SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 September 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
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
incorporation or organization) identification no.)
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 (973) 256-6100
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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 November 10, 1998.
Class Outstanding
- --------------------------- ----------------
$.10 par value common stock 2,477,525 shares
LITTLE FALLS BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
Page
Number
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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............................. 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 15
Item 2. Changes in Securities........................................... 15
Item 3. Defaults upon Senior Securities................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............. 15
Item 5. Other Materially Important Events............................... 15
Item 6. Exhibits and Reports on Form 8-K................................ 15
SIGNATURES
LITTLE FALLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Cash and due from banks................................. $5,885,679 $2,737,709
Interest-bearing deposits in other banks................ 687,321 550,522
Federal funds sold...................................... 6,250,000 3,500,000
----------- -----------
Total cash and cash equivalents.................... 12,823,000 6,788,231
Investment securities held-to-maturity net
(estimated fair values $52,025,000
and $58,129,000)...................................... 51,693,173 57,987,644
Investment securities available for sale................ 33,922,292 --
Mortgage-backed securities held to maturity, net
(estimated fair values $69,477,000
and $91,246,000)...................................... 69,242,702 90,957,446
Mortgage-backed securities available for sale........... 6,848,503 13,929,048
Loans receivable, net................................... 152,831,119 147,033,259
Premises and equipment, net............................. 2,630,104 2,617,175
Investment in real estate, net.......................... 81,281 427,317
Foreclosed real estate, net............................. 367,200 604,219
Interest receivable, net................................ 2,571,746 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..................... 2,585,640 2,856,230
Other assets............................................ 1,336,753 725,234
----------- -----------
TOTAL ASSETS...................................... $340,701,113 $328,522,494
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.............................................. $233,543,693 $230,132,675
Securities sold under agreements to repurchase........ 68,377,000 58,719,500
Accounts payable and other liabilities................ 1,617,622 1,375,658
----------- -----------
Total liabilities................................. 303,538,315 290,227,833
----------- -----------
Stockholders' Equity:
Preferred stock; 5,000,000 authorized shares;
none outstanding.................................... -- --
Common stock, par value $.10; 10,000,000
authorized shares; 3,041,750 issued;
2,477,525 and 2,607,921 outstanding................ 304,175 304,175
Additional paid-in-capital............................ 29,177,623 29,067,633
Retained earnings - substantially restricted.......... 19,307,810 18,275,517
Common Stock acquired ESOP............................ (1,984,762) (2,106,432)
Unearned restricted MSBP stock, at cost............... (1,101,818) (1,329,167)
Treasury stock, at cost; 564,225 and 433,829 shares... (8,191,308) (5,632,286)
Unrealized losses in securities available
for sale, net of deferred taxes..................... (135,205) (71,062)
Minimum pension liability............................. (213,717) (213,717)
-------- --------
Total stockholders' equity........................ 37,162,798 38,294,661
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $340,701,113 $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 Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---------- ----------- ----------- -----------
Interest income:
Loans receivable.................................. $2,827,929 $2,616,791 $8,470,672 $7,112,288
Mortgage-backed securities........................ 1,300,446 1,799,175 4,455,356 5,357,533
Investment securities and other interest earning
assets.......................................... 1,522,563 932,442 4,230,918 2,830,882
--------- --------- ---------- ----------
Total interest income............................... 5,650,938 5,348,408 17,156,946 15,300,703
--------- --------- ---------- ----------
Interest expense:
Deposits.......................................... 2,600,168 2,570,720 7,790,124 7,639,391
Borrowings........................................ 1,145,111 751,279 3,241,342 1,712,174
