Exhibit 13.0
1996 Annual Report to Stockholders
[** LOGO **]
Little Falls Bancorp, Inc.
ANNUAL REPORT - 1996
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Little Falls Bancorp, Inc.
Annual Report - 1996
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TABLE OF CONTENTS
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Letter to Stockholders .................................................... 1
Corporate Profile and Stock Market Information............................. 2
Selected Financial and Other Data.......................................... 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 5
Management Responsibility Statement....................................... 16
Independent Auditors' Report.............................................. 17
Consolidated Statements of Financial Condition............................ 18
Consolidated Statements of Income......................................... 19
Consolidated Statements of Retained Earnings.............................. 20
Consolidated Statements of Cash Flows..................................... 21
Notes to Consolidated Financial Statements................................ 24
Other Corporate Information............................................... 51
Little Falls Bancorp, Inc.
86 Main Street
Little Falls, New Jersey 07424
To Our Stockholders:
On behalf of our directors, officers and employees, we are pleased to present to
you our second annual stockholders' report.
The year 1996 was an historic year for Little Falls Bank. The year began with
Little Falls Bancorp, Inc., selling 3,041,750 shares of stock in its initial
public offering to the Bank's customers, directors, employees and interested
investors in connection with the Bank's conversion from a federally chartered
mutual savings bank to a federally chartered stock savings bank and the
acquisition of all of the issued and outstanding capital stock of the Bank by
the Company. The Conversion generated $26.8 million of net proceeds.
After much anticipation and speculation, the FDIC imposed a special assessment
on SAIF members to recapitalize the deposit insurance fund. For the Bank, this
resulted in a one-time expense of $1.2 million. While this materially impacted
earnings for 1996, it is expected to significantly decrease federal deposit
insurance premiums going forward. In spite of the special assessment, 1996
earnings increased over 1995's level.
During the past year, there were several other positive accomplishments achieved
by the Company. For example, loans increased by $20.9 million due to record
originations in excess of $31.0 million; non-performing assets decreased by $1.2
million as the area economy continued to improve and the Bank was able to
resolve some problem assets, and the net interest spread increased by 25 basis
points as the Bank was able to reduce its cost of funds.
In addition, the Bank closed its Mount Holly office, and sold the $9.2 million
of deposits to an unaffiliated financial institution. A small gain was recorded
on the sale. The Bank also closed its Frenchtown office, with the deposits being
retained. We believe this consolidation will better serve our customers and we
anticipate a reduction in operating costs going forward as a result of these
transactions.
In October 1996, John P. Pullara retired as President of Little Falls Bank. Mr.
Pullara started with the Bank in 1955, serving as President since 1977. His
guidance helped the Bank through some very difficult times for the thrift
industry, culminating in the January 5, 1996 completion of Little Falls Bancorp,
Inc.'s initial public offering. The Board of Directors and the management team
want to take this moment to offer their thanks for the leadership John Pullara
provided.
Your Board of Directors and management team are committed to protecting and
enhancing the value of your investment in the Company. To do so, we are
challenged to continue delivering high quality services to our customers and
communities and build on our past accomplishments. We appreciate the confidence,
support and loyalty of our customers, employees, and stockholders.
Sincerely,
/s/ Leonard G. Romaine
Leonard G. Romaine
President
March 17, 1997
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Little Falls Bancorp, Inc.
Corporate Profile
Little Falls Bancorp, Inc. (the "Company") is a New Jersey corporation
organized in August 1995 at the direction of the Board of Directors of the
Little Falls Bank (the "Bank") to acquire all of the capital stock of the Bank
issued upon its conversion from the mutual to stock form of ownership on January
5, 1996 (the "Conversion"). In connection with the Conversion, the Company sold
3,041,750 shares of Common Stock for net proceeds of $26.8 million. The Company
is a unitary savings and loan holding company which, under existing laws,
generally is not restricted in the types of business activities in which it may
engage provided that the Bank retains a specified amount of its assets in
housing-related investments. At the present time, because the Company does not
conduct any active business, the Company does not intend to employ any persons
other than officers of the Bank but utilizes the support staff of the Bank from
time to time.
The Bank is a federally chartered stock savings bank headquartered in
Little Falls, New Jersey. The Bank was founded in 1887 and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") and the
Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products.
The Bank attracts deposits from the general public and has historically
used such deposits primarily to originate loans secured by first mortgages on
owner-occupied one- to four-family residences in its market area and to purchase
mortgage-backed securities. The Bank also originates a limited number of
commercial real estate, residential construction, and consumer loans, which
consists mainly of second mortgages and home equity lines of credit.
Stock Market Information
Since its issuance on January 5, 1996, the Company's common stock has
traded on the Nasdaq National Market. The following table reflects the stock
price as published by the Nasdaq National Market. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission, and may
not represent actual transactions.
HIGH LOW
---- ---
October 1, 1996 - December 31, 1996 $ 13 3/4 $ 11
July 1, 1996 - September 30, 1996 11 3/4 10
April 1, 1996 - June 30, 1996 11 9 1/2
January 5, 1996 - March 31, 1996 11 7/8 10
The number of stockholders of record of common stock as of the record date
of February 28, 1997 ("Record Date"), was approximately 444. This does not
reflect the number of persons or entities who held stock in nominee or "street"
name through various brokerage firms. As of the Record Date, there were
2,745,180 shares outstanding.
The Company's ability to pay dividends to stockholders is subject to the
requirements of New Jersey law. No dividend may be paid by the Company unless
its board of directors determines that the Company will be able to pay its debts
in the ordinary course of business after payment of the dividend. In addition,
the Company's ability to pay dividends is dependent, in part, upon the dividends
it receives from the Bank. The Bank may not declare or pay a cash dividend on
any of its stock if the effect thereof would cause the Bank's regulatory capital
to be reduced below (1) the amount required for the liquidation
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account established in connection with the Bank's conversion from mutual to
stock form, or (2) the regulatory capital requirements imposed by the Office of
Thrift Supervision ("OTS").
Selected Financial Condition Data
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Year Ended December 31, 1996 1995 1994 1993 1992
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(In Thousands)
Total Assets............. $303,518 $310,355 $193,385 $202,280 $200,091
Loans receivable (net)... 117,116 96,230 94,754 101,775 128,748
Mortgage-backed securities 112,473 118,020 51,664 56,401 38,119
Investment securities.... 51,370 29,999 36,146 24,999 13,971
Cash and cash equivalents 10,374 53,419 4,065 12,608 12,701
Deposits................. 228,312 247,851 176,173 186,704 187,502
Retained earnings........ 40,448 16,223 15,715 14,149 11,259
Selected Operating Data
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Year Ended December 31, 1996 1995 1994 1993 1992
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(In Thousands)
Total interest income...... $ 18,776 $13,813 $13,075 $14,237 $16,549
-------- -------- ------- ------- -------
Total interest expense..... 11,258 9,314 7,170 7,708 9,691
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Net interest income...... 7,518 4,499 5,905 6,529 6,858
Provision for loan losses.. 183 131 356 328 391
-------- -------- ------- ------- -------
Net interest income after
provision for loan losses 7,335 4,368 5,549 6,201 6,467
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Total non-interest income 409 178 143 917 310
-------- -------- ------- ------- -------
Total non-interest expense 6,747(1) 3,840(2) 2,912 3,059 2,698
-------- -------- ------- ------- -------
Income before provision for
income taxes and cumulative
effect of accounting change 996 705 2,781 4,058 4,079
Income tax expense......... 385 241 1,066 1,493 1,430
-------- -------- ------- ------- -------
Net income before cumulative
effect of accounting
change................. 611 464 1,715 2,565 2,649
-------- -------- ------- ------- -------
Cumulative effect of accounting
change................... -- -- -- 325(3) --
-------- -------- ------- ------- -------
Net income............... $ 611 $ 464 $ 1,715 $ 2,890 $ 2,649
======== ======== ======= ======= =======
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(1) Includes one-time special assessment to recapitalize the SAIF.
(2) Includes a non-recurring expense of $195,000 due to the implementation of
a directors' medical plan.
(3) Reflects the adoption of Statement of Financial Accounting Standard
("SFAS") No. 109 which relates to the accounting of deferred income taxes.
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Other Selected Data
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Year Ended December 31, 1996 1995 1994 1993 1992
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Return on average assets....... 0.21% 0.22% 0.86% 1.43% 1.32%
Return on average equity....... 1.44% 2.89% 11.62% 21.67% 26.11%
Average equity to average
assets....................... 14.78% 7.64% 7.62% 6.42% 5.07%
Net interest rate spread....... 2.22% 1.97% 2.86% 3.20% 3.41%
Per Share Information:
Earnings per share (1)....... $ 0.22 N/A N/A N/A N/A
Dividends per share(1)....... 0.05 N/A N/A N/A N/A
Tangible book value per
share (1).................... 13.56 N/A N/A N/A N/A
Dividend payout ratio(1)....... 22.28% N/A N/A N/A N/A
Non-performing assets to total
assets....................... 0.91% 1.27% 3.09% 2.85% 2.37%
Non-performing loans to total
assets....................... 0.63% 0.79% 2.18% 1.93% 1.94%
Allowance for loan losses to
total loans.................. 0.92% 0.98% 1.21% 0.79% 0.56%
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(1) No shares of common stock were outstanding until January 5, 1996.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The largest components of the Bank's net income are net interest income,
which is the difference between interest income and interest expense, and
noninterest income derived primarily from fees. Consequently, the Bank's
earnings are dependent on its ability to originate loans, net interest income,
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Bank's net income is also affected by its provision for loan
losses and foreclosed real estate as well as the amount of non-interest
expenses, such as compensation and benefit expense, occupancy and equipment
expense and deposit insurance premium expenses. Earnings of the Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Branch Purchases/Consolidation
In December 1995, the Bank purchased three branch offices located in
Milford, Glen Gardner, and Baptistown, New Jersey from an unaffiliated
commercial bank ("Seller"). This increased the Bank's branch office network at
that time to a total of seven offices, plus its main office. The amount paid by
the Seller to the Bank for the transfer of such assets and liabilities of the
three branches equaled the outstanding balances and accrued interest on the
deposit liabilities transferred, reduced by (i) $1.0 million, net of
adjustments, (ii) petty cash and vault cash transferred, and (iii) a cash
premium equal to 7.55% of the deposit liabilities to be assumed. The acquisition
was paid for with cash received from the deposits acquired. The result was a
$4.1 million acquisition cost in excess of the fair market value of the tangible
net assets acquired and was recorded as an intangible asset net of $500,000,
which is a premium over the cost of fixed assets. In connection with the
acquisition, the Bank assumed approximately $54.4 million of deposit
liabilities. In consideration of the assumption of the deposit liabilities and
certain other obligations, the Bank purchased branch office properties and fixed
assets at a purchase price of $1.0 million, which had an estimated fair market
value of approximately $1.5 million. Management initially reinvested a
substantial portion of the cash received as a result of the branch purchases in
investment and mortgage-backed securities with short and medium terms.
Management completed the branch acquisition based upon its analysis indicating a
reduction in the Bank's cost of funds would result from the lower cost of funds
of the acquired deposits. These lower costing funds were in turn invested in
primarily investment and adjustable rate mortgage-backed securities which
resulted in an increase in net income, as well as a beneficial impact on the
Bank's interest rate sensitivity.
During the year ended December 31, 1996, the Bank closed two branches. On
August 30, 1996, the branch office located at Frenchtown was closed. The
deposits were retained, and customers were able to use the Alexandria, Milford
and Kingwood offices for their transactions. Based upon Management's evaluation
of the above noted branch purchases, the proximity of other offices to the
Frenchtown office and the ability of the Bank to decrease expenses and improve
efficiencies through consolidation, the decision was made to close the branch.
On December 20, 1996, the Bank closed its Mount Holly branch office, and sold
the deposits to an unaffiliated financial institution. Deposits sold totaled
$9.2 million, for which a premium of 1.5%, or $138,000 was received. The sale of
deposits was funded through a Federal Home Loan Bank ("FHLB") advance. The
branch closing and related sale of deposits is expected to result in reduced
operating expenses for the Bank, and eliminates the Bank's only branch in
Burlington County.
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Management Strategy
The Bank has been and intends to continue to be a community-oriented
financial institution offering a variety of financial services. Management's
strategy has been to emphasize residential mortgage loans, monitor interest rate
risk through asset and liability management, maintain asset quality and control
operating expense. The Bank's purchase of three branches from an unaffiliated
commercial bank reflects the Bank's intention to provide a variety of services
to its community which includes the origination of more consumer loans.
Historically, the Bank's strategy has been primarily to make loans and
secondarily to invest remaining funds in mortgage-backed securities and
investment securities.
During 1996, the Bank originated in excess of $31.0 million of loans, an
increase of 231% over 1995 originations. However, during the past few years
prior to 1996, due to decreased loan demand coupled with prepayments on loans
due to a generally lower interest rate environment, the Bank had been investing
excess liquidity in investments and mortgage-backed securities. Management
believes that the Bank's purchases of mortgage-backed securities and investment
securities have enhanced the Bank's asset quality and interest rate sensitivity.
