SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|X| EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 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 Number: 0-25106
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LAKEVIEW FINANCIAL CORP.
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(Exact name of Registrant as specified in its Charter)
New Jersey 22-3334052
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1117 Main Street, Paterson, New Jersey 07503
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (973) 890-1234
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $2.00 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based on the closing price of the registrant's Common Stock
on October 13, 1998 was $38.1 million.
As of October 13, 1998 there were issued and outstanding 4,818,478
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended July
31, 1998. (Parts II and IV)
2. Portions of Proxy Statement for the 1998 Annual Meeting of Stockholders.
(Part III)
Part I
Lakeview Financial Corporation (the "Company") may from time to time
make written or oral "forward-looking statements", including statements
contained in the Company's filings with the Securities and Exchange Commission
(including this Annual Report on Form 10-K and the exhibits thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
federal reserve system, inflation, interest rates, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing the risks
resulting from these factors.
The Company cautions that the listed factors are not exclusive. The
Company does not undertake to update any forward-looking statement, whether
written or oral, that may be made from time to time by or on behalf of the
Company.
Item 1. Business
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General
The Company, a New Jersey Corporation, is a unitary savings and loan
holding company. The principal asset of the Company consists of 100% of the
issued and outstanding shares of common stock of Lakeview Savings Bank
("Lakeview" or the "Savings Bank"). On February 27, 1998, the Company acquired
Westwood Financial Corporation ("Westwood"), the holding company of Westwood
Savings Bank ("Westwood Bank"), Westwood, New Jersey. With the completion of the
Westwood Acquisition, the Company added two additional Bergen County branches
and three additional ATM's, bringing the total branch network to ten branches
and nine ATM's. In September 1998, the Company's eleventh branch office was
opened in Fairview, Bergen County, New Jersey.
The principal business of the Savings Bank is the acceptance of savings
deposits from the general public and the origination and purchase of mortgage
loans for the purpose of constructing, financing or refinancing one- to four
family residences and the purchase of mortgage-backed securities. The Savings
Bank also originates home equity loans.
On October 8, 1998, the Company announced that the Company's Board of
Directors has been evaluating strategic alternatives in order to maximize
shareholder value. Included in the Company strategic alternatives is a possible
sale of the Company; however, at this time, it is not possible to determine
whether the Company will receive any expressions of interest or, if so, whether
any such expressions of interest will be acceptable or result in the Company
entering into negotiations with any potential acquirer. The Company has retained
Sandler O'Neill & Partners, L.P. to assist in its evaluation of its
alternatives. As a matter of policy, the Company does not intend to comment
publicly concerning any proposals that may be received or any possible
negotiations the Company may enter into in connection with any such proposals
until the Company determines that public disclosure would be appropriate.
Competition
The Savings Bank's primary market area consists of Bergen and Passaic
counties in northern New Jersey, and is one of many financial institutions
serving this market area. The competition for deposit products comes from other
insured financial institutions such as commercial banks, thrift institutions and
credit unions in the Savings Bank's market area. Deposit competition also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition comes from other insured financial institutions such
as commercial banks, thrift institutions and credit unions.
2
Lending Activities
Loan Portfolio Data. The following table sets forth the composition of
the Savings Bank's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses, loans in process, and deferred
loan origination fees and costs.
1994 1995 1996 1997 1998
------------------ ------------------- ---------------- ----------------- -------------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
(Dollars in thousands)
TYPE OF LOAN:
Real Estate Loans:
Construction loans:
Residential (1-4 family)..........$ 190 .13% $ 915 .63% $ 863 .52% $ -- --% $ 300 .10%
Multi-family/commercial........... 550 .40 -- -- -- -- 377 .16 1,797 .61
-------- ---- ------- ------ ------- ------ ------- ------- ------ -----
Total construction loans........ 740 .53 915 .63 863 .52 377 .16 2,097 .71
Residential (1-4 family)............ 79,383 57.33 84,051 57.81 84,006 50.35 82,647 36.22 99,184 33.97
Multi-family/Commercial............. 20,879 15.08 22,186 15.26 33,063 19.81 68,192 29.89 79,386 27.19
Commercial loans.................... -- -- -- -- 697 .42 8,982 3.94 14,186 4.86
Home equity, second mortgage and
home improvement loans............. 36,223 26.16 37,221 25.60 46,705 27.99 66,057 28.95 93,633 32.07
Consumer Loans:
Passbook account loans.............. 1,242 .90 1,022 .70 1,517 .91 1,914 .84 3,508 1.20
Student loans....................... 6 -- 1 -- -- -- -- -- -- --
-------- ------ ------- ------ -------- ------ ------- ------- --------- ------
Total loans.........................$138,473 100.00% $145,396 100.00% $166,851 100.00% $228,169 100.00% $291,994 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY:
Real Estate Loans
1-4 family..........................$116,346 84.02% $119,885 82.46% $124,467 74.60% $133,852 58.66% $174,191 59.66%
Multi-Family/Commercial............... 20,879 15.08 24,488 16.84 40,170 24.07 83,421 36.56 100,109 34.28
Consumer Loans:
Passbook accounts................... 1,242 .90 1,022 .70 1,517 .91 1,914 .84 3,508 1.20
Student loans....................... 6 -- 1 -- -- -- -- -- -- --
Commercial loans...................... -- -- -- -- 697 .42 8,982 3.94 14,186 4.86
-------- ------- -------- ------ ------- ------ ------- ------- ------ ------
Total loans.........................$138,473 100.00% $145,396 100.00% $166,851 100.00% $228,169 100.00% $291,994 100.00%
======= ======= ======= ====== ======= ====== ======= ====== ======= ======
3
One- to Four Family Mortgage Loans. The Savings Bank offers first
mortgage loans secured by one- to four family residences in the Savings Bank's
market area. Typically, such residences are single family homes that serve as
the primary residence of the owner. Additionally, this loan category includes a
relatively small amount of loans collateralized by mixed use properties which
are primarily residential, but have some commercial use as well. The Savings
Bank currently offers 15 and 30 year fixed-rate mortgage loans, 15 year balloon
mortgage loans with five to seven year maturities, and adjustable rate mortgage
("ARM") loans with one, three or five year adjustment periods and 15 to 30 year
maturities. The Savings Bank retains ARM loans, 15 year fixed-rate mortgages and
balloon mortgage loans. Fixed-rate loans with more than 15 year maturities are
sold in the secondary market.
Monthly payments on balloon loans are based on a 15 year amortization
schedule. Renewal of balloon mortgage loans is based on the credit history as
well as the current qualification of the borrower at time of renewal. The
Savings Bank offers balloon mortgages in an effort to make its mortgage loan
portfolio more interest rate sensitive. Interest rates charged on fixed-rate
loans are competitively priced based on the local competitive market. Loan
origination fees on these loans are generally up to 2% of the loan amount
depending on the interest rate accepted by the borrower.
Balloon loans pose a different credit risk from 15 year mortgage loans.
The balloon loans mature in five to seven years but payments are based on a
fifteen year amortization schedule. At the time of the loan's maturity, the
borrower must either pay the balloon payment or refinance the loan. If the
borrower is ineligible for refinancing at the time of loan maturity and cannot
make the large balloon payment, the loan will go into default. In the case of
standard mortgage loans, payments are spread out evenly over the term of the
loan, thereby decreasing this credit risk.