--------- --------- ---------- ----------
Total interest expense.............................. 3,745,279 3,321,999 11,031,466 9,351,565
--------- --------- ---------- ----------
Net interest income before provision for loan
losses.............................................. 1,905,659 2,026,409 6,125,480 5,949,138
Provision for loan losses........................... 60,000 60,000 180,000 180,000
--------- ---------- ---------- ----------
Net interest income after provisions for loan
losses............................................ 1,845,659 1,966,409 5,945,480 5,769,138
--------- --------- ---------- ----------
Total non-interest income........................... 116,520 68,034 281,146 364,691
--------- ---------- ---------- ----------
Non-interest expense:
Compensation and employee benefits................ 605,316 661,711 2,045,612 1,915,351
Occupancy, net.................................... 68,585 67,471 226,313 218,422
Equipment......................................... 98,407 101,510 322,117 323,245
Deposit insurance premiums........................ 29,844 29,786 89,826 95,800
Loss (income) on foreclosed real estate........... (3,471) 27,337 13,421 66,440
Amortization of deposit premium................... 90,197 90,197 270,590 270,590
Miscellaneous expense............................. 364,594 370,789 1,104,480 1,058,032
--------- --------- ---------- ----------
Total non-interest expenses......................... 1,253,472 1,348,801 4,072,359 3,947,880
--------- --------- ---------- ----------
Income before provision for income taxes............ 708,707 685,642 2,154,267 2,185,949
Provision for income taxes.......................... 226,000 229,000 719,050 815,000
--------- --------- ---------- ----------
Net income...................................... 482,707 456,642 1,435,217 1,370,949
--------- --------- ---------- ----------
Other comprehensive income, net of income taxes:
Unrealized holding losses on Securities available
for sale, net of income taxes..................... (227,357) (46,417) (44,995) (46,417)
Less gains on disposition of securities available
for sale, net of income taxes..................... (19,148) - (19,148) -
--------- ------- ---------- -------
Total other comprehensive income (246,505) (46,417) (64,143) (46,417)
--------- --------- ---------- -----------
Comprehensive income $ 236,202 $ 410,225 $ 1,371,074 $ 1,324,532
======== ======== ========== ===========
See notes to unaudited consolidated financial statements.
Weighted average number of common shares
outstanding:
basic 2,190,046 2,371,363 2,209,637 2,402,618
========= ========= ========= =========
diluted 2,282,214 2,461,826 2,317,936 2,467,004
========= ========= ========= =========
Earnings per share:
basic $0.22 $0.19 $0.65 $0.57
==== ==== ==== ====
diluted $0.21 $0.19 $0.62 $0.56
==== ==== ==== ====
2
LITTLE FALLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months
Ended September 30,
--------------------------------
1998 1997
-------------- -----------
Cash flows from operating activities:
Net income.............................................................. $1,435,217 $1,370,949
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................................... 99,401 99,460
Provision for loan losses............................................. 180,000 180,000
Provision for losses on foreclosed properties......................... -- 27,356
Amortization of intangibles........................................... 270,590 270,591
Amortization (accretion) of deferred fees, premiums and discounts, net 183,501 120,508
Amortization of unearned ESOP shares.................................. 231,660 177,719
Amortization of unearned restricted MSBP stock, at cost............... 227,349 283,221
Loss on sale of foreclosed real estate................................ 8,162 39,067
Gain on sale of real estate held for investment....................... (37,911) (106,318)
Gain on sale of mortgage-backed securities available for sale......... (29,910) --
Decrease (increase) in other assets................................... (572,820) 258,193
Increase in interest receivable, net.................................. (492,655) (795,295)
Increase (decrease) in interest payable............................... (45,228) 471,595
Increase in accounts payable and other liabilities.................... 266,150 199,426
------------ ------------
Net cash provided by operating activities........................... 1,723,506 2,596,472
------------ ------------
Cash flows from investing activities:
Principal collections on mortgage-backed securities held to maturity.. 21,638,349 15,365,831
Purchase of mortgage-backed securities available for sale............. (4,961,068) (9,865,157)
Principal collections on mortgage-backed securities available for sale 3,751,899 --
Purchase of loans..................................................... -- (15,096,510)
