SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
-------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-27010
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LITTLE FALLS BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-3402073
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
86 Main Street, Little Falls, New Jersey 07424
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 256-6100
N/A
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check x/ whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date May 9, 1997.
Class Outstanding
- --------------------------- ----------------
$.10 par value common stock 2,477,525 shares
LITTLE FALLS BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
Page
Number
------
PART I - CONSOLIDATED FINANCIAL INFORMATION OF LITTLE FALLS
BANCORP, INC.
Item 1. Financial Statements and Notes Thereto...........................1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................6
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................13
Item 2. Changes in Securities...........................................13
Item 3. Defaults upon Senior Securities.................................13
Item 4. Submission of Matters to a Vote of Security Holders.............13
Item 5. Other Materially Important Events...............................13
Item 6. Exhibits and Reports on Form 8-K.......................13
SIGNATURES
LITTLE FALLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, December 31,
1998 1997
------------- -------------
ASSETS
Cash and due from banks................................................ $ 3,600,345 $ 2,737,709
Interest-bearing deposits in other banks............................... 390,149 550,522
Federal funds sold..................................................... 19,500,000 3,500,000
----------- -----------
Total cash and cash equivalents................................... 23,490,494 6,788,231
Investment securities held-to-maturity net
(estimated fair values $58,920,000
and $58,129,000)..................................................... 58,679,591 57,987,644
Investment securities available for sale............................... 15,212,910 --
Mortgage-backed securities available for
sale................................................................. 11,954,422 13,929,048
Mortgage-backed securities held to maturity, net
(estimated fair values $84,527,000
and $91,246,000)..................................................... 84,271,082 90,957,446
Loans receivable....................................................... 148,446,662 147,033,259
Premises and equipment................................................. 2,618,071 2,617,175
Investment in real estate.............................................. 424,752 427,317
Foreclosed real estate................................................. 585,352 604,219
Interest receivable.................................................... 2,617,275 2,079,091
Federal Home Loan Bank of New York stock, at cost...................... 3,767,600 2,517,600
Excess of cost over assets acquired.................................... 2,766,033 2,856,230
Other assets........................................................... 609,136 725,234
----------- -----------
TOTAL ASSETS..................................................... $355,443,380 $328,522,494
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................................. $233,847,551 $230,132,675
Borrowed money....................................................... 83,877,000 58,719,500
Accounts payable and other liabilities............................... 1,466,282 1,375,658
------------ -----------
Total liabilities................................................ 319,190,833 290,227,833
----------- -----------
Stockholders' Equity:
Preferred stock; 5,000,000 authorized shares;
none outstanding................................................... -- --
Common stock, par value $.10; 10,000,000
authorized shares; shares issued 3,041,750;
shares outstanding 2,477,525 and 2,607,921........................ 304,175 304,175
Additional paid-in-capital........................................... 29,105,270 29,067,633
Retained earnings - substantially restricted......................... 18,603,670 18,275,517
Common Stock acquired by ESOP shares................................. (2,065,875) (2,106,432)
Unearned restricted MSBP stock, at cost.............................. (1,253,384) (1,329,167)
Treasury stock, at cost; 564,225 and 433,829 shares.................. (8,191,308) (5,632,286)
Unrealized loss on securities available
for sale........................................................... (36,284) (71,062)
Minimum pension liability net of deferred taxes...................... (213,717) (213,717)
----------- ------------
Total stockholders' equity....................................... 36,252,547 38,294,661
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $355,443,380 $328,522,494
=========== ===========
- ---------------------
* The consolidated balance sheet at December 31, 1997 has been taken from the
audited balance sheet at that date.
See notes to unaudited consolidated financial statements.
