Little Falls Bancorp, Inc.
Annual Report - 1998
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TABLE OF CONTENTS
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Letter to Stockholders ........................................ 1
Corporate Profile and Stock Market Information................. 2
Selected Financial and Other Data.............................. 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 4
Management Responsibility Statement............................ 17
Independent Auditors' Report................................... 18
Consolidated Statements of Financial Condition................. 19
Consolidated Statements of Income.............................. 20
Consolidated Statements of Comprehensive Income................ 21
Consolidated Statements of Changes in Stockholders' Equity..... 22
Consolidated Statements of Cash Flows.......................... 23
Notes to Consolidated Financial Statements..................... 26
Other Corporate Information.................................... 59
Little Falls Bancorp, Inc.
86 Main Street
Little Falls, New Jersey 07424
To Our Stockholders:
On behalf of our directors, officers and employees, we are pleased to present to
you our fourth annual stockholders' report. Last year was quite eventful. As you
know, we had initially hoped to combine with Skylands Community Bank to form a
more diversified institution with a wider customer base.
However, the agreement was mutually terminated in November 1998.
As previously reported, on January 26, 1999, we signed an agreement with HUBCO,
Inc., Mahwah, New Jersey, whereby HUBCO would acquire Little Falls. If the
required shareholder and regulatory approvals are obtained, we expect to close
the transaction in the second quarter of 1999.
We look forward to the proposed transaction and the opportunities that it
presents.
Your Board of Directors and management team are committed to protecting and
enhancing the value of your investment in the Company. We appreciate the
confidence, support and loyalty of our customers, employees, and stockholders.
Sincerely,
/s/Leonard G. Romaine
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Leonard G. Romaine
President
1
Little Falls Bancorp, Inc.
Corporate Profile
Little Falls Bancorp, Inc. (the "Company") is a New Jersey corporation
organized in August 1995 at the direction of the Board of Directors of the
Little Falls Bank (the "Bank") to acquire all of the capital stock of the Bank
issued upon its conversion from the mutual to stock form of ownership on January
5, 1996 (the "Conversion"). The Company is a unitary savings and loan holding
company which, under existing laws, generally is not restricted in the types of
business activities in which it may engage provided that the Bank retains a
specified amount of its assets in housing-related investments. At the present
time, because the Company does not conduct any active business, the Company does
not intend to employ any persons other than officers of the Bank but utilizes
the support staff of the Bank from time to time.
The Bank is a federally chartered stock savings bank headquartered in
Little Falls, New Jersey. The Bank was founded in 1887 and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") and the
Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products.
The Bank attracts deposits from the general public and uses such
deposits primarily to originate loans secured by first mortgages on
owner-occupied one- to four-family residences in its market area, purchase loans
to diversify its loan portfolio, and to purchase mortgage-backed and investment
securities. The Bank also originates a limited number of commercial real estate,
residential construction, and consumer loans, which consists mainly of second
mortgages and home equity lines of credit.
Stock Market Information
Since its issuance on January 5, 1996, the Company's common stock has
traded on the Nasdaq National Market. The following table reflects the stock
price as published by the Nasdaq National Market. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down, or commission, and may
not represent actual transactions.
HIGH LOW
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October 1, 1998 - December 31, 1998 $21 1/2 $11 1/2
July 1, 1998 - September 30, 1998 22 14
April 1, 1998 - June 30, 1998 22 1/4 18 1/4
January 1, 1998 - March 31, 1998 20 1/2 17 1/2
October 1, 1997 - December 31, 1997 20 1/2 16 1/4
July 1, 1997 - September 30, 1997 18 1/2 15 1/4
April 1, 1997 - June 30, 1997 15 7/8 12 5/8
January 5, 1997 - March 31, 1997 14 1/8 12 1/4
The number of stockholders of record of common stock as of the record
date of March 19, 1999 ("Record Date"), was 376. This does not reflect the
number of persons or entities who held stock in nominee or "street" name through
various brokerage firms. As of the Record Date, there were 2,470,551 shares
outstanding.
2
The Company's ability to pay dividends to stockholders is subject to
the requirements of New Jersey law. No dividend may be paid by the Company
unless its board of directors determines that the Company will be able to pay
its debts in the ordinary course of business after payment of the dividend. In
addition, the Company's ability to pay dividends is dependent, in part, upon the
dividends it receives from the Bank. The Bank may not declare or pay a cash
dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock form, or (2) the regulatory capital requirements imposed by the
Office of Thrift Supervision ("OTS").
Selected Financial Condition Data
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December 31, 1998 1997 1996 1995 1994
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(In Thousands)
Total Assets......................... $350,617 $328,522 $303,518 $310,355 $193,385
Loans receivable (net)............... 149,062 147,033 117,116 96,230 94,754
Mortgage-backed securities held
to maturity......................... 61,373 90,957 112,473 118,020 51,664
Mortgage-backed securities
available for sale.................. 13,971 13,929 -- -- --
Investment securities - held to
maturity............................ 40,577 57,988 51,370 29,999 36,146
Investment securities - available
for sale........................... 39,423 -- -- -- --
Cash and cash equivalents............ 33,393 6,788 10,374 53,419 4,065
Deposits............................. 243,048 230,133 228,312 247,851 176,173
Stockholders' equity................. 37,445 38,295 40,448 16,223 15,715
Selected Operating Data
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Year Ended December 31, 1998 1997 1996 1995 1994
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(In Thousands)
Total interest income.................. $22,746 $ 21,064 $ 18,776 $13,813 $13,075
Total interest expense................. 14,695 12,920 11,258 9,314 7,170
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Net interest income.................. 8,051 8,144 7,518 4,499 5,905
Provision for loan losses.............. 161 240 183 131 356
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Net interest income after
provision for loan losses........... 7,890 7,904 7,335 4,368 5,549
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Total non-interest income............ 404 427 409 178 143
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Total non-interest expense........... 5,702 5,403 6,747(1) 3,840(2) 2,912
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Income before provision for
income taxes ......................... 2,592 2,928 996 705 2,781
Income tax expense..................... 844 1,072 385 241 1,066
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Net income........................... $ 1,748 $ 1,856 $ 611 $ 464 $ 1,715
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(footnotes on following page)
3
Other Selected Data
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Year Ended December 31, 1998 1997 1996 1995 1994
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Return on average assets...................... 0.51% 0.60% 0.21%(1) 0.22%(2) 0.86%
Return on average equity...................... 4.65% 4.74% 1.44%(1) 2.89%(2) 11.62%
Average equity to average assets.............. 10.92% 12.57% 14.78% 7.64% 7.62%
Net interest rate spread...................... 2.03% 2.27% 2.22% 1.97% 2.86%
Per Share Information:
Diluted earnings per share (1) (2) (3)...... $ 0.76 $ 0.75 $0.22 N/A N/A
Dividends per share (3)..................... $ 0.22 $ 0.155 $0.05 N/A N/A
Tangible book value per
share (3)................................... $14.11 $13.59 $13.56 N/A N/A
Dividend payout ratio (1) (2) (3)............. 28.94% 20.62% 22.28% N/A N/A
Non-performing assets to total assets......... 0.37% 0.57% 0.91% 1.27% 3.09%
Non-performing loans to total assets.......... 0.29% 0.39% 0.63% 0.79% 2.18%
Allowance for loan losses to total loans...... 0.88% 0.79% 0.92% 0.98% 1.21%
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(1) Includes one-time special assessment of $1,167,000 to recapitalize the
SAIF.
(2) Includes a non-recurring expense of $195,000 due to the implementation
of a directors' medical plan. (3) No shares of common stock were
outstanding until January 5, 1996.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The largest components of the Bank's net income are net interest
income, which is the difference between interest income and interest expense,
and noninterest income derived primarily from fees. Consequently, the Bank's
earnings are dependent on its ability to originate loans, net interest income,
and the relative amounts of interest-earning assets and interest-bearing
liabilities. The Bank's net income is also affected by its provision for loan
losses and foreclosed real estate as well as the amount of non-interest
expenses, such as compensation and benefit expense, occupancy and equipment
expense and deposit insurance premium expenses. Earnings of the Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Financial Condition
The Bank's total assets increased by $22.1 million to $350.6 million at
December 31, 1998 from $328.5 million at December 31, 1997. Total loans
receivable increased by $2.0 million due to loan originations of $25.5 million,
offset somewhat by loan repayments. Investment securities held to maturity
decreased by $17.4 million due to maturing or called securities of $52.0 million
and the sale of $3.0 million of securities which were within three months of
their maturity, offset somewhat by purchases of $37.6 million. Investment
securities available for sale increased by $39.4 million due to purchases of
$45.9 million, offset somewhat by maturing or called securities of $5.3 million
and the sale of $1.0 million of securities. Mortgage-backed securities held to
maturity decreased by $29.6 million due to repayments of principal. Total cash
and cash equivalents increased by $26.6 million due in part to the increase in
deposits of $12.9 million.
Total deposits increased by $12.9 million. Borrowed funds increased by
$9.8 million as the Bank took advantage of lower interest rates to fund
investing and lending activities.
Total stockholders' equity decreased by $849,000 primarily due to the
repurchase of shares of Company stock pursuant to the Company's stock repurchase
program (130,396 shares at a total price of approximately $2.6 million), a
$247,000 unrealized loss on securities available for sale net of deferred taxes
and dividends paid, offset somewhat by earnings for the year.
5
Average Balance, Net Interest Income, Yields Earned and Rates Paid
The following table sets forth certain information relating to the
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of daily
average balances has caused any material difference in the information
presented.
1998 1997 1996
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Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)............... $150,345 $11,381 7.57% $131,625 $10,081 7.66% $105,794 $ 8,255 7.80%
Mortgage-backed securities(5)..... 90,582 5,481 6.05 107,304 7,118 6.63 119,684 7,972 6.64
Investment securities(2)(5)....... 79,604 5,236 6.64 55,615 3,624 6.52 40,316 2,164 5.37
Other interest-earning assets..... 11,390 598 5.25 4,596 241 5.24 7,431 385 5.18
------- ------ ------- ------ ------- ------
Total interest-earning
assets......................... 331,921 22,746 6.85 299,140 21,064 7.04 273,225 18,776 6.87
------ ------ ------
Non-interest-earning assets........ 12,284 12,566 14,223
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Total assets..................... $344,205 $311,706 $287,448
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Interest-bearing liabilities:
Savings accounts.................. $ 42,848 1,277 2.98 $ 45,724 1,440 3.15 $ 51,633 1,860 3.60
Now and money market.............. 33,639 607 1.80 32,788 642 1.96 39,270 1,155 2.94
Certificates of deposit........... 156,216 8,620 5.52 148,122 8,246 5.57 147,707 8,068 5.46
Borrowed funds.................... 72,357 4,191 5.79 43,975 2,592 5.89 3,173 175 5.52
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Total interest-bearing
liabilities.................... 305,060 14,695 4.82 270,609 12,920 4.77 241,783 11,258 4.66
------ ------ ------
Non-interest bearing
liabilities...................... 1,546 1,928 3,171
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Total liabilities................. 306,606 272,537 244,954
Stockholders' equity............... 37,599 39,169 42,494
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Total liabilities and
stockholders' equity............. $344,205 $311,706 $287,448
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Net interest income................ $ 8,051 $ 8,144 $ 7,518
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Interest rate spread(3)............ 2.03% 2.27% 2.21%
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Net yield on interest-
earning assets(4)................ 2.42% 2.72% 2.75%
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Ratio of average interest-
earning assets to average
interest-bearing liabilities..... 108.81% 110.54% 111.00%
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(1) Average balances include non-performing loans.
(2) Includes interest-bearing deposits in other financial institutions and
FHLB stock.
(3) Interest-rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as
a percentage of average interest-earning assets.
(5) Includes both held to maturity and available for sale.
6
The table below sets forth certain information regarding changes in
interest income and interest expense of the Bank for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by prior rate); (ii) changes in rates
(changes in rate multiplied by prior average volume); (iii) changes in
rate-volume (changes in rate multiplied by the change in average volume).
Year Ended December 31,
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1998 vs. 1997 1997 vs. 1996
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Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- -------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
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(In Thousands)
Interest income:
Loans receivable................ $ 1,434 $ (117) $ (17) $ 1,300 $2,016 $(152) $ (38) $1,826
Mortgage-backed securities...... (1,109) (625) 97 (1,637) (825) (33) 4 (854)
Investment securities........... 1,453 149 60 1,662 821 463 176 1,460
Other interest-earning assets... 569 (63) (149) 357 (147) 5 (2) (144)
------ ----- ----- ------ ----- ---- ---- -----
Total interest-earning assets.. 2,347 (656) ( 9) 1,682 1,865 283 140 2,288
------ ----- ----- ------ ----- ---- ---- -----
Interest expense:
Savings accounts................ (91) (77) 5 (163) (213) (234) 27 (420)
Now and money market............ 17 (51) (1) (35) (191) (386) 64 (513)
Certificates of deposit......... 450 (72) (4) 374 23 155 - 178
Borrowed funds.................. 1,774 (104) (71) 1,599 2,250 12 155 2,417
------ ----- ----- ------ ----- ---- ---- -----
Total interest-bearing
liabilities.................. 2,150 (304) (71) 1,775 1,869 (453) 246 1,662
------ ----- ----- ------ ----- ---- ---- -----
Net change in net interest
income......................... $ 197 $ (352) $ 62 $ (93) $ (4) $ 736 $(106) $ 626
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Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
General. Net income decreased by $108,000, or 5.84% to $1.7 million for
the year ended December 31, 1998 from $1.9 million for the year ended December
31, 1997.
The decrease in earnings for the year was due in part to the costs
associated with terminating a merger agreement with Skylands Community Bank, the
expense incurred due to the immediate vesting of stock awards to a deceased
director during the fourth quarter of fiscal 1998, and an increase in losses on
foreclosed real estate, offset somewhat by a decrease in taxes.
Interest Income. Interest income increased $1.7 million, or 7.99% to
$22.7 million for the year ended December 31, 1998 from $21.1 million for the
year ended December 31, 1997. The increase was primarily due to increases of
$18.7 million, $24.0 million and $6.8 million in the average balance of loans,
investment securities, both held to maturity and available for sale and other
interest earning assets, respectively, offset somewhat by a decrease of $16.7
million in mortgage-backed securities, both held to maturity and available for
sale. Also, the average yield on all interest earning assets decreased by 19
basis points (100 basis points equals 1%) to 6.85%.
