1
EXHIBIT 13
MLF BANCORP, INC. AND SUBSIDIARIES
FIVE YEAR REVIEW OF SELECTED FINANCIAL DATA AND
PRICE PER SHARE OF COMMON STOCK
Dollars in Thousands, except for percentages
- --------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED MARCH 31, 1996 1995 1994 1993 1992
====================================================================================================================
Total Assets $1,765,812 $1,563,452 $1,001,037 $989,308 $989,528
- --------------------------------------------------------------------------------------------------------------------
Loans Receivable, Net 691,791 550,013 268,335 290,380 380,389
- --------------------------------------------------------------------------------------------------------------------
Investments and Mortgage-Related
Securities, Net 429,092 515,383 428,103 418,064 241,805
- --------------------------------------------------------------------------------------------------------------------
Assets Available for Sale 564,354 436,332 264,724 230,660 289,372
- --------------------------------------------------------------------------------------------------------------------
Deposit Accounts 830,997 688,678 679,525 618,693 652,162
- --------------------------------------------------------------------------------------------------------------------
Borrowings 778,225 710,541 256,795 304,881 275,534
- --------------------------------------------------------------------------------------------------------------------
Equity 140,337 141,300 53,978 57,056 47,122
- --------------------------------------------------------------------------------------------------------------------
Nonperforming Assets 10,445 8,931 12,360 24,658 36,849
====================================================================================================================
Net Interest Income 43,762 36,749 22,820 25,014 22,228
- --------------------------------------------------------------------------------------------------------------------
Provision for Loan Losses 4,000 3,400 1,113 3,169 9,627
- --------------------------------------------------------------------------------------------------------------------
Other Income 7,269 3,412 8,616 7,196 10,214
- --------------------------------------------------------------------------------------------------------------------
Operating Expenses 29,139 23,093 21,000 20,253 19,045
- --------------------------------------------------------------------------------------------------------------------
Net Income 11,620 8,694 1,862 7,488 545
====================================================================================================================
Net Interest Margin 2.79% 2.90% 2.39% 2.74% 2.45%
- --------------------------------------------------------------------------------------------------------------------
Operating Expenses as a Percent of
Average Assets 1.79 1.76 2.10 2.14 1.96
- --------------------------------------------------------------------------------------------------------------------
Return on Average Assets 0.71 0.66 0.19 0.79 0.06
- --------------------------------------------------------------------------------------------------------------------
Return of Average Equity 7.88 8.22 3.17 14.81 1.05
====================================================================================================================
Nonperforming Assets as a Percent of
Total Assets (1) 0.59 0.57 1.23 2.49 3.72
- --------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses as a Percent of
Nonperforming Loans (1) 156.20 134.74 137.50 55.16 40.68
====================================================================================================================
(1) Asset Quality Ratios are end-of-period ratios. With the exception of
end-of-period ratios, all ratios are based on average daily balances during the
indicated periods.
The following table shows market price information for the Company's Common
Stock.
The prices set forth below represent the high, low and closing prices on the
NASDAQ National Market System during the periods indicated.
- --------------------------------------------------------------------------------------------------------------------
PRICE PER SHARE
====================================================================================================================
QUARTERLY PERIOD ENDED HIGH LOW CLOSE
====================================================================================================================
September 30, 1994 $16.75 $15.25 $15.88
- --------------------------------------------------------------------------------------------------------------------
December 31, 1994 16.00 12.25 13.50
- --------------------------------------------------------------------------------------------------------------------
March 31, 1995 16.13 13.38 16.00
- --------------------------------------------------------------------------------------------------------------------
June 30, 1995 19.63 15.75 19.25
- --------------------------------------------------------------------------------------------------------------------
September 30, 1995 23.88 19.00 23.13
- --------------------------------------------------------------------------------------------------------------------
December 31, 1995 24.63 21.00 22.25
- --------------------------------------------------------------------------------------------------------------------
March 31, 1996 24.75 21.75 23.88
- --------------------------------------------------------------------------------------------------------------------
One
2
FINANCIAL
TABLE OF CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS Nine
INDEPENDENT AUDITORS' REPORT Nineteen
CONSOLIDATED FINANCIAL STATEMENTS Twenty
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Twenty-six
DIRECTORS, OFFICERS AND SHAREHOLDER INFORMATION Inside back cover
Eight
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
MLF Bancorp, Inc. (the "Bancorp" or "Company") is the holding company of its
wholly-owned subsidiary, Main Line Bank (the "Bank"). The Bancorp, through its
subsidiary, provides commercial, mortgage and consumer banking services through
an 18 branch network in the Philadelphia metropolitan area and nine mortgage
loan production offices which are located in eastern Pennsylvania, southern New
Jersey and northern Delaware.
The Bank's conversion to a federally chartered stock savings bank was
completed on August 11, 1994 (the "Conversion"). The Conversion has been
accounted for in a manner similar to a pooling of interests. Accordingly, the
Bank's assets, liabilities and equity continue to be reflected based on their
historical amounts.
The following discussion provides an overview of the general business,
financial condition and results of operations of the Company, and should be
read in conjunction with the Company's consolidated financial statements
presented elsewhere herein. Accordingly, the discussion below with respect to
results of operations relates primarily to the Bank, and the financial data for
the period prior to the Conversion reflects financial data of the Bank. For
purposes of this discussion, MLF Bancorp, Inc. including its wholly-owned
subsidiaries, will be referred to as the Company.
The operating results of the Company depend primarily upon its net interest
income, which is determined by the difference between interest income on
interest-earning assets, principally loans, mortgage-related securities and
investments, and interest expense on interest-bearing liabilities, which
principally consist of deposits and borrowings. The Company's net income is
also affected by its provision for loan losses, as well as the level of its
other income, including mortgage banking income, net gains or losses on sale of
assets available for sale and its operating expenses, such as compensation and
employee benefits, net occupancy expense, federal deposit insurance and
miscellaneous other expenses, and income taxes.
During the year ended March 31, 1996, the Company completed its acquisition of
Hart Mortgage Co., ("Hart") a privately-held mortgage banking company, and
Suburban Federal Savings Bank ("Suburban") a $66.0 million in assets community
bank headquartered in Collingdale, Delaware County, Pennsylvania. Both
acquisitions were accounted for using the purchase method of accounting. These
acquisitions were completed during the fourth fiscal quarter of 1996, and as
such, the effect on the Company's results of operations was not material.
On April 1, 1996, the Company completed its acquisition of Philadelphia
Mortgage Corporation ("PMC"), a privately-held mortgage banking company.
ASSET AND LIABILITY MANAGEMENT
The principal objective of the Company's asset and liability management
function is to maximize the Company's net interest margin while maintaining a
level of risk appropriate given the Company's business focus, operating
environment, capital and liquidity requirements and performance objectives,
establish prudent asset concentration guidelines and manage the risk consistent
with Board of Directors approved guidelines. Through such management, the
Company seeks to reduce the vulnerability of its operations to changes in
interest rates and to manage the ratio of interest-rate sensitive assets to
interest-rate sensitive liabilities within specified maturities or repricing
dates. The Company's actions in this regard are taken under the guidance of
the Asset/Liability Management Committee ("ALCO"), which is chaired by the
Chief Executive Officer and comprised principally by members of the Company's
senior management. The ALCO meets twice a month to review, among other things,
the sensitivity of the Company's asset and liabilities to interest rate
changes, the book and market values of assets and liabilities, unrealized gains
and losses, purchase and sale activity and maturities of investments and
borrowings. In connection therewith, the ALCO generally reviews the Company's
liquidity, cash flow needs, maturities of investments, deposits and borrowings
and current market conditions and interest rates. A pricing subcommittee meets
weekly to make pricing and funding decisions with respect to the Company's
retail deposits and selected consumer loans.
