Exhibit 13.0
1997 Annual Report to Stockholders
Annual Report 1997
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
Annual Report - 1997
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
Annual Report - 1997
Table of Contents
The Board of Directors 2
A Message from the President 3
Corporate Information 4
Corporate Headquarters and Branch Locations 5
Community Services 6
Corporate Profile and Stock Market Information 7
Selected Financial and Other Data 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Index to Financial Statements F-1
- --------------------------------------------------------------------------------
The Board of Directors
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Board of Directors
Little Falls Bancorp and Little Falls Bank
Seated, left to right:
Edward J. Seugling, Vice Chairman;
Albert J. Weite, Chairman;
Leonard G. Romaine, President, Little Falls Bank/ Little Falls Bancorp, Inc.
Standing, left to right:
Directors; John P. Pullara, C. Evan Daniels,
Raoul G. Barton, George Kuiken
Norman A. Parker
Director
(not present at time of photo)
Richard A. Capone
Chief Financial Officer
and Treasurer
2
- --------------------------------------------------------------------------------
A Message from the President...
- --------------------------------------------------------------------------------
[GRAPHICS OMITTED]
Leonard G. Romaine
President
To Our Stockholders:
On behalf of our directors, officers and employees, we are pleased to present to
you our third annual Stockholders' Report. We believe your Bank has made
significant strides in its first two years as a public company. During the past
two years, we have been able to grow our loan portfolio through strong
originations of over $58.0 million, supplemented by purchases of $15.1 million
of participations in multi-family loans. Such purchases should enable us to take
advantage of higher yields while diversifying our loan portfolio.
Furthermore, excess liquidity was utilized to repurchase 137,259 shares of
common stock in fiscal 1997 and to invest in mortgage-backed and investment
securities. Such repurchases were accretive to earnings and management believes
that its purchases of mortgage-backed securities and investment securities have
enhanced the Bank's asset quality and interest rate sensitivity.
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 25, 1998
3
- --------------------------------------------------------------------------------
Corporate Information
- --------------------------------------------------------------------------------
Board of Directors of Little Falls Bancorp, Inc. and/or
Little Falls Bank
Albert J. Weite, Chairman of the Board
Edward J. Seugling, Vice Chairman of the Board
Raoul G. Barton
C. Evan Daniels
George Kuiken
Norman A. Parker
John P. Pullara
Leonard G. Romaine
Executive Officers of Little Falls Bancorp, Inc.
and/or Little Falls Bank
Leonard G. Romaine, President
Richard A. Capone, Chief Financial Officer and Treasurer
Anne Bracchitta, Secretary
Michael J. Allen, Vice President
Denise Hopper, Vice President
Della Talerico, Vice President
Corporate Counsel
Vincent N. Marino, Esq.
86 Main Street
Little Falls, NJ 07424
Independent Auditors
Radics & Co., LLC
55 US Highway #46
Pine Brook, NJ 07058
Special Counsel
Malizia, Spidi, Sloane & Fisch, P.C.
One Franklin Square
1301 K Street NW
Suite 700 East
Washington, DC 20005
Transfer Agent and Registrar
Chase Mellon Shareholder Services, LLC
450 W 33rd Street
New York, NY 10001-2697
The Company's Annual Report for the Year-Ended December 31, 1997, filed with the
Securities and Exchange Commission on Form 10-K without exhibits, is available
without charge upon written request. For a copy of 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 21,
1998 at 3:00 pm at The Bethwood, Lackawanna Avenue, Totowa, New Jersey.
4
- --------------------------------------------------------------------------------
Corporate Headquarters and Branch Locations
- --------------------------------------------------------------------------------
LITTLE FALLS BANCORP, INC.
86 Main Street
Little Falls, New Jersey 07424
(973)256-6100
LITTLE FALLS BANK
MAIN OFFICE
86 Main Street
Little Falls, New Jersey 07424
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
Routes 12 and 519
Baptistown, New Jersey 08825
[GRAPHICS OMITTED]
Little Falls Office and Corporate Headquarters
Kingwood Office
Alexandria Office
Milford Office
Spruce Run Office
West Paterson Office
5
- --------------------------------------------------------------------------------
Community Services
- --------------------------------------------------------------------------------
[GRAPHICS OMITTED]
Little Falls Bank, its Board of Directors, Management and Staff are firmly
committed to the communities we serve. From street fairs to team sponsorships,
from church and civic support to the health and well-being of every age group,
Little Falls Bank takes very seriously the importance of its role in the
community. Milford Fair Milford Fair Milford Fair Kingwood Fair and Flea Market
- --------------------------------------------------------------------------------
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 uses such
deposits primarily to originate loans secured by first mortgages on
owner-occupied one- to four-family residences in its market area, purchase loans
to diversify its loan portfolio, and to purchase mortgage-backed and investment
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, 1997 - December 31, 1997 $20 1/2 $16 1/4
July 1, 1997 - September 30, 1997 18 1/2 15 1/4
April 1, 1997 - June 30, 1997 15 7/8 12 5/8
January 1, 1997 - March 31, 1997 14 1/8 12 1/4
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 March 23, 1998 ("Record Date"), was approximately 418.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
2,477,525 shares outstanding.
7
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
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 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
December 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Total Assets ................................ $328,522 $303,518 $310,355 $193,385 $202,280
Loans receivable (net) ...................... 147,033 117,116 96,230 94,754 101,775
Mortgage-backed securities held
to maturity ........................ 90,957 112,473 118,020 51,664 56,401
Mortgage-backed securities
available for sale ................. 13,929 -- -- -- --
Investment securities - held to
maturity ........................... 57,988 51,370 29,999 36,146 24,999
Cash and cash equivalents ................... 6,788 10,374 53,419 4,065 12,608
Deposits .................................... 230,133 228,312 247,851 176,173 186,704
Stockholders' equity ........................ 38,295 40,448 16,223 15,715 14,149
Selected Operating Data
Year Ended December 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Total interest income ....................... $ 21,064 $ 18,776 $ 13,813 $ 13,075 $ 14,237
Total interest expense ...................... 12,920 11,258 9,314 7,170 7,708
Net interest income ................ 8,144 7,518 4,499 5,905 6,529
Provision for loan losses ................... 240 183 131 356 328
Net interest income after
provision for loan losses . 7,904 7,335 4,368 5,549 6,201
Total non-interest income ................... 427 409 178 143 917
Total non-interest expense .................. 5,403 6,747(1) 3,059,912
Income before provision for
income taxes and cumulative
effect of accounting change ........ 2,928 996 705 2,781 4,058
Income tax expense .......................... 1,072 385 241 1,066 1,493
Net income before cumulative
effect of accounting change 1,856 611 464 1,715 2,565
Cumulative effect of accounting
change ............................. -- -- -- -- 325(3)
Net income ......................... $ 1,856 $ 611 $ 464 $ 1,715 $ 2,890
(footnotes on following page)
8
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
Other Selected Data
Year Ended December 31,
---------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Return on average assets 0.60% 0.21%(1) 0.22% 0.86% 1.43%
Return on average equity 4.74% 1.44%(1) 2.89% 11.62% 21.67%
Average equity to average assets 12.57% 14.78% 7.64% 7.62% 6.42%
Net interest rate spread 2.27% 2.22% 1.97% 2.86% 3.20%
Per Share Information:
Diluted earnings per share(4) $0.75 $0.22 N/A N/A N/A
Dividends per share(4) $0.155 $0.05 N/A N/A N/A
Tangible book value per share(4) $13.59 $13.56 N/A N/A N/A
Dividend payout ratio(4) 20.62% 22.28% N/A N/A N/A
Non-performing assets to
total assets 0.57% 0.91% 1.27% 3.09% 2.85%
Non-performing loans to total assets 0.39% 0.63% 0.79% 2.18% 1.93%
Allowance for loan losses to total loans 0.79% 0.92% 0.98% 1.21% 0.79%
- -----------------------
(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.
(4) No shares of common stock were outstanding until January 5, 1996.
9
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
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.
Financial Condition
The Bank's total assets increased by $24.9 million to $328.5 million at
December 31, 1997 from $303.5 million at December 31, 1996. Total loans
receivable increased by $29.9 million due to mortgage originations of $27.3
million and the purchase of $15.1 million of multi-family loans located in New
York and New Jersey, offset somewhat by loan repayments. Investment securities
increased by $6.6 million due to purchases of $16.0 million offset by securities
which matured or were called. Mortgage-backed securities held to maturity
decreased by $21.5 million due to repayments of principal. $14.0 million of
adjustable rate mortgage-backed securities were purchased during the year and
classified as available for sale. Total cash and cash equivalents decreased by
$3.6 million.
Total deposits increased by $1.8 million. Borrowed funds increased by
$25.1 million due to $15.0 million of FHLB reverse repurchase agreements being
used to fund the above noted purchase of $15.l million of multi-family loans,
and $10 million of FHLB reverse repurchase agreements being used to fund the
purchase of adjustable rate mortgage-backed securities. These securities were
used as collateral for the borrowing.