7
Interest Expense. Interest expense increased $1.8 million to $14.7
million for the year ended December 31, 1998 from $12.9 million for the year
ended December 31, 1997. This was due to an increase in the average balance of
borrowed funds of $28.4 million and an increase of $6.1 million in the average
balance of deposits coupled with an increase in the average rate paid on
interest-bearing liabilities of 5 basis points to 4.82%.
Net Interest Income. Net interest income decreased by $93,000 or 1.14%
for the year ended December 31, 1998 as compared to the year ended December 31,
1997. The increase was due to the reasons noted above.
Provision for Losses on Loans. The Bank maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience, adverse situations that
may affect the borrowers' ability to repay loans, estimated value of the
underlying collateral and current and expected market conditions. The provision
for loan losses decreased $79,000 or 32.86% to $161,000 for the year ended
December 31, 1998 from $240,000 for the year ended December 31, 1997, primarily
due to a decrease in the Bank's non-performing loans. While the Bank maintains
its allowance for losses at a level which it considers to be adequate, there can
be no assurance that further additions will not be made to the loss allowances
and that such losses will not exceed the estimated amounts.
Non-Interest Income. Non-interest income decreased by $24,000 or 5.66%
to $403,000 at December 31, 1998 from $428,000 at December 31, 1997. A gain of
$125,000 was recorded on the sale of the Bank's Frenchtown office building in
1997. The Frenchtown branch was closed in 1996, and the related deposits were
transferred to the Bank's other Hunterdon County offices. This was offset by
$47,000 of gains recorded in 1998 on the sales of investment and mortgage-backed
securities and an $81,000 increase in service fee income.
Non-Interest Expense. Non-interest expense increased $299,000, or 5.53%
to $5.7 million at December 31, 1998 from $5.4 million for the year ended
December 31, 1997. This increase was due to the recording of $106,000 of
expenses connected with the terminated merger agreement with Skylands Community
Bank and $140,000 of expense for the immediate vesting of stock awards for a
director who died during the fourth quarter of 1998. Exclusive of the
aforementioned items, non-interest expense increased $53,000, or 0.98%.
Income Tax Expense. Income tax expense decreased $229,000 or 21.31% to
$844,000 for the year ended December 31, 1998 from $1.1 million for the year
ended December 31, 1997. This increase was due to a decrease in pre-tax income
of $337,000 and an increase in investments in assets that are taxed at a reduced
federal income tax rate.
Comparison of Operating Results for Years Ended December 31, 1997 and 1996
General. Net income increased by $1.2 million, or 203.8% to $1.9
million for the year ended December 31, 1997 from $611,000 for the year ended
December 31, 1996.
The increase in earnings for the year was due in part to the $1.2
million charge in the third quarter of 1996 connected with a one time special
assessment from the Savings Association Insurance Fund ("SAIF"). This one time
assessment was the result of legislation that was effective on September 30,
1996 for the purpose of recapitalizing the SAIF. Other factors for the increase
in earnings
8
were an increase of $569,000 in net interest income after the provision for loan
losses, a decrease of $62,000 in the loss on foreclosed real estate and an
additional decrease of $270,000 in deposit insurance premiums offset somewhat by
increases in the provision for income taxes of $687,000, and miscellaneous
expense of $184,000.
Interest Income. Interest income increased $2.3 million, or 12.2% to
$21.1 million for the year ended December 31, 1997 from $18.6 million for the
year ended December 31, 1996. The increase was primarily due to increases of
$25.8 million and $15.3 million in the average balances of loans and investment
securities, respectively, offset somewhat by decreases of $12.4 million and $2.8
million in the average balances of mortgage-backed securities and other interest
earnings assets, respectively. Also, the average yield on all interest earning
assets increased by 17 basis points to 7.04%. In addition, the payoff of two
problem loans resulted in the recording of approximately of $170,000 of income
previously reserved for.
Interest Expense. Interest expense increased $1.7 million to $12.9
million for the year ended December 31, 1997 from $11.3 million for the year
ended December 31, 1996. This was due to an increase in the average balance of
borrowed funds of $40.8 million coupled with an increase in the average rate
paid on interest-bearing liabilities of 11 basis points to 4.77% partially,
offset by a decrease in the average balance of interest-bearing deposits of
$12.0 million.
Net Interest Income. Net interest income increased by $626,000, or 8.3%
for the year ended December 31, 1997 as compared to the year ended December 31,
1996. The increase was due to the reasons noted above.
Provision for Losses on Loans. The Bank maintains an allowance for loan
losses based upon management's periodic evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience, adverse situations that
may affect the borrowers' ability to repay loans, estimated value of the
underlying collateral and current and expected market conditions. The provision
for loan losses increased $57,000 or 31.2% to $240,000 for the year ended
December 31, 1997 from $183,000 for the year ended December 31, 1996, primarily
due to the increase in the loan portfolio. The allowance for loan losses was
$1.2 million at December 31, 1997. While the Bank maintains its allowance for
losses at a level which it considers to be adequate, there can be no assurance
that further additions will not be made to the loss allowances and that such
losses will not exceed the estimated amounts.
Non-Interest Income. Non-interest income increased by $19,000, or 4.7%
to $428,000 at December 31, 1997 from $409,000 at December 31, 1996. A gain of
$125,000 was recorded on the sale of the Bank's Frenchtown office building in
1997. The Frenchtown branch was closed in 1996, and the related deposits were
transferred to the Bank's other Hunterdon County offices. This offset a gain of
$138,000 recorded in 1996 on the sale of the deposits of the Bank's Mount Holly
office to an unaffiliated financial institution.
Non-Interest Expense. Non-interest expense decreased $1.3 million, or
19.9% to $5.4 million at December 31, 1997 from $6.7 million for the year ended
December 31, 1996. This decrease was primarily due to the $1.2 million charge in
the third quarter of 1996 connected with a one time special assessment from the
Savings Association Insurance Fund ("SAIF"). This one time assessment was the
result of legislation that was effective on September 30, 1996 for the purpose
of recapitalizing the SAIF. Other factors for the decrease in non-interest
expense were the additional decrease in deposit insurance
9
premiums of $270,000, a decrease of $62,000 in the loss on foreclosed real
estate offset somewhat by an increase of $184,000 in miscellaneous expense.
The decrease on the loss on foreclosed real estate was primarily due to
a gain of $11,000 being recorded on the sales of a foreclosed properties for the
year ended December 31, 1997, compared to a loss of $28,000 on the sale of
foreclosed properties for the year ended December 31, 1996. Miscellaneous
expense increased by $184,000 due in most part to the expense connected with the
director's management stock bonus plan, which increased to $139,000 in 1997 from
$39,000 for 1996 due to a full year of vesting, an increase in legal expense of
$50,000 and a loss of $19,000 on the sale of the Bank's Mount Holly office. The
deposits of this branch were sold in 1996.
Income Tax Expense. Income tax expense increased $687,000, or $178.2%
to $1.1 million for the year ended December 31, 1997 from $385,000 for the year
ended December 31, 1996. This increase was due to an increase in pre-tax income
of $1.9 million.
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.
In order to encourage monitor its interest rate risk, the Company
utilizes the services of an outside consultant to calculate the sensitivity of
its net portfolio value ("NPV") to changes in interest rates. NPV is the
difference between incoming and outgoing discounted cash flows from assets,
10
liabilities, and off-balance sheet contracts. The Company's interest rate risk
("IRR") is measured as the change to its NPV as a result of hypothetical 100
basis point ("bp") changes in market interest rates.
Net Portfolio Equity Value NPV as % of PV of Assets
----------------------------------------------------- ---------------------------------
Change in
Interest Rates $ Change
in Basis Points in Market % Change
(Rate Shock) Amount Value(1) From Base NPV Ratio(2) Changes(3)
--------------- -------- ---------- ----------- ------------ ------------
(Dollars in Thousands)
300 29,875 (12,238) (29) 9.04% (287)bp
200 34,118 (7,995) (19) 10.08% (183)bp
100 38,197 (3,916) (9) 11.04% (87)bp
0 42,113 -- -- 11.91% --
(100) 45,866 3,753 9 12.71% 80 bp
(200) 49,454 7,341 17 13.44% 153 bp
(300) 52,879 10,766 26 14.11% 220 bp
- -------------------------------------------------------
(1) Represents the increase (decrease) of the estimated NPV at the
indicated change in interest rates compared to the NPV assuming no
change in interest rates.
(2) Calculated as the estimated NPV divided by the present value of total
assets. The Company's PV is the estimated present value of total
assets.
(3) Calculated as the increase (decrease) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio
assuming no change in interest rates.
Certain assumptions utilized by the Company in assessing its interest
rate risk were employed in preparing the previous table. These assumptions
related to interest rates, loan prepayment rates, core deposit duration, and the
market values of certain assets under the various interest rate scenarios. It
was also assumed that delinquency rates will not change as a result of changes
in interest rates although there can be no assurance that this will be the case.
The calculation methodology used by the Company has certain shortcomings which
include, among others, that the repricing of both loans and deposits is often
discretionary and under the control of the Bank's customers. Even if interest
rates change in the designated amounts, there can be no assurance that the
Company's assets and liabilities would perform as projected.
Generally, net interest income should decrease with an instantaneous
100 basis point increase in interest rates while net interest income should
increase with instantaneous declines in interest rates. Generally, during
periods of increasing interest rates, the Company's liabilities are expected to
reprice faster than its assets, causing a decline in the Company's interest rate
spread. This would result from an increase in the Company's cost of funds that
would not be immediately offset by an increase in its
11
yield on earning assets. An increase in the cost of funds without an equivalent
increase in the yield on interest-earning assets would tend to reduce net
interest income.
Liquidity and Capital Resources
The Bank is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other investments. OTS regulations require that a savings
association maintain liquid assets of not less than 4% of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. At December 31, 1998, the Bank's liquidity was in excess of the minimum
requirement. The Bank adjusts liquidity as appropriate to meet its
asset/liability objectives.
The Bank's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and funds provided from operations. While scheduled loan repayments
are a relatively predictable source of funds, deposit flows and loan and
mortgage-backed security prepayments are significantly influenced by general
interest-rates, economic conditions and competition. In addition, the Bank
invests excess funds in overnight deposits which provide liquidity to meet
lending requirements.
The Bank's most liquid asset is cash, which includes investments in
highly liquid short-term investments. The level of these assets are dependent on
the Bank's operating, financing and investing activities during any given
period. At December 31, 1998, cash and cash equivalents totaled $33.4 million.
The Bank has other sources of liquidity if a need for additional funds arises.
Another source of liquidity is the repayment and prepayment of mortgage-backed
and investment securities. Additional sources of funds include the ability to
utilize FHLB of New York advances and the ability to borrow against
mortgage-backed and investment securities. At December 31, 1998 the Bank had a
$9.0 million repurchase agreement with a rate of 5.82%. The repurchase agreement
matures in December 1999 and is callable quarterly on interest payment dates. As
of March 6, 1999, the borrowing was still in place. The repurchase agreement was
used to fund the sale of the Mount Holly branch deposits which were sold in
December 1996. In an effort to increase earnings, reduce the Company's interest
rate sensitivity, and to better match its interest rate position, in November
1998, the Company entered into a financial transaction whereby it purchased two
fixed rate agency securities at an average rate of 6.17%, with terms of 15
years, and each is callable after one year. The funds for the purchase of these
securities came from a Federal Home Loan Bank of New York convertible advance.
The borrowing has a rate of 4.93% and matures November 19, 2003, but is callable
quarterly on interest payment dates starting November 19, 2001. At December 31,
1998, the Bank had a 30-day $9.5 million repurchase agreement with a rate of
5.29% and maturing on January 14, 1999. (This repurchase agreement subsequently
rolled over in January 1999, at a rate of 4.95%. In February, the repurchase
agreement was paid down to $9.0 million and the rate became 4.92%.) On March 10,
1998, the Bank took advantage of low interest rates to increase its borrowings
to fund investing and lending activities, and to allow for the maturing and
withdrawal of high yielding savings deposits, to borrow $25.0 million from the
Federal Home Loan Bank of New York. This convertible advance has a rate of
5.35%, with a maturity date of March 11, 2008. On March 12, 2001, and quarterly
thereafter, the Federal Home Loan Bank of New York has the right to call this
advance.
The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows from operating activities, consisting primarily of net
income adjusted for depreciation, amortization and provisions for loan and real
estate
12
owned losses, were $3.0, $3.4 million and $1.6 million for the years ended
December 31, 1998, 1997 and 1996, respectively. Net cash provided by (used in)
investing activities, which consisted primarily of disbursement of loan
originations, loan purchases, mortgage-backed security purchases and investment
security purchases, offset by principal collections on loans and mortgage-backed
securities and proceeds from the maturities of investment securities, were $3.9
million, $(29.5) million and $(37.2) million for fiscal 1998, 1997 and 1996,
respectively. Net cash provided by (used in) financing activities consisting
primarily of proceeds from stock subscriptions, net activity in deposit and
escrow accounts, and activity in borrowed funds were $19.7 million, $22.5
million and $(7.5) million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Operating activities in 1998 provided $3.0 million in cash due in most
part to income of $1.7 million adjusted for $180,000 in the provision for loan
and real estate owned losses, $361,000 of goodwill amortization and $352,000 in
the amortization of deferred fees, premiums and discounts. Investing activities
in 1998 provided funds of $3.9 million due to maturities of $52.0 million and
$5.0 million of investment securities held to maturity and investment securities
available for sale, respectively, repayments of $29.4 million of mortgage backed
securities held to maturity, $6.6 million of repayments of mortgage-backed
securities available for sale and $8.4 million in proceeds from the sale of
mortgage-backed securities available for sale, offset somewhat by purchases of
$45.9 million, $37.6 million and $15.0 million in investment securities
available for sale, investment securities held to maturity and mortgage-backed
securities available for sale, respectively. Financing activities in 1998
provided $19.7 million primarily due to an increase of $50.0 million in long
term borrowed funds and a net change of $13.0 million in deposits offset
somewhat by a decrease of $40.2 million in short term borrowings.