Financial Condition
The Bank's total assets decreased by $6.9 million to $303.5 million at
December 31, 1996 from $310.4 million at December 31, 1995. Total loans
receivable increased by $20.9 million due to mortgage originations of $30.9
million offset by loan repayments. Investment securities increased by $21.4
million due to purchases of $32.3 million offset by securities which matured.
Mortgage-backed securities decreased by $5.5 million due to repayments being
greater than the $16.1 million of purchases. Total cash and cash equivalents
decreased by $43.0 million due to the $30.9 million of mortgages originated, the
$32.3 million of investment securities purchased, the purchase of $16.1 million
of mortgage-backed securities, the $19.5 million decrease in deposits and the
refund of $19.7 million of over-subscribed stock subscriptions, partially offset
by amortization and repayments on loans and mortgage-backed securities, the
maturities of investment securities and borrowed funds.
Total deposits decreased by $19.5 million due in part to $2.8 million
being used for the purchase of stock in the Conversion, and the sale of $9.2
million of deposits in connection with the closing of the Mount Holly branch
office. Borrowed funds increased by $33.6 million, due to $9.0 million of FHLB
advances used to fund the sale of the Mount Holly deposits, and $24.6 million of
repurchase agreements with terms of one year, six months and overnight. The $9.0
million FHLB advance has a rate of 5.82% and a term of three years, with a
one-time callable feature at the end of the second year. The repurchase
agreements were the result of a financial transaction entered into by the Bank,
whereby it purchased a $25.0 million fixed-rate Federal National Mortgage
Association ("FNMA") note and simultaneously borrowed $25.0 million from an
independent third party, using the FNMA note as collateral. The note has an
initial term of ten years at an annual rate of 7.20% and is callable after two
years and continuously thereafter. The borrowings are comprised of a combination
of repurchase agreements with terms of one year, six months and overnight. The
annual rates payable on the one year and six month repurchase agreements are
5.68% and 5.50%, respectively. The effective rate on the overnight repurchase
agreement adjusts daily.
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Accounts payable and other liabilities decreased by $44.5 million
primarily due to the decrease of stock subscriptions payable of $44.8 million.
The decrease was due to the refund of $19.7 million of over-subscribed stock
subscriptions and the remaining funds being used to purchase the Company's
common stock in the Conversion.
Total stockholders equity increased by $24.2 million mainly due to the
completion of the mutual to stock conversion, partially offset by the repurchase
of 296,570 shares at an aggregate cost of $3.3 million. Earnings for the year
ended December 31, 1996, also contributed to the increase, although to a much
smaller extent.
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Average Balance, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material difference in the information presented.
1996 1995 1994
-------------------------------- ------------------------------ ------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)........ $105,794 $ 8,255 7.80% $ 93,638 $7,580 8.09% $ 97,481 $7,776 7.98%
Mortgage-backed securities. 119,684 7,972 6.64 63,605 3,839 6.04 53,984 3,187 5.90
Investment securities(2)... 40,316 2,164 5.37 36,163 1,998 5.52 35,827 2,000 5.58
Other interest-earning
assets.................... 7,431 385 5.18 6,900 395 5.72 4,993 112 2.24
-------- ------- ------ ------ ----- ------
Total interest-earning
assets.................. 273,225 18,776 6.87 200,306 13,812 6.90 192,285 13,075 6.80
------- ------ ------
Non-interest-earning assets. 14,223 9,940 6,406
-------- ------- -------
Total assets.............. $287,448 $210,246 $198,691
======= ======= =======
Interest-bearing
liabilities:
Savings accounts........... $ 51,633 1,860 3.60 $ 31,425 929 2.95 $ 31,602 860 2.72
Now and money market 39,270 1,155 2.94 27,099 1,086 4.01 28,326 945 3.34
Certificates of deposit.... 147,707 8,068 5.46 130,513 7,299 5.59 122,080 5,365 4.39
Borrowed funds............. 3,173 175 5.52 -- -- -- -- -- --
Total interest-bearing
liabilities.............. 241,783 11,258 4.66 189,037 9,314 4.93 182,008 7,170 3.94
------- ------ ------
Non-interest bearing
liabilities............... 3,171 5,149 1,551
-------- -------- --------
Total liabilities.......... 244,954 194,186 183,559
Retained earnings........... 42,494 16,060 15,132
-------- -------- --------
Total liabilities and
retained earnings........ $287,448 $210,246 $198,691
======== ======== ========
Net interest income......... $ 7,518 $4,498 $5,905
======= ====== ======
Interest rate spread(3)..... 2.21% 1.97% 2.86%
====== ====== ======
Net yield on interest-earning
assets(4)................. 2.75% 2.25% 3.07%
====== ====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 111.00% 105.96% 105.65%
====== ====== ======
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(1) Average balances include non-performing loans.
(2) Includes interest-bearing deposits in other financial institutions and
FHLB stock.
(3) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
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The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by prior rate); (ii) changes in rates
(changes in rate multiplied by prior average volume); (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume).
Year Ended December 31,
---------------------------------------------------------------------------------------
1996 vs. 1995 (1) 1995 vs. 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- ------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- ------- ------- ------- -------- ------- -------- -------
(In Thousands)
Interest income:
Loans receivable .............. $ 985 $ (274) $ (36) $ 675 $ (306) $ 115 $ (5) $ (196)
Mortgage-backed securities..... 3,385 398 351 4,134 568 71 13 652
Investment securities ......... 142 22 2 166 19 (21) -- (2)
Other interest-earning assets.. 45 (49) (6) (10) 43 174 66 283
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets. 4,557 97 311 4,965 324 339 74 737
------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Savings accounts .............. 597 203 131 931 (5) 74 -- 69
Now and money market .......... 488 (289) (130) 69 (41) 190 (8) 141
Certificates of deposit ....... 962 (170) (22) 770 371 1,462 101 1,934
Borrowed funds ................ 175 -- -- 175 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ................ 2,222 (256) (21) 1,945 325 1,726 93 2,144
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest
income ....................... $ 2,335 $ 353 $ 332 $ 3,020 $ (1) $(1,387) $ (19) $(1,407)
------- ------- ------- ------- ------- ------- ------- -------
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
General. Net income increased $147,000 or 31.7% to $611,000 for the year
ended December 31, 1996 from $464,000 for the year ended December 31, 1995. This
was primarily the result of a $3.0 million increase in net interest income and a
$230,000 increase in non-interest income, offset by a $2.9 increase in
non-interest expenses and an $144,000 increase in the provision for income taxes
in fiscal 1996 compared to fiscal 1995.
Interest Income. Interest income increased $5.0 million or 35.9% to $18.8
million for the year ended December 31, 1996 from $13.8 million for the year
ended December 31, 1995. This increase was primarily due to increases of $56.1
million and $12.2 million in the average balances of mortgage-backed securities
and loans receivable, respectively. These increases were primarily due to the
funds received from the purchase of three branches in December, 1995 and from
the Conversion.
Interest Expense. Interest expense increased $1.9 million, or 20.9% to
$11.3 million for the year ended December 31, 1996 from $9.3 million for the
year ended December 31, 1996. The increase was mainly due to the increase in the
average balance of interest-bearing deposits to $238.6 million for
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the year ended December 31, 1996 from $189.0 million for the year ended December
31, 1995. In addition, the average balance of borrowed funds increased to $3.2
million during 1996. In 1995, the Company had no borrowed funds. The increase in
the average balance of interest-bearing liabilities was offset somewhat by the
decrease in the average rate paid on interest-bearing liabilities of 29 basis
points (100 basis points equals 1%) to 4.66% for the year ended December 31,
1996.
Net Interest Income. Net interest income increased by $3.0 million, or
67.1% for the year ended December 31, 1996 as compared to the year ended
December 31, 1995. This increase was due to the investment of $26.8 million
received from the Conversion in loans and mortgage-backed securities and the
decrease in the average rate paid on interest-bearing liabilities, as described
earlier. This resulted in an increase in the net interest spread and net
interest margin to 2.21% and 2.75%, respectively, for the year ended December
31, 1996 compared with a net interest spread and net interest margin of 1.97%
and 2.25%, respectively, for the year ended December 31, 1995.
Provision for Losses on Loans. The Bank maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience, adverse situations that
may affect the borrowers' ability to repay loans, estimated value of the
underlying collateral and current and expected market conditions. The provision
for loan losses increased $52,000 or 39.2% to $183,000 for the year ended
December 31, 1996 from $131,000 for the year ended December 31, 1995, primarily
due to the write-off of a loan in the third quarter. The allowance for loan
losses was $936,000 at December 31, 1996. While the Bank maintains its allowance
for losses at a level which it considers to be adequate, there can be no
assurance that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts.
Non-Interest Income. Non-interest income increased by $230,000, or 129.3%
to $409,000 for the year ended December 31, 1996 from $178,000 for the year
ended December 31, 1995. The increase was due in most part to a $138,000 gain
recorded on the sale of the Mount Holly deposits in December, 1996. Income on
checking accounts increased by $70,000 to $121,000 for the year ended December
31, 1996, from $51,000 for the year ended December 31, 1995 primarily due to the
increase in checking accounts that resulted from the purchase of three branches
from an unaffiliated commercial bank.
Non-Interest Expense. Non-interest expense increased $2.9 million, or
75.7% to $6.7 million for the year ended December 31, 1996 from $3.8 million for
the year ended December 31, 1995. This was primarily due to the increase in
deposit insurance premiums of $1.2 million, or 286.9%. This increase was due to
a special assessment charged by the FDIC on its SAIF members to capitalize the
SAIF at the designated reserve level of 1.25% as of October 1, 1996. The Bank
paid $1.2 million in November 1996 for this special assessment. The FDIC has
subsequently lowered its premium rate for deposits. Other factors causing the
increase in non-interest expense was the increase in compensation and employee
benefits of $920,000 and the increase in other expenses of $714,000. The
increase in compensation and employee benefits was due to the additional
employees resulting from the purchase of three branch offices in December 1995,
the adoption of an employee stock ownership plan ("ESOP") and the management
stock bonus plan ("MSBP"). For the year ended December 31, 1996, the ESOP and
MSBP expenses were $178,000 and $49,000, respectively. The acquisition of the
branch offices also caused increases in occupancy, equipment and deposit
insurance premiums. In addition, the acquisition resulted in an increase in the
amortization of goodwill to $361,000 for the year ended December 31, 1996, from
$30,000 for the year ended December 31, 1995.
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The 1996 increases were partially offset by a nonrecurring 1995 expense of
$195,000 for the implementation of a directors' medical plan, which was recorded
during the three months ended June 30, 1995. On August 30, 1996, the Bank closed
its Frenchtown office. The decision to close the branch was based on
management's evaluation of the purchase of three branch offices in the same
county from an unaffiliated commercial bank in December 1995 and the ability of
the Bank to decrease expenses and improve efficiencies through consolidation. On
December 20, 1996, the Bank closed its Mount Holly office, and sold the related
deposits to an unaffiliated local financial institution. This should result in
decreased operating expenses going forward.
Income Tax Expense. Income tax expense increased $144,000 to $385,000 for
the year ended December 31, 1996 from $241,000 for the year ended December 31,
1995 due to an increase in pre-tax income of $291,000.
Comparison of Operating Results for Years Ended December 31, 1995 and 1994
General. Net income decreased $1.3 million or 73.0% to $464,000 for the
year ended December 31, 1995 from $1.7 million for the year ended December 31,
1994. This was primarily the result of a $1.4 million decrease in net interest
income and a $929,000 increase in non-interest expense, offset somewhat by a
$225,000 decrease in the provision for loan losses and a $825,000 decrease in
the provision for income taxes in fiscal 1995 compared to fiscal 1994.
Interest Income. Interest income increased $737,000 or 5.6% to $13.8
million for the year ended December 31, 1995 from $13.1 million for the year
ended December 31, 1994. This increase was primarily due to increases of $9.6
million and $1.9 million in the average balances of mortgage-backed securities
and other interest-earning assets, respectively. These increases were due
primarily to the funds received from the purchase of three branches, as well as
the Bank investing excess liquidity in such securities and stock subscriptions
received in connection with the Conversion. In addition, there was a decrease of
$196,000 in income earned on loans due to a decrease in the average balance of
loans receivable, reflecting both lower demand and increased competition for
loans in the Bank's market area.
Interest Expense. Interest expense increased $2.1 million or 29.9% to $9.3
million for the year ended December 31, 1995 from $7.2 million for the year
ended December 31, 1994. The average balance of interest-bearing deposits
increased by $7.0 million and the average rate paid on interest-bearing
liabilities increased 99 basis points (100 basis points equals 1%) to 4.93% for
the year ended December 31, 1995 from 3.94% in 1994 due to the increase in
general market rates and a shift in the deposit mix to higher yielding
certificate accounts. The Bank's average cost of certificates of deposit
increased from 4.39% for the year ended December 31, 1994 to 5.59% for the year
ended December 31, 1995 and the average balance of certificates of deposit
increased by $8.4 million.