1
LITTLE FALLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the Three Months
Ended March 31,
----------------------------------
1998 1997
------------ -----------
Interest income:
Loans receivable........................................................ $2,789,542 $2,205,524
Mortgage backed securities.............................................. 1,619,400 1,814,168
Investment securities and other interest earning assets................. 1,198,830 961,423
--------- --------
Total interest income............................................... 5,607,772 4,981,115
Interest expense:
Deposits................................................................ 2,599,740 2,521,787
Borrowings.............................................................. 918,442 473,696
--------- ---------
Total interest expense.................................................... 3,518,182 2,995,483
--------- ---------
Net interest income before provision for loan losses...................... 2,089,590 1,985,632
Provision for loan losses................................................. 60,000 60,000
--------- ---------
Net interest income after provision for loan losses.................. 2,029,590 1,925,632
--------- ---------
Non-interest income:
Total non-interest income................................................. 62,519 60,883
--------- ---------
Non-interest expense:
Compensation and employee benefits...................................... 724,221 636,569
Occupancy, net.......................................................... 94,541 76,590
Equipment............................................................... 101,260 115,017
Deposit insurance premiums.............................................. 30,057 30,973
Loss on foreclosed real estate.......................................... 6,876 9,892
Amortization of deposit premium......................................... 90,197 90,197
Miscellaneous expense................................................... 339,708 311,924
--------- ---------
Total non-interest expense........................................... 1,386,860 1,271,162
--------- ---------
Income before provision for income taxes............................. 705,249 715,353
Provision for income taxes................................................ 246,700 270,000
--------- ---------
Net income.......................................................... 458,549 445,353
Other comprehensive income - unrealized holding gains on securities
available for sale, net of income taxes of $19,547 in 1998.............. 34,778 --
---------- ------
$ 493,327 $ 445,353
========== ==========
Weighted average number of common shares outstanding:
basic 2,259,761 2,508,014
========== ==========
diluted 2,378,608 2,557,243
========== ==========
Earnings per share:
basic $ 0.20 $ 0.18
====== ======
diluted $ 0.19 $ 0.17
====== ======
See notes to unaudited consolidated financial statements.
2
LITTLE FALLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
-----------------------------------------
1998 1997
--------------- ---------------
Cash flows from operating activities:
Net income.............................................................. $458,549 $445,353
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................................... 32,004 34,299
Provision for loan losses............................................. 60,000 60,000
Amortization of intangibles........................................... 90,197 90,197
Amortization of deferred fees, premiums and discounts, net............ 54,867 24,337
Amortization of unearned ESOP shares.................................. 78,194 54,589
Amortization of MSBP cost............................................. 75,783 43,800
Loss (gain) on sale of foreclosed real estate......................... -- 8,169
Decrease in other assets.............................................. 96,551 207,882
Increase in interest receivable, net.................................. (538,184) (563,745)
Increase (decrease) in interest payable............................... 126,718 (47,381)
Increase (decrease) in accounts payable and other liabilities......... (72,175) 231,973
-------- -------
Net cash provided by operating activities........................... 462,504 589,473
------- -------
Cash flows from investing activities:
Principal collections on mortgage-backed securities available for sale 1,982,192 --
Principal collections on mortgage-backed securities held to maturity.. 6,668,594 5,458,872
Net increase in loans receivable...................................... (1,448,269) (5,095,002)
Purchase of investments held to maturity.............................. (7,694,185) --
Purchases of premises and equipment................................... (30,335) (15,371)
Proceeds from sale of foreclosed real estate.......................... -- 74,631
Purchases of Federal Home Loan Bank of New York stock................. (1,250,000) (146,300)
--------- --------
Net cash provided by (used in) investing activities................. (9,979,280) 276,830
--------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits.................................... 3,750,957 (793,578)
Treasury stock acquired................................................ (2,559,022) --
Increase in borrowed money............................................. 25,157,500 --
Cash dividends paid.................................................... (130,396) (68,630)
--------- ----------
Net cash used in financing activities................................ 26,219,039 (862,208)
---------- ----------
Increase in cash and cash equivalents................................ 16,102,263 4,095
Cash and cash equivalents:
Beginning of period..................................................... 6,788,231 10,373,964
--------- ----------
End of period........................................................... $23,490,494 $10,378,059
========== ==========
Supplemental disclosures:
Cash paid during the year for:
Interest................................................................ $ 3,391,464 $ 3,040,164
=========== ============
Income Taxes............................................................ -- --
=========== ============
Unrealized gain on securities available for sale, net of
income taxes........................................................ $ 34,778 $ --
=========== ============
Repurchase of stock for MSBP - trade date March 26, 1997,
settlement date April 1, 1997........................................... $ -- $ 1,688,171
=========== ============
Dividend declared......................................................... $ -- $ 82,355
=========== ============
See notes to unaudited consolidated financial statements.
3
LITTLE FALLS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the three month
periods ended March 31, 1998 and 1997 include the accounts of Little
Falls Bancorp, Inc. (the "Company") and its subsidiary, Little Falls
Bank (the "Bank"). The Company's business is conducted principally
through the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not
include all information necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows
in conformity with generally accepted accounting principles. However,
all adjustments, consisting of normal recurring accruals, which, in the
opinion of management, are necessary for a fair presentation of the
consolidated financial statements have been included. The results of
operations for the periods ended March 31, 1998 and 1997 are not
necessarily indicative of the results which may be expected for the
entire fiscal year or any other period.
