SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
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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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (201) 256-6100
--------------
N/A
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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 August 10, 1998.
Class Outstanding
- --------------------------- ----------------
$.10 par value common stock 2,477,525 shares
LITTLE FALLS BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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)
June 30, December 31,
1998 1997
----------- -----------
ASSETS
Cash and due from banks................................................ $5,989,174 $2,737,709
Interest-bearing deposits in other banks............................... 1,393,467 550,522
Federal funds sold..................................................... 3,500,000 3,500,000
----------- -----------
Total cash and cash equivalents................................... 10,882,641 6,788,231
Investment securities held-to-maturity net
(estimated fair values $57,938,000
and $58,129,000)..................................................... 57,677,075 57,987,644
Investment securities available for sale............................... 25,350,866 --
Mortgage-backed securities available for
sale................................................................. 15,584,096 13,929,048
Mortgage-backed securities held to maturity, net
(estimated fair values $76,159,000
and $91,246,000)..................................................... 76,016,364 90,957,446
Loans receivable, net.................................................. 153,134,871 147,033,259
Premises and equipment, net............................................ 2,644,696 2,617,175
Investment in real estate, net......................................... 81,281 427,317
Foreclosed real estate................................................. 367,200 604,219
Interest receivable, net............................................... 2,154,013 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.................................... 2,675,836 2,856,230
Other assets........................................................... 1,010,945 725,234
----------- -----------
TOTAL ASSETS..................................................... $351,347,484 $328,522,494
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................................. $228,769,299 $230,132,675
Borrowed money....................................................... 83,877,000 58,719,500
Accounts payable and other liabilities............................... 1,772,938 1,375,658
------------ -----------
Total liabilities................................................ 314,419,237 290,227,833
----------- -----------
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........................................... 29,146,962 29,067,633
Retained earnings - substantially restricted......................... 18,973,755 18,275,517
Common Stock acquired by ESOP shares................................. (2,025,319) (2,106,432)
Unearned restricted MSBP stock, at cost.............................. (1,177,601) (1,329,167)
Treasury stock, at cost; 564,225 and 433,829 shares.................. (8,191,308) (5,632,286)
Unrealized gain (loss) on securities available
for sale net of deferred taxes..................................... 111,300 (71,062)
Minimum pension liability net of deferred taxes...................... (213,717) (213,717)
----------- ------------
Total stockholders' equity....................................... 36,928,247 38,294,661
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................... $351,347,484 $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 For the Six Months
Ended June 30, Ended June 30,
-------------------------------- -------------------------
1998 1997 1998 1997
------------- ---------------- -------------- ----------
Interest income:
Loans receivable..................................................... $2,853,201 $2,289,973 $5,642,743 $4,495,497
Mortgage backed securities........................................... 1,535,510 1,744,190 3,154,910 3,558,358
Investment securities and other interest earning assets.............. 1,509,525 937,017 2,708,355 1,898,440
--------- -------- --------- ---------
Total interest income............................................ 5,898,236 4,971,180 11,506,008 9,952,295
--------- --------- ---------- ---------
Interest expense:
Deposits............................................................. 2,590,216 2,546,884 5,189,956 5,068,671
Borrowings........................................................... 1,177,788 487,199 2,096,231 960,895
--------- --------- --------- ---------
Total interest expense................................................. 3,768,004 3,034,083 7,286,187 6,029,566
--------- --------- --------- ---------
Net interest income before provision for loan losses................... 2,130,232 1,937,097 4,219,821 3,922,729
Provision for loan losses.............................................. 60,000 60,000 120,000 120,000
--------- --------- --------- ---------
Net interest income after provision for loan losses............... 2,070,232 1,877,097 4,099,821 3,802,729
--------- --------- --------- ---------
Non-interest income:
Total non-interest income.............................................. 102,106 215,315 164,625 296,657
--------- --------- --------- ---------
Non-interest expense:
Compensation and employee benefits................................... 716,075 618,040 1,440,296 1,253,640
Occupancy, net....................................................... 63,187 72,961 157,728 150,951
Equipment............................................................ 122,450 108,514 223,710 221,735
Deposit insurance premiums........................................... 29,925 35,041 59,982 66,014
Loss on foreclosed real estate....................................... 10,016 26,664 16,892 39,103
Amortization of deposit premium...................................... 90,197 90,196 180,394 180,393
Miscellaneous expense................................................ 400,177 356,042 739,885 687,243
--------- --------- --------- ---------
Total non-interest expense........................................ 1,432,027 1,307,458 2,818,887 2,599,079
--------- --------- --------- ---------
Income before provision for income taxes.......................... 740,311 784,954 1,445,559 1,500,307
Provision for income taxes............................................. 246,350 316,000 493,050 586,000
--------- --------- --------- ---------
Net income....................................................... 493,961 468,954 952,509 914,307
Other comprehensive income - unrealized holding gains on securities
available for sale, net of income taxes of $93,100 and $112,647 in 1998 147,584 -- 182,362 --
---------- ---------- --------- ----------
$ 641,545 $ 468,954 $1,134,871 $ 914,307
========== ========== ========= ==========
Weighted average number of common shares outstanding:
basic 2,179,319 2,402,476 2,219,343 2,457,225
========== ========= ========= =========
diluted 2,297,377 2,450,347 2,337,134 2,505,510
========== ========= ========= =========
Earnings per share:
basic $0.23 $0.20 $0.43 $0.37
===== ===== ===== =====
diluted $0.22 $0.19 $0.41 $0.36
===== ===== ===== =====
See notes to unaudited consolidated financial statements.