The Company's primary ALCO monitoring tool is asset/liability simulation
models, which are prepared on a quarterly basis and are designed to capture the
dynamics of balance sheet, rate and spread movements and to quantify variations
in net interest income under different interest rate environments. The Company
also utilizes market-value analysis, which addresses the change in equity value
arising from movements in interest rates. The market value of equity is
estimated by valuing the Company's assets and liabilities. The extent to which
assets have gained or lost value in relation to the gains or losses of
liabilities determines the appreciation or depreciation in equity on a
market-value basis. Market value analysis is intended to evaluate the impact
of immediate and sustained interest-rate shifts of the current yield curve upon
the market value of the current balance sheet.
Nine
4
A more conventional but limited ALCO monitoring tool involves an analysis of
the extent to which assets and liabilities are "interest rate sensitive" and
measuring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity "gap" is defined as the difference between interest-earning assets
and interest-bearing liabilities maturing or repricing within a given time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive
gap would tend to affect net interest income adversely. While a conventional
gap measure may be useful, it is limited in its ability to predict trends in
future earnings. It makes no presumptions about changes in prepayment
tendencies, deposit or loan maturity preferences or repricing time lags that
may occur in response to a change in the interest rate environment.
CHANGES IN FINANCIAL CONDITION
GENERAL. The Company's total assets increased by $202.4 million or 12.9% at
March 31, 1996 compared to March 31, 1995. The increase is primarily due to an
increase in loans receivable, including loans available for sale of $211.5
million or 36.8%, offset slightly by an aggregate decrease in investments,
mortgage-related securities and mortgage-related, debt and equity securities
available for sale of $28.0 million or 3.0%. The asset growth was funded
primarily through a growth in deposits of $142.3 million, or 20.7%, and to a
lesser extent, growth in borrowed money of $67.7 million or 9.5%.
CASH AND INVESTMENTS. Cash and investments decreased $17.9 million or 27.1%
from $66.2 million at March 31, 1995 to $48.3 million at March 31, 1996. The
decrease was primarily the result of two U.S. Government agency step-up bonds
and one debenture totaling $30.0 million being called, which were only
partially offset through additional investment purchases.
MORTGAGE-RELATED SECURITIES AND MORTGAGE-RELATED, DEBT AND EQUITY SECURITIES
AVAILABLE FOR SALE. Mortgage-related securities and mortgage-related, debt and
equity securities available for sale decreased $6.8 million or 0.8% to $873.5
million at March 31, 1996 from $880.3 million at March 31, 1995, as repayments
and sales occurred at a rate faster than the purchases of such securities. In
November 1995, the Financial Accounting Standards Board ("FASB") issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities" which permitted a one-time
transfer of securities up to December 31, 1995. In December 1995, in
accordance with provisions in that Special Report, the Bank transferred $56.8
million of mortgage-related securities to mortgage-related, debt and equity
securities available for sale.
LOANS AVAILABLE-FOR-SALE AND LOANS RECEIVABLE, NET. Aggregate loans receivable
(loans receivable, net and loans available for sale) totaled $786.8 million at
March 31, 1996, an increase of $211.5 million or 36.8% from $575.3 million at
March 31, 1995, due to a $141.8 million or 25.8% increase in loans receivable,
net and a $69.8 million increase in loans available for sale. Of the $141.8
million increase in loans receivable, net, approximately 41.0% or $57.6 million
were related to the Suburban acquisition. Also contributing to the increase
was: a $39.9 million or 49.5% increase in commercial and multi-family real
estate loans (primarily secured by office buildings, healthcare facilities and
retail/apartment complexes, all of which are located in the Company's lending
area); a $51.6 million or 87.3% increase in gross residential construction
loans, as the Company became more involved in construction of residential
projects in its primary lending area; a $16.9 million or 18.1% increase in
consumer loans, as the Company continues its expansion in the equity loan
market; and a $36.3 million or 108.9% increase in commercial business loans
(primarily 5 loans accounting for 66% of the increase).
NON-PERFORMING ASSETS. The Company's total non-performing assets increased by
$1.5 million or 17.0% from $8.9 million or 0.6% of total assets at March 31,
1995 to $10.4 million or 0.6% of total assets at March 31, 1996. At March 31,
1996, the Company's nonperforming loans totaled $8.4 million compared to $6.8
million at March 31, 1995. The primary reason for the $1.6 million or 24.3%
increase over March 31, 1995, was due to the acquisition of $3.1 million of
nonaccrual loans in connection with the Suburban acquisition, which caused
single family and construction nonperforming loans to increase by $1.3 million
and $1.8 million, respectively, over March 31, 1995 balances, despite a $2.2
million decrease in nonaccruing commercial real estate loans.
Other real estate owned, net increased to $2.0 million (comprised of 12
properties) as of March 31, 1996 as compared to $1.0 million as of March 31,
1995, primarily due to the acquisition of Suburban's other real estate owned,
which had a carrying value of $900,000 (comprised of five properties) at March
31, 1996.
At March 31, 1996, the Company's allowance for loan losses amounted to $13.1
million (including a $754,000 specific allowance on two commercial construction
loans and one residential project construction loan) or 156.2% of
non-performing loans and 1.6% of gross loans receivable. At March 31, 1995,
the Company's allowance for loan losses was $9.1 million (which included a
$475,000 specific allowance on two commercial real estate loans and one
residential project construction loan) or 134.7% of non-performing loans and
1.6% of gross loans receivable.
Total charge-offs were $1.2 million and $1.8 million for the years ended March
31, 1996 and 1995, respectively.
Ten
5
MORTGAGE SERVICING RIGHTS. Mortgage servicing rights increased $9.0 million or
70.5% from $12.8 million at March 31, 1995 to $21.9 million at March 31, 1996.
The increase was due to purchases of mortgage servicing rights of $12.0 million
and originated mortgage servicing rights of $760,000 offset by amortization of
$3.7 million during the year. As of the beginning of the current fiscal year,
the Company adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights,"
and as a result, included $760,000 in income from mortgage banking operations.
DEPOSITS. Deposits increased by $142.3 million or 20.7% from $688.7 million
at March 31, 1995 to $831.0 million at March 31, 1996. Interest and
noninterest-bearing checking accounts and certificates of deposit increased by
$32.4 million or 26.4%, $27.9 million or 51.9%, and $88.6 million or 21.2%,
respectively. During the fiscal year, the Company increased its deposits
through the Suburban acquisition and the purchase of an Individual Retirement
Account portfolio, which had balances of $59.1 million and $30.0 million,
respectively, at the dates of acquisition.
BORROWINGS. Total borrowings increased by $67.7 million or 9.5% to $778.2
million at March 31, 1996 from $710.5 million at March 31, 1995. The Company's
borrowings are primarily comprised of advances from the Federal Home Loan Bank
("FHLB") and repurchase agreements. Repurchase agreements are commitments the
Company enters into to sell securities under terms which require it to
repurchase the same securities by a specified date. Such agreements represent
a competitive cost funding source for the Company; however, the Company is
subject to the risk that the lender may default at maturity and not return the
collateral. The repurchase agreements are primarily comprised of various
Federal Home Loan Mortgage Corporation ("FHLMC") and large, established
investment brokerage institution repurchase agreements and had a weighted
average maturity of approximately 13 months and a weighted average interest
rate of 5.66% at March 31, 1996, compared to 60 days and 6.18%, respectively,
at March 31, 1995.