Net Interest Income. Net interest income decreased primarily due to
interest income increasing at a slower pace than interest expense, as loan
originations decreased dramatically due to increased competition and low demand
for residential lending in the Bank's primarily market area and depositors
sought higher returns in certificate accounts compared to traditional savings
accounts. This resulted in a decline in the net interest spread and the net
interest margin to 1.97% and 2.25%, respectively, for the year ended December
31, 1995 compared with a net interest spread and net interest margin of 2.86%
and 3.07%, respectively, for the year ended December 31, 1994.
- 11 -
Provision for Losses on Loans. The Bank maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience, adverse situations that
may affect the borrowers' ability to repay loans, estimated value of the
underlying collateral and current and expected market conditions. The provision
for loan losses decreased $225,000 or 63.1% to $131,000 for the year ended
December 31, 1995 from $356,000 for the year ended December 31, 1994, primarily
due to a decrease in non-performing loans. The allowance for loan losses was
$958,000 at December 31, 1995. While the Bank maintains its allowance for losses
at a level which it considers to be adequate, there can be no assurance that
further additions will not be made to the loss allowances and that such losses
will not exceed the estimated amounts.
Non-Interest Income. Non-interest income, primarily consisting of loan
fees and checking account fees, increased $35,000 or 24.3% to $178,000 for the
year ended December 31, 1995 from $143,000 for the year ended December 31, 1994.
Non-Interest Expense. Non-interest expense increased $929,000 or 31.9% to
$3.8 million for the year ended December 31, 1995 from $2.9 million for the year
ended December 31, 1994. This was primarily due to the loss on foreclosed real
estate, which increased by $355,000 to $372,000 at December 31, 1995 from
$17,000 at December 31, 1994. This increase was due in most part to the payment
of back taxes of approximately $141,000 on seven properties, as well as
additional write downs of approximately $150,000 on foreclosed properties due to
the Bank receiving updated appraisals. Also contributing to increased
non-interest expense was a nonrecurring expense of $195,000 for the
implementation of a directors' medical plan. Pursuant to SFAS No. 106, this
nonrecurring expense represents a transition obligation which is permitted to be
recognized in the period when the plan was adopted. To a lesser extent, the
increase in non-interest expense was due to increases in compensation and
related expenses of $150,000 to $1.7 million for the year ended December 31,
1995 from $1.5 million in the same period in 1994, $30,000 of amortization of a
deposit premium resulting from the December, 1995 purchase of three branches,
and increases of $27,000 and $35,000 to $54,000 and $68,000, respectively, for
legal and consulting service expenses, respectively. Non-interest expense
includes insurance premiums paid to the FDIC which were $413,000 and $425,000
for the years ended December 31, 1995 and 1994, respectively.
Management anticipates that its non-interest expense will increase as a
result of additional expenses relating to the Company operating as a public
stock company, as well as expenses relating to its stock benefit plans.
Income Tax Expense. Income tax expense decreased $825,000 to $241,000 for
the year ended December 31, 1995 from $1.1 million for the year ended December
31, 1995 due to a reduction in pre-tax income of $2.1 million.
Asset and Liability Management
In an effort to reduce interest rate risk and protect it from the negative
effect of rapid increases and decreases in interest rates, the Bank has
instituted certain asset and liability management measures including emphasizing
the origination of three, five and ten year adjustable-rate mortgage loans and
investing excess funds in short- and medium-term mortgage-backed and investment
securities. The Bank retains an asset/liability consultant, FinPro, Inc., to
assist it in analyzing its asset liability position. With the consultant's
assistance, the Bank undertakes a quarterly extensive study of various trends,
conducts separate deposit and asset analyses and prepares various
asset/liability tables including contractual interest
- 12 -
rate gap, interest rate gap with prepayment assumptions, margin/spread and
duration tables. Interest rate gap analysis measures the difference between
amounts of interest-earning assets and interest-bearing liabilities which either
reprice or mature within a given period of times and their sensitivity to
changing interest rates.
The Bank, like many other thrift institutions, is exposed to interest rate
risk as a result of the difference in the maturity of interest-bearing
liabilities and interest-earning assets and the volatility of interest rates.
Most deposit accounts react more quickly to market interest rate movements than
do the existing mortgage loans because of the deposit accounts' shorter terms to
maturity; sharp decreases in interest rates would typically increase the Bank's
earnings. Conversely, this same mismatch will generally adversely affect the
Bank's earnings during periods of increasing interest rates. The extent of
movement of interest rates is an uncertainty that could have a negative impact
on the earnings of the Bank.
Volatility in interest rates can also result in disintermediation, which
is the flow of funds away from savings institutions (such as the Bank) and into
other investments, such as U.S. Government and corporate securities and other
investment vehicles. Because of the absence of federal insurance premiums and
reserve requirements, such investments may pay higher rates of return than
investment vehicles offered by savings institutions.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments having maturities of five years or less.
OTS regulations require that a savings association maintain liquid assets of not
less than 5% of its average daily balance of net withdrawable deposit accounts
and borrowings payable in one year or less, of which short-term liquid assets
must consist of not less than 1%. At December 31, 1996, the Bank's liquidity was
in excess of the minimum requirement. The Bank adjusts liquidity as appropriate
to meet its asset/liability objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan repayments
are a relatively predictable source of funds, deposit flows and loan and
mortgage-backed security prepayments are significantly influenced by general
interest-rates, economic conditions and competition. In addition, the Bank
invests excess funds in overnight deposits which provide liquidity to meet
lending requirements.
The Bank's most liquid asset is cash, which includes investments in highly
liquid short-term investments. The level of these assets are dependent on the
Bank's operating, financing and investing activities during any given period. At
December 31, 1996, cash and cash equivalents totaled $10.4 million, with cash
received from stock subscriptions accounting for $44.8 million in 1995. The Bank
has other sources of liquidity if a need for additional funds arises. Another
source of liquidity is the repayment and prepayment of mortgage-backed and
investment securities. Additional sources of funds include the ability to
utilize FHLB of New York advances and the ability to borrow against
mortgage-backed and investment securities. At December 31, 1996, the Bank had a
$9.0 million advance with a rate of 5.82%. The advance matures in December 1999,
and has a one time call feature at December 20, 1998. This advance was used to
fund the sale of the Mount Holly branch deposits. In an effort to increase
earnings, reduce the Company's interest rate sensitivity, and to better match
its interest rate
- 13 -
position, on November 13, 1996, the Company entered into a financial transaction
whereby it purchased a $25.0 million fixed-rate FNMA note and simultaneously
borrowed $25.0 million from an independent third party using the FNMA note as
collateral. The note has an initial term of ten years at an annual rate of 7.20%
and is callable after two years and continuously thereafter. The borrowings are
comprised of a combination of repurchase agreements with terms of one year, six
months and overnight. The annual rates payable on the one year and six month
repurchase agreements are 5.68% and 5.50%, respectively. The effective rate on
the overnight repurchase agreement adjusts daily.
The Bank's cash flows are comprised of three primary classifications: cash
flows from operating activities, investing activities and financing activities.
Cash flows from operating activities, consisting primarily of net income
adjusted for depreciation, amortization and provisions for loan and real estate
owned losses, were $1.6 million, $368,000, and $1.6 million for the years ended
December 31, 1996, 1995, and 1994, respectively. Net cash provided by (used in)
investing activities consisted primarily of disbursement of loan originations,
mortgage-backed security purchases and investment purchases, offset by principal
collections on loans and mortgage-backed securities and proceeds from the
maturities of investment securities or sales of securities, were $(37.2)
million, $(12.8) million and $453,000 for fiscal 1996, 1995 and 1994,
respectively. Net cash provided by (used in) financing activities consisting
primarily of proceeds from stock subscriptions, net activity in deposit and
escrow accounts, and activity in borrowed funds were $(7.5) million, $61.8
million and $(10.6) million for the years ended December 31, 1996, 1995 and
1994, respectively.
Operating activities in 1996 provided $1.6 million in cash primarily due
to net income of $611,000 adjusted for $153,000 in depreciation, a $183,000
provision for loan and real estate owned losses, $361,000 of goodwill
amortization. Investing activities in 1996 used $37.2 million due to $16.1
million and $32.3 million in purchases of mortgage-backed and investment
securities, respectively, and a $21.3 million increase in loans receivable,
$11.0 million from the maturity of investment securities held to maturity, and
$21.5 million from principle collections on mortgage-backed securities held to
maturity. Financing activities used $7.8 million due to a $7.5 million decrease
in deposits, a $19.7 million refunding of oversubscribed deposits related to the
initial public offering completed in January 1996, $9.1 million used to fund the
sale of the deposits of the Mount Holly branch, and $3.3 million for the
repurchase of common stock, offset somewhat by an increase in borrowed funds of
$33.6 million.
Operating activities in 1995 provided $368,000 in cash due primarily to
net income of $464,000 adjusted for $103,000 in depreciation, a $382,000
provision for loan and real estate owned losses and $355,000, $127,000 and
$528,000 increases in interest receivable, net, interest payable and other
assets, respectively. Investing activities in 1995 used $12.8 million due to
$75.2 million and $6.0 million in purchases of mortgage-backed and investment
securities, respectively, and $2.2 million due to an increase in loans
receivable offset somewhat by $49.3 million of cash received in connection with
the branch acquisitions, $12.2 million provided due to the maturity of
investment securities held to maturity and $8.8 million from principle
collections on mortgage-backed securities held to maturity. Financing activities
provided $61.6 million primarily due to $44.8 million in proceeds from stock
subscriptions and a $17.1 million increase in deposits.
Operating activities in 1994 provided $1.6 million in cash due primarily
to net income of $1.7 million adjusted for $93,000 in depreciation, a $356,000
provision for loan and real estate owned losses and increases of $262,000 in
interest receivable, net and $160,000 in other assets. Investing activities in
1994 provided $453,000 due to $8.0 million from the maturity of investment
securities held to maturity, $7.7 million from principle collections on
mortgage-backed securities held to maturity and $6.2
- 14 -
million from the decrease in loans receivable, offset by $3.1 million and $19.1
million in purchases of mortgage-backed and investment securities. Financing
activities used $10.6 million primarily due to a $10.5 million decrease in
deposits.
The Bank anticipates that it will have sufficient funds available to meet
its current commitments. As of December 31, 1996, the Bank had mortgage
commitments to fund loans of $3.3 million. Also, at December 31, 1996, there
were commitments on unused lines of credit relating to home equity loans of $3.0
million. Certificates of deposit scheduled to mature in one year or less at
December 31, 1996 totaled $103.4 million. Based on historical deposit
withdrawals and outflows, and on internal monthly deposit reports monitored by
management, management believes that a majority of such deposits will remain
with the Bank. As a result, no adverse liquidity effects are expected.
At December 31, 1996, the Bank exceeded each of the three regulatory
capital requirements on a fully phased-in basis.
Impact of Information and Changing Prices
The financial statements of the Bank and notes thereto, 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 Bank's operations.
Unlike most industrial companies, nearly all the assets and liabilities of
the Bank are monetary. As a result, interest rates have a greater impact on the
Bank's performance than do the effects of general levels of inflation. Interest
rates do not necessary move in the same direction or to the same extent as the
price of goods and services.
- 15 -
LITTLE FALLS BANCORP, INC. LOGO
Little Falls Bancorp, Inc.
86 Main Street
Little Falls, NJ 07424-1493
(201) 256-6100
January 31, 1997
MANAGEMENT RESPONSIBILITY STATEMENT
-----------------------------------
Management of Little Falls Bancorp, Inc. is responsible for the preparation of
the consolidated financial statements and all other financial information
included in this report. The consolidated financial statements were prepared in
accordance with generally accepted accounting principles applied on a consistent
basis. All financial information included in the report agrees with the
consolidated financial statements. In preparing the consolidated financial
statements, management makes informed estimates and judgments, with
consideration given to materiality, about the expected results of various events
and transactions.
Management maintains a system of internal accounting control that includes
personnel selection, appropriate division of responsibilities, and formal
procedures and policies consistent with high standards of accounting and
administrative practice. Consideration has been given to the necessary balance
between the costs of systems of accounting and internal control and the benefits
derived.
Management reviews and modifies its systems of accounting and internal control
in light of changes in conditions and operations as well as in response to
recommendations from the independent certified public accountants. Management
believes the accounting and internal control systems provide reasonable
assurance that assets are safeguarded and financial information is reliable.
The Board of Directors is responsible for determining that management fulfills
its responsibilities in the preparation of the consolidated financial statements
and the control of operations. The Board appoints the certified public
accountants. The Board meets with management and the independent certified
public accountants, approves the overall scope of audit work and related fee
arrangements and reviews audit reports and findings.
