SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
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- or -
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission Number: 0-27010
LITTLE FALLS BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
New Jersey 22-3402073
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
86 Main Street 07424
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (201) 256-6100
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.10 par value per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing price of the Registrant's Common Stock
as quoted on the Nasdaq Stock Market, on March 26, 1998, was $47.7 million
(2,477,525) shares at $19.25 per share).
As of March 26, 1998 there were issued 3,041,750 and outstanding
2,477,525 shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended
December 31, 1997. (Parts I, II and IV)
2. Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
INDEX
PART I Page
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Item 1. Business 1
Item 2. Properties...........................................................................................25
Item 3. Legal Proceedings....................................................................................25
Item 4. Submission of Matters to a Vote of Security-Holders..................................................26
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................26
Item 6. Selected Financial Data..............................................................................26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................26
Item 8. Financial Statements and Supplementary Data..........................................................26
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure.........................................................................................26
PART III
Item 10. Directors and Executive Officers of the Registrant...................................................27
Item 11. Executive Compensation...............................................................................27
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................27
Item 13. Certain Relationships and Related Transactions.......................................................27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................27
PART I
Item 1. Business
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General
Little Falls Bancorp, Inc. (the "Company") is a New Jersey corporation
organized in August 1995 at the direction of Little Falls Bank (the "Bank") for
the purpose of becoming a savings and loan holding company and to acquire all of
the capital stock issued by the Bank in its conversion from the mutual to stock
form of ownership (the "Conversion"). On January 5, 1996, the Registrant sold
3,041,750 shares of its common stock, par value $0.10 per share (the "Common
Stock") in a subscription offering as part of the Conversion. The Company is a
unitary savings and loan holding company which, under existing laws, generally
is not restricted in the types of business activities in which it may engage
provided that the Bank retains a specified amount of its assets in
housing-related investments. References to the "Bank" herein, unless the context
required otherwise, refer to the Company on a consolidated basis. The net
conversion proceeds totaled approximately $26.8 million of which $14.6 million
was invested in the Bank.
The Bank is a federally chartered stock savings bank headquartered in
Little Falls, New Jersey. The Bank was originally chartered in 1887 as the
Little Falls Building and Loan Association. On December 2, 1993, the Bank
converted its mutual charter from a federally chartered savings association to a
New Jersey chartered savings bank, changing its name to Little Falls Savings
Bank. Effective October 1995, the Bank converted its New Jersey mutual charter
to a federal mutual charter and changed its name to "Little Falls Bank." The
Bank's deposits are federally insured and the Bank is a member of the Federal
Home Loan Bank ("FHLB") System.
The Company and the Bank are subject to regulation by the Office of
Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC")
and the Securities and Exchange Commission ("SEC").
The Bank is a community oriented savings institution offering a variety
of financial services to meet the needs of the communities it serves. The Bank
conducts its business from its main office in Little Falls, New Jersey and five
branch offices located in Passaic and Hunterdon Counties, New Jersey. 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. To a lesser extent, the Bank also originates a
limited number of commercial real estate, residential construction and consumer
loans, which mainly consist of home equity lines of credit. Further, the Bank
also invests in mortgage-backed securities and investment securities.
The principal sources of funds for the Bank's lending activities are
deposits, the amortization, repayment and maturity of loans, mortgage-backed
securities and investment securities. Principal sources of income are interest
and fees on loans, mortgage-backed securities and investment securities. The
Bank's principal expense is interest paid on deposits.
Because the Bank did not convert to stock form (including the initial
sale of Common Stock by the Company) until January 5, 1996, a part of the
presentation herein is that of the Bank in mutual form.
1
Year 2000
The Company recognizes that the arrival of the Year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000 and, like other companies, has
assessed and is repairing its computer applications and business processes to
provide for their continued functionality. An assessment of external entities
which it interfaces with, such as vendors, counterparties, customers, payment
systems, and others, is ongoing. Until such assessments are complete, it is not
possible to predict the affect on the Company of noncompliance by external
entities.
The Company expects that the principal costs will be those associated
with the remediation and testing of its computer applications. This effort is
under way and is following a process of inventory, scoping and analysis,
modification, testing and certification, and implementation. A major portion of
these costs will be met from existing resources through a reprioritization of
technology development initiatives, with the remainder representing incremental
costs.
The Company does not anticipate that the related overall costs will be
material to any single year.
Market Area and Competition
The Bank focuses on serving its customers located in the New Jersey
community of Little Falls and surrounding communities in Passaic and Hunterdon
Counties, New Jersey. Economic growth in the Bank's market area remains
dependent upon the local economy. The economy of the greater New York -
New Jersey market has historically benefitted from having a large number of
corporate headquarters and concentration of financial services-related
industries. It also has a well-educated employment base and a large number of
industrial, service and high technology businesses. Over the past few years, New
Jersey's economy has slowly begun to recover from the effects of a prolonged
decline in the national and regional economy, layoffs in the financial services
industry and corporate relocations. Employment levels and real estate markets in
the Bank's market area have stabilized and in some instances begun to improve.
Whether such improvement will continue is dependent, in large part, upon the
general economic health of the United States and other factors beyond the Bank's
control and, therefore, cannot be estimated. In addition, the deposit and loan
activity of the Bank is significantly affected by economic conditions in its
market area. The Bank's principal competitors are financial institutions and
mortgage banking companies, many of which are significantly larger and have
greater financial resources than the Bank. The Bank's competition for loans on a
retail and wholesale basis comes principally from commercial banks, mortgage
brokers, banking and insurance companies. The Bank's competition for deposits
has historically come from commercial banks, thrift institutions and credit
unions. In addition, the Bank faces increasing competition for deposits from
non-bank institutions, such as brokerage firms and insurance companies in such
areas as short-term money market funds, corporate and government securities
funds, mutual funds and annuities.
2
Lending Activities
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the loan portfolio as of the dates indicated.