The Savings Bank currently offers ARM loans with interest rates that
adjust every one, three or five years with a maximum rate increase cap of 2% per
year, and a lifetime cap of 6%. The interest rate on these mortgages since 1985
has been the U.S. Treasury bill rate plus 3%. As of July 31, 1998, one year,
three year, and five year ARM loans totaled $34.0 million or 34.2% of the one-
to four family portfolio. ARM loans are originated for a term of up to 30 years.
The Savings Bank originates one- to four family residential mortgage loans in
amounts up to 80% of the appraised value of the mortgaged property. The Savings
Bank retains the ARM loans it originates for its loan portfolio.
Generally, ARM loans pose credit risks different than the risks
inherent in fixed-rate loans, primarily because as interest rates rise, the
underlying payments of the borrower rise, thereby increasing the potential for
default. At the same time, the marketability of the underlying property may be
adversely affected by higher interest rates. The Savings Bank attempts to reduce
this credit risk by qualifying ARM loan borrowers based on the first full
interest rate adjustment. The Savings Bank does not originate ARM loans which
provide for negative amortization.
The Savings Bank also offers 15 year fixed-rate mortgage loans.
Interest rates charged on fixed-rate loans are competitively priced based on the
Federal Home Loan Mortgage Corporation ("FHLMC") buy rates. Loan origination
fees on these loans are generally 2% of the loan amount. The Savings Bank
retains these 15 year mortgage loans for its loan portfolio.
4
Multi-Family and Commercial Real Estate. The Savings Bank originates
multi-family real estate loans usually secured by property located in the
Savings Bank's primary market area. The Savings Bank's commercial real estate
loans are secured by such property as mixed use and office buildings, small
retail stores and industrial buildings. The Savings Bank's multi-family and
commercial real estate loans are five or seven year balloon mortgages with
amortization periods typically of 15 years and loan to value ratios of 80% or
less.
Multi-family and commercial real estate may entail significant
additional credit risks compared to one- to four family residential lending.
Commercial and multi-family real estate mortgage loans may involve large loan
balances to single borrowers or groups of related borrowers. In addition, the
payment experience on loans secured by income producing properties is typically
dependent on the successful operation of the properties and thus may be subject
to a greater extent to adverse conditions in the real estate market or in the
general economy.
Home Equity, Second Mortgage and Home Improvement Loans. The Savings
Bank originates home equity, second mortgage and home improvement loans secured
by one-family residences. These loans generally are originated as adjustable
rate loans which adjust monthly and have terms of from 15 to 30 years. No loan
origination fee is usually charged on these loans. Loans made on owner-occupied,
one-family residences are generally subject to a 70% combined loan-to-value
limitation, including any other outstanding mortgages or liens, and are made at
an adjustable rate of 185 points over the prime rate. Loans on non-owner
occupied properties are limited to a 65% loan to value ratio, and are made at an
adjustable rate of 210 points over the prime rate.
Commercial Loans. On January 12, 1996, the Savings Bank granted to Industry
Mortgage Company ("IMC") a line of credit for $7 million with an interest rate
of 10%. At July 31, 1998, $ 6.8 million was outstanding. To date, such loan is
not in compliance with the Savings Bank's loans to one borrower limit. In
addition, the Company has a 5.40% investment in IMC. See "-- Loans to One
Borrower."
5
Loan Maturity Table
The following table sets forth the maturity of the Savings Bank's loan
portfolio at July 31, 1998. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $42.0 million during the year ended July 31, 1998. Adjustable-rate
mortgage loans are shown as maturing based on contractual maturities.
Home Equity,
Multi-Family Second Mortgage
1-4 Family and and Home
Real Estate Commercial Improvement Commercial
Mortgage Real Estate(2) Loans(1) Loans Total
-------- -------------- -------- ----- -----
(In thousands)
Amounts Due:
Within 3 months............... $ 842 $ 2,123 $ 5,625 $ 1,351 $ 9,941
3 months to 1 Year............ 1,275 1,671 4,793 8,910 16,649
------ ------ ------ ------ -------
2,117 3,794 10,418 10,261 26,590
After 1 year:
1 to 3 years................ 6,228 3,771 5,981 1,525 17,505
3 to 5 years................ 6,009 9,144 22,488 2,400 40,041
5 to 10 years............... 19,965 18,581 20,810 - 59,356
10 to 20 years.............. 38,896 41,094 37,144 - 117,134
Over 20 years............... 25,969 5,099 300 - 31,368
------ ------ ------ ------- -------
Total due after one year...... 97,067 77,689 86,723 3,925 265,404
------ ------ ------ ------ -------
Total amount due.............. $99,184 $81,483 $97,141 $14,186 $291,994
====== ====== ====== ====== =======
(1) Also includes passbook and student loans.
(2) Also includes construction loans.
The following table sets forth the dollar amount of all loans due after
July 31, 1999, which have pre-determined interest rates and which have floating
or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
One-to four family..................... $ 63,584 $ 33,783 $ 97,367
Multi-family and commercial real estate 21,138 56,251 77,389
Home equity, second mortgage and
home improvement loans............... 56,217 30,506 86,723
Commercial loans....................... - 3,925 3,925
-------- ------- -------
Total................................ $140,939 $124,465 $265,404
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6
Loan Approval Authority and Underwriting. Upon receipt of any loan
application from a prospective borrower, a credit report and verifications are
ordered to confirm specific information relating to the loan applicant's
employment, income and credit standing. An appraisal of the real estate intended
to secure a first mortgage proposed loan is undertaken by an independent fee
appraiser approved by the Board of Directors. In connection with the loan
approval process, the Savings Bank's loan officers analyze the loan applications
and the property involved. All loans are processed at the Savings Bank's office
by the Savings Bank's loan servicing department. The Savings Bank originates
residential first mortgage loans that conform to the FHLMC and Federal National
Mortgage Association ("FNMA") guidelines, so that such loans can be sold if the
Savings Bank desires to do so.
All mortgage loans are underwritten under guidelines and policies
issued by the Board of Directors. The Savings Bank's Loan Committee reviews all
loans and the full Board of Directors then ratifies the actions of the staff and
committee in regard to all loans except consumer loans and passbook loans. Fixed
rate loans with terms of 30 years are immediately sold after funding to FHLMC or
other private secondary mortgage market purchasers depending on the
attractiveness of the pricing.
Loan applicants are promptly notified of the decision of the Savings
Bank by a letter setting forth the terms and conditions of the decision. If
approved, these terms and conditions include the amount of the loan, interest
rate basis, amortization term, a brief description of real estate to be
mortgaged to the Savings Bank, and the notice of requirement of insurance
coverage to be maintained to protect the Savings Bank's interest. The Savings
Bank requires title, fire and casualty insurance for all first mortgage loans,
as well as an escrow account for the payment of real estate taxes. Disability
insurance is available but not required.
Loan Commitments. The Savings Bank generally grants commitments to fund
real estate mortgage loans for periods of up to 90 days at a specified term and
interest rate. These are primarily for fixed-rate loans. The total amount of the
Savings Bank's commitments to originate loans as of July 31, 1998 was $5.3
million.