Purchases of investments available for sale........................... (34,135,347) --
Net increase in loans receivable...................................... (5,989,555) (13,049,530)
Maturity of investments held to maturity.............................. 18,000,000 6,342,000
Proceeds from sale of mortgage-backed security available for sale..... 8,323,081 --
Purchase of investments held to maturity.............................. (11,694,185) (8,000,000)
Purchases of premises and equipment................................... (108,910) (60,123)
Proceeds from sale of real estate held for investment................. 380,528 248,378
Proceeds from sale of foreclosed real estate.......................... 228,857 344,333
Purchases of Federal Home Loan Bank of New York stock................. (1,250,000) (146,300)
------------ -----------
Net cash used in investing activities............................... (5,816,351) (23,917,078)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits.................................... 3,432,060 (2,096,778)
Net increase in borrowed funds......................................... 9,657,500 24,876,000
Increase in advances from borrowers.................................... -- 29,584
Repurchase of common stock............................................. (2,559,022) (2,355,282)
Purchase of MSBP stock................................................. -- (1,688,171)
Cash dividends paid.................................................... (402,924) (287,462)
------------- -------------
Net cash provided by financing activities............................ 10,127,614 18,477,891
------------ ------------
Decrease in cash and cash equivalents................................ 6,034,769 (2,842,715)
Cash and cash equivalents:
Beginning of period..................................................... 6,788,231 10,373,964
------------ ------------
End of period........................................................... 12,823,000 7,531,249
============ ============
Supplemental disclosures:
Cash paid during the year for:
Interest................................................................ $11,076,694 $ 8,877,270
Income taxes............................................................ 1,006,114 668,000
Unrealized losses on securities available for sale,
net of income tax....................................................... (64,143) (46,417)
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 nine
month periods ended September 30, 1998 and 1997 include the accounts of
Little Falls Bancorp, Inc. (the "Company") and its subsidiary, Little
Falls Bank (the "Bank") which became the wholly owned subsidiary of the
Company on January 5, 1996. 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 September 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.
4
SFAS No. 125 also addresses the accounting and reporting standards for
securities lending, 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 Postretirement
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.
NOTE 5 - SUBSEQUENT EVENT - TERMINATION OF AGREEMENT OF MERGER
On August 12, 1998, the Company and Skylands Community Bank,
Hackettstown, New Jersey ("Skylands"), entered into an Agreement and
Plan of Reorganizations and Merger ("Agreement"), pursuant to which,
subject to the conditions and upon the terms stated therein, Little
Falls would have merged with and into a new company ("Acquisition
Corp.") organized to effect the reorganization, and the Bank would have
been merged with and into Skylands Bank. Skylands and Acquisition Corp.
would have been the surviving entities and operated under the names of
"Skylands Community Bank" and "Little Falls the Company, Inc.,"
respectively (the two mergers are collectively referred to herein as
the "Mergers").
5
In accordance with the Agreement, each share of the common stock,
$.10 par value per share, of the Company ("the Company Common Stock")
outstanding immediately prior to the effective time of the Mergers (the
"Effective Time") would at the Effective Time be converted into one
share of the common stock, $2.50 par value per, share of Acquisition
Corp. ("Acquisition Corp. Common Stock"), and each share of the common
stock, $2.50 par value per share, of Skylands ("Skylands Common Stock")
outstanding immediately prior to the Effective Time would at the
Effective Time be converted into the right to receive eight-tenths (.8)
shares of Acquisition Corp. Common Stock. The Company shareholders and
Skylands shareholders, upon completion of the Mergers, would own
approximately 57% and 43% of Acquisition Corp., respectively. The
Mergers would have been accounted for as a "pooling of interests."
On November 5, 1998, the Company and Skylands announced that the
parties had mutually agreed to terminate the Agreement and related
Stock Option Agreements. In connection with the termination, the
Company expects to write-off $200,000 in expenses during the quarter
ending December 31, 1998.