At December 31,
--------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ -------------------- ------------------- --------------------- -----------------
Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ------- ------ ------- ------ ----------- --------- ---------- ------ ----------
(Dollars in Thousands)
Type of Loans:
One- to four-
family..............$118,254 80.42% $ 108,367 92.53% $88,828 92.31% $87,851 92.71% $95,278 93.62%
Multi-family and
commercial real
estate............. 17,362 11.81 3,659 3.13 4,639 4.82 4,463 4.71 3,614 3.54
Residential
construction........ 350 0.24 525 0.45 1,098 1.14 521 0.55 -- --
Consumer:
Savings account...... 807 0.55 889 0.76 824 0.86 866 .91 1,015 1.00
Second mortgages..... 11,630 7.91 5,028 4.29 2,540 2.64 2,694 2.84 3,007 2.95
Other................ 12 0.01 25 0.02 42 0.04 52 .05 87 .09
-------- ------ -------- ------ ------- ------ ------- ------ -------- ------
Total loans
receivable (gross). 148,415 100.94 118,493 101.18 97,971 101.81 96,447 101.77 103,001 101.20
Less:
Loans in process... 233 0.16 150 (0.13) 450 (0.47) 186 (.18) -- --
Deferred loan
origination (0.12)
fees and costs.... (19) (0.01) 138 333 (0.35) 338 (.36) 408 (.40)
Allowance for loan
losses............ 1,168 0.79 1,090 (0.93) 958 (0.99) 1,169 (1.23) 818 (.80)
-------- ------ -------- ------ ------- ------ ------- ------ -------- ------
Total loans, net.....$147,033 100.00% $117,115 100.00% $96,230 100.00% $94,754 100.00% $101,775 100.00%
======== ====== ======== ====== ======= ====== ======= ====== ======== ======
3
Loan Maturity Tables
The following table sets forth the contractual maturity of the Bank's
loan portfolio at December 31, 1997. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totaled $15.7 million for the year ended December 31, 1997.
Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities rather than the period in which interest rates are next scheduled to
adjust.
Multi-Family
and
One- to Four- Commercial Residential
Family Real Estate Construction Consumer Total
------------- ----------- ------------ --------- -----
(In Thousands)
Amounts Due:
Within 1 year.................. $ 76 $ -- $ 350 $ 1,154 $ 1,580
-------- ------- ------- ------- --------
1 to 5 years................. 2,755 -- -- 75 2,830
5 to 10 years................ 5,020 -- -- 1,376 6,396
Over 10 years................ 109,367 17,114 -- 9,844 136,325
-------- ------- ------- ------- --------
Total due after one year....... 117,142 17,114 -- 11,295 145,551
-------- ------- ------- ------- --------
Non-performing................. 1,036 248 -- -- 1,284
Total amount due............... 118,254 17,362 350 12,449 148,415
Less:
Allowance for loan and
lease loss................... 877 231 4 56 1,168
Loans in process............... -- -- 233 -- 233
Deferred loan fees (costs)..... 8 -- -- (27) (19)
-------- ------- ------- ------- --------
Loans receivable, not........ $117,369 $17,131 $ 113 $12,420 $147,033
======== ======= ======= ======= ========
The following table sets forth the dollar amount at December 31, 1997
of all loans due after December 31, 1998, which have pre-determined interest
rates and which have floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One- to four-family................ $38,153 $ 80,025 $118,178
Multi-family and
commercial real estate........... 268 17,094 17,362
Consumer........................... 8,402 2,893 11,295
------- -------- --------
Total............................ $46,823 $100,012 $146,835
======= ======== ========
4
One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of single-family residential mortgage loans
secured by owner-occupied property. The Bank originates one- to four-family
residential mortgage loans in amounts up to 80% of the appraised value of the
mortgaged property and in amounts up to 70% of the appraised value on loans
which exceed $200,000. No private mortgage insurance is obtained since loan to
value ratios do not exceed 80%. All loans are held in the Bank's portfolio.
The Bank has an agreement with a mortgage solicitation firm pursuant to
which the Bank receives one- to four-family mortgage applications on a
state-wide basis. The Bank then submits bids on the mortgage applications on
which it is interested prior to making the final loan. The submission of a bid
to provide the mortgage loan is not a firm commitment on the Bank's part, as the
Bank applies its own underwriting standards before committing to the loan. All
loans must be documented, including an original appraisal. This agreement has
provided the majority of loan applications received by the Bank in the past
year.
Loan referrals are also obtained from local realtors or builders,
existing or past customers and members of the local community. Mortgage loans
generally include due-on sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event that
the borrower transfers ownership of the property without the Bank's consent.
The Bank primarily originates adjustable-rate mortgage loans with a
guaranteed renewal for a thirty-year term. These loans adjust after one, three,
five or ten years. The Bank's ARM loans are originated for its portfolio and do
not conform to FNMA or FHLMC standards. Although the Bank's ARM loans have a 6%
lifetime cap, at the adjustment period, interest rate changes are discretionary.
Generally, ARM loans pose credit risks somewhat greater than the risk inherent
in fixed-rate loans primarily because, as interest rates rise, the underlying
payments of the borrower rise, increasing the potential for default. The Bank
also offers fixed-rate loans with terms of 15 and 30 years. The Bank offers
various loan programs with varying interest rates and fees which are
competitively priced based on market conditions and the Bank's cost of funds.
The Bank has purchased and participated in a limited number of loans,
primarily in its market area. At December 31, 1997, the Bank had $4.5 million of
purchased loans and $2.4 million in loan participations. The Bank purchases and
participates in loans after applying its own underwriting standards. The Bank
typically does not service the loans that it purchases or participates in with
other financial institutions.
Multi-Family and Commercial Real Estate Loans. The Company has recently
purchased participations in multi-family mortgage loans secured primarily by
apartment buildings located in New Jersey and New York. These loans are
generally adjustable-rate loans with maturities up to 25 years. These loans
typically amortize over 20 to 25 years. As of December 31, 1997, $17.4 million,
or 11.8%, of the Bank's loan portfolio consisted of multi-family residential and
commercial real estate loans. These loans are generally made in amounts up to
75% of the appraised value of the mortgaged property. In purchasing such loans,
the Bank evaluates the mortgage primarily on the net operating income generated
by the real estate to support the debt service. The Bank also considers the
financial resources and income level of the borrower, the borrower's experience
in owning or managing similar property, the marketability of the property and
the Bank's lending experience, if any, with the borrower. The typical
multi-family property in the Bank's multi-family lending portfolio has between
11 and 110 dwelling units with an average loan balance of approximately
$700,000.
5
To a lesser extent, the Bank's policy has been to originate commercial
real estate loans. The loans are generally made in amounts up to 65% of the
appraised value of the property. The Bank's commercial real estate loans
primarily have rates equal to the prime rate plus a margin. In making such
loans, the Bank primarily considers the net operating income generated by the
real estate to support the debt service, the financial resources and income
level and managerial resources of the borrower, the marketability of the
property and the Bank's lending experience with the borrower.