Loans to One Borrower. Regulations limit loans-to-one borrowers in an
amount equal to 15% of unimpaired capital and unimpaired surplus on an unsecured
basis and an additional amount equal to 10% of unimpaired capital and unimpaired
surplus if the loan is secured by readily marketable collateral. At July 31,
1998, the Savings Bank's maximum loan-to-one borrower limit was $5.4 million and
its largest loans to one borrower relationship was a commercial line of credit
(the "IMC line of credit") with $6.8 million outstanding. The second largest
loans to one borrower relationships are aggregated loans of $5.5 million
outstanding, secured by multi-family properties in Englewood Cliffs and
Glenrock, New Jersey. Such loans were in compliance with regulations applicable
at the time the loans were originated. The Savings Bank is currently in the
process of remedying such non-compliance. Both loans are performing in
accordance with contractual terms.
Non-Performing Loans and Asset Classification. The Savings Bank's
collection policy provides for a late charge to be added to the amount due when
a loan is 15 days past due. The borrower is immediately notified of the
assessment and payment is requested. Periodic contacts are made at 30 day
intervals. At 60 days past due, a letter is sent by the Savings Bank's attorney.
At 120 days, the attorney is authorized to take final action up to initiation of
foreclosure proceedings, if deemed warranted.
7
Loans are reviewed on a monthly basis and are placed on a non-accrual
status when, in the opinion of management, the collection of additional interest
is doubtful. Loans are placed on a non-accrual status when either principal or
interest is 90 days or more past due. Interest accrued and unpaid at the time a
loan is placed on non-accrual status is charged against interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan.
The following table sets forth information with respect to the Savings
Bank's non-performing assets for the periods indicated. During the periods
indicated the Savings Bank had no restructured loans within the meaning of
Statement of Financial Accounting Standards No. 15 ("SFAS 15").
At July 31,
-----------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars In thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 family
dwelling units(1)........................ $ 8,362 $ 3,143 $ 2,316 $ 3,007 $ 1,884
All other mortgage loans................... 566 229 101 804 910
--------- --------- --------- ---------- ----------
Total........................................ $ 8,928 $ 3,372 $ 2,417 $ 3,811 $ 2,794
======== ======== ======== ========= =========
Real estate owned (net of allowance)......... $ 3,762 $ 3,608 $ 1,667 $ 1,929 $ 505
======== ======== ======== ========= =========
Other non-performing assets.................. $ -- $ 850 $ 494 $ -- $ --
======== ======== ======== ========= =========
Total non-performing assets.................. $ 12,690 $ 7,830 $ 4,578 $ 5,740 $ 3,299
======== ======== ======== ========= =========
Total non-performing loans to
net loans.................................. 6.56% 2.37% 1.48% 1.70% .97%
==== ==== ==== ==== ====
Total non-performing loans to
total assets............................... 2.16% .80% .53% .75% .47%
==== ==== ==== ==== ====
Total non-performing assets to total assets.. 3.07% 1.87% 1.00% 1.13% .56%
==== ==== ==== ==== ====
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(1) Includes home equity, home improvement and second mortgage loans.
Management of the Savings Bank regularly reviews the loan portfolio in
order to identify potential problem loans, and classifies any potential problem
loan as a special mention, substandard, doubtful, or loss asset according to the
Department classification of asset regulations. The Savings Bank does not accrue
interest on any loan that is 90 days or more delinquent. Potential problem loans
that have not been recorded as non-accrual loans as of July 31, 1998, totalled
$5.5 million, or .93% of total assets. These loans are accruing but classified
by the Savings Bank as substandard.
For the year ended July 31, 1998, interest income amounting to
approximately $242,000, would have been recognized if interest on loans 90 days
or more in arrears had been recorded based on original contract terms.
8
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that does not
currently warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital.
In accordance with its classification of assets policy, the Savings
Bank regularly reviews the problem assets in its portfolio to determine whether
any assets require classification in accordance with applicable regulations. At
July 31, 1998, the Savings Bank had classified $686,000 as special mention, $7.4
million as substandard, $678,000 as doubtful, and $38,000 as loss.
Mortgage Loans Purchased from Capital Resources. At July 31, 1998, the
Savings Bank had approximately $2.7 million of residential real estate second
mortgage loans that were acquired from Capital Resources, a now defunct mortgage
company. Of this total amount, $643,000 was classified as non-accrual loans and
$2.0 million was classified as performing loans. However, based upon
management's review, $640,000 of these performing loans were considered
potential problem loans. At July 31, 1998, the Savings Bank allocated $934,000
of the loan loss allowance to the mortgage loans purchased from Capital
Resources.
Real Estate Owned. Real estate acquired by the Savings Bank as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until it is sold. Real estate acquired in settlement of loans is initially
recorded at fair value at the date of foreclosure establishing a new cost basis.
After foreclosure, valuations are periodically performed by management and the
real estate is carried at the lower of cost or fair value, minus estimated cost
to sell.
9
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the potential
losses that may be incurred in the Savings Bank's loan portfolio. Such
evaluation, which includes a review of all loans of which full collectibility of
interest and principal may not be reasonably assured, considers the Savings
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 following table sets forth the allocation of the Savings Bank's
allowance for loan losses by loan category and the percent of loans in each
category to total loans receivable at the dates indicated. The portion of the
loan loss allowance allocated to each loan category does not represent the total
available for future losses that may occur within the loan category because the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio.
10
Analysis of the Allowances for Losses on Loans and Real Estate Owned
The following tables set forth information with respect to the Savings
Bank's allowance for loan losses and REO at the dates indicated:
At or for the year ended July 31,
--------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Total loans outstanding, net of allowance............ $136,143 $142,123 $163,457 $224,564 $286,869
======= ======= ======= ======= =======
Average loans outstanding............................ $136,165 $139,442 $155,497 $192,822 $252,935
======= ======= ======= ======= =======
Allowance balance (at beginning of
period)............................................ $ 2,638 $ 1,714 $ 2,535 $ 3,073 $ 3,411
Acquired from Westwood............................... -- -- -- -- 428
Provision (credit):
Residential........................................ 1,842 1,493 384 361 800
Commercial real estate............................. (77) (145) 278 500 550
Consumer........................................... 282 28 2 -- --
Commercial......................................... -- -- -- 100 150
Charge-offs:
Residential........................................ (3,069) (1,381) (418) (610) (614)
Commercial real estate............................. -- -- -- (89) (373)
Consumer........................................... (1) (24) (11) -- --
Recoveries:
Residential........................................ 99 850 303 76 126
------- ------- ------- ------- --------
Allowance balance (at end of period)................. $ 1,714 $ 2,535 $ 3,073 $ 3,411 $ 4,478
======= ======= ======= ======= ========
Allowance for loan losses as a percent
of total loans outstanding, net.................... 1.26% 1.78% 1.88% 1.52% 1.56%
Net loans charged off as a percent of
average loans outstanding.......................... 2.18% .40% .08% .32% .34%
At or for the year ended July 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ----- ---- ---- ----
(In thousands)
Total real estate owned, net of allowance........ $ 3,762 $3,608 $1,667 $1,929 $ 505
====== ===== ===== ===== =====
Allowance balance - beginning.................... $ 823 $ 188 $ -- $ -- $ --
Provision........................................ 713 502 654 44 58
Net charge-offs.................................. (1,348) (690) (654) (44) (58)
------ ----- ------ ------ -----
Allowance balance - ending....................... $ 188 $ -- $ -- $ -- $ --
====== ===== ====== ====== =====
11
Analysis of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance by
category, which management believes can be allocated only on an approximate
basis. The allocation of the allowance to each category is not necessarily
indicative of future loss and does not restrict the use of the allowance to
absorb losses in any category:
At July 31,
--------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------ ----------------- ----------------- ----------------- -----------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------- ------ -------- ------ ------ ------- ------- ------ -------
(Dollars in thousands)
Residential(1)........................ $1,458 84.02% $2,420 82.46% $2,689 74.60% $2,681 58.66% $2,880 59.66%
Multi-family/Commercial real estate... 250 15.08 106 16.84 384 24.07 630 36.56 1,348 34.28
Consumer.............................. 6 .90 9 .70 -- .91 -- .84 -- 1.20
Commercial............................ -- -- -- -- -- .42 100 3.94 250 4.86
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,714 100.00% $2,535 100.00% $3,073 100.00% $3,411 100.00% $4,478 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
(1) Includes residential construction, home equity, second mortgage and home
improvement loans.