FHLB advances increased $56.1 million or 17.5% from $319.9 million at March 31,
1995 to $376.0 million at March 31, 1996. At March 31, 1996, FHLB advances had
a weighted average maturity of approximately 18 months and a weighted average
interest rate of 6.21%, compared to 18 months and 6.36% at March 31, 1995. The
overall increase in borrowings was primarily used to fund the Company's
increased lending activities during the year.
EQUITY. At March 31, 1996, total equity was $140.3 million or 7.9% of total
assets, compared to $141.3 million or 9.0% of total assets at March 31, 1995.
Total equity decreased by $963,000 during the year ended March 31, 1996
primarily due to the repurchase of 683,500 shares or 10.0% of the Company's
outstanding common stock at an aggregate cost of $15.0 million, and dividends
paid to common shareholders totaling $3.2 million, which was partially offset
by net income of $11.6 million for the year, and the $2.2 million of
amortization related to stock benefit plans. The Company's market value
position related to its mortgage-related, debt and equity securities classified
as assets available for sale, net of income taxes, went from an unrealized loss
of $3.2 million at March 31, 1995 to an unrealized gain of $120,000 at March
31, 1996, favorably effecting equity by $3.3 million.
Eleven
6
The following table sets forth, for the periods and at the date
indicated, information regarding the Company's average balance sheet.
Information is based on average daily balances during the periods presented.
Year Ended March 31,
At March 31, -----------------------------------------------------------------------------------------
1996 1996 1995 1994
------------ ----------------------------- -------------------------- -----------------------------
Average Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------ ----------------------------- -------------------------- -----------------------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable:
Mortgage loans:
Residential(1) 7.68% $366,363 $29,303 8.00% $208,126 $16,164 7.77% $148,446 $11,620 7.83%
Commercial 8.79 100,801 9,318 9.24 71,694 6,590 9.19 48,367 4,421 9.14
Construction loans 10.73 37,455 4,883 13.04 16,522 2,028 12.27 11,336 1,028 9.07
Other:
Consumer loans:
Home equity loans
and lines of credit 9.38 82,715 7,689 9.30 71,863 6,306 8.78 66,437 5,378 8.09
Unsecured lines
of credit 11.85 3,282 399 12.16 3,854 414 10.74 4,173 396 9.49
Automobile 8.29 6,648 544 8.18 8,990 742 8.25 10,876 999 9.19
Other(1) 9.41 15,763 1,501 9.52 10,082 797 7.91 7,546 665 8.81
Commercial business 7.83 49,133 3,966 8.07 21,333 1,671 7.83 7,564 740 9.78
---- ------ ----- ------ ----- ------ ------
Total loans receivable 8.34 662,160 57,603 8.70 412,464 34,712 8.42 304,745 25,247 8.28
------- ------
Mortgage-related
securities(1) 7.06 821,436 57,216 6.97 753,745 49,058 6.51 598,345 33,723 5.64
Investment securities(1) 6.31 77,199 5,098 6.60 89,501 5,671 6.34 44,770 2,549 5.69
Other interest-earning
assets 5.20 8,283 504 6.08 13,608 792 5.82 7,330 380 5.18
----- --- ------- ------ ----- ------
Total interest-earning
assets 7.64% 1,569,078 $120,421 7.67% 1,269,318 $90,233 7.11% 955,190 $61,899 6.48%
==== ======== ==== ======= ==== ====== ====
Noninterest-earning assets 59,059 41,267 46,259
------ ------ ------
Total assets $1,628,137 $1,310,585 $1,001,449
========= ========= =========
Interest-bearing
liabilities:
Deposits 4.25% $745,410 $31,785 4.26% $691,667 $25,626 3.70% $638,794 $23,616 3.70%
FHLB advances 6.21 361,128 22,775 6.31 320,572 18,078 5.64 278,599 14,990 5.38
Other borrowings 5.65 357,064 22,099 6.19 179,871 9,780 5.44 15,427 473 3.07
--------- -------- -------- ------- -------- ------
Total interest-bearing
liabilities 5.06% 1,463,602 $76,659 5.24% 1,192,110 $53,484 4.49% 932,820 $39,079 4.19%
==== ======= ==== ======= ==== ======= ====
Noninterest-bearing
liabilities 17,163 12,666 9,861
-------- -------- --------
Total liabilities 1,480,765 1,204,776 942,681
Equity 147,372 105,809 58,768
--------- -------- --------
Total liabilities and
equity $1,628,137 $1,310,585 $1,001,449
========= ========== ==========
Net interest-earning assets $ 105,476 $ 77,208 $ 22,370
========= ======== ========
Net interest
income/interest
rate spread 2.58% $43,762 2.43% $ 36,749 2.62% $22,820% 2.29%
==== ======= ==== ======= ===== ====== ====
Net yield on
interest-earning
assets(2) 2.79% 2.90% 2.39%
==== ===== ====
Ratio of interest-earning
assets to interest-bearing
liabilities 107.21% 106.48% 102.40%
====== ====== ======
- ---------------
(1) Includes assets available for sale.
(2) Net interest income divided by interest-earning assets.
Twelve
7
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Company's interest income and expense during 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 (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in
rate and volume. The combined effect of changes in both rate and volume has
been allocated proportionately to the change due to rate and the change due to
volume.
Year Ended March 31,
-----------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
---------------------------------- -----------------------------------
Increase Increase
(Decrease) Due To (Decrease) Due to
------------------ Total -------------------
Increase Total Increase
Rate Volume (Decrease) Rate Volume (Decrease)
----- ---------- ---------- ------ -------- ----------------
(Dollars in Thousands)
Interest-earnings assets:
Loans receivable:
Mortgage loans:
Residential(1) $598 $12,541 $13,139 $ 39 $ 4,505 $ 4,544
Commercial 22 2,706 2,728 24 2,145 2,169
Construction 257 2,598 2,855 435 565 1,000
Consumer loans:
Home equity loans and lines of credit 444 939 1,383 472 456 928
Unsecured lines of credit 56 (71) (15) 21 (3) 18
Automobile (21) (177) (198) (94) (163) (257)
Other(1) 216 488 704 5 127 132
Commercial loans 31 2,264 2,295 25 906 931
----- ------- -------- ------ ------- --------
Total loans receivable 1,603 21,288 22,891 927 8,538 9,465
Mortgage-related securities(1) 4,456 3,702 8,158 5,731 9,604 15,335
Investment securities(1) 313 (886) (573) 317 2,805 3,122
Other interest-earning assets 58 (346) (288) 53 359 412
------ ------- -------- ------ ------- --------
Total interest-earning assets 6,430 23,758 30,188 7,028 21,306 28,334
------ ------- -------- ------ ------- --------
Interest-bearing liabilities:
Deposits 3,561 2,598 6,159 52 1,958 2,010
FHLB advances 2,510 2,187 4,697 749 2,339 3,088
Other borrowings 2,652 9,667 12,319 931 8,376 9,307
------ ------- -------- ------ ------- --------
Total interest-bearing liabilities 8,723 14,452 23,175 1,732 12,673 14,405
------ ------- -------- ------ ------- --------
Increase (decrease) in net interest income $(2,293) $ 9,306 $ 7,013 $5,296 $ 8,633 $ 13,929
======== ======= ======= ====== ======= ========
- -------------
(1) Includes assets available for sale.
NET INCOME. The Company reported net income of $11.6 million or $1.82 per
fully diluted share for the year ended March 31, 1996, compared to net income
of $8.7 million or $0.97 per fully diluted share for the year ended March 31,
1995. (Per share amounts for the year ended March 31, 1995 are computed from
August 11, 1994 , the date the Company completed its initial public offering.)
