant to the guidelines of the FASB Special Report for SFAS No. 115,
A Guide To Implementation Of Statement 115 On Accounting For Certain Investments
In Debt And Equity Securities. The special report provided that between November
15, 1995, but no later than December 31, 1995, an enterprise could reaccess the
classification of all securities held at that time and account for any resulting
reclassification at fair value. Reclassification from the held to maturity
category that resulted from this one time reassessment would not call into
question the intent of the enterprise to hold debt securities to maturity in the
future.
Investment securities held to maturity declined $14.9 million, or 26.7%, to
$40.8 million at July 31, 1996, from $55.7 million at July 31, 1995. The decline
was mainly attributed to the reclassification as discussed above. Offsetting the
decrease were purchases of investment securities totaling $107.0 million.
Mortgage-backed securities held to maturity decreased $53.9 million, or 30.7%,
to $121.5 million at July 31, 1996, from $175.4 million at July 31, 1995.
Purchases of $2.8 million of mortgage-backed securities were offset by principal
repayments of $25.2 million from the portfolio and the transfer discussed
previously.
Equity securities restricted for sale increased $7.8 million, or 100% to $7.8
million at July 31, 1996. In July 1995, Branchview, a subsidiary of the Savings
Bank, became the sole owner of Residential Money Center, Inc. (RMC), a
residential mortgage company in Montvale, New Jersey. RMC owned a 9.09% limited
partnership interest in Industry Mortgage Company, L.P. ("IMC"). On June 25,
1996, IMC completed a reorganization plan whereby the limited partners received
restricted common stock in exchange for their partnership interest in connection
with a public offering of unrestricted common stock. Immediately, prior to the
reorganization, Branchview purchased a limited partner's half share interest in
IMC for $4,778,000. As a result of the reorganization, Branchview received
830,928 shares of restricted common stock in exchange for its limited
partnership interest. As of July 31, 1996, Branchview owns 8.87% of IMC and the
market value of such investment was approximately $19.9 million, based on the
quoted market price per share of unrestricted stock. In accordance with SFAS
115, Accounting for Certain Investments in Debt and Equity Securities, due to
restrictions on the sale or transfer of these shares of common stock under
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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Rule 144 of the 1933 Securities Act, Lakeview is required to carry the stock at
the historical cost basis of $7.8 million, until the restrictions are removed,
or within one year of the restriction expiring, at which time the shares will be
carried at fair value.
Excess of cost over fair value of net assets acquired decreased $1.3 million or
11.4% to $10.2 million at July 31, 1996, from $11.5 million at July 31, 1995.
The $1.3 million represents amortization during the fiscal year ended July 31,
1996.
Deposits increased $10.7 million, or 3.1%, to $354.2 million at July 31, 1996,
from $343.5 million at July 31, 1995. The increase was mainly attributed to
interest credited to deposits of $14.0 million offset by a net decrease in
deposits before interest of $3.3 million.
Borrowings increased $35.0 million, or 184.2%, to $54.0 million at July 31,
1996, from $19.0 million at July 31, 1995. The increase was used to fund the
asset growth.
Shareholders' equity decreased $3.7 million, or 7.4%, during the twelve months
ended July 31, 1996, to $45.8 million. This was primarily due to the charge to
equity of $1.8 million representing the change in unrealized losses on
securities available for sale, purchase of treasury stock of $6.7 million, and
purchase of common stock acquired by ESOP of $1.6 million. In addition, cash
dividends of $582 thousand were paid during the year ended July 31, 1996.
Offsetting declines, net income for the year ended July 31, 1996, of $6.3
million, and amortization of the employee and management stock plans of $758
thousand.
Shareholders' equity averaged $45.6 million during the twelve months ended July
31, 1996, a decrease of $2.5 million, or 5.2%, compared to $48.1 million during
the twelve months ended July 31, 1995. Book value per common share rose $1.49,
or 8.0% to $20.20 at July 31, 1996 from $18.71 at July 31, 1995.
As a result of continued earnings progress, there has been a $.0625 per share
dividend since the 3rd fiscal quarter in 1994. In addition, on January 11, 1996,
the Company declared a special 10% stock dividend on the common stock to
shareholders of record January 23, 1996. This resulted in the issuance of
227,670 shares of common stock.
The market price of the common stock was $20.50 at July 31, 1996, compared with
$16.03 the prior year end. The common stock of Lakeview Financial Corp. is
traded on the NASDAQ National Market under the symbol of LVSB. The quarterly
market price ranges per common share since conversion to a stock form of
organization are listed in the table that follows.
For the quarters ended:
1994 1995 1996
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Prices Oct. Jan. Apr Jul. Oct. Jan Apr. Jul.
High.................................... 15.91 13.53 14.44 16.59 17.39 17.88 19.88 21.00
Low..................................... 12.19 11.98 12.95 13.18 15.80 16.02 17.25 17.75
Closing................................. 13.02 12.95 13.98 16.03 16.25 17.25 19.63 20.50
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Comparison of Operating Results
for the Year Ended July 31, 1996 and 1995
Net Income: Net income for the year ended July 31, 1996 was $6,274,000, a
decrease of $21 thousand or .3% from net income of $6,295,000 for the fiscal
year ended July 31, 1995. The decrease in net income was due to a $469,000
decrease in net interest income, $176,000 increase in other expense, and a
$177,000 decrease in other income, which was offset by a $712,000 decrease in
provision for loan losses.
Interest Income: Total interest income increased $2.6 million or 9.1% to $31.0
million for the year ended July 31, 1996 from $28.4 million for the year ended
July 31, 1995. The increase was due primarily to growth in interest-earning
assets and an increase in the average yield on interest earning assets from
7.37% to 7.53% due to generally increased market rates of interest. Total
average interest-earning assets for the year ended July 31, 1996 increased $25.7
million or 6.6% to $411.3 million from $385.6 million for the year ended July
31, 1995. The increase in interest-earning assets was due to the increase in
loan originations and purchases for year ended July 31, 1996.
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Interest Expense: Total interest expense increased $3.0 million or 22.2% from
$13.5 million for the year ended July 31, 1995 to $16.5 million for the year
ended July 31, 1996. The increase was due to an increase in interest-bearing
liabilities. Total average interest bearing liabilities increased $25.3 million
or 6.9% from $366.8 million for the year ended July 31, 1995 to $392.1 million
for the year ended July 31, 1996. The increase in average interest bearing
liabilities during the year ended July 31, 1996 was coupled with an increase in
average cost for the same period. Average cost on interest bearing liabilities
increased from 3.69% for the year ended July 31, 1995 to 4.22 % for the year
ended July 31, 1996 due to generally increased market rates of interest.
Net Interest Income: Net interest income decreased 3.3% or $469 thousand to
$14.4 million for the year ended July 31, 1996, from $14.9 million for the year
ended July 31, 1995. Interest rate spread which represents the difference
between the average yield on interest earning assets and the average cost on
interest bearing liabilities was 3.68% and 3.31% for the years ended July 31,
1995 and 1996, respectively. The reduced spread was in part due to the interest
rate sensitivity of the Corporation's balance sheet as interest bearing
liabilities repriced faster than interest-carrying assets in a rising interest
rate environment.
Other Income: Total other income decreased $177 thousand or 2.7% to $7.0 million
for the year ended July 31, 1996 from $7.2 million for the year ended July 31,
1995. The Bank's realized gains on investments increased from $2.1 million for
the year ended July 31, 1995 to $2.8 million for the year ended July 31, 1996.
This increase resulted from the sale of FNMA, SLMA, FHLMC and other equity
securities during 1996. Other operating income decreased $756 thousand from $3.9
million for the year ended July 31, 1995 to $3.1 million for the year ended July
31, 1996. This was mainly attributed to a decrease of income from the
Branchview, Inc. subsidiary from $3.6 million for the year ended July 31, 1995
to $3.5 million for the year ended July 31, 1996.
Other Expense: Total other expenses increased $176 thousand or 1.6% to $10.9
million for the year ended July 31, 1996 from $10.7 million for the same period
last year. The growth was attributed to an increase in employee compensation of
$282 thousand or 6.5% to $4.6 million for the year ended July 31, 1996 from $4.4
million for the year ended July 31, 1995. The increase is mainly attributed to
the increase in subsidiary activity of Lakeview Mortgage Depot, Inc. Net losses
from REO operation increased $270 thousand or 41.7% to $921 thousand for the
year ended July 31, 1996 from $650 thousand for the year ended July 31, 1995.
The increase was mainly attributed to an increase in provisions for REO losses
of $152 thousand or 30.3% to $654 thousand for the year ended July 31, 1996,
from $502 thousand for the year ended July 31, 1995. These increases were
partially offset by a decrease in other operating expenses.
Provision for Losses on Loans: The Provision for losses on loans decreased
from $1.4 million for the year ended July 31, 1995 compared to $664 thousand for
the year ended July 31, 1996, due to a reduction in non-performing loans and
improved market conditions. Management of the Savings Bank regularly assess the
credit risk of the loan portfolio based on the information available at such
times including trends in the local real estate market and levels of the Savings
Bank's non-performing loans and assets. Additional provision for loan losses may
be required as the result of this assessment.
Comparison of Operating Results
for the Year Ended July 31, 1995 and 1994
Net Income: Net income for the year ended July 31, 1995 was $6.3 million, an
increase of $1.7 million or 37.7% from net income of $4.6 million for the fiscal
year ended July 31, 1994. The increase in net income was primarily due to a $3.7
million, or 32.8% increase in net interest income. Net income for the year ended
July 31, 1994 included $1.3 million due to the effect of a change in accounting
for income taxes as a result of the adoption of Statement of Financial
Accounting Standards No. 109.
Interest Income: Total interest income increased $9.5 million or 50.1% to $28.4
million for the year ended July 31, 1995 from $18.9 million for the year ended
July 31, 1994. The increase was due primarily to growth in interest-earning
assets and to a lesser extent, an increase in the average yield on interest
earning assets from 7.28% to 7.37%. Total average interest-earning assets for
the year ended July 31, 1995 increased $125.2 million or 48.1% to $385.6 million
from $260.4 million for the year ended July 31, 1994. The increase in
interest-eaming assets was due to the investing of the
11
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
proceeds from the Conversion and the funds received from the Acquisition in
mortgage-backed securities and investments securities.
Interest Expense: Total interest expense increased $5.8 million or 75.0% from
$7.7 million for the year ended July 31, 1994 to $13.5 million for the year
ended July 31, 1995. The increase was due to an increase in interest-bearing
liabilities. Total average interest bearing liabilities increased $125.9 million
or 52.3% from $240.9 million for the year ended July 31, 1994 to $366.8 million
for the year ended July 31, 1995. The increase in average interest bearing
liabilities during the year ended July 31, 1995 was coupled with an increase in
average cost for the same period. Average cost on interest bearing liabilities
increased from 3.21% for the year ended July 31, 1994 to 3.69% for the year
ended July 31, 1995 as market rates continued to increase through April 1995,
offset by a slight decrease in market rates subsequent to April 1995.
