SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission file number 0-27010
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LITTLE FALLS BANCORP, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-3402073
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(State or other jurisdiction of (I.R.S. employer identification
incorporation or organization) no.)
86 Main Street, Little Falls, New Jersey 07424
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (973) 256-6100
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N/A
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Former name, former address and former fiscal year,if changed since last report.
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date May 11, 1999.
Class Outstanding
- --------------------------- -------------------
$.10 par value common stock 2,470,551 shares
LITTLE FALLS BANCORP, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
Page
Number
PART I - CONSOLIDATED FINANCIAL INFORMATION OF LITTLE FALLS
BANCORP, INC.
Item 1. Financial Statements and Notes Thereto...........................1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................6
Item 3. Quantitative and Qualitative Disclosure about Market Risk........12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................14
Item 2. Changes in Securities...........................................14
Item 3. Defaults upon Senior Securities.................................14
Item 4. Submission of Matters to a Vote of Security Holders.............14
Item 5. Other Materially Important Events...............................14
Item 6. Exhibits and Reports on Form 8-K................................14
SIGNATURES
LITTLE FALLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
March 31, December 31,
1999 1998*
---------- -----------
ASSETS
Cash and due from banks............................................... $ 6,300,396 $ $5,780,361
Interest-bearing deposits in other banks.............................. 544,819 612,931
Federal funds sold.................................................... 17,750,000 27,000,000
---------- ----------
Total cash and cash equivalents.................................. 24,595,215 33,393,292
Investment securities held-to-maturity net (estimated fair
values $39,950,000 and $40,358,000)................................. 40,575,467 40,577,457
Investment securities available for sale.............................. 39,422,860 39,422,602
Mortgage-backed securities available for sale......................... 26,568,159 13,971,394
Mortgage-backed securities held to maturity, net
(estimated fair values 54,153,000 and $61,307,000).................. 54,061,103 61,373,296
Loans receivable...................................................... 153,211,923 149,061,512
Premises and equipment................................................ 2,556,300 2,601,679
Investment in real estate............................................. 81,281 81,281
Foreclosed real estate................................................ 297,000 297,000
Interest receivable................................................... 2,256,975 1,961,170
Federal Home Loan Bank of New York stock, at cost..................... 3,767,600 3,767,600
Excess of cost over assets acquired................................... 2,405,246 2,495,443
Other assets.......................................................... 1,503,717 1,613,221
----------- -----------
TOTAL ASSETS.................................................... $351,302,846 $ 350,616,947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits............................................................ $244,228,867 $ 243,048,053
Borrowed money...................................................... 68,000,000 68,500,000
Accounts payable and other liabilities.............................. 1,682,862 1,623,438
----------- -----------
Total liabilities............................................... 313,911,729 313,171,491
----------- -----------
Stockholders' Equity:
Preferred stock; 5,000,000 authorized shares; none outstanding...... -- --
Common stock, par value $.10; 10,000,000
authorized shares; shares issued 3,041,750;
shares outstanding 2,470,551 and 2,477,525....................... 304,175 304,175
Additional paid-in-capital.......................................... 29,243,852 29,204,431
Retained earnings - substantially restricted........................ 19,671,241 19,517,521
Common Stock acquired by ESOP....................................... (1,896,185) (1,936,741)
Unearned restricted MSBP stock, at cost............................. (912,238) (855,791)
Treasury stock, at cost; 571,199 and 564,225 shares................. (8,329,916) (8,191,308)
Unrealized loss on securities available for sale.................... (411,239) (318,258)
Minimum pension liability net of deferred taxes..................... (278,573) (278,573)
----------- -----------
Total stockholders' equity...................................... 37,391,117 37,445,456
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................... $351,302,846 $ 350,616,947
=========== ===========
- ---------------------
* The consolidated statement of financial condition at December 31, 1998
has been taken from the audited statement of financial condition at
that date.
See notes to unaudited consolidated financial statements.