Total stockholders' equity decreased by $2.0 million primarily due to
the purchase of shares of Company stock pursuant to the Company's stock
repurchase program (137,259 shares at a total price of approximately $2.4
million) and by the Bank Management Stock Bonus Plan (121,670 shares at a total
price of approximately $1.7 million) and to dividends paid, offset somewhat by
earnings for the year.
10
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
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. 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.
1997 1996 1995
----------------------------- ---------------------------- ----------------------------
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) $131,625 $10,081 7.66% $105,794 $ 8,255 7.80% $ 93,638 $ 7,580 8.09%
Mortgage-backed securities(5) 107,304 7,118 6.63 119,684 7,972 6.64 63,605 3,839 6.04
Investment securities(2) 55,615 3,624 6.52 40,316 2,164 5.37 36,163 1,998 5.52
Other interest-earning assets 4,596 241 5.24 7,431 385 5.18 6,900 395 5.72
-------- ------- -------- ------- -------- -------
Total interest-earning assets 299,140 21,064 7.04 273,225 18,776 6.87 200,306 13,812 6.90
------- ------- -------
Non-interest-earning assets 12,566 14,223 9,940
-------- ------- --------
Total assets $311,706 $287,448 $210,246
======== ======== ========
Interest-bearing liabilities:
Savings accounts $ 45,724 1,440 3.15 $ 51,633 1,860 3.60 $ 31,425 929 2.95
Now and money market 32,788 642 1.96 39,270 1,155 2.94 27,099 1,086 4.01
Certificates of deposit 148,122 8,246 5.57 147,707 8,068 5.46 130,513 7,299 5.59
Borrowed funds 43,975 2,592 5.89 3,173 175 5.52 -- -- --
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 270,609 12,920 4.77 241,783 11,258 4.66 189,037 9,314 4.93
------- ------- -------
Non-interest bearing liabilities 1,928 3,171 5,149
-------- ------- --------
Total liabilities 272,537 244,954 194,186
Retained earnings 39,169 42,494 16,060
-------- ------- --------
Total liabilities and retained
earnings $311,706 $287,448 $210,246
======== ======== ========
Net interest income $ 8,144 $ 7,518 $ 4,498
======= ======= =======
Interest rate spread(3) 2.27% 2.21% 1.97%
==== ==== ====
Net yield on interest-earning
assets(4) 2.72% 2.75% 2.25%
==== ==== ====
Ratio of average interest-earning
assets to average interest-
bearing liabilities 110.54% 111.00% 105.96%
====== ====== ======
- -------------
(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.
(5) Includes both held to maturity and available for sale.
11
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
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,
-----------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
---------------------------------------- ---------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ----- ------- ------- ------- ------- ------- -------
(In Thousands)
Interest income:
Loans receivable .............. $ 2,016 $ (152) $ (38) $ 1,826 $ 985 $(274) $ (36) $ 675
Mortgage-backed securities .... (825) (33) 4 (854) 3,385 398 351 4,134
Investment securities ......... 821 463 176 1,460 142 22 2 166
Other interest-earning assets . (147) 5 (2) (144) 45 (49) (6) (10)
------ ----- ------- ------- ------- ------- ------- -------
Total interest-earning assets 1,865 283 140 2,288 4,557 97 311 4,965
------ ----- ------- ------- ------- ------- ------- -------
Interest expense:
Savings accounts .............. (213) (234) 27 (420) 597 203 131 931
Now and money market .......... (191) (386) 64 (513) 488 (289) (130) 69
Certificates of deposit ....... 23 155 -- 178 962 (170) (22) 770
Borrowed funds ................ 2,250 12 155 2,417 175 -- -- 175
Total interest-bearing
liabilities ........ 1,869 (453) 246 1,662 2,222 (256) (21) 1,945
------ ----- ------- ------- ------- ------- ------- -------
Net change in net
interest income ............... $ (4) $ 736 $ (106) $ 626 $ 2,335 $ 353 $ 332 $ 3,020
====== ===== ======= ======= ======= ======= ======= =======
Comparison of Operating Results for Years Ended December 31, 1997 and 1996
General. Net income increased by $1.2 million, or 203.8% to $1.9
million for the year ended December 31, 1997 from $611,000 for the year ended
December 31, 1996.
The increase in earnings for the year was due in part to the $1.2
million charge in the third quarter of 1996 connected with a one time special
assessment from the Savings Association Insurance Fund ("SAIF"). This one time
assessment was the result of legislation that was effective on September 30,
1996 for the purpose of recapitalizing the SAIF. Other factors for the increase
in earnings were an increase of $569,000 in net interest income after the
provision for loan losses, a decrease of $62,000 in the loss on foreclosed real
estate and an additional decrease of $270,000 in deposit insurance premiums
offset somewhat by increases in the provision for income taxes of $687,000, and
miscellaneous expense of $184,000.
12
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
Interest Income. Interest income increased $2.3 million, or 12.2% to
$21.1 million for the year ended December 31, 1997 from $18.6 million for the
year ended December 31, 1996. The increase was primarily due to increases of
$25.8 million and $15.3 million in the average balances of loans and investment
securities, respectively, offset somewhat by decreases of $12.4 million and $2.8
million in the average balances of mortgage-backed securities and other interest
earnings assets, respectively. Also, the average yield on all interest earning
assets increased by 17 basis points to 7.04%. In addition, the payoff of two
problem loans resulted in the recording of approximately of $170,000 of income
previously reserved for.
Interest Expense. Interest expense increased $1.7 million to $12.9
million for the year ended December 31, 1997 from $11.3 million for the year
ended December 31, 1996. This was due to an increase in the average balance of
borrowed funds of $40.8 million coupled with an increase in the average rate
paid on interest-bearing liabilities of 11 basis points (100 basis points equals
1%) to 4.77% partially, offset by a decrease in the average balance of
interest-bearing deposits of $12.0 million.
Net Interest Income. Net interest income increased by $626,000, or 8.3%
for the year ended December 31, 1997 as compared to the year ended December 31,
1996. The increase was due to the reasons noted above.
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 $57,000 or 31.2% to $240,000 for the year ended
December 31, 1997 from $183,000 for the year ended December 31, 1996, primarily
due to the increase in the loan portfolio. The allowance for loan losses was
$1.2 million at December 31, 1997. 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 $19,000, or 4.7%
to $428,000 at December 31, 1997 from $409,000 at December 31, 1996. A gain of
$125,000 was recorded on the sale of the Bank's Frenchtown office building in
1997. The Frenchtown branch was closed in 1996, and the related deposits were
transferred to the Bank's other Hunterdon County offices. This offset a gain of
$138,000 recorded in 1996 on the sale of the deposits of the Bank's Mount Holly
office to an unaffiliated financial institution.
Non-Interest Expense. Non-interest expense decreased $1.3 million, or
19.9% to $5.4 million at December 31, 1997 from $6.7 million for the year ended
December 31, 1996. This decrease was primarily due to the $1.2 million charge in
the third quarter of 1996 connected with a one time special assessment from the
Savings Association Insurance Fund ("SAIF"). This one time assessment was the
result of legislation that was effective on September 30, 1996 for the purpose
of recapitalizing the SAIF. Other factors for the decrease in non-interest
expense were the additional decrease in deposit insurance premiums of $270,000,
a decrease of $62,000 in the loss on foreclosed real estate offset somewhat by
an increase of $184,000 in miscellaneous expense.
13
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
The decrease on the loss on foreclosed real estate was primarily due to
a gain of $11,000 being recorded on the sales of foreclosed properties for the
year ended December 31, 1997, compared to a loss of $28,000 on the sale of
foreclosed properties for the year ended December 31, 1996. Miscellaneous
expense increased by $184,000 due in most part to the expense connected with the
director's management stock bonus plan, which increased to $139,000 in 1997 from
$39,000 for 1996 due to a full year of vesting, an increase in legal expense of
$50,000 and a loss of $19,000 on the sale of the Bank's Mount Holly office. The
deposits of this branch were sold in 1996.
A great deal of information has been disseminated about the global
computer year 2000. Many computer programs that can only distinguish the final
two digits of the year entered (a common programming practice in earlier years)
are expected to read entries for the year 2000 as the year 1900 and compute
payment, interest or delinquency based on the wrong date or are expected to be
unable to compute payment, interest or delinquency. Rapid and accurate data
processing is essential to the operation of the Bank. Data processing is also
essential to most other financial institutions and many other companies. All of
the material data processing of the Bank that could be affected by this problem
is provided by a third party service bureau. The service bureau of the Bank has
advised the Bank that it expects to be year 2000 complaint prior to December 31,
1999. However, if the service bureau is unable to resolve this potential problem
in time, the Bank would likely experience significant data processing delays,
mistakes or failures. These delays, mistakes or failures could have a
significant adverse impact on the financial condition and results of operation
of the Bank.
Income Tax Expense. Income tax expense increased $687,000, or $178.2%
to $1.1 million for the year ended December 31, 1997 from $385,000 for the year
ended December 31, 1996. This increase was due to an increase in pre-tax income
of $1.9 million.
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 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
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
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.
15
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
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.
Risk 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 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.