/s/Leonard G. Romaine /s/Richard A. Capone
- --------------------- --------------------
Leonard G. Romaine Richard A. Capone
President Chief Financial Officer and Treasurer
[LOGO]
R RADICS & CO., LLC
- --------------------------------------------------------------------------------
Established Certified Public Accountants & Consultants
1933
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors and Stockholders
Little Falls Bancorp, Inc.
Little Falls, New Jersey
We have audited the consolidated statements of financial condition of Little
Falls Bancorp, Inc. (the "Company") and subsidiary as of December 31, 1996 and
1995 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated statements of income, changes
in stockholders' equity, and cash flows for the year ended December 31, 1994
were audited by other auditors, whose report, dated January 31, 1995, expressed
an unqualified opinion on these statements.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the consolidated
financial position of Little Falls Bancorp, Inc. and subsidiary as of December
31, 1996 and 1995 and the results of their operations and cash flows for the
years then ended, in conformity with generally accepted accounting principles.
Radics & Co., LLC
January 31, 1997
-17-
55 US Highway 46 East, Post Office Box 676, Pine Brook, NJ 07058-0676
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
---------------------------------------
Assets Notes 1996 1995
- ------ ------------------ ----------------- ------------------
Cash and due from banks $ 1,746,743 $ 2,518,055
Interest-bearing deposits in other banks 3,627,221 11,101,033
Federal funds sold 5,000,000 39,800,000
----------------- -----------------
Total cash and cash equivalents 1 and 16 10,373,964 53,419,088
Investment securities held to maturity 1,3 and 16 51,370,297 29,999,470
Mortgage-backed securities held to maturity 1,4 and 16 112,473,144 118,020,300
Loans receivable 1,5 and 16 117,115,784 96,229,678
Premises and equipment 1 and 6 2,659,239 2,789,468
Investment in real estate 1 and 7 683,054 546,786
Foreclosed real estate 1 857,157 1,500,825
Interest receivable 1 and 16 1,735,291 1,717,349
Federal Home Loan Bank of New York stock 9 and 16 2,075,700 1,395,200
Excess of cost over assets acquired 1 3,217,017 3,577,800
Other assets 13 957,091 1,158,999
----------------- ------------------
Total assets $303,517,738 $310,354,963
================= ==================
Liabilities and stockholders equity
- -----------------------------------
Liabilities
- -----------
Deposits 8 and 16 $228,311,543 $247,851,373
Advance payments from borrowers for taxes - 701,773
Stock subscriptions payable 2 - 44,831,296
Securities sold under agreements to repurchase 10 33,623,500 -
Accounts payable and other liabilities 12 1,134,397 747,298
----------------- ------------------
Total Liabilities 263,069,440 294,131,740
----------------- ------------------
Commitments 15 and 16 - -
Stockholders' equity 2,11,12, and 13
- --------------------
Preferred stock $0.10 par value, 5,000,000 shares - -
authorized; none issued and outstanding
Common stock $0.10 par value, 10,000,000 shares
authorized; 3,041,750 shares issued
at December 31, 1996 304,175 -
Additional paid in capital 28,974,799 -
Retained earnings - substantially restricted 16,802,056 16,327,286
Common stock aquired by employee stock (2,271,173) -
ownership plan ("ESOP")
Treasury stock, at cost; 296,569 shares at (3,277,004) -
December 31,1996
Minimum pension liability,
net of deferred income taxes (84,555) (104,063)
----------------- ------------------
Total stockholders' equity 40,448,298 16,223,223
----------------- ------------------
Total liabilities and stockholders' equity $303,517,738 $310,354,963
================= ==================
- 18 -
See notes to consolidated financial statements.
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
December 31,
----------------------------------------------------------
Notes 1996 1995 1994
----------------------- ------------------ ----------------- ------------------
Interest income:
Loans receivable 5 $ 8,255,040 $ 7,579,947 $ 7,776,258
Mortgage-backed securities 7,972,069 3,839,383 3,186,726
Investment securities
and other interest-earning assets 2,549,230 2,393,297 2,112,506
------------------ ----------------- ------------------
Total interest income 18,776,339 13,812,627 13,075,490
------------------ ----------------- ------------------
Interest expense:
Deposits 8 11,082,926 9,313,730 7,170,191
Borrowings 175,324 - -
------------------ ----------------- ------------------
Total interest expense 11,258,250 9,313,730 7,170,191
------------------ ----------------- ------------------
Net interest income 7,518,089 4,498,897 5,905,299
Provision for loan losses 5 182,900 131,359 356,083
------------------ ----------------- ------------------
Net interest income
after provision for loan losses 7,335,189 4,367,538 5,549,216
------------------ ----------------- ------------------
Non-interest income:
Service fees 199,033 152,662 126,649
Other 209,538 25,501 16,721
------------------ ----------------- ------------------
Total non-interest income 408,571 178,163 143,370
------------------ ----------------- ------------------
Non-interest expenses:
Compensation and employee benefits 12 2,608,587 1,688,213 1,538,337
Occupancy, net 6 334,406 166,347 154,817
Equipment 6 401,510 268,841 226,489
Deposit insurance premiums 14 1,596,307 412,639 424,870
Loss on foreclosed real estate 88,981 372,304 17,141
Amortization of deposit premium 360,783 30,069 -
Other 12 1,356,853 902,059 550,131
------------------ ----------------- ------------------
Total non-interest expenses 6,747,427 3,840,472 2,911,785
------------------ ----------------- ------------------
Income before provision for income taxes 996,333 705,229 2,780,801
Provision for income taxes 13 385,444 241,490 1,066,207
------------------ ----------------- ------------------
Net income $ 610,889 $ 463,739 $ 1,714,594
================== ================= ==================
Net income per common share and common
stock equivalents $ 0.22 N/A (1) N/A (1)
================== ================= ==================
Weighted average number of common
shares and common stock equivalents outstanding 2,733,000 N/A (1) N/A (1)
================== ================= ==================
(1) Little Falls Bancorp, Inc. converted to stock form on January 5, 1996.
See notes to consolidated financial statements.
-19-
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Minimum
Pension
Retained Liability,
Earnings - Common Stock Net of
Common Additional Substantially Aquired by Treasury Deferred
Stock Paid in Capital Restricted ESOP Stock Income Taxes Total
-------- --------------- ---------------- ------------ --------------------------- -----------
Balance -
December 31, 1993 $ -- $ -- $ 14,148,953 $ -- $ -- $ -- $ 14,148,953
Net income for the year
ended December 31, 1994 -- -- 1,714,594 -- -- -- 1,714,594
Additional pension liability,
net of deferred income taxes -- -- -- -- -- (148,825) (148,825)
---------- ------------ ----------- ------------ ---------- --------- ------------
Balance -
December 31, 1994 -- -- 15,863,547 -- -- (148,825) 15,714,722
Net income for the year
ended December 31, 1995 -- -- 463,739 -- -- -- 463,739
Decrease in minimum
pension liability, net
of deferred income taxes -- -- -- -- -- 44,762 44,762
---------- ------------ ----------- ------------ ---------- ---------- ------------
Balance - December 31, 1995 -- -- 16,327,286 -- -- (104,063) 16,223,223
Net income for the year ended
December 31, 1996 -- -- 610,889 -- -- -- 610,889
Net proceeds from issuance of
common stock 304,175 28,959,347 -- -- -- -- 29,263,522
Acquisition of common stock
by ESOP -- -- -- (2,433,400) -- -- (2,433,400)
ESOP shares committed to be
released -- 15,452 -- 162,227 -- -- 177,679
Purchase of 296,570 shares
of treasury stock -- -- -- -- (3,277,004) -- (3,277,004)
Decrease in minimum pension
liability, net of -- -- -- -- -- 19,508 19,508
of deferred income taxes
Dividends paid -- -- (136,119) -- -- -- (136,119)
---------- ------------ ------------ ----------- ----------- ------------ ------------
Balance - December 31, 1996 $304,175 $ 28,974,799 $ 16,802,056 $ (2,271,173) $(3,277,004) $ (84,555) $ 40,448,298
========== ============ ============ ============= =========== ============ ============
See notes to consolidated financial statements. -20-
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended December 31,
----------------------------------------------
1996 1995 1994
------------- ------------ --------------
Cash flows form operating activities:
Net income $ 610,889 $ 463,739 $ 1,714,594
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 153,207 102,863 92,817
Provision for loan and real estate owned losses 182,900 381,809 356,083
Amortization of intangibles 360,783 30,069 --
Amortization (accretion) of
deferred fees, premiums and discounts, net 40,903 7,186 (77,004)
Gain on sale of branch (138,320) -- --
Loss (Gain) on sale of foreclosed real estate 28,418 (27,705) --
Deferred income taxes (243,005) 1,808 71,772
Increase in interest receivable (17,942) (354,543) (261,626)
Increase in other assets (2,446) (528,405) (160,072)
Increase (decrease) in interest payable 180,501 127,445 (28,276)
Increase (decrease) in
accounts payable and other liabilities 256,012 163,438 (131,108)
ESOP shares committed to be released 177,679 -- --
------------ ------------ ------------
Net cash provided by operating activities 1,589,579 367,704 1,577,180
------------ ------------ ------------
Cash flows from investing activities:
Purchases of investment securities held to maturity (32,347,937) (6,022,500) (19,147,279)
Maturities of investment securities held to maturity 11,000,000 12,167,500 8,000,000
Purchases of mortgage-backed securities held to maturity (16,073,205) (75,243,631) (3,059,236)
Principal collections on
mortgage-backed securities held to maturity 21,500,221 8,849,495 7,756,975
Net (increase) decrease in loans receivable (21,265,657) (2,239,571) 6,177,391
Purchases of premises and equipment (159,246) (482,366) (40,619)
Proceeds from sales of foreclosed real estate 849,629 713,646 698,604
(Purchase) Redemption of Federal Home Loan Bank
of New York stock (680,500) 116,100 67,600
Cash and cash equivalents
received in connection with acquisition -- 49,303,415 --
------------ ------------ ------------
Net cash (used in ) provided by investing activities (37,176,695) (12,837,912) 453,436
------------ ------------ ------------
See notes to consolidated financial statements.
-21-
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
-------------- ------------- ---------------
Cash flows from financing activities:
Net (decrease) increase in deposits $ (7,464,225) $ 17,135,595 $(10,501,656)
Decrease in advances from borrowers for taxes (701,773) (142,723) (72,156)
(Refunds of) proceeds from stock subscriptions (19,706,653) 44,831,296 --
Proceeds of securities sold under
agreement to repurchase 33,623,500 -- --
Costs of insurance of common stock (731,348) -- --
Dividends paid (136,119) -- --
Cash paid in connection with branch sales (9,064,385) -- --
Treasury stock acquired (3,277,004) -- --
------------ ------------ ------------
Net cash (used in) provided by financing activities (7,458,007) 61,824,168 (10,573,812)
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (43,045,124) 49,353,960 (8,543,196)
Cash and cash equivalents:
Beginning 53,419,088 4,065,128 12,608,324
------------ ------------ ------------
Ending $ 10,373,964 $ 53,419,088 $ 4,065,128
============ ============ ============
See notes to consolidated financial statements.
-22-
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Supplemental disclosures:
Cash paid during the period for:
Interest $ 11,077,749 $ 9,186,285 $ 7,199,015
============ ============ ============
Income taxes $ 410,701 $ 403,925 $ 1,072,511
============ ============ ============
Loans receivable transferred to foreclosed real estate $ 406,379 $ 672,584 $ 871,350
============ ============ ============
Loans to facilitate sale of foreclosed real estate $ 172,000 -- --
============ ============ ============
(Decrease) increase in minimum
pension liability, net of deferred income taxes (19,508) (44,762) $ 148,825
============ ============ ============
Property transferred to investment in real estate $ 145,478 $ 243,667 $ --
============ ============ ============
Issuance of common stock:
Deposits used for stock purchases $ 2,859,458 $ -- $ --
Stock subscriptions used for stock purchases 25,124,642 -- --
Deferred costs (422,630) -- --
------------ ------------ ------------
$ 27,561,470 $ -- $ --
============ ============ ============
Assets acquired in connection with acquisition:
Cash and cash equivalents $ -- $ 49,303,415 $ --
Loans receivable -- 8,564 --
Premises and equipment -- 1,500,000 --
------------ ------------ ------------
-- 50,811,979 --
------------ ------------ ------------
Liabilities assumed in connection with acquisition:
Deposits -- 54,414,848 --
Other -- 5,000 --
------------ ------------ ------------
-- 54,419,848 --
------------ ------------ ------------
Excess of cost over assets acquired $ -- $ (3,607,869) $ --
============ ============ ============
Liabilities assigned in connection with sale of branch:
Deposits $ 9,221,324 $ -- $ --
============ ============ ============
Assets sold in connection with sale of branch:
Loans $ 18,619 $ -- $ --
============ ============ ============
See notes to consolidated financial statements.