6
LITTLE FALLS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes," "anticipates," "contemplates," "expects," and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected. Those risks and
uncertainties include changes in interest rates, risks associated with the
effect of opening a new branch, the ability to control costs and expenses, and
general economic conditions. The Company undertakes no obligation to publicly
release the results of any revisions to those forward looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
General
The Company is a New Jersey corporation organized in August 1995 at the
direction of the Board of Directors of the Bank to acquire all of the capital
stock of the Bank issued in the Conversion. The Company is a unitary savings and
loan holding company which, under existing laws, generally is not restricted in
the types of business activities in which it may engage provided that the Bank
retains a specified amount of its assets in housing-related investments.
The Bank is a federally chartered stock savings bank headquartered in
Little Falls, New Jersey. The Bank was founded in 1887 and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") and the
Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products. It is the Bank's intent to remain an independent
community savings bank serving the local banking needs of its community.
The Bank attracts deposits from the general public and has historically
used such deposits primarily to originate loans secured by first mortgages on
owner-occupied one- to four-family residences in its market area and to purchase
mortgage-backed securities. The Bank also originates a limited number of
commercial real estate, residential construction, and consumer loans, which
mainly consist of home equity lines of credit.
The largest components of the Bank's net income are net interest
income, which is the difference between interest income and interest expense,
and noninterest income derived primarily from fees. Consequently, the Bank's
earnings are dependent on its ability to originate loans, net interest income,
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Bank's net income is also affected by its provision for loan
losses and foreclosed real estate as well as the amount of non-interest
expenses, such as compensation and benefit expense, occupancy and equipment
expense and deposit insurance premium expenses. Earnings of the Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Comparison of Financial Condition
Total assets increased by $12.2 million at September 30, 1998 as
compared to December 31, 1997. Net loans increased by $5.8 million due to
mortgage originations, including second mortgages, of $19.8 million, offset
somewhat by loan repayments. Mortgage-backed securities (including those
7
available for sale) decreased by $28.8 million due to repayments of principal
and the sale of a security with a balance of $8.3 million offset somewhat by
securities purchased. Investment securities (including those available for sale)
increased by $27.6 million primarily due to purchases exceeding maturities.
Total deposits increased, after interest credited, by $3.4 million.
Borrowed funds increased by $9.7 million as the Bank took advantage of lower
interest rates to fund investing and lending activities, and to allow for the
maturing and withdrawal of high yielding savings deposits.
Total stockholders' equity decreased by $1.1 million, primarily due to
the purchase of shares of Company stock pursuant to the Company's stock
repurchase program (130,396 shares at an average price of approximately $19.625
per share) and to dividends paid, offset somewhat by earnings during the period.
Non-performing Assets
The following table sets forth information regarding non-performing
loans and real estate owned.
At the At the
Nine Months Ended Year Ended
September 30,1998 December 31, 1997
----------------- -----------------
(Dollars in Thousands)
Total non-performing loans............. $ 953 $ 1,284
Real estate owned...................... 367 604
----- -----
Total non-performing assets............ $1,320 $1,888
===== =====
Total non-performing loans to
net loans............................ 0.62% 0.87%
===== =====
Total non-performing loans to
total assets......................... 0.28% 0.39%
===== =====
Total non-performing assets to
total assets......................... 0.39% 0.57%
===== =====
Comparison of Earnings for the Three and Nine Months Ended September 30, 1998
and 1997
Net Income. Net income for the three and nine months ended September
30, 1998 increased $26,000 and $64,000, respectively, over the same periods in
1997. For the three months ended September 30, 1998 the increase was primarily
due to an increase in non-interest income and decreases in compensation and
employee benefits and loss (income) on foreclosed real estate, offset somewhat
by a decrease in net interest income. For the nine month period, the increase
was primarily due to an increase in net interest income and decreases in loss
(income) on foreclosed real estate and income tax expense, offset somewhat by an
increase in compensation and employee benefits and a decrease in non-interest
income.
Total Interest Income. Interest income increased by $303,000 or 5.7%
and $1.9 million or 12.1% for the three and nine months ended September 30,
1998, respectively, as compared to the three and nine months ended September 30,
1997. These increases were due in most part to increases of $28.4 million and
$38.3 million in the average balances of interest earning assets for the three
and nine month periods ended September 30, 1998 as compared to the same periods
in 1997.