The Bank's commercial real estate loans typically are secured by
properties such as mixed-use properties, retail stores, office buildings and
strip shopping centers. The Bank's commercial real estate portfolio includes
multi-family loans. In 1997, the Bank purchased $15.1 million of loan
participations on apartment buildings in New York and New Jersey. These were
adjustable rate loans and resulted in increasing the Bank's yield on interest
earning assets while diversifying its loan portfolio. For a discussion of the
Bank's largest commercial real estate loan, see "- Loans to One Borrower."
Loans secured by multi-family and commercial real estate generally
involve a greater degree of risk than one- to four-family residential mortgage
loans and carry larger loan balances. This increased credit risk is a result of
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on income
producing properties, and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
real estate is typically dependent upon the successful operation of the related
real estate. If the cash flow from the property is reduced, the borrower's
ability to repay the loan may be impaired.
Residential Construction Loans. The Bank's policy has been to originate
residential construction loans to a lesser extent than other types of mortgages.
Residential construction loans are made up to a maximum of 80% of the appraised
value of the home, based upon the builder's plans. The rate charged is generally
the prime rate plus a margin. The loan proceeds are disbursed based upon work
completed. For a discussion of the Bank's largest residential construction loan,
see "-- Loans to One Borrower."
Consumer Loans. The Bank's consumer loans primarily consist of home
equity loans, and, to a much lesser extent, student loans and loans secured by
savings deposits. The home equity lines of credit are made with loan to value
ratios of up to 80% on either a fixed or adjustable rate basis.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to make payments on the proposed loan and
other indebtedness. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount. The Bank's consumer loans tend to
have higher interest rates and shorter maturities than one- to four-family
mortgage loans, but are considered to entail a greater risk of default than
mortgage loans.
Loan Approval Authority and Underwriting. The Board of Directors
generally approves all mortgage loans although the Bank's President has the
authority to approve loans up to $500,000. Any loans exceeding that amount must
be approved by the Board of Directors.
The Bank uses board approved independent fee appraisers on real estate
loans. It is the Bank's policy to obtain title insurance on all properties
securing real estate loans and to obtain fire, flood and casualty insurance on
all loans that require security.
6
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all real estate approved loans. Generally, the commitment requires
the loan to be closed within sixty days of issuance. At December 31, 1997, the
Bank had $3.2 million of commitments to fund new mortgage loans and commitments
on unused lines of credit relating to home equity loans of $4.1 million.
Loans to One Borrower. Savings associations are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and
retained income on an unsecured basis and an additional amount equal to 10% of
unimpaired capital and retained income if the loan is secured by readily
marketable collateral (generally, financial instruments, not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $4.1 million as of December 31, 1997.
At December 31, 1997, the Bank's three largest lending relationships
ranged from $1.1 million to $1.2 million. They are all performing loans on
apartment buildings in New Jersey and New York in which the Bank has a
participating interest. See also "-- Multi-Family and Commercial Real Estate."
Non-Performing Loans and Classified Assets
Loan Delinquencies. The Bank's collection procedures provide that when
a mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment
is still delinquent after 30 days past due, the customer will receive a letter
from the Bank. If the delinquency continues, similar subsequent efforts are made
to eliminate the delinquency. If the loan continues in a delinquent status for
60 days or more and no repayment plan is in effect, the Bank's attorney will
send a letter to the customer. After 90 days past due, the Board of Directors
typically approves the initiation of foreclosure proceedings as soon as
possible. Loans are reviewed on a monthly basis and are placed on a non-accrual
and non-performing status when the loan becomes more than 90 days delinquent.
The following table sets forth information regarding non-performing
loans and real estate owned. During the periods indicated, the Bank had no
restructured loans within the meaning of SFAS No. 15.
At December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-performing loans:
Nonaccrual loans:
One- to four-family residential .......... $1,036 $ 989 $1,059 $4,182 $3,894
Multi-family and commercial real estate .. 248 860 860 -- --
Consumer loans ........................... -- 52 23 20 --
------ ------ ------ ------ ------
Total nonaccrual loans ...................... 1,284 1,901 1,942 4,202 3,894
Accruing one- to four-family residential . -- -- 505 -- --
------ ------ ------ ------ ------
Total non-performing loans .................. 1,284 1,901 2,447 4,202 3,894
------ ------ ------ ------ ------
Real estate owned ........................... 604 857 1,501 1,765 1,859
------ ------ ------ ------ ------
Total non-performing assets ................. $1,888 $2,758 $3,948 $5,967 $5,753
====== ====== ====== ====== ======
Total non-performing loans to net loans ..... .87% 1.62% 2.54% 4.43% 3.83%
====== ====== ====== ====== ======
Total non-performing loans to total assets .. .39% .63% .79% 2.17% 1.93%
====== ====== ====== ====== ======
Total non-performing assets to total assets . .57% .91% 1.27% 3.09% 2.85%
====== ====== ====== ====== ======
Interest income that would have been recorded on nonaccrual loans had
they been current under the original terms of such loans was approximately
$111,000 and $198,000 for the years ended December 31, 1997 and 1996,
respectively. Amounts included in the Bank's interest income attributable
7
to non-performing loans for the years ended December 31, 1997 and 1996 were
approximately $50,000 and $84,000, respectively.
Classified and Criticized Assets. OTS regulations provide for a
classification system for problem assets of insured institutions which covers
all problem assets. Under this classification system, problem assets of insured
institutions are classified as "substandard," "doubtful," or "loss." An asset is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the "distinct possibility"
that the insured institution may sustain "some loss" if the deficiencies are not
corrected. Loans classified as substandard may or may not be considered impaired
under generally accepted accounting principals. Assets classified as doubtful
have all of the weaknesses inherent in those classified substandard, with the
added characteristic that the weaknesses present make "collection or liquidation
in full," on the basis of currently existing facts, conditions and values,
"highly questionable and improbable." Assets classified as loss are those
considered "uncollectible" and as such, are charged off by the Bank. Assets
which do not currently expose the Bank to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are designated "special mention" by management.
When the Bank classifies problem assets as either substandard or
doubtful, it may establish general allowances for loan and lease losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities. When the Bank classifies problem assets as loss, it is
considered uncollectible and the Bank charges off such amount. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS, which may order the
establishment of additional general or specific loss allowances. A portion of
general loss allowances established to cover possible losses related to assets
classified as substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital.
The following table provides further information about the Bank's
classified assets as of the dates indicated.