-23-
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------
Basis of financial statement presentation
-----------------------------------------
The consolidated financial statements, which have been prepared in
conformity with generally accepted accounting principles, include the
accounts of the Company and its wholly owned subsidiary, Little Falls
Bank (the "Bank"). All significant intercompany accounts and
transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amount of assets and
liabilities as of the date of the consolidated statement of financial
condition and revenues and expenses for the periods then ended. Actual
results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes in
the near term relate to the determination of the allowance for loan
losses, the valuation of foreclosed real estate, the assessment of
prepayment risks associated with mortgage-backed securities and the
determination of the amount of deferred tax assets that are more likely
than not to be realized. Management believes that the allowance for
loan losses is adequate, foreclosed real estate is appropriately
valued, prepayment risks associated with mortgage-backed securities are
properly recognized and all deferred tax assets are more likely than
not to be recognized. While management uses available information to
recognize losses on loans and foreclosed real estate, future additions
to allowance for loan losses or further writedowns of foreclosed real
estate may be necessary based on changes in economic conditions in the
market area. Additionally, assessments of prepayment risks related to
mortgage - backed securities are based upon current market conditions,
which are subject to frequent change. Finally, the assessment of the
amount of the amount of deferred tax assets more likely than not to be
realized is based on projected future taxable income, which is subject
to continual revisions for updated information.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses and foreclosed real estate. Such agencies may require the Bank
to recognize additions to the allowance or additional writedowns on
real estate based on their judgments about information available to
them at the time of their examination.
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash and amounts due from banks,
federal funds sold and interest-bearing deposits in other banks having
original maturities of three months or less. Generally, federal funds
sold are sold for one day periods.
-24-
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Investment and mortgage-backed securities
-----------------------------------------
Investments in debt securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Debt and equity securities that are bought
and held principally for the purpose of selling them in the near term are
classified as trading securities and reported at fair value, with
unrealized holding gains and losses included in earnings. Debt and equity
securities not classified as trading securities nor as held-to maturity
securities are classified as available for sale securities and reported at
fair value, with unrealized holding gains or losses, net of deferred income
taxes, reported in a separated component of retained earnings. The Bank has
both the intent and ability to hold all securities to maturity.
Premiums are amortized and discounts are accreted to interest income using
the interest method. Gains or losses on the sale of securities are based on
specifically identifiable cost and are accounted for on a trade date basis.
Loans receivable
----------------
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan origination fees and
discounts.
Loan fees and certain direct loan origination costs are deferred, and the
net fee or cost accreted or amortized as an adjustment of yield using the
interest method over the contractual lives of the related loans. Unearned
interest on consumer loans is recognized over the contractual lives of the
loans using a method which approximates the interest method.
Uncollectible interest on loans that are contractually past due is charged
off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income
equal to all interest previously accrued, and income is subsequently
recognized only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is reestablished, in which case the loan is returned to
accrual status.
Allowance for loans losses
--------------------------
An allowance for loan losses is maintained at a level considered adequate
to absorb future loan losses. Management of the Bank, in determining the
allowance for loan losses, considers the risks inherent in its loan
portfolio and changes in the nature and volume of its loan activities,
along with the general economic and real estate market conditions.
-25-
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Allowance for loan losses (Cont'd)
-------------------------
The Bank utilizes a two tier approach: ( 1 ) identification of problem
loans and the establishment of specific loss allowances on such loans; and
( 2 ) establishment of general valuation allowances on the remainder of its
loan portfolio. The Bank maintains a loan review system which allows for a
periodic review of its loan portfolio and the early identification of
potential problem loans. Such system takes into consideration, among other
things, delinquency status, size of loans, types of collateral and
financial condition of the borrowers. Specific loan loss allowances are
established for identified loans based on a review of such information
and/or appraisals of the underlying collateral. General loan loss
allowances are based upon a combination of factors including, but not
limited to, actual loan loss experience, composition of the loan portfolio,
current economic conditions and management's judgment. Although management
believes that adequate specific and general loan loss allowances are
established, actual losses are dependent upon future events and, as such,
further additions to the level of the loan loss allowance may be necessary.
Effective January 1, 1995, the Bank adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards (`Statement")
No. 114, "Accounting by Creditors for Impairment of a Loan" , and Statement
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". The provisions of these statements are
applicable to all loans, uncollateralized as well as collateralized, except
for large groups of smaller-balance homogeneous loans that are collectively
evaluated for impairment and loans that are measured at fair value or at
the lower of cost or fair value. Additionally, such provisions apply to all
loans that are renegotiated in troubled debt restructurings involving a
modification of terms.
The Statements require that impaired loans be measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or the fair value of the collateral if the loan is collateral
dependent. A loan evaluated for impairment is deemed to be impaired when,
based on current information and events, it is probable that the Bank will
be unable to collect all amounts due according the contractual terms of the
loan agreement. An insignificant payment delay, which is defined by the
Bank as up to ninety days, will not cause a loan to be classified as
impaired. A loan is not impaired during a period of delay in payment if the
Bank expects to collect all amounts due, including interest accrued at the
contractual interest rate for the period of delay. Thus, a demand loan or
other loan with no stated maturity is not impaired if the Bank expects to
collect all amounts due, including interest accrued at the contractual
interest rate, during the period the loan is outstanding. All loans
identified as impaired are evaluated independently. The Bank does not
aggregate such loans for evaluation purposes. Payments received on impaired
loans are applied first to interest receivable and then to principal.
The adoption of Statements No. 114 and 118 did not have a material adverse
impact on consolidated financial condition or operations.
-26-
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Premises and equipment
----------------------
Land is carried at cost. Buildings and improvements, leasehold improvements
and furniture, fixtures and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed
on a straight-line basis over the lesser of the estimated useful lives of
the assets or, if applicable, the term of lease. Significant renovations
and additions are capitalized. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts and any resulting gain or loss is reflected in operations for
the period. Maintenance and repairs are charged to expense as incurred.
Rental income is netted against occupancy expense.
Investment in real estate
-------------------------
Investment in real estate is carried at cost less accumulated depreciation.
Foreclosed real estate
----------------------
Real estate properties acquired through, or in lieu of, loan foreclosure
are initially recorded at the lower of cost or fair value at the date of
foreclosure. Subsequent valuations are periodically performed and an
allowance for losses established by a charge to operations if the carrying
value of a property exceeds its fair value less estimated selling costs.
Costs relating to development and improvement of property are capitalized,
whereas income and expenses relating to the operating and holding of
properties are recorded in operations as earned or incurred. Gains and
losses from sales of these properties are recognized as they occur.
Excess of cost over assets acquired
-----------------------------------
The cost in excess of the fair value of net assets acquired through the
acquisition of certain assets and assumption of certain liabilities of
branch offices is being amortized to expense over a ten year period by use
of the straight-line method.
Income taxes
------------
The Company and its subsidiary file a consolidated federal income tax
return and separate state income tax returns. Income taxes are allocated to
the Company and its subsidiary based upon the contribution of their
respective income or loss to the consolidated return. Federal and State
income taxes have been provided on the basis of reported income. The
amounts reflected on the tax returns differ from these provisions due
principally to temporary differences in the reporting of certain items for
financial reporting and tax reporting purposes. In accordance with FASB
Statement No. 109, "Accounting for Income Taxes", 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.
- 27 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ---------------------------------------------
Income taxes (Cont'd)
------------
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 more likely than not will
not be realized. Management believes, based upon current facts, that it is
more likely than not that there will be sufficient taxable income in future
years to realize the deferred tax assets. 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.
Accounting for stock based compensation
---------------------------------------
In October 1995, the FASB issued Statement No. 123 " Accounting for
Stock-Based Compensation." Statement No. 123 establishes financial
accounting and reporting standards for stock-based employees compensation
plans. Statement No. 123 encourages all entities to adopt the "fair value
based method" of accounting for employee stock compensation plans. However,
Statement No. 123 also allows an entity to continue to measure compensation
cost under such plans using the "intrinsic value based method." Underthe
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.
The accounting requirements of Statement No. 123 are effective for
transactions entered into in fiscal years that begin after December 15,
1995. The Company has elected to account for compensation cost under the
intrinsic value based method. Included in note 12 to consolidated financial
statements are the pro forma disclosures required by Statement No. 123.
Net income per common share
---------------------------
Net income per common share is calculated by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding, adjusted for the unallocated portion of shares
held by the ESOP in accordance with the American Institute of Certified
Public Accountants' ("AICPA") Statement of Position ("SOP") 93-6. Stock
options granted are considered common stock equivalents and therefore
considered in net income per common share calculations, if dilutive, using
the treasury stock method.
Net income per common share for the year ended December 31, 1996 is
calculated based on the net income for the entire year. The calculation of
the weighted average number of common shares outstanding, adjusted for the
unallocated portion of shares held by the ESOP, from the date of conversion
to stock form (January 5, 1996) through December 31, 1996, assumes such
shares were outstanding for the entire year (as if the conversion had taken
place on January 1, 1996).
- 28 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------------------
Interest rate risk
------------------
The Bank is principally engaged in the business of attracting deposits from
the general public and using these deposits, along with borrowings and
other funds, to make loans secured by real estate and to purchase
mortgage-backed and investment securities. The potential for interest-rate
risk exists as a result of the generally shorter duration of the Bank's
interest-sensitive liabilities compared to the generally longer duration of
its interest-sensitive assets. In a rising interest rate environment,
liabilities will reprice faster than assets, thereby reducing the market
value of long-term assets and net interest income. For this reason,
management regularly monitors the maturity structure of the Bank's
interest-earning assets and interest-bearing liabilities in order to
measure its level of interest-rate risk and to plan for future volatility.
Concentration of risk
---------------------
The Bank's lending and real estate activity is concentrated in real estate
and loans secured by real estate located in the State of New Jersey. In
general, the Bank's loan portfolio performance is dependent upon local
economic conditions.
Reclassification
----------------
Certain amounts for the years ended December 31, 1995 and 1994 have been
reclassified to conform to the current year's presentation.
2. REORGANIZATION AND STOCKHOLDERS' EQUITY
- -------------------------------------------
On July 13, 1995, the Board of Directors of the Bank adopted a Plan of
Conversion, which was subsequently amended, pursuant to which the Bank
would convert from a federally chartered mutual savings bank to a federally
chartered stock savings bank, with the concurrent formation of a holding
company. The holding company, Little Falls Bancorp, Inc., ( the "company")
is a New Jersey corporation organized in August 1995 to acquire all of the
capital stock of the Bank upon the completion of the conversion. In October
1995, the Bank converted from a New Jersey chartered mutual savings bank to
a federally chartered mutual savings bank. Concurrently, the Bank changed
its name from "Little Falls Savings Bank" to " Little Falls Bank". On
January 5, 1996, the conversion and initial public stock offering were
completed with the issuance of 3,041,750 shares of Company's common stock,
par value $0.10 per share, for net proceeds, after conversion costs and the
effect of the shares acquired by the ESOP, of $26,830,022. Concurrently
with the issuance of the Company's common stock, the Company utilized
$14,671,962 of the net proceeds to purchase all of the outstanding capital
stock of the Bank.
At the time of the conversion, the Bank, in order to grant priority to
eligible depositors in the event of future liquidation, established a
liquidation account of $15,488,000, an amount equal to its total net worth
as of September 30, 1995, the date of the latest statement of financial
condition appearing in the final prospectus. The liquidation account will
be maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits. Subsequent increases in the
deposit account will not restore an eligible account holder's interest in
the liquidation account. In the unlikely event of a complete liquidation,
each eligible account holder will be entitled to receive a distribution
from the liquidation account in an amount proportionate to their current
adjusted qualifying balances. The balance of the liquidation account on
December 31, 1996 has not been determined.
- 29 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
2. REORGANIZATION AND STOCKHOLDERS' EQUITY (Cont'd)
- ------------------------------------------
The ability of the Company to pay dividends to stockholders is dependant
upon the receipt of income from the subsidiary Bank. The Bank may not
declare or pay any dividend on or repurchase any of its capital stock if
the effect thereof would cause its net worth to be reduced below: 1) the
amount required for the liquidation account, or 2) the net worth
requirements contained in section 563.13 ( b ) of the rules and regulation
of the Office of Thrift Supervision ("the OTS").
During the year ended December 31, 1996, the Company approved plans to
repurchase 296,570 shares of its common stock outstanding, up to five
percent (5%) of the shares outstanding at any single instance. In
accordance therewith, 296,570 shares, at an aggregate cost of $3,277,004,
were purchased in the open market.
3. INVESTMENT SECURITIES HELD TO MATURITY
- -------------------------------------------
December 31, 1996
----------------------------------------------------
Amortized Gross Unrealized Estimated
------------------
Cost Gains Losses Fair Value
---------- ----- ------ -----------
U.S. Government
(including agencies):
Due in one year or less $ 9,008,182 $ -- $ 23,182 $ 8,985,000
Due after one year through five years 15,014,352 -- 147,477 14,866,875
Due after five years 27,005,763 4,237 -- 27,010,000
Municipal bonds
Due within one year 342,000 -- -- 342,000
----------- ----------- ----------- -----------
$51,370,297 $ 4,237 $ 170,659 $51,203,875
=========== =========== =========== ===========
December 31, 1995
------------------------------------------------------
Amortized Gross Unrealized Estimated
---------------------
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
U.S. Government
(including agencies):
Due in one year or less $ 8,000,083 $ - $ 58,833 $ 7,941,250
Due after one year through five years 21,999,387 73,792 158,179 21,915,000
----------- ----------- ----------- -----------
$29,999,470 $ 73,792 $ 217,012 $29,856,250
=========== =========== =========== ===========
There were no sales of investment securities held to maturity during the years
ended December 31, 1996, 1995 and 1994.