8
Total Interest Expense. Interest expense increased $423,000 or 12.7%
and $1.7 million or 18.0% for the quarter and nine months ended September 30,
1998, respectively, as compared to the quarter and nine months ended September
30, 1997. These increases were primarily due to the increases of $32.3 million
and $41.2 million in the average balance of interest bearing liabilities for the
nine months ended September 30, 1998 as compared to the same periods in 1997,
and to increases of five and ten basis points in the average cost of interest
bearing liabilities for the three and nine months ended September 30, 1998, as
compared to the same periods in 1997.
At September 30, 1998, the Bank had $59.9 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) $9.5 million repurchase agreement with a rate of 5.62%,
maturing October 13, 1998. This repurchase agreement was
subsequently rolled over at a rate of 5.32% and matures
November 1998.
(d) $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 November, 1998 and has a rate of
5.72%.
Net Interest Income. Net interest income decreased $121,000 and
increased $176,000 for the three and nine month periods ended September 30,
1998, respectively, when compared to the three month and nine month periods
ended September 30, 1997. The decrease for the three month period was due to the
decrease in the net interest spread and an increase in the average balance of
interest bearing liabilities, offset somewhat by an increase in the average
balance of interest earning assets. For the nine month period, the increase was
due in most part to an increase in the average balance of interest earning
assets offset in part by an increase in the average balance of interest bearing
liabilities and a decrease in the net interest spread. Interest bearing
liabilities increased during those periods due to an increase in the average
balance of borrowed money.
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 September 30, 1998 and 1997 and $180,000 for each of the nine
months ended September 30, 1998.
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
9
that these regulators may be applying more conservative criteria in evaluating
real estate market values, requiring significantly increased provisions for
potential loan losses. While the Bank believes it has established an adequate
allowance for loan losses, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to significantly
increase its allowance for loan losses, thereby negatively affecting the Bank's
financial condition and earnings or that the Bank may not have to increase its
level of loan loss allowance in the future.
Management will continue to review its loan portfolio to determine the
extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
An analysis of the allowance for loan losses follows:
Nine Months
Ended September 30,
-----------------------
1998 1997
-------- --------
(In thousands)
Balance - beginning............................ $ 1,168 $ 1,090
Provisions charged to operations............... 180 180
Loans charged off, net of recoveries........... (19) (151)
----- -----
Balance-ending................................. $ 1,329 $ 1,119
====== ======
Impaired loans and related amounts recorded in the allowance for loan
losses at September 30, 1998 are summarized as follows (in thousands):
At At
September 30, December 31,
1998 1997
-------------- ---------------
With recorded allowances................ $ 614 $744
Without recorded allowances............. - -
----- -----
Total impaired loans.................... 614 744
Related allowance for loan losses....... 92 111
----- -----
Net impaired loans...................... $ 522 $ 633
===== =====
Non-interest Income. Non-interest income increased by $48,000 and
decreased by $84,000 for the three and nine months ended September 30, 1998,
respectively. The increase for the three month period was due in most part to a
gain of $30,000 on the sale of a mortgage-backed security classified as
available for sale. The decrease during the nine month period was primarily due
to a $125,000 gain recorded on the sale of the Bank's Frenchtown, NJ branch
office in June 1997 offset somewhat by a $30,000 gain on the sale of a
mortgage-backed security classified as available for sale. The office had been
closed during the third quarter of 1996 and deposits were transferred to other
Bank's offices.
Non-interest Expense. Non-interest expense decreased by $95,000 for the
three months ended September 30, 1998 as compared to the three months ended
September 30, 1997. This decrease was due in most part to a decrease in
compensation and employee benefits of $56,000 and a decrease of $31,000 in loss
on foreclosed real estate. The decrease in compensation and employee benefits
was due to an decrease in pension-related expenses of $43,000 and a decrease in
other employee benefits of $44,000,
10
offset somewhat by normal annual merit increases. The increase in compensation
and employee benefits for the nine-month period was due to an increase in the
expense related to the Company's Employee Stock Ownership Plan resulting from
the increase in the average price of Little Falls Bancorp, Inc. common stock and
normal merit increases offset by decreases in pension-related expenses and other
employee benefits.