The $2.9 million or 33.7% increase is primarily attributable to a $6.4 million
or 19.2% increase in net interest income after provision for loan losses and a
$3.9 million or 113.0% increase in other income, which was partially offset by
a $6.0 million or 26.2% increase in operating expenses and a $1.3 million or
26.1% increase in provision for income taxes.
The Company reported net income of $8.7 million for the year ended March 31,
1995, compared to net income of $1.9 million for the year ended March 31, 1994.
The $6.8 million or 366.9% increase is primarily attributable to an $11.6
million or 53.6% increase in net interest income after provision for loan
losses and a $2.5 million or 33.3% decrease in the provision for income taxes,
which was partially offset by a $5.2 million or 60.4% decrease in other income
and a $2.1 million or 10.0% increase in operating expenses.
Thirteen
8
NET INTEREST INCOME. Net interest income before provision for loan losses
amounted to $43.8 million during the year ended March 31, 1996, a $7.0 million
19.1% increase over the comparable period in 1995. During the 1996 period, a
$30.2 million or 33.5% increase in total interest income more than offset a
$23.2 million or 43.3% increase in total interest expense. Net interest income
before provision for loan losses amounted to $36.7 million during the year
ended March 31, 1995, a $13.9 million or 61.0% increase over the comparable
period in 1994. During the 1995 period, a $28.3 million or 45.8% increase in
total interest income more than offset a $14.4 million or 36.9% increase in
total interest expense.
The $30.2 million increase in total interest income during the year ended March
31, 1996 over the prior comparable period was primarily due to a $20.2 million
or 60.2% increase in interest income earned on loans receivable and an
aggregate $12.4 million or 23.9% increase in interest income earned on
mortgage-related debt and equity securities and assets available for sale. This
increase was caused by a $249.7 million or 60.5% increase in the average
balance of total loans receivable (including assets available for sale), and a
$67.7 million or 9.0% increase in the average balance of total mortgage-related
securities (including assets available for sale), coupled with rate increases
in yields earned on the total loans receivable portfolio and the aggregate
mortgage-related securities portfolio of 28 and 46 basis points, respectively
(with 100 basis points equaling 1.0%). The increase in the average loans
receivable balance was the combination of residential real estate loans, which
increased by $125.0 million or 76.0%, and commercial and residential
construction loans, which are principally adjustable rate loans.
The $28.3 million increase in total interest income during the year ended March
31, 1995 over the prior comparable period was primarily due to an $11.2 million
or 50.3% increase in interest income earned on loans receivable and an
aggregate $14.8 million or 40.1% increase in interest income earned on
mortgage-related securities. This increase was caused by a $107.7 million or
35.3% increase in the average balance of total loans receivable, and a $155.4
million or 26.0% increase in the average balance of total mortgage-related
securities, coupled with an 87 basis point increase in yield earned on the
aggregate mortgage-related securities portfolio. The increase in the loans
receivable balance was primarily adjustable-rate residential loans where the
majority of the originated loan production was placed in the Bank's
held-to-maturity loan portfolio instead of being sold in the secondary market.
Because adjustable-rate loans generally earn lower yields than fixed-rate
loans, the adjustable-rate product favorably impacts the Bank's interest rate
sensitive assets, but causes a negative effect on the overall mortgage loan
yield compared to fixed-rate loans. Adjustable-rate loans were preferred by
borrowers since there was a general upward trend in interest rates during the
1994 fiscal year which reduced the refinancing volume compared to the prior
year. Additionally, interest income on investments increased $1.9 million or
82.9% due to a $44.7 million or 100.0% increase in the average balance and a 65
basis point increase in yield earned.
Total interest expense increased by $23.2 million or 43.3% for the year ended
March 31, 1996 over the prior comparable period. The increase in interest
expense is principally attributable to a $12.6 million increase in interest
expense on other borrowed money, principally reverse repurchase agreements, due
primarily to a $177.2 million or 98.5% increase in the average balance, and to
a lesser extent, an increase in the yield paid. Additionally, the increase in
total interest expense was caused by a $6.2 million or 24.0% increase in
interest expense on deposits as the average balance of deposits increased by
$100.2 million and the yield paid increased by 29 basis points, and a $4.7
million or 26.0% increase in interest expense on FHLB advances. The change was
caused primarily by a 67 basis point increase in the interest rate, and to a
lesser extent, a $40.5 million increase in the average balance. In the fourth
quarter of fiscal 1996, the Company prepaid approximately $20.0 million in FHLB
advances, extending the maturity by approximately two years and reducing its
cost of funds by approximately 225 basis points.
Total interest expense increased by $14.4 million or 36.9% for the year ended
March 31, 1995 over the prior comparable period. The increase in interest
expense is principally attributable to a $12.4 million increase in interest
expense on borrowed money, principally reverse repurchase agreements and FHLB
advances, primarily due to a $188.3 million or 64.0% increase in the aggregate
average balance, and to a lesser extent, a 46 basis point increase in yield
paid. Additionally, the increase in total interest expense was caused by a
$2.0 million or 8.5% increase in interest expense on deposits as the average
balance of deposits increased by $52.9 million, but the average interest rate
paid thereon remained constant during the comparative periods.
PROVISION FOR LOAN LOSSES. The Company establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed to be appropriate based upon an assessment of
prior loss experience, the volume and type of lending presently being conducted
by the Company, industry standards, past due loans, economic conditions in the
Company's market area generally and other factors related to the collectibility
of the Company's loan portfolio. For the year ended March 31, 1996, the
provision for loan losses amounted to $4.0 million, an increase of $600,000 or
17.7% from the comparable 1995 period. For the year ended March 31, 1995, the
provision for loan losses amounted to $3.4 million, an increase of $2.3 million
or 205.5% from the comparable 1994 period. The increased provision during the
year ended March 31, 1996 is a result of the growth in the Company's loan
receivable portfolio. At March 31, 1996, the allowance for loan losses
amounted to 156.2% of total non-performing loans and 1.6% of gross loans
receivable, as compared to 134.7% and 1.6%, respectively at March 31, 1995.
Although management utilizes its best judgment in providing for possible
losses, there can be no assurance that the Company will not have to increase
its provisions for loan losses in the future as a result of future increases in
non-performing loans or for other reasons, which could adversely affect the
Company's results of operations. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the
Company's provision for loan losses and the carrying
Fourteen
9
value of its other non-performing assets based on their judgments about
information available to them at the time of their examination. The Company
was last examined by the Office of Thrift Supervision ("OTS") as of December
31, 1994. The Company was not required to increase its provision for loan
losses or adjust the carrying value of its other non-performing assets as a
result of such examination.
OTHER INCOME. Total other income more than doubled to $7.3 million for the
year ended March 31, 1996 as compared to $3.4 million for the comparable
period in 1995. The $3.9 million increase is primarily attributable to gains
on sales of mortgage-related and equity securities of $255,000 in the current
period compared to a $2.0 million net loss recognized in 1995, and a $2.3
million improvement in income from mortgage banking operations. The increase
was due primarily to the Company's adoption of SFAS No. 122, as discussed
above, in the amount of $760,000. Also, the Company sold a higher percentage
of originated loans, servicing released, in the secondary market, compared to
the prior year, thus resulting in increased gains. Partially offsetting these
gains was a $514,000 increase in loss on sale of other real estate owned.