These statements should be read in conjunction with the consolidated
financial statements and related notes which are incorporated by
reference in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
NOTE 3 - EARNINGS PER SHARE
During the quarter ended March 31, 1998, the Company adopted Statement
of Financial Accounting Standards ("Statement") No. 128, "Earnings Per
Share" and has restated previously reported per share amounts. Under
the new standard, basic earnings per share is computed by dividing
income applicable to common shares by the weighted average number of
common shares outstanding for the period (excluding any dilution).
Diluted earnings per share includes the effect of all dilutive
potential common shares outstanding during the period. Sources of
potential common shares include unearned shares and outstanding stock
options.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities (SFAS No. 125) and SFAS No.
127, Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125 (SFAS No. 127) in June and December 1996,
respectively. SFAS No. 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. It requires entities to recognize servicing assets and
liabilities for all contracts to service financial assets, unless the
assets are securitized and all servicing is retained. The servicing
assets will be measured initially at fair value, and will be amortized
over the estimated useful lives of the servicing assets. In addition,
the impairment of servicing assets will be recognized through a
valuation allowance. SFAS No. 125 also addresses the accounting and
reporting standards for securities lending,
4
dollar-rolls, repurchase agreements and similar transactions. The
Company has prospectively adopted SFAS No. 125 on January 1, 1997.
However, in accordance with SFAS No. 127, the Company deferred
adoption of the standard as it relates to securities lending,
dollar-rolls, repurchase agreements and similar transactions until
January 1, 1998. The adoption of SFAS No. 125 did not have a material
impact on its consolidated financial statements.
Comprehensive Income. Effective January 1, 1998, the Company
adopted Statement No. 130, "Reporting Comprehensive Income." Statement
No. 130 requires the reporting of comprehensive income in addition to
net income from operations. Comprehensive income is more inclusive
financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net income. As required, the provisions of Statement
No. 130 have been retroactively applied to previously reported
periods. The application of Statement No. 130 had no effect on the
Company's consolidated financial condition or operations.
5
LITTLE FALLS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is a New Jersey corporation organized in August 1995 at the
direction of the Board of Directors of the Bank to acquire all of the capital
stock of the Bank issued in the Conversion. The Company is a unitary savings and
loan holding company which, under existing laws, generally is not restricted in
the types of business activities in which it may engage provided that the Bank
retains a specified amount of its assets in housing-related investments.
The Bank is a federally chartered stock savings bank headquartered in
Little Falls, New Jersey. The Bank was founded in 1887 and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") and the
Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products. It is the Bank's intent to remain an independent
community savings bank serving the local banking needs of its community.
The Bank attracts deposits from the general public and has historically
used such deposits primarily to originate loans secured by first mortgages on
owner-occupied one- to four-family residences in its market area and to purchase
mortgage-backed securities. The Bank also originates a limited number of
commercial real estate, residential construction, and consumer loans, which
mainly consist of home equity lines of credit.
The largest components of the Bank's net income are net interest
income, which is the difference between interest income and interest expense,
and noninterest income derived primarily from fees. Consequently, the Bank's
earnings are dependent on its ability to originate loans, net interest income,
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Bank's net income is also affected by its provision for loan
losses and foreclosed real estate as well as the amount of non-interest
expenses, such as compensation and benefit expense, occupancy and equipment
expense and deposit insurance premium expenses. Earnings of the Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Comparison of Financial Condition
Total assets increased $26.9 million at March 31, 1998, as compared to
December 31, 1997. This increase was primarily due to a $25.0 million Federal
Home Loan Bank ("FHLB") advance taken by the Bank in March 1998. Federal Funds
sold increased by $16.0 million as a result of the previously noted $25.0
borrowing. It is not the Bank's intention to keep a large portion of the funds
in federal funds sold. Net loans increased by $1.4 million due in most part to
mortgage originations of $3.9 million offset somewhat by loan repayments.
Mortgage-backed securities (including those available for sale) decreased by
$8.7 million due to repayments and no new purchases. Investment securities
(including those available for sale) increased by $15.9 million as the Bank used
a portion of the $25.0 million borrowings to fund these purchases.
Total deposits remained relatively stable, increasing, excluding
interest credited, by $1.1 million.