1
LITTLE FALLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
For the Three Months
Ended March 31,
1999 1998
---------- ---------
Interest income:
Loans receivable........................................................ $ 2,825,801 $ 2,789,542
Mortgage backed securities.............................................. 1,166,855 1,619,400
Investment securities and other interest earning assets................. 1,618,441 1,198,830
---------- ---------
Total interest income............................................... 5,611,097 5,607,772
---------- ---------
Interest expense:
Deposits................................................................ 2,661,590 2,599,740
Borrowings.............................................................. 887,181 918,442
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Total interest expense.................................................... 3,548,771 3,518,182
---------- ---------
Net interest income before provision for loan losses...................... 2,062,326 2,089,590
Provision for loan losses................................................. -- 60,000
---------- ---------
Net interest income after provision for loan losses.................. 2,062,326 2,029,590
---------- ---------
Non-interest income:
Total non-interest income................................................. 87,637 62,519
---------- ---------
Non-interest expense:
Compensation and employee benefits...................................... 669,783 724,221
Occupancy, net.......................................................... 68,904 94,541
Equipment............................................................... 130,895 101,260
Deposit insurance premiums.............................................. 29,738 30,057
Loss on foreclosed real estate.......................................... 1,636 6,876
Amortization of deposit premium......................................... 90,197 90,197
Miscellaneous expense................................................... 664,338 339,708
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Total non-interest expense........................................... 1,655,491 1,386,860
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Income before provision for income taxes............................. 494,472 705,249
Provision for income taxes................................................ 192,100 246,700
--------- ---------
Net income.......................................................... 302,372 458,549
Other comprehensive income - unrealized holding gains (losses) on securities
available for sale, net of income taxes of $(52,257) and $19,547........ (92,981) 34,778
-------- ---------
Comprehensive income................................................ $ 209,391 $ 493,327
======== =========
Weighted average number of common shares outstanding:
basic 2,206,672 2,259,761
========= ==========
diluted 2,320,797 2,378,608
========= ==========
Earnings per share:
basic $ 0.14 $ 0.20
===== ======
diluted $ 0.13 $ 0.19
===== ======
See notes to unaudited consolidated financial statements.
2
LITTLE FALLS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended March 31,
------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income.............................................................. $ 302,372 $ 458,549
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.......................................................... 52,268 32,004
Provision for loan losses............................................. -- 60,000
Amortization of intangibles........................................... 90,197 90,197
Amortization of deferred fees, premiums and discounts, net............ 117,996 54,867
Amortization of unearned ESOP shares.................................. 79,977 78,194
Amortization of MSBP cost............................................. 120,453 75,783
Decrease in other assets.............................................. 161,762 96,551
Increase in interest receivable, net.................................. (295,805) (538,184)
Increase in interest payable.......................................... 2,019 126,718
Increase (decrease) in accounts payable and other liabilities......... 44,032 (72,175)
---------- ----------
Net cash provided by operating activities........................... 675,271 462,504
---------- ----------
Cash flows from investing activities:
Principal collections on mortgage-backed securities available for sale 2,214,570 1,982,192
Principal collections on mortgage-backed securities held to maturity.. 7,217,519 6,668,594
Net increase in loans receivable...................................... (4,147,325) (1,448,269)
Matured or called investments held to maturity........................ -- 7,000,000
Purchase of investments available for sale ........................... -- (15,207,277)
Purchase of investments held to maturity.............................. -- (7,694,185)
Purchases of premises and equipment................................... (6,889) (30,335)
Purchase of mortgage-backed securities available for sale............. (14,981,250) --
Purchases of Federal Home Loan Bank of New York stock................. -- (1,250,000)
----------- ----------
Net cash (used in) investing activities.............................. (9,703,375) (9,979,280)
----------- ----------
Cash flows from financing activities:
Net increase in deposits............................................... 1,194,188 3,750,957
Treasury stock acquired................................................ (138,608) (2,559,022)
Increase (decrease) in borrowed money................................. (500,000) 25,157,500
Cash dividends paid.................................................... (148,653) (130,396)
Cost of MSBP shares purchased........................................ (176,900) --
----------- ----------
Net cash provided by financing activities............................ 230,027 26,219,039
----------- ----------
Increase (decrease) in cash and cash equivalents..................... (8,798,077) 16,102,263
Cash and cash equivalents:
Beginning of period..................................................... 33,393,292 6,788,231
----------- ----------
End of period........................................................... $ 24,595,215 $ 23,490,494
=========== ==========
Supplemental disclosures:
Cash paid during the year for:
Interest................................................................ $ 3,546,752 $ 3,391,464
=========== =========
Income Taxes............................................................ -- --
=========== ==========
Unrealized gain on securities available for sale, net of
income taxes........................................................ $ 92,981 $ 34,778
=========== ==========
See notes to unaudited consolidated financial statements.