16
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
In order to monitor its interest rate risk, the Company utilizes the
services of an outside consultant to calculate 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. The Company's interest rate risk ("IRR") is
measured as the change to its NPV as a result of hypothetical 100 basis point
("bp") changes in market interest rates.
Net Portfolio Equity Value NPV as % of PV of Assets
-------------------------- ------------------------
Change in
Interest Rates $ Change
in Basis Points in Market % Change
(Rate Shock) Amount Value(1) From Base NPV Ratio(2) Changes(3)
------------ ------ -------- --------- ------------ ----------
(Dollars in Thousands)
300 31,935 (10,532) (25) 10.41% (251)bp
200 35,610 (6,857) (16) 11.33% (159)bp
100 39,121 (3,346) (8) 12.16% (76)bp
Static 42,467 -- -- 12.92% --
(100) 45,649 3,182 7 13.61% 69 bp
(200) 48,667 6,200 15 14.23% 131 bp
(300) 51,521 9,054 21 14.80% 188 bp
- --------------------
(1) Represents the increase (decrease) of the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in interest
rates.
(2) Calculated as the estimated NPV divided by the present value of total
assets. The Company's PV is the estimated present value of total assets.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming no
change in interest rates.
Certain assumptions utilized by the Company in assessing its interest
rate risk were employed in preparing the previous table. These assumptions
related to interest rates, loan prepayment rates, core deposit duration, and the
market values of certain assets under the various interest rate scenarios. It
was also assumed that delinquency rates will not change as a result of changes
in interest rates although there can be no assurance that this will be the case.
The calculation methodology used by the Company has certain shortcomings which
include, among others, that the repricing of both loans and deposits is often
discretionary and under the control of the Bank's customers. Even if interest
rates change in the designated amounts, there can be no assurance that the
Company's assets and liabilities would perform as projected.
Generally, net interest income should decrease with an instantaneous
100 basis point increase in interest rates while net interest income should
increase with instantaneous declines in interest rates. Generally, during
periods of increasing interest rates, the Company's liabilities are expected to
reprice faster than its assets, causing a decline in the Company's interest rate
spread. This would result from an increase in the Company's cost of funds that
would not be immediately offset by an increase in its yield on earning assets.
An increase in the cost of funds without an equivalent increase in the yield on
interest-earning assets would tend to reduce net interest income.
17
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
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. OTS regulations require that a savings
association maintain liquid assets of not less than 4% of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. At December 31, 1997, 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, 1997, cash and cash equivalents totaled $6.8 million.
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, 1997, the Bank had a
$9 million repurchase agreement with a rate of 5.82%. The repurchase agreement
matures in December 1999, and has a one time call feature at December 20, 1998.
The repurchase agreement was used to fund the sale of the Mount Holly branch
deposits which were sold in December 1996. In an effort to increase earnings,
reduce the Company's interest rate sensitivity, and to better match its interest
rate 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 7.2% and is callable after two years and continuously thereafter. The
borrowings are comprised of a combination of repurchase agreements with
remaining terms of two months. The annual rates payable on these repurchases
agreements are 5.77% and 5.74%. (These advances were subsequently rolled over
for 6 months, nine months and nine months with new rates of 5.62%, 5.62% and
5.61%, respectively). On July 10, 1997, the Bank borrowed $10.0 million from the
FHLB of New York and used these funds to purchase two agency collateralized
mortgage obligation ("CMO") securities. The securities consist of a $1.5 million
FNMA which adjusts monthly to the 30 day LIBOR rate plus 125 basis points with a
10% cap, and an $8.2 million FHLMC which adjusts monthly to the 30 day LIBOR
rate plus 115 basis points with a 9% cap. Both securities meet the OTS
guidelines set forth in Thrift Bulletin 13. The securities were used as
collateral for the $10.0 million borrowing, which was set up initially as a 30
day repurchase agreement and has been rolled over monthly since it's inception.
At December 31, 1997, the rate on the borrowed funds was 6.05%: (This advance
was subsequently rolled over twice in 1998 at a rate of 5.61% each time). On
August 1, 1997, the Bank borrowed $15.0 million from the Federal Home Loan Bank
of New York with
18
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
a term of one year and a rate of 5.8%. These funds were used to purchase $15.1
million of loan participations on apartment buildings. These participations have
an approximate yield of 8.36%.
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 $3.4 million, $1.6 million, and $368,000 for the years
ended December 31, 1997, 1996, and 1995, respectively. Net cash used in
investing activities consisted primarily of disbursement of loan originations,
loan purchases, 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, were $29.5, $37.2
million, and $12.8 million for fiscal 1997, 1996 and 1995, 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 $22.5 million, $(7.5) million and $61.8 million
for the years ended December 31, 1997, 1996 and 1995, respectively.
Operating activities in 1997 provided $3.4 million in cash primarily
due to net income of $1.9 million adjusted for $149,000 in depreciation,
$367,000 in the provision for loan and real estate owned lossed and $361,000 of
goodwill amortization. Investing activities in 1997 used $29.5 million due to
$16.0 million, $14.0 million and $15.1 million in purchases of investment
securities held to maturity, mortgage-backed securities available for sale, and
loans, respectively, and the $15.0 million increase in loans receivable, offset
somewhat by $21.4 million from principal collections on mortgage-backed
securities held to maturity and $9.3 million from the maturity of investment
securities held to maturity. Financing activities in 1997 provided $22.5 million
due to a $1.8 million change in deposits and $25.1 million increase in borrowed
funds offset somewhat by $1.7 million and $2.4 million for the purchase of stock
by the MSBP program and the repurchase of shares of stock for the stock
repurchase program, 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
19
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
- --------------------------------------------------------------------------------
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.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. As of December 31, 1997, the Bank had mortgage
commitments to fund loans of $3.2 million. Also, at December 31, 1997, there
were commitments on unused lines of credit relating to home equity loans of $4.1
million. Certificates of deposit scheduled to mature in one year or less at
December 31, 1997 totaled $130.8 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, 1997, the Bank exceeded each of the three regulatory
capital requirements on a fully phased-in basis. See Note 11 of Notes to
Consolidated Financial Statements.
Impact of Inflation 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.
20
- --------------------------------------------------------------------------------
Financial Statements
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc.
and Subsidiary
Consolidated Financial Statements
(With Independent Auditors' Report Thereon)
December 31, 1997
--------------------------------------
INDEX
F-2 Management Responsibility Statement
F-3 Independent Auditors' Report
F-4 Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996
F-5 Consolidated Statements of Income for Each of the Years in the
Three Year Period Ended December 31, 1997
F-6 Consolidated Statements of Changes in Stockholders' Equity for Each of
the Years in the Three Year Period Ended December 31, 1997
F-7 - 8 Consolidated Statements of Cash Flows for Each of the Years in the
Three Year Period Ended December 31, 1997
F-9 - 40 Notes to Consolidated Financial Statements
F-1
Logo
Little Falls Bancorp, Inc.
86 Main Street
Little Falls, NJ 07424-1493
201.256.6100
January 16, 1998
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 Richard
- -----------------------------
Leonard G. Romaine Richard
President
/s/A. Capone
- ------------
A. Capone
Chief Financial Officer and Treasurer
F-2
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, 1997 and
1996 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. 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.
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 audits
provide 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, 1997 and 1996 and the results of their operations and cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/Radics & Co., LLC
- --------------------
Pine Brook, New Jersey
January 16, 1998, except for the last paragraph
of Note 2, as to which the date is January 27, 1998
F-3
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
- --------------------------------------------------------------------------------
December 31,
------------------------------
Assets Notes 1997 1996
------------- ------------- -------------
Cash and due from banks ........................................ $ 2,737,709 $ 1,746,743
Interest-bearing deposits in other banks ....................... 550,522 3,627,221
Federal funds sold ............................................. 3,500,000 5,000,000
------------- -------------
Total cash and cash equivalents .............. 1 and 17 6,788,23 10,373,964
Investment securities held to maturity ......................... 1, 3 and 17 57,987,644 51,370,297
Mortgage-backed securities available for sale .................. 1, 4 and 17 13,929,048 --
Mortgage-backed securities held to maturity .................... 1, 4 and 17 90,957,446 112,473,144
Loans receivable ............................................... 1, 5 and 17 147,033,259 117,115,784
Premises and equipment ......................................... 1 and 6 2,617,175 2,659,239
Investment in real estate ...................................... 1 and 7 427,317 683,054
Foreclosed real estate ......................................... 1 604,219 857,157
Interest receivable ............................................ 1 and 16 2,079,091 1,735,291
Federal Home Loan Bank of New York stock ....................... 9 and 16 2,517,60 2,075,700
Excess of cost over assets acquired ............................ 1 2,856,230 3,217,017
Other assets ................................................... 13 725,234 957,091
------------- -------------
Total assets ................................. $ 328,522,494 $ 303,517,738
============= =============
Liabilities and stockholders' equity
Liabilities
Deposits ....................................................... 8 and 17 $230,132 $ 228,311,543
Borrowed money ................................................. 10 and 17 58,719,500 33,623,500
Accounts payable and other liabilities ......................... 12 and 13 1,375,658 1,134,397
------------- -------------
Total liabilities ............................ 290,227,833 263,069,440
------------- -------------
Commitments .................................................... 16 and 17 -- --
Stockholders' equity ...........................................2, 11, 12 and 13
Preferred stock $.10 per value, 5,000,000 shares
authorized; none issued and outstanding ............... -- --
Common stock $.10 par value, 10,000,000 shares
authorized; 3,041,750 shares issued; shares outstanding
2,607,921 (1997) and 2,745,180 (1996) ................. 304,175 304,175
Additional paid in capital ..................................... 29,067,633 28,974,799
Retained earnings - substantially restricted ................... 18,275,517 16,802,056
Common stock acquired by employee
stock ownership plan ("ESOP") ......................... (2,106,432) (2,271,173)
Unearned restricted Management Stock
Bonus Plan ("MSBP") stock, at cost .................... (1,329,167) --
Treasury stock, at cost; 433,829 and
296,570 shares at December 31, 1997 and 1996 .......... (5,632,286) (3,277,004)
Unrealized loss on mortgage-backed
securities available for sale, net .................... (71,062) --
Minimum pension liability, net of deferred income taxes ........ (213,717) (84,555)
------------- -------------
Total stockholders' equity ................... 38,294,661 40,448,298
------------- -------------
Total liabilities and stockholders' equity ... $ 328,522,494 $ 303,517,738
============= =============
See notes to consolidated financial statements.