On November 5, 1998, the Company and Skylands announced that the
parties had mutually agreed to terminate the Agreement and related Stock Option
Agreements. In connection with the termination, the Company expects to write-off
approximately $200,000 in expenses during the quarter ending December 31, 1998.
Income Tax Expense. Income tax expense decreased $3,000 and $96,000 for
the three and nine month periods ended September 30, 1998 as compared to the
same periods last year. These decreases were due in most part to the Company
increasing investments in assets that are taxed at a reduced Federal tax rate.
Liquidity and Capital Resources
On September 30, 1998, the Bank was in compliance with its three
regulatory capital requirements as follows:
Amount Percent
------ -------
(Dollars in thousands)
Tangible capital............................... $28,466 8.49%
Tangible capital requirement................... 5,029 1.50
------ ----
Excess over requirement........................ $23,437 6.99%
====== ====
Core capital................................... $28,466 8.49%
Core capital requirement....................... 13,411 4.00%
------ ----
Excess over requirement........................ $15,055 4.49%
====== ====
Risk based capital............................. $21,740 16.40%
Risk based capital requirement................. 10,604 8.00%
------ ----
Excess over requirement........................ $11,136 8.40%
====== ====
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 Company's requirements.
The Company'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 Company's primary sources of funds are deposits and scheduled
amortization and prepayment of loan and mortgage-backed principal. During the
past several years, the Company has used such funds primarily to fund maturing
time deposits, pay savings withdrawals, fund lending commitments, purchase new
investments, and increase liquidity. The Company 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
11
mortgage-backed and investment securities. As of September 30, 1998, the Company
had $68.4 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 Company anticipates that it will have sufficient funds available to
meet its current commitments. As of September 30, 1998, the Company had mortgage
commitments to fund loans of $2.5 million. Also, at September 30, 1998, there
were commitments on unused lines of credit relating to home equity loans of $4.5
million. Certificates of deposit scheduled to mature in one year or less at
September 30, 1998 totaled $115.2 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 Company. 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.
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.
12
Year 2000
During fiscal 1998, the Bank adopted a Year 2000 Compliance Plan (the
"Plan") and established a Year 2000 Compliance Committee (the "Committee"). The
objectives of the Plan and the Committee are to prepare the Bank for the
millennium. As recommended by the Federal Financial Institutions Examination
Council, the Plan encompasses the following phases: Awareness, Assessment,
Renovation, Validation and Implementation. These phases will enable the Bank to
identify risks, develop an action plan, perform adequate testing and complete
certification that its processing systems will be Year 2000 ready. Execution of
the plan is currently on target. The Bank is currently in Phase 3, Renovation,
(which includes code enhancements, program changes, hardware and software
upgrades, system replacements and third party vendor monitoring) and Phase 4,
Validation, (which includes testing of incremental changes to hardware and
software, testing connections with third-party vendors and establishing controls
to ensure timely completion of all hardware and software prior to final
implementation). Prioritization of the most critical applications has been
addressed, along with contract and service agreements. The primary operating
software for the Bank is obtained and maintained by an external provider of
software (the "External Provider"). The Bank has maintained ongoing contact with
this vendor so that modification of the software is a top priority and is
expected to be accomplished, though there is no assurance, by December 31, 1998.
The Bank has contacted all other material vendors and suppliers regarding their
Year 2000 readiness. Each of these third parties has delivered written assurance
to the Bank that they expect to be Year 2000 compliant prior to the Year 2000.
The Renovation phase is targeted for completion by December 31, 1998 and the
Validation phase is targeted for completion by March 31, 1999. The
Implementation phase is to certify that systems are Year 2000 ready, along with
assurances that any new systems are compliant on a going forward basis. The
implementation phase is targeted for completion by September 30, 1999.