Net Interest Income: Net interest income increased 32.8% or $3.7 million to
$14.9 million for the year ended July 31, 1995, from $11.2 million for the year
ended July 31, 1994. The increase was due primarily to the growth of the Savings
Bank from the Conversion and the Acquisition mitigated by a decrease in interest
rate spread during the year ended July 31, 1995. Interest rate spread which
represents the difference between the average yield on interest earning assets
and the average cost on interest bearing liabilities was 3.68% and 4.07% for the
years ended July 31, 1995 and 1994, respectively.
Non-Interest Income: Total other income increased $4.6 million or 176.9% to $7.2
million for the year ended July 31, 1995 from $2.6 million for the year ended
July 31, 1994. Loan fees and service charges increased $420 thousand or 51.6% to
$1.2 million for the year ended July 31, 1995 from $815 thousand for the year
ended July 31, 1994. The increase was due to an increase in the average balance
of deposits during the year ended July 31, 1995. Additionally, the Bank's
realized gains on investments increased from $866 thousand for the year ended
July 31, 1994 to $2.1 million for the year ended July 31, 1995. This increase
resulted from the sale of FNMA stock during 1995. Other operating income
increased $2.9 million from $927 thousand for the year ended July 31, 1994 to
$3.9 million for the year ended July 31, 1995. This was due to an increase of
income from the Branchview, Inc. of $3.1 million from $488 thousand for the year
ended July 31, 1994 to $3.6 million for the year ended July 31, 1995. The
increase in income from Branchview, Inc., was due to the gain on sale of
Residential Money Centers, Inc. ("RMC").
Non-Interest Expense: Total other expenses increased $4.0 million or 59.5% to
$10.7 million for the year ended July 31, 1995 from $6.7 million for the same
period last year. Employee compensation increased $1.8 million or 71.9% to $4.4
million for the year ended July 31, 1995 from $2.5 million for the year ended
July 31, 1994. The increase was due primarily to the increase in personnel
resulting from the Acquisition. Net losses from REO operation decreased $669
thousand or 50.7% to $650 thousand for the year ended July 31, 1995 from $1.3
million for the year ended July 31, 1994, due to a stabilizing real estate
market. Office occupancy and equipment expense increased $350 thousand to $830
thousand for the year ended July 31, 1995 from $480 thousand for the year ended
July 31, 1994. The increase was due primarily to the expansion of the Savings
Bank from two branches to eight. The increase in other operating expense for the
year ended July 31, 1995 is attributable to an increase of $253 thousand of FDIC
insurance expense and an increase of $200 thousand in computer service expense
which represents a full year of insurance assessments and data processing
expenses on the deposits acquired in April 1994. An increase of $882 thousand
for the year ended July 31, 1995 represents a full year of amortization of the
deposit premium paid for the acquisition.
Provision for Losses on Loans: The Provision for losses on loans decreased
slightly from $2.0 million for the year ended July 31, 1994 compared to $1.4
million for the year ended July 31, 1995 due to improved asset quality.
Management of the Savings Bank regularly assess the credit risk of the loan
portfolio based on the information available at such times including trends in
the local real estate market and level of the Savings Bank's non-performing
loans and assets. Additional provisions for loan losses may be required as the
result of this assessment.
Income Taxes: Income before taxes and cumulative effect of accounting changes
increased $4.9 million to $10 million for the year ended July 31, 1995 from $5.1
million for the year ended July 31, 1994. Income tax expense increased $1.9
million for the year ended July 31, 1995 to $3.7 million from $1.8 million for
the same period a year earlier. The increase was due primarily to higher pre-tax
income. Income tax expense as a percentage of pre-tax income increased from
35.8% for the year ended July 31, 1994, to 37.2% for the year ended July 31,
1995. The slight increase in the percentage of tax expense is primarily due to
the higher state tax rate associated with the income from the sale of the assets
of RMC.
12
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Liquidity and Capital Resources
The Bank's primary sources of funds includes savings deposits, loan repayments
and prepayments, cash flow from operations and borrowings from the Federal Home
Loan Bank of New York ("FHLB"). The Bank uses its capital resources principally
to fund loan origination and purchases, repay maturing borrowings for
investments, and for short and long-term liquidity needs. The Bank expects to be
able to fund or refinance, on a timely basis, its commitments and long-term
liabilities.
The Bank's liquid assets consist of cash and cash equivalents, which include
investments in highly short-term investments. The level of these assets are
dependent on the Bank's operating, financing and investment activities during
any given period. At July 31, 1996, cash and cash equivalents totaled $6.9
million.
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of July 31, the Bank had commitments to fund loans of
$13,295,000.
The Bank has completed the repurchase of 662,372 shares as of July 31, 1996. The
repurchased shares have been held as treasury stock and are available for
general corporate purposes.
The Bank had leverage, Tier 1 and risk-based capital ratios of 7.5%, 15.4% and
16.7%, at July 31, 1996, which exceeded the FDIC's respective minimum
requirements of 4.00%, 4.00% and 8.00% respectively.
Impact of Inflation and Changing Prices
The financial statements of the Corporation and notes there- to, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Corporation's
operations. Unlike most industrial companies. nearly all the assets and
liabilities of the Corporation are monetary in nature. As a result, interest
rates have a greater impact on the Corporation's performance than do the effects
of general levels of inflation. Interest rates do not necessarily move in the
same direction or to the same extent as the price of goods and services.
Recent Legislation
Capitalization of the Savings Association Insurance Fund.
On September 30, 1996, H.R. 1362 was signed into law by the President. Title II
of H.R. 1362 is titled the Economic Growth and Paperwork Reduction Act of 1996
(the "Act"). Among its many provisions, the Act provides for resolving the
BIF/SAIF premium disparity.
The BIF/SAIF legislation provides for a one-time assessment to recapitalize the
SAIF. The assessment will be based on the amount of SAIF-assessable deposits
held by an institution as of March 31, 1995 (with certain exceptions). The
assessment is effective on September 30, 1996 and is payable on the later of
1996, October 1, 1996 or such date within 60 days as the FDIC shall decide. The
FDIC has made the special assessment payable by November 27, 1996.
The BIF/SAIF legislation does not specify an actual assessment but states that
the total assessment will be equal to the amount necessary to recapitalize the
SAIF as of October 1, 1996. A recent report of the America's Community Bankers
estimated the assessment at approximately 65.7 basis points per $100 of
SAIF-assessable deposits as of March 31, 1995.
The BIF/SAIF legislation provides that the amount of the special assessment is
deductible under section 162 of the Internal Revenue Code (the "Code") in the
year in which the assessment is paid. The BIF/SAIF legislation also provides
that section 172 (f) of the Code will not apply to deductions taken under
section 162 of the Code for the special assessment. The Savings Bank has
estimated the amount of assessment to be approximately $2.2 million, before tax
benefit, and such amount was accrued on September 30, 1996.
Certain portions of this document concerning future performance,
developments or events, concerning growth in lending and equity investments, and
any other guidance on future periods, constitute forward-looking statements,
which are subject to a number of risks and uncertainties including interest rate
fluctuations and government and regulatory actions which might cause actual
results to differ materially from stated expectations.
13
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Consolidated Balance Sheets
July 31, 1995 and 1996
1995 1996
- ------------------------------------------------------------------------------------------------------------------
Assets
Cash on hand and in banks............................................. $ 8,021,666 $ 6,902,040
Investment securities held to maturity, market value of
$55,457,430 and $40,083,449 at July 31, 1995 and 1996,
respectively (note 4)................................................. 55,737,605 40,821,195
Investment securities available for sale (note 5)..................... 8,567,375 89,967,424
Equity securities restricted, market value of $19,942,272
at July 31, 1996 (note 7)............................................. - 7,806,358
Mortgage-backed securities held to maturity, market value of
$173,500,278 and $119,471,910 at July 31, 1995 and 1996,
respectively (notes 6 and 13)......................................... 175,375,296 121,461,936
Loans receivable, net (notes 8 and 13)................................ 142,122,945 163,457,374
Real estate owned, net (note 9)....................................... 3,608,392 1,666,533
Investments required by law - stock in the Federal Home
Loan Bank of New York, at cost (note 13).............................. 2,587,400 2,587,400
Accrued interest receivable (note 10)................................. 2,718,349 3,646,512
Office properties and equipment, net (note 11)........................ 4,299,594 4,182,639
Excess of cost over fair value of net assets acquired,
net (note 3).......................................................... 11,496,712 10,176,424
Other assets (note 14)................................................ 4,676,663 5,184,150
- -----------------------------------------------------------------------------------------------------------------
Total assets........................................................ $419,211,997 $457,859,985
- -----------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits (note 12)..................................................... 343,489,328 354,246,770
Borrowings (note 13)................................................... 19,000,000 54,000,000
ESOP debt (note 16).................................................... 858,929 721,429
Advance payments by borrowers for taxes and insurance.................. 1,501,453 1,711,930
Other liabilities...................................................... 4,922,053 1,420,176
- -----------------------------------------------------------------------------------------------------------------
Total liabilities..................................................... 369,771,763 412,100,305
- -----------------------------------------------------------------------------------------------------------------
Common stock - $2.00 par value; authorized 10,000,000
shares, issued 2,928,076 shares and outstanding 2,265,704
shares at July 31, 1996................................................ 5,323,920 5,856,152
Additional paid-in capital............................................. 21,733,849 26,186,632
Retained income substantially restricted............................... 28,982,735 29,984,480
Unrealized losses on securities available for sale, net of tax......... (55,054) (1,884,921)
Treasury stock at cost, 662,372 shares................................. (3,970,106) (10,655,120)
Unallocated ESOP shares................................................ (834,910) (2,306,895)
Unallocated MSBP shares................................................ (1,740,200) (1,420,648)
- -----------------------------------------------------------------------------------------------------------------
Total stockholders' equity (notes 2, 14, 16, 18, and 19)............... 49,440,234 45,759,680
Total liabilities and stockholders' equity............................ $419,211,997 $457,859,985
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
14
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Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Income
Years ended July 31, 1994, 1995 and 1996
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans receivable................................................................ $ 11,749,136 $ 12,509,446 $ 14,131,327
Mortgage-backed securities...................................................... 5,513,480 11,162,655 9,604,671
Investment securities, held to maturity and Federal funds....................... 1,366,865 4,535,201 3,004,345
Investment securities available for sale........................................ 317,353 222,924 4,232,012
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income......................................................... 18,946,834 28,430,226 30,972,355
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on Deposits (note 12).................................................. 6,859,922 11,943,596 14,064,295
Interest on borrowings.......................................................... 874,711 1,594,984 2,485,475
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense........................................................ 7,734,633 13,538,580 16,549,770
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income ............................................................ 11,212,201 14,891,646 14,422,585
Provision for losses on loans (note 8).......................................... 2,047,121 1,376,404 13,221
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for losses on loans......................... 9,165,080 13,515,242 13,758,364
- -----------------------------------------------------------------------------------------------------------------------------------
Other income:
Loan fees and service charges................................................... 814,956 1,235,073 1,153,266
Net realized gains on sales of investment securities
available for sale ............................................................. 866,399 2,107,244 2,768,781
Other operating income (note 7)................................................. 927,021 3,864,028 3,107,539
- -----------------------------------------------------------------------------------------------------------------------------------
Total other income.............................................................. 2,608,376 7,206,345 7,029,586
- -----------------------------------------------------------------------------------------------------------------------------------