3
LITTLE FALLS BANCORP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the three month
periods ended March 31, 1999 and 1998 include the accounts of Little
Falls Bancorp, Inc. (the "Company") and its subsidiary, Little Falls
Bank (the "Bank"). The Company's business is conducted principally
through the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
NOTE 2 - BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not
include all information necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows
in conformity with generally accepted accounting principles. However,
all adjustments, consisting of normal recurring accruals, which, in the
opinion of management, are necessary for a fair presentation of the
consolidated financial statements have been included. The results of
operations for the periods ended March 31, 1999 and 1998 are not
necessarily indicative of the results which may be expected for the
entire fiscal year or any other period.
These statements should be read in conjunction with the consolidated
financial statements and related notes which are incorporated by
reference in the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1998.
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share is computed by dividing income applicable to
common shares by the weighted average number of common shares
outstanding for the period (excluding any dilution). Diluted earnings
per share includes the effect of all dilutive potential common shares
outstanding during the period. Sources of potential common shares
include unearned shares and outstanding stock options.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS No. 125) and SFAS No. 127, Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125 (SFAS
No. 127) in June and December 1996, respectively. SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities. It requires entities to
recognize servicing assets and liabilities for all contracts to service
financial assets, unless the assets are securitized and all servicing is
retained. The servicing assets will be measured initially at fair value,
and will be amortized over the estimated useful lives of the servicing
assets. In addition, the impairment of servicing assets will be recognized
through a valuation allowance. SFAS No. 125 also addresses the accounting
and reporting standards for securities lending, dollar- rolls, repurchase
agreements and similar transactions. The Company has prospectively adopted
4
SFAS No. 125 on January 1, 1997. However, in accordance with SFAS No. 127,
the Company deferred adoption of the standard as it relates to securities
lending, dollar-rolls, repurchase agreements and similar transactions until
January 1, 1998. The adoption of SFAS No. 125 did not have a material
impact on its consolidated financial statements.
Comprehensive Income. Effective January 1, 1998, the Company adopted
Statement No. 130, "Reporting Comprehensive Income." Statement No. 130
requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income. As
required, the provisions of Statement No. 130 have been retroactively
applied to previously reported periods. The application of Statement No.
130 had no effect on the Company's consolidated financial condition or
operations.
NOTE 5 - PENDING MERGER
On January 26, 1999, the Company signed a definitive merger agreement under
which Hudson United Bancorp (formerly HUBCO, Inc.) ("HUBC") will acquire
the Company in a combination stock and cash transaction. Under the terms of
the agreement, Company shareholders will receive either 0.6408 shares of
HUBC common stock or $20.64 in cash or a combination of shares of HUBC
common stock and cash. The shares of HUBC 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.
In connection with the execution of the merger agreement, the Company has
issued an option to HUBC, which would enable HUBC to purchase up to 493,000
shares of Company common stock under certain circumstances. As part of the
transaction, the Bank will be merged into Hudson United Bank.
On April 27, 1999, the Company's shareholders approved the proposed merger.
It is anticipated that the merger will be effective at 4:00 p.m. (Eastern
Standard Time) on Thursday, May 20, 1999 and that listing of the Company's
common stock on Nasdaq will cease prior to the opening of the market on
Friday, May 21, 1999.