Investment securities held to maturity with a carrying value of approximately
$2,000,000 at December 31 1996, were pledged to secure public funds. See note 10
for securities pledged as collateral for repurchase agreements.
- 30 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. MORTGAGE-BACKED SECURITIES HELD TO MATURITY
- -------------------------------------------------
December 31, 1996
------------------------------------------------------------
Carrying Gross Unrealized Estimated
------------------------------
Value Gains Losses Fair Value
------------- -------- --------- -------------
Government National Mortgage Association $ 34,166,041 $211,082 $ 8,570 $ 34,368,553
Federal Home Loan Mortgage Corporation 28,391,893 223,170 260,908 28,354,155
Federal National Mortgage Association 49,915,210 148,410 360,828 49,702,792
------------ -------- --------- ------------
$112,473,144 $582,662 $ 630,306 $112,425,500
============ ======== ========= ============
December 31, 1995
---------------------------------------------------------------
Carrying Gross Unrealized Estimated
---------------------
Value Gains Losses Fair Value
-------------- -------- ----------- -------------
Government National Mortgage Association $ 39,246,722 $386,465 $ 7,365 $ 39,625,822
Federal Home Loan Mortgage Corporation 32,652,388 368,631 116,363 32,904,656
Federal National Mortgage Association 46,121,190 203,454 12,777 46,311,867
------------ -------- ---------- ------------
$118,020,300 $958,550 $ 136,505 $118,842,345
============ ======== ========== ============
December 31, 1996
------------------------------------------------ ------------------
Principal Unamortized Unearned Carrying
Balance Premium Discounts Value
---------------- -------------- ------------ ---------------
Government National Mortgage Association $ 33,675,013 $ 510,696 $ 19,668 $ 34,166,041
Federal Home Loan Mortgage Corporation 28,296,802 219,734 124,643 28,391,893
Federal National Mortgage Association 49,434,097 517,150 36,037 49,915,210
------------ ----------- -------- ------------
$111,405,912 $ 1,247,580 $180,348 $112,473,144
============ =========== ======== ============
December 31, 1995
------------------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premium Discounts Value
----------------- ---------------- ------------ ---------------
Government National Mortgage Association $ 38,714,537 $ 562,120 $ 29,935 $ 39,246,722
Federal Home Loan Mortgage Corporation 32,589,950 264,915 202,477 32,652,388
Federal National Mortgage Association 45,612,561 508,629 - 6,121,190
------------ ------------ ---------- ------------
$116,917,048 $ 1,335,664 $ 232,412 $118,020,300
============ ============ ========== ============
There were no sales of mortgage-backed securities held to maturity during the
years ended December 31, 1996, 1995 and 1994.
- 31 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. LOANS RECEIVABLE
- ---------------------
December 31,
--------------------------------------
1996 1995
----------------- --------------
Real estate mortgage:
One-to-four family $ 108,367,393 $ 88,828,104
Commercial and multi-family 3,658,543 4,638,556
112,025,936 93,466,660
-------------- --------------
Construction 525,000 1,098,087
-------------- --------------
Consumer:
Second mortgage 5,028,193 2,539,240
Passbook or certificate 888,885 824,151
Student education guaranteed
by the State of New Jersey 25,368 42,418
-------------- --------------
5,942,446 3,405,809
-------------- --------------
Total loans 118,493,382 97,970,556
-------------- --------------
Less: Loans in process 150,000 450,000
Allowance for loan losses 1,089,828 958,149
Deferred loan fees and discounts 137,770 332,729
-------------- --------------
1,377,598 1,740,878
-------------- --------------
$ 117,115,784 $ 96,229,678
============== ==============
An analysis of the allowance for loan losses follows:
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ -----------
Balance - beginning $ 958,149 $ 1,169,058 $ 817,636
Provisions charged to operations 182,900 131,359 356,083
Loans charged off, net of recoveries (51,221) (342,268)
---------- ------------ -----------
Balance - ending $1,089,828 $ 958,149 $ 1,169,058
========== ============ ===========
- 32 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. LOANS RECEIVABLE (Cont'd.)
- ---------------------
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows ( in thousands):
December, 31
-----------------------
1996 1995
---------- -----------
Recorded investment in impaired loans:
With recorded allowances $ 1,777 $ 1,743
Without recorded allowances - 267
--------- ---------
Total impaired loans 1,777 2,010
Related allowance for loan losses 404 30
--------- ---------
Net impaired loans $ 1,373 $ 1,980
========= =========
Average recorded investment in impaired loans $ 1,717 $ 1,783
========= =========
Interest income recognized on impaired loans during
the period each loan was impaired:
Total $ 57 $ 42
========= =========
Cash basis $ 57 $ 33
========= =========
At December 31, 1996, 1995 and 1994, nonaccrual loans for which the accrual of
interest had been discontinued totalled approximately $1,901,000, $1,942,000 and
$4,202,000, respectively. Interest income that would have been recorded under
the original terms of such loans and the interest income actually recognized is
summarized as follows (in thousands):
Year Ended December 31,
----------------------------
1996 1995 1994
-------- ----------- -------
Interest income
that would have been recorded $ 198 $ 189 $ 419
Interest income recognized $ 84 $ 39 $ 33
The activity with respect to loans to directors, officers and associates of such
persons is as follows:
Year ended December 31,
-------------------------------
1996 1995
---------------- --------------
Balance - beginning $ 855,760 $ 882,640
Loans originated 569,187 40,439
Collection of principal (256,670) (67,319)
---------- -----------
Balance - ending $1,168,277 $ 855,760
========== ===========
- 33 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. PREMISES AND EQUIPMENT
- ---------------------------
December 31,
---------------------------
1996 1995
---------- ------------
Land $ 614,714 $ 662,324
Buildings and improvements 2,296,452 2,549,603
Furniture, fixtures and equipment 1,038,673 886,222
Leasehold improvements 54,122 54,122
---------- ------------
4,003,961 4,152,271
Less accumulated depreciation and amortization 1,344,722 1,362,803
---------- ------------
$2,659,239 $ 2,789,468
========== ============
Depreciation and amortization expense totalled $143,997, $92,735 and $83,704 for
the years ended December 31, 1996,1995 and 1994, respectively.
7. INVESTMENT IN REAL ESTATE
- ------------------------------
The Bank owns real estate adjoining its main office and other land originally
acquired for a future office site no longer to be used for that purpose. The
real estate adjoining the main office is comprised of various rental units both
residential and commercial. During the year ended December 31, 1996, as a result
of the relocation of a branch office and the sale of deposits in another branch
office, properties with a carrying value of $145,478 were transferred from
premises and equipment to investment in real estate. The Bank does not have
immediate plans to utilize these facilities . The income received from the
properties, net of expenses, is included in other income. The properties are
summarized as follows:
December 31,
------------------------
1996 1995
----------- ----------
Land $ 291,277 $ 243,667
Buildings and improvements 622,480 362,534
---------- ----------
913,757 606,201
Less accumulated depreciation and amortization 230,703 59,415
---------- ----------
$ 683,054 $ 546,786
========== ==========
- 34 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
8. DEPOSITS
- -------------
December 31, 1996
------------------------------------------
Weighted
Average
Rate Amount Percent
--------- --------------- --------
Now accounts and non-interest-bearing deposits 1.46% $ 20,871,936 9.14
Money market accounts 3.33 14,822,840 6.49
Passbook and club accounts 3.26 49,700,347 21.77
Certificates of deposit 5.48 142,916,420 62.60
------------- ------
4.48 $ 228,311,543 100.00
============= ======
December 31, 1995
--------------------------------------------
Weighted
Average
Rate Amount Percent
---------- ---------------- --------
Now accounts and non-interest-bearing deposits 1.94% $ 23,113,126 9.32
Money market accounts 5.15 19,575,052 7.90
Passbook and club accounts 3.21 51,850,350 20.92
Certificates of deposit 5.44 153,312,845 61.86
-------------- ------
4.26 $ 247,851,373 100.00
============== ======
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of greater than $100,000 was approximately $18,177,000 and
$13,221,000 at December 31, 1996 and 1995, respectively. These certificates of
deposit do not receive a preferential interest rate. Deposits in excess of
$100,000 are not federally insured.
The scheduled maturities of certificates of deposit are as follows:
December 31,
---------------------
1996 1995
----------- --------
(In thousands)
Three months or less $ 27,834 $ 38,811
Over three months to one year 75,561 67,233
Over one year to three years 37,488 43,292
Over three years 2,033 3,977
---------- ---------
$ 142,916 $ 153,313
========== =========
- 35 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
8. DEPOSITS (Cont'd)
- -------------
A summary of interest on deposits follows:
Year Ended December 31,
------------------------------------------------
1996 1995 1994
---------------- --------------- ---------------
Now accounts $ 366,984 $ 195,025 $ 228,544
Money market 788,001 890,973 716,033
Passbook and club 1,859,939 970,934 860,198
Certificates of deposit 8,068,002 7,256,798 5,365,416
------------ ----------- -----------
$ 11,082,926 $ 9,313,730 $ 7,170,191
============ =========== ===========
9. ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
- -----------------------------------------------------
The Bank has an available line of credit with the Federal Home Loan Bank of New
York, subject to the terms and conditions of the lenders' overnight advances
program, in the amount of $28,068,200 at December 31, 1996. Advances under this
line of credit, which expires on November 21, 1997, are made for one day
periods. During the year ended December 31, 1996, the bank did not borrow funds
under this program.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPUCHASE
- ---------------------------------------------------
December 31, 1996
-----------------------------------------
Interest
Lender Maturity Rate Amount
------------- ----------- ---------------
Security broker dealer 5-19-97 7.20% $ 8,175,000
Security broker dealer 11-20-97 5.68 8,148,000
Security broker dealer overnight 7.10 8,300,000
Federal Home Loan Bank 12-20-99 5.82 9,000,000
-------------
6.44 $ 33,623,500
=============
- 36 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. SECURITIES SOLD UNDER AGREEMENTS TO REPUCHASE (Cont'd.)
- ---------------------------------------------------
Certain information concerning securities sold under agreements to repurchase is
summarized as follows:
Year Ended
December 31, 1996
--------------------------
Average balance during the year $ 3,173,000
Average interest rate during the year 5.53%
Maximum month-end balance during the year $ 33,624,000
Investment securities held to maturity
underlying the agreement at year end:
Carrying value $ 35,331,000
Estimated fair value $ 35,168,000
There were no similar borrowings during the year ended December 31, 1995.
11. REGULATORY CAPITAL
- ------------------------
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 adverse effect on
the Bank. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The OTS has prescribed capital requirements which include three separate
measurements of capital adequacy: a leverage-ratio capital standard ("Core"), a
tangible capital standard and a risk based capital standard (collectively known
as the "Capital Rule"). The Capital Rule requires each savings institution to
maintain tangible capital equal to at least 1.5% of its tangible assets and core
capital equal to at least 3.0% of its adjusted total assets. The Capital Rule
further requires each savings institution to maintain total capital equal to at
least 8.0% of its risk-weighted assets.
The following table sets forth the capital position of the Bank as calculated as
of December 31, 1996:
Tangible Core Risk-Based
------------------------ ------------------------ ------------------------
Amount Percent Amount Percent Amount Percent
Capital as calculated under GAAP $ 28,874 9.61 $ 28,874 9.61 $ 28,874 30.50
Deduct goodwill ( 3,217) (1.07) (3,217) 1.07 (3,217) (3.40)
Deduct investment in real estate - - - - (683) (0.72)
Add qualifying
general loan loss allowance - - - - 936 0.99
-------- ----- -------- ----- --------- -----
Capital, as calculated 25,657 8.54 25,657 8.54 25,910 27.37
Capital, as required 4,506 1.50 9,013 3.00 7,573 8.00
-------- ----- -------- ----- --------- -----
Excess $ 21,151 7.04 $ 16,644 5.54 $ 18,337 19.37
======== ==== ======== ==== ========= =====
- 37 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. REGULATORY CAPITAL (Cont'd)
- ----------------------
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
imposes increased requirements on the operations of financial institutions and
mandated the development of regulations designed to empower regulators to take
prompt corrective action with respect to institutions that fall below certain
capital standards. FDICIA stipulates that an institution with less than 4% core
capital is deemed to be undercapitalized. Quantitative measures established by
FDICIA to ensure capital adequacy require the Bank to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets (as
defined). Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.