Other Expenses:
Compensation and employee benefits (notes 15 and 16)........................ 2,540,536 4,366,722 4,648,774
Office occupancy and equipment expense....................................... 479,497 829,861 871,113
Net loss on real estate owned activities (note 9).......................... 1,319,692 650,194 920,917
Other operating expenses....................................................... 1,926,816 3,524,382 3,106,738
Amortization of the excess of cost over fair value of net
assets acquired................................................................. 438,288 1,320,288 1,320,288
- -----------------------------------------------------------------------------------------------------------------------------------
Total other expenses............................................................ 6,704,829 10,691,447 10,867,830
- -----------------------------------------------------------------------------------------------------------------------------------
Income before Federal and state income tax and
cumulative effect of accounting change.......................................... 5,068,627 10,030,140 9,920,120
- -----------------------------------------------------------------------------------------------------------------------------------
Federal and state income tax expense (note 14):
Current......................................................................... 942,978 3,889,513 4,112,206
Deferred........................................................................ 869,693 (154,000) (466,000)
- -----------------------------------------------------------------------------------------------------------------------------------
1,812,671 3,735,513 3,646,206
- -----------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting change....................... 3,255,956 6,294,627 6,273,914
Cumulative effect of accounting change (note 14)............................... 1,315,011 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income...................................................................... $ 4,570,967 $ 6,294,627 $ 6,273,914
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share....................................................... N/A $ 2.21 $ 2.48
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 1994, 1995 and 1996
1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income....................................................... $ 4,570,967 $ 6,294,627 $ 6,273,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of the excess of cost over fair
value of net assets acquired..................................... 438,288 1,320,288 1,320,288
Amortization of discounts and premiums, net................... (130,276) (259,384) (473,518)
Provision for losses on loans and real estate owned............ 2,760,441 2,303,781 1,318,710
Gain on sale of loans............................................ (54,428) (6,040) (9,598)
Net realized gains on investment securities
available for sale............................................... (866,399) (2,107,244) (2,768,781)
Net loss (gain) on sale of real estate owned.................. 228,344 (223,884) (26,043)
(Increase) decrease in accrued interest receivable............. (1,643,413) 2,695 (928,163)
Net decrease in deferred loan fees............................... (153,386) (137,479) (67,691)
Decrease in other assets......................................... (1,241,786) (1,654,851) (507,487)
Amortization of ESOP shares...................................... 116,000 297,881 312,708
Amortization of MSBP shares...................................... 217,000 505,454 445,564
Increase (decrease) in other liabilities........................ 92,640 3,556,573 (2,473,471)
Depreciation, net................................................ 122,051 264,081 288,225
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities........................ 4,456,043 10,156,498 2,704,657
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Originations of loans............................................ (30,842,434) (31,274,312) (40,782,321)
Principal payments on loans...................................... 23,302,088 19,582,717 20,366,983
Purchase of loans................................................ (1,122,754) (136,946) (2,686,962)
Proceeds from the sale of loans.................................. 5,334,175 1,171,675 924,888
Net increase in office properties and equipment............ (3,039,776) (402,733) (171,270)
Principal payments on mortgage-backed securities............. 17,391,871 16,629,760 25,230,317
Purchases of mortgage-backed securities
held to maturity................................................. (146,941,142) (18,762,454) (2,773,214)
Maturities of investment securities held to maturity........ -- 10,975,000 41,096,117
Purchase of investment securities held to maturity........... (62,631,562) (4,057,500) (107,027,312)
Proceeds from sale of investment securities
available for sale............................................... 3,891,839 20,864,634 53,587,858
Purchases of investment securities available for sale........... (1,379,904) (16,141,726) (50,034,792)
Proceeds from maturity of investment securities
available for sale............................................... -- -- 18,319,150
Principle payments on investment securities
available for sale.............................................. -- -- 1,534,201
Increase in Federal Home Loan Bank stock......................... (345,300) (731,100) --
16
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Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Cash Flows
Years ended July 31, 1994, 1995 and 1996 continued
1994 1995 1996
- -------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities, cont.:
Net decrease in certificates of deposit.......................... 99,000 -- --
Proceeds from sale of real estate owned.......................... 4,078,047 2,771,608 1,644,527
Premium on deposit acquisition................................... (12,430,000) -- --
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by, investing activities............. (204,635,852) 488,623 (40,771,830)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits.............................. (10,643,875) (1,425,210) 10,757,443
Proceeds from acquisition of deposits............................ 191,428,005 -- --
Net increase in borrowings....................................... 521,429 837,500 34,862,500
Net increase in advance payments by borrowers
for taxes and insurance.......................................... 10,172 61,161 210,477
Proceeds from stock offering..................................... 23,319,374 -- --
Purchase of treasury stock....................................... -- (3,970,106) (6,685,014)
Purchase of shares by ESOP....................................... (1,100,000) -- (1,615,985)
Purchase of shares by MSBP....................................... (2,200,00) -- --
Dividends paid................................................... (151,250) (615,430) (581,874)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities.............. 201,183,855 (5,112,085) 36,947,547
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents................. 1,004,046 5,533,036 (1,119,626)
Cash and cash equivalents at beginning of year................... 1,484,584 2,488,630 8,021,666
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year.........................$ 2,488,630 $ 8,021,666 $ 6,902,040
- -------------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest......................................................... 7,785,386 12,923,418 14,055,717
Income Taxes..................................................... 625,000 3,995,000 4,767,992
Supplemental disclosure of noncash investing
and financing activities:
Transfer of loans receivable to real estate owned................ 2,842,067 3,084,247 331,114
Transfer of investment securities held to maturity to
investments securities available for sale........................ -- 11,579,750 80,858,447
Transfer of Federal Funds Deposit to Loans....................... -- 850,000 --
Transfer of mortgage-backed securities held to maturity
to investment securities available for sale...................... -- -- 31,746,557
- -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Years ended July 31, 1994, 1995 and 1996
Common Stock
- -------------------------------------------------------------------------------------------------------------------
Number Additional
of Dollar Paid-in
shares amount capital
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1993............................................. $ - $ -- $ --
- -
Net proceeds of stock offering (note 2).............................. 2,420,000 4,840,000 18,479,374
Common stock acquired by ESOP and
MSBP (note 2)........................................................ - -- --
Amortization of ESOP shares.......................................... - -- 32,000
Amortization of MSBP shares.......................................... - -- 63,000
Dividends paid....................................................... - -- --
Net income........................................................... - -- --
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994............................................. 2,420,000 4,840,000 18,574,374
- -------------------------------------------------------------------------------------------------------------------
Amortization of ESOP shares.......................................... - -- 116,791
Amortization of MSBP shares.......................................... - -- 199,654
Net income........................................................... - -- --
Cash dividend ($0.25 per common share)............................... - -- --
Purchase of treasury stock........................................... (259,508) -- --
Stock dividend....................................................... 241,960 483,920 2,843,030
Cumulative effect of accounting change -
Adoption of FASB 115, net of tax (note 1)............................ - -- --
Change in unrealized loss on
securities available for sale, net of tax............................ - -- --
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1995............................................. $2,402,452 $ 5,323,920 $21,733,849
- -------------------------------------------------------------------------------------------------------------------
Common stock acquired by ESOP........................................ - -- --
Amortization of ESOP shares.......................................... - -- 168,708
Amortization of MSBP shares.......................................... - -- 126,012
Net income........................................................... - -- --
Cash dividend ($0.25 per common share)............................... - -- --
Purchase of treasury stock........................................... (321,991) -- --
Stock dividend distribution.......................................... 185,243 532,232 4,158,063
Change in unrealized loss on securities available for sale,
net of tax........................................................... - -- --
- -------------------------------------------------------------------------------------------------------------------
Balance at July 31, 1996............................................. $2,265,704 $ 5,856,152 $26,186,632
- -------------------------------------------------------------------------------------------------------------------
18
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- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net unrealized loss on Total
Treasury Retained Unallocated shares securities available Stockholders'
stock income ESOP MSBP for sale, net of tax Equity
- ------------------------------------------------------------------------------------------------------------------------------------
- $ 22,210,771 $ - $ - $ - $ 22,210,771
- - - - - 23,319,374
- - (1,100,000) (2,200,000) - (3,300,000)
- - 84,000 - - 116,000
- - - 154,000 - 217,000
- (151,250) - - - (151,250)
4,570,967 - - - 4,570,967
- ------------------------------------------------------------------------------------------------------------------------------------
- $ 26,630,488 $ (1,016,000) $ (2,046,000) - $ 46,982,862
- ------------------------------------------------------------------------------------------------------------------------------------
- - 181,090 - - 297,881
- - - 305,800 - 505,454
- 6,294,627 - - - 6,294,627
- (615,430) - - - (615,430)
(3,970,106) - - - - (3,970,106)
- (3,326,950) - - - -
- - - - 198,920 198,920
- - - - (253,974) (253,974)
- ------------------------------------------------------------------------------------------------------------------------------------
($3,970,106) $ 28,982,735 ($ 834,910) ($1,740,200) ($ 55,054) $49,440,234
- ------------------------------------------------------------------------------------------------------------------------------------
- - (1,615,985) - - (1,615,985)
- - 144,000 - - 312,708
- - - 319,552 - 445,564
- 6,273,914 - - - 6,273,914
- (581,874) - - - (581,874)
(6,685,014) - - - (6,685,014
- (4,690,295) - - - -
- - - - (1,829,867) (1,829,867)
- ------------------------------------------------------------------------------------------------------------------------------------
($10,655,120) $ 29,984,480 ($ 2,306,895) ($ 1,420,648) ($ 1,884,921) $ 45,759,680
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
19
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Lakeview Financial Corp. and Subsidiaries
Notes to Consolidated Financial Statements
July 31, 1995 and 1996
Notel
Summary of Significant Accounting Policies
The following items comprise the significant accounting policies which
Lakeview Financial Corp. and subsidiaries (the Bank) followed in preparing
and presenting these consolidated financial statements:
Business:
The Bank provides a full range of retail banking services through its
branches in Passaic and Bergen Counties, New Jersey. The Bank is subject to
competition from other financial institutions. The Bank is subject to the
regulations of certain regulatory agencies and undergoes periodic
examinations by those regulatory agencies. The consolidated financial
statements have been prepared in conformity with generally accepted
accounting principles. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the dates of the
consolidated balance sheets, and revenues and expenses for the years then
ended. Actual results could differ significantly from those estimates and
assumptions.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for losses on
loans and the valuation of real estate acquired in connection with
foreclosures or in settlement of loans. It is management's judgment that the
allowance for loan and real estate losses are adequate to provide for
potential loan and real estate losses.
Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
Lakeview Financial Corp. and its wholly owned subsidiaries, Lakeview
Savings Bank (LSB), LVS, Inc. (LVS), Lakeview Investment Services, Inc.
(LISI), Branchview, Inc. (Branchview), and Lakeview Mortgage Depot, Inc.
(LMD).
In May 1993, Lakeview Savings Bank, SLA converted from a state-chartered
savings and loan association to a statechartered savings bank. In connection
with the conversion, the Bank changed its name from Lakeview Savings Bank,
SLA and subsidiaries to Lakeview Savings Bank and subsidiaries.
On August 25, 1994, the Bank completed a reorganization into a holding
company form of ownership, and the Bank became a wholly-owned subsidiary of
Lakeview Financial Corp. The stockholders of the Bank exchanged their shares
of the Bank for the same number of shares of Lakeview Financial Corp.
Investment Securities
and Mortgage-Backed Securities
Effective August 1, 1994, the Bank adopted Statement of Financial Accounting
Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt or
Equity Securities". Under SFAS 115, the Bank is required to report debt,
readily-marketable equity and mortgage-backed securities in one of the following
categories (i) "held-to-maturity" (management has a positive intent and ability
to hold to maturity) which are to be reported at amortized cost; (ii) "trading"
(held for current resale) which are to be reported at fair value with unrealized
gains and losses included in earnings and (iii) "available-for-sale (all other
debt, readily marketable equity and mortgage-backed securities) which are to be
reported at fair value, with unrealized gains and losses excluded from earnings
and reported, net of income tax, as a separate component of equity. The adoption
of SFAS 115 resulted in a net increase of $198,920 to stockholders' equity.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
"Special Report - A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt Equity Securities," which provided transition
guidance permitting an enterprise to reassess the appropriateness of the
classifications of all its securities before December 31, 1995. The Savings Bank
reassessed its classifications, and on December 31, 1995, transferred $112.6
million in amortized cost of investment and mortgage-backed securities from held
to maturity to the available for sale classification. The related net unrealized
gain after tax effect as of the date of transfer was $157,000.
Premiums and discounts on debt and mortgage-backed securities are amortized to
expense and accreted to income over the estimated life of the respective
security using a method that approximates the level yield method.
Gains and losses on the sale of securities available for sale are based upon the
amortized cost of the security using the specific identification method.
Office Properties and Equipment
Premises, furniture and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization charges are
computed using the straight-line method. Premises, furniture and equipment are
depreciated over the estimated useful life of the assets, except for leasehold
improvements, which are amortized over the term of the lease or the estimated
useful life of the asset, if shorter. Estimated useful lives are ten to forty
years for premises, and three to ten years for furniture and equipment.
Expenditures for maintenance and repairs are expensed as incurred. The costs of
major renewals and improvements are capitalized. Premises and major items of
furniture and equipment are removed from the property accounts upon
20
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disposition at their carrying amount, and gains or losses on such transactions
are included in other non-interest income or expense.
Income Taxes
The Bank files a consolidated federal income tax return. In accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109), deferred income tax expense or benefit is determined by
recognizing deferred tax assets and liabilities for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The realization of deferred
tax assets is assessed and a valuation allowance provided, when necessary, for
that portion of the asset which is not likely to be realized. Management
believes, based upon current facts, that it is more likely than not there will
be sufficient taxable income in future years to realize the deferred tax assets.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in earnings in the period that includes the enactment date.
Loans
Loans are stated at principal amounts outstanding, net of unearned discount and
net deferred loan origination fees and costs. Interest income on loans is
accrued and credited to interest income as earned.
Loan origination and commitment fees and certain direct loan origination costs
are deferred and the net fee or cost is recognized in interest income using the
level-yield method over the contractual life of the specifically identified
loans or recognized as the loans are sold or prepaid. Discounts and premiums
relating to mortgage loans purchased are deferred and accreted or amortized to
income using straight-line method over the life of the loan or ten years,
whichever is shorter.
Loans are generally placed on nonaccrual status when a loan becomes more than 90
days past due or it appears that interest is uncollectible. Previously accrued
and unpaid interest is reversed when a loan is placed on nonaccrual status.
Interest income on nonaccrual loans is recognized only in the period in which it
is ultimately collected. After principal and interest payments have been brought
current and future collectibility is reasonably assured, loans are returned to
accrual status.
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan" (SFAS 114), and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures" ("SFAS
118") were adopted prospectively by the Bank on January 1, 1995. These
statements address the accounting for impaired loans and specify how allowances
for loan losses related to these impaired loans should be determined. The
adoption of these statements did not affect the level of the overall allowance
or the operating results. Income recognition and charge-off policies were not
changed as a result of SFAS 114 and SFAS 118. The Savings Bank defines the
population of impaired loans to be all non-accrual commercial real estate,
multi-family and land loans. Impaired loans are individually assessed to
determine that the loan's carrying value is not in excess of the fair value of
the collateral or the present value of the loan's expected future cash flows.
Smaller balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and installment loans, are
specifically excluded from the impaired loan portfolio. There were $645,184 of
impaired loans requiring no valuation allowance at July 31, 1996, as defined by
SFAS 114 and SFAS 118.
Real Estate Owned
Real estate owned, acquired or deemed acquired through foreclosure or deed in
lieu of foreclosure, is carried at the lower of estimated fair value less
estimated disposition costs or the balance of the loan on the property at date
of acquisition. Costs relating to the development and improvement of property
are capitalized, whereas those relating to holding property are charged to
expense. Losses are charged to operations as incurred or when it is determined
that the investment in real estate owned is greater than its estimated net
realizable value.
Allowances For Losses On Loans And Real Estate Owned
The allowances for losses on loans and real estate owned are based on
management's evaluations of the adequacy of the allowances based on the Bank's
past loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral, and current economic conditions. Additions are made
to the allowance through periodic provisions which are charged to earnings. All
losses of principal are charged to the allowance when the loss actually occurs
or when a determination is made that a loss is probable. Subsequent recoveries,
if any, are added back to the allowance.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and in banks, and Federal funds sold with a maturity of three months or
less.
Earnings Per Share
Income per common share is calculated by dividing net income, by the average
number of shares of common stock
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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and average number of common stock equivalents outstanding during the period.
The weighted average number of shares outstanding during the year ended July 31,
1996 used in the earnings per share calculation was 2,527,172. Per share data
has been adjusted to reflect the 10% stock dividend paid during 1995 and 1996.
Reclassification's
Certain reclassification's have been made to the 1994 and 1995 amounts to
conform to the 1996 presentation.
Note 2
Conversion from Mutual
to Stock Form of Ownership
On December 22, 1993, the Bank completed its conversion from a state chartered
mutual savings bank to a state chartered stock savings bank. The Bank issued
2,420,000 shares at $10 per share for a total of $24,200,000. The net proceeds
of the stock offering, after reflecting offering expenses of $880,626, were
$23,319,374. The proceeds were added to the Bank's general funds to be used for
general corporate purposes.
As part of the reorganization to the stock form of ownership, the Lakeview
Savings Bank Employee Stock Ownership Plan (ESOP) purchased 110,000 shares of
the Bank's common stock at $10 per share, or $1,100,000, which was funded by a
loan from an unaffiliated lender. The Bank intends to make discretionary cash
contributions to the ESOP sufficient to service the amount borrowed.
Additionally, the Lakeview Savings Bank Management Stock Bonus Plan (MSBP)
purchased 220,000 shares at $10 per share totaling $2,200,000. The funds used to
acquire the MSBP shares were contributed by the Bank. The Bank has allocated 66%
of the shares to directors, officers and other key employees of the Bank (see
Note 16).
Note 3
Excess of Cost Over Fair Value
of Net Assets Acquired, Net
On December 31, 1989, the Bank acquired a savings and loan association. The
acquisition has been accounted for as a purchase and, accordingly, all assets
and liabilities acquired were adjusted to and recorded at their fair values as
of December 31, 1989. The excess of cost over fair value of net assets acquired
(goodwill) amounted to $1,084,373 and was allocated to core deposit value to be
amortized on a straightline basis over 15 years. Total amortization charged to
date amount to $475,949, at July 31, 1996.
On April 22, 1994, the Bank acquired certain assets and assumed certain
liabilities of Prospect Park Federal Savings Bank, a failed savings bank, from
the Resolution Trust Corporation. The excess of cost over the fair value of the
assets and liabilities acquired amounted to $12,430,000 and is being amortized
on a straight-line basis over ten years. Total amortization charged to date
amounts to $2,862,000 at July 31, 1996.
Note 4
Investment Securities Held to Maturity
The amortized cost and estimated market values of investment securities held to
maturity as of July 31, 1995 and 1996 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------------
July 31, 1995:
FHLB structured notes........................... $ 36,960,980 $ 74,895 ($ 262,500) $ 36,773,375
FHLMC structured notes.......................... 8,000,000 11,250 (116,250) 7,895,000
FNMA structured notes........................... 10,776,625 81,805 (69,375) 10,789,055
- ----------------------------------------------------------------------------------------------------------------------------------
$ 55,737,605 $ 167,950 ($ 448,125) $55,457,430
- ----------------------------------------------------------------------------------------------------------------------------------
July 31, 1996:
FHLB obligations................................ $ 20,741,938 $8,062 ($ 518,850) $20,231,150
FHLMC obligations............................... 14,079,257 115,743 (264,225) 13,930,775
FNMA obligations................................ 6,000,000 0 (78,476) 5,921,524
- ----------------------------------------------------------------------------------------------------------------------------------
$ 40,821,195 $ 123,805 ($ 861,551) $40,083,449
- ----------------------------------------------------------------------------------------------------------------------------------
The yield on the structured notes increases periodically over the contractual
five or ten-year term of the security. However, the issuer has the option to
repay these securities as the yield adjusts. As of July 31, 1996, the Bank had
no structured notes in its held to maturity portfolio.