At December 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------ ------ ---------
(In Thousands)
Criticized:
Special Mention........ $ 3,912 $ 2,931 $2,639 $2,094 $ 1,406
Classified:
Substandard............ 1,637 3,665 3,925 5,901 8,549
Doubtful............... -- -- -- -- --
Loss................... -- -- -- 123 501
------- -------- ------ ------ -------
$ 5,549 $ 6,596 $6,564 $8,118 $10,456
======= ======== ====== ====== =======
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is carried at the lower of the
cost or fair value less selling costs. It is the policy of the Bank to obtain an
appraisal on all real estate acquired through foreclosure as soon as practicable
after it takes possession of the property. The Bank generally reassesses the
value of real estate owned at least every eighteen
8
months. These properties are subsequently evaluated and carried at the lower of
the "new" cost or fair value minus selling costs of the underlying collateral.
The Bank's real estate owned totaled approximately $604,000 at December 31,
1997.
Allowance for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the potential losses that may be
incurred in the Bank's loan portfolio. Such evaluation, which includes a review
of certain loans of which full collectibility of interest and principal may not
be reasonably assured, considers the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
current economic conditions.
Management will continue to review its loan portfolio to determine the
extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
As a result of the declines in regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institution by the FDIC, OTS or other federal or state regulators. Results
of recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate market values, requiring
significantly increased provisions for potential loan losses. While the Bank
believes it has established an adequate allowance for loan losses, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to significantly increase its allowance for loan losses,
thereby negatively affecting the Bank's financial condition and earnings or that
the Bank may not have to increase its level of loan loss allowance in the
future.
9
Analysis of the Allowance for Loan Losses. The following table sets
forth information with respect to the Bank's allowance for loan losses at the
dates indicated.
At December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Total loans outstanding ........ $148,415 $118,493 $ 97,971 $ 96,447 $103,001
======== ======== ======== ======== ========
Allowance balances (at beginning
of period) .................... $ 1,090 $ 958 $ 1,169 $ 818 $ 731
Provision:
One- to four-family .......... 168 136 87 340 325
Multi-family and commercial
real estate(1) ............. 35 38 35 13 --
Consumer ..................... 37 9 9 3 3
======== ======== -------- -------- --------
Total provision for loan losses 240 183 131 356 328
-------- -------- -------- -------- --------
Charge-offs net of recoveries:
One- to four-family .......... 154 51 342 5 241
Multi-family and commercial
real estate ................ -- -- -- -- --
Consumer ....................... 8 -- -- -- --
-------- -------- -------- -------- --------
Total charge-offs .............. 162 51 342 5 241
-------- -------- -------- -------- --------
Allowance balance (at end of
period) ...................... $ 1,168 $ 1,090 $ 958 $ 1,169 $ 818
======== ======== ======== ======== ========
Allowance for loan losses as
a percent of total loans
outstanding .................. 0.79% 0.92% 0.98% 1.21% 0.79%
======== ======== ======== ======== ========
-----------------
(1) Includes residential construction loans.
10
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan and lease losses by loan
category and the percentage of loans in each category to net loans receivable at
the dates indicated. The portion of the loan loss allowance allocated to each
loan category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
At December 31,
---------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------- ---------------------- --------------------- ---------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Loan Portfolio Amount Loan Portfolio Amount Loan Portfolio Amount Loan Portfolio Amount Loan Portfolio
------ -------------- ------ -------------- ------ -------------- ------ -------------- ------ --------------
(Dollars in Thousands)
At end of
period
allocated to:
One-to four-
family........$ 877 79.68% $ 863 91.66% $778 92.31% $1,033 92.71% $814 93.62%
Multi-family
and
commercial
real
estate(1)... 235 11.93 200 3.27 162 4.82 127 4.71 -- 3.54
Consumer ...... 56 8.39 27 5.07 18 3.54 9 3.80 4 4.04
------ ------ ------ ------ ---- ------ ------ ------ ---- ------
Total
allowance.....$1,168 100.00% $1,090 100.00% $958 100.00% $1,169 100.00% $818 100.00%
====== ====== ====== ====== ==== ====== ====== ====== ==== ======
(1) Includes residential construction loans.
11
Investment Activities
General. The investment policy of the Bank, which is approved by the
Board of Directors and implemented by certain officers as authorized by the
Board, is designed primarily to provide and maintain liquidity and to manage the
interest rate sensitivity of its overall assets and liabilities, to generate a
favorable return without incurring undue interest rate and credit risk, to
provide a flow of earnings and a countercyclical balance to earnings and to
provide a balance of quality and diversification of the Bank's assets. In
establishing its investment strategies, the Bank considers its business and
growth plans, the economic environment, its interest rate sensitivity position,
the types of securities to be held, and other factors. Federally chartered
savings institutions have authority to invest in various types of assets,
including U.S. Treasury obligations, securities of various federal agencies,
mortgage-backed and mortgage-related securities, certain certificates of deposit
of insured banks and savings institutions, certain bankers acceptances,
repurchase agreements, loans of federal funds, and, subject to certain limits,
corporate securities, commercial paper and mutual funds.
Current regulatory and accounting guidelines regarding investment
portfolio policy require insured institutions to categorize securities as held
for "investment," "sale," or "trading." At December 31, 1996, the Bank had no
securities held available for sale or trading. The Bank's securities portfolio,
which the Bank has the ability and intent to hold to maturity, are accounted for
on an amortized cost basis. The Bank may purchase securities in the future to be
held available for sale or trading.
At December 31, 1997, the Bank's investment securities portfolio
primarily consisted primarily of short and medium term U.S. Government and
agency securities. In addition, at December 31, 1997, the Bank had federal funds
sold of $3.5 million and FHLB stock of $2.5 million.
To supplement lending activities and to utilize excess liquidity, the
Bank invests in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. The mortgage-backed securities portfolio at December 31,
1997 consisted of both fixed-rate and adjustable rate certificates issued by the
FHLMC, GNMA and FNMA. The fixed rate certificates provide the certificate holder
principal payments while the adjustable rate securities provide protection
against rising interest rates.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, FNMA, and GNMA.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, fixed rate or adjustable rate, as well as prepayment risk, are passed
on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
To reduce the effect of interest rate changes on net interest income
the Bank invests in collateralized mortgage obligations ("CMOs"). All of the
products that were purchased are adjustable
12
on a monthly basis and use London Interbank Offered Rates ("LIBOR") index. All
of the securities have a cap rate of either 9.0%, or 10.0% and all of the
products meet the current FFIEC tests. The securities are tested on a quarterly
basis.