As of March 31, 1996, the most recent notification from the OTS, the Bank was
categorized 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, and Tier I leverage ratios of 10%, 6%, and 5%,
respectively. There are no conditions existing or events which have occurred
since notification that management believes have changed the institution's
category.
12. BENEFIT PLANS
- -------------------
Employee Pension Plan
- ---------------------
The Bank has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and employees'
compensation. The Bank's funding policy is to contribute the maximum amount
deductible for federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service to date but also for those
expected to be earned in the future.
Plan assets are composed primarily of certificates of deposit, savings accounts
and insurance contracts. The following tables present the plan's funded status
and the components of net periodic pension cost:
December 31,
---------------------------------
1996 1995
---------------- ----------------
Actuarial present value of benefit obligations:
Vested $ 1,493,630 $ 1,327,888
Non-vested
4,382 7,116
------------ ------------
Total benefit obligation $ 1,498,012 $ 1,335,004
============ ============
- 38 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- ----------------
Employee Pension Plan (Cont'd)
- ---------------------
December 31,
------------------------------
1996 1995
-------------- -------------
Projected benefit obligation $ 1,919,617 $ 1,743,089
Plan assets at fair value 1,222,245 1,010,000
Projected benefit
obligation in excess of plan assets 697,372 733,089
Unrecognized net transition
obligation being amortized over fifteen years (96,350) (110,115)
Unrecognized net loss (553,681) (570,632)
Additional minimum liability 228,426 272,663
------------ -------------
Accrued pension cost including in accounts payable and
other liabilities $ 275,767 $ 325,005
============ =============
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
------------ -------------- -------------
Net periodic pension cost included the following
components:
Service cost $ 87,161 $ 113,020 $ 93,368
Interest cost 127,080 122,026 91,045
Actual return on plan assets (74,297) (89,941) (52,500)
Net amortization and deferral 60,784 63,398 55,064
---------- ------------ -----------
Net periodic pension cost included in
compensation and employee benefits $ 200,728 $ 208,493 $ 186,977
========== ============ ===========
Significant actuarial assumptions used in determining plan benefits are:
Year Ended December 31,
----------------------------------
1996 1995 1994
Annual salary increase 5.00% 6.00% 5.00%
Long-term return on assets 8.00% 8.00% 7.00%
Discount rate 7.00% 8.25% 7.00%
- 39 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- -------------------
Directors retirement plan
- -------------------------
The board of Directors adopted a plan, effective January 1, 1995, which provides
that any director with twenty or more years of service may retire and continue
to be paid at the rate of 50% of regular directors fees. These payments will
continue for the directors' lifetime. This plan is unfunded. The following
tables present the status of the plan and the components of net periodic plan
cost:
December 31,
-------------------------------
1996 1995
-------------- ----------------
Actuarial present value of benefit obligation:
Vested $ 189,536 $ 98,892
Non-vested 143,912 162,232
----------- -------------
$ 333,448 $ 261,124
=========== =============
Projected benefit obligation $ 357,661 $ 279,624
Unrecognized past service cost (235,914) (253,231)
Unrecognized net (loss) gain (46,819) 3,866
----------- -------------
Accrued plan cost included in accounts payable and other
liabilities $ 74,928 $ 30,259
=========== =============
Year Ended December 31,
-------------------------------
1996 1995
-------------- ----------------
Net periodic plan cost included the following components:
Service cost $ 6,380 $ 4,151
Interest cost 20,972 14,563
amortization of past service cost 17,317 11,545
------------ ----------
Net periodic plan cost included in other expense $ 44,669 $ 30,259
============ ==========
A discount rate of 7.50% and 8.25% and a rate of increase in future compensation
levels of 7% and 8% were assumed in the plan valuation for the years ended
December 31, 1996 and 1995, respectively.
- 40 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- -------------------
Directors health benefits plan
- ------------------------------
The Board of Directors also adopted a plan, effective January 1, 1995, providing
for the continuation of the directors' medical insurance coverage for their
lifetime after retirement. Benefits under this plan are available to directors
retiring after December 31, 2000 upon their attainment of the later of age 75 or
twenty years of service. This plan is unfunded. The following tables present the
status of the plan and the net components of periodic plan cost:
December 31,
-----------------------------
1996 1995
------------- ---------------
Accumulated postretirement benefit obligation $ 160,094 $ 198,828
Unrecognized net gain (loss) 44,907 (3,646)
---------- -----------
Accrued plan cost included in accounts payable
and other liabilities $ 205,001 $ 195,182
========== ===========
Year Ended December 31,
-------------------------------
1996 1995
-------------- ----------------
Net periodic plan cost included the following components:
Service cost $ 2,866 $ 4,082
Interest cost 10,969 13,270
Immediate recognition of prior service cost - 177,830
Net amortization (4,016) -
------------ -----------
Net periodic plan cost included in other expense $ 9,819 $ 195,182
============ ===========
A discount rate of 7.50% and 8.25% was assumed for the years ended December 31,
1996 and 1995, respectively. For both the year ended December 31, 1996 and 1995,
a medical cost trend rate of 10.5%, decreasing 0.5% per year thereafter until an
ultimate rate of 5.5% is reached, was used in the plan's valuation. Increasing
the assumed medical cost trend by one percent in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1996, by
$20,000 and the aggregate of the service and interest components of net periodic
postretirement benefit cost for the year ended December 31, 1996, by $2,000.
- 41 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- -------------------
Employee Stock Ownership Plan (ESOP)
- -----------------------------
Effective upon conversion, an ESOP was established for all eligible employees.
The ESOP used $2,433,400 of proceeds from a term loan from the Company to
purchase 243,340 shares of Company common stock in the initial offering. The
term loan from the Company to the ESOP, including interest, is payable over one
hundred and eighty (180) equal monthly installments. The initial interest rate
is 8.25% and is subject to semi-annual adjustment based on the prime rate. The
Bank intends to make contributions to the ESOP which will be equal to the
principal and interest payment required from the ESOP on the term loan. Shares
purchased with the loan proceeds are pledged as collateral for the term loan and
are held in a suspense account for future allocation among participants.
Contributions to the ESOP and shares released from the suspense account will be
allocated among the participants on the basis of compensation, as described by
the plan in the year of allocation. During the year ended December 31, 1996, the
Bank made a $286,659 cash contribution to the ESOP of which $196,181 and $90,478
were applied to interest and principal, respectively. At December 31, 1996, the
loan had an outstanding balance of $ 2,342,922. The ESOP is accounted for in
accordance with SOP 93-6, which was issued by the AICPA in November 1993.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP
shares in the consolidated statements of financial condition. As shares are
committed to be released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares become
outstanding for net income per common share computations. Dividends on allocated
ESOP shares are recorded as a reduction of retained earnings. Contributions
equivalent to dividends on unallocated ESOP shares are recorded as a reduction
of debt. ESOP compensation expenses were $177,679 for the year ended December
31, 1996.
The ESOP shares at December 31, 1996 were as follows:
Allocated shares 9,048
Shares committed to be released 7,175
Unreleased Shares 227,117
-------------
Total ESOP Shares 243,340
=============
Fair value of unreleased shares $ 2,895,742
=============
Management Stock Bonus Plan (the "MSBP")
- -----------------------------------------
On July 3, 1996, the Bank established a MSBP to provide both key employees and
outside directors with a proprietary interest in the company in a manner
designed to encourage such persons to remain with the Bank. The Bank will
contribute sufficient funds to the MSBP to purchase 121,670 shares of common
stock of the Company in the open market.
Underthe MSBP, awards are granted in the form of common stock held by the MSBP
Trust. The awards vest over a period of time not more than five years,
commencing one year from the date of award. The awards become fully vested upon
termination of employment due to death, disability or change in control of the
Bank or Company. At December 31, 1996, 54,748 shares were granted to directors
and 27,986 shares were granted to officers and employees. None of the granted
shares were vested at December 31, 1996. $87,903 of expense related to the MSBP
shares was recorded during the year ended December 31, 1996.
- 42 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd)
- -------------------
Management Stock Bonus Plan (the "MSRP") (Cont'd)
- ----------------------------------------
During the year ended December 31, 1996, the Bank did not contribute funds to
the MSBP trust to enable the trust to purchase the 121,670 shares of Company
common stock. Based on the market price on December 31, 1996, had the Bank
contributed sufficient funds to purchase the shares in the open market,
stockholders' equity would have been decreased by $1,463,390.
Stock Option Plan
- -----------------
The company has adopted the 1996 Stock Option Plan (the "Plan") authorizing the
grant of stock options equal to 304,175 shares of common stock to officers,
directors and key employees of the Bank or the Company. Options granted under
the Plan may be either options that qualify as incentive stock options as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
non-statutory options. Options granted will vest and will be exercisable on a
cumulative basis in equal installments at the rate of 20% per year commencing
one year from the date of grant. All options granted will be exercisable in the
event the optionee terminates his employment due to death, disability or normal
retirement or in the event of a change in control of the Bank or the Company.
The options expire ten years from the date of grant.
In the event of change in control of the Bank or Company the optionee will be
given (1) substitute options by the acquiring or succeeding corporation, (2)
shares of stock issueable upon the exercise of such substitute options or (3)
cash for each option granted, equal to the difference between the exercise price
of the option and the fair market value or merger price equivalent to cash
payment for each share of common stock exchanged in the change of control
transaction.
During the year ended December 31, 1996, 121,655 and 109,496 shares of common
stock were granted under the plan at an option price of $10.625 (the market
price on the date of stockholders approval ) as non-incentive stock options to
directors and incentive stock options to officers and employees, respectively.
The weighted average excercise price of the options granted in 1996 and
outstanding at December 31, 1996 is $10.625. No options were exercised or
exerciseable as of December 31, 1996.
The Company, as permitted by Statement No. 123, recognizes compensation cost for
stock options granted based on the intrinsic value method instead of the fair
value based method. The weighted-average grant-date fair value of options
granted during 1996, all of which have excercise prices equal to the market
price of the Company's common stock as the grant date, is estimated at $2.81 per
share using the Black-Scholes option-pricing model. The assumptions used for
estimating fair value are expected common stock divided yield of 0.94%, expected
volatility of 13.9%, expected option life of 5 years and a risk free
interest-rate of 6.875%. Had the Company used the fair value based method, net
income would be decreased to $571,000 and net income per common share and common
stock equivalents would be $0.21.
13. INCOME TAXES
- -------------------
The Bank qualifies as a Saving and Loan Association under the provisions of the
Internal Revenue Code and was therefore, prior to January 1, 1996, permitted to
deduct from taxable income an allowance for bad debts based on the greater of:
(1) actual loan losses (the "experience method"); or (2) eight (8) percent of
taxable income before such bad debt deduction less certain adjustments (the
"percentage of taxable income method"). For the tax years 1995 and 1994, the
Bank used the percentage of taxable income method.
- 43 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. INCOME TAXES (Cont'd)
- -------------------
On August 21, 1996, legislation was signed into law which repealed the
percentage of taxable income method for tax bad debt deductions. The repeal is
effective for the Bank's taxable year beginning January 1, 1996. In addition,
the legislation requires the Bank to include in taxable income its 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 Federal tax bad debt deductions and
the corresponding increase in the Federal tax bad debt reserve in excess of the
base year have been reflected as temporary differences pursuant to FASB
Statement No. 109, with deferred income taxes recorded thereon, this change in
the tax law is not expected to have a material adverse effect on the Company's
consolidated financial position or operations.
Retained earnings at December 31, 1996 includes approximately $2.4 million of
tax bad debt deductions which, in accordance with FASB Statement No. 109, are
considered a permanent difference between the book and income tax basis of loans
receivable, and for which income taxes have not been provided. If such amount is
used for purposes other than bad debt losses, including distributions in
liquidation, it will be subject to income tax at the then current rate.
The provision for income taxes is summarized as follows:
Year Ended December 31,
----------------------------------------------
1996 1995 1994
----------- ------------ -------------
Current:
Federal $ 540,688 $ 222,142 $ 913,197
State 87,761 17,540 81,238
---------- ---------- ------------
628,449 239,682 994,435
---------- ---------- ------------
Deferred:
Federal (222,744) 1,658 65,953
State (20,261) 150 5,819
---------- ---------- ------------
(243,005) 1,808 71,772
---------- ---------- ------------
$ 385,444 $ 241,490 $ 1,066,207
========== ========== ============
The provision for income taxes differs from that computed at the federal
statutory rate of 34% as follows:
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
------------------ ------------------ -------------------
Tax at the statutory rate $ 338,753 $ 239,777 $ 945,472
New Jersey Savings Institution Tax 44,550 11,675 53,616
Other 2,141 (9,962) 67,119
---------- ------------- -----------
$ 385,444 $ 241,490 $ 1,066,207
========== ============= ===========
- 44 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. INCOME TAXES (Cont'd)
- -------------------
The tax effects of existing temporary differences which give rise to significant
portions of deferred tax assets and liabilities are as follows:
December 31,
-------------------------------
1996 1995
-------------- --------------
Deferred tax assets:
Allowance for loan losses $ 346,353 $ 148,769
Deferred loan origination fees, net 46,702 104,609
Deferred compensation 97,185 75,670
Minimum pension liability 47,521 58,485
Goodwill 46,829 -
MSBP 31,627 -
Other 1,920 -
------------ -----------
Total deferred tax assets 618,137 387,533
------------ -----------
Deferred tax liabilities:
Depreciation of premises and equipment 64,196 63,450
Other 11,852 14,035
------------ -----------
Total deferred tax liabilities 76,048 77,485
------------ -----------
Net deferred tax asset included in other assets $ 542,089 $ 310,048
============ ===========
At December 31, 1996 and 1995, current income taxes receivable of $55,769 and
$273,517, respectively, are included in other assets.