6
Total stockholders' equity decreased by $2.0 million, primarily due to
the purchase of 130,396 shares of stock at an average price of $19,625 per
share. Equity was also reduced $130,000 due to a dividend paid on February 12,
1998. These were offset somewhat by earnings for the quarter.
Non-performing Assets
The following table sets forth information regarding non-performing
loans and real estate owned.
At At At
March 31, December 31, March 31,
--------- ------------ ---------
1998 1997 1997
---- ---- ----
(In thousands)
Total non-performing loans........ $ 955 $ 1,284 $ 1,967
Real estate owned................. 585 604 774
------ ------ -----
Total non-performing assets....... $ 1,540 $ 1,888 $ 2,741
====== ====== =====
Total non-performing loans to
net loans....................... 0.64% 0.87% 1.61%
====== ====== =====
Total non-performing loans to
total assets.................... 0.27% 0.39% .65%
====== ====== =====
Total non-performing assets to
total assets.................... 0.43% 0.57% .90%
====== ====== =====
Comparison of Earnings for the Three Months Ended March 31, 1998 and 1997
Net Income. Net income for the three months ended March 31, 1998
increased $13,000 to $459,000 over the same period of 1997. This increase was
due primarily to an increase of $104,000 in net interest income, offset somewhat
by increases in compensation and employee benefits and occupancy expense.
Total Interest Income. Interest income increased by $627,000 or 12.58%
to $5.6 million for the three months ended March 31, 1998 as compared to the
three months ended March 31, 1997. This increase was due in most part to an
increase of $30.9 million in the average balance of interest earning assets. In
addition, the average rate earned on interest earning assets increased by 9
basis points to 6.95% from 6.86%. This increase was due in part to the change in
the composition of average interest earning assets. For the three months ended
March 31, 1998, the average balance of loans made up 45.9% of all the average of
interest earning assets, up from 40.9% for the three months ended March 31,
1997. The average balance of investment securities (including available for
sale) increased to 19.6% from 17.7%. Conversely, mortgage-backed securities made
up 31.5% of the average interest earning assets for the quarter ended March 31,
1998, down from 37.8% for the first quarter of 1997. The average balance of
federal funds sold and interest bearing deposits in banks increased to 3.4% of
all interest earning assets for the quarter ended March 31, 1998, from 2.95% for
the quarter ended March 31, 1997. In general, mortgage-backed securities have a
lower yield than loans because they are guaranteed as to principal and interest.
Federal funds and interest bearing deposits in banks have a lower yield than
investment securities, generally, due to their relatively short terms.
Total Interest Expense. Interest expense increased by $523,000 or
17.45% for the quarter ended March 31, 1998 as compared to the same period of
1997. This increase was primarily due to the increase in the average balance of
interest bearing liabilities of $33.7 million and an increase in the average
cost
7
of funds of 19 basis points to 4.84% for the quarter ended March 31, 1998 as
compared to the quarter ended March 31, 1997. The $33.7 million increase in the
average balance of interest bearing liabilities was due to the average balance
of borrowed money increasing by $29.9 million. At March 31, 1998, the Bank had
$75.4 million of borrowings with the FHLB. They consist of the following:
(a) $9.0 million repurchase agreement with rate of 5.82%, maturing
December 1999 with a one time call feature at December 20, 1998.
(b) Two repurchase agreements of approximately $8.2 million each.
Both mature in November 1998, at rates of 5.62% and 5.61%.
(c) $10.0 million repurchase agreement with a rate of 5.61%, maturing
April 30, 1998. (This repurchase agreement was subsequently
rolled over at a rate of 5.62% and will mature June 1, 1998).
(d) $15.0 million advance with a rate of 5.80%, maturing in August
1998.
(e) $25.0 million advance at a rate of 5.35%, with a final maturity
of March 2011, but it is callable by the Federal Home Loan Bank
after March 2001.
In addition, the Bank has an $8.5 million repurchase agreement with an
independent third party, which matures in August, 1998 and has a rate of 5.62%.
Net Interest Income. Net interest income increased $104,000 or 5.2%,
due to the reasons discussed in the two previous sections.
Provisions for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the potential losses that may be
incurred in the Bank's loan portfolio. Such evaluation, which includes a review
of certain loans of which full collectibility of interest and principal may not
be reasonably assured, considers the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
current economic conditions. The provision for loan losses was $60,000 in the
quarters ended March 31, 1998 and 1997.