Investment and Mortgage-backed Securities Portfolio. The following table sets
forth the carrying value of the Bank's investment and mortgage-backed securities
portfolio.
At December 31,
----------------------------------------
1997 1996 1995
------- ---------- --------
(In Thousands)
Investment Securities:
U.S. Government
securities................. $ -- $ 6,006 $10,014
U.S. Agency securities....... 57,988 45,022 19,985
Other securities............. -- 342 --
------- -------- -------
Total investment 57,988 51,370 29,999
------- -------- -------
securities...............
Federal funds sold............ 3,500 5,000 39,800
FHLB Stock.................... 2,518 2,076 1,395
------- -------- -------
Total investment
securities, federal
funds sold and FHLB
stock.................... $64,006 $ 58,446 $71,194
======= ======== =======
At December 31,
-------------------------------------------------------
1997 1996 1995
---- ---- ----
Amount(1) Amount Amount
--------- ------ ------
(Dollars in Thousands)
Mortgage-backed securities:
GNMA........................... $ 26,337 $ 33,675 $ 38,714
FNMA........................... 42,393 49,434 45,613
FHLMC.......................... 34,932 28,297 32,590
-------- --------- --------
Total...................... 103,662 111,406 116,917
Net premiums................... 1,224 1,067 1,103
-------- --------- --------
Net mortgage-backed
securities..................... $104,886 $ 112,473 $118,020
======== ========= ========
- ---------------------
(1) Includes held to maturity and available for sale (available for sale
issues are reflected net of an unrealized loss of $111,500).
13
Investment and Mortgage-backed Securities' Portfolios Maturities. The
following table sets forth certain information regarding the carrying values,
weighted average yields and maturities of the Bank's investment and
mortgage-backed securities portfolios at December 31, 19976.
Total Investment and
One Year or Less One to Five Years More Than Five Years Mortgage-backed Securities
------------------ ------------------ -------------------- ---------------------------------------
Weighted Weighted Weighted Weighted Estimated
Carrying Average Carrying Average Carrying Average Carrying Average Fair
Value Yield Value Yield Value Yield Value Yield Value
------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
U.S. Agency securities... $10,006 5.26% 9,000 6.17% $38,982 7.18% $ 57,988 6.69% $ 58,129
======= ==== ====== ==== ======= ==== ======== ==== ========
GNMA..................... $ -- $ -- 36 7.68% $26,736 7.12% $ 26,772 7.12% $ 26,952
FNMA(1).................. 455 7.14 2,200 7.00 40,196 6.77 42,851 6.78 42,884
FHLMC(1)................. -- -- 8,883 6.65 26,380 6.73 35,263 6.71 35,339
------- ---- ------ ---- ------- ---- -------- ---- --------
Total mortgage-backed
securities........... .$ 455 7.14% 11,119 6.72% $93,312 6.86% $104,886 6.84% $105,175
======= ==== ====== ==== ======= ==== ======== ==== ========
- ----------------------
(1) Includes mortgage-backed securities held to maturity and available for sale.
14
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. The Bank derives funds from amortization and
prepayment of loans and maturities of investment securities, mortgage-backed
securities and operations. Scheduled loan principal repayments are a relatively
stable source of funds, while deposit inflows and outflows and loan prepayments
are significantly influenced by general interest rates and market conditions.
The Bank can obtain advances from the FHLB as an alternative to retail deposit
funds. FHLB advances may also be used to acquire certain other assets as may be
deemed appropriate for investment purposes. These advances are collateralized by
the capital stock of the FHLB held by the Bank and by certain of the Bank's
mortgage loans and mortgage-backed securities.
Deposits. The Bank currently offers NOW Accounts, Super NOW accounts,
regular passbook statement savings accounts and savings accounts, money market
deposit accounts and term certificate accounts, primarily to consumers within
its primary market area. Deposit account terms vary according to the minimum
balance required, the time period the funds must remain on deposit and the
interest rate, among other factors.
Although the Bank partially relies on customer service and
relationships with customers to attract and retain deposits, market interest
rates and rates offered by competing financial institutions significantly affect
the Bank's ability to attract and retain deposits.
The interest rates paid by the Bank on deposits are monitored regularly
and are set as needed at the direction of the Board of Directors. The interest
rates on deposit account products are determined by evaluating the interest
rates offered by other local institutions, and the degree of competition the
Bank wishes to maintain; the Bank's anticipated need for cash and the timing of
that desired cash flow; the cost of borrowing from other sources versus the cost
of acquiring funds through customer deposits; and the Bank's anticipation of
future economic conditions and related interest rates. The Bank's interest rates
typically are competitive with those offered by competitors in the Bank's
primary market area.
Regular savings accounts, money market accounts and NOW accounts
including non-interest bearing deposits constituted $44.5 million, $10.0 million
and $21.3 million, respectively, or 19.3%, 4.3%, and 9.3%, respectively.
Certificates of deposit constituted $154.4 million or 67.1% of the deposit
portfolio. As of December 31, 1997, the Bank had no brokered deposits.
Jumbo Certificate Accounts. The following table indicates the amount of
the Bank's certificates of deposit of greater than $100,000 by time remaining
until maturity as of December 31, 1996.
Certificates
of Deposits
--------------
Maturity Period (In Thousands)
- ---------------
Within three months................. $ 2,172
Three through six months............ 3,059
Six through twelve months........... 2,916
Over twelve months.................. 1,873
-------
$10,020
=======
15
Savings Deposit Activity. The following table sets forth the savings
activities of the Bank for the periods indicated.
Year Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Net increase (decrease)
before interest credited, deposits
purchased and deposits sold............ $ (8,507) $(21,401) $ 7,949
Deposits purchased....................... -- -- 54,415
Deposits sold............................ -- (9,221) --
Interest credited........................ 10,328 11,083 9,314
-------- -------- -------
Net increase (decrease) in
savings deposits....................... $ 1,821 $(19,539) $71,678
======== ======== =======
Borrowings
At December 31, 1997, the Bank had $50.4 million of borrowings with the
Federal Home Loan Bank. These consist of the following:
(a) $9.0 million repurchase agreement with a rate of
5.82%, maturing December, 1999 with a one time call
feature at December 20, 1998.
(b) Two repurchase agreements of approximately $8.2
million each. Both mature in February 1998, and have
rates of 5.76% and 5.74%. (These repurchase
agreements were subsequently rolled over for nine
months, maturing in November 1998, at rates of 5.62%
and 5.61%.)