5
LITTLE FALLS BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
General
The largest components of the Company'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 Company'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 Company'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 Company also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities.
Comparison of Financial Condition
The Company's total assets increased by $686,000 to $351.3 million at
March 31, 1999 from $350.6 million at December 31, 1998. Total loans receivable
increased by $4.2 million due to loan originations of $11.2 million, offset
somewhat by loan repayments. Investment securities remained relatively stable.
Mortgage-backed securities held to maturity decreased by $7.3 million due to
repayments of principal. Mortgage-backed securities available for sale increased
$12.6 million due to purchases of $15.0 million offset somewhat by repayments.
Total cash and cash equivalents decreased by $8.8 million due in part to the
above noted purchases.
Total deposits and borrowed funds remained relatively stable,
increasing $1.2 million and decreasing $500,000, respectively.
Total stockholders' equity decreased by $54,000 primarily due to cash
dividends paid of $149,000 and the purchase of 6,974 shares of the Company's
common stock at a cumulative price of $139,000, offset somewhat by earnings for
the quarter.
6
Non-performing Assets
The following table sets forth information regarding non-performing
loans and real estate owned.
At At At
March 31, December 31, March 31,
--------- ------------ ---------
1999 1998 1998
---- ---- ----
(In thousands)
Total non-performing loans...... $ 933 $1,003 $ 955
Real estate owned............... 297 297 585
----- ----- ------
Total non-performing assets..... $ 1,230 $1,300 $ 1,540
===== ===== ======
Total non-performing loans to
net loans..................... 0.61% 0.67% 0.64%
==== ==== ======
Total non-performing loans to
total assets.................. 0.27% 0.29% 0.27%
==== ==== ======
Total non-performing assets to
total assets.................. 0.35% 0.37% 0.43%
==== ==== ======
Comparison of Earnings for the Three Months Ended March 31, 1998 and 1997
Net Income. Net income for the three months ended March 31, 1999
decreased $156,000 to $302,000 over the same period of 1998. The Company had
previously reported net income of $402,000 for the quarter in an April 26, 1999
earnings release. See "-- Non-Interest Expense." The decrease in net income was
due to an increase in miscellaneous expense of $325,000 offset somewhat by
increases in net interest income after the provision for loan losses and
non-interest income of $33,000 and $25,000, respectively, and decreases in
compensation and employee benefits and income tax expense of $54,000 and
$55,000, respectively.
Total Interest Income. Interest income remained at $5.6 million for the
quarter ended March 31, 1999 compared to the same quarter in 1998. The increase
of $13.7 million in interest earning assets for the three months ended March 31,
1999, as compared to the three months ended March 31, 1998, was offset by a
decrease of 29 basis points in the average rate earned between the two periods.
Total Interest Expense. Interest expense increased by $31,000 or 0.87%
for the quarter ended March 31, 1999 as compared to the same period of 1998.
This increase was primarily due to the increase in the average balance of
interest bearing liabilities of $17.1 million offset somewhat by a decrease in
the average cost of funds of 23 basis points to 4.61% for the quarter ended
March 31, 1999 as compared to the quarter ended March 31, 1998. The $17.1
million increase in the average balance of interest bearing liabilities was due
to the average balance of deposits increasing by $12.4 million and the average
balance of borrowed money increasing by $4.7 million. At March 31, 1999, the
Bank had $68.0 million of borrowings with the FHLB. They consist of the
following:
(a) $25.0 million advance at a rate of 5.35%, with a final maturity
of March 2011, callable by the Federal Home Loan Bank after
March 2001.
(b) $25.0 million advance maturing November 2003, with a rate of
4.93%. On November 19, 2001 and quarterly thereafter, the
borrowing can be called with four days notice.
7
(c) $9.0 million repurchase agreement with a rate of 5.82%,
maturing December 1999 and is callable quarterly on interest
payment dates. As of May 5, the borrowing was still in place.