14. LEGISLATIVE MATTERS
- -------------------------
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Savings Association Insurance Fund
("SAIF") member institutions, including the Bank, to recapitalize the SAIF and
spread the obligation for payment of Financial Corporation ("FICO") bonds across
all SAIF and Bank Insurance Fund ("BIF") members. The special assessment levied
amounted to 65.7 basis points on SAIF assessable deposits held as of March 31,
1995. The special assessment was recognized in the third quarter of 1996 and is
tax deductible. The Bank took a charge of $1,167,427 as result of the special
assessment. This legislation eliminated the substantial disparity between the
amount that BIF and SAIF members had been paying for deposit insurance premiums.
Beginning on January 1, 1997, the FDIC has estimated that, in addition to normal
deposit insurance premiums, BIF members will pay a portion of the FICO payment
equal to 1.3 basis points on BIF-insured deposits compared to 6.4 basis points
by SAIF members on SAIF-insured deposits. All institutions will pay a pro-rate
share of the FICO payment on the earlier of January 1, 2000 or the date upon
which the last savings association ceases to exist. The legislation also
requires BIF and SAIF to be merged by January 1, 1999 provided that legislation
is adopted to eliminate the saving association charter and no savings
associations remain as of the time.
The FDIC has recently lowered SAIF assessments to a range comparable to that of
BIF members, although SAIF members must also make the FICO payments described
above. Management cannot predict the precise level of FDIC insurance assessments
on an ongoing basis or whether the BIF and SAIF will eventually be merged.
- 45 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. COMMITMENTS
- ------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing need of its customers. These
financial instruments include commitments to extend credit. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the loan agreement. These commitments
are comprised of the undisbursed portion of construction loans, unused amounts
of lines of credit and residential loan originations. The Bank's exposure to
credit loss from nonperformance by the other party to the financial instruments
for commitments to extend credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Collateral, usually in the form of residential real estate, is generally
required to support financial instruments with credit risk.
At December 31, 1996, the Bank had commitments outstanding to originate mortgage
loans of $ 3,313,000, of which $2,898,000, were for adjustable rate loans with
initial rates ranging from 6.50% to 8.25%, $265,000 were for fixed rate loans
with rates ranging from 7.25% to 8.25% and $150,000 was for a commercial loan
with a fixed rate of 10.25%. The commitments are due to expire within sixty
days. The rates at which the Bank has committed to fund these loans are set
based on the rate in effect when the borrower accepts the commitment in writing.
At December 31, 1996, outstanding commitments related to unused home equity
lines of credit totalled $2,974,000. These amounts, when used, will carry
interest rates that will float at the prime rate plus 13/4%.
Rental expenses related to the occupancy of premises totalled approximately
$38,000 for each of the years ended December 31, 1996, 1995 and 1994. Minimum
non-cancelable obligations under lease agreements with original terms of more
than one year are as follows:
December 31, Amount
------------ -------------
1997 $ 22,800
1998 22,800
1999 22,800
2000 22,800
2001 22,800
Thereafter 22,800
------------
$ 136,800
============
16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
- ---------------------------------------------------------------
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. Singnificant estimations were used for
the purposes of this disclosure. The following methods and assumptions were used
to estimate the fair value of each class of financial instruments for which it
is practicable to estimate such value:
Cash and cash equivalents and interest receivable
-------------------------------------------------
For cash and cash equivalents and interest receivable, the carrying amounts
approximate fair value.
Investment and mortgage-backed securities
-----------------------------------------
For investment and mortgage-backed securities, fair value is estimated
using quoted market prices.
- 46 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd)
- ---------------------------------------------------------------
Loans receivable
----------------
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Deposits
--------
The fair value of demand, savings and money market deposits is the
amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated by discounting the future cash
flows using the rates currently offered for deposits of similar
remaining maturities.
Securities sold under agreements to repurchase
----------------------------------------------
The fair value of securities sold under agreements to repurchase is
estimated by discounting cash flows using rates currently available for
borrowings of similar remaining securities.
Commitments to extend credit
----------------------------
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
credit-worthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates.
December 31,
-------------------------------------------------------------
1996 1995
------------------------------ ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
Financial assets:
Cash and cash equivalents $ 10,374 $ 10,374 $ 53,419 $ 53,419
Investment
securities held to maturity 51,370 51,204 29,999 29,855
Mortgage-backed
securities held to maturity 112,473 112,426 118,020 118,842
Loans receivable 117,116 114,850 96,230 98,506
Interest receivable 1,735 1,735 1,717 1,717
Financial liabilities:
Deposits 228,312 227,954 247,851 248,661
Securities sold under agreements to
repurchase 33,624 33,475 - -
Commitments:
To fund loans 6,287 6,287 6,835 6,835
- 47 -
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd)
- ---------------------------------------------------------------
Fair value estimates are made at a specific point in time based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the 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 factors. These estimates are subjective
in nature, involve uncertainties and matters of judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. In addition, fair value estimates are based on existing
on-and-off balance sheet financial instruments without attempting to estimate
the value of anticipated future business, and exclude the value of assets and
liabilities that are not considered financial instruments. Other significant
assets that are not considered financial assets include premises and equipment.
In addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates. Finally, reasonable comparability
between financial institutions may not be likely due to the wide range of
permitted valuation techniques and numerous estimates which must be made given
the absence of active secondary markets for many of the financial instruments.
The lack of uniform valuation methodologies introduces a greater degree of
subjectivity to those estimated fair values.
17. PARENT ONLY FINANCIAL INFORMATION
- --------------------------------------
Little Falls Bancorp, Inc. operates one wholly owned subsidiary, Little Falls
Bank. The earnings of the subsidiary are recognized by the holding Company using
the equity method of accounting. Accordingly, the earnings of the subsidiary are
recorded as increases in the Company's investment in the subsidiary. The
following are the condensed financial statements for Little Falls Bancorp, Inc.
(parent company only) as of December 31, 1996 and for the period then ended. The
Company had no operations prior to the Bank's conversion to stock form on
January 5, 1996.
December 31,
Statement of Financial Condition 1996
- -------------------------------- -----
Assets
- ------
Cash and due from banks $ 555,582
Loan receivable from Little Falls Bank 8,854,264
ESOP loan receivable 2,342,922
Investment in subsidiary 28,874,037
Other assets 12,167
------------
Total assets $ 40,638,972
============
Liabilities and stockholders' equity
- ------------------------------------
Liabilities
- -----------
Other liabilities $ 190,674
Stockholders' equity
- --------------------
Common stock 304,175
Additional paid in capital 28,974,799
Retained earnings 16,802,056
Common Stock acquired by ESOP (2,271,173)
Treasury stock (3,277,004)
Minimum pension liability, net (84,555)
------------
Total stockholders' equity 40,448,298
------------
Total liabilities and stockholders' equity $ 40,638,972
============
- 48 -
LITTLE FALLS BANCORP, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
17. PARENT ONLY FINANCIAL INFORMATION (Cont'd)
- -------------------------------------
Statement of Income
- ------------------- From Inception,
January 5, 1996,
to December 31, 1996
---------------------
Interest income $ 880,582
Equity in undistributed earnings of subsidiary 248,247
------------
1,128,829
Expenses 270,940
------------
Income before income taxes 853,889
Income taxes 243,000
------------
Net income $ 610,889
============
From Inception,
Statement of Cash Flows January 5, 1996
- ----------------------- to December 31, 1996
---------------------
Cash flow from operations activities:
Net income $ 610,889
Adjustments to reconcile net income
provided by operations activities:
Equity in undistributed earnings of the subsidiary (248,247)
(Increase) in other assets (12,167)
Increase in other liabilities 190,674
------------
Net cash provided by operations activities 541,149
------------
Cash flow from investing activities:
Purchase of all outstanding stock of the Bank (14,638,780)
Loan to Little Falls Bank (12,205,380)
Repayments of loan by Little Falls Savings Bank 3,351,116
Loan to ESOP (2,433,400)
Repayments of loan by ESOP 90,478
------------
Net cash used in investing activities (25,835,966)
------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 29,263,522
Acquisition of treasury stock (3,277,004)
Dividends paid (136,119)
------------
Net cash provided by financing activities 25,850,399
------------
Net increase in cash and cash equivalents 555,582
Cash and cash equivalents-beginnings --
------------
Cash and cash equivalents- ending $ 555,582
============
- 49 -
LITTLE FALLS BANCORP, INC.,
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
Year Ended December 31, 1996
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- --------
(In thousands except per share data)
Interest income $ 3,237 $ 4,670 $ 4,614 $ 4,782
Interest expense 2,912 2,751 2,721 2,874
------- ------- -------- -------
Net interest income 1,798 1,919 1,893 1,908
Provision for loan losses 30 -- 153 --
Non-interest income 53 82 67 207
Non-interest expenses 1,427 1,296 2,564 1,460
Income taxes 133 282 (275) 246
------- ------- -------- -------
Net income (loss) $ 261 $ 423 $ (482) $ 409
======= ======= ======== =======
Net income (loss) per common share
and common stock equivalents $ 0.09 $ 0.15 $ (0.18) $ 0.16
======= ======= ======== =======
Year Ended December 31, 1995
----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- ------- ------- --------
(In thousands except per share data)
Interest income $ 3,237 $ 3,161 $ 3,537 $ 3,878
Interest expense 1,998 2,266 2,383 2,667
------- ------- -------- -------
Net interest income 1,239 895 1,154 1,211
Provision for loan losses -- 285 107 (261)
Non-interest income (loss) 34 37 113 (6)
Non-interest expenses 724 995 898 1,224
Income taxes 181 (121) 138 43
------- ------- -------- -------
Net income (loss) $ 368 $ (227) $ 124 $ 199
======= ======= ========= =======
Net income (loss) per common share
and common stock equivalents (1) N/A N/A N/A N/A
======= ======= ========= =======
(1) Little Falls Bancorp., Inc. converted to stock form on January 5, 1996
- 50 -
Board of Directors of Little Falls Bancorp, Inc.
and
Little Falls Bank
Albert J. Weite, Chairman of the Board Edward J. Seugling, Vice Chairman of the Board
Leonard G. Romaine (Bank only) Raoul G. Barton
John P. Pullara George Kuiken
C. Evan Daniels Norman A. Parker
Executive Officers of Little Falls Bancorp, Inc.
and/or
Little Falls Bank
Leonard G. Romaine Richard A. Capone Anne Bracchitta
President Chief Financial Officer and Treasurer Secretary
Della Talerico Michael J. Allen Mary Denise Hopper
Vice President Vice President Vice President
------------------------------------------------
Corporate Counsel: Independent Auditors:
Vincent Marino Radics & Co., LLC
86 Main Street 55 US Highway #46
Little Falls, New Jersey 07424 Pine Brook, New Jersey 07058
Special Counsel: Transfer Agent and Registrar:
Malizia, Spidi, Sloane & Fisch, P.C. Chase Mellon Shareholder
One Franklin Square Services, L.L.C.
1301 K Street, N.W., Suite 700 East 450 West 33rd Street
Washington, D.C. 20005 New York, New York 10001-2697
------------------------------------------------
The Company's Annual Report for the Year Ended December 31, 1996 filed
with the Securities and Exchange Commission on Form 10-K without exhibits
is available without charge upon written request. For a copy of the Form
10-K or any other investor information, please write the Secretary of the
Company at 86 Main Street, Little Falls, New Jersey. Copies of any
exhibits to the Form 10-K are available at cost. The Annual Meeting of
Stockholders will be held on April 17, 1997 at 3:30 p.m. at the office of
the Company.
-51-
OFFICE LOCATIONS
LITTLE FALLS BANCORP, INC.
86 Main Street
Little Falls, New Jersey 07424
(201) 256-6100
LITTLE FALLS BANK
Main Office
86 Main Street
Little Falls, New Jersey 07424
(201) 256-6100
Branch Offices
West Paterson
Route 46 & McBride Avenue
West Paterson, New Jersey 07424
Spruce Run
220 Main Street
Glen Gardner, New Jersey 08826
Milford
34 Bridge Street
Milford, New Jersey 08848
Alexandria
636 Milford-Frenchtown Road
Alexandria Township, New Jersey 08848
Kingwood
Route 12 and 519
Baptistown, New Jersey 08825