(c) $10.0 million, 30 day repurchase agreement with a
rate of 6.05%. (This repurchase agreement was
subsequently rolled over twice in 1998 at a rate of
5.61% each time.)
(d) $15.0 million advance with a rate of 5.80%, maturing
in August, 1998.
In addition, the Bank had a $8.4 repurchase agreement with an
independent third party, which matures in February, 1998 and has a rate of
5.77%. (This repurchase agreement was subsequently rolled over for six months at
a rate of 5.62%).
Subsidiary Activities
As of December 31, 1997, the Bank was the sole subsidiary of the Company.
The Bank has no active subsidiaries.
Personnel
As of December 31, 1997, the Bank had 36 full-time and 9 part-time
employees. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
16
Regulation
Set forth below is a brief description of all materials laws and
regulations which relate to the regulation of the Bank and the Company. The
description does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company. The Company is also
required to file certain reports with, and otherwise comply with, the rules and
regulations of the OTS and the SEC.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
Savings Association Insurance Fund ("SAIF")-insured savings association) would
become subject to restrictions applicable to bank holding companies unless such
other associations each also qualify as a QTL and were acquired in a supervisory
acquisition. See "Regulation of the Bank -- Qualified Thrift Lender Test."
Restrictions on Acquisitions. The Company must obtain approval from the OTS
before acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a multiple savings and
loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval.
Federal Securities Law. The Company is subject to filing and reporting
requirements by virtue of having its common stock registered under the
Securities Exchange Act of 1934. Furthermore, Company stock held by persons who
are affiliates (generally officers, directors and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain resale restrictions. If the Company meets specified current public
information requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
17
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
law, especially in such matters as the ownership of savings accounts and the
form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company, the Bank and their
operations.
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of federally insured banks and
savings institutions and safeguards the safety and soundness of the banking and
savings industries. Two separate insurance funds, the Bank Insurance Fund
("BIF") for commercial banks, state savings banks and some federal savings
banks, and the SAIF for savings associations, are maintained and administered by
the FDIC. The Bank is a member of the SAIF and its deposit accounts are insured
by the FDIC, up to the prescribed limits. The FDIC has examination authority
over all insured depository institutions, including the Bank, and has under
certain circumstances, authority to initiate enforcement actions against
federally insured savings institutions to safeguard safety and soundness and the
deposit insurance fund.
Assessments. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and the SAIF. The FDIC may
increase assessment rates for either fund if necessary to restore the fund's
ratio of reserves to insured deposits to its target level within a reasonable
time and may decrease such assessment rates if such target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments are set within a range, based on the
risk the institution poses to its deposit insurance fund. This risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
FDIC assessments on SAIF institutions currently range from 0 to 27 basis
points. In addition, legislation requires the cost of prior thrift failures to
be shared by both the SAIF and the Bank Insurance Fund ("BIF") (Fico Bond
payments). The Fico Bond assessment for savings institutions in 1997 was
approximately $.064 per $100 in deposits.
Examination Fees. In addition to federal deposit insurance premiums,
savings institutions like the Bank are required by OTS regulations to pay
assessments to the OTS to fund the operations of the
18
OTS. The general assessment is paid on a semi-annual basis and is computed based
on total assets of the institution, including subsidiaries.
Regulatory Capital Requirements. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets, (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based capital requirement equal to
8.0% of total risk-weighted assets.
Savings associations with a greater than "normal" level of interest rate
exposure will, in the future, be subject to a deduction for an interest rate
risk ("IRR") component which may be from capital for purposes of calculating
their risk-based capital requirement. See "-- Net Portfolio Value Analysis."
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), plus purchased mortgage servicing rights
valued at the lower of the maximum percentage established by the OTS or the
amount includable in core capital. Core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.
The OTS requires a core capital ratio of at least 3% for those savings
associations in the strongest financial and managerial condition. All other
savings associations are required to maintain minimum core capital of at least
4% of total adjusted assets, with a maximum core capital ratio requirement of
5%. In determining the required minimum core capital ratio, the OTS assesses the
quality of risk management and the level of risk in each savings association on
a case-by-case basis.
The risk-based capital standard for savings institutions requires the
maintenance of total risk-based capital (which is defined as core capital plus
supplementary capital) of 8% of risk-weighted assets. The components of
supplementary capital include, among other items, cumulative perpetual preferred
stock, perpetual subordinated debt, mandatory convertible subordinated debt,
intermediate-term preferred stock and the portion of the allowance for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease losses includable in supplementary capital is limited to a
maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is
limited to 100% of core capital. A savings association must calculate its
risk-weighted assets by multiplying each asset and off-balance sheet item by
various risk factors as determined by the OTS, which range from 0% for cash to
100% for delinquent loans, property acquired through foreclosure, commercial
loans and other assets.
19
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of December 31, 1997:
Percent of
Adjusted
Amount Assets
(Dollars in Thousands)
Tangible Capital:
Actual capital.............................. $26,416 8.10%
Regulatory requirement...................... 4,890 1.50
------- -----
Excess.................................... $21,526 6.60%
======= =====
Core Capital:
Actual capital.............................. $26,416 8.10%
Regulatory requirement...................... 9,780 3.00
------- -----
Excess.................................... $16,636 5.10%
======= =====
Risk-Based Capital:
Actual capital.............................. $27,138 23.83%
Regulatory requirement...................... 9,112 8.00
------- -----
Excess.................................... $18,026 15.83%
======= =====
The Bank is not under any agreement with regulatory authorities nor is it
aware of any current recommendations by the regulatory authorities which, if
they were to be implemented, would have a material effect on liquidity, capital
resources or operations of the Bank or the Company.
Net Portfolio Value Analysis. In order to encourage associations to reduce
their IRR, the OTS adopted a final rule in August 1993 incorporating an IRR
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its Net Portfolio Value ("NPV") to changes in interest rates. NPV
is the difference between incoming and outgoing discounted cash flows from
assets, liabilities, and off-balance sheet contracts. An institution's IRR is
measured as the change to its NPV as a result of a hypothetical 200 basis point
("bp") change in market interest rates. A resulting change in NPV of more than
2% of the estimated market value of its assets will require the institution to
deduct from its capital 50% of that excess change. The rules provide that the
OTS will calculate the IRR component quarterly for each institution. The rule
will not become effective until the OTS evaluates the process by which savings
associations may appeal an interest rate risk reduction determination. It is
uncertain as to when this evaluation may be completed.