Operating activities in 1997 provided $3.4 million in cash primarily
due to income of $1.9 million adjusted for $149,000 in depreciation, $367,000 in
the provision for loan and real estate owned losses and $361,000 of goodwill
amortization. Investing activities in 1997 used $29.5 million due to $16.0
million, $14.0 million and $15.1 million in purchases of investment securities
held to maturity, mortgage-backed securities available for sale, and loans,
respectively, and the $15.0 million increase in loans receivable, offset
somewhat by $21.4 million from principal collections on mortgage-backed
securities held to maturity and $9.3 million from the maturity of investment
securities held to maturity. Financing activities in 1997 provided $22.5 million
due to a $1.8 million change in deposits and $25.1 million increase in borrowed
funds offset somewhat by $1.7 million and $2.4 million for the repurchase of
stock for the MSBP program and stock repurchase program, respectively.
Operating activities in 1996 provided $1.6 million in cash primarily
due to net income of $611,000 adjusted for $153,000 in depreciation, a $183,000
provision for loan and real estate owned losses, $361,000 of goodwill
amortization. Investing activities in 1996 used $37.2 million due to $16.1
million and $32.3 million in purchases of mortgage-backed and investment
securities, respectively, and a $21.3 million increase in loans receivable,
$11.0 million from the maturity of investment securities held to maturity, and
$21.5 million from principle collections on mortgage-backed securities held to
maturity. Financing activities used $7.8 million due to a $7.5 million decrease
in deposits, a $19.7 million refunding of oversubscribed deposits related to the
initial public offering completed in January 1996, $9.1 million used to fund the
sale of the deposits of the Mount Holly branch, and $3.3 million for the
repurchase of common stock, offset somewhat by an increase in borrowed funds of
$33.6 million.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. As of December 31, 1998, the Bank had mortgage
commitments to fund loans of $5.1 million. Also, at December 31, 1998, there
were commitments on unused lines of credit relating to home equity loans of $4.6
million. Certificates of deposit scheduled to mature in one year or less at
December 31, 1998
13
totaled $125.7 million. Based on historical deposit withdrawals and outflows,
and on internal monthly deposit reports monitored by management, management
believes that a majority of such deposits will remain with the Bank. As a
result, no adverse liquidity effects are expected.
At December 31, 1998, the Bank exceeded each of the three regulatory
capital requirements on a fully phased-in basis. See Note 11 to the Consolidated
Financial Statements.
Year 2000 Readiness
The following discussion of the implications of the Year 2000 problem
for the Company, contains numerous forward looking statements based on
inherently uncertain information. The cost of the project and the date on which
the Company plans to complete the internal Year 2000 modifications are based on
management's assumptions of future events including the continued availability
of internal and external resources, third party modifications and other factors.
However, there can be no guarantee that these statements will be achieved and
actual results could differ. Moreover, although management believes it will be
able to make the necessary modifications in advance, there can be no guarantee
that failure to modify the systems would not have a material adverse effect on
the Company.
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. 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 March 31, 1999. 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. Due to the announcement of the Company's
potential acquisition by HUBCO, the Renovation and Valuation phases targeted
completion dates have been changed to April 30, 1999 and May 31, 1999,
respectively. 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 December
31, 1998 approximately $65,000 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.
14
The Company does not separately track the internal costs incurred for
the Year 2000 project because such costs are principally the related payroll
costs.
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.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with the Company, such as public utilities, customers, vendors, payment systems
providers and other financial institutions, makes it impossible to assure that a
failure to achieve compliance by one or more of these entities would not have
material adverse impact on the operations of the Company.
Impact of Inflation and Changing Prices
The financial statements of the Bank and notes thereto, presented
elsewhere herein, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of the Bank's operations.
Unlike most industrial companies, nearly all the assets and liabilities
of the Bank are monetary. As a result, interest rates have a greater impact on
the Bank's performance than do the effects of general levels of inflation.
Interest rates do not necessary move in the same direction or to the same extent
as the price of goods and services.
15
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
(With Independent Auditor's Report Thereon)
December 31, 1998
--------------------------------------------------------
INDEX
-----
Page
---------
Management Responsibility Statement 17
Independent Auditors' Report 18
Consolidated Statements of Financial Condition
as of December 31, 1998 and 1997 19
Consolidated Statements of Income
for Each of the Years in the Three Year
Period Ended December 31, 1998 20
Consolidated Statements of Comprehensive Income
for Each of the Years in the Three Year
Period Ended December 31, 1998 21
Consolidated Statements of Changes in Stockholders' Equity
for Each of the Years in the Three Year Period Ended
December 31, 1998 22
Consolidated Statements of Cash Flows
for Each of the Years in the Three Year Period Ended
December 31, 1998 23 - 24
Notes to Consolidated Financial Statements 25 - 58
All schedules are omitted because the required information is either not
applicable or not required or the required information is included in the
consolidated financial statements or notes thereto.
16
[LOGO] LITTLE FALLS
BANCORP, INC.
Little Falls Bancorp, Inc.
86 Main Street
Little Falls, NJ 07424-1493
973-256-6100
January 22, 1999
MANAGEMENT RESPONSIBILITY STATEMENT
-----------------------------------
Management of Little Falls Bancorp, Inc. is responsible for the preparation of
the consolidated financial statements and all other financial information in
this report. The consolidated financial statements were prepared in accordance
with generally accepted accounting principles applied on a consistent basis. All
financial information included in the report agrees with the consolidated
financial statements. In preparing the consolidated financial statements,
management makes informed estimates and judgments, with consideration given to
materiality, about the expected results of various events and transactions.
Management maintains a system of internal accounting control that includes
personnel selection, appropriate division of responsibilities, and formal
procedures and policies consistent with high standards of accounting and
administrative practice. Consideration has been given to the necessary balance
between the costs of systems of accounting and internal control and the benefits
derived.
Management reviews and modifies its systems of accounting and internal control
in light of changes in conditions and operations as well as in response to
recommendations from the independent certified public accountants. Management
believes the accounting and internal control systems provide reasonable
assurance that assets are safeguarded and financial information is reliable.
The Board of Directors is responsible for determining that management fulfills
its responsibilities in the preparation of the consolidated financial statements
and the control of operations. The Board appoints the certified public
accountants. The Board meets with management and the independent certified
public accountants, approves the overall scope of audit work and related fee
arrangements and reviews audit reports and findings.
/s/Leonard G. Romaine /s/Richard A. Capone
- ---------------------------------- -------------------------------------
Leonard G. Romaine Richard A. Capone
President Chief Financial Officer and Treasurer
17
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors and Stockholders
Little Falls Bancorp, Inc.
Little Falls, New Jersey
We have audited the consolidated statements of financial condition of Little
Falls Bancorp, Inc. (the "Company") and subsidiary as of December 31, 1998 and
1997 and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to in the second
preceding paragraph present fairly, in all material respects, the consolidated
financial position of Little Falls Bancorp, Inc. and subsidiary as of December
31, 1998 and 1997 and the results of their operations and cash flows for each of
the years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/s/Radics & Co., LLC
Pine Brook, New Jersey
January 22, 1999, except for the last two paragraphs of Note 2, as to which the
date is January 26, 1999.
18
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
December 31,
--------------------------------------
Assets Notes 1998 1997
- ------ ------------------ ------------------ ------------------
Cash and due from banks $ 5,780,361 $ 2,737,709
Interest-bearing deposits in other banks 612,931 550,522
Federal funds sold and securities purchased under
agreements to resell 27,000,000 3,500,000
-------------- --------------
Total cash and cash equivalents 1 and 17 33,393,292 6,788,231
Investment securities available for sale 1,4, 10 and 17 39,422,602 -
Investment securities held to maturity 1,4, 10 and 17 40,577,457 57,987,644
Mortgage-backed securities available for sale 1,5, 10 and 17 13,971,394 13,929,048
Mortgage-backed securities held to maturity 1,5, 10 and 17 61,373,296 90,957,446
Loans receivable 1,6, 10 and 17 149,061,512 147,033,259
Premises and equipment 1 and 7 2,601,679 2,617,175
Investment in real estate 1 and 8 81,281 427,317
Foreclosed real estate 1 297,000 604,219
Interest receivable 1 and 17 1,961,170 2,079,091
Federal Home Loan Bank of New York stock 10 3,767,600 2,517,600
Excess of cost over assets acquired 1 2,495,443 2,856,230
Other assets 13 1,613,221 725,234
-------------- --------------
Total assets $ 350,616,947 $ 328,522,494
============= =============
Liabilities and stockholders' equity
- ------------------------------------
Liabilities
- -----------
Deposits 9 and 17 $ 243,048,053 $ 230,132,675
Borrowed money 10 and 17 68,500,000 58,719,500
Accounts payable and other liabilities 12 and 13 1,623,438 1,375,658
-------------- --------------
Total liabilities 313,171,491 290,227,833
-------------- --------------
Commitments 16 and 17 - -
Stockholders' equity 1,2,3,11,12 and 13
- --------------------
Preferred stock $.10 par value, 5,000,000 shares
authorized; none issued and outstanding - -
Common stock $.10 par value, 10,000,000 shares
authorized; 3,041,750 shares issued; shares outstanding
2,477,525 (1998) and 2,607,921 (1997) 304,175 304,175
Additional paid in capital 29,204,431 29,067,633
Retained earnings - substantially restricted 19,517,521 18,275,517
Common stock acquired by employee
stock ownership plan ("ESOP") (1,936,741) (2,106,432)
Unearned restricted Management Stock
Bonus Plan ("MSBP") stock, at cost (855,791) (1,329,167)
Treasury stock, at cost; 564,225 shares (1998)
and 433,829 shares (1997) (8,191,308) (5,632,286)
Accumulated other comprehensive income (596,831) (284,779)
-------------- --------------
Total stockholders' equity 37,445,456 38,294,661
-------------- --------------
Total liabilities and stockholders' equity $ 350,616,947 $ 328,522,494
============== ==============
See notes to consolidated financial statements.
19
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Year Ended December 31,
-----------------------------------------------------
Notes 1998 1997 1996
-------- ----------- ----------- -----------
Interest income:
Loans receivable 5 $11,380,802 $10,081,393 $ 8,255,040
Mortgage-backed securities 5,481,359 7,117,907 7,972,069
Investment securities and other
interest-earning assets 5,884,145 3,864,885 2,549,230
----------- ----------- -----------
Total interest income 22,746,306 21,064,185 18,776,339
----------- ----------- -----------
Interest expense:
Deposits 8 10,504,020 10,327,779 11,082,926
Borrowings 4,190,912 2,592,479 175,324
----------- ----------- -----------
Total interest expense 14,694,932 12,920,258 11,258,250
----------- ----------- -----------
Net interest income 8,051,374 8,143,927 7,518,089
Provision for loan losses 5 161,132 240,000 182,900
----------- ----------- -----------
Net interest income after provision for
loan losses 7,890,242 7,903,927 7,335,189
----------- ----------- -----------
Non-interest income:
Service fees 228,722 147,818 169,678
Other 4 and 5 174,774 279,877 238,893
----------- ----------- -----------
Total non-interest income 403,496 427,695 408,571
----------- ----------- -----------
Non-interest expenses:
Compensation and employee benefits 12 2,679,782 2,622,159 2,608,587
Occupancy, net 6 290,877 295,305 334,406
Equipment 6 432,893 430,366 401,510
Deposit insurance premiums 15 117,613 126,987 1,596,307
Loss on foreclosed real estate 44,017 26,900 88,981
Amortization of deposit premium 1 360,787 360,787 360,783
Other 12 1,776,203 1,540,603 1,356,853
----------- ----------- -----------
Total non-interest expenses 5,702,172 5,403,107 6,747,427
----------- ----------- -----------
Income before provision for income taxes 2,591,566 2,928,515 996,333
Provision for income taxes 13 843,850 1,072,400 385,444
----------- ----------- -----------
Net income $ 1,747,716 $ 1,856,115 $ 610,889
=========== =========== ===========
Net income per common share: 1 and 14
Basic $ 0.79 $ 0.78 $ 0.22
=========== =========== ===========
Diluted $ 0.76 $ 0.75 $ 0.22
=========== =========== ===========
See notes to consolidated financial statements.
20
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
-----------------------------------------------
Year Ended December 31,
------------------------------------------------
1998 1997 1996
------------ ------------ ----------
Net income $ 1,747,716 $ 1,856,115 $ 610,889
----------- ----------- ---------
Other comprehensive income, net of income taxes:
Unrealized holding gains on securities available for sale,
net of income taxes of $134,235 and $39,938 in 1998 and 1997, respectively (217,386) (71,062) -
Reclassification adjustment for realized gains on securities
available for sale, net of income taxes of $16,754 in 1998 (29,810) - -
----------- ----------- ---------
(247,196) (71,062) -
Minimum pension liability adjustment, net of income taxes
of $36,450, $72,590 and $(10,964), respectively (64,856) (129,162) 19,508
----------- ----------- ---------
Other comprehensive income (312,052) (200,224) 19,508
----------- ----------- ---------
Comprehensive income $ 1,435,664 $ 1,655,891 $ 630,397
=========== =========== =========
See notes to consolidated financial statements.