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The amortized cost and estimated market values of investment securities
held to maturity at July 31, 1996, by contractual maturity, are shown
below:
Estimated
Amortized market
cost value
- ----------------------------------------------------------------------------------------------------------------------------------
Due in one year or less..................................................... $ - $ -
Due after one year through five years....................................... - -
Due after five years through ten years...................................... 18,329,257 18,298,489
Due after ten years......................................................... 22,491,938 21,784,960
- ----------------------------------------------------------------------------------------------------------------------------------
$40,821,195 $40,083,449
- ----------------------------------------------------------------------------------------------------------------------------------
Note 5
Investments Available for Sale
The amortized cost and estimated market values of investments
available for sale at July 31, 1995 and 1996 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ------------------------------------------------------------------------------------------------------------------------------------
July 31, 1995:
SLMA stock................................................... $ 4,689,121 - ($ 379,121) $ 4,310,000
Equity Securities............................................ 3.964,250 293,125 - 4,257,375
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8,653,371 $293,125 ($ 379,121) $8,567,375
- ------------------------------------------------------------------------------------------------------------------------------------
July 31, 1996:
U.S. Agency Securities....................................... $59,899,079 - ($1,853,868) $58,045,211
GNMA MBS..................................................... 4,520,361 163,406 - 4,683,767
FNMA\FHLMC REMICS............................................ 1,994,239 41,499 (2,067) 2,033,671
Private issue REMICS......................................... 9,999,368 (477,784) 9,521,584
Municipal Bonds.............................................. 3,229,386 (146,776) 3,082,610
FNMA Stock................................................... 8,999,430 (172,930) 8,826,500
Equity Securities............................................ 4,269,830 121,670 (617,419) 3,774,081
- ------------------------------------------------------------------------------------------------------------------------------------
$ 92,911,693 $326,575 ($3,270,844) $89,967,424
- ------------------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated market values of investments available for
sale at July 31, 1996, by contractual maturities are shown below:
Estimated
Amortized market
cost value
- ----------------------------------------------------------------------------------------------------------------------------------
Due in one year or less $ 13,269,260 $12,600,580
Due after one year through five years 8,000,000 7,917,328
Due after five years through ten years 26,224,929 25,514,693
Due after ten years 45,417,504 43,934,823
- ----------------------------------------------------------------------------------------------------------------------------------
$ 92,911,693 $89,967,424
- ----------------------------------------------------------------------------------------------------------------------------------
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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Equity securities have been classified as maturing in one year or less, since
they have no stated maturity.
During the years ended July 31, 1994, 1995 and 1996, proceeds from sale of
securities available for sale of $3,891,839, $20,864,634, and $53,587,858,
respectively, were received, resulting in gross gains of $866,399, $2,107,244
and $2,768,781, respectively.
Note 6
Mortgage-backed Securities Held to Maturity
The amortized cost and estimated market values of mortgage-backed securities
held to maturity at July 31, 1995 and 1996 are as follows:
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------------
July 31, 1995:
GNMA...................................................... $ 5,183,091 $245,752 $ - $ 5,428,843
FHLMC..................................................... 57,167,299 456,105 (519,100) 57,104,304
FNMA...................................................... 47,540,422 201,718 (623,001) 47,119,139
REMICs.................................................... 48,887,166 216,859 (1,394,830) 47,709,195
Other..................................................... 16,597,318 11,359 (469,880) 16,138,797
- ----------------------------------------------------------------------------------------------------------------------------------
$175,375,296 $1,131,793 ($3,006,811) $173,500,278
- ----------------------------------------------------------------------------------------------------------------------------------
July 31, 1996:
FHLMC..................................................... $ 47,954,027 $ 130,680 $ (944,332) $ 47,140,375
FNMA...................................................... 38,922,756 253,491 (584,785) 38,591,462
FNMA/FHLMC/REMICS......................................... 34,585,153 265,693 (1,110,773) 33,740,073
- ----------------------------------------------------------------------------------------------------------------------------------
$121,461,936 $649,864 ($2,639,890) $119,471,910
- ----------------------------------------------------------------------------------------------------------------------------------
The amortized cost and market value of mortgage-backed securities held to
maturity at July 31, 1996, are shown below. The expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalties.
Estimated
Amortized market
cost value
- ----------------------------------------------------------------------------------------------------------------------------------
Due in one year or less................................................ $ 4,184,585 $ 4,157,764
Due after one year through five years.................................. 45,466,530 44,332,136
Due after five years through ten years................................. 20,470,754 20,178,036
Due after ten years.................................................... 51,340,067 50,803,974
- ----------------------------------------------------------------------------------------------------------------------------------
$121,461,936 $119,471,910
- ----------------------------------------------------------------------------------------------------------------------------------
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Note 7
Investments Held By Subsidiary
On February 6, 1995, Branchview Inc., a subsidiary of the Savings Bank sold the
majority of its equity interest in Residential Money Centers ("RMC"), a
residential mortgage company which originates mortgages and sells them in the
secondary market, to an unrelated third party for a gain of $3.8 million, of
which $3.4 million was recorded as a gain in 1995 and is reflected in other
operating income. Under the terms of the sale, the balance has been deferred and
will remain in escrow for 18 months pending resolution of normal contingencies.
In July 1995, Branchview purchased the remaining partnership interest of RMC,
for $1.5 million, and became the sole owner of RMC. RMC's only remaining asset
was a 9.09% limited partnership interest in Industry Mortgage Company, L.P.
("IMC").
IMC is a specialized consumer finance company engaged in purchasing,
originating, servicing and selling home equity loans secured primarily by first
liens on one-to-four family residential properties.
On June 25, 1996, IMC completed a reorganization plan whereby the limited
partners received restricted common stock in exchange for their partnership
interest in connection with a public offering of unrestricted common stock.
Immediately prior to the reorganization, Branchview purchased a limited
partner's half share interest in IMC for $4,778,000. As a result of the
reorganization, Branchview received 830,928 shares of restricted common stock in
exchange for its limited partnership interest. The offering price of the common
stock was $18.00 per share.
Upon completion of the public offering, IMC had outstanding an aggregate of
11,065,092 shares of common stock. Of these shares, the 3,100,000 shares sold in
the public offering will be freely tradable without restriction or further
registration under the Securities Act. The remaining 7,965,092 shares held by
existing stockholders of IMC (including Branchview) are "restricted securities"
within the meaning of Rule 144. None of the restricted shares of common stock
have been held for more than two years by stockholders who are not affiliates of
the Company and will be eligible for sale in the public market upon the
expiration of the restrictions in reliance on Rule 144(k) under the Securities
Act.
In general, under Rule 144 the Securities Act as currently in effect, a person,
including an affiliate, may sell an amount of restricted securities which were
last purchased from the issuer or an affiliate of the issuer a minimum of two
years prior to such sale, such that, within any three-month period, such
person's sales do not exceed the greater of 1% of the then outstanding shares of
the Company's common stock, or the average weekly trading volume in the Common
Stock on Nasdaq during the four calendar weeks preceding the date on which
notice of such sale is filed under Rule 144(k) of the Securities Act, or if no
such notice is required, the date of receipt of the order to execute the
transaction. In addition, under Rule 144(k), a stockholder who is not deemed an
affiliate, and has not been an affiliate for at least three months prior to the
sale, is entitled to sell restricted securities which were last purchased from
the issuer or an affiliate of the issuer a minimum of at least 3 years prior to
such sale without complying with the foregoing requirements. In calculating the
two and three year holding periods described above, a holder of restricted
securities can include the holding of a prior owner who was no an affiliate.
Notwithstanding the limitations on sale described above, otherwise restricted
securities may be sold at any time through an effective registration statement
pursuant to the Securities Act.
As of July 31, 1996, the carrying value of Branchview's investment in IMC is
$7,806,000 represented by the 830,928 shares of restricted common stock of IMC.
Although the investment in IMC is represented by equity securities, it is
carried at cost because the restriction period is in excess of one year. The
market value of such investment at July 31, 1996, based on the quoted market
price per share of the unrestricted common stock is $19.9 million. Included in
other income in 1996 is approximately $2.3 million representing the Bank's share
of partnership earnings in IMC prior to its reorganization.
Note 8
Loans Receivable, Net
A comparative summary of loans receivable at July 31, 1995 and 1996 is as
follows:
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Loan balances by type:
Real estate loans.................................................... $142,043,522 $163,279,564
Construction loans................................................... 915,000 762,715
Consumer loans....................................................... 1,136,811 1,517,033
Other................................................................ 850,000 1,191,082
- -----------------------------------------------------------------------------------------------------------------------------------
144,945,333 166,750,394
- -----------------------------------------------------------------------------------------------------------------------------------
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Less:
Allowance for loan losses............................................ 2,534,836 3,073,158
Deferred loan fees................................................... 287,552 219,862
- -----------------------------------------------------------------------------------------------------------------------------------
$142,122,945 $163,457,374
- -----------------------------------------------------------------------------------------------------------------------------------
The Bank serviced loans for others in the approximate amount of $17,142,812,
$17,927,900 and $13,792,727 at July 31, 1994, 1995 and 1996, respectively.
Servicing income earned in the year ended July 31, 1994, 1995, and 1996 amounted
to $21,530, $15,211, and $42,173, respectively.
A comparative summary of non-accrual loans at July 31, 1995 and 1996 is as
follows:
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
No. Amount No. Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Real estate and other loans..................................................... 56 $ 4,222,259 40 $2,910,953
Percent of real estate and other loans.......................................... 3.0% 1.8%
- -----------------------------------------------------------------------------------------------------------------------------------
An analysis of the allowance for loan losses for the years ended July 31, 1994,
1995 and 1996 is as follows:
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year.................................................... $2,638,365 $1,713,590 $2,534,836
Provision charged to operations................................................. 2,047,121 1,376,404 664,221
Charge-offs..................................................................... (3,070,734) (1,405,037) (429,341)
Recoveries...................................................................... 98,838 849,879 303,442
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year.......................................................... $1,713,590 $2,534,836 $3,073,158
- -----------------------------------------------------------------------------------------------------------------------------------
Included in loans is a secured loan amounting to $2.4 million, which was on
non-accrual during a portion of fiscal 1996. In 1996, the Bank signed an
agreement with the guarantor of the loan ("Forbearance Agreement") whereby all
past-due principal and interest was brought current and principal and interest
payments were prepaid through the date of the loan, December 16, 1996. The
Forbearance Agreement provides the guarantor an option to extend the due date of
the loan to December 16, 1997, with approvals of the participating banks
including the Bank. If the option is granted, the guarantor must prepay all
interest and principal to such due date.
For the years ended July 31, 1994, 1995 and 1996, additional interest income
before taxes amounting to approximately $703,000, $234,000 and $201,000,
respectively, would have been recognized if interest on loans three months or
more in arrears had been recorded based on original terms. At July 31, 1996,
there were no commitments to lend additional funds to borrowers whose loans are
classified as nonperforming.