2
LITTLE FALLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
Ended June 30,
--------------------------------------
1998 1997
------------- ------------
Cash flows from operating activities:
Net income.............................................................. $ 952,509 $ 914,307
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................................... 66,624 67,701
Provision for loan losses............................................. 120,000 120,000
Amortization of intangibles........................................... 180,394 180,394
Amortization of deferred fees, premiums and discounts, net............ 104,556 70,578
Amortization of unearned ESOP shares.................................. 160,442 108,935
Amortization of MSBP cost............................................. 151,566 109,587
Loss on sale of foreclosed real estate................................ 8,162 39,067
Gain on sale of real estate held for investment....................... (37,911) (106,318)
Decrease (increase) in other assets................................... (398,358) 32,708
Decrease (increase) in interest receivable, net....................... (74,922) 24,629
Increase in interest payable.......................................... 198,375 166,943
Increase in accounts payable and other liabilities.................... 171,738 133,089
--------- ---------
Net cash provided by operating activities........................... 1,603,175 1,861,620
--------- ---------
Cash flows from investing activities:
Principal collections on mortgage-backed securities available for sale 3,313,201 --
Principal collections on mortgage-backed securities held to maturity.. 14,902,486 9,998,843
Maturity of investments held to maturity.............................. 12,000,000 6,342,000
Net increase in loans receivable...................................... (6,195,393) (11,150,897)
Purchase of mortgage-backed securities available for sale............. (4,961,068) --
Purchase of investments held to maturity.............................. (11,694,185) (2,000,000)
Purchase of investments available for sale............................ (25,131,597) --
Purchases of premises and equipment................................... (90,725) (27,221)
Proceeds from sale of foreclosed real estate.......................... 209,990 364,333
Proceeds from sale of real estate held for investment................. 380,528 248,378
Purchases of Federal Home Loan Bank of New York stock................. (1,250,000) (146,300)
----------- ----------
Net cash provided by (used in) investing activities................. (18,516,763) 3,629,136
----------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits.................................... (1,336,209) (2,998,735)
Treasury stock acquired................................................ (2,559,022) --
Increase (decrease) in borrowed money.................................. 25,157,500 (124,000)
Purchase of MSBP stock................................................. -- (1,688,171)
Cash dividends paid.................................................... (254,271) (150,985)
---------- ----------
Net cash provided by (used in) financing activities.................. 21,007,998 (4,961,891)
---------- ----------
Increase in cash and cash equivalents................................ 4,094,410 528,865
Cash and cash equivalents:
Beginning of period..................................................... 6,788,231 10,373,964
---------- ----------
End of period........................................................... 10,882,641 $10,902,829
========== ==========
Supplemental disclosures:
Cash paid during the year for:
Interest................................................................ $ 7,087,812 $ 5,862,623
=========== ===========
Income Taxes............................................................ 746,114 595,000
=========== ===========
Unrealized gain on securities available for sale, net of $ 182,362 --
=========== ===========
income taxes........................................................
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 and six
month periods ended June 30, 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 June 30, 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 material adverse
effect on the Company's consolidated financial condition or
operations.
Employers' Disclosures about Pensions and Other Postre-
tirement Benefits. In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." This statement supersedes the disclosure requirements in
FASB statements No. 87, "Employers' Accounting for Pensions," No. 88,
"Employers' accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits," and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." This statement addresses disclosures only. It does not
address measurement or recognition and, as such, will not have any
impact on consolidated financial condition or operations. The
disclosure requirements of SFAS No. 132 are effective for fiscal years
beginning after December 15, 1997.