12
Investment Activities and Mortgage-Backed Securities
General. Income from investment securities provides a significant
source of income for the Savings Bank. The Savings Bank maintains a portfolio of
investment securities such as U.S. government and agency securities,
non-governmental securities, and interest-bearing deposits, in addition to the
Savings Bank's mortgage-backed securities held to maturity portfolio. The amount
of short-term investments reflects management's response to the significantly
increasing percentage of savings deposits with short maturities. It is the
intention of management to maintain shorter maturities in the Savings Bank's
investment portfolio in order to better match the interest rate sensitivities of
its assets and liabilities. However, during periods of rapidly declining
interest rates, such investments also decline at a faster rate than does the
yield on long-term investments.
Investment decisions are made within policy guidelines established by
the Board of Directors. The investment policy of the Savings Bank established by
the Board of Directors is based on its asset/liability management goals. The
intent of the policy is to establish a portfolio of high quality, diversified
investments in order to optimize net interest income within acceptable limits of
safety and liquidity.
Purchases of securities other than equity securities are generally made
with the intent of holding them to maturity. Currently, the policy is to invest
in instruments with an expected average life of five to ten years, to be held to
maturity. Investments and mortgage-backed securities held to maturity are
recorded at amortized cost. Premiums are amortized and discounts accreted on a
level yield method over the life of the investment.
The Savings Bank maintains a portfolio of investments available for
sale and trading to enhance total return on investments and reduce interest rate
and credit risk. These investments are accounted at market value. The Savings
Bank's Investment Policy designates what securities may be maintained in this
portfolio. The Savings Bank's trading portfolio is comprised of U.S. agency
securities. As of July 31, 1998, there were no trading securities outstanding
and the available for sale portfolio was comprised of mortgage-backed
securities, U.S. agency securities, and equity securities.
Mortgage-Backed Securities. The Savings Bank's mortgage-backed
securities, or pass-through certificates, represent a participation interest in
a pool of single-family mortgages, the principal and interest payments on which
are passed from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interest
in the form of securities, to investors such as the Savings Bank. Such
quasi-governmental agencies that guarantee the payment of principal and interest
to investors include the FHLMC, Government National Mortgage Association
("GNMA"), or the Federal National Mortgage Association ("FNMA"). Pass-through
certificates typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates
and maturities that are within a specified range. The underlying pool of
mortgages can be composed of either fixed rate mortgage loans or ARM loans.
Mortgage-backed securities are generally referred to as mortgage participation
certificates or pass-through certificates. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, (i.e., fixed rate or
adjustable rate) as well as prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Mortgage-backed securities issued by FHLMC, FNMA
and GNMA make up a majority of the pass-through market. Generally, the Savings
Bank purchases mortgage-backed securities guaranteed by GNMA and FNMA and
participation certificates issued by the FHLMC. GNMA mortgage-backed securities
are certificates issued
13
and backed by the GNMA and are secured by interests in pools of mortgages which
are fully insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Veterans' Administration ("VA"). FHLMC mortgage-backed
securities are participation certificates issued and guaranteed by the FHLMC and
secured by interests in pools of conventional mortgages originated by savings
associations.
Mortgage-backed securities provide for monthly payments of principal
and interest and generally have contractual maturities ranging from five to
thirty years. However, due to expected repayment terms being significantly less
than the underlying mortgage loan pool contractual maturities, the estimated
lives of these securities could be significantly shorter.
The Savings Bank also purchases mortgage-backed securities and
collateralized mortgage obligations ("CMOs") issued by government agencies,
private issuers and financial institutions, some of which are qualified under
the Internal Revenue Code of 1986, as amended (the "Code"), as Real Estate
Mortgage Investment Conduits ("REMICs"). CMOs and REMICs (collectively CMOs)
have been developed in response to investor concerns regarding the uncertainty
of cash flows associated with the prepayment option of the underlying mortgagor
and are typically issued by governmental agencies, governmental sponsored
enterprises and special purpose entities, such as trusts, corporations or
partnerships, established by financial institutions or other similar
institutions. Some CMO instruments are most like traditional debt instruments
because they have stated principal amounts and traditionally defined
interest-rate terms. Purchasers of certain other CMO instruments are entitled to
the excess, if any, of the issuer's cash inflows, including reinvestment
earnings, over the cash outflows for debt service and administrative expenses.
These mortgage related instruments may include instruments designated as
residual interests, which represent an equity ownership interest in the
underlying collateral, subject to the first lien of the investors in the other
classes of the CMO. Certain residual CMO interests may be riskier than many
regular CMO interests to the extent that they could result in the loss of a
portion of the original investment. Moreover, cash flows from residual interests
are very sensitive to prepayments and, thus, contain a high degree of
interest-rate risk.
At July 31, 1998, the Savings Bank's investment in CMOs did not include
any residual interests or interest-only or principal-only securities. As a
matter of policy, the Savings Bank does not invest in residual interests of CMOs
or interest-only and principal-only securities. The CMOs held by the Savings
Bank at July 31, 1998 consisted of floating rate and fixed rate tranches. The
interest rate of a majority of the Savings Bank's floating-rate securities
adjusts monthly and provides the institution with net interest margin protection
in an increasing market interest rate environment. The securities are backed by
mortgages on one-to-four family residential real estate and have contractual
maturities up to 30 years. The securities are primarily PACs and TACs (Planned
and Targeted Amortization Classes) and are designed to provide a specific
principal and interest cash-flow.
Private issued CMOs tend to have greater prepayment and credit risk
than those issued by government agencies or government sponsored enterprises
(e.g., FHLMC, FNMA, and GNMA) generally because they often are secured by jumbo
loans (i.e., loans with aggregate outstanding balances above the limit for
purchases by FHLMC or FNMA). At July 31, 1998, the Savings Bank had CMOs with an
aggregate carrying amount (including discounts and premiums) of $43.4 million,
of which $8.6 million, or 19.8% were privately issued. To minimize the risk of
private issued CMOs, the Savings Bank only purchases those CMOs rated AA or
better by one of the rating agencies.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition,
14
mortgage-backed and related securities are more liquid than individual mortgage
loans and may be used to collateralize borrowings of the Savings Bank in the
event that the Savings Bank determined to utilize borrowings as a source of
funds. Mortgage-backed securities issued or guaranteed by the GNMA, FNMA or the
FHLMC (except interest-only securities or the residual interests in CMOs) are
weighted at no more than 20.0% for risk-based capital purposes, compared to a
weight of 50.0% to 100.0% for residential loans.