21
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Retained Common
Additional Earnings - Stock
Common Paid in Substantially Acquired
Stock Capital Restricted By ESOP
---------- ------------ ------------- --------------
Balance - December 31, 1995 $ - $ - $ 16,327,286 $ -
Net income - - 610,889 -
Net proceeds from
issuance of common stock 304,175 28,959,347 - -
Acquisition of common stock by ESOP - - - (2,433,400)
ESOP shares committed to be released - 15,452 - 162,227
Purchase of 296,570 shares of treasury stock - - - -
Decrease in minimum pension
liability, net of deferred income taxes - - - -
Dividends paid - - (136,119) -
--------- ----------- ------------ -------------
Balance - December 31, 1996 304,175 28,974,799 16,802,056 (2,271,173)
Net income - - 1,856,115 -
Acquisition of common stock by MSBP - - - -
ESOP shares committed to be released - 92,834 - 164,741
Amortization of MSBP stock - - - -
Purchase of 137,259 shares of treasury stock - - - -
Unrealized (loss) on securities available for sale, net - - - -
(Increase) in minimum pension
liability, net of deferred income taxes - - - -
Dividends paid - - (382,654) -
--------- ----------- ------------ -------------
Balance - December 31, 1997 304,175 29,067,633 18,275,517 (2,106,432)
Net income - - 1,747,716 -
ended December 31, 1998
ESOP shares committed to be released - 136,798 - 169,691
Amortization of MSBP stock - - - -
Purchase of 130,396 shares of treasury stock - - - -
Unrealized (loss) on securities available for sale, net - - - -
(Increase) in minimum pension
liability, net of deferred income taxes - - - -
Dividends paid - - (505,712) -
--------- ----------- ------------ -------------
Balance - December 31, 1998 $ 304,175 $29,204,431 $ 19,517,521 $ (1,936,741)
========= =========== ============ =============
22
- -----------------2nd half of table follows--------------------------------------
- -----------------2nd half of table below----------------------------------------
Unearned Accumulated
Restricted Other
MSBP Treasury Comprehensive
Stock Stock Income Total
---------- ------------ ------------- -------------
Balance - December 31, 1995 $ - $ - $ (104,063) $ 16,223,223
Net income - - - 610,889
Net proceeds from issuance of common stock
issuance of common stock - - - 29,263,522
Acquisition of common stock by ESOP - - - (2,433,400)
ESOP shares committed to be released - - - 177,679
Purchase of 296,570 shares of treasury stock - (3,277,004) - (3,277,004)
Decrease in minimum pension
liability, net of deferred income taxes - - 19,508 19,508
Dividends paid - - - (136,119)
--------- ----------- ------------ -------------
Balance - December 31, 1996 - (3,277,004) (84,555) 40,448,298
Net income - - - 1,856,115
Acquisition of common stock by MSBP (1,600,268) - - (1,600,268)
ESOP shares committed to be released - - - 257,575
Amortization of MSBP stock 271,101 - - 271,101
Purchase of 137,259 shares of treasury stock - (2,355,282) - (2,355,282)
Unrealized (loss) on securities available for sale, net - - (71,062) (71,062)
(Increase) in minimum pension
liability, net of deferred income taxes - - (129,162) (129,162)
Dividends paid - - - (382,654)
--------- ----------- ------------ -------------
Balance - December 31, 1997 (1,329,167) (5,632,286) (284,779) 38,294,661
Net income ended December 31, 1998 - - - 1,747,716
ESOP shares committed to be released - - - 306,489
Amortization of MSBP stock 473,376 - - 473,376
Purchase of 130,396 shares of treasury stock - (2,559,022) - (2,559,022)
Unrealized (loss) on securities available for sale, net - - (247,196) (247,196)
(Increase) in minimum pension
liability, net of deferred income taxes - - (64,856) (64,856)
Dividends paid - - - (505,712)
--------- ----------- ------------ -------------
Balance - December 31, 1998 $(855,791) $(8,191,308) $ (596,831) $ 37,445,456
========= =========== ============ =============
See notes to consolidated financial statements.
22
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Year Ended December 31,
--------------------------------------------------
1998 1997 1996
------------ ------------- -----------
Cash flows from operating activities:
Net income $ 1,747,716 $ 1,856,115 $ 610,889
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 131,395 149,187 153,207
Provision for loan and real estate owned losses 180,000 367,356 182,900
Amortization of intangibles 360,787 360,787 360,783
Amortization of deferred fees, premiums and discounts, net 352,432 117,732 40,903
Gain on sales of investment securities available for sale (16,654) - -
Gain on sales of mortgage-backed seucrities available for sale (29,910) - -
Gain on sale of branch - - (138,320)
Gain on sale of investment in real estate (37,911) (106,318) -
Loss (gain) on sale of foreclosed real estate 19,875 (11,086) 28,418
Deferred income taxes (148,250) (35,527) (243,005)
Decrease (increase) in interest receivable 117,921 (343,800) (17,942)
(Increase) decrease in other assets (566,063) 366,147 (2,447)
(Decrease) increase in interest payable (54,160) 92,789 180,501
Increase in accounts payable and other liabilities 127,036 55,364 256,012
ESOP shares committed to be released 306,489 257,575 177,679
Amortization of MSBP cost 501,237 271,101 -
----------- ----------- ---------
Net cash provided by operating activities 2,991,940 3,397,422 1,589,578
----------- ----------- ---------
Cash flows from investing activities:
Purchases of:
Investment securities available for sale (45,929,794) - -
Investment securiites held to maturity (37,583,247) (15,977,500) (32,347,937)
Mortgage-backed seucriites available for sale (15,035,553) (14,048,125) -
Mortgage-backed securities held to maturity - - (16,073,205)
Loans - (15,096,510) -
Premises and equipment (112,479) (102,193) (159,246)
Federal Home Loan Bank of New York stock (1,250,000) (441,900) (680,500)
Proceeds from maturities of and repayments on:
Investment securities available for sale 5,000,000 - -
Investment securities held to maturity 52,000,000 9,342,000 11,000,000
Mortgage-backed securities available for sale 6,615,242 - -
Mortgage-backed securities held to maturity 29,375,738 21,444,380 21,500,221
Proceeds from sales of:
Investment securities available for sale 1,028,100 - -
Investment securities held to maturity 3,000,000 - -
Mortgage-backed securities available for sale 8,352,991 - -
Investment in real estate 380,527 42,125 -
Foreclosed real estate 268,476 394,486 849,629
Net (increase) in loans receivable (2,187,526) (15,023,967) (21,265,657)
----------- ----------- ---------
Net cash provided by (used in) investing activities 3,922,475 (29,467,204) (37,176,695)
----------- ----------- ---------
See notes to consolidated financial statements.
23
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
Cash flows from financing activities:
Net increase (decrease) in deposits $12,974,880 $ 1,814,156 $(7,464,225)
Decrease in advances from borrowers for taxes - - (701,773)
(Refunds of) proceeds from stock subscriptions - - 19,706,653)
Net change in short-term borrowings (40,219,500) 10,096,000 24,623,500
Proceeds of long-term borrowings 50,000,000 15,000,000 9,000,000
Costs of issuance of common stock - - (731,348)
Dividends paid (505,712) (382,654) (136,119)
Cash paid in connection with branch sales - - (9,064,385)
Cost of MSBP shares - (1,688,171) -
Treasury stock acquired (2,559,022) (2,355,282) (3,277,004)
----------- ----------- -----------
Net cash provided by (used in) financing activities 19,690,646 22,484,049 (7,458,007)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 26,605,061 (3,585,733) (43,045,124)
Cash and cash equivalents - beginning 6,788,231 10,373,964 53,419,088
----------- ----------- -----------
Cash and cash equivalents - ending $33,393,292 $ 6,788,231 $10,373,964
=========== =========== ===========
Supplemental disclosures:
Cash paid during the period for:
Interest $14,749,082 $12,827,469 $11,077,749
=========== =========== ===========
Income taxes, net of refunds $ 1,305,745 $ 957,808 $ 410,701
=========== =========== ===========
Unrealized loss on securities available
for sale, net of deferred income taxes $ 247,196 $ 71,062 $ -
=========== =========== ===========
Loans to facilitate sales of investment in real estate $ - $ 215,000 $ -
=========== =========== ===========
Loans receivable transferred to foreclosed real estate $ - $ 157,818 $ 406,379
=========== =========== ===========
Loans to facilitate sales of foreclosed real estate $ - $ - $ 172,000
=========== =========== ===========
Increase (decrease) in minimum
pension liability, net of deferred income taxes $ 64,856 $ 129,162 $ (19,508)
=========== =========== ===========
Property transferred to investment in real estate $ - $ 9,629 $ 145,478
=========== =========== ===========
Issuance of common stock:
Deposits used for stock purchases $ - $ - $ 2,859,458
Stock subscriptions used for stock purchases - - 25,124,642
Deferred costs - - (422,630)
----------- ----------- -----------
$ - $ - $27,561,470
Reduction in MSBP liability in connection with purchase
of MSBP shares $ - $ (87,903) $ -
=========== =========== ===========
Liabilities assigned in connection with branch sales:
Deposits $ - $ - $ 9,221,324
=========== =========== ===========
Assets sold in connection with branch sales:
Loans $ - $ - $ 18,619
=========== =========== ===========
See notes to consolidated financial statements.
24
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------
Basis of financial statement presentation
-----------------------------------------
The consolidated financial statements, which have been prepared in
conformity with generally accepted accounting principles, include the
accounts of Little Falls Bancorp, Inc. (the "Company") and its wholly
owned subsidiary, Little Falls Bank (the "Bank"). All significant
intercompany accounts and transactions have been eliminated in
consolidation. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect
the reported amount of assets and liabilities as of the dates of the
consolidated statements of financial condition and revenues and
expenses for the periods then ended. Actual results could differ
significantly from those estimates. Material estimates that are
particularly susceptible to significant changes relate to the
determination of the allowance for loan losses, the valuation of
foreclosed real estate, the assessment of prepayment risks associated
with mortgage-backed securities and the determination of the amount of
deferred tax assets that are more likely than not to be realized.
Management believes that the allowance for loan losses is adequate,
foreclosed real estate is appropriately valued, prepayment risks
associated with mortgage-backed securities are properly recognized and
all deferred tax assets are more likely than not to be recognized.
While management uses available information to recognize losses on
loans and foreclosed real estate, future additions to allowance for
loan losses or further writedowns of foreclosed real estate may be
necessary based on changes in economic conditions in the market area.
Additionally, assessments of prepayment risks related to mortgage-
backed securities are based upon current market conditions, which are
subject to frequent change. Finally, the assessment of the amount of
deferred tax assets more likely than not to be realized is based on
projected future taxable income, which is subject to continual
revisions for updated information.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses and foreclosed real estate. Such agencies may require the Bank
to recognize additions to the allowance or additional writedowns on
real estate based on their judgments about information available to
them at the time of their examination.
Comprehensive income
--------------------
Effective January 1, 1998, the Company and the Bank adopted Statement
of Financial Accounting Standards ("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 a 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 effect on the Company's
consolidated financial condition or operations.
At December 31, 1998 and 1997, accumulated other comprehensive income
includes unrealized losses on securities available for sale, net of
deferred income taxes, of $(318,258) and $(71,062), respectively, and
additional minimum pension liability, net of deferred income taxes, of
$(213,717) and $(278,573), respectively.
25
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------------------
Cash and cash equivalents
-------------------------
Cash and cash equivalents include cash and amounts due from banks,
federal funds sold and interest-bearing deposits in other banks having
original maturities of three months or less. Generally, federal funds
sold are sold for one day periods.
Investment and mortgage-backed securities
-----------------------------------------
Debt securities for which there is the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and
reported at amortized cost. Debt and equity securities that are bought
and held principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair value, with
unrealized holding gains and losses included in earnings. Debt and
equity securities not classified as trading securities nor as held-to
maturity securities are classified as available for sale securities and
reported at fair value, with unrealized holding gains or losses, net of
deferred income taxes, included in accumulated other comprehensive
income.
Premiums are amortized and discounts are accreted to interest income
using the interest method. Gains or losses on the sale of securities
are based on specifically identifiable cost and are accounted for on a
trade date basis.
Loans receivable
----------------
Loans receivable are stated at unpaid principal balances, less the
allowance for loan losses and net deferred loan origination fees and
costs and discounts.
Loan fees and certain direct loan origination costs are deferred, and
the net fee or cost accreted or amortized as an adjustment of yield
using the interest method over the contractual lives of the related
loans. Unearned interest on consumer loans is recognized over the
contractual lives of the loans using a method which approximates the
interest method.
Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's
periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are
received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is reestablished, in
which case the loan is returned to accrual status.
Allowance for loans losses
--------------------------
An allowance for loan losses is maintained at a level considered
adequate to absorb future loan losses. Management of the Bank, in
determining the allowance for loan losses, considers the risks inherent
in its loan portfolio and changes in the nature and volume of its loan
activities, along with the general economic and real estate market
conditions.
26
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------------------
Allowance for loan losses (Cont'd.)
-------------------------
The Bank utilizes a two tier approach: (1) identification of impaired
loans and the establishment of specific loss allowances on such loans;
and (2) establishment of general valuation allowances on the remainder
of its loan portfolio. The Bank maintains a loan review system which
allows for a periodic review of its loan portfolio and the early
identification of potential impaired loans. Such system takes into
consideration, among other things, delinquency status, size of loans,
types of collateral and financial condition of the borrowers. Specific
loan loss allowances are established for identified loans based on a
review of such information and/or appraisals of the underlying
collateral. General loan loss allowances are based upon a combination
of factors including , but not limited to, actual loan loss experience,
composition of the loan portfolio, current economic conditions and
management's judgment. Although management believes that adequate
specific and general loan loss allowances are established, actual
losses are dependent upon future events and, as such, further additions
to the level of the loan loss allowance may be necessary.
Impaired loans are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or the
fair value of the collateral if the loan is collateral dependent. A
loan evaluated for impairment is deemed to be impaired when, based on
current information and events, it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of
the loan agreement. An insignificant payment delay, which is defined by
the Bank as up to ninety days, will not cause a loan to be classified
as impaired. A loan is not impaired during a period of delay in payment
if the Bank expects to collect all amounts due, including interest
accrued at the contractual interest rate for the period of delay. Thus,
a demand loan or other loan with no stated maturity is not impaired if
the Bank expects to collect all amounts due, including interest accrued
at the contractual interest rate, during the period the loan is
outstanding. All loans identified as impaired are evaluated
independently. The Bank does not aggregate such loans for evaluation
purposes. Payments received on impaired loans are applied first to
interest receivable and then to principal.
Premises and equipment
----------------------
Land is carried at cost. Buildings and improvements, leasehold
improvements and furniture, fixtures and equipment are carried at cost
less accumulated depreciation and amortization. Depreciation and
amortization are computed on a straight-line basis over the lesser of
the estimated useful lives of the assets or, if applicable, the term of
lease. Significant renovations and additions are capitalized. When
assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in operations for the period.
Maintenance and repairs are charged to expense as incurred. Rental
income is netted against occupancy expense.
Investment in real estate
-------------------------
Investments in real estate are carried at the lower of cost less
accumulated depreciation or fair value less estimated disposal costs.
27
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- ------------------------------------------------
Foreclosed real estate
----------------------
Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at the lower of cost or fair value
at the date of foreclosure. Subsequent valuations are periodically
performed and an allowance for losses established by a charge to
operations if the carrying value of a property exceeds its fair value
less estimated selling costs. Costs relating to development and
improvement of properties are capitalized, whereas income and expenses
relating to the operating and holding of properties are recorded in
operations as earned or incurred. Gains and losses from sales of these
properties are recognized as they occur.