As a result of the declines in regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institution by the FDIC, OTS or other federal or state regulators. Results
of recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate market values, requiring
significantly increased provisions for potential loan losses. While the Bank
believes it has established an adequate allowance for loan losses, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to significantly increase its allowance for loan losses,
thereby negatively affecting the Bank's financial condition and earnings or that
the Bank may not have to increase its level of loan loss allowance in the
future.
Management will continue to review its loan portfolio to determine the
extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
8
An analysis of the allowance for loan losses follows:
Three Months
Ended March 31,
---------------------
1998 1997
---- ----
(In thousands)
Balance - beginning $1,168 $1,090
Provisions charged to operations......... 60 60
Loans charged off, net of recoveries..... (19) (142)
----- ----
Balance-ending........................... $1,209 $1,008
===== =====
Impaired loans and related amounts recorded in the allowance for loan
losses at March 31, 1998 are summarized as follows (in thousands):
At At At
March 31, December 31, March 31,
1998 1997 1997
------ ------ -----
With recorded allowances.......... $ 741 $ 744 $1,612
Without recorded allowances....... -- -- --
----- ----- ----
Total impaired loans................. 741 744 1,612
Related allowance for loan losses.... 111 111 245
----- ----- -----
Net impaired loans................... $ 630 $ 633 $1,367
===== ===== =====
Non-interest Income. Non-interest income increased by $2,000 for the
three months ended March 31, 1998 as compared to the three months ended March
31, 1997.
Non-interest Expense. Non-interest expense increased by $116,000 or
9.1%, for the three months ended March 31, 1998 as compared to the same period
last year. The increase was primarily due to increases in compensation and
employee benefits, occupancy and miscellaneous expense. Compensation and
employee benefits increased by $89,000 due in most part to an increase in the
expense related to the Company's Employee Stock Ownership Plan resulting from
the increase in the stock price of Little Falls Bancorp, Inc., an increase in
employee health insurance fees, an increase in the expense related to Management
Stock Bonus Plan and normal annual merit increases. Occupancy expense increased
$18,000 due in most part to the payment of $34,000 in back rent to settle a
disputed rental increase. Miscellaneous expense increased $28,000, primarily due
to the expense for the directors stock bonus plans. For the three months ended
March 31, 1998 and 1997, the expense for the directors stock bonus plans was
$43,000 and $19,000, respectively.
Income Tax Expense. Income tax expense decreased from $270,000 to
$247,000, due to the Bank increasing investments in assets that are taxed at a
reduced Federal tax rate.
9
Liquidity and Capital Resources
On March 31, 1998, the Bank was in compliance with its three regulatory
capital requirements as follows:
Amount Percent
------ -------
(Dollars in thousands)
Tangible capital.................... $27,081 7.67%
Tangible capital requirement........ 5,296 1.50%
------- ------
Excess over requirement............. $21,785 6.17%
====== ======
Core capital........................ $27,081 7.67%
Core capital requirement............ 10,592 3.00%
------ ------
Excess over requirement............. $16,489 4.67%
====== ======
Risk based capital.................. $22,884 16.77%
Risk based capital requirement...... 10,916 8.00%
------ -------
Excess over requirement............. $11,968 8.77%
====== =======
Management believes that under current regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future.
Events beyond the control of the Bank, such as increased interest rates or a
downturn in the economy in areas in which the Bank operates could adversely
affect future earnings and as a result, the ability of the Bank to meet its
future minimum capital requirements.
The Bank's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost effective
manner. The Bank's primary sources of funds are deposits and scheduled
amortization and prepayment of loan and mortgage-backed principal. During the
past several years, the Bank has used such funds primarily to fund maturing time
deposits, pay savings withdrawals, fund lending commitments, purchase new
investments, and increase liquidity. The Bank is currently able to fund its
operations internally. Additionally, sources of funds include the ability to
utilize Federal Home Loan Bank of New York advances and the ability to borrow
against mortgage-backed and investment securities. As of March 31, 1998, the
Bank had $83.9 million of borrowed funds. Loan payments, maturing investments
and mortgage-backed security prepayments are greatly influenced by general
interest rates, economic conditions and competition.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. As of March 31, 1998, the Bank had mortgage
commitments to fund loans of $4.6 million. Also, at March 31, 1998, there were
commitments on unused lines of credit relating to home equity loans of $4.2
million. Certificates of deposit scheduled to mature in one year or less at
March 31, 1998 totaled $122.0 million. Based on historical deposit withdrawals
and outflows, and on internal monthly deposit reports monitored by management,
management believes that a majority of such deposits will remain with the Bank.