Total other income decreased $5.2 million or 60.4% to $3.4 million for the
year ended March 31, 1995 from the comparable prior year. During the 1995
period, the Company recognized a $2.0 million net loss on the sale of assets
available for sale, compared to a net gain of $3.4 million during the prior
comparable year and a $611,000 net gain on other real estate activities (gains
on sale of other real estate owned and real estate held for development or
resale), compared to a $2.6 million net gain on other real estate activities
during the prior comparable year. The overall net loss on the sale of assets
available for sale in fiscal 1995 is mainly attributable to the sale of
approximately $78.6 million of mortgage-related and debt securities at a net
loss of $2.1 million. The Company used the proceeds from these asset sales to
purchase higher yielding, adjustable-rate mortgage-related securities in order
to enhance the yield on the Company's available for sale portfolio. The $2.0
million decline in net gains on other real estate activities from fiscal 1994
was primarily the result of reduced real estate sales activity in the 1995
fiscal year. Offsetting such declines in fiscal 1995 was income from mortgage
banking operations, which increased by $745,000 or 53.0% to $2.2 million at
March 31, 1995.
OPERATING EXPENSES. For the year ended March 31, 1996, operating expenses
totaled $29.1 million, an increase of $6.0 million or 26.2% over the prior
comparable period. Compensation and employee benefits increased by $1.8 million
or 15.2% from $12.1 million for the year ended March 31, 1995 to $13.9 million
for the year ended March 31, 1996. The change was attributable primarily to
increases in expenses related to stock benefit plans, the addition of personnel
from the Suburban and Hart operations since acquisition, and new business
center openings. Advertising expense increased by $1.1 million to $1.9 million
at March 31, 1996 due to increased emphasis in various consumer and commercial
product campaigns and de novo business center openings. The Company's
continued expansion of its business center network and acquisitions was the
primary reason for the $993,000 or 30.9% increase in net occupancy costs, which
totaled $4.2 million for the year ended March 31, 1996. Operationg expenses
also increased due to amortization of goodwill and other intangible assets
related to the purchases of a certificate of deposit portfolio and the Suburban
and Hart acquisitions in the current year. Included in the overall $1.2
million increase in other operating expenses is a $462,000 prepayment penalty
related to the debt restructuring discussed above, and various other expenses
related to the Suburban and Hart operations since acquisition, as well as a
full year of expenses related to being a publicly held company.
Operating expenses totaled $23.1 million for the year ended March 31, 1995, an
increase of $2.1 million or 10.0% over the prior comparable period. The
increase over the prior fiscal year was primarily due to a $1.5 million or
14.6% increase in compensation and employee benefits expense related to general
salary increases, stock benefit programs, and certain organizational
restructuring charges. Also reflected in the increase in total operating
expenses was a $360,000 or 12.6% increase in net occupancy costs associated
with the Company's improvements of its administrative facilities.
INCOME TAXES. Income tax expense totaled $6.3 million or 35.1% of pre-tax
earnings compared to $5.0 million or 36.0% of pre-tax earnings for the year
ended March 31, 1995, a $1.3 million or 26.1% increase primarily attributable
to additional pre-tax earnings during the year.
The Company incurred income tax expense of $5.0 million or 36% of pre-tax
earnings, during the year ended March 31, 1995, compared to $7.5 million during
fiscal 1994. The primary reason for the $2.5 million decrease was the
establishment of an additional deferred tax liability of $3.3 million during
fiscal 1994, which was done in anticipation of the Company's intention to
convert its charter to that of a commercial bank. The Company's action is
predicated on the Board of Directors' intention to undertake such a charter
conversion in the future, among other reasons, in order to have increased
regulatory flexibility to diversify its products and services as set forth in
its business plan. When the Company undertakes such a conversion, it will be
required to recapture and pay taxes on the approximately $17.8 million in bad
debt deductions previously taken. Because of the significant cash flow impact
of completing such a conversion (i.e., the required payment to the Internal
Revenue Service), and the pending legislation in Congress that could
significantly reduce such payment, the Company anticipates delaying the charter
conversion until such time as the execution of its business plan would
otherwise be inhibited. The Company is currently unable to establish a
definitive time frame for this event, because various causal factors, such as
commercial loan growth, asset mix, and certain other activities, are not solely
within the Company's control. Should the factors upon which the Board of
Directors based its intention to undertake such a charter conversion change in
such a manner that the expected benefits are no longer desirable, achievable or
necessary to accomplish the Company's business plan, the decision to complete
the charter conversion may be reconsidered.
Fifteen
10
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits, borrowings, repayments,
prepayments and maturities of outstanding loans and mortgage-related
securities, sales of assets available for sale, maturities of investment
securities and other short-term investments, and funds provided from
operations. While scheduled loan and mortgage-related securities repayments
and maturing investment securities and short-term investments are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by the movement of interest rates in general, economic conditions
and competition. The Company manages the pricing of its deposits to maintain a
deposit balance deemed appropriate and desirable. Although the Company's
deposits represent approximately 51.1% of its total liabilities at March 31,
1996, the Company has also utilized other borrowing sources, namely FHLB
advances and reverse repurchase agreements, which in the aggregate represent
approximately 47.9% of total liabilities at March 31, 1996. In addition to its
ability to obtain advances from the FHLB under several different credit
programs, the Company has established a line of credit with the FHLB, in an
amount not to exceed 10% of total assets and subject to certain conditions,
including the holding of a pre-determined amount of FHLB stock as collateral.
This line of credit is used from time to time for liquidity purposes. As an
additional source of funds, the Company has access to the Federal Reserve Bank
discount window.
Liquidity management is both a daily and long-term function. Excess
liquidity is generally invested in short-term investments such as FHLB
overnight deposits. On a longer-term basis, the Company maintains a strategy
of investing in various mortgage-related securities and lending products.
During the year ended March 31, 1996, the Bank used its sources of funds to
primarily fund loan commitments and maintain a substantial portfolio of
mortgage-related securities, and to meet its ongoing commitments to pay
maturing savings certificates and savings withdrawals. At March 31, 1996, the
total approved loan commitments outstanding amounted to $41.5 million. At the
same date, commitments under unused lines and letters of credit amounted to
$77.7 million and the unadvanced portion of construction loans approximated
$61.4 million. Certificates of deposit scheduled to mature in one year or less
at March 31, 1996 totaled $318.1 million. Management of the Company believes
that the Company has adequate resources, including principal prepayments and
repayments of loans and mortgage-related securities, to fund all of its
commitments to the extent required. In addition, although the Company has
extended commitments to fund loans or lines and letters of credit,
historically, the Company has not been required to fund all of its outstanding
commitments. Management believes that a significant portion of maturing
deposits will remain with the Company.
The Company is required by the OTS to maintain average daily balances of
liquid assets and short-term liquid assets (as defined) in amounts equal to 5%
and 1%, respectively, of net withdrawable deposits and borrowings payable in
one year or less to assure its ability to meet demand for withdrawals and
repayment of short-term borrowings. The liquidity requirements may vary from
time to time at the direction of the OTS depending upon economic conditions and
deposit flows. The Company generally maintains a liquidity ratio of between 5%
and 7% of its net withdrawable deposits and borrowings payable in one year or
less. The Company's average monthly liquidity ratio and short-term liquid
assets for March 1996 was 5.6% and 2.9%, respectively.
CAPITAL RESOURCES. The OTS requires that the Company meet minimum regulatory
tangible, core and risk-based capital requirements. At March 31, 1996, the
Company exceeded all regulatory capital requirements. The following table sets
forth the Company's compliance with each of the regulatory capital requirements
at March 31, 1996.
Tangible Core Risk-based
Capital Capital Capital
----------- ----------- -----------
Total Regulatory Capital $ 131,881 131,881 143,547
Minimum Required Regulatory Capital 26,461 52,960 75,011
----------- ---------- ----------
Excess Regulatory Capital $ 105,420 78,921 68,536
=========== ========== ==========
Regulatory Capital as a
Percentage of Assets (1) 7.48 % 7.48 % 15.31 %
Minimum Capital Required as a
Percentage of Assets 1.50 3.00 8.00
----------- ---------- ----------
Excess Regulatory Capital as a
Percentage of Assets 5.98 % 4.48 % 7.31 %
=========== ========== ===========
(1) Tangible and core capital are computed as a percentage of adjusted total
assets of $1.8 billion. Risk-based capital is computed as a percentage of
total risk-weighted assets of $938 million.