(d) $9.0 million, 30 day repurchase agreement with a rate of 4.89%.
This borrowing came due on April 16, and was paid off.
Net Interest Income. Net interest income decreased $27,000 or 1.30%, due to
the reasons discussed in the two previous sections.
Provisions for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the potential losses that may be
incurred in the Bank's loan portfolio. Such evaluation, which includes a review
of certain loans of which full collectibility of interest and principal may not
be reasonably assured, considers the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral and
current economic conditions. The provision for loan losses was $0 and $60,000 in
the quarters ended March 31, 1999 and 1998.
While the Bank believes it has established an adequate allowance for loan
losses, there can be no assurance that its regulators, in reviewing the Bank's
loan portfolio, will not request the Bank to significantly increase its
allowance for loan losses, thereby negatively affecting the Bank's financial
condition and earnings or that the Bank may not have to increase its level of
loan loss allowance in the future.
Management will continue to review its loan portfolio to determine the
extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
8
An analysis of the allowance for loan losses follows:
Three Months
Ended March 31,
-----------------------
1999 1998
---- ----
(In thousands)
Balance - beginning $1,329 $1,168
Provisions charged to operations....... - 60
Loans charged off, net of recoveries... - (19)
----- -----
Balance-ending......................... $1,329 $1,209
===== =====
Impaired loans and related amounts recorded in the allowance for loan
losses at March 31, 1999 are summarized as follows (in thousands):
At At At
March 31, December 31, March 31,
1999 1998 1998
------ ------ ------
With recorded allowances....... $ 233 $ 367 $ 741
Without recorded allowances.... -- -- --
----- ------ ------
Total impaired loans.............. 233 367 741
Related allowance for loan losses. 35 55 111
----- ------ ------
Net impaired loans................ $ 195 $ 312 $ 630
===== ====== ======
Non-interest Income. Non-interest income increased by $25,000 for the 1999
period primarily due to a $39,000 fee received for the prepayment of a
multi-family mortgage loan.
Non-interest Expense. Non-interest expense increased by $269,000 or 19.37%,
for the three months ended March 31, 1999 as compared to the same period last
year. The increase was primarily due to a $325,000 increase in miscellaneous
expenses. This increase was due in most part to an increase of $160,000 in
expenses connected with director's retirement and health plans due to
acceleration of benefits related to the merger as well as an increase for the
directors stock compensation plan of $17,000 and $100,000 of expenses connected
with the upcoming merger with HUBC (such expense was not reported in the
Company's earnings release for the quarter). In addition, approximately $50,000
was expensed as a result of a robbery at one of the branch offices during the
quarter.
Compensation and employee benefits decreased $54,000 to $670,000 for the
three months ended March 31, 1999, from $724,000 for the three months ended
March 31, 1998 . This decrease was due to a decrease of $67,000 in employee
benefits.
Income Tax Expense. Income tax expense decreased from $247,000 to $192,000,
due to a decrease in pretax income of $211,000 as well as the Bank increasing
investments in assets that are taxed at a reduced Federal tax rate. The 1999
pretax income includes $100,000 of expenses related to the HUBC merger which are
not tax deductible.
9
Liquidity and Capital Resources
On March 31, 1999, the Bank was in compliance with its three regulatory
capital requirements as follows:
Amount Percent
------ -------
(Dollars in thousands)
Tangible capital.................. $29,210 8.45%
Tangible capital requirement...... 5,188 1.50%
----- ----
Excess over requirement........... $24,022 6.95%
====== ====
Core capital...................... $29,210 8.45%
Core capital requirement.......... 13,834 4.00%
------ ----
Excess over requirement........... $15,376 4.45%
====== ====
Risk based capital................ $30,458 20.54%
Risk based capital requirement.... 11,861 8.00%
------ -----
Excess over requirement........... $18,597 12.54%
====== =====
Management believes that under current regulations, the Bank will
continue to meet its minimum capital requirements in the foreseeable future.