Accounting for Derivative Instruments and Hedging Activities.In
June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. In
addition, certain provisions of this statement will permit, at the
date of initial adoption of this Statement, the transfer of any
held-to-maturity security into either the available for sale or
trading category and the transfer of any available for sale security
into the trading category. Transfers from the held-to-maturity
portfolio at the date of initial adoption will not call into question
the entity's intent to hold other debt securities to maturity in the
future. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999 and is not expected to have a
material impact on the Company. The Company at this time does not
intent to adopt SFAS No. 133 earlier than required.
5
LITTLE FALLS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
General
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 $22.8 million at June 30, 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. Investment
securities available for sale increased by $25.4 million as the Company used a
portion of the $25.0 million borrowings to fund these purchases. Net loans
increased by $6.1 million due in most part to mortgage originations of $14.5
million offset somewhat by loan repayments. Mortgage-backed securities
(including those available for sale) decreased by $13.3 million due to
repayments offset somewhat by purchases of $5.0 million.
Total deposits decreased, excluding interest credited, by $6.6 million.
This decrease was due in most part to the Bank reducing the rate paid on
certificates of deposit. As a result, the weighted average rate paid on deposits
decreased from 4.60% at December 31, 1997 to 4.45% at June 30, 1998, a decrease
of 15 basis points.
Total stockholders' equity decreased by $1.4 million, primarily due to
the purchase of 130,396 shares of stock at an average price of $19.625 per share
offset somewhat by earnings of $953,000 for
6
the six months ended June 30, 1998. Equity was also reduced $254,000 due to a
dividends paid during the period.
Non-performing Assets
The following table sets forth information regarding non-performing
loans and real estate owned.
At At At
June 30, December 31, June 30,
1998 1997 1997
(In thousands)
Total non-performing loans........................... $801 $1,284 $2,671
Real estate owned.................................... 367 604 454
--- ----- -----
Total non-performing assets.......................... $1,168 $1,888 $3,125
===== ===== =====
Total non-performing loans to net loans.............. 0.52% 0.87% 2.08%
====
Total non-performing loans to total assets........... 0.23% 0.39% 0.89%
====
Total non-performing assets to total assets.......... 0.33% 0.57% 1.04%
====
Comparison of Earnings for the Three and Six Months Ended June 30, 1998 and 1997
Net Income. Net income for the three and six months ended June 30, 1998
increased $25,000 to $494,000 and $38,000 to $953,000, respectively, over the
same periods in 1997. These increases were due primarily to increases in net
interest income, offset somewhat by increases in compensation and employee
benefits.
Total Interest Income. Interest income increased by $927,000 or 18.6%
and $1.6 million or 15.6% for the three and six months ended June 30, 1998 as
compared to the three and six months ended June 30, 1997. These increases were
due in most part to increases of $53.0 million and $42.3 million in the average
balance of interest earning assets for the three and six month periods ended
June 30, 1998 as compared to the same periods one year ago. In addition, the
average rate earned on interest earning assets increased to 6.94% from 6.93% and
to 6.95% from 6.89% during the three and six month periods, respectively. This
increase was due in part to the change in the composition of average interest
earning assets. For the three and six months ended June 30, 1998, the average
balance of loans made up 44.2% and 44.9% of all the average of interest earning
assets, up from 44.0% and 42.2% for the three and six months ended June 30,
1997, respectively. The average balance of investment securities (including
available for sale) increased to 23.5% and 21.2% from 17.8% and 17.7%.
Conversely, mortgage-backed securities made up 28.1% and 29.7% of the average
interest earning assets for the periods ended June 30, 1998, down from 36.3% and
37.1% for the same periods of 1997. The average balance of federal funds sold
and interest bearing deposits in banks increased to 3.1% and 3.1% of all
interest earning assets for the periods ended June 30, 1998, from 1.2% and 2.2%
for the same periods ended June 30, 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 $734,000 or 24.2%
for the quarter ended June 30, 1998 and $1.3 million or 20.8% for the six months
ended June 30, 1998 as compared to the same periods of 1997. These increases
were primarily due to the increase in the average balance of interest bearing
liabilities of $53.6 million and $44.8 and an increase in the average cost of
funds of 10
7
basis points to 4.81% for the quarter ended June 30, 1998 and 14 basis points to
4.82% for the six months ended June 30, 1998 as compared to the same periods
ended June 30, 1997. The increases in the average balance of interest bearing
liabilities was due to the increase in the average balance of borrowed money. At
June 30, 1998, the Bank had $83.9 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 5.60%,
maturing July 2, 1998. This repurchase agreement was
subsequently rolled over at a rate of 5.63% and matured August
1998. At that time it was rolled over again at a rate of 5.65%
and will mature in September 1998.