The Bank uses the same credit policies and collateral requirements in making
commitments and conditional obligations as it does for on-balance-sheet loans.
Commitments to extend credit are agreements to lend to customers as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the borrower. Collateral held varies but primarily includes residential
properties. Outstanding loan commitments, primarily fixed-rate loans, at July
31, 1995 and 1996 amounted to $2,274,900 and $13,295,000, respectively.
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Note 9
Real Estate Owned, Net
Activity in the allowance for losses on real estate owned for the years ended
July 31, 1994, 1995 and 1996 is as follows:
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
Balance at beginning of year.............................................. $823,125 $ 188,119 $ -
Provision for losses...................................................... 713,320 502,377 654,489
Charge-offs, net ......................................................... (1,348,326) (690,496) (654,489)
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of year.................................................... $188,119 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------
Net loss on real estate owned activities for the years ended
July 31, 1994, 1995 and 1996 consists of the following:
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------
Provision for real estate owned losses.................................... $713,320 $ 502,377 $ 654,489
Net loss on sale of real estate owned and
related expenses.......................................................... 606,372 147,817 266,428
- -----------------------------------------------------------------------------------------------------------------------
$ 1,319,692 $ 650,194 $ 920,917
- -----------------------------------------------------------------------------------------------------------------------
Note 10
Accrued Interest Receivable
Accrued interest receivable for the years ended July 31, 1995 and 1996,
respectively, are summarized as follows:
1995 1996
- -----------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity.......................................... $ 894,180 $1,021,063
Investment securities available for sale........................................ $ 25,249 $ 961,514
Mortgage-backed securities...................................................... 987,697 668,487
Loans receivable................................................................ 811,223 995,448
- -----------------------------------------------------------------------------------------------------------------------
$ 2,718,349 $3,646,512
- -----------------------------------------------------------------------------------------------------------------------
Note 11
Office Properties and Equipment, net
Office properties and equipment, net, at July 31, 1995 and 1996
consists of the following:
1995 1996
- -----------------------------------------------------------------------------------------------------------------------
Cost:
Land............................................................................ $ 793,158 $ 793,158
Parking lot improvements........................................................ 26,913 26,913
Building and building improvements.............................................. 3,513,101 3,600,269
Furniture and equipment......................................................... 1,234,000 1,290,631
Automobiles..................................................................... 75,165 102,636
- -----------------------------------------------------------------------------------------------------------------------
5,642,337 5,813,607
- -----------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation................................................... 1,342,743 1,630,968
- -----------------------------------------------------------------------------------------------------------------------
$ 4,299,594 $4,182,639
- -----------------------------------------------------------------------------------------------------------------------
Non-interest expense includes rentals for premises and equipment of $73,000,
$156,000 and $177,000 for the years ended July 31, 1994, 1995 and 1996
respectively.
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Note 12
Deposits
Deposit balances at July 31. 1995 and 1996 are summarized as follows:
1995 1996
Interest Weighted Interest Weighted
Rate average Rate average
Ranges rate Amount % Ranges rate Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
NOW accounts and money
market deposits....................0 - 2.85 2.10% $ 66,225,465 19.3 0 - 2.85 1.86% $ 69,588,989 19.6
Savings deposits...................0 - 2.85 2.39% 73,586,111 21.4 0 - 2.85 2.38% 74,612,769 21.1
Certificates of deposit............2 - 10 5.27% 203,677,752 59.3 0 - 8 5.11% 210,045,012 59.3
- -----------------------------------------------------------------------------------------------------------------------------------
$343,489,328 100.0 $ 354,246,770 100.0
- -----------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit greater than $100,000 total approximately
$14,310,083 and $17,512,390 at July 31, 1995 and 1996, respectively.
The contractual maturities of certificates of deposit at July 31, 1995
and 1996 are as follows (in thousands):
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Within one year................................................................... $163,745 $ 170,389
One to three years................................................................ 33,282 35,069
Thereafter........................................................................ 6,651 4,587
- -----------------------------------------------------------------------------------------------------------------------------------
$203,678 $ 210,045
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense on deposits for the years ended July 31, 1994, 1995 and
1996 consists of the following:
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Certificates of deposit........................................... $ 4,962,138 $ 8,429,880 $10,880,983
Passbook and club accounts........................................ 1,425,258 2,695,257 2,384,500
NOW and money market accounts..................................... 472,526 818,459 798,812
- -----------------------------------------------------------------------------------------------------------------------------------
$ 6,859,922 $11,943,596 $14,064,295
- -----------------------------------------------------------------------------------------------------------------------------------
Note 13
Borrowings
Borrowings at July 31, 1995 and 1996 consists of the following:
Interest
1995 1996 Rate Maturity
- -----------------------------------------------------------------------------------------------------------------------------------
FHLB of New York Advance $19,000,000 - 6.13% Aug. 1, 1995
FHLB of New York Advance - $10,000,000 5.44% Aug.22,1996
FHLB of New York Advance - $10,000,000 5.44% Aug.26,1996
FHLB of New York Line of Credit - $14,000,000 6.00% Aug. 1, 1996
Reverse Repurchase Agreement - $20,000,000 5.60% Aug. 8, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
$19,000,000 $54,000,000
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28
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The line of credit and advances from the Federal Home Loan Bank of New York
("FHLB") are secured by stock in the FHLB of New York and a blanket pledge over
the Bank's Agency securities, qualifying loans and mortgage-backed securities.
At July 31, 1996, the Bank had a credit line available of $41,961,400, from the
Federal Home Loan Bank of New York.
At July 31, 1996, the Savings Bank had entered into repurchase agreements with 1
major national broker/dealer which totaled $20 million. During the years ended
July 31, 1995 and 1996, the maximum month-end balance of the repurchase
agreements was $0 and $20 million, respectively. The average amount of
repurchase agreements held during the years ended July 31, 1995 and 1996 was $0
and $5.1 million, respectively. Interest paid on secured borrowings in fiscal
1995 and 1996 was $0 and $282,124, respectively.
Note 14
Federal and State Income Taxes
As discussed in note 1, the Bank adopted SFAS 109 as of August 1, 1993. The
cumulative effect of this change in accounting for income taxes of $1,315,011 is
reported separately in the consolidated statement of income for the year ended
July 31, 1994.
Income tax expense (benefit) for the years ended July 31, 1994, 1995 and 1996 is
comprised of the following:
1994 1995 1996
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Current:
Federal............................................................ $ 809,121 $3,377,513 $3,582,788
State.............................................................. 133,857 512,000 529,418
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$942,978 $3,889,513 $4,112,206
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal............................................................ 806,436 (141,000 (428,000)
State.............................................................. 63,257 (13,000) (38,000)
- -----------------------------------------------------------------------------------------------------------------------------------
869,693 (154,000) (466,000)
- -----------------------------------------------------------------------------------------------------------------------------------
Total income tax expense........................................... $1,812,671 $3,735,513 $3,646,206
- -----------------------------------------------------------------------------------------------------------------------------------
If certain conditions are met, savings and loan associations are allowed a
special bad debt deduction in determining income for tax purposes, based on
specified experience formulas or a percentage of taxable income before such
deduction. The Bank used the experience method in 1995. It is anticipated that
the experience method will be used in preparing the 1996 tax return.
On August 21, 1996 legislation was signed into law which repealed the percentage
of taxable income method for tax bad debt deduction. The repeal is effective for
the Bank's taxable year beginning August 1, 1996. In addition, the legislation
requires the Company to include in taxable income its tax bad debt reserves in
excess of its base year reserves over a six, seven, or eight year period
depending upon the attainment of certain loan origination levels.
Since the percentage of taxable income method for tax bad debt deduction and the
corresponding increase in the tax bad debt reserve in excess of the base year
have been recorded as temporary differences pursuant to SFAS 109, this change in
the tax law is not expected to have a material effect on the Company's statement
of operations.
Retained income at July 31, 1996 includes approximately $3,600,000 for which no
provision for income tax has been made. This amount represents an allocation of
income to bad debt deductions for tax purposes only. Reduction of amounts so
allocated by other than tax bad debt losses or recomputation of bad debt
deductions resulting from an operating loss carryback to prior years will create
income for tax purposes only, which will be subject to the then current
corporate income tax rate.
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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A reconciliation of expected income tax expense (computed by multiplying the
U.S. Federal corporate income tax rate of 34% to income before income taxes) and
total income tax expense for the years ended July 31, 1994, 1995 and 1996 is as
follows:
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Expected income tax expense............................................. $1,723,333 $3,410,248 $3,372,841
Dividends received deduction............................................ (77,512) (52,263) (88,246)
State income taxes, net of Federal tax benefit.......................... 130,095 337,920 324,336
Amortization of goodwill and other, net................................. 36,755 39,608 37,275
- -----------------------------------------------------------------------------------------------------------------------------------
Total income tax expense................................................ $1,812,671 $3,735,513 $3,646,206
- -----------------------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset at July 31, 1994 and 1995 are as
follows:
Deferred tax assets:
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses............................................... $938,000 $1,059,000
Loan fees............................................................... 106,000 81,000
Uncollected interest.................................................... 54,000 93,000
Accrued bonus........................................................... 65,000 65,000
Goodwill................................................................ 189,000 344,000
Unrealized loss or securities available for sale........................ 31,000 1,059,348
Other................................................................... 129,000 239,000
- -----------------------------------------------------------------------------------------------------------------------------------
........................................................................ $1,512,000 $2,940,348
- -----------------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Intangible assets....................................................... 245,000 225,000
Depreciation............................................................ 117,000 85,000
Other................................................................... 67,000 53,000
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429,000 363,000
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Net deferred asset...................................................... $1,083,000 $2,577,348
- -----------------------------------------------------------------------------------------------------------------------------------
Management believes, based upon current facts, that it is more likely than not
that there will be sufficient taxable income in future years to realize the net
deferred tax asset. However there can be no assurances about the levels of
future earnings.
30
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Note 15
Employee Benefit Plan
The Bank has in effect a noncontributory defined benefit plan covering
substantially all of its employees upon their becoming eligible. The benefits
are based on years of service and compensation. Total pension expense (income)
was $35,276, ($14,488) and ($52,664) for the years ended July 31, 1994, 1995 and
1996, respectively.