Events beyond the control of the Bank, such as increased interest rates or a
downturn in the economy in areas in which the Bank operates could adversely
affect future earnings and as a result, the ability of the Bank to meet its
future minimum capital requirements.
The Bank's liquidity is a measure of its ability to fund loans, pay
withdrawals of deposits, and other cash outflows in an efficient, cost effective
manner. The Bank's primary sources of funds are deposits and scheduled
amortization and prepayment of loan and mortgage-backed principal. During the
past several years, the Bank has used such funds primarily to fund maturing time
deposits, pay savings withdrawals, fund lending commitments, purchase new
investments, and increase liquidity. The Bank is currently able to fund its
operations internally. Additionally, sources of funds include the ability to
utilize Federal Home Loan Bank of New York advances and the ability to borrow
against mortgage-backed and investment securities. As of March 31, 1999, the
Bank had $68.0 million of borrowed funds. Loan payments, maturing investments
and mortgage-backed security prepayments are greatly influenced by general
interest rates, economic conditions and competition.
The Bank anticipates that it will have sufficient funds available to
meet its current commitments. As of March 31, 1999, the Bank had mortgage
commitments to fund loans of $3.5 million. Also, at March 31, 1999, 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
March 31, 1999 totaled $126.2 million. Based on historical deposit withdrawals
and outflows, and on internal monthly deposit reports monitored by management,
management believes that a majority of such deposits will remain with the Bank.
As a result, no adverse liquidity effects are expected.
The Bank is required under federal regulations to maintain certain
specified levels of "liquid investments," which include certain United States
government obligations and other approved investments. Current regulations
require the Bank to maintain liquid assets of not less than 4% of its net
withdrawable accounts plus short term borrowings. Those levels may be changed
from time to time by the regulators to reflect current economic conditions. The
Bank has maintained liquidity in excess of regulatory requirements.
10
Year 2000
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 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 HUBC (See "Note 5 to Unaudited Consolidated
Financial Statements"), the Renovation and Valuation phases targeted completion
dates have been postponed. In the event the closing of the merger with HUBC does
not occur as expected, new completion dates will be determined. 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 was previously 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 this year. In total, the
Bank estimates that its cost for compliance will amount to approximately
$100,000 over the two year period from 1998 - 1999. As of March 31, 1999
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.
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.
11
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. Furthermore, any
problems with the integration of the Company's system with HUBC's system upon
completion of the merger, could have a material adverse impact on the operations
of the Company.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Additional Key Operating Ratios
For the
Three Months Ended
March 31,
1999(1) 1998(1)
------- -------
Diluted earnings per common share (2)........... $ 0.13 $ 0.19
Return on average assets........................ 0.34% 0.55%
Return on average equity........................ 3.21% 4.81%
Interest rate spread............................ 2.05% 2.11%
Net interest margin............................. 2.45% 2.59%
Noninterest expense to average assets........... 1.88% 1.66%
Net charge-offs to average outstanding
loans......................................... -- 0.05%
At March 31, At December 31,
1999 1998
------ ------
Tangible book value per share... $14.16 $14.11
- ----------------
(1) The ratios for the three month period are annualized where appropriate.
(2) The average number of shares and share equivalents outstanding during the
three months ended March 31, 1999 and 1998 was 2,320,797 and 2,378,608,
respectively.
Quantitative and Qualitative Disclosure About Market Risk
There has been no material changes from the information regarding market
risk disclosed under the heading "Risk Management" in the Company's Annual
Report for the year ended December 31, 1998.
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
12
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.
13
LITTLE FALLS BANCORP, INC. AND SUBSIDIARY
PART II
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor the Bank was engaged in any legal
proceeding of a material nature at March 31, 1999. From time
to time, the Company is a party to routine legal proceedings
in the ordinary course of business, such as claims to enforce
liens, condemnation proceedings on properties in which the
Company holds security interests, claims involving the making
and servicing of real property loans, and other issues
incident to the business of the Company. There were no
lawsuits pending or known to be contemplated against the
Company at March 31, 1999 that would have a material effect on
the operations or income of the Company or the Bank, taken as
a whole.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable. See, however, "Note 5 to "Unaudited
Consolidated Financial Statements" and Item 6(b).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER MATERIALLY IMPORTANT EVENTS
See Item 6(b).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report.