The Bank expects to incur consulting and other expenses related to
testing and enhancements to prepare the systems for the Year 2000. The Bank does
not anticipate that the related costs will be material in any single year. In
total, the Bank estimates that it's cost for compliance will amount to
approximately $100,000 over the two year period from 1998 - 1999. As of
September 30, 1998 the Bank estimates that approximately $50,000 of these costs
have been incurred. No assurance can be given that the Year 2000 Compliance Plan
will be completed successfully by the Year 2000, in which event the Bank could
incur significant costs. If the External Provider is unable to resolve the
potential problem in time, the Bank would likely experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial statements of the
Company.
Successful and timely completion of the Year 2000 project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the progress and results of the Bank's
External Provider, testing plans, and all vendors, suppliers and customer
readiness.
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.
13
Additional Key Operating Ratios
For the For the
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
1998(1) 1997(1) 1998(1) 1997(1)
------- ------- ------- -------
Return on average assets................................... 0.55% 0.57% 0.55% 0.60%
Return on average equity................................... 5.18% 4.75% 5.12% 4.63%
Interest rate spread....................................... 1.96% 2.24% 2.07% 2.22%
Net interest margin........................................ 2.27% 2.64% 2.46% 2.70%
Noninterest expense, to average assets..................... 1.44% 1.66% 1.57% 1.69%
At September 30, At December 31,
1998 1997
-------------- --------------
Tangible book value per share...................................... $13.96 $13.59
- ----------------
(1) The ratios for the three and nine month periods are annualized.
14
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 September 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 September
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
On November 5, 1998, the Registrant announced that it and Skylands
Community Bank had mutually agreed to terminate the Agreement and Plan
of Reorganization and Mergers, including the related stock option
agreements. In connection with the termination, the Registrant expects
to write-off approximately $200,000 in expenses during the quarter
ending December 31, 1998.
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***
10.8 1997 Directors Stock Compensation Plan
10.9 1998 Directors Stock Compensation Plan
11.0 Earnings Per Share Calculation
27.0 Financial Data Schedule****
(b) Reports on Form 8-K.
On August 17, 1998 the Registrant filed a current Report on Form 8-K
announcing that it had entered into an Agreement and Plan of Reorganization and
Mergers with Skyland Community Bank (Items 5 and 7).
15
- ----------------------------
* 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.
16
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: November 12, 1998 By: /s/ Leonard G. Romaine
--------------------------------------
Leonard G. Romaine
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 1998 By: /s/ Richard Capone
--------------------------------------
Richard Capone
Senior Vice President and
Chief Financial Officer
(Principal Officer)
EXHIBIT 11
EARNINGS (LOSS) PER SHARE CALCULATION
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
------------- ------------- -------------- ----------
Net Income......................................... $ 482,707 $ 456,642 1,435,217 $1,370,949
Basic Weighted Average Shares 2,190,046 2,371,363 2,209,637 2,402,618
Outstanding........................................
Basic Earnings Per Share........................... $0.22 $0.19 $0.65 $0.57
Basic Weighted Average Shares 2,190,046 2,371,363 2,209,637 2,402,618
Outstanding........................................
Potential common stock due to:
Stock options.................... 87,362 86,430 100,934 63,166
MSBP............................. 4,806 4,033 7,365 1,220
--------- --------- --------- ---------
Diluted weighted average shares 2,282,214 2,461,826 2,317,936 2,467,004
outstanding........................................
Diluted earnings per share......................... $0.21 $0.19 $0.62 $0.56
Basic earnings per share of common stock for the three and nine month periods
ended September 30, 1998 and 1997 has been determined by dividing net income for
the period by the weighted average number of shares of common stock outstanding,
net of average unearned ESOP shares of 200,639, 204,740, 220,919, and 225,020,
respectively, and average unearned MSBP shares of 86,840, 93,129, 77,115, and
92,097, respectively.