F-4
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
- --------------------------------------------------------------------------------
Year Ended December 31,
------------------------------------
Notes 1997 1996 1995
----------- ----------- ----------- -----------
Interest income:
Loans receivable ...................................... 5 $10,081,393 $ 8,255,040 $ 7,579,947
Mortgage-backed securities ............................ 7,117,907 7,972,069 3,839,383
Investment securities and other interest-earning assets 3,864,885 2,549,230 2,393,297
----------- ----------- -----------
Total interest income ........................ 21,064,185 18,776,339 13,812,627
----------- ----------- -----------
Interest expense:
Deposits .............................................. 8 10,327,779 11,082,926 9,313,730
Borrowings ............................................ 2,592,479 175,324 --
----------- ----------- -----------
Total interest expense ....................... 12,920,258 11,258,250 9,313,730
----------- ----------- -----------
Net interest income ............................................ 8,143,927 7,518,089 4,498,897
Provision for loan losses ...................................... 5 240,000 182,900 131,359
----------- ----------- -----------
Net interest income after provision for loan losses ............ 7,903,927 7,335,189 4,367,538
----------- ----------- -----------
Non-interest income:
Service fees .......................................... 147,818 169,678 133,464
Other ................................................. 279,877 238,89 44,699
----------- ----------- -----------
Total non-interest income .................... 427,695 408,571 178,163
----------- ----------- -----------
Non-interest expenses:
Compensation and employee benefits .................... 12 2,622,159 2,608,587 1,688,213
Occupancy, net ........................................ 6 295,305 334,406 166,347
Equipment ............................................. 6 430,366 401,510 268,841
Deposit insurance premiums ............................ 15 126,987 1,596,307 412,639
Loss on foreclosed real estate ........................ 26,900 88,981 372,304
Amortization of deposit premium ....................... 360,787 360,783 30,069
Other ................................................. 12 1,540,603 1,356,853 902,059
----------- ----------- -----------
Total non-interest expenses .................. 5,403,107 6,747,427 3,840,472
----------- ----------- -----------
Income before provision for income taxes ....................... 2,928,515 996,333 705,229
Provision for income taxes ..................................... 13 1,072,400 385,444 241,490
----------- ----------- -----------
Net income ..................................................... $ 1,856,115 $ 610,889 $ 463,739
=========== =========== ===========
Net income per common share: ................................... 1 and 14
Basic ................................................. $ 0.78 $ 0.22 N/A(1)
=========== =========== ===========
Diluted ............................................... $ 0.75 $ 0.22 N/A(1)
=========== =========== ===========
(1) Little Falls Bancorp, Inc. converted to stock form on January 5, 1996.
See notes to consolidated financial statements.
F-5
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes
in Stockholders' Equity
- --------------------------------------------------------------------------------
Unrealized
Loss on Minimum
Mortgage- Pension
Backed Liability,
Retained Common Unearned Securities Net of
Additional Earnings- Stock Restricted Available Deferred
Common Paid in Substantially Acquired MSBP Treasury For Income
Stock Capital Restricted By ESOP Stock Stock Sale, Net Taxes Total
-------- ------------ ------------ ------------ ----------- ---------- ------------ --------- ------------
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
deferred
income taxes . -- -- -- -- -- -- -- 19,508 19,508
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
Net income
for the
year ended
December
31, 1997 ..... -- -- 1,856,115 -- -- -- -- -- 1,856,115
Acquisition of
common stock
by MSBP....... -- -- -- -- (1,600,268) -- -- -- (1,600,268)
ESOP shares
committed
to be
released ..... -- 92,834 -- 164,741 -- -- -- -- 257,575
Amortization
of
MSBP stock ... -- -- -- -- 271,101 -- -- -- 271,101
Purchase of
137,259
shares of
treasury
stock ........ -- -- -- -- -- (2,355,282) -- -- (2,355,282)
Unrealized
loss on
mortgage-
backed
securities
available
for sale,
net .......... -- -- -- -- -- -- (71,062) -- (71,062)
Increase in
minimum
pension
liability,
net of
deferred
income taxes . -- -- -- -- -- -- -- (129,162)
(129,162)
Dividends paid . -- -- (382,654) -- -- -- -- -- (382,654)
-------- ------------ ------------ ------------ ----------- ---------- ------------ --------- ------------
Balance -
December
31, 1997 .....$304,175 $ 29,067,633 $ 18,275,517 $ (2,106,432)$(1,329,167) $5,632,286) $ (71,062) $(213,717) $ 38,294,661
======== ============ ============ ============ =========== ========== ============ ========= ============
See notes to consolidated financial statements
F-6
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
Year Ended December 31,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income ........................................................ $ 1,856,115 $ 610,889 $ 463,739
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation ............................................. 149,187 153,207 102,863
Provision for loan and real estate owned losses .......... 367,356 182,900 381,809
Amortization of intangibles .............................. 360,787 360,783 30,069
Amortization of deferred fees, premiums and discounts, net 117,732 40,903 7,186
Gain on sale of branch ................................... -- (136,320) --
Gain on sale of investments in real estate ............... (106,318) -- --
(Gain) loss on sale of foreclosed real estate ............ (11,086) 28,418 (27,705)
Deferred income taxes .................................... (35,527) 1,808
Increase in interest receivable .......................... (343,800) (17,942) (354,543)
Decrease (increase) in other assets ...................... 366,147 (2,447)
Increase in interest payable ............................. 92,789 180,501 127,445
Increase in accounts payable and other liabilities ....... 55,364 256,012 163,438
ESOP shares committed to be released ..................... 257,575 177,679 --
Amortization of MSBP cost ................................ 271,101 -- --
------------ ------------ ------------
Net cash provided by operating activities .............. 3,397,422 1,589,578 367,704
------------ ------------ ------------
Cash flows from investing activities:
Purchases of investment securities held to maturity ............... (15,977,500) (32,347,937) (6,022,500)
Maturities of investment securities held to maturity .............. 9,342,000 11,000,000 12,167,500
Purchases of mortgage-backed securities available for sale ........ (14,048,125) -- --
Purchases of mortgage-backed securities held to maturity .......... -- (16,073,205) (75,243,631)
Principal collections on
mortgage-backed securities held to maturity .............. 21,444,380 21,500,221 8,849,495
Purchase of loans ................................................. (15,096,510) -- --
Net (increase) in loans receivable ................................ (15,023,967) (21,265,657) (2,239,571)
Purchases of premises and equipment ............................... (102,193) (159,246) (482,366)
Proceeds from sales of investments in real estate ................. 42,125 -- --
Proceeds for sales of foreclosed real estate ...................... 394,486 849,629 713,646
(Purchase) redemption of Federal Home Loan Bank of
New York stock ........................................... (441,900) (680,500) 116,100
Cash and cash equivalents received in connection with acquisition . -- -- 49,303,415
------------ ------------ ------------
Net cash (used in) investing activities ................ (29,467,204) (37,176,695) (12,837,912)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits ............................... 1,814,156 (7,464,225) 17,135,595
Decrease in advances from borrowers for taxes ..................... -- (701,773) (142,723)
(Refunds of) proceeds from stock subscriptions .................... -- (19,706,653) 44,831,296
Net change in short-term borrowings ............................... 10,096,000 24,623,500 --
Proceeds of long-term borrowings .................................. 15,000,000 9,000,000 --
Costs of issuance of common stock ................................. -- (731,348) --
Dividends paid .................................................... (382,654) (136,119) --
Cash paid in connection with branch sales ......................... -- (9,064,385) --
Cost of MSBP shares ............................................... (1,688,171) -- --
Treasury stock acquired ........................................... (2,355,282) (3,277,004) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 22,484,049 (7,458,007) 61,824,168
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents (3,585,733) (43,045,124) 49,353,960
Cash and cash equivalents--beginning 10,373,964 53,419,088 4,065,128
------------ ------------ ------------
Cash and cash equivalents--ending $ 6,788,231 $ 10,373,964 $ 53,419,088
============ ============ ============
See notes to consolidated financial statements.