Investment Portfolio
The following table sets forth the carrying value of the Company's
investment portfolio, short-term investments, and Federal Home Loan Bank
("FHLB") stock at the dates indicated. At July 31, 1998, the market value of the
investment securities that are held to maturity was $83.1 million and the market
value of investment securities available for sale was $37.9 million, with a cost
basis of $29.6 million.
At July 31,
-------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
(In thousands)
Investment Securities:
U.S. agency securities available for sale(1).. $ -- $ -- 58,045 $ 48,781 $ 2,995
U.S. agency securities held to maturity....... 61,662 55,738 40,821 42,682 81,965
Mortgage-backed securities held to
maturity..................................... 173,067 175,375 121,462 102,249 101,771
Equity securities available for sale(1)....... 11,269 8,567 12,601 41,846 21,862
Municipal bonds available for sale(1)......... -- -- 3,083 -- --
Municipal bonds held to maturity.............. -- -- -- -- 1,866
GNMA mortgage-backed securities
available for sale(1)....................... -- -- 4,684 4,192 3,352
FNMA/FHLMC CMO securities
available for sale(1)....................... -- -- 2,034 1,489 1,038
Private Issue CMO securities
available for sale(1)....................... -- -- 9,521 9,284 8,620
Equity securities restricted for sale(2)...... -- -- 7,806 -- --
Other Securities.............................. 975 -- -- -- --
------- ------- ------- ------- -------
Total Investment Securities................. 246,973 239,680 260,057 250,523 223,469
Interest-bearing deposits..................... -- 5,632 -- -- --
Federal funds sold............................ 850 -- -- -- 39,900
FHLB stock.................................... 1,856 2,587 2,587 3,550 4,626
------- ------- ------- ------- -------
Total Investments........................... $249,679 $247,899 $262,644 $254,073 $267,995
======= ======= ======= ======= =======
- ---------------------
(1) Carried at market value.
(2) In 1996, equity securities restricted for sale ("IMC investment") were
carried at cost due to restrictions on the sale or transfer of these
securities. During the fourth quarter ended July 31, 1997, the
restrictions were changed and the securities were reclassified to the
available for sale portfolio and such securities are carried at market
value.
15
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Savings Bank's
investment securities portfolio at July 31, 1998 by contractual maturity. The
expected maturities may differ from contractual maturities due to the terms of
the securities which may have callable or prepayment obligations.
After One Through After Five Through Over
One Year or Less Five Years Ten Years Ten Years Totals
----------------- ----------------- ------------------ ---------------- ----------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- ------ -------- ------- -------- -------- -------- ------ -------- ------
(Dollars in thousands)
U. S. agency securities available
for sale............................... $ 2,995 5.34% $ -- --% $ -- --% $ -- --% $ 2,995 5.34%
U.S. agency securities held to maturity. 3,500 5.49 1,500 6.71 22,000 7.27 54,965 7.47 81,965 7.32
Mortgage-backed securities held to
maturity............................... 8,887 6.17 25,127 5.83 13,934 6.16 53,823 6.14 101,771 6.07
Equity securities available for sale(1). 21,862 .51 -- -- -- -- -- -- 21,862 .51
Municipal bonds held to maturity........ 1,459 3.55 407 5.25 -- -- -- -- 1,866 3.92
FHLB stock(1)........................... 4,626 7.43 -- -- -- -- -- -- 4,626 7.43
GNMA mortgage-backed securities
available for sale.................... -- -- -- -- -- -- 3,352 8.26 3,352 8.26
FNMA/FHLMC CMO's
available for sale.................... -- -- -- -- -- -- 1,038 6.84 1,038 6.84
Private issue CMO's
available for sale.................... -- -- -- -- -- -- 8,620 6.36 8,620 6.36
Federal funds........................... 39,900 5.50 -- -- -- -- -- -- 39,900 5.50
------ ------- -------- -------- -------
Total................................. $83,229 4.29% $27,034 5.75% $35,934 6.74% $121,798 6.82% $267,995 5.92%
====== ==== ====== ==== ====== ==== ======= ==== ======= ====
- ------------------
(1) Equity securities and other securities have been classified as maturing in
one year or less, since they have no stated maturity.
16
Sources of Funds
General. Deposits are the major source of the Savings Bank's funds for
lending and other investment purposes. In addition to deposits, the Savings Bank
derives funds from loan and mortgage-backed securities principal repayments, and
maturities of investment securities. Loan and mortgage-backed securities
payments are a relatively stable source of funds, while deposit inflows are
significantly influenced by general interest rates and money market conditions.
Deposits. The Savings Bank offers a wide variety of deposit accounts,
although a majority of such deposits are in fixed-term, market-rate certificate
accounts. Deposit account terms vary, primarily as to the required minimum
balance amount, the amount of time that the funds must remain on deposit and the
applicable interest rate. The Savings Bank's deposits are typically obtained
from the area in which its offices are located. The Savings Bank had no brokered
certificates of deposits as of July 31, 1998.
Deposit Portfolio. Deposits in the Savings Bank as of July 31, 1998, were
represented by various types of savings programs described below.
Weighted Minimum Percentage of Average
Category Term Average Rates Balance Amount Balance Total Deposits Balance
- -------- ---- ------------- -------------- ------- -------------- -------
(Dollars in thousands)
NOW Accounts None 1.31% $ 250 $ 73,335 16.05% $ 61,072
Regular Savings and Club
Accounts None 2.24 100 93,213 20.40 82,427
Money Market Checking
Accounts None 2.35 2,500 10,763 2.36 8,805
Money Market Passbook
Accounts None 2.54 7,500 16,917 3.70 17,289
Certificates of Deposit:
Fixed Term, Fixed Rate 3-6 Months 4.51 2,500 28,324 6.20 31,592
Fixed Term, Fixed Rate 7-12 Months 5.43 500 177,910 38.94 135,921
Fixed Term, Fixed Rate 13-30 5.29 500 39,103 8.56 48,683
Months
Fixed Term, Fixed Rate 31-120 5.43 500 16,600 3.63 16,158
Months
Fixed Term, Variable Rate 18 Months 5.26 500 715 .16 742
------- ------ -------
Total $456,880 100.00% $402,689
======= ====== =======
17
Certificates of Deposit with Balances Greater Than $100,000. The
following table indicates the amount of the Savings Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of July 31,
1998.
Certificates
Maturity Period of Deposits
- --------------- --------------
(In thousands)
Within three months................... $ 8,199
Three through six months.............. 10,454
Six through twelve months............. 10,160
Over twelve months.................... 1,786
------
$30,599
======
Borrowings. Although deposits are the Savings Bank's primary source of
funds, the Savings Bank's policy has been to utilize borrowings as an
alternative or less costly source of funds. The Savings Bank obtains advances
from the FHLB of New York. Such advances are made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The maximum amount that the FHLB of New York will advance to member
institutions, including the Savings Bank, for purposes other than meeting
withdrawals, fluctuates from time to time in accordance with the policies of the
FHLB of New York. The maximum amount of FHLB of New York advances to a member
institution generally is reduced by borrowings from any other source.