Net pension cost for the years ended July 31, 1994, 1995 and 1996 includes the
following:
1994 1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the period........................ $ 53,235 $39,095 $ 36,915
Interest cost on projected benefit obligation........................... 37,699 35,103 38,638
Return on plan assets................................................... (445,761) (98,518) (83,128)
Net amortization and deferral loss...................................... 390,103 9,832 (45,089)
- -----------------------------------------------------------------------------------------------------------------------------------
Total pension cost (benefit)............................................ $ 35,276 ($ 14,488) ($52,664)
- -----------------------------------------------------------------------------------------------------------------------------------
The following table sets forth the plan's funded status at July 31,
1995 and 1996:
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of obligations - accumulated benefit
obligation, including vested benefits of $372,867 and $519,641
at July 31, 1995 and 1996, respectively......................................... $ 458,188 $527,475
Projected benefit obligation.................................................... 608,112 569,452
Plan assets at fair value....................................................... 1,210,917 1,223,715
Plan assets in excess of projected benefit obligation........................... 602,805 654,263
Unrecognized net transition obligation.......................................... (76,711) (68,187)
Unrecognized prior service cost................................................. - (40,748)
Unrecognized deferred loss...................................................... (530,649) (497,219)
- -----------------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost............................................................ ($4,555) $48,109
- -----------------------------------------------------------------------------------------------------------------------------------
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 6.50% in fiscal 1995 and 1996. The
assumed long-term rate of return on plan assets was 7.25% in both years, and the
assumed rate of increase in future compensation levels was 5.5% in both years.
Supplemental Executive Retirement Plan ("SERP")
During fiscal year 1996, the Bank implemented a Supplemental Executive
Retirement Plan ("SERP"), which provides a post-employment supplemental
retirement benefit to the eligible participant's Pension Plans Annual Benefit.
The SERP is not a tax-qualified employee benefit plan. The SERP expense was
$84,006, for the year ended July 31, 1996.
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Note 16
Stock Benefit Plans
Stock Option Plan
The Bank has adopted a stock option and incentive plan (Option Plan). Pursuant
to the Option Plan, stock options of 439,200 common shares, adjusted for stock
dividends, may be granted to directors and officers of the Bank. Options granted
under the Option Plan may be either options that qualify as Incentive Stock
Options as defined in Section 422 of the Internal Revenue Code of 1986 (the
Code), as amended, or options that do not qualify.
Exercise prices of the options range from $8.26 to $16.02 per share. All options
have been adjusted to reflect stock dividends. At July 31, 1996, 418,157 granted
qualified stock options were outstanding, and none of the stock options granted
were exercised during this period.
Employee Stock Ownership Plan
The Bank has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed one year of service with the Bank
and having attained age 2 1. The ESOP Trust purchased 1 10,000 shares of common
stock in the Bank's initial public offering with proceeds from a loan from an
unaffiliated lender. On July 31, 1996 the ESOP Trust purchased an additional
84,744 shares for $1,615,985. The Bank makes cash contributions to the ESOP on
an annual basis sufficient to enable the ESOP to make the required loan payments
to the unaffiliated lender. Dividends declared on ESOP shares are used to
purchase additional common shares of the Bank, for inclusion in the Plan, as
Plan assets.
The note payable referred to above bears interest at Federal funds plus 3.25%,
with interest payable quarterly and principal payable in equal annual
installments over eight years. The loan is secured by the shares of the stock
purchased.
As the debt is repaid, shares are released from collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
The Bank accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as deferred ESOP
shares in the statement of financial position. As shares are released from
collateral, the Bank reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations.
Management Stock Bonus Plans
The Bank has adopted MSBPs for directors and management to enable the Bank to
attract and retain experienced and capable personnel in key positions of
responsibility. A total of 220,000 shares of restricted stock were purchased on
the conversion date. Allocated restricted stock is payable over a five-year
vesting period, at 20% per year, beginning in the year of the award. The Bank
will recognize compensation expense in the amount of the fair market value of
the common stock at the grant date, pro rata over the years during which the
shares are payable and recorded as an addition to stockholders' equity equal to
the compensation expense recorded. Compensation expense attributable to the
MSBPs amounted to $154,000, $305,800 and $319,552 in 1994, 1995 and 1996,
respectively. The shares are entitled to all voting and other stockholder
rights, except that the shares, while restricted, cannot be sold, pledged or
otherwise disposed of, and are required to be held in escrow.
If a holder of restricted stock under the MSBPs terminated employment for
reasons other than death, disability, retirement following five years of service
or change of control in the Bank, such employee forfeits all rights to any
allocated shares which are still restricted. If termination is caused by death,
disability, retirement or change in control of the Bank, all allocated shares
become unrestricted.
Note 17
Commitments and Contingencies
At July 31, 1996, the Bank was obligated under noncancelable operating leases
for premises and equipment as follows (in thousands):
- --------------------------------------------------------------------------------
1997............................................$137,311
1998.............................................124,459
1999.............................................116,985
2000..............................................94,560
Thereafter........................................94,560
- --------------------------------------------------------------------------------
In the normal course of business, there are various outstanding legal
proceedings and claims. In the opinion of management, after consultation with
legal counsel, the disposition of such legal proceedings and claims will not
materially affect the Bank's consolidated financial position, results of
operations or liquidity.
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Note 18
Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgements by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I Capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of July 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of July 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
Tier 1 leverage ratios as set forth in the table below. There are no conditions
or events since that notification that Management believes have changed the
Bank's category.
The Bank's actual capital amounts and ratios are also presented in the table.
Required To be well capitalized
for capital under prompt corrective
Actual adequacy purposes action provision
- -----------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
As of July 31, 1996:
Total capital (to risk-weighted assets)...............$41,540,507 19.3% $17,211,156 8.0% $ 21,513,945 10.0%
Tier I capital (to risk-weighted assets)...............33,200,112 15.4% 8,605,578 4.0% 12,908,367 6.0%
Tier 1 capital (to average assets).....................33,200,112 7.5% 17,630,520 4.0% 22,038,150 5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
As of July 31, 1995:
Total capital (to risk-weighted assets)................49,400,232 25.5% 15,495,517 8.0% 19,369,396 10.0%
Tier 1 capital (to risk-weighted assets)...............37,875,170 19.6% 7,747,758 4.0% 11,621,637 6.0%
Tier 1 capital (to average assets).....................37,875,170 9.1% 16,702,240 4.0% 20,877,800 5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
33
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Note 19
Stock Repurchase Program
On October 28, 1994 the Bank announced that the Board of Directors had approved
a 5% stock repurchase program. On April 10, 1995 the Company announced that the
Board of Directors had approved a 10% stock repurchase program. On November 30,
1995, March 25, 1996, and July 29, 1996, the Company announced that the Board of
Directors had approved additional 5% stock repurchase programs. On January 9,
1995 and January 2, 1996, the Company announced that the Board of Directors had
approved an additional 10% stock dividend of its outstanding common stock. The
repurchased shares have been held as treasury stock and are available for
general corporate purposes. The Bank has completed the repurchase of 662,372
shares of common stock as of July 31, 1996.
Note 20
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a
specific point in time based on relevant market information and information
about the financial instrument. Such estimates do not include any premium or
discount that could result from offering for sale at one time the Bank's entire
holdings of a particular financial instrument. Because no market value exists
for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
assumptions, many of which involve circumstances outside the control of
management. Because of the uncertainties surrounding these factors and
assumptions, the reported fair values represent estimates only and, therefore,
cannot be compared to the historical accounting model. Changes in assumptions or
methodologies could significantly affect the estimates of fair value.
Fair value estimates presented are based on financial instruments both on- and
off-balance-sheet, and no attempt has been made to estimate the value of
anticipated future business, and the value of assets and liabilities that are
not considered financial instruments. In addition, the tax consequences related
to the realization of the unrealized gains and losses can have a potential
effect on fair value estimates and have not been considered in any of the
estimates. The fair value information supplements the basic financial statements
and other traditional financial data presented throughout the financial
statements, and the aggregate fair value of financial instruments presented does
not represent the underlying value of the Bank taken as a whole and should not
be compared with the fair value of other financial institutions, which may
differ depending on the assumptions used and the valuation techniques employed.
The following methods and assumptions were used to estimate the fair value of
significant financial instruments at July 31, 1995 and 1996:
Financial Assets
The carrying amount of cash and cash equivalents is considered to approximate
fair value. The fair values of securities held for sale and investment
securities are based on quoted market prices. The fair values of equity
securities restricted is based on the quoted market price of unrestricted shares
without discount for the restriction. The fair value of loans represents the
present value of the estimated future cash flows discounted at estimates of
market interest rates adjusted for criteria discussed above. Fair value of
significant nonperforming loans is generally based on the estimated cash flows
which are discounted employing a rate that incorporates the risk associated with
such cash flows. The fair value of the FHLB stock is the same as its carrying
value.
Financial Liabilities
The carrying amounts of deposit liabilities payable on demand are considered to
approximate fair value. The fair value of fixed maturity deposits was estimated
by discounting estimated future cash flows using rates currently offered for
deposit products with similar maturities. Long-term borrowing fair values are
discounted using rates available on borrowings with similar terms and
maturities.
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Off-balance-sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar arrangements.
The carrying amounts and related fair values at July 31, 1995 and 1996 are as
follows:
Carrying amount Fair value
- -----------------------------------------------------------------------------------------------------------------------------------
1995:
Financial assets:
Cash and cash equivalents........................................... $ 8,021,666 $ 8,021,666
Investment securities............................................... 55,737,605 55,457,430
Investments held for sale........................................... 8,567,375 8,567,375
Mortgage-backed securities.......................................... 175,375,296 173,500,278
Loans receivable, net............................................... 142,122,945 145,896,430
Federal Home Loan Bank of New York stock............................ 2,587,400 2,587,400
Financial liabilities:
Deposits............................................................ 343,489,328 344,688,499
Borrowings.......................................................... 19,000,000 19,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
1996:
Financial assets:
Cash and cash equivalents........................................... $ 6,902,040 $ 6,902,040
Investment securities held to maturity.............................. 40,821,195 40,083,449
Investments available for sale...................................... 89,967,424 89,967,424
Mortgage-backed securities held to maturity......................... 121,461,936 119,471,910
Equity securities restricted........................................ 7,806,358 19,942,272
Loans receivable, net............................................... 163,457,374 163,873,689
Federal Home Loan Bank of New York stock............................ 2,587,400 2,587,400
Financial liabilities:
Deposits............................................................ 354,246,770 355,068,772
Borrowings.......................................................... 54,000,000 54,000,000
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35
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Note 21
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" (SFAS 122), was issued by the Financial Accounting Standards
Board (FASB) in May 1995. SFAS 122 amends certain provisions of SFAS 65 to
eliminate the accounting distinction between rights to service mortgage loans
for others that are acquired through loan origination activities and those
acquired through purchase transactions. SFAS 122 generally would require a
mortgage banking enterprise that purchases or originates loans to allocate the
cost of acquiring those loans to the mortgage servicing rights and the loans
based on their relative fair values if it is practicable to estimate those fair
values.