F-7
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Consolidated Statement of Cash Flows
- --------------------------------------------------------------------------------
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------ ------------ ------------
Supplemental disclosures:
Cash paid during the period for:
Interest ....................................... $ 12,827,469 $ 11,077,749 $ 9,186,285
============ ============ ============
Income taxes, net of refunds ................... $ 957,808 $ 410,701 $ 403,925
============ ============ ============
Unrealized loss on mortgage-backed securities
available for sale, net of deferred income taxes $ (71,062) $ -- $ --
============ ============ ============
Loans to facilitate sales of investment in real estate .. $ 215,000 $ -- $ --
============ ============ ============
Loans receivable transferred to foreclosed real estate .. $ 157,818 $ 406,379 $ 672,584
============ ============ ============
Loans to facilitate sales of foreclosed real estate ..... $ -- $ 172,000 $ --
============ ============ ============
Increase (decrease) in minimum
pension liability, net of deferred income taxes $ 129,162 $ (19,508) $ (44,762)
============ ============ ============
Property transferred to investment in real estate ....... $ 9,629 $ 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 $ --
============ ============ ============
Reduction in MSBP liability in connection with purchase
of MSBP shares ................................. $ (87,903) $ -- $ --
============ ============ ============
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 branch sales:
Deposits ....................................... $ -- $ 9,221,324 $ --
============ ============ ============
Assets sold in connection with branch sales:
Loans .......................................... $ -- $ 18,619 $ --
============ ============ ============
See notes to consolidated financial statements.
F-8
- --------------------------------------------------------------------------------
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 dates of the consolidated statements 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 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 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.
Investment and mortgage-backed securities
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 separate component of retained earnings.
F-9
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Cont'd.)
Investment and mortgage-backed securities (Cont'd.)
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 costs 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.
The Bank utilizes a two tier approach: (1) identification of impaired 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 impaired
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.
F-10
- --------------------------------------------------------------------------------
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.)
Impaired loans are 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 to
the contractual terms of the loan agreement. An insignificant payment delay,
which is defined by the Bank as up to ninety days, will not cause a loan to be
classified as impaired. A loan is not impaired during 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.
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
Investments in real estate are carried at the lower of cost less accumulated
depreciation or fair value less estimated disposal costs.
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 properties 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.
F-11
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Cont'd.)
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. Deferred
income tax expense or benefit is determined by recognizing deferred tax assets
and liabilities for the estimated future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
difference 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 all
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 Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("Statement") No. 123 "Accounting
for Stock-Based Compensation". Statement No. 123 establishes financial
accounting and reporting standards for stock-based employees compensation plans.
While all entities are encouraged to adopt the "fair value based method" of
accounting for employee stock compensation plans, Statement No. 123 also allows
an entity to continue to measure compensation cost under such plans using the
"intrinsic value based method" specified in Accounting Principles Board Opinion
No. 25.
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
usually the vesting period. Fair value is determined using an option pricing
model that takes into account the stock price at the grant date, the exercise
price, the expected life of the option, the volatility of the underlying stock
and the expected dividends on it, and the risk free interest rate over the
expected life of the option. Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date or other measurement date over the amount an employee must pay
to acquire the stock.
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.
F-12
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Cont'd.)
Net income per common share
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share".
Statement No. 128 is effective for years ending after December 15, 1997 and
requires that prior period data be restated. Per share amounts are reported in
accordance with Statement No. 128.
Basic net income per common share is calculated by dividing net income by the
weighted average number of shares of common stock 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. Diluted net income per share is calculated by adjusting the
weighted average number of shares of common stock outstanding to include the
effect of stock options, stock-based compensation grants and other securities,
if dilutive, using the treasury stock method. See Note 14 to consolidated
financial statements for a reconciliation of such amounts.
Per share amounts for the year ended December 31, 1996 have been 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).
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 year ended December 31, 1996 and 1995 have been
reclassified to conform to the current year's presentation.
F-13
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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
the Company's common stock, par value $.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, 1997 has not been determined.
The ability of the Company to pay dividends to stockholders is dependent 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 years ended December 31, 1997 and 1996, the Company approved plans to
repurchase 137,259 and 296,570 shares, respectively, of its common stock
outstanding, up to five percent (5%) of the shares outstanding at any single
instance. In accordance therewith, during the years ended December 31, 1997 and
1996, 137,259 and 296,570 shares, respectively, at an aggregate cost of
$2,355,282 and $3,277,004, respectively, were purchased in the open market.
On January 27, 1998, the Company announced that it intends to repurchase in the
open market up to 5%, or 130,396 shares, of its common shares outstanding as of
that date.
F-14
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Investment Securities Held to Maturity
December 31, 1997
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
U.S. Government (including agencies):
Due in one year or less ............................ $10,005,774 $ -- $ 69,571 $ 9,936,203
Due after one year through five years .............. 11,000,000 26,270 46,875 10,979,395
Due after five years through ten years ............. 30,981,870 239,337 -- 31,221,207
Due after ten years ................................ 6,000,000 2,500 10,000 5,992,500
$57,987,644 $ 268,107 $ 126,446 $58,129,305
=========== =========== =========== ===========
December 31, 1997
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- 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 through ten years ............. 27,005,763 4,237 -- 27,010,000
----------- ----------- ----------- -----------
51,028,297 4,237 170,659 50,861,875
Muncipal bonds:
Due within one year ................................ 342,000 -- -- 342,000
----------- ----------- ----------- -----------
$51,370,297 $ 4,237 $ 170,659 $51,203,875
=========== =========== =========== ===========
There were no sales of investment securities held to maturity during the years
ended December 31, 1997, 1996 and 1995.
Investment securities held to maturity with a carrying value of approximately
$2,000,000 at December 31, 1997 and 1996, were pledged to secure public funds.
See Note 10 to consolidated financial statements for securities pledged as
collateral for repurchase agreements.
4. Mortgage-Backed Securities Available for sale:
December 31, 1997
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
Federal Home Loan Mortgage Corporation $ 12,512,965 $ -- $ 104,516 $ 12,408,449
Federal National Mortgage Association 1,527,083 -- 6,484 1,520,599
------------ ----------- ----------- ------------
$ 14,040,048 $ -- $ 111,000 $ 13,929,048
============ =========== =========== ============
F-15
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. Mortgage-Backed Securities (Cont'd.)
Held to maturity:
December 31, 1997
------------------------------------------------------------------
Carrying Gross Unrealized Estimated
Value Gains Losses Fair Value
------------ ------------ ----------- ------------
Government National Mortgage Association $ 26,771,595 $ 215,909 $ 35,973 $ 26,951,531
Federal Home Loan Mortgage Corporation 22,853,912 219,635 143,405 22,930,142
Federal National Mortgage Association 41,331,939 200,891 168,976 41,363,854
------------ ------------ ----------- ------------
$ 90,957,446 $ 636,435 $ 348,354 $ 91,245,527
============ ============ =========== ============
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, 1997
-----------------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premium Discounts Value
------------ ----------- ------------ ------------
Government National Mortgage Association $ 26,336,892 $ 442,503 $ 7,800 $ 26,771,595
Federal Home Loan Mortgage Corporation 22,725,681 185,390 57,159 22,853,912
Federal National Mortgage Association 40,898,959 460,159 27,179 41,331,939
------------ ----------- ------------ ------------
$ 89,961,532 $ 1,088,052 $ 92,138 $ 90,957,446
============ =========== ============ ============
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
============ ============ ============ ============
There were no sales of mortgage-backed securities available for sale or held to
maturity during the years ended December 31, 1997, 1996 and 1995.
See note 10 for securities pledged as collateral for repurchase agreements.