The Savings Bank utilizes the Regular Advance Program of the FHLB of
New York under an advances, collateral, pledge and security agreement. The
program offers a wide range of interest rates and maturities on advances that
are collateralized by various assets. At July 31, 1998, the Savings Bank had
$55.0 million outstanding under the Regular Advance Program. The Savings Bank
will continue to use this program in the future to meet long term operating
needs.
The Savings Bank utilizes the FHLB Overnight Line of Credit Program.
The line of credit has a variable rate of interest and matures daily. The
maximum amount that can be borrowed under this program is approximately $62.8
million. The line of credit has a term of one year and expired in August 1998.
This program has the same collateral requirement as the Regular Advance Program.
At July 31, 1998, the Savings Bank had no borrowings outstanding under this
program.
The Savings Bank has a blanket pledge with the FHLB of New York and has
pledged all of its stock in the FHLB, federal funds sold, U.S. agency
securities, certain qualifying loans, and mortgage-backed securities.
18
The following tables set forth certain information regarding borrowings
by the Savings Bank.
As of July 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Weighted average rate paid on:
FHLB advances/line of credit............................ 4.44% 5.81% 5.79% 5.53% 5.64%
Reverse Repurchase Agreements........................... -- -- 6.33 5.47 --
Line of credit.......................................... -- -- -- 8.00 8.08
ESOP.................................................... 7.54 8.96 9.12 6.16 5.93
During the Year Ended July 31,
---------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(In thousands)
Maximum amount of borrowings outstanding during the year:
FHLB advances/line of credit............................ $ 51,909 $ 32,000 $ 50,460 $ 68,500 $89,900
Reverse Repurchase Agreement............................ -- -- 20,000 40,000 --
Line of credit.......................................... -- -- -- 2,000 9,450
ESOP.................................................... 1,100 1,021 859 2,354 8,782
Maximum amount of short-term borrowings outstanding
at any month end with respect to:
FHLB advances/line of credit............................ $36,000 $30,500 $49,450 $67,750 $85,250
Reverse Repurchase Agreement............................ -- -- 20,000 20,000 --
Line of credit.......................................... -- -- -- 2,000 9,450
ESOP.................................................... 1,100 1,021 859 2,354 8,782
Subsidiaries
Branchview, Inc. ("Branchview")
Branchview, a New Jersey corporation owned by the Company, has a 5.40%
interest in IMC. IMC is a mortgage banking company involved in the origination
and securitization of equity mortgage products. At July 31, 1998, the market
value of the IMC stock was $16.6 million with a cost basis of $7.8 million. On
October 16, 1998, IMC announced that they intend to explore financial and
strategic alternatives including the possible sale of IMC. At such date the
market value of the IMC stock decreased to $1.8 million. For further information
please refer to the Annual Report - Note 22 to the Consolidated Financial
Statements.
Lakeview Mortgage Depot, Inc. ("LMD")
LMD, a New Jersey mortgage corporation, is 90% owned by the Company and
was formed in October 1995. For the year ended July 31, 1998, the Company
recorded net consolidated income before taxes of $62,000. During fiscal 1998,
LMD closed its Pennsylvania office and its sole office is located in New Jersey.
19
Lakeview Investment Services, Inc. ("LISI")
LISI was organized by the Savings Bank to provide brokerage and
insurance services to the Savings Bank's customers, utilizing the services of
Cross Marketing, Inc., a registered broker dealer.
LISI is not a significant source of revenues or expenses.
Lakeview Credit Card Services, Inc. ("LCCS")
LCCS, a wholly owned subsidiary of the Savings Bank was formed in
January 1996. On October 1, 1996, LCCS entered into a joint venture agreement
with IMC Credit Card, Inc., ("IMCC") a wholly owned subsidiary of IMC, to market
secured credit cards through IMCC's retail loan centers and correspondents. The
Savings Bank dissolved the Agreement during 1998 and LCCS is currently inactive.
North Properties, Inc. ("North Properties")
North Properties, a wholly owned subsidiary of the Savings Bank, was
formed in May 1997 to hold real estate owned properties.
Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Savings Bank's market risk arises primarily from interest rate
risk inherent in its lending, investment and deposit taking activities. The
Savings Bank's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact the
Savings Bank's earnings to the extent that the interest rates borne by assets
and liabilities do not change at the same speed, to the same extent or on the
same basis. To that end, management actively monitors and manages its interest
rate risk exposure.
The principal objective of the Savings Bank's interest rate risk
management is to evaluate the interest rate risk inherent in certain balance
sheet accounts, determine the level of risk appropriate given the Savings Bank's
business strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, the Savings Bank seeks
to minimize the vulnerability of its operations to changes in interest rates.
The Savings Bank's Board of Directors reviews their interest rate risk position
quarterly. The Savings Bank's Asset/Liability Committee is comprised of the
Savings Bank's senior management under the direction of the Board of Directors,
with senior management responsible for reviewing with the Board of Directors its
activities and strategies, the effect of those strategies on the Savings Bank's
net interest margin, the market value of the portfolio and the effect that
changes in interest rates will have on the Savings Bank's portfolio and the
Savings Bank's exposure limits.
The Savings Bank utilizes the following strategies to manage interest
rate risk: (1) emphasizing the origination and retention of fixed-rate mortgage
loans having terms to maturity of not more than 15 years, adjustable-rate loans
and consumer loans consisting primarily of home equity loans and lines of
credit; (2) selling substantially all fixed-rate conforming mortgage loans with
terms of thirty years without recourse and on a servicing-retained basis; and
(3) investing primarily in adjustable-rate mortgage-backed securities, which may
generally bear lower yields as compared to longer term investments, but which
better position the Savings Bank for increases in market interest rates, and
holding the majority of these securities as available for sale. The Savings Bank
currently does not participate in hedging programs,
20
interest rate swaps or other activities involving the use of off-balance sheet
derivative financial instruments, but may do so in the future to mitigate
interest rate risk.
Net Portfolio Value. The Savings Bank's interest rate sensitivity in
monitored by management through the use of the inhouse model which estimates the
change in the Savings Bank's net portfolio value ("NPV") over a range of
interest rate scenarios. The NPV is defined as the current market value of
assets, minus the current market value of liabilities, plus or minus the current
value of off-balance sheet items. The market values are estimated through two
cash flow-based valuation methodologies and an option-based valuation model: (1)
static discounted cash flow analysis, (2) an option-based pricing analysis
(modified discounted cash flow analysis to value embedded options), and (3) the
Black-Scholes model to value-off balance sheet items. The change in NPV measures
an institution's vulnerability to changes in interest rates by estimating the
change in the market value of an institution's assets, liabilities, and off-
balance sheet contracts in response to an instantaneous change in the general
level of interest rates.
The following table lists the Savings Bank's percentage changes in NPV
assuming an immediate change of plus or minus of up to 400 basis points from the
level of interest rates at July 31, 1998. As the table shows, increases in
interest rates would result in decreases in the Savings Bank's NPV, while
decreases in interest rates would result in increases in the Savings Bank's NPV.
All market risk instruments presented in this table are held to maturity or
available for sale. The Savings Bank has no trading securities.