2.1 Agreement and Plan of Merger among HUBC, Hudson United Bank,
the Company and the Bank dated January 26, 1999.1
2.2 Stock Option Agreement by and between HUBC and the Company
dated January 26, 1999.1
3.1 Articles of Incorporation of Little Falls Bancorp, Inc.2
3.2 Bylaws of Little Falls Bancorp, Inc.2
4.0 Form of Stock Certificate of Little Falls Bancorp, Inc.2
10.1 Employment Agreement between the Bank and John P. Pullara3
10.2 Employment Agreement between the Bank and Leonard G. Romaine3
10.4 Form of Employment Agreement with Eight Employees of the Bank4
10.6 1996 Management Stock Bonus Plan4
10.7 1996 Stock Option Plan4
10.8 1997 Directors Stock Compensation Plan5
10.9 1998 Directors Stock Compensation Plan5
10.10 Directors Retirement and Consultation Plan5
11.0 Earnings Per Share Calculation
27.0 Financial Data Schedule6
14
(b) Reports on Form 8-K.
On January 27, 1999, the Registrant filed a Current Report on
Form 8-K (Items 5 and 7), announcing the execution of the
Agreement and Plan of Merger among the Registrant, the Bank,
HUBC and Hudson United Bank.
On May 4, 1999, the Registrant filed a current report on Form
8-K (Items 5 and 7), announcing the results of its special
meeting of stockholders and the fixing of the exchange ratio
in the proposed merger with HUBC.
1. Incorporated by reference into this document from the Exhibits to
Registrant's Current Report on Form 8-K dated January 27, 1999.
2. Incorporated by reference into this document from the Exhibits to Form
S-1, Registration Statement, initially filed with the Securities and
Exchange Commission on September 25, 1995 (Registration No. 33-97316).
3. Incorporated by reference into this document from the Exhibits to
Registrant's Annual Report on Form 10-K for the Year Ended December 31,
1995 (File No. 0-27010).
4. Incorporated by reference into this document from the Exhibits to
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996 (File No. 0-27010).
5. Incorporated by reference into this document from the Exhibits to
Registrant's Annual Report on Form 10-K/A for the year ended December
31, 1998 (File No. 0-27010).
6. In electronic filing only.
15
LITTLE FALLS BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LITTLE FALLS BANCORP, INC.
Date: May 17, 1999 By: /s/ Leonard G. Romaine
------------------------------------
Leonard G. Romaine
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 17, 1999 By: /s/ Richard Capone
------------------------------------
Richard Capone
Senior Vice President and
Chief Financial Officer
(Principal Officer)
EXHIBIT 11
EARNINGS PER SHARE CALCULATION
For the three months
Ended March 31,
------------------------
1999 1998
-------- ---------
Net Income......................................$ 302,372 $ 458,549
======== =========
Basic Weighted Average Shares Outstanding....... 2,206,672 2,259,761
Basic Earnings Per Share........................$ 0.14 $ 0.20
--------- ---------
Basic Weighted Average Shares Outstanding....... 2,206,672 2,259,761
Potential common stock due to:
Stock options................. 106,613 103,387
MSBP.......................... 7,512 15,011
-------- -------
Diluted weighted average shares outstanding..... 2,320,797 2,378,608
--------- ---------
Diluted earnings per share......................$ 0.13 $ 0.19
--------- ---------
Basic earnings per share of common stock for the three month periods ended March
31, 1999 and March 31, 1998 has been determined by dividing net income for the
period by the weighted average number of shares of common stock outstanding, net
of average unearned ESOP shares of 192,392 and 208,864, respectively, and
average unearned MSBP shares of 75,826 and 99,175 respectively.