20
The following table presents the Bank's NPV at December 31, 1997, as
calculated by OTS and based on OTS assumptions using raw data provided to the
OTS by the Bank.
Net Portfolio Value
($ In Thousands)
Change in Percent of Change in
Interest Rate Amount of Estimated NPV Ratio NPV
(Basis Points) NPV Change (1) NPV (2) (3) Ratio (4)
-------------- --- ---------- ------- --- ---------
+400 4,264 (29,252) -87% 1.42% (862)bp
+300 11,932 (21,585) -64% 3.87% (618)bp
+200 19,570 (13,946) -42% 6.17% (388)bp
+100 26,884 (6,632) -20% 8.25% (179)bp
Par 33,516 -- -- 10.04% --
-100 39,212 5,696 17% 11.51% 147 bp
-200 43,922 10,406 31% 12.67% 262 bp
-300 48,912 15,396 46% 13.85% 381 bp
-400 55,122 21,606 64% 15.28% 524 bp
- ---------------------
(1) Represents the excess (deficiency) of the estimated NPV assuming the
indicated change in interest rates minus the estimated NPV assuming no
change in interest rates.
(2) Calculated as the amount of change in the estimated NPV divided by the
estimated NPV assuming no change in interest rates.
(3) Calculated as the estimated NPV divided by average total assets.
(4) Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
If the OTS rule regarding the IRR component had been in effect at December
31, 1997, the Bank would have had to deduct from its risk-based capital
approximately $3.6 million. The Bank would have met its capital requirements,
had this rule been in effect at December 31, 1997.
December 31, December 31,
1997(1) 1996
------------ ------------
*** RISK MEASURES: 200 BP RATE SHOCK ***
Pre-Shock NPV Ratio: NPV as % of PV of Assets................. 10.04 % 9.17 %
Exposure Measure: Post-Shock NPV Ratio........................ 6.17 % 5.71 %
Sensitivity Measure: Change in NPV Ratio...................... (388) bp (346) bp
*** CALCULATION OF CAPITAL COMPONENT ***
Change in NPV as % of PV of Assets............................ 4.18 % 3.73 %
Interest Rate Risk Capital Component ($000)................... $3,637 $2,630
21
Certain shortcomings are inherent in the methodology used in the above
table. Modeling changes in NPV requires the making of certain assumptions that
may tend to oversimplify the manner in which actual yields and costs respond to
changes in market interest rates. First, the models assume that the composition
of the Bank's interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured. Second,
the models assume that a particular change in interest rates is reflected
uniformly across the yield curve regardless of the duration to maturity or
repricing of specific assets and liabilities. Accordingly, although the NPV
measurements do provide an indication of the Bank's interest rate risk exposure
at a particular point in time, such measurements are not intended to provide a
precise forecast of the effect of changes in market interest rates on the Bank's
net interest income.
In times of decreasing interest rates, the value of fixed-rate assets could
increase in value and the lag in repricing of interest rate sensitive assets
could be expected to have a positive effect on the Bank.
Prompt Corrective Action. The FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, which became effective December 19, 1992, the banking
regulators are required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution's degree of capitalization. Under the OTS final rule implementing
the prompt corrective action provisions, an institution shall be deemed to be
(i) "well capitalized" if it has total risk-based capital of 10.0% or more, has
a Tier I risk- based capital ratio (core or leverage capital to risk-weighted
assets) of 6.0% or more, has a leverage capital of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risked-based ratio of
4.0% or more and a leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized," (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
capital ratio that is less than 4.0% (3.0% in certain circumstances), (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. In addition, under certain circumstances, a federal
banking agency may reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized institution or an
undercapitalized institution to comply with supervisory actions as if it were in
the next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized). Immediately upon
becoming undercapitalized, an institution shall become subject to various
restrictions and could be subject to additional supervisory actions.
As of December 31, 1997, the Bank was a "well capitalized institution" as
defined in the prompt corrective action regulations and as such is not subject
to any prompt corrective action measures.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established in
connection with the Conversion.
22
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. Based on
the Bank's capital levels at December 31, 1997, the Bank was a Tier 1
institution. In the event the Bank's capital fell below its fully phased-in
requirement or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Finally, under the FDICIA, a savings association is prohibited from making
a capital distribution if, after making the distribution, the savings
association would be "undercapitalized" (not meet any one of its minimum
regulatory capital requirements). OTS regulations also prohibit the Bank from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory (or total) capital of the Bank would be reduced below the
amount required to be maintained for the liquidation account established by it
for certain depositors in connection with its conversion from mutual to stock
form. In addition, such regulations prohibit an institution from repurchasing
any of its stock for a period of at least one year from the date of its
conversion without a waiver of such prohibition by the OTS.
Qualified Thrift Lender Test. The Home Owners' Loan Act ("HOLA"), as
amended, requires savings institutions to meet a QTL test. If the Bank maintains
an appropriate level of Qualified Thrift Investments (primarily residential
mortgages and related investments, including certain mortgage-backed securities)
("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full
borrowing privileges from the FHLB of New York. The required percentage of QTIs
is 65% of portfolio assets (defined as all assets minus intangible assets,
property used by the institution in conducting its business and liquid assets
equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The
method for measuring compliance with the QTL test is on a monthly basis in nine
out of every 12 months. As of December 31, 1997, the Bank was in compliance with
its QTL requirement.
A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations: (i)
the savings association may not engage in any new activity or make any new
investment, directly or indirectly, unless such activity or investment is
permissible for a national bank; (ii) the branching powers of the savings
association shall be restricted to those of a national bank; (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of dividends by the savings association shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings association ceases to be a QTL, it must cease
any activity and not retain any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
23
Loans-to-One Borrower. See "Business -- Lending Activities -- Loans-to-One
Borrower."
Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as
implemented by OTS regulations, a savings association has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. Current law requires public disclosure of an institution's
CRA rating and requires the OTS to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
in lieu of the existing five-tiered numerical rating system. The Bank received a
satisfactory rating as a result of its last evaluation in March, 1997.
Transactions With Affiliates. Generally, restrictions on transactions with
affiliates require that transactions between a savings association or its
subsidiaries and its affiliates be on terms as favorable to the Bank as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the Bank's capital;
collateral in specified amounts must usually be provided by affiliates to
receive loans from the Bank. Affiliates of the Bank include the Company and any
company which would be under common control with the Bank. In addition, a
savings association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate which is not a subsidiary. The OTS has the discretion to treat
subsidiaries of savings associations as affiliates on a case-by-case basis.