Changes In
Market Rate
Interest Rates
In Basis NPV as a % of Portfolio
Points Net Portfolio Value Value of Assets
------------- ---------------------------------- -------------------------
Basis Points
(Rate Shock) Amount $ Change % Change NPV Ratio % Change
------------- --------- ----------- --------- ----------- --------
(Dollars in thousands)
+400 35,185 (21,352) (38) 6.68 (316)
+300 42,675 (13,862) (25) 7.90 (194)
+200 48,977 (7,560) (13) 8.85 (99)
+100 54,111 (2,426) (4) 9.57 (27)
0 56,537 - - 9.84 -
-100 60,288 3,751 7 10.29 45
-200 61,319 4,782 8 10.31 47
-300 59,870 3,333 6 9.96 12
-400 59,047 2,510 4 9.70 (14)
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in NPV require the making of
certain assumptions which may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this regard,
the NPV model presented assumes that the composition of the Savings Bank's
interest sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being
21
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly, although
the NPV measurements and net interest income models provide an indication of the
Savings Bank's interest rate risk exposure at a particular point in time, such
measurements are not intended to and do not provide a precise forecast of the
effect of changes in market interest rates on the Savings Bank's net interest
income and will differ from actual results.
The following table shows the Savings Bank's financial instruments that
are sensitive to changes in interest rates, categorized by expected maturity,
and the instruments' fair values at July 31, 1998. Market risk sensitive
instruments are generally defined as on-and-off-balance sheet derivatives and
other financial instruments.
Expected Maturity/Principal Repayment at July 31,
Interest Total Fair
Rates 1999 2000 2001 2002 2003 Thereafter Balance (1) Value
-------- --------- -------- -------- --------- -------- ---------- ----------- ----------
(Dollars in thousands)
Interest-earning assets
- -----------------------
Mortgage loans.............. 8.33% $ 21,171 $16,660 $17,413 $15,647 $14,709 $95,067 $180,667 $181,433
Home equity, second
mortgage and home
improvements loans........ 9.01% 18,468 9,803 8,568 13,126 11,195 35,981 97,141 97,553
Commercial loans............ 9.88% 10,574 1,477 266 1,375 494 -- 14,186 14,541
Mortgage-backed
securities held
to maturity............... 6.07% 9,646 15,394 24,691 6,033 12,631 33,376 101,771 101,798
Investment securities held
to maturity(1)............ 6.71% 108,773 5,697 1,533 -- -- 12,354 128,357 127,635
Securities available for
sale...................... 3.08% 26,158 1,171 1,054 948 853 7,683 37,867 37,867
Interest-bearing liabilities
- ----------------------------
NOW and money market
accounts.................. 1.38% 2,691 29,767 29,767 10,370 10,370 18,050 101,015 101,015
Savings and clubs
accounts.................. 2.24% -- 27,964 27,964 9,321 9,321 18,643 93,213 93,213
Certificates of deposits.... 5.31% 238,165 17,734 4,855 814 983 101 262,652 266,215
FHLB of New York
advances.................. 5.43% 10,000 30,000 -- -- -- 15,000 55,000 63,086
Line of credit.............. 8.25% 9,928 -- -- -- -- -- 9,928 9,928
ESOP debt................... 8.40% 314 314 314 314 314 7,213 8,783 8,783
- ---------------
(1) Includes federal funds totaling $39.9 million.
Expected maturities are contractual matures adjusted for prepayments of
principal. The Savings Bank uses certain assumptions to estimate fair values and
expected maturities. For assets, expected maturities are based upon contractual
maturity, call dates, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on the Savings Bank's historical
experience. The Savings Bank's average Constant Prepayment Rate ("CPR") on its
total fixed-rate portfolio is 10%, and 8% on its adjustable-rate portfolio for
interest-earning assets (excluding investment
22
securities, which do not have prepayment features). For deposit liabilities, in
accordance with standard industry practice and the Savings Bank's own historical
experience, decay factors used to estimate NOW, money market accounts, and
savings accounts were 0% to 30%, 12.5% to 25% and 0% to 30%, respectively.
Employees
At July 31, 1998, the Savings Bank had 70 full-time and 42 part-time
employees. None of the Savings Bank's employees are represented by a collective
bargaining group. The Savings Bank believes that its relationship with its
employees is good.
REGULATION
Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Savings Bank. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Association and not for the benefit of stockholders of the
Holding Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Association satisfies the Qualified Thrift Lender ("QTL") test. If the
Company acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Holding Company and any of its subsidiaries (other than the
Association or any other SAIF-insured savings association) would become subject
to restrictions applicable to bank holding companies unless such other
associations each also qualify as a QTL and were acquired in a supervisory
acquisition. See "-- Regulation of the Savings Bank - Qualified Thrift Lender
Test."
Insurance of Deposit Accounts. The deposit accounts held by the Savings
Bank are insured by the SAIF to a maximum of $100,000 for each insured member
(as defined by law and regulation). Insurance of deposits may be terminated by
the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
As a member of the SAIF, the Savings Bank pays an insurance premium to
the FDIC equal to a minimum of 0.23% of its total deposits. The FDIC also
maintains another insurance fund, the Savings Bank Insurance Fund ("BIF"), which
primarily insures commercial bank deposits. In 1996, the annual insurance
premium for most BIF members was lowered to $2,000. The lower insurance premiums
for BIF members placed SAIF members at a competitive disadvantage to BIF
members.
23
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Savings Bank of
approximately .657% of deposits held on March 31, 1995. Beginning January 1,
1997, the deposit insurance assessment for most SAIF members was reduced to
.064% of deposits on an annual basis through the end of 1999. During this same
period, BIF members will be assessed approximately .013% of deposits. After
1999, assessments for BIF and SAIF members should be the same. It is expected
that these continuing assessments for both SAIF and BIF members will be used to
repay outstanding Financing Corporation bond obligations. As a result of these
changes, beginning January 1, 1997, the rate of deposit insurance assessed the
Savings Bank declined by approximately 70%.
Capital Requirements. Under FDIC regulations, the Savings Bank is
required to maintain a minimum leverage capital requirement consisting of a
ratio of Tier 1 capital to total risk-weighted assets of 4%. For institutions
other than those most highly rated by the FDIC, an additional "cushion" of at
least 100 to 200 basis points is required. Tier 1 capital is the sum of common
stockholders' equity, noncumulative perpetual preferred stock (including any
related surplus) and minority investments in certain subsidiaries, less certain
intangible assets, deferred tax assets, certain identified losses and certain
investments in securities subsidiaries. As a SAIF-insured, state-chartered bank,
the Savings Bank must currently also deduct from Tier 1 capital an amount equal
to its investments in, and extensions of credit to, subsidiaries engaged in
certain activities not permissible for national banks.
In addition to the leverage ratio, the Savings Bank must maintain a
minimum ratio of qualifying total capital to risk-weighted assets of at least
8.0%, of which at least four percentage points must be Tier 1 capital.
Qualifying total capital consists of Tier 1 capital plus Tier 2 or supplementary
capital items which include allowances for loan losses in an amount of up to
1.25% of risk-weighted assets, cumulative preferred stock and preferred stock
with a maturity of over 20 years and certain other capital instruments. The
includable amount of Tier 2 capital cannot exceed the institution's Tier 1
capital. Qualifying total capital is further reduced by the amount of the bank's
investments in banking and finance subsidiaries that are not consolidated for
regulatory capital purposes, reciprocal cross-holdings of capital securities
issued by other banks and certain other deductions. Under the FDIC risk-weighted
system, all of a bank's balance sheet assets and the credit equivalent amounts
of certain off-balance sheet items are assigned to risk weight categories. The
aggregate dollar amount of each category is multiplied by the risk weight
assigned to that category. The sum of these weighted values equals the bank's
risk-weighted assets.