Bancorp, as a separately incorporated holding company, does not have any
significant operations other than serving as sole stockholder of the Bank. On
an unconsolidated basis, Bancorp does not have paid employees. The Bancorp's
assets primarily consist of its investment in the Bank and has no material
sources of income other than the earnings of the Bank. The only expenses
incurred by Bancorp relate to its reporting obligations under the Securities
and Exchange Act of 1934, and related expenses as a publicly traded company.
Bancorp will be directly reimbursed by the Bank for all such expenses.
Management believes that Bancorp currently has adequate liquidity available to
respond to its obligations as the Bancorp itself engages only in limited
business operations independent of the Bank and its subsidiaries and therefore,
does not require a substantial amount of liquid assets. Under applicable
federal regulations, the Bank may pay dividends within certain limits and only
after notice to the OTS. See Note 17 of the Notes to Consolidated Financial
Statements.
Sixteen
11
PROPOSED DEPOSIT INSURANCE PREMIUMS. Deposits of the Bank are currently
insured by the Savings Association Insurance Fund ("SAIF"). The Federal
Deposit Insurance Corporation ("FDIC") has established a new assessment rate
schedule with a premium range between 0 to 31 basis points for Bank Insurance
Fund ("BIF") insured institutions while retaining the existing assessment rate
of 23 to 31 basis points applicable to SAIF member institutions. In announcing
this premium reduction for BIF-insured institutions retroactive to May 1995,
the FDIC noted that the premium differential may have adverse competitive
consequences for SAIF members, such as the Bank, including lesser earnings as
compared to BIF-insured institutions and possible impaired ability to raise
funds in the capital markets.
Several alternatives to mitigate the effect of the BIF/SAIF premium disparity
have been suggested by the Administration, by members of Congress and by
industry groups. One such proposal included in the Balanced Budget Act of 1995
is that all SAIF-insured institutions pay a one-time charge of approximately
$0.85 for every $100 of assessable deposits as of March 31, 1996. If such
option were to be effected, the Company would recognize a one-time charge of
approximately $0.71 per share, after taxes. Such a special assessment for
SAIF-insured institutions will facilitate the recapitalization of the SAIF and
permit a reduction in future SAIF premiums which then will be comparable to the
recently announced assessment rates for BIF-insured institutions. However,
there can be no assurance that any of these alternatives to mitigate the
pending effect of the BIF/SAIF premium disparity will be enacted as proposed.
The Balanced Budget Act of 1995 was vetoed by the President for reasons
unrelated to the recapitalization of the SAIF.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements of the Company and related notes
presented herein have been prepared in accordance with generally accepted
accounting principles ("GAAP") which require the measurement of financial
position and operating results principally in terms of historical dollars,
without considering changes in the relative purchasing power of money over time
due to inflation.
Unlike most industrial companies, substantially all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services, since such prices are affected by inflation to a
larger extent than interest rates. In the current interest rate environment,
liquidity and the maturity structure of the Bancorp's assets and liabilities
are critical to the maintenance of acceptable performance levels.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
122, "Accounting for Mortgage Servicing Rights." This standard requires an
entity to recognize a separate asset for the right to service mortgage loans
for others regardless of how such servicing rights were acquired. Additionally,
an entity such as the Company is required to assess the fair value of these
assets at each reporting date to determine impairment. The Company adopted this
standard during the current fiscal year and included $760,000 in other income
from mortgage banking operations as a result of the adoption of SFAS 122.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes accounting and reporting standards for
stock-based employee compensation plans. In general, this statement requires a
fair value based method of accounting for stock-based awards or similar equity
instruments and encourages all entities to adopt this method of accounting for
all employee stock compensation plans. In the event that fair value accounting
is not adopted, SFAS 123 requires proforma disclosure of net income and
earnings per share as if fair value accounting had been adopted. The Company
does not anticipate adopting the fair value accounting option of SFAS 123, and
will instead provide the required proforma disclosures, as permitted starting
in fiscal 1997.
Seventeen
12
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for the
years ended March 31, 1996 and 1995 (dollars in thousands, except per share
data):
Quarters ended
--------------------------------------------------------------------------------------------
Year ended March 31, 1996 Year ended March 31, 1995
--------------------------------------------- ------------------------------------------
Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 Mar 31
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest income $ 28,984 $ 29,898 $ 29,706 $ 31,833 $ 16,810 $ 20,599 $ 24,863 $ 27,961
Interest expense 18,456 19,288 19,099 19,816 9,681 11,613 14,971 17,219
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income 10,528 10,610 10,607 12,017 7,129 8,986 9,892 10,742
Provision for
loan losses 1,000 1,000 1,000 1,000 500 500 1,100 1,300
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income
after provision for
loan losses 9,528 9,610 9,607 11,017 6,629 8,486 8,792 9,442
Other income (expense) 1,164 1,914 1,755 2,436 843 1,345 1,427 (203)
Operating expenses 6,423 6,490 6,657 9,569 5,449 5,569 6,151 5,924
- -----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,269 5,034 4,705 3,884 2,023 4,262 4,068 3,315
Income taxes 1,548 1,964 1,641 1,119 719 1,565 1,383 1,307
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,721 $ 3,070 $ 3,064 $ 2,765 $ 1,304 $ 2,697 $ 2,685 $ 2,008
====================================================================================================================================
Earnings per common and
common equivalent share $ 0.42 $ 0.46 $ 0.48 $ 0.45 N/A $ 0.26 $ 0.39 $ 0.32
====================================================================================================================================
Earnings per common share -
assuming full dilution $ 0.42 $ 0.46 $ 0.48 $ 0.46 N/A $ 0.26 $ 0.39 $ 0.32
====================================================================================================================================
Earnings per share are not calculated until August 11, 1994, the date of the
Company's IPO.
For the fourth fiscal quarter ended March 31, 1996, interest income and net
interest income after provision for loan losses was increased by $3.9 million
quarter of fiscal 1995. The increase is primarily attributable to the growth
in average earning assets of approximately $166 million, coupled with an
improvement in the net interest spread from the fourth fiscal quarter of fiscal
1995.
Non-interest expenses increased by $3.6 million to $9.6 million for the quarter
ended March 31, 1996. Higher operating costs were incurred primarily as a
result of the Suburban and Hart acquisitions, specifically compensation and
occupancy expenses. Goodwill amortization also increased, due to the
aforementioned acquisitions as well as the purchase of a deposit portfolio in
fiscal 1996.
Eighteen
13
MLF BANCORP, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MLF Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial condition
of MLF Bancorp, Inc. and subsidiaries (the "Company") as of March 31, 1996 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity and cash flow for each of the years in the three-year
period ended March 31, 1996. 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. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MLF Bancorp, Inc.
and subsidiaries as of March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1996, in conformity with general accepted accounting
principles.
As described in notes 1 and 11 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, effective April 1, 1992.