The Bank's authority to extend credit to its officers, directors and 10%
shareholders, as well as to entities that such persons control is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things, these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans the Bank may make
to such persons based, in part, on the Bank's capital position, and require
certain approval procedures to be followed. Recent legislation permits savings
institutions to make loans to executive officers, trustees and principal
shareholders ("insiders") on preferential terms, provided the extension of
credit is made pursuant to a benefit or compensation program of the Bank that is
widely available to employees of the Bank or its affiliates and does not give
preference to any insider over other employees of the Bank or affiliate.
Branching by Federal Savings Banks. Effective May 11, 1992, the OTS amended
its Policy Statement on Branching by Federal Savings Associations to permit
interstate branching to the full extent permitted by statute (which is
essentially unlimited). This permits savings associations with interstate
networks to diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
associations. However, the OTS will evaluate a branching applicant's record of
compliance with the CRA. A poor CRA record may be the basis for denial of a
branching application.
24
Liquidity Requirements. All savings associations are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the required liquid
asset ratio is 4%. At December 31, 1997, the Bank's liquidity ratio was 44.14%.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administer the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. As of December 31, 1997, the Bank had $2.5 million
in FHLB stock, which was in compliance with this requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1997, dividends paid by
the FHLB of New York to the Bank totaled $148,000.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS.
Savings associations have authority to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve policy generally requires savings
associations to exhaust all OTS sources before borrowing from the Federal
Reserve System. The Bank had no such borrowings at December 31, 1997.
Item 2. Properties
- --------------------
The Bank operates from its main office located at 86 Main Street, Little
Falls, New Jersey and five branch offices, one of which is leased. This includes
three branches purchased from an unaffiliated commercial bank in December 1996.
The Bank's total investment in office property and equipment is $4.0 million
with a net book value of $2.6 million at December 31, 1997.
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor its subsidiaries are involved in any pending legal
proceedings, other than routine legal matters occurring in the ordinary course
of business, which in the aggregate involve amounts which are believed by
management to be immaterial to the consolidated financial condition or results
of operations of the Company.
25
Item 4. Submission of Matters to a Vote of Security-Holders
- ------------------------------------------------------------
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Information relating to the market for Registrant's common equity and
related stockholder matters appears under "Stock Market Information" in the
Registrant's 1997 Annual Report to Stockholders ("Annual Report") on page 7, and
is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The above-captioned information appears in the Annual Report on pages 8 and
9, and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The above-captioned information appears under Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Annual Report
on pages 10 through 20 and is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Financial Statements of the Bank, together with the report thereon by
Radics & Co., LLC, appear in the Annual Report on pages F-1 through F-40 and are
incorporated herein by reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
26
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" at pages 4 through 8 of the Registrant's definitive proxy
statement for the Registrant's 1998 Annual Meeting of Stockholders to be held on
April 21, 1998 (the "Proxy Statement"), which was filed with the Commission on
March 25, 1998 and incorporated herein by reference. See also "Item 1. Business
of the Bank -- Personnel" included herein.
Item 11. Executive Compensation
- --------------------------------
The information relating to executive compensation is incorporated herein
by reference to the Registrant's Proxy Statement at pages 8 through 14.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement at pages 2 and 3.
PART IV
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Registrant's Proxy Statement at page
15.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
(1) Financial Statements of the Company are incorporated by reference to
the following indicated pages of the Annual Report.
PAGE
----
Independent Auditors' Report................................ F-3
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996................................ F-4
Consolidated Statements of Income For the Years Ended
December 31, 1997, 1996 and 1995.......................... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1997, 1996 and 1995...... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.......................... F-7
Notes to Consolidated Financial Statements.................. F-9
27
The remaining information appearing in the Annual Report is not deemed
to be filed as part of this report, except as expressly provided herein.
(2) All schedules are omitted because they are not required or
applicable, or the required information is shown in the consolidated financial
statements or the notes thereto.
(3) Exhibits
(a) The following exhibits are filed as part of this report.
2.0 Branch Sale Agreement**
3.1 Articles of Incorporation of Little Falls Bancorp, Inc.*
3.2 Bylaws of Little Falls Bancorp, Inc.*
4.0 Form of Stock Certificate of Little Falls Bancorp, Inc.*
10.1 Employment Agreement between the Bank and John P. Pullara**
10.2 Employment Agreement between the Bank and Leonard G. Romaine**
10.4 Form of Employment Agreement with Eight Employees of the
Bank***
10.6 1996 Management Stock Bonus Plan***
10.7 1996 Stock Option Plan***
13.0 1997 Annual Report to Stockholders
21.0 Subsidiary of the Registrant (See Item 1 - Business-Subsidiary
Activities)
27.0 Financial Data Schedule ****
(b) Reports on Form 8-K.
None.
- ---------------------
* Incorporated herein by reference into this document from the Exhibits
to Form S-1, Registration Statement, initially filed with the
Securities and Exchange Commission on September 25, 1995 (Registration
No. 33-97316).
** Incorporated by reference into this document from the Exhibits to
Registrant's Annual Report on Form 10-K for the Year Ended December 31,
1995 (File No. 0-27010).
*** Incorporated by reference into this document from the Exhibits to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996 (File No. 0-27010).
**** In electronic filing only.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LITTLE FALLS BANCORP, INC.
Dated: March 31, 1998 By: /s/ Leonard G. Romaine
-----------------------
Leonard G. Romaine
President and Director
(Duly Authorized
Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Leonard G. Romaine By: /s/ Richard A. Capone
-------------------------------------- ------------------------------------
Leonard G. Romaine Richard A. Capone
President and Director Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Date: March 31, 1998 Date: March 31, 1998
By: By: /s/ John P. Pullara
-------------------------------------- -------------------------------------
Albert J. Weite John P. Pullara
Chairman of the Board and Director Director
Date: March 31, 1998 Date: March 31, 1998
By: /s/ Edward J. Seugling By: /s/ George Kuiken
--------------------------------------- -------------------------------------
Edward J. Seugling George Kuiken
Vice Chairman of the Board and Director Director
Date: March 31, 1998 Date: March 31, 1998
By: /s/Raoul G. Barton By: /s/ Norman A. Parker
--------------------------------------- -------------------------------------
Raoul G. Barton Norman A. Parker
Director Director
Date: March 31, 1998 Date: March 31, 1998
By: /s/ C. Evans Daniels
---------------------------------------
C. Evans Daniels
Director
Date: March 31, 1998