Pursuant to New Jersey banking law the minimum leverage capital for a
depository institution is a ratio of Tier 1 capital to total risk-weighted
assets of four percent. However, the Commissioner of the Department may require
a higher ratio for a particular depository institution. New Jersey banking law
requires that a depository institution maintain qualifying capital of at least
eight percent of its risk weighted assets. At least four percent of this
qualifying capital shall be in the form of Tier 1 capital. For purposes of New
Jersey banking law, risk weighted assets, Tier 1 capital, and total assets are
defined in the same manner as in the FDIC regulations.
The Savings Bank was in compliance with both the FDIC and New Jersey
capital requirements at July 31, 1998.
Capital Distributions. Earnings of the Savings Bank appropriated to bad
debt reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then current tax rate by the Savings Bank on the amount of
earnings removed from the reserves for such distributions.
24
Dividends payable by the Savings Bank to the Company and dividends
payable by the Company to stockholders are subject to various additional
limitations imposed by federal and state laws, regulations and policies adopted
by federal and state regulatory agencies. The Savings Bank is required by
federal law to obtain FDIC approval for the payment of dividends if the total of
all dividends declared by the Savings Bank in any year exceed the total of the
Savings Bank's net profits (as defined) for that year and the retained net
profits (as defined) for the preceding two years, less any required transfers to
surplus. Under New Jersey law, the Savings Bank may not pay dividends unless,
following payment, the capital stock of the Savings Bank would be unimpaired and
(a) the Savings Bank will have a surplus of not less than 50% of its capital
stock, or, if not, (b) the payment of such dividends will not reduce the surplus
of the Savings Bank.
Under applicable regulations, the Savings Bank would be prohibited from
making any capital distributions if, after making the distribution, the Savings
Bank would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a
Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of
less than 4.0%, unless a higher ratio is required by the Commissioner of the
Department.
Federal Home Loan Bank System. The Savings Bank is a member of the FHLB
of New York, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a reserve
or central bank for its members within its assigned region. The FHLB of New York
is funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. The FHLB of New York makes loans to members
(i.e., advances) in accordance with policies and procedures established by the
Board of Directors of the FHLB.
As a member, the Savings Bank is required to purchase and maintain
stock in the FHLB of New York in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year.
Qualified Thrift Lender Test. The Savings Bank must maintain an
appropriate level of certain investments ("Qualified Thrift Investments") and
otherwise qualify as a "Qualified Thrift Lender" ("QTL"), in order to continue
to enjoy full borrowing privileges from the FHLB of New York. The required
percentage of Qualified Thrift Investments is 65% of portfolio assets. In
addition, savings banks may include shares of stock of the Federal Home Loan
Banks, FNMA and FHLMC as qualifying QTL assets. Compliance with the QTL test is
measured on a monthly basis in nine out of every 12 months. As of July 31, 1998,
the Savings Bank was in compliance with its QTL requirement.
Federal Reserve System. The Board of Governors of the Federal Reserve
System (the "FRB") requires all depository institutions to maintain non-interest
bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts) and non-personal time
deposits. The balances maintained to meet the reserve requirements imposed by
the FRB may be used to satisfy the liquidity requirements that are imposed by
the NJDB. At July 31, 1998, the Savings Bank met these reserve requirements.
Item 2. Properties and Equipment
- ----------------------------------
The Company and the Savings Bank operate from their main office and 10
branch offices. Of the total, the Savings Bank leases three branch offices and
all other branch offices are owned by the Savings Bank.
25
Item 3. Legal Proceedings
- --------------------------
There are various claims and lawsuits in which the Company or the
Savings Bank are periodically involved, such as claims to enforce liens,
condemnation proceedings on properties in which the Savings Bank holds security
interests, claims involving the making and servicing of real property loans, and
other issues incident to the Savings Bank's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained in the section captioned "Market For Common
Stock" in the Management Discussion and Analysis of Financial Condition and
Results of Operations of the Company's Annual Report to Shareholders for fiscal
year ended July 31, 1998 (the "Annual Report") is incorporated herein by
reference.
Item 6. Selected Financial Data
- --------------------------------
The information contained in the section captioned "Selected Financial
Data" of the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Refer to Market Risk disclosure beginning on page 20.
Item 8. Financial Statements
- -----------------------------
The Company's financial statements listed under Item 14 are
incorporated herein by reference.
Item 9. Change In and Disagreements with Accountants on Accounting and Financial
Disclosure
- --------------------------------------------------------------------------------
Not applicable.
26
PART III
Item 10. Directors and Executive Officers
- ------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance," "I - Information with Respect to
Nominees for Directors, Directors Continuing In Office, and Executive Officers"
and "Biographical Information" in the Proxy Statement is incorporated herein by
reference.
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I -
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements,
including any pledge by any person of securities of the
Registrant, the operation of which may at a subsequent date
result in a change in control of the Registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
herein by reference.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report.
(1) The consolidated balance sheets of Lakeview Financial
Corp. and subsidiaries as of July 31, 1998 and 1997
and the related consolidated statements of income,
stockholders' equity and cash flows for each of the
years in the three year period ended July 31, 1998,
together with the related notes and the independent
auditors' report of KPMG Peat Marwick LLP,
independent certified public accountants.
27
(2) Schedules omitted as they are not applicable.
(3) Exhibits
The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Lakeview Financial Corp.*
3.2 Bylaws of Lakeview Financial Corp.*
4 Stock Certificate of Lakeview Financial Corp.*
10.1 Form of Lakeview Savings Bank 1993 Stock Option Plans*
10.2 Lakeview Savings Bank Management Stock Bonus Plan and
Trust Agreement*
10.3 Employment Agreements**
10.4 Supplemental Retirement Plan for Senior Officers***
13 Portions of the 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See-"Part I - Business").
23 Independent Auditors' Consent
27 Financial Data Schedule (electronic filing only)
- ------------------
* Incorporated herein by reference to the registration statement on Form
S-4 (File No. 33-77646).
** Incorporated herein by reference to the Form 10-K for fiscal year ended
July 31, 1994.
*** Incorporated herein by reference to the Form 10-K for fiscal year ended
July 31, 1996.
(b) On October 8, 1998, the Company filed a Form 8-K reporting the
announcement of the Company's evaluation of strategic
alternatives in order to maximize shareholder value.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized as of October 22, 1998.
LAKEVIEW FINANCIAL CORP.
By: /s/Kevin J. Coogan
------------------------------------
Kevin J. Coogan
President, Chief Executive
Officer and Director
Pursuant to the requirement of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities as of October 22, 1998.
By: /s/Kevin J. Coogan By:
----------------------------------- ----------------------------
Kevin J. Coogan Leo J. Dean
President, Chief Executive Officer Director
and Director
By: /s/Leo J. Costello By: /s/Michael R. Rowe
----------------------------------- ----------------------------
Leo J. Costello Michael R. Rowe
Chairman of the Board Director
By: /s/Robert J. Davenport By: /s/Dennis D. Pedra
----------------------------------- ----------------------------
Robert J. Davenport Dennis D. Pedra
Director Director
By: By: /s/Anthony G. Gallo
----------------------------------- ----------------------------
Vincent A. Scola Anthony G. Gallo
Director Vice President and Chief
Financial Officer