/s/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
April 24, 1996
[KPMG PEAT MARWICK LLP LOGO]
Nineteen
14
MLF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
March 31, 1996 and 1995 March 31,
(Dollars in Thousands, except share and per share data) -------------------------
Assets 1996 1995
-------------------------
Cash (including interest-bearing deposits of $11,283 and $3,248
at March 31, 1996 and 1995, respectively) $ 23,323 $ 20,007
Assets available for sale:
Mortgage-related, debt and equity securities 469,321 411,065
Loans 95,033 25,267
Investments (market value $24,946 and $45,320
at March 31, 1996 and 1995, respectively) 24,942 46,163
Mortgage-related securities (market value $401,231 and $453,455
at March 31, 1996 and 1995, respectively) 404,150 469,220
Loans receivable, net of allowance for loan loss
($13,124 and $9,111 at March 31, 1996 and 1995, respectively) 691,791 550,013
Accrued income receivable 12,085 10,684
Other real estate owned, net 2,043 1,010
Premises and equipment, at cost less accumulated depreciation
($13,774 and $11,704 at March 31, 1996 and 1995, respectively) 14,343 13,671
Mortgage servicing rights 21,865 12,823
Goodwill and other intangible assets 3,499 670
Other assets 3,417 2,859
----------- ------------
Total assets $ 1,765,812 $ 1,563,452
=========== ============
Liabilities and Equity
Deposits $ 830,997 $ 688,678
Advances from Federal Home Loan Bank 376,013 319,928
Securities sold under agreements to repurchase 402,212 390,613
Advance payments by borrowers for taxes and insurance 3,533 3,987
Accrued interest payable 5,371 3,832
Other liabilities 7,349 15,114
----------- ------------
Total liabilities $ 1,625,475 $ 1,422,152
Commitments and contingencies
Stockholders' Equity:
Preferred stock, no par value, authorized 5,000,000 shares;
no shares issued and outstanding - -
Common stock, $0.01 par value, authorized 30,000,000 shares;
7,273,800 shares issued 73 73
Additional paid-in capital 95,977 95,541
Common stock acquired by stock benefit plans (8,888) (10,632)
Treasury stock, at cost; 1,026,900 and 363,000 shares
at March 31, 1996 and 1995, respectively (20,531) (5,648)
Unrealized gain (loss) on mortgage-related, debt and equity
securities available for sale 120 (3,200)
Retained earnings 73,586 65,166
----------- ------------
Total stockholders' equity 140,337 141,300
----------- ------------
Total liabilities and stockholders' equity $ 1,765,812 $ 1,563,452
=========== ============
See accompanying notes to consolidated financial statements.
Twenty
15
MLF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended March 31, 1996, 1995, and 1994
(Dollars in Thousands, except share and per share data) Year ended March 31,
---------------------------------
1996 1995 1994
----------------------------------
Interest income:
Loans $ 53,678 $ 33,512 $ 22,298
Mortgage-related securities 31,585 29,340 24,206
Investments 2,136 4,180 2,285
Assets available for sale 32,518 22,409 12,730
Interest-bearing deposits 504 792 380
--------- -------- ---------
Total interest income 120,421 90,233 61,899
--------- -------- ---------
Interest expense:
Deposits 31,785 25,626 23,616
FHLB advances 22,775 18,078 14,990
Other borrowings 22,099 9,780 473
--------- -------- ---------
Total interest expense 76,659 53,484 39,079
--------- -------- ---------
Net interest income 43,762 36,749 22,820
Provision for loan losses 4,000 3,400 1,113
--------- -------- ---------
Net interest income after provision
for loan losses 39,762 33,349 21,707
--------- -------- ---------
Other income:
Retail fees and charges 1,551 1,615 1,339
Mortgage banking operations 4,420 2,151 1,406
Net gain (loss) on sale of:
Mortgage-related, debt and equity securities available
for sale 255 (2,059) 2,057
Other real estate owned (515) (1) 329
Real estate held for development
or resale 614 612 2,305
Rental income 583 676 691
Other 361 418 489
--------- -------- ---------
Total other income 7,269 3,412 8,616
--------- -------- ---------
MLF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations, Continued
Year ended March 31,
(Dollars in Thousands, except share and per share data) ---------------------------------------
1996 1995 1994
---------------------------------------
Operating expenses:
General and administrative:
Compensation and employee
benefits $ 13,892 $ 12,059 $ 10,526
Advertising 1,939 850 889
Data processing 1,538 1,337 1,290
Federal insurance premiums 1,549 1,749 1,712
Amortization of goodwill and other intangible assets 1,412 368 368
Net occupancy costs 4,211 3,218 2,858
Professional fees 693 796 1,072
Other 3,905 2,716 2,285
----------- ---------- --------
Total operating expenses 29,139 23,093 21,000
----------- ---------- --------
Income before income taxes 17,892 13,668 9,323
Income taxes 6,272 4,974 7,461
----------- ---------- --------
Net income $ 11,620 $ 8,694 $ 1,862
=========== =========== ========
Earnings per common and common equivalent share $ 1.83 $ 0.97 (a) N/A
=========== =========== ========
Earnings per common and common equivalent share
assuming full dilution $ 1.82 $ 0.97 (a) N/A
=========== =========== ========
Weighted average number of shares outstanding - primary 6,347,679 6,728,481 N/A
=========== =========== ========
Weighted average number of shares outstanding - fully diluted 6,393,297 6,728,481 N/A
=========== =========== ========
(a) Earnings per share is calculated since August 11, 1994, the date of the
initial public offering
See accompanying notes to consolidated financial statements.
Twenty-one
16
MLF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Common
stock
Additional acquired by
Common paid-in stock benefit Treasury
stock capital plans stock
------------------------------------------------------------------
(Dollars in Thousands)
Balance at March 31, 1993 $ - - - -
Net unrealized loss on mortgage-
related, debt and equity securities
available for sale, net of taxes - - - -
Net income - - - -
-------- ------ ------- -------
Balance at March 31, 1994 $ - - - -
Common stock issued 73 95,499 - -
Common stock acquired by stock
benefit plans - - (11,446) -
ESOP stock committed to be released - - 441 -
Excess of fair value above cost of
stock benefit plans - 42 - -
RRP stock amortization - - 373 -
Net unrealized loss on mortgage-
related, debt and equity securities
available for sale, net of taxes - - - -
Purchase of treasury stock - - - (5,648)
Net income - - - -
-------- ------ ------- -------
Balance at March 31, 1995 $ 73 95,541 (10,632) (5,648)
ESOP stock committed to be released - - 915 -
Excess of fair value above cost of
stock benefit plans - 436 - -
RRP stock amortization - - 829 -
Net unrealized gain on mortgage-
related, debt and equity securities
available for sale, net of taxes - - - -
Exercise of stock options - - - 152
Purchase of treasury stock - - - (15,035)
Dividends paid - - - -
Net income - - - -
-------- ------ ------- -------
Balance at March 31, 1996 $ 73 95,977 (8,888) (20,531)
======== ====== ======= =======
Unrealized gain (loss)
on mortgage-
related, debt and
equity securities Total
available for sale Retained stockholders'
(net of taxes) earnings equity
---------------------------------------------------------
Balance at March 31, 1993 2,446 54,610 57,056
Net unrealized loss on mortgage-
related, debt and equity securities
available for sale, net of taxes (4,940) - (4,940)
Net income - 1,862 1,862
------ ------ -------
Balance at March 31, 1994 (2,494) 56,472 53,978
Common stock issued - - 95,572
Common stock acquired by stock
benefit plans - - (11,446)
ESOP stock committed to be released - - 441
Excess of fair value above cost of
stock benefit plans - - 42
RRP stock amortization - - 373
Net unrealized loss on mortgage-
related, debt and equity securities
available for sale, net of taxes (706) - (706)
Purchase of treasury stock - - (5,648)
Net income - 8,694 8,694
------ ------ -------
Balance at March 31, 1995 (3,200) 65,166 141,300
ESOP stock committed to be released - - 915
Excess of fair value above cost of
stock benefit plans - - 436
RRP stock amortization - - 829
Net unrealized gain on mortgage-
related, debt and equity securities
available for sale, net of taxes 3,320 - 3,320
Exercise of stock options - (6) 146
Purchase of treasury stock - - (15,035)
Dividends paid - (3,194) (3,194)
Net income - 11,620 11,620
------ ------ -------
Balance at March 31, 1996 120 73,586 140,337
====== ====== =======
See accompanying notes to consolidated financial statements.