Any costs allocated to mortgage servicing rights should be recognized as
separate asset and amortized in proportion to and over the period of estimated
net servicing income and should be evaluated for impairment based on their fair
value. SFAS 122 is effective for fiscal years beginning after December 15, 1995.
Management has determined that the adoption of SFAS 122 will not have a material
impact on the Bank's consolidated financial statements.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). This statement establishes financial accounting and
reporting standards for stock-based employees compensation plans. SFAS 123
encourages all entities to adopt the "fair value base method" of accounting for
employee stock compensation plans. However, SFAS 123 also allows an entity to
continue to measure compensation cost under such plans using the "intrinsic
value based method." Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is recognized
over the service period, usually the vesting period. Fair value is determined
using an option pricing model that takes into account the stock price at the
grant date, the exercise price, the expected life of the option, the volatility
of the underlying stock and the expected dividends on it, and the risk-free
interest rate over the expected life of the option. Under the intrinsic value
based method, compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock. Most stock plans have no intrinsic
value at date of grant, and under previous accounting guidance, no compensation
cost was to be recognized.
The accounting requirements of this statement are effective for transactions
entered into in fiscal years that begin after December 15, 1995. The Bank
intends to continue accounting for compensation cost under the intrinsic value
based method and will provide pro forma disclosures for all awards granted after
July 31, 1996. Such disclosures include net income and earnings per share as if
the fair value based method of accounting has been applied.
In June 1996, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" SFAS 125).
SFAS 125 amends portions of SFAS 115, amends and extends to all servicing assets
and liabilities the accounting standards for mortgages servicing rights now in
SFAS 65, and supercedes SFAS 122. The
36
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statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
Those standards are based upon consistent application of a financial components
approach that focuses on control. The statement also defines accounting
treatment for servicing assets and other retained interest in the assets that
are transferred. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and
is to be applied prospectively. The adoption of the statement is not expected to
have a material effect on the Bank's financial condition or results of
operation.
Note 22
Subsequent Event (Unaudited)
Recapitalization of the Savings Association Insurance Fund ("SAIF") and its
Impact on Insurance Premiums
On September 30, 1996 the President signed into law the Deposit Insurance Funds
Act of 1996 (the Act). Among other provisions, the Act empowers the FDIC to
impose a special assessment on deposits of institutions insured by the Savings
Association Insurance Fund (SAIF) including the Bank. This special assessment,
which is based on deposits at March 31, 1995, is intended to recapitalize the
SAIF.
Based on information issued by the FDIC, the special assessment is expected to
be 65.7 basis points per $100 of insured deposits and was accrued by the Bank on
September 30, 1996. The amount of the assessment is expected to approximate $2.2
million before tax benefit and is payable on November 27, 1996.
It is expected that annual insurance premium rates will be reduced for
institutions in the lowest risk category, including the Bank, to a level which
approximates those paid by institutions insured by the Bank Insurance Fund
(BIF). In addition to the annual insurance premiums, the Bank will be assessed
approximately 6.5 basis points on eligible deposits to cover FICO obligations
beginning on January 1, 1997. The Bank paid insurance premiums to the FDIC of
$794,011 during fiscal 1996.
Note 23
Parent Company Only
At fiscal year end 1996, Lakeview Financial Corp. (Parent only), which was
formed in August 1994, had three subsidiaries: Lakeview Savings Bank,
Branchview, Inc., and Lakeview Mortgage Depot, Inc. The earnings of the
subsidiaries are recognized by the Parent Company using the equity method of
accounting. Accordingly, earnings of the subsidiaries are recorded as increases
in the Parent Company's investment in the subsidiaries and dividends paid reduce
the Parent Company's investment in the subsidiaries. The following information
should be read in conjunction with other Notes to the Consolidated Financial
Statements.
37
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
Condensed financial statements of the Parent Company only are presented below.
Condensed Balance Sheet
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Cash on hand and in banks....................................................... 152,855 244,371
Investments in subsidiaries..................................................... 49,291,953 45,515,234
Other assets.................................................................... - 75
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets.................................................................... $ 49,444,808 $ 45,759,680
- -----------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities..................................................................... 4,574 -
Stockholders' equity............................................................ 49,440,234 45,759,680
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and Stockholders' equity...................................... 49,444,808 45,759,680
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Statement of Income
Equity in earnings of subsidiaries.............................................. $ 6,279,834 $ 6,310,835
Interest income................................................................. 16,127 -
Securities gains................................................................ 20,709 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total income.................................................................... 6,316,670 6,310,835
Total other expenses............................................................ 17,431 34,957
- -----------------------------------------------------------------------------------------------------------------------------------
Net income before taxes......................................................... 6,299,239 6,275,878
Taxes expense................................................................... 4,612 1,964
- -----------------------------------------------------------------------------------------------------------------------------------
Net income...................................................................... $ 6,294,627 $ 6,273,914
- -----------------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows
Cash flows from operating activities:
Net income..................................................................... $ 6,294,627 $ 6,273,914
Adjustments to reconcile net income to net cash
provided by operating activities
Equity in earnings of subsidiaries............................................. (6,279,834) (6,310,835)
Investment in subsidiaries..................................................... 99,997 (250,180)
Change in other assets......................................................... - (75)
Change in other liabilities.................................................... 4,574 (4,574)
Dividends from subsidiaries.................................................... 4,619,027 7,650,154
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activity........................................ 4,738,391 7,358,404
Cash flows from financing activities:
Purchase of treasury stock..................................................... (3,970,106) (6,685,014)
Dividend paid.................................................................. (615,430) (581,874)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities.......................................... (4,585,536) (7,266,888)
Net change in cash and cash equivalents......................................... 152,855 91,516
Cash and cash equivalents at beginning of period................................ - 152,855
Cash and cash equivalents at end of period...................................... $152,855 $ 244,371
- -----------------------------------------------------------------------------------------------------------------------------------
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Note 24
Quarterly Financial Data (Unaudited)
The following table contains quarterly financial data for the years ended July
31, 1995 and 1996 (dollars in thousands)-
First Second Third Fourth
Year Ended July 31, 1995 Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income........................... $ 6,968 $7,094 $ 7,060 $ 7,308 $ 28,430
Total Interest Expense.......................... 3,053 3,278 3,394 3,814 13,539
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision
for Loan Losses................................. 3,915 3,816 3,666 3,494 14,891
Provision for Loan Losses....................... 121 443 651 161 1,376
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses................................. 3,794 3,373 3,015 3,333 13,515
Total Other Income.............................. 668 769 5,001 769 7,207
Total Other Expense............................. 2,678 2,490 2,875 2,648 10,691
Net Income Before Taxes......................... 1,784 1,652 5,141 1,454 10,031
Federal and State Income Taxes.................. 626 542 2,070 498 3,736
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income...................................... $ 1,158 $1,110 $ 3,071 $ 956 $ 6,295
- -----------------------------------------------------------------------------------------------------------------------------------
................................................ First Second Third Fourth
Year Ended July 31, 1996........................ Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income........................... $ 7,482 $7,533 $ 7,697 $ 8,260 $ 30,972
Total Interest Expense.......................... 4,078 4,024 4,151 4,297 16,550
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Before Provision
for Loan Losses................................. 3,404 3,509 3,546 3,963 14,422
Provision for Loan Losses....................... 184 175 184 121 664
Net Interest Income After Provision
for Loan Losses................................. 3,220 3,334 3,362 3,842 13,758
Total Other Income.............................. 968 1,708 1,697 2,657 7,030
Total Other Expense............................. 2,648 2,679 2,616 2,925 10,868
Net Income Before Taxes......................... 1,540 2,363 2,443 3,574 9,920
Federal and State Income Taxes.................. 519 863 936 1,328 3,646
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Net Income...................................... $ 1,021 $ 1,500 $ 1,507 $ 2,246 $ 6,274
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39
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LAKEVIEW FINANCIAL CORP. 1996 ANNUAL REPORT
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Independent Auditors' Report
[KPMG Peat Marwick LLP Letterhead]
The Board of Directors and Stockholders
Lakeview Financial Corp. and Subsidiaries
Paterson, New Jersey:
We have audited the accompanying consolidated balance sheets of Lakeview
Financial Corp. and subsidiaries as of July 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the years in the three-year period ended July 31, 1996. These consolidated
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
manage-ment, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lakeview Financial
Corp. and subsidiaries as of July 31, 1995 and 1996, and the results of their
operations and their cash flows for each of the years in the three year period
ended July 31, 1996 in conformity with generally accepted accounting principles.
As discussed in notes 1 and 14 to the consolidated financial statements, as of
August 1, 1993 the Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," and as of August 1,
1994, Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
/s/KPMG Peat Marwick LLP
Short Hills, New Jersey
September 5, 1996
40
Lakeview Financial Corp. CORPORATE
and Subsidiaries INFORMATION
DIRECTORS TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
Leo J. Costello 10 Commerce Drive
Chairman of the Board Cranford, NJ 07016
Kevin J. Coogan
Robert J. Davenport CORPORATE ADDRESS
Leo J. Dean 1117 Main Street
Dennis D. Pedra Paterson, NJ 07503
Michael R. Rowe
Vincent A. Scola SHAREHOLDER INFORMATION
Sandy L. Coulthart
Corporate Administrator
FINANCIAL INFORMATION
Anthony G. Gallo
OFFICERS Chief Financial Officer
Kevin J. Coogan MARKET INFORMATION
President/CEO NASDAQ National Marketing System
Kevin M. McCloskey CORPORATE SYMBOL "LVSB"
Vice President/COO
Anthony G. Gallo COUNSEL
Vice President/CFO Salvatore Borrelli, Esq.
989 McBride Avenue
Annette Barrone West Paterson, NJ 07424
Vice President/Treasurer
WASHINGTON COUNSEL
Helen Saco Malizia, Spidi, Sloane & Fisch, P.C.
Vice President/Secretary One Franklin Square
1301 K Street, N.W.
Jeanine Kachele Suite 700 East
Vice President/Branch Manager Washington, D.C. 20005
Robert Campbell
Assistant Comptroller INDEPENDENT AUDITORS
KPMG Peat Marwick, LLP
Mary Requena 150 John F. Kennedy Parkway
Assistant Secretary/Trearurer Short Hills, NJ 07078
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10-K INFORMATION A copy of the Corporation's Annual Report on Form 10-K for the
fiscal year ended July 31, 1996 as filed with the Securities and Exchange
Commission will be furnished without charge to Stockholders as of the record
date upon written request to the Secretary.
Lakeview Financial Corp., 989 McBride Avenue, West Paterson, NJ 07424.
[The following at bottom of page]
[Charting the course. Picture of Ship]
[Lakeview Financial Corp. - 989 McBride Avenue - West Paterson, NJ 07424
(201) 890-1234]
[Design: Studio Inc/Printing: Millburn Press]