Excess of cost over assets acquired
-----------------------------------
The cost in excess of the fair value of net assets acquired through the
acquisition of certain assets and assumption of certain liabilities of
branch offices is being amortized to expense over a ten year period by
use of the straight-line method.
Income taxes
------------
The Company and its subsidiary file a consolidated federal income tax
return and separate state income tax returns. Income taxes are
allocated to the Company and its subsidiary based upon the contribution
of their respective income or loss to the consolidated return. Federal
and State income taxes have been provided on the basis of reported
income. The amounts reflected on the tax returns differ from these
provisions due principally to temporary differences in the reporting of
certain items for financial reporting and tax reporting purposes.
Deferred income tax expense or benefit is determined by recognizing
deferred tax assets and liabilities for the estimated future tax
consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary difference are expected to be recovered or settled. The
realization of deferred tax assets is assessed and a valuation
allowance provided, when necessary, for that portion of the asset which
more likely than not will not be realized. Management believes, based
upon current facts, that it is more likely than not that there will be
sufficient taxable income in future years to realize all deferred tax
assets. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in earnings in the period that includes the
enactment date.
Accounting for stock-based compensation
---------------------------------------
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123 "Accounting for Stock-Based Compensation".
Statement No. 123 establishes financial accounting and reporting
standards for stock-based employees compensation plans. While all
entities are encouraged to adopt the "fair value based method" of
accounting for employee stock compensation plans, Statement No. 123
also allows an entity to continue to measure compensation cost under
such plans using the "intrinsic value based method" specified in
Accounting Principles Board Opinion No. 25.
28
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------------------
Accounting for stock-based compensation (Cont'd.)
---------------------------------------
Under the fair value based method, compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period, usually the vesting period. Fair value is determined
using an option pricing model that takes into account the stock price
at the grant date, the exercise price, the expected life of the option,
the volatility of the underlying stock and the expected dividends on
it, and the risk free interest rate over the expected life of the
option. Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the
grant date or other measurement date over the amount an employee must
pay to acquire the stock.
The accounting requirements of Statement No. 123 are effective for
transactions entered into in fiscal years that begin after December 15,
1995. The Company has elected to account for compensation cost under
the intrinsic value based method. Included in Note 12 to consolidated
financial statements are the pro forma disclosures required by
Statement No. 123.
Net income per common share
---------------------------
Basic net income per common share is calculated by dividing net income
by the weighted average number of shares of common stock outstanding,
adjusted for the unallocated portion of shares held by the ESOP in
accordance with the American Institute of Certified Public Accountants'
("AICPA") Statement of Position ("SOP") 93-6. Diluted net income per
share is calculated by adjusting the weighted average number of shares
of common stock outstanding to include the effect of stock options,
stock-based compensation grants and other securities, if dilutive,
using the treasury stock method. See Note 14 to consolidated financial
statements for a reconciliation of such amounts.
Per share amounts for the year ended December 31, 1996 have been
calculated based on the net income for the entire year. The calculation
of the weighted average number of common shares outstanding from the
date of conversion to stock form (January 5, 1996) through December 31,
1996, assumes such shares were outstanding for the entire year (as if
the conversion had taken place on January 1, 1996).
Nature of operations and interest rate risk
-------------------------------------------
The Company is a holding company whose principal activity is the
ownership and management of the Bank. The Bank is principally engaged
in the business of attracting deposits from the customers located
primarily in northern New Jersey and using these deposits, along with
borrowings and other funds, to make loans secured by real estate
located primarily in northern New Jersey and to purchase
mortgage-backed and investment securities. The potential for
interest-rate risk exists as a result of the generally shorter duration
of the Bank's interest-sensitive liabilities compared to the generally
longer duration of its interest-sensitive assets. In a rising interest
rate environment, liabilities will reprice faster than assets, thereby
reducing the market value of long-term assets and net interest income.
For this reason, management regularly monitors the maturity structure
of the Bank's interest-earning assets and interest-bearing liabilities
in order to measure its level of interest-rate risk and to plan for
future volatility.
29
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
- -----------------------------------------------
Concentration of risk
---------------------
The Bank's lending and real estate activity is concentrated in real
estate and loans secured by real estate located in the State of New
Jersey. In general, the Bank's loan portfolio performance is dependent
upon local economic conditions.
Reclassification
----------------
Certain amounts for the year ended December 31, 1997 and 1996 have been
reclassified to conform to the current year's presentation.
2. REORGANIZATION AND STOCKHOLDERS' EQUITY
- --------------------------------------------
On January 5, 1996, the Bank converted from a federally chartered mutual savings
bank to a federally chartered stock savings bank, with the concurrent formation
of a holding company. The holding company, Little Falls Bancorp, Inc., a New
Jersey corporation organized in August 1995, acquired all of the capital stock
of the Bank upon the completion of the conversion. On January 5, 1996, the
conversion and initial public stock offering were completed with the issuance of
3,041,750 shares of the Company's common stock, par value $.10 per share, for
net proceeds, after conversion costs and the effect of the shares acquired by
the ESOP, of $26,830,022. Concurrently with the issuance of the Company's common
stock, the Company utilized $14,671,962 of the net proceeds to purchase all of
the outstanding capital stock of the Bank.
At the time of the conversion, the Bank, in order to grant priority to eligible
depositors in the event of future liquidation, established a liquidation account
of $15,488,000, an amount equal to its total net worth as of September 30, 1995,
the date of the latest statement of financial condition appearing in the final
prospectus. The liquidation account will be maintained for the benefit of
eligible account holders who continue to maintain their accounts at the Bank
after the conversion. The liquidation account will be reduced annually to the
extent that eligible account holders have reduced their qualifying deposits.
Subsequent increases in the deposit account will not restore an eligible account
holder's interest in the liquidation account. In the unlikely event of a
complete liquidation, each eligible account holder will be entitled to receive a
distribution from the liquidation account in an amount proportionate to their
current adjusted qualifying balances. The balance of the liquidation account on
December 31, 1998 has not been determined.
The ability of the Company to pay dividends to stockholders is dependent upon
the receipt of income from the subsidiary Bank. The Bank may not declare or pay
any dividend on or repurchase any of its capital stock if the effect thereof
would cause its net worth to be reduced below: (1) the amount required for the
liquidation account, or (2) the net worth requirements contained in section
563.13 (b) of the rules and regulation of the Office of Thrift Supervision (the
"OTS").
During the years ended December 31, 1998, 1997 and 1996, the Company approved
plans to repurchase 130,396, 137,259 and 296,570 shares, respectively, of its
common stock outstanding, up to five percent (5%) of the shares outstanding at
any single instance. In accordance therewith, during the years ended December
31, 1998, 1997 and 1996, 130,396, 137,259 and 296,570 shares, respectively, at
an aggregate cost of $2,599,022, $2,355,282, and $3,277,004, respectively, were
purchased in the open market.
30
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
3. PENDING MERGER
- --------------------
On January 26, 1999, the Company signed a definitive merger agreement under
which HUBCO, Inc. ("HUBCO") will acquire the Company in a combination stock and
cash transaction. Under the terms of the agreement, Company shareholders will
receive either 0.65 shares of HUBCO common stock or $20.64 in cash or a
combination of shares of HUBCO common stock and cash. The shares of HUBCO common
stock offered in this transaction will be in an amount equal to approximately
51% of the outstanding shares of the Company multiplied by the exchange ratio.
The remaining 49% of the outstanding shares will be purchased for cash at the
fixed per share price of $20.64. The exchange ratio of 0.65 shares of HUBCO
common stock is based upon HUBCO's median common stock price being between
$34.43 and $29.23 during a pre-determined pricing period. If the median
pre-closing price of HUBCO common stock is $29.00 or less, the exchange ratio
shall be increased in increments to a maximum exchange ratio of 0.70 effective
if the HUBCO median common stock price is $27.14 or lower. If the median
pre-closing price of HUBCO common stock is $34.50 or more, the exchange ratio
will be decreased in increments to a minimum exchange ratio of 0.60 at $37.50.
In connection with the execution of the merger agreement, the Company has issued
an option to HUBCO, which would enable HUBCO to purchase up to 493,000 shares of
Company common stock under certain circumstances. As part of the transaction,
the Company will be merged into Hudson United Bank. The merger is subject to
approval, by Federal and New Jersey bank regulatory authorities and Company
shareholders, as well as other customary conditions. The transaction is expected
to close in the second quarter of 1999.
4. INVESTMENT SECURITIES
- --------------------------
Available for sale:
December 31, 1998
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Carrying
Cost Gains Losses Value
------------ ------------ ------------ ------------
U.S. Government (including agencies):
Due after five years through ten years $ 7,002,442 $ 10,370 $ 4,600 $ 7,008,212
Due after ten years 5,751,429 81,696 -- 5,833,125
----------- ----------- -----------
12,753,871 92,066 4,600 12,841,337
Corporate bonds due after ten years 2,001,080 -- 11,080 1,990,000
Trust preferred securities 11,960,918 36,876 501,529 11,496,265
Preferred stock 13,199,307 10,000 114,307 13,095,000
----------- ----------- ----------- -----------
$39,915,176 $ 138,942 $ 631,516 $39,422,602
=========== =========== =========== ===========
Held to maturity:
December 31, 1998
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
U.S. Government (including agencies):
Due after one year through five years $ 5,685,303 $ 47,187 $ -- $ 5,732,490
Due after five years through ten years 5,002,894 14,606 -- 5,017,500
Due after ten years 29,889,260 -- 281,447 29,607,813
----------- ----------- ----------- -----------
$40,577,457 $ 61,793 $ 281,447 $40,357,803
=========== =========== =========== ===========
31
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
4. INVESTMENT SECURITIES (Cont'd.)
- ---------------------------
December 31, 1997
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
U.S. Government (including agencies):
Due in one year or less $10,005,774 $ -- $ 69,571 $ 9,936,203
Due after one year through five years 11,000,000 26,270 46,875 10,979,395
Due after five years through ten years 30,981,870 239,337 -- 31,221,207
Due after ten years 6,000,000 2,500 10,000 5,992,500
----------- ----------- ----------- -----------
$57,987,644 $ 268,107 $ 126,446 $58,129,305
=========== =========== =========== ===========
During the year ended December 31, 1998, proceeds from sales of investment
securities available for sale totaled $1,028,100 and resulted in gross gains of
$16,654. During the year ended December 31, 1998, proceeds from the sale of an
investment security held to maturity, which was within three months of final
maturity, totaled $3,000,000 and did not result in any gain or loss. There were
no sales of investment securities available for sale or held to maturity during
the years ended December 31, 1997 and 1996.
Investment securities held to maturity with a carrying value of approximately
$2,000,000 at both December 31, 1998 and 1997, were pledged to secure public
funds.
5. MORTGAGE-BACKED SECURITIES
- -------------------------------
Available for sale:
December 31, 1998
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Carrying
Cost Gains Losses Value
------------ ------------ ------------ ------------
Federal Home Loan Mortgage Corporation $ 5,324,055 $ -- $ 4,761 $ 5,319,294
Federal National Mortgage Association 8,663,950 51 11,901 8,652,100
----------- ----------- ----------- -----------
$13,988,005 $ 51 $ 16,662 $13,971,394
=========== =========== =========== ===========
December 31, 1997
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Carrying
Cost Gains Losses Value
------------ ------------ ------------ ------------
Federal Home Loan Mortgage Corporation $12,512,965 $ -- $ 104,516 $12,408,449
Federal National Mortgage Association 1,527,083 -- 6,484 1,520,599
----------- ----------- ----------- -----------
$14,040,048 $ -- 111,000 13,929,048
=========== =========== =========== ===========
32
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
5. MORTGAGE-BACKED SECURITIES (Cont'd.)
- -------------------------------
Held to maturity:
December 31, 1998
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Government National Mortgage Association $17,643,283 $ 37,940 $ 183,033 $17,498,190
Federal Home Loan Mortgage Corporation 14,963,351 119,208 48,363 15,034,196
Federal National Mortgage Association 28,766,662 126,559 118,173 28,775,048
----------- ----------- ----------- -----------
$61,373,296 $ 283,707 $ 349,569 $61,307,434
=========== =========== =========== ===========
December 31, 1997
------------------------------------------------------
Gross Unrealized
Amortized -------------------------- Estimated
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
Government National Mortgage Association $26,771,595 $ 215,909 $ 35,973 $26,951,531
Federal Home Loan Mortgage Corporation 22,853,912 219,635 143,405 22,930,142
Federal National Mortgage Association 41,331,939 200,891 168,976 41,363,854
----------- ----------- ----------- -----------
$90,957,446 $ 636,435 $ 348,354 $91,245,527
=========== =========== =========== ===========
December 31, 1998
------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premium Discounts Value
------------ ------------ ------------ ------------
Government National Mortgage Association $17,293,334 $ 355,946 $ 5,997 $17,643,283
Federal Home Loan Mortgage Corporation 14,856,408 119,872 12,929 14,963,351
Federal National Mortgage Association 28,436,352 349,880 19,570 28,766,662
----------- ----------- ----------- -----------
$60,586,094 $ 825,698 $ 38,496 $61,373,296
=========== =========== =========== ===========
December 31, 1997
------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premium Discounts Value
------------ ------------ ------------ ------------
Government National Mortgage Association $26,336,892 $ 442,503 $ 7,800 $26,771,595
Federal Home Loan Mortgage Corporation 22,725,681 185,390 57,159 22,853,912
Federal National Mortgage Association 40,898,959 460,159 27,179 41,331,939
----------- ----------- ----------- -----------
$89,961,532 $ 1,088,052 $ 92,138 $90,957,446
=========== =========== =========== ===========
During the year ended December 31, 1998, proceeds from sales of mortgage-backed
securities available for sale totaled $8,352,991 and resulted in gross gains of
$29,910. There were no sales of mortgage-backed securities available for sale
during the years ended December 31, 1997 and 1996 and there were no sales of
mortgage-backed securities held to maturity during the years ended December 31,
1998, 1997 and 1996.