F-16
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. Loans Receivable
December 31,
------------------------------
1997 1996
------------- -------------
Real estate mortgage:
One-to-our family .......................... $ 118,254,242 $ 108,367,393
Commercial and multi-family ................ 17,361,751 3,658,543
------------- -------------
135,615,993 112,025,936
------------- -------------
Construction ........................................ 350,000 525,000
------------- -------------
Consumer:
Second mortgage ............................ 11,629,689 5,028,193
Passbook or certificate .................... 807,062 888,885
Student education .......................... 12,451 25,368
------------- -------------
12,449,202 5,942,446
------------- -------------
Total loans ....................... 148,415,195 118,493,382
------------- -------------
Less: Loans in process .............................. 233,125 150,000
Allowance for loan losses .................. 1,168,160 1,089,828
Deferred loan fees, costs and discounts, net (19,349) 137,770
------------- -------------
1,381,936 1,377,598
------------- -------------
$ 147,033,259 $ 117,115,784
============= =============
An analysis of the allowance for loan losses follows:
Year Ended December 31,
-------------------------------------------
1997 1996 1995
----------- ----------- -----------
Balance--beginning ..................... $ 1,089,828 $ 958,149 $ 1,169,058
Provisions charged to operations ....... 240,000 182,900 131,359
Loans charged off, net of recoveries.... (161,668) (51,221) (342,268)
----------- ----------- -----------
Balance--ending ........................ $ 1,168,160 $ 1,089,828 $ 958,149
=========== =========== ===========
F-17
- --------------------------------------------------------------------------------
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,
------------------------
1997 1996 1995
------ ------ ------
Recorded investment in impaired loans:
With recorded allowances ..................................... $ 744 $1,777 $1,743
Without recorded allowance ................................... -- -- 267
------ ------ ------
Total impaired loans ................................ 744 1,777 2,010
Related allowance for loan losses ............................ 111 404 30
------ ------ ------
Net impaired loans .................................. $ 633 $1,373 $1,980
====== ====== ======
Average recorded investment in impaired loans ......................... $1,509 $1,717 $1,783
====== ====== ======
Interest income recognized on impaired loans during the period each
loan was impaired:
Total ............................................... $ 214 $ 57 $ 42
====== ====== ======
Cash basis .......................................... $ 197 $ 57 $ 33
====== ====== ======
At December 31, 1997, 1996 and 1995, nonaccrual loans for which the accrual of
interest had been discontinued totalled approximately $1,284,000, $1,901,000 and
$1,942,000, 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,
-----------------------
1997 1996 1995
---- ---- ----
Interest income that would have been recorded... $111 $198 $189
Interest income recognized ..................... $ 50 $ 84 $ 39
The activity with respect to loans to directors, executive officers and
associates of such persons is as follows:
Year Ended December 31,
------------------------------------
1997 1996
----------- -----------
Balance--beginning .... $ 1,168,277 $ 855,760
Loans originated ...... 242,128 569,187
Collection of principal (14,879) (256,670)
Other additions ....... 53,099 --
----------- -----------
Balance--ending ....... $ 1,448,625 $ 1,168,277
=========== ===========
F-18
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. Premises and Equipment
December 31,
-----------------------
1997 1996
---------- ----------
Land ......................................... $ 614,714 $ 614,714
Buildings and improvements ................... 2,301,063 2,296,452
Furniture, fixture and equipment ............. 1,071,944 1,038,673
Leasehold improvements ....................... 54,122 54,122
---------- ----------
4,041,843 4,003,961
Less accumulated depreciation and amortization 1,424,668 1,344,722
---------- ----------
$2,617,175 $2,659,239
========== ==========
Depreciation and amortization expense totalled $134,628, $143,997 and $92,735
for the years ended December 31, 1997, 1996 and 1995, 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 which is 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. In addition, during the years
ended December 31, 1997 and 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 $9,629 and $145,478, respectively, were transferred from
premises and equipment to investment in real estate. These properties were sold
during the year ended December 31, 1997 at a gain of $106,318. Also, during the
year ended December 31, 1997, a $100,000 impairment loss was recorded on a
parcel of land to reduce its carrying value from $243,667 to $143,667. The
income received from the properties, net of expenses, is included in other
income. The properties are summarized as follows:
December 31,
-------------------
1997 1996
-------- --------
Land ......................................... $143,667 $291,277
Buildings and improvements ................... 363,452 622,480
-------- --------
507,119 913,757
Less accumulated depreciation and amortization 79,802 230,703
-------- --------
$427,317 $683,054
======== ========
F-19
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. Deposits
December 31, 1997
-----------------
Weighted
Average
Rate Amount Percent
---- ------------ ------
NOW accounts and non-interest-bearing deposits.. 1.33% $ 21,338,938 9.27
Money Market accounts .......................... 2.94 9,952,885 4.33
Passbook and club accounts ..................... 3.08 44,468,893 19.32
Certificates of deposit ........................ 5.63 154,371,959 67.08
------------ ------
4.62 $230,132,675 100.00
============ ======
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 ................... 3.60 49,700,347 21.77
Certificates of deposit ...................... 5.48 142,916,420 62.60
------------ ------
4.48 $228,311,543 100.00
============ ======
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of greater than $100,000 was approximately $10,020,000 and
$18,177,000 at December 31, 1997 and 1996, 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,
--------------------------
1997 1996
-------- --------
Three months or less .............. $ 40,847 $ 27,834
Over three months to one year ..... 89,942 75,561
Over one year to three years ...... 21,296 37,488
Over three years .................. 2,287 2,033
-------- --------
$154,372 $142,916
======== ========
F-20
- --------------------------------------------------------------------------------
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,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
NOW accounts .......... $ 260,813 $ 366,984 $ 195,025
Money Market .......... 380,732 788,001 890,973
Passbook and club ..... 1,440,145 1,859,939 970,934
Certificates of deposit 8,246,089 8,068,002 7,256,798
----------- ----------- -----------
$10,327,779 $11,082,926 $ 9,313,730
=========== =========== ===========
9. Line of Credit
The Bank has an available line of credit with the Federal Home Loan Bank of New
York ("FHLB"), subject to the terms and conditions of the lenders' overnight
advances program, in the amount of $30,018,400 at December 31, 1997. Borrowings
under this line of credit, which expires on November 23, 1998, are made for one
day periods and are secured by the Bank's investment in FHLB stock and an
assignment of the Bank's unpledged, qualifying one-to-four family mortgage
loans. During the year ended December 31, 1997, the Bank did not borrow funds
under this program. See Note 10 to consolidated financial statements for FHLB
borrowers under other programs.
10. Borrowed Money
December 31,
---------------------------
1997 1996
Interest ------------- -------------
Lender Maturity Rate Amount Amount
- ------ -------- ---- ------ ------
Securities sold under agreement to repurchase:
Security broker dealer .............. May 19, 1997 5.50% $ -- $ 8,175,000
Security broker dealer .............. November 20, 1997 5.68% -- 8,148,000
Security broker dealer .............. Overnight 7.10% -- 8,300,000
FHLB ................................ January 30, 1998 6.05% 10,000,000 --
FHLB ................................ February 17, 1998 5.74% 8,175,000 --
Security broker dealer .............. February 18, 1998 5.77% 8,368,500 --
FHLB ................................ February 19, 1998 5.76% 8,176,000 --
FHLB ................................ December 30, 1999 5.82% 9,000,000 9,000,000
----------- -----------
43,719,500 33,623,000
Advance:
FHLB ................................ August 3, 1998 5.80% 15,000,000 --
----------- -----------
$58,719,500 $33,623,000
=========== ===========
F-21
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10. Borrowed Money (Cont'd.)
Certain information concerning borrowed money is summarized as follows:
Year Ended December 31,
--------------------------------
1997 1996
-------------- --------------
Average balance during the year ......... $ 43,974,600 $ 3,173,000
Average interest rate during the year ... 5.89% 5.53%
Maximum month-end balance during the year $ 58,719,500 $ 33,624,000
Average interest rate at year end ....... 5.83% 6.02%
At December 31, 1997, the Bank's investment in FHLB stock and a blanket
assignment of the Bank's unpledged, qualifying one-to-four family mortgage loans
served as collateral for FHLB advances. The carrying values of collateral for
the agreements to repurchase are as follows:
December 31,
-------------------------
1997 1996
----------- -----------
Investment securities held to maturity ...... $18,700,000 $35,331,000
Mortgage-backed securities available for sale 9,749,213 --
Mortgage-backed securities held to maturity . 21,500,903 --
----------- -----------
$49,950,116 $35,331,000
=========== ===========
11. Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to met 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.
F-22
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. Regulatory Capital (Cont'd.)
The following table sets forth the capital position of the Bank as calculated as
of December 31, 1997:
Tangible Core Risk-Based
--------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Capital as calculated under GAAP ..... $ 29,201 8.96 $ 29,201 8.96 $ 29,201 25.60
Deduct goodwill ...................... (2,856) (2,856) (0.88) (2,856) (2.41)
Add unrealized loss on
securities available for sale 71 0.02 71 0.02 71 0.06
Deduct investment in real estate ..... -- -- -- -- (427) (0.37)
Add qualifying general
loan loss allowance ......... -- -- -- -- 1,149 1.01
-------- ---- -------- ---- -------- -----
Capital, as calculated ............... 26,416 8.10 26,416 8.10 27,138 23.83
Capital, as required ................. 4,890 1.50 9,780 3.00 9,112 8.00
-------- ---- -------- ---- -------- -----
Excess ............................... $ 21,526 6.60 $ 16,636 5.10 $ 18,026 15.83
======== ==== ======== ==== ======== =====
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICA")
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. FDICA 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 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital to average assets (as
defined). Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
As of June 23, 1997, 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 1 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.
F-23
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Benefit Plans (Cont'd.)
Employee pension plan (Cont'd.)