As a result, no adverse liquidity effects are expected. Note, however, that
purchases of common stock of the Company pursuant to the repurchase plan and
MSBP will require additional liquidity. Management is currently evaluating its
options on these matters.
The Bank is required under federal regulations to maintain certain
specified levels of "liquid investments," which include certain United States
government obligations and other approved investments. Current regulations
require the Bank to maintain liquid assets of not less than 4% of its net
withdrawable accounts plus short term borrowings. Those levels may be changed
from time to time by the regulators to reflect current economic conditions. The
Bank has maintained liquidity in excess of regulatory requirements.
10
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.
Year 2000
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 Company. Data processing is also essential to
most other financial institutions and many other companies. All of the material
data processing of the Company that could be affected by this problem is
provided by a third party service bureau. The service bureau of the Company has
advised the Company 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 Company 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 Company.
Furthermore, the Company is requiring its computer systems and software vendors
to represent that the products provided are or will be Year 2000 compliant and
has planned a program of testing for compliance. The Company is obtaining
representations from its primary third party vendors that they will have
resolved any Year 2000 problems and anticipates that its vendors also will have
resolved any Year 2000 problems. There can be no assurances, however, that the
Company's plan or the performance by the Company's vendors will be effective to
remedy all potential problems. To the extent the Company's systems are not fully
Year 2000 compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software would not have a
materially adverse effect on the Company's business, financial condition,
results of operations, cash flows, and business prospects.
11
Further, any Year 2000 failure on the part of the Company's customers could
result in additional expense or loss to the Company. The Company expects to be
in year 2000 compliance by the end of 1998.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Additional Key Operating Ratios
For the
Three Months Ended
March 31,
1998(1) 1997(1)
------- -------
Diluted earnings per common share (2)..... $ 0.19 $ 0.17
Return on average assets.................. 0.55% 0.59%
Return on average equity.................. 4.81% 4.44%
Interest rate spread...................... 2.11% 2.21%
Net interest margin....................... 2.59% 2.73%
Noninterest expense to average assets..... 1.66% 1.69%
Net charge-offs to average outstanding
loans................................... 0.05% 0.47%
At March 31, At December 31,
1998 1997
------------ ---------------
Tangible book value per share........ $13.52 $13.59
- ----------------
(1) The ratios for the three month period are annualized.
(2) The average number of shares and share equivalents outstanding during
the three months ended March 31, 1998 and 1997 was 2,378,608 and
2,557,243, respectively.
12
LITTLE FALLS BANCORP, INC. AND SUBSIDIARY
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank was engaged in any legal proceeding
of a material nature at March 31, 1998. From time to time, the Company
is a party to routine legal proceedings in the ordinary course of
business, such as claims to enforce liens, condemnation proceedings on
properties in which the Company holds security interests, claims
involving the making and servicing of real property loans, and other
issues incident to the business of the Company. There were no lawsuits
pending or known to be contemplated against the Company at March 31,
1998 that would have a material effect on the operations or income of
the Company or the Bank, taken as a whole.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
3.1 Articles of Incorporation of Little Falls Bancorp, Inc.*
3.2 Bylaws of Little Falls Bancorp, Inc.*
4.0 Form of Stock Certificate of Little Falls Bancorp, Inc.*
10.1 Employment Agreement between the Bank and John P. Pullara**
10.2 Employment Agreement between the Bank and Leonard G. Romaine**
10.4 Form of Employment Agreement with Eight Employees of the Bank***
10.6 1996 Management Stock Bonus Plan***
10.7 1996 Stock Option Plan***
11.0 Earnings Per Share Calculation
27.0 Financial Data Schedule****
(b) Reports on Form 8-K.
None.
- ------------------
* Incorporated herein by reference into this document from the Exhibits to
Form S-1, Registration Statement, initially filed with the Securities and
Exchange Commission on September 25, 1995 (Registration No. 33-97316).
** Incorporated by reference into this document from the Exhibits to
Registrant's Annual Report on Form 10-K for the Year Ended December 31,
1995 (File No. 0-27010).
*** Incorporated by reference into this document from the Exhibits to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996 (File No. 0-27010).
**** In electronic filing only.
13
LITTLE FALLS BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITTLE FALLS BANCORP, INC.
Date: May 15, 1998 By: /s/Leonard G. Romaine
-------------------------------------------
Leonard G. Romaine
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 1998 By: /s/Richard Capone
-------------------------------------------
Richard Capone
Senior Vice President and
Chief Financial Officer
(Principal Officer)