33
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE
- ---------------------
December 31,
------------------------------
1998 1997
------------- --------------
Real estate mortgage:
One-to-our family $ 117,232,070 $ 118,254,242
Commercial and multi-family 17,435,462 17,361,751
------------ ------------
134,667,532 135,615,993
------------ ------------
Construction - 350,000
------------ ------------
Consumer:
Second mortgage 14,811,424 11,629,689
Passbook or certificate 752,217 807,062
Other 14,615 12,451
------------ ------------
15,578,256 12,449,202
------------ ------------
Total loans 150,245,788 148,415,195
------------ ------------
Less: Loans in process - 233,125
Allowance for loan losses 1,329,292 1,168,160
Deferred loan fees, costs and discounts, net (145,016) (19,349)
------------ ------------
1,184,276 1,381,936
------------ ------------
$149,061,512 $147,033,259
============ ============
An analysis of the allowance for loan losses follows:
Year Ended December 31,
--------------------------------------
1998 1997 1996
---------- ---------- -----------
Balance - beginning $1,168,160 $1,089,828 $ 958,149
Provisions charged to operations 161,132 240,000 182,900
Loans charged off, net of recoveries - (161,668) (51,221)
---------- ---------- ----------
Balance - ending $1,329,292 $1,168,160 $1,089,828
========== ========== ==========
34
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
6. LOANS RECEIVABLE (Cont'd.)
- ---------------------
Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows (in thousands):
December 31,
--------------------------------
1998 1997 1996
--------- --------- ----------
Recorded investment in impaired loans:
With recorded allowances $ 367 $ 744 $1,777
Without recorded allowance - - -
Total impaired loans 367 744 1,777
------ ------ ------
Related allowance for loan losses 55 111 404
------ ------ ------
Net impaired loans $ 312 $ 633 $1,373
====== ====== ======
Average recorded investment in impaired loans $ 596 $1,509 $1,717
====== ====== ======
Interest income recognized on impaired loans
during the period each loan was impaired:
Total $ 43 $ 214 $ 57
====== ====== ======
Cash basis $ 43 $ 197 $ 57
====== ====== ======
At December 31, 1998, 1997 and 1996, nonaccrual loans for which the accrual of
interest had been discontinued totaled approximately $1,003,000, $1,284,000 and
$1,901,000, respectively. Interest income that would have been recorded under
the original terms of such loans and the interest income actually recognized is
summarized as follows (in thousands):
Year Ended December 31,
-------------------------
1998 1997 1996
------- ------- -------
Interest income that would have been recorded $ 89 $111 $198
Interest income recognized 60 50 84
The activity with respect to loans to directors, executive officers and
associates of such persons is as follows:
Year Ended December 31,
---------------------------
1998 1997
------------ ------------
Balance - beginning $ 1,448,625 $ 1,168,277
Loans originated 57,252 242,128
Collection of principal (46,580) (14,879)
Other additions -- 53,099
----------- -----------
Balance - ending $ 1,459,297 $ 1,448,625
=========== ===========
35
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------
7. PREMISES AND EQUIPMENT
- ---------------------------
December 31,
-----------------------------
1998 1997
------------- ------------
Land $ 614,714 $ 614,714
Buildings and improvements 2,294,053 2,301,063
Furniture, fixture and equipment 1,184,423 1,071,944
Leasehold improvements 61,132 54,122
---------- ----------
4,154,322 4,041,843
Less accumulated depreciation and amortization 1,552,643 1,424,668
---------- ----------
$2,601,679 $2,617,175
========== ==========
Depreciation and amortization expense totaled $127,975, $134,628 and $143,997
for the years ended December 31, 1998, 1997 and 1996, respectively.
8. INVESTMENT IN REAL ESTATE
- ------------------------------
The Bank owns real estate originally acquired for a future office site which is
no longer to be used for that purpose. During the year ended December 31, 1997,
a $100,000 impairment loss was recorded on a parcel of land to reduce its
carrying value from $243,667 to $143,667. A portion of that land was sold in
1998 for $62,386, with no gain or loss resulting. Property adjoining the Bank's
main office, which had been rented, was sold in 1998 for proceeds of $318,141,
resulting in a gain of $37,911. During the years ended December 31, 1997 and
1996, as a result of the relocation of a branch office and the sale of deposits
in another branch office, properties with a carrying value of $9,629 and
$145,478, respectively, were transferred from premises and equipment to
investment in real estate. These properties were sold during the year ended
December 31, 1997 at a gain of $106,318. The income received from the
properties, net of expenses, is included in other income. The properties are
summarized as follows:
December 31,
-------------------------
1998 1997
---------- -----------
Land $ 81,281 $143,667
Buildings and improvements - 363,452
-------- --------
81,281 507,119
Less accumulated depreciation and amortization - 79,802
-------- --------
$ 81,281 $427,317
======== ========
36
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. DEPOSITS
- -------------
December 31, 1998
--------------------------------
Weighted
Average
Rate Amount Percent
------ ------------ -------
NOW accounts and non-interest-bearing deposits 1.55 % $ 29,110,521 11.98
Money Market accounts 2.73 6,995,025 2.87
Passbook and club accounts 2.97 41,427,787 17.05
Certificates of deposit 5.44 165,514,720 68.10
------------ ------
4.48 $243,048,053 100.00
============ ======
December 31, 1997
--------------------------------
Weighted
Average
Rate Amount Percent
------ ------------ -------
NOW accounts and non-interest-bearing deposits 1.33 % $ 21,338,938 9.27
Money Market accounts 2.94 9,952,885 4.33
Passbook and club accounts 3.08 44,468,893 19.32
Certificates of deposit 5.63 154,371,959 67.08
------------ ------
4.62 $230,132,675 100.00
============ ======
The aggregate amount of certificates of deposit with a minimum denomination of
greater than $100,000 was approximately $14,542,000 and $10,020,000 at December
31, 1998 and 1997, respectively. These certificates of deposit do not receive a
preferential interest rate. Deposits in excess of $100,000 are not federally
insured.
The scheduled maturities of certificates of deposit are as follows:
December 31,
--------------------------
1998 1997
---------- -----------
(In Thousands)
Three months or less $ 31,395 $ 40,847
Over three months to one year 94,352 89,942
Over one year to three years 34,287 21,296
Over three years 5,481 2,287
-------- --------
$165,515 $154,372
======== ========
37
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
9. DEPOSITS (Cont'd.)
- -------------
A summary of interest on deposits follows:
Year Ended December 31,
------------------------------------------
1998 1997 1996
------------- ------------- --------------
NOW accounts $ 263,010 $ 260,813 $ 366,984
Money Market 344,020 380,732 788,001
Passbook and club 1,276,998 1,440,145 1,859,939
Certificates of deposit 8,619,992 8,246,089 8,068,002
----------- ----------- -----------
$10,504,020 $10,327,779 $11,082,926
=========== =========== ===========
10. BORROWED MONEY
- -------------------
The Bank has an available line of credit with the Federal Home Loan Bank of New
York ("FHLB"), subject to the terms and conditions of the lenders' overnight
advances program, in the amount of $34,807,900 at December 31, 1998. Borrowings
under this line of credit, which expires on November 23, 1999, are made for one
day periods and are secured by the Bank's investment in FHLB stock and an
assignment of the Bank's unpledged, qualifying one-to-four family mortgage
loans. During the year ended December 31, 1998, the Bank did not borrow funds
under this program. The following table presents borrowed money at the dates
indicated:
Interest December 31,
-----------------------------------
Lender Maturity Rate 1998 1997
- ------ ----------------------- ------------ ----------------- ----------------
Securities sold under agreement to repurchase:
FHLB January 30, 1998 6.05% $ - $ 10,000,000
FHLB February 17, 1998 5.74% - 8,175,000
Security broker dealer February 18, 1998 5.77% - 8,368,500
FHLB February 19, 1998 5.76% - 8,176,000
FHLB January 14, 1999 5.29% 9,500,000 -
Advance:
FHLB August 3, 1998 5.80% 15,000,000
FHLB (a) December 20, 1999 5.82% 9,000,000 9,000,000
FHLB (b) November 19, 2003 4.93% 25,000,000 -
FHLB (b) March 11, 2008 5.35% 25,000,000 -
------------ ------------
$ 68,500,000 $ 58,719,500
============ ============
(a) Lender has option to terminate the advance on March 20, 1999, and quarterly
thereafter, upon four days advance notice.
(b) Convertible at lender option to replacement funding at then current rates
on November 19, 2001 and March 12, 2001.
38
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
10. BORROWED MONEY (Cont'd.)
- -------------------
Certain information concerning borrowed money is summarized as follows:
Year Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- ------------- ---------------
Average balance during the year $ 72,357,000 $ 43,974,600 $ 3,173,000
Average interest rate during the year 5.79% 5.89% 5.53%
Maximum month-end balance during the year $ 83,877,000 $ 58,719,500 $ 33,625,000
Average interest rate at year end 5.25% 5.83% 6.02%
At December 31, 1998 and 1997, borrowed money is collateralized by the Bank's
investment in FHLB stock, a blanket assignment of the Bank's unpledged,
qualifying one-to-four family mortgage loans and securities as follows:
December 31,
-----------------------------------
1998 1997
---------------- ----------------
Investment securities held to maturity $ 5,002,894 $ 18,700,000
Mortgage-backed securities available for sale 593,718 9,749,213
Mortgage-backed securities held to maturity 41,425,704 21,500,903
------------- ------------
$ 47,022,316 $ 49,950,116
============= ============
11. REGULATORY CAPITAL
- -----------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to met minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material adverse effect on
the Bank. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
39
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
11. REGULATORY CAPITAL (Cont'd.)
- -----------------------
The following table sets forth the capital position of the Bank:
To Be Well
Capitalized
Under Prompt
Minimum Capital Corrective
Actual Requirements Actions Provisions
----------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ---------- ------------ ---------- ------------ ----------
(Dollars in Thousands)
December 31, 1998
-----------------
Total Capital
(to risk-weighted assets) $ 29,988 20.45% $ 11,729 8.00% $ 14,661 10.00%
Tier I Capital
(to risk-weighted assets) 28,740 19.60% - - 8,797 6.00%
Core (Tier I) Capital
(to adjusted total assets) 28,740 8.33% 13,801 4.00% 17,252 5.00%
Tangible Capital
(to adjusted total assets) 28,740 8.33% 5,176 1.50% - -
December 31, 1997
-----------------
Total Capital
(to risk-weighted assets) 27,138 23.83% 9,112 8.00% 11,390 10.00%
Tier I Capital
(to risk-weighted assets) 26,416 23.20% - - 6,834 6.00%
Core (Tier I) Capital
(to adjusted total assets) 26,416 8.10% 13,040 4.00% 16,300 5.00%
Tangible Capital
(to adjusted total assets) 26,416 8.10% 4,890 1.50% - -
As of June 23, 1997, the most recent notification from the OTS, the Bank was
categorized as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions existing or events which have
occurred since notification, that management believes have changed the
institution's category.
40
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS
- ----------------------
Employee pension plan
---------------------
The Bank has a defined benefit pension plan covering all eligible
employees. The benefits are based on years of service and employees'
compensation. The Bank's funding policy is to contribute the maximum
amount deductible for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to service to date
but also for those expected to be earned in the future.
Plan assets are composed primarily of certificates of deposit, savings
accounts and insurance contracts. The following tables present the
plan's funded status and the components of net periodic pension cost:
December 31,
------------------------------
1998 1997
-------------- --------------
Actuarial present value of benefit obligations:
Vested $ 2,126,247 $ 1,873,615
Non-vested 37,156 16,195
----------- -----------
Total benefit obligation $ 2,163,403 $ 1,889,810
=========== ===========
Projected benefit obligation - beginning $ 2,410,463 $ 1,919,617
Service cost 88,844 94,253
Interest cost 167,472 168,152
Actuarial loss 101,359 280,229
Benefits paid (19,344) -
Settlements (59,936) (51,788)
----------- -----------
Projected benefit obligation - ending 2,688,858 2,410,463
----------- -----------
Plan assets at fair value - beginning 1,245,710 1,222,245
Actual return on assets 37,126 26,654
Employer's contributions 291,033 73,432
Benefits paid (19,344) -
Settlements (59,936) (51,788)
----------- -----------
Plan assets at fair value - ending 1,494,589 1,270,543
----------- -----------
Plan benefit obligation in excess of plan assets 1,194,269 1,139,920
Unrecognized net transition
obligation being amortized over fifteen years (68,820) (82,585)
Unrecognized net loss (960,589) (842,511)
Additional minimum liability 503,954 416,413
----------- -----------
Accrued pension cost included
in accounts payable and other liabilities $ 668,814 $ 631,237
=========== ===========
41
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ----------------------
Employee pension plan (Cont'd.)
---------------------
Year Ended December 31,
-------------------------------------
1998 1997 1996
----------- ------------ -----------
Net periodic pension cost included
the following components:
Service cost $ 88,844 $ 94,253 $ 87,161
Interest cost 167,472 168,152 127,080
Expected return on plan assets (107,863) (103,159) (82,697)
Amortization of transition obligation 13,765 13,765 13,765
Amortization of unrecognized loss 54,018 67,904 55,419
--------- --------- ---------
Net periodic pension cost included
in compensation and employee benefits $ 216,236 $ 240,915 $ 200,728
========= ========= =========
Significant actuarial assumptions used in determining plan benefits are:
Year Ended December 31,
-----------------------------------------------------
1998 1997 1996
---------------- ---------------- ---------------
Annual salary increase 5.50% 5.50% 5.00%
Long-term return on assets 8.00% 8.00% 8.00%
Discount rate 7.25% 7.50% 7.00%
Directors retirement plan
-------------------------
The Bank has a directors retirement plan, which provides that any
director with twenty or more years of service may retire and continue
to be paid at the rate of 50% of regular directors fees. These payments
will continue for the directors' lifetime. This plan is unfunded. The
following tables present the status of the plan and the components of
net periodic plan cost:
December 31,
-----------------------------
1998 1997
------------- -----------
Actuarial present value of benefit obligation:
Vested $ 339,498 $ 253,159
Non-vested - 57,394
$ 339,498 $ 310,553
========= =========
Projected benefit obligation - begining $ 366,691 $ 357,661
Service cost 843 784
Interest cost 26,585 26,825
Actuarial gain (16,753) (18,579)
--------- ---------
Projected benefit obligation - ending 377,366 366,691
Unrecognized past service cost (201,322) (218,618)
Unrecognized net (loss) (6,805) (23,558)
Accrued plan cost included
in accounts payable and other liabilities $ 169,239 $ 124,515
========= =========
42
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ----------------------
Directors retirement plan (Cont'd.)