(d) $15.0 million advance with a rate of 5.80%, maturing in August
1998. This advance was subsequently rolled over at a rate of
5.76% and will mature in September 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 $193,000, or 9.97%
and $297,000, or 7.57% during the three and six month periods 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 June 30, 1998 and 1997 and $120,000 for each of the six months
ended June 30, 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.
8
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.
An analysis of the allowance for loan losses follows:
Six Months
Ended June 30,
------------------------
1998 1997
---- ----
(In thousands)
Balance - beginning...................... $1,168 $1,090
Provisions charged to operations......... 120 120
Loans charged off, net of recoveries..... (19) (150)
---- -----
Balance-ending........................... $1,269 $1,060
===== =====
Impaired loans and related amounts recorded in the allowance for loan
losses at June 30, 1998 are summarized as follows (in thousands):
At At At
June 30, December 31, June 30,
1998 1997 1997
-------------- ----------------- ---------
With recorded allowances........... $614 $744 $1,509
Without recorded allowances........ - - -
----- ----- ------
Total impaired loans............... 614 744
1,509
Related allowance for loan losses.. 92 111 208
---- --- -----
Net impaired loans................. $522 $633 $1,301
=== === =====
Non-interest Income. Non-interest income decreased by $113,000 and
$132,000 for the three and six months ended June 30, 1998 as compared to the
three and six months ended June 30, 1997. These decreases were primarily due to
a $125,000 gain recorded on the sale of the Bank's Frenchtown office building in
June, 1997.
Non-interest Expense. Non-interest expense increased by $125,000 and
$220,000 for the three and six months ended June 30, 1998 as compared to the
same periods in 1997. These increases were primarily due to increases of $98,000
and $187,000 in compensation and employee benefits. These increases were mainly
due to an increase in the expense related to the Company's Employee Stock
Ownership Plan resulting from the increase in the market price of the common
stock of Little Falls Bancorp, Inc., an increase in the expense connected with
the Management Stock Bonus Plan and normal annual merit increases. Miscellaneous
expense increased by $44,000 and $52,000 primarily due to an increase in the
expense connected with the 1997 Director's Stock Compensation Plan.
Income Tax Expense. Income tax expense decreased $70,000 and $93,000,
due to a decrease in pre-tax income and the Bank increasing investments in
assets that are taxed at a reduced Federal tax rate.
9
Liquidity and Capital Resources
On June 30, 1998, the Bank was in compliance with its three regulatory
capital requirements as follows:
Amount Percent
------ -------
(Dollars in thousands)
Tangible capital.............................. $27,798 8.05%
Tangible capital requirement.................. 5,181 1.50%
------- -----
Excess over requirement....................... $ 22,617 6.55%
======= =====
Core capital.................................. $27,798 8.05%
Core capital requirement...................... 13,816 4.00%
------ -----
Excess over requirement....................... $13,982 4.05%
====== =====
Risk based capital............................ $21,000 15.33%
Risk based capital requirement................ 10,959 8.00%
------ -----
Excess over requirement....................... $10,041 7.33%
====== ====
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 June 30, 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 June 30, 1998, the Bank had mortgage
commitments to fund loans of $3.6 million. Also, at June 30, 1998, there were
commitments on unused lines of credit relating to home equity loans of $4.3
million. Certificates of deposit scheduled to mature in one year or less at June
30, 1998 totaled $109.8 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.
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
11
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. 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 For the
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------
1998(1) 1997(1) 1998(1) 1997(1)
------- ------- ------- -------
Diluted earnings per common share (2)............ $0.22 $0.19 $0.41 $0.36
Return on average assets......................... 0.56% 0.63% 0.55% 0.61%
Return on average equity......................... 5.39% 4.75% 5.09% 4.59%
Interest rate spread............................. 2.14% 2.22% 2.12% 2.21%
Net interest margin.............................. 2.51% 2.70% 2.55% 2.71%
Noninterest expense to average assets............ 1.61% 1.71% 1.63% 1.70%
Net charge-offs to average outstanding
loans.......................................... 0.01% 0.01% 0.01% 0.12%
At June 30, At December 31,
1998 1997
---- ----
Tangible book value per share............... $13.83 $13.59
- ----------------
(1) The ratios for the three and six month periods are annualized.
(2) The average number of shares and share equivalents outstanding during
the three and six months ended June 30, 1998 and 1997 was 2,297,377,
2,337,134, 2,450,347, and 2,505,510, 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 June 30, 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 June 30,
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: August 14, 1998 By: /s/ Leonard G. Romaine
-------------------------------------
Leonard G. Romaine
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1998 By: /s/ Richard Capone
-------------------------------------
Richard Capone
Senior Vice President and
Chief Financial Officer
(Principal Officer)