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,
----------------------------------
1997 1996
----------- -----------
Actuarial present value of benefit obligations:
Vested .................................. $ 1,873,615 $ 1,493,630
Non-vested .............................. 16,195 4,382
----------- -----------
Total benefit obligation ....... $ 1,889,810 $ 1,498,012
=========== ===========
Projected benefit obligation ..................... $ 2,410,463 $ 1,919,617
Plan assets at fair value ........................ 1,258,573 1,222,245
----------- -----------
Plan benefit obligation in excess of plan assets . 1,151,890 697,372
Unrecognized net transition obligation
being amortized over fifteen years ...... (82,585)
Unrecognized net loss ............................ (854,481) (553,681)
Additional minimum liability ..................... 416,413 228,426
----------- -----------
Accrued pension cost included
in accounts payable and other liabilities $ 631,237 $ 275,767
=========== ===========
Year Ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Net periodic pension cost
included the following components:
Service cost ................ $ 94,253 $ 87,161 $113,010
Interest cost ............... 168,152 127,080 122,026
Actual return on plan assets (14,684)
Net amortization and deferral (6,806) 60,784 63,398
-------- -------- --------
Net periodic pension cost included
in compensation and employee benefits.. $240,915 $200,728 $208,493
======== ======== ========
F-24
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Benefit Plans (Cont'd.)
Employee pension plan (Cont'd.)
Significant actuarial assumptions used in determining plan benefits are:
Year Ended December 31, 1997
----------------------------
1997 1996 1995
---- ---- ----
Annual salary increase 5.50% 5.00% 6.00%
Long-term return on assets 8.00% 8.00% 8.00%
Discount rate 7.50% 7.00% 8.25%
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,
--------------------------
1997 1996
--------- ---------
Actuarial present value of benefit obligation:
Vested ............................... $ 253,159 $ 189,536
Non-vested ........................... 57,394 143,912
--------- ---------
$ 310,553 $ 333,448
========= =========
Projected benefit obligation .................. $ 366,691 $ 357,661
Unrecognized past service cost ................ (218,618) (235,914)
Unrecognized net (loss) ....................... (23,558)
--------- ---------
Accrued plan cost included
in accounts payable and other liabilities ... $ 124,515 $ 74,928
========= =========
Year Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
Net periodic plan cost included the following components:
Service cost ................................... $ 784 $ 6,380 $ 4,151
Interest cost .................................. 26,825 20,972 14,563
Amortization of past service cost
and unrecognized net loss ........................... 21,978 17,317 11,545
------- ------- -------
Net periodic plan cost included in other expense ........ $49,587 $44,669 $30,259
======= ======= =======
F-25
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Benefit Plans (Cont'd.)
Directors retirement plan (Cont'd.)
Significant actuarial assumptions used in determining plan benefits are:
Year Ended December 31, 1997
----------------------------
1997 1996 1995
---- ---- ----
Annual compensation increase........... 7.00% 7.00% 8.00%
Discount rate.......................... 7.25% 7.50% 8.25%
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 their attainment of age 60 and twenty years of service. This plan
is unfunded. The following tables present the status of the plan and the net
components of net periodic plan cost:
December 31,
--------------------
1997 1996
-------- --------
Accumulated postretirement benefit obligation... $158,388 $160,094
Unrecognized net gain........................... 55,426 44,907
-------- --------
Accrued plan cost included in
accounts payable and other liabilities. $213,814 $205,001
======== ========
Year Ended December 31,
--------------------------------
1997 1996 1995
------- ------- --------
Net periodic plan cost included the following components:
Service cost................................. $ 190 $ 2,866 $ 4,082
Interest cost................................ 12,007 10,969 13,270
Immediate recognition of prior service cost.. -- -- 177,830
Net amortization............................. (3,384) (4,016) --
------- ------- --------
Net periodic plan cost included in other expense...... $ 8,813 $ 9,819 $195,182
======= ======= ========
A discount rate of 7.25%, 7.50% and 8.25% was assumed for the years ended
December 31, 1997, 1996 and 1995, respectively. For the years ended December 31,
1997, 1996 and 1995, a medical cost trend rate of 7.0%, 7.5% and 10.5%,
respectively, decreasing 0.5% per year thereafter until an ultimate rate of 5.0%
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, 1997, by $18,459 and the
aggregate of the service and interest components of net periodic postretirement
benefit cost for the year ended December 31, 1997 by $1,522.
F-26
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Benefit Plans (Cont'd.)
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-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 years ended December 31, 1997 and
1996, the Bank made cash contributions of $323,642 and $286,659 to the ESOP of
which $193,801 and $196,181, respectively, were applied to interest and $129,841
and $90,478, respectively, were applied to principal. At December 31, 1997 and
1996, the loan had an outstanding balance of $2,213,081 and $2,342,922,
respectively. 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 basic 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 $255,061 and $177,679 for the years ended December 31, 1997 and
1996, respectively.
The ESOP shares were as follows:
December 31,
-----------------------
1997 1996
---------- ----------
Allocated shares ................ 16,223 9,048
Shares commited to be released... 16,474 7,175
Unreleased shares ............... 210,643 227,117
---------- ----------
Total ESOP shares ............... 243,340 243,340
========== ==========
Fair value of unreleased shares.. $4,318,182 $2,895,742
========== ==========
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, during the
year ended December 31, 1997, contributed $1,688,171 to the MSBP to allow the
MSBP to purchase 121,670 shares of common stock of the Company in the open
market at an average cost of $13.875 per share.
F-27
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Benefit Plans (Cont'd.)
MSBP (Cont'd.)
Under the 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 or disability. At December 31, 1997,
79,248 shares had been granted to directors and 26,767 shares had been granted
to officers and employees. 16,311 shares were vested at December 31, 1997.
$271,101 and $87,903 of expense related to the MSBP shares was recorded during
the years ended December 31, 1997 and 1996, respectively.
Stock Option Plan
The Company 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 or disability. 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.
Shares of common stock have been granted under the plan as non-incentive stock
options to directors and incentive stock options to officers and employees,
respectively, as follows:
Shares Weighted
----------------------------- Average
Non- Exercise Exercise
Incentive Incentive Total Price Price
------- ------- ------- ----------- -----------
Granted in 1996 ......................... 121,665 109,476 231,161 $ 10.625 $ 10.625
Granted in 1997 .......................... -- 16,000 16,000 20.000 20.000
------- ------- ------- -----------
121,665 125,476 247,161 $ 11.232
======= ======= ======= ===========
No options have been exercised. Options for 46,232 shares are exercisable at
December 31, 1997 at a weighted average exercise price of $10.625. No options
were exercisable at December 31, 1996.
F-28
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Benefit Plans (Cont'd.)
Stock Option Plan (Cont'd.)
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 1997 and 1996, all of which have exercise prices equal to the
market price of the Company's common stock at the grant date, is estimated using
the Black-Scholes option-pricing model. Such fair values and the assumptions
used for estimating fair values are as follows:
December 31,
--------------------
1997 1996
---- ----
Weighted average grant-date fair value per share $ 5.87 $ 2.81
Expected common stock dividend yield ........... 1.00% 0.94%
Expected volatility ............................ 23.29% 13.90%
Expected option life ........................... 5 years 5 years
Risk-free interest rate ........................ 5.88% 6.875%
Had the Company used the fair value based method, net income for the years ended
December 31, 1997 and 1996 would have been decreased to $1,736,000 and $574,000,
respectively, and basic and diluted net income per common share would have been
reduced to $0.73 and $0.70, respectively, for the year ended December 31, 1997
and $0.21 each during the year ended December 31, 1996.
13. Income Taxes
The Bank qualifies as a Savings Institution 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").
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 did not have a material adverse effect on the Company's consolidated
financial position or operations.
F-29
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. Income Taxes (Cont'd.)
Retained earnings at December 31, 1997 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,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Current:
Federal.... $ 990,405 $ 540,688 $ 222,142
State ..... 117,522 87,761 17,540
----------- ----------- -----------
1,107,927 628,449 239,682
----------- ----------- -----------
Deferred:
Federal.... (32,405) (222,744) 1,658
State ..... (3,122) (20,261) 150
----------- ----------- -----------
(35,527) (243,005) 1,808
----------- ----------- -----------
$ 1,072,400 $ 385,444 $ 241,490
=========== =========== ===========
The provision for income taxes differs from that computed at the federal
statutory rate of 34% as follows:
Year Ended December 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
Tax at the statutory rate .................. $ 995,695 $ 338,753 $ 239,777
New Jersey Savings Institution Tax,
net of federal income tax effect... 75,504 44,550 11,675
Other ...................................... 1,201 2,141 (9,962)
---------- ---------- ----------
$1,072,400 $ 385,444 $ 241,490
========== ========== ==========
F-30
- --------------------------------------------------------------------------------
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,
------------------
1997 1996
-------- --------
Deferred tax assets:
Allowance for loan losses .............................. $316,151 $346,353
Deferred loan orgination fees, net ..................... 63,821 46,702
Deferred compensation .................................. 115,025 97,185
Minimum pension liability .............................. 120,111 47,521
Goodwill ............................................... 90,101 46,829
MSBP ................................................... 15,513 31,627
Unrealized loss on securities available for sale ....... 39,938 --
Other .................................................. -- 1,920
-------- --------
Total deferred tax assets ..................... 760,660 618,137
-------- --------
Deferred tax liabilities:
Depreciation of premises and equipment ................. 67,944 64,196
Other .................................................. 2,572 11,852
-------- --------
Total deferred tax liabilities ................ 70,516 76,048
-------- --------
Net deferred tax asset included in other assets $690,144 $542,089
======== ========
At December 31, 1997 and 1996, current income taxes receivable of $25,526 and
$55,769, respectively, are included in other assets. At December 31, 1997,
income taxes payable of $119,876 are included in other liabilities.