-------------------------
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
Net periodic plan cost included the following components:
Service cost $ 843 $ 784 $ 6,380
Interest cost 26,585 26,825 20,972
Amortization of past service cost 17,296 17,296 17,296
Amortization of unrecognized net loss - 4,682 21
--------- -------- --------
Net periodic plan cost included in other expense $ 44,724 $ 49,587 $ 44,669
========= ======== ========
Significant actuarial assumptions used in determining plan benefits are:
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
--------------- ---------------- ---------------
Annual compensation increase 4.50% 7.00% 7.00%
Discount rate 6.50% 7.25% 7.50%
Directors health benefits plan
------------------------------
The Bank has a directors health benefit plan which provides for the
continuation of the directors' medical insurance coverage for their
lifetime after retirement. Benefits under this plan are available to
directors retiring after attainment of age 60 and twenty years of
service. This plan is unfunded. The following tables present the status
of the plan and the net components of net periodic plan cost:
December 31,
----------------------
1998 1997
---------- ----------
Accumulated postretirement benefit obligation - beginning $ 158,388 $ 160,094
Service cost 204 190
Interest cost 11,483 12,007
Actuarial loss (gain) 4,987 (13,903)
--------- ---------
Accumulated postretirement benefit obligation - ending 175,062 158,388
Unrecognized net gain 45,709 55,426
--------- ---------
Accrued plan cost included in
accounts payable and other liabilities $ 220,771 $ 213,814
========= =========
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- --------------
Net periodic plan cost included the following components:
Service cost $ 204 $ 190 $ 2,866
Interest cost 11,483 12,007 10,969
Amortization of unrecognized gain (4,730) (3,384) (4,016)
--------- ------- -------
Net periodic plan cost included in other expense $ 6,957 $ 8,813 $ 9,819
========= ======= =======
43
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ------------------
Directors health benefit plan (Cont'd.)
-----------------------------
A discount rate of 6.50%, 7.25% and 7.50% was assumed for the years
ended December 31, 1998, 1997 and 1996, respectively. For the years
ended December 31, 1998 1997and 1996, a medical cost trend rate of
6.5%, 7.0% and 7.5%, respectively, decreasing 0.5% per year thereafter
until an ultimate rate of 5.0% is reached, was used in the plan's
valuation. Increasing the assumed medical cost trend by one percent in
each year would increase the accumulated postretirement benefit
obligation as of December 31, 1998, by $15,335 and the aggregate of the
service and interest components of net periodic postretirement benefit
cost for the year ended December 31, 1998 by $1,392, while a one
percent decrease in the assumed medical cost trend would result in
comparable decreases of $13,475 and $1,299, respectively.
ESOP
----
Effective upon conversion, an ESOP was established for all eligible
employees. The ESOP used $2,433,400 of proceeds from a term loan from
the Company to purchase 243,340 shares of Company common stock in the
initial offering. The term loan from the Company to the ESOP, including
interest, is payable over one-hundred-eighty (180) equal monthly
installments. The initial interest rate is 8.25% and is subject to
semi-annual adjustment based on the prime rate. The Bank intends to
make contributions to the ESOP which will be equal to the principal and
interest payment required from the ESOP on the term loan. Shares
purchased with the loan proceeds are pledged as collateral for the term
loan and are held in a suspense account for future allocation among
participants. Contributions to the ESOP and shares released from the
suspense account will be allocated among the participants on the basis
of compensation, as described by the plan, in the year of allocation.
The ESOP is accounted for in accordance with SOP 93-6, which was issued
by the AICPA in November 1993. Accordingly, the ESOP shares pledged as
collateral are reported as unearned ESOP shares in the consolidated
statements of financial condition. As shares are committed to be
released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for basic net income per common share computations. ESOP
compensation expenses were $306,489, $257,575 and $177,679 for the
years ended December 31, 1998, 1997 and 1996, respectively.
44
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ------------------
ESOP (Cont'd.)
----
The ESOP shares were as follows:
December 31,
-----------------------------
1998 1997
------------- ------------
Allocated shares 33,927 16,223
Shares committed to be released 15,739 16,474
Unreleased shares 193,674 210,643
----------- -----------
Total ESOP shares 243,340 243,340
=========== ===========
Fair value of unreleased shares $ 3,873,480 $ 4,318,182
=========== ===========
MSBP
----
On July 3, 1996, the Bank established a MSBP to provide both key
employees and outside directors with a proprietary interest in the
Company in a manner designed to encourage such persons to remain with
the Bank. The Bank, during the year ended December 31, 1997 contributed
$1,688,171 to the MSBP to allow the MSBP to purchase 121,670 shares of
common stock of the Company in the open market at an average cost of
$13.875 per share.
Under the MSBP, awards are granted in the form of common stock held by
the MSBP Trust. The awards vest over a period of time not more than
five years, commencing one year from the date of award. The awards
become fully vested upon termination of employment due to death or
disability. At December 31, 1998 and 1997, 103,798 shares and 79,248
shares, respectively, had been granted to directors and, at both
December 31, 1998 and 1997, 26,767 shares had been granted to officers
and employees. 37,522 shares and 16,311 shares were vested at December
31, 1998 and 1997, respectively. $501,237, $271,101 and $87,903 of
expense related to the MSBP shares was recorded during the years ended
December 31, 1998, 1997 and 1996, respectively.
45
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ----------------------
Stock Option Plan
-----------------
The Company adopted the 1996 Stock Option Plan (the "Plan") authorizing
the grant of stock options equal to 304,175 shares of common stock to
officers, directors and key employees of the Bank or the Company.
Options granted under the Plan may be either options that qualify as
incentive stock options as defined in Section 422 of the Internal
Revenue Code of 1986, as amended, or non-statutory options. Options
granted will vest and will be exercisable on a cumulative basis in
equal installments at the rate of 20% per year commencing one year from
the date of grant. All options granted will be exercisable in the event
the optionee terminates his employment due to death or disability. The
options expire ten years from the date of grant.
In the event of change in control of the Bank or Company, the optionee
will be given: (1) substitute options by the acquiring or succeeding
corporation, (2) shares of stock issueable upon the exercise of such
substitute options or (3) cash for each option granted, equal to the
difference between the exercise price of the option and the fair market
value or merger price equivalent to cash payment for each share of
common stock exchanged in the change of control transaction.
Shares of common stock have been granted under the plan as
non-incentive stock options to directors and incentive stock options to
officers and employees, respectively, as follows:
Shares Weighted
-------------------------------------- Average
Non- Exercise Exercise
Incentive Incentive Total Price Price
----------- ------------ ----------- ------------ -----------
Granted in 1996 121,665 109,496 231,161 $ 10.625 $ 10.625
Granted in 1997 - 16,000 16,000 20.000 20.000
------- ------- -------
Balance at December 31, 1997 121,665 125,496 247,161 11.232
Cancelled - (304) (304) 10.625 10.625
Forfeited - (6,083) (6,083) 10.625 10.625
------- ------- -------
Balance at December 31, 1998 121,665 119,109 240,774 11.248
======= ======= =======
No options have been exercised. Options for 93,110 shares were
excercisable at December 31, 1998 at a weighted average exercise price
of $10.947. Options for 46,232 shares were exercisable at December 31,
1997 at a weighted average exercise price of $10.625.
46
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
12. BENEFIT PLANS (Cont'd.)
- ----------------------
Stock Option Plan (Cont'd.)
-----------------
The Company, as permitted by Statement No. 123, recognizes compensation
cost for stock options granted based on the intrinsic value method
instead of the fair value based method. The weighted-average grant-date
fair value of options granted during 1997 and 1996, all of which have
exercise prices equal to the market price of the Company's common stock
at the grant date, were estimated using the Black-Scholes
option-pricing model. Such fair values and the assumptions used for
estimating fair values are as follows:
December 31,
-----------------------
1997 1996
------------ ----------
Weighted average grant-date fair value per share $ 5.87 $ 2.81
Expected common stock dividend yield 1.00% 0.94%
Expected volatility 23.29% 13.90%
Expected option life 5 years 5 years
Risk-free interest rate 5.88% 6.875%
Had the Company used the fair value based method, net income for the
years ended December 31, 1998, 1997 and 1996 would have been decreased
to $1,616,000, $1,736,000 and $574,000, respectively, and basic and
diluted net income per common share would have been reduced to $0.73
and $0.70, respectively, for the year ended December 31, 1998, $0.73
and $0.70, respectively, for the years ended December 31, 1997 and
$0.21 each during the year ended December 31, 1996.
13. INCOME TAXES
- ---------------------
The Bank qualifies as a Savings Institution under the provisions of the Internal
Revenue Code and was therefore, prior to January 1, 1996, permitted to deduct
from taxable income an allowance for bad debts based on the greater of: (1)
actual loan losses (the "experience method"); or (2) eight (8) percent of
taxable income before such bad debt deduction less certain adjustments (the
"percentage of taxable income method").
On August 21, 1996, legislation was signed into law which repealed the
percentage of taxable income method for tax bad debt deductions. The repeal is
effective for the Bank's taxable year beginning January 1, 1996. In addition,
the legislation requires the Bank to include in taxable income its bad debt
reserves in excess of its base year reserves over a six, seven, or eight year
period depending upon the attainment of certain loan origination levels. Since
the percentage of taxable income method for Federal tax bad debt deductions and
the corresponding increase in the Federal tax bad debt reserve in excess of the
base year have been reflected as temporary differences pursuant to FASB
Statement No. 109, with deferred income taxes recorded thereon, this change in
the tax law did not have a material adverse effect on the Company's consolidated
financial position or operations.
47
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. INCOME TAXES (Cont'd.)
- ---------------------
Retained earnings at December 31, 1998 includes approximately $2.4 million of
tax bad debt deductions which, in accordance with FASB Statement No. 109, are
considered a permanent difference between the book and income tax basis of loans
receivable, and for which income taxes have not been provided. If such amount is
used for purposes other than bad debt losses, including distributions in
liquidation, it will be subject to income tax at the then current rate.
The provision for income taxes is summarized as follows:
Year Ended December 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- -------------
Current:
Federal $ 887,989 $ 990,405 $ 540,688
State 104,111 117,522 87,761
--------- ---------- ---------
992,100 1,107,927 628,449
--------- ---------- ---------
Deferred:
Federal (135,889) (32,405) (222,744)
State (12,361) (3,122) (20,261)
--------- ---------- ---------
(148,250) (35,527) (243,005)
--------- ---------- ---------
$ 843,850 $1,072,400 $ 385,444
========= ========== =========
The provision for income taxes differs from that computed at the federal
statutory rate of 34% as follows:
Year Ended December 31,
-----------------------------------------------
1998 1997 1996
-------------- --------------- -------------
Tax at the statutory rate $ 881,132 $ 995,695 $ 338,753
New Jersey Savings Institution Tax,
net of federal income tax effect 60,555 75,504 44,550
Dividends received deduction (96,381) - -
Other (1,456) 1,201 2,141
--------- ----------- ---------
$ 843,850 $ 1,072,400 $ 385,444
========= =========== =========
48
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
13. INCOME TAXES (Cont'd.)
- ---------------------
The tax effects of existing temporary differences which give rise to significant
portions of deferred tax assets and liabilities are as follows:
December 31,
-----------------------------
1998 1997
------------- -------------
Deferred tax assets:
Allowance for loan losses $ 380,915 $ 316,151
Deferred loan origination fees, net 63,821 63,821
Deferred compensation 176,979 115,025
Minimum pension liability 156,561 120,111
Goodwill 133,544 90,101
MSBP 4,757 15,513
Unrealized loss on securities available for sale 190,927 39,938
---------- ---------
Total deferred tax assets 1,107,504 760,660
---------- ---------
Deferred tax liabilities:
Depreciation of premises and equipment 81,671 67,944
Other - 2,572
---------- ---------
Total deferred tax liabilities 81,671 70,516
---------- ---------
Net deferred tax asset included in other assets $1,025,833 $ 690,144
========== =========
At December 31, 1998 and 1997, current income taxes receivable of $309,549 and
$25,526, respectively, are included in other assets. At December 31, 1998 and
1997, income taxes payable of $95,242 and $119,876, respectively, are included
in other liabilities.
49
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
14. NET INCOME PER COMMON SHARE
- ------------------------------------
Year Ended December 31, 1998
-----------------------------------------
Weighted
Net Average Per Share
Income Shares Amounts
------------ ------------- ----------
Basic net income per share $ 1,747,716 2,207,591 $ 0.79
======
Effect of dilutive securities:
Stock options - 96,875
MSBP unearned shares - 6,774
----------- -----
Diluted net income per share $ 1,747,716 2,311,240 $ 0.76
=========== ========== ======
Year Ended December 31, 1997
-----------------------------------------
Weighted
Net Average Per Share
Income Shares Amounts
------------ -------------- ----------
Basic net income per share $ 1,856,115 2,389,063 $ 0.78
======
Effect of dilutive securities:
Stock options - 71,296
MSBP unearned shares - 6,531
----------- ---------
Diluted net income per share $ 1,856,115 2,466,890 $ 0.75
=========== ========= ======
Year Ended December 31, 1996
-----------------------------------------
Weighted
Net Average Per Share
Income Shares Amounts
------------ ------------ ----------
Basic net income pre share $ 610,889 2,727,627 $ 0.22
======
Effect of dilutive securities:
Stock options - 7,336
MSBP unearned shares - 1,681
----------- ---------
Diluted net income per share $ 610,889 2,736,644 $ 0.22
=========== ========= ======
50
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
15. LEGISLATIVE MATTERS
- ------------------------
On September 30, 1996, legislation was enacted which, among other things,
imposed a special one-time assessment on Savings Association Insurance Fund
("SAIF") member institutions, including the Bank, to recapitalize the SAIF and
spread the obligation for payment of Financial Corporation ("FICO") bonds across
all SAIF and Bank Insurance Fund ("BIF") members. The special assessment levied
amounted to 65.7 basis points on SAIF assessable deposits held as of March 31,
1995. The special assessment was recognized in the third quarter of 1996 and is
tax deductible. The Bank took a charge of $1,167,427 as a result of the special
assessment. This legislation eliminated the substantial disparity between the
amount that BIF and SAIF members had been paying for deposit insurance premiums.
Currently, the Federal Deposit Insurance Corporation ("FDIC") has estimated
that, in addition to normal deposit insurance premiums, BIF members will pay a
portion of the FICO payment equal to 1.3 basis points on BIF-insured deposits
compared to 6.4 basis points by SAIF members on SAIF-insured deposits.
The FDIC has lowered SAIF assessments to a range comparable to that of BIF
members, although SAIF members must also make the FICO payments described above.
Management cannot predict the precise level of FDIC insurance assessments on an
ongoing basis.
16. COMMITMENTS
- ----------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the loan agreement. These commitments
are comprised of the undisbursed portion of construction loans, unused amounts
of lines of credit and residential loan originations. The Bank's exposure to
credit loss from nonperformance by the other party to the financial instruments
for commitments to extend credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Collateral, usually in the form of residential real estate, is generally
required to support financial instruments with credit risk.
At December 31, 1998, the Bank had commitments outstanding to originate mortgage
loans of $5,128,000, of which $1,251,000 were for adjustable rate loans with
initial rates over the first ten years of the loan terms ranging from 6.25% to
6.75% and $3,877,000 were for fixed rate loans with rates ranging from 6.25% to
7.00%. The commitments are due to expire within sixty days. The rates at which
the Bank has committed to fund these loans are set based on the rate in effect
when the borrower accepts the commitment in writing.
At December 31, 1998, outstanding commitments related to unused home equity
lines of credit totaled $4,618,000. These amounts, when used, will carry
interest rates that will float at rates ranging from the prime rate plus 1/4% to
the prime rate plus 1 3/4%.
51
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
16. COMMITMENTS (Cont'd.)
- --------------------
Rental expenses related to the occupancy of premises totaled approximately
$68,000, $30,000 and $38,000 for the years ended December 31, 1998, 1997 and
1996, respectively. Minimum non-cancellable obligations under lease agreements
with original terms of more than one year are as follows:
December 31, Amount
------------ ----------
1999 $ 36,360
2000 36,360
2001 36,360
2002 15,150
--------
$124,230
========
17. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------
The fair value of a financial instrument is defined as the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than a forced or liquidation sale. Significant estimations were used for
the purposes of this disclosure. The following methods and assumptions were used
to estimate the fair value of each class of financial instruments for which it
is practicable to estimate such value:
Cash and cash equivalents and interest receivable
-------------------------------------------------
For cash and cash equivalents and interest receivable, the carrying
amounts approximate fair value.
Investment and mortgage-backed securities
-----------------------------------------
For investment and mortgage-backed securities, both available for sale
and held to maturity, fair value is estimated using quoted market
prices.
Loans receivable
----------------
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Deposits
--------
The fair value of demand, savings and money market deposits is the
amount payable on demand at the reporting date. The fair value of
certificates of deposit is estimated by discounting the future cash
flows using the rates currently offered for deposits of similar
remaining maturities.
52
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
17. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
- ---------------------------------------------------------------
Borrowed money
--------------
The fair value of advances and securities sold under agreements to
repurchase is estimated by discounting cash flows using rates currently
available for borrowings of similar remaining securities.
Commitments to extend credit
----------------------------
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates.
December 31,
-----------------------------------------------------
1998 1997
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
Financial assets:
Cash and cash equivalents $ 33,393 $ 33,393 $ 6,788 $ 6,788
Investment securities available for sale 39,423 39,423 - -
Investment securities held to maturity 40,577 40,358 57,988 58,129
Mortgage-backed securities available for sale 13,971 13,971 13,929 13,929
Mortgage-backed securities held to maturity 61,373 61,307 90,957 91,246
Loans receivable 149,062 154,536 147,033 148,534
Interest receivable 1,961 1,961 2,079 2,079
Financial liabilities:
Deposits 243,048 244,613 230,133 226,113
Borrowed money 68,500 68,488 58,720 58,708
Commitments:
To fund loans 9,746 9,746 7,306 7,306
Fair value estimates are made at a specific point in time based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the entire holdings of
a particular financial instrument. Because no market exists for a
significant portion of the financial instruments, fair value estimates
are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in
nature, involve uncertainties and matters of judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. In addition, fair value estimates
are based on existing on-and-off balance sheet financial instruments
without attempting to estimate the value of anticipated future business
and exclude the value of assets and liabilities that are not considered
financial instruments. Other significant assets that are not considered
financial assets include premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in any of the estimates. Finally, reasonable
comparability between financial institutions may not be likely due to
the wide range of permitted valuation techniques and numerous estimates
which must be made given the absence of active secondary markets for
many of the financial instruments. The lack of uniform valuation
methodologies introduces a greater degree of subjectivity to those
estimated fair values.
53
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
18. PARENT ONLY FINANCIAL INFORMATION
- --------------------------------------
The Company operates one wholly owned subsidiary, the Bank. The earnings of the
Bank are recognized by the Company using the equity method of accounting.
Accordingly, the earnings of the Bank are recorded as increases in the Company's
investment in the subsidiary. The following are the condensed financial
statements for the Company (parent company only) as of December 31, 1998, 1997
and for the periods ended December 31, 1998, 1997 and 1996. The Company had no
operations prior to the Bank's conversion to stock form on January 5, 1996.
December 31,
---------------------------------
Statements of Financial Condition 1998 1997
--------------------------------- --------------- --------------
Assets
------
Cash and due from banks $ 1,167,896 $ 1,167,965
Securities available for sale 6,331,875 -
Loan receivable from subsidiary - 6,044,666
ESOP loan receivable 2,049,555 2,213,081
Investment in subsidiary 31,273,275 29,200,841
Other assets 127,965 18,000
----------- -----------
Total assets $40,950,566 $38,644,553
=========== ===========
Liabilities and stockholders' equity
Liabilities
Due to subsidiary $ 3,405,982 $ 257,783
Other liabilities 99,128 92,109
----------- -----------
3,505,110 349,892
----------- -----------
Stockholders' equity
Common stock 304,175 304,175
Additional paid in capital 29,204,431 29,067,633
Retained earnings 19,517,521 18,275,517
Common stock acquired by ESOP (1,936,741) (2,106,432)
Unearned restricted MSBP stock (855,791) (1,329,167)
Treasury stock (8,191,308) (5,632,286)
Accumulated other comprehensive income (596,831) (284,779)
----------- -----------
Total stockholders' equity 37,445,456 38,294,661
----------- -----------
Total liabilities and stockholders equity $40,950,566 $38,644,553
=========== ===========
54
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
- --------------------------------------
STATEMENTS OF INCOME
--------------------
From
Inception
January 5,
Year Ended December 31, 1996 to
--------------------------------- December 31,
1998 1997 1996
------------- ------------ -------------
Interest income $ 543,398 $ 666,225 $ 880,582
Equity in undistributed earnings of subsidiary 1,591,741 1,598,621 248,247
----------- ----------- ----------
2,135,139 2,264,846 1,128,829
Expenses 336,173 235,731 274,940
----------- ----------- ----------
Income before income taxes 1,798,966 2,029,115 853,889
Income taxes 51,250 173,000 243,000
----------- ----------- ----------
Net income $ 1,747,716 $ 1,856,115 $ 610,889
=========== =========== ==========
55
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
-----------------------------------------
18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
- --------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
From
Inception
January 5,
Year Ended December 31, 1996 to
----------------------------------- December 31,
1998 1997 1996
----------------- ------------- ---------------
Cash flows from operating activities:
Net income $ 1,747,716 $ 1,856,115 $ 610,889
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of premiums 1,044 - -
Equity in undistributed earnings of subsidiary (1,591,741) (1,598,620) (248,247)
(Increase) in other assets (100,764) (5,833) (12,167)
Increase in other liabilities 7,019 30,327 61,782
----------- ----------- -----------
Net cash provided by operating activities 63,274 281,989 412,257
----------- ----------- -----------
Cash flows from investing activities:
Purchase of all outstanding stock of the Bank - - (14,638,780)
Purchase of securities available for sale (6,355,000) - -
Loan to the Bank - - (12,205,380)
Repayments of loan by the Bank 6,044,666 2,809,598 3,351,116
Loan to ESOP - - (2,433,400)
Repayments of loan by ESOP 163,526 129,841 90,478
----------- ----------- -----------
Net cash (used in) provided by investing activities (146,808) 2,939,439 (25,835,966)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock - - 29,263,522
Increase in due from subsidiary 3,148,199 128,891 128,892
Acquisition of treasury stock (2,559,022) (2,355,282) (3,277,004)
Dividends paid (505,712) (382,654) (136,119)
----------- ----------- -----------
Net cash provided by (used in) financing activities 83,465 (2,609,045) 25,979,291
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (69) 612,383 555,582
Cash and cash equivalents - beginning 1,167,965 555,582 -
----------- ----------- -----------
Cash and cash equivalents - ending $ 1,167,896 $ 1,167,965 $ 555,582
=========== =========== ===========
56
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
- -----------------------------------------
Year Ended December 31, 1998
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share data)
Interest income $ 5,608 $ 5,898 $ 5,651 $ 5,589
Interest expense 3,518 3,768 3,745 3,664
------- ------- ------- -------
Net interest income 2,090 2,130 1,906 1,925
Provision for loan losses 60 60 60 (19)
Non-interest income 63 102 116 122
Non-interest expenses 1,387 1,432 1,253 1,629
Income taxes 247 246 226 125
------- ------- ------- -------
Net income $ 459 $ 494 $ 483 $ 312
======= ======= ======= =======
Net income per common share:
Basic $ 0.20 $ 0.23 $ 0.22 $ 0.14
======= ======= ======= =======
Diluted $ 0.19 $ 0.22 $ 0.21 $ 0.14
======= ======= ======= =======
Year Ended December 31, 1998
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share data)
Interest income $ 4,981 $ 4,971 $ 5,348 $ 5,764
Interest expense 2,995 3,034 3,322 3,569
------- ------- ------- -------
Net interest income 1,986 1,937 2,026 2,195
Provision for loan losses 60 60 60 60
Non-interest income 61 215 68 84
Non-interest expenses 1,272 1,307 1,348 1,477
Income taxes 270 316 229 257
------- ------- ------- -------
Net income $ 445 $ 469 $ 457 $ 485
======= ======= ======= =======
Net income per common share:
Basic $ 0.18 $ 0.20 $ 0.19 $ 0.21
======= ======= ======= =======
Diluted $ 0.17 $ 0.19 $ 0.19 $ 0.20
======= ======= ======= =======
57
LITTLE FALLS BANCORP, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
20. IMPACT OF RECENT ACCOUNTING STANDARDS
- ----------------------------------------------
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Statement No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation.
At the date of initial application of Statement No. 133, an entity may transfer
any held-to-maturity security into the available-for-sale category or the
trading category. An entity will then be able in the future to designate a
security transferred into the available-for-sale category as the hedged item, or
its variable interest payments as the cash flow hedged transactions, in a hedge
of the exposure to changes in market interest rates, changes in foreign currency
exchange rates, or changes in the overall fair value. (Statement No. 133
precludes a held-to-maturity security from being designated as the hedged item
in a fair value hedge of market interest rate risk or the risk of changes in its
overall fair value and precludes the variable cash flows of a held-to-maturity
security from being designated as the hedged transaction in a cash flow hedge of
market interest rate risk). Statement No. 133 provides that such transfers from
the held-to-maturity category at the date of initial adoption shall not call
into question an entity's intent to hold other debt securities to maturity in
the future.
Statement No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, the quarter ended March 31, 2000 for the Company
and Bank. Initial application shall be as of the beginning of an entity's fiscal
quarter. Earlier application of all of the provisions of Statement No. 133 is
permitted only as of the beginning of a fiscal quarter. Earlier application of
selected provisions or retroactive application of provisions of Statement No.
133 are not permitted.
Management of the Company and Bank has not yet determined when Statement No. 133
will be implemented, but does not believe the ultimate implementation of
Statement No. 133 will have a material impact on their consolidated financial
position or results of operations.
58
Board of Directors of Little Falls Bancorp, Inc.
and
Little Falls Bank
Albert J. Weite, Chairman of the Board Edward J. Seugling, Vice Chairman of
Leonard G. Romaine (Bank only) the Board
John P. Pullara Raoul G. Barton
George Kuiken
Norman A. Parker
Executive Officers of Little Falls Bancorp, Inc.
and/or
Little Falls Bank
Leonard G. Romaine Richard A. Capone Anne Bracchitta
President Chief Financial Officer and Treasurer Secretary
Michael J. Allen Mary Denise Hopper
Vice President Vice President
------------------------------------------------
Corporate Counsel: Independent Auditors:
Vincent Marino Radics & Co., LLC
86 Main Street 55 US Highway #46
Little Falls, New Jersey 07424 Pine Brook, New Jersey 07058
Special Counsel: Transfer Agent and Registrar:
Malizia, Spidi, Sloane & Fisch, P.C. Chase Mellon Shareholder
One Franklin Square Services, L.L.C.
1301 K Street, N.W., Suite 700 East 4 50 West 33rd Street
Washington, D.C. 20005 New York, New York 10001-2697
------------------------------------------------
The Company's Annual Report for the Year Ended December 31, 1998 filed
with the Securities and Exchange Commission on Form 10-K without
exhibits is available without charge upon written request. For a copy
of the Form 10-K or any other investor information, please write the
Secretary of the Company at 86 Main Street, Little Falls, New Jersey.
Copies of any exhibits to the Form
10-K are available at cost.
59
OFFICE LOCATIONS
LITTLE FALLS BANCORP, INC.
86 Main Street
Little Falls, New Jersey 07424
(973) 256-6100
LITTLE FALLS BANK
Main Office
86 Main Street
Little Falls, New Jersey 07424
(973) 256-6100
Branch Offices
West Paterson
Route 46 & McBride Avenue
West Paterson, New Jersey 07424
Spruce Run
220 Main Street
Glen Gardner, New Jersey 08826
Milford
34 Bridge Street
Milford, New Jersey 08848
Alexandria
636 Milford-Frenchtown Road
Alexandria Township, New Jersey 08848
Kingwood
Route 12 and 519
Baptistown, New Jersey 08825