F-31
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. Net Income Per Common Share
Year Ended December 31, 1997
----------------------------
Weighted
Net Average Per Share
Income Shares Amounts
------ ------ -------
Basic net income per share ... $1,856,115 2,389,063 $ 0.78
Effect of dilutive securities: ========
Stock options ....... -- 71,296
MSBP unearned shares -- 6,531
---------- ---------
Diluted net income per share . $1,856,116 2,466,890 $ 0.75
========== ========= ========
Year Ended December 31, 1996
Weighted
Net Average Per Share
Income Shares Amounts
------ ------ -------
Basic net income per share ... $610,889 2,727,627 $ 0.22
Effect of dilutive securities: ============
Stock options ....... -- 7,336
MSBP unearned shares -- 1,681
-------- ---------
Diluted net income per share . $610,889 2,736,644 $ 0.22
======== ========= ============
15. 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 a 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.
Currently, the Federal Deposit Insurance Corporation ("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.
F-32
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
15. Legislative Matters (Cont`d.)
The FDIC has 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.
16. Commitments
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs 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, 1997, the Bank had commitments outstanding to originate mortgage
loans of $3,205,000, of which $377,000 were for five year commercial adjustable
rate loans with initial rates ranging from 8.23% to 9.50% and $2,828,000 were
for fixed rate loans with rates ranging from 7.00% to 8.50%. 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, 1997, outstanding commitments related to unused home equity
lines of credit totalled $4,101,000 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
$30,000, $38,000 and $38,000 for the years ended December 31, 1997, 1996 and
1995, respectively. Minimum non-cancellable obligations under lease agreements
with original terms of more than one year are as follows:
December 31, Amount
------------ ------
1998 $ 42,497
1999 42,497
2000 42,497
2001 42,497
2002 17,707
--------
$187,695
========
F-33
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
17. 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. Significant 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, both available for sale and held
to maturity, fair value is estimated using quoted market prices.
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.
Borrowed money
The fair value of advances and 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 creditworthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
F-34
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
17. Disclosures About the Fair Value of Financial Instruments (Cont'd.)
December 31,
-------------------------------------
1997 1996
------------------ -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents ................... $ 6,788 $ 6,788 $ 10,374 $ 10,374
Investment securities held to maturity ...... 57,988 58,129 51,370 51,204
Mortgage-backed securities available for sale 13,929 13,929 -- --
Mortgage-backed securities held to maturity . 90,957 91,246 112,473 112,426
Loans receivable ............................ 147,033 148,534 117,116 114,850
Interest receivable ......................... 2,079 2,079 1,735 1,735
Financial liabilities:
Deposits .................................... 230,133 226,113 228,312 227,954
Borrowed money .............................. 58,720 58,708 33,624 33,475
Commitments:
To fund loans................................ 7,306 7,306 6,287 6,287
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 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.
F-35
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
18. Parent Only Financial Information
The Company operates one wholly owned subsidiary, the Bank. The earnings of the
Bank are recognized by the Company using the equity method of accounting.
Accordingly, the earnings of the Bank are recorded as increases in the Company's
investment in the subsidiary. The following are the condensed financial
statements for the Company (parent company only) as of December 31, 1997 and
1996 and for the periods then ended. The Company had no operations prior to the
Bank's conversion to stock form on January 5, 1996.
December 31,
----------------------------
Statements of Financial Condition 1997 1996
------------ ------------
Assets
Cash and due from banks ........................... $ 1,167,965 $ 555,582
Loan receivable from the Bank ..................... 6,044,666 8,854,264
ESOP loan receivable .............................. 2,213,081 2,342,922
Investment in subsidiary .......................... 29,200,841 28,874,037
Other assets ...................................... 18,000 12,167
------------ ------------
Total assets ............................. $ 38,644,553 $ 40,638,972
============ ============
Liabilities and stockholders' equity
Liabilities
Other liabilities ................................. $ 349,892 $ 190,674
------------ ------------
Stockholders' equity
Common stock ...................................... 304,175 304,175
Additional paid in capital ........................ 29,067,633 28,974,799
Retained earnings ................................. 18,204,455 16,802,056
Common stock acquired by ESOP ..................... (2,106,432) (2,271,173)
Unearned restricted MSBP stock .................... (1,329,167) --
Treasury stock .................................... (5,632,286) (3,277,004)
Minimum pension liability, net .................... (213,717) (84,555)
------------ ------------
Total stockholders' equity ............... 38,294,661 40,448,298
------------ ------------
Total liabilities and stockholders' equity $ 38,644,553 $ 40,638,972
============ ============
F-36
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
18. Parent Only Financial Information (Cont'd.)
Statements of Income
From
Inception
January 5,
Year Ended 1996 to
December 31, December 31,
------------ ------------
1997 1996
---------- ----------
Interest income .............................. $ 666,225 $ 880,582
Equity in undistributed earnings of subsidiary 1,598,621 248,247
---------- ----------
2,264,846 1,128,829
Expenses ..................................... 235,731 274,940
---------- ----------
Income before income taxes ................... 2,029,115 853,889
Income taxes ................................. 173,000 243,000
---------- ----------
Net income ................................... $1,856,115 $ 610,889
========== ==========
F-37
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
18. Parent Only Financial Information (Cont'd.)
Statements of Cash Flows
From
Inception
January 5,
Year Ended 1996 to
December 31, December 31,
1997 1996
------------ ------------
Cash flows from operations activities:
Net income ................................................. $ 1,856,115 $ 610,889
Adjustments to reconcile net income provided by
operative activities:
Equity in undistributed earnings of subsidiary .... (1,598,620) (248,247)
(Increase) in other assets ........................ (5,833) (12,167)
Increase in other liabilities ..................... 159,218 190,674
------------ ------------
Net cash provided by operating activities ......... 410,880 541,149
------------ ------------
Cash flows from investing activities:
Purchase of all outstanding stock of the Bank .............. -- (14,638,780)
Loan to the Bank ........................................... -- (12,205,380)
Repayments of loan by the Bank ............................. 2,809,598 3,351,116
Loan to ESOP ............................................... -- (2,433,400)
Repayments of Loan by ESOP ................................. 129,841 90,478
------------ ------------
Net cash provided by (used in) investing activities 2,939,439 (25,835,966)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock ................. -- 29,263,522
Acquisition of treasury stock .............................. (2,355,282) (3,277,004)
Dividends paid ............................................. (382,654) (136,119)
------------ ------------
Net cash (used in) provided by financing activities (2,737,936) 25,850,399
------------ ------------
Net increase in cash and cash equivalents ........................... 612,383 555,582
Cash and cash equivalents--beginning ................................ 555,582 --
------------ ------------
Cash and cash equivalents--ending ................................... $ 1,167,965 $ 555,582
============ ============
F-38
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
19. Quarterly Financial Data (unaudited)
Year Ended December 31, 1997
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------ ------ ------ ------
(In thousands, except per share data)
Interest income ............ $4,981 $4,971 $5,348 $5,764
Interest expense ........... 2,995 3,034 3,322 3,569
------ ------ ------ ------
Net interest income 1,986 1,937 2,026 2,195
Provision for loan losses .. 60 60 60 60
Non-interest income ........ 69 189 41 129
Non-interest expense ....... 1,280 1,281 1,321 1,522
Income taxes ............... 270 316 229 257
------ ------ ------ ------
Net income ................. $ 445 $ 469 $ 457 $ 485
====== ====== ====== ======
Net income per common share:
Basic ............. $ 0.18 $ 0.20 $ 0.19 $ 0.21
====== ====== ====== ======
Diluted ........... $ 0.17 $ 0.19 $ 0.19 $ 0.20
====== ====== ====== ======
Year Ended December 31, 1996
----------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share data)
Interest income ............ $ 4,710 $ 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 expense ....... 1,427 1,296 2,564 1,460
Income taxes ............... 133 282 (275) 246
------- ------- ------- -------
Net income ................. $ 261 $ 423 $ (482) $ 409
======= ======= ======= =======
Net income per common share:
Basic ............. $ 0.09 $ 0.15 $ (0.18) $ 0.16
======= ======= ======= ======
Diluted ........... $ 0.09 $ 0.15 $ (0.18) $ 0.16
======= ======= ======= ======
F-39
- --------------------------------------------------------------------------------
Little Falls Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
20. Impact of Recent Accounting Standards
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income". Statement No. 130 requires that all items that are components of
"comprehensive income" be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income is
defined as the "change in equity [net assets] of a business enterprise during a
period from transactions and other events and circumstances from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners". Companies
will be required to (a) classify items of other comprehensive income by their
nature in the financial statements and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Statement No. 130 is effective for fiscal years beginning after December 15,
1997 and requires reclassification of prior periods presented. As the
requirements of Statement No. 130 are disclosure-related, its implementation
will have no impact on the Company's consolidated financial condition or results
of operations.
F-40