Twenty-two
17
MLF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended March 31,
(Dollars in Thousands) ---------------------------------------------
1996 1995 1994
---------------------------------------------
Net cash flows from operating activities:
Net income $ 11,620 $ 8,694 $ 1,862
---------- -------- ---------
Adjustments to reconcile net
income to net cash provided
by operating activities:
Amortization of:
Goodwill and other intangible assets $ 1,412 $ 368 $ 368
Deferred loan
origination fees (2,345) (1,308) (775)
Premiums and discounts on
loans, mortgage-related
securities, investments,
and assets available for sale 1,063 3,199 6,378
Mortgage servicing rights 3,703 1,535 2,069
Common stock acquired by
stock benefit plans 2,326 856 -
Provision for loan losses 4,000 3,400 1,113
Net (gain) loss on sales of:
Mortgage-related, debt and equity
securities available for sale (255) 2,059 (2,057)
Loans available for sale (2,129) (87) (1,346)
Real estate held for development
or resale and other real estate owned (99) (611) (2,634)
Depreciation and amortization of
premises and equipment 2,156 1,616 1,335
Increase/decrease in:
Loans available for sale (67,637) 6,183 (1,502)
Accrued income receivable (1,401) (4,636) 141
Deferred income taxes (4,554) (1,222) 3,396
Other assets (1,717) 913 618
Accrued interest payable 1,539 2,345 (103)
Other liabilities (5,467) 8,967 3,737
---------- -------- ---------
Total adjustments (69,405) 23,577 10,738
---------- -------- ---------
Net cash (used) provided by operating activities (57,785) 32,271 12,600
---------- -------- ---------
MLF BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Year ended March 31,
(Dollars in Thousands) ------------------------------------------
1996 1995 1994
------------------------------------------
Cash flows from investing activities:
Net (increase) decrease in loans receivable $ (144,510) $ (289,673) $ 18,565
Proceeds from sales of:
FHLB stock 12,907 16,382 6,873
Mortgage-related, debt and equity securities
available for sale 100,801 76,541 157,222
Proceeds from maturities, calls or repayments of:
Mortgage-related securities 56,735 62,708 274,310
Mortgage-related, debt and equity securities
available for sale 87,333 53,118 69,236
Investments 30,000 - -
Purchases and originations of:
Investments (21,681) (48,887) (5,817)
Mortgage-related securities (49,834) (120,268) (290,325)
Mortgage-related, debt and equity securities
available for sale (183,458) (305,517) (265,608)
Mortgage servicing rights (12,745) (12,316) (772)
Dispositions of real estate held for
development or resale, net 1,773 3,402 6,034
Net (increase) decrease in other real estate owned (801) 255 708
Proceeds from sale of other real estate owned 330 2,338 3,092
Excess of liabilities assumed over assets acquired (3,148) - -
Purchases of premises and equipment (2,828) (2,377) (1,253)
-------------- ---------- ---------
Net cash used in investing activities (129,126) (564,294) (27,735)
-------------- ---------- ---------
(Continued)
Twenty-three
18
Consolidated Statements of Cash Flows, Continued
Year ended March 31,
(Dollars in Thousands) ---------------------------------------
1996 1995 1994
---------------------------------------
Cash flows from financing activities:
Net increase in deposits $ 112,301 $ 9,153 $ 60,832
Proceeds from deposits purchased 28,925 - -
Dividends paid (3,194) - -
Proceeds from securities sold under
agreements to repurchase 2,445,548 1,791,246 98,854
Payments of securities sold under
agreements to repurchase (2,433,949) (1,400,795) (118,135)
Proceeds from FHLB advances 4,165,625 1,040,855 248,983
Payments of FHLB advances and other (4,109,540) (977,560) (277,788)
Net (decrease) increase in advance payments
by borrowers for taxes and insurance (454) 2,453 (1,376)
Net proceeds from issuance of common stock - 95,572 -
Common stock acquired by stock benefit plans, net - (11,446) -
Purchase of treasury stock (15,035) (5,648) -
-------------- ---------- ---------
Net cash provided by financing activities 190,227 543,830 11,370
-------------- ---------- ---------
Net increase (decrease) in cash and cash equivalents $ 3,316 $ 11,807 $ (3,765)
Cash and cash equivalents:
Beginning of period 20,007 8,200 11,965
----------- -------- ----------
End of period $ 23,323 $ 20,007 $ 8,200
=========== ======== ==========
Supplemental disclosure:
Cash payments for interest $ 75,120 $ 51,139 $ 39,176
Cash payments (refunds) for income taxes 14,498 (700) 773
Net cash paid for companies acquired 3,200 - -
Transfer of mortgage-related securities
to mortgage-related, debt and equity
securities available for sale 56,828 - -
Transfer of investments to mortgage-
related, debt and equity securities
available for sale - - 102
Transfer of loans receivable into other real estate owned 1,077 529 3,142
Net unrealized gain (loss) on
mortgage-related, debt and equity
securities available for sale 5,576 (1,055) (8,533)
Tax effect on unrealized gain (loss) on
mortgage-related, debt and equity
securities available for sale 2,256 (349) (3,593)
See accompanying notes to consolidated financial statements.
Twenty-four
19
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On January 19, 1994, the Board of Directors of Main Line Bank (the
"Bank") adopted a Plan of Conversion to convert from a federally
chartered mutual savings bank to a federally chartered stock savings
bank with the concurrent formation of MLF Bancorp, Inc. (the
"Bancorp"), a unitary savings and loan holding company (the
"Conversion"). The Conversion was completed on August 11, 1994
whereby Bancorp issued 7,273,800 shares of its common stock in a
public offering to the Bank's eligible depositors and borrowers and
the MLF Bancorp Employee Stock Ownership Plan (the "ESOP") and
resulted in proceeds to Bancorp of $95,572,000, net of $2,624,000 of
costs associated with the Conversion.
BUSINESS
Bancorp's principal subsidiary, Main Line Bank, is a
federally-chartered stock savings bank conducting business from its
branch bank system located in Chester, Delaware, and Montgomery
Counties, Pennsylvania. The Bank is subject to competition from other
financial institutions and other companies which provide financial
services. The Bank and Bancorp are subject to the regulations of
certain federal agencies and undergo periodic examinations by those
regulatory authorities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bancorp,
the Bank and the Bank's wholly-owned subsidiaries (collectively
referred to as the "Company"). All significant intercompany
transactions have been eliminated in consolidation. Additionally,
certain reclassifications have been made in order to conform with the
current year's presentation. The accompanying consolidated financial
statements have been prepared on an accrual basis.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the statement of financial condition
and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance
for loan losses, the valuation of other real estate owned, and the
valuation of deferred tax assets as well as the effect of prepayments
on mortgage servicing rights and premiums and discounts associated
with investments and mortgage-related securities. Management believes
that the allowance for loan losses, and the valuations of other real
estate owned and deferred tax assets are adequate, and that the effect
of prepayments on mortgage servicing rights and premiums and discounts
associated with investments and mortgage-related securities has been
adequately evaluated. Various regulatory agencies, as an integral
part of their examination process, periodically review the Company's
allowance for loan losses, and valuation of other real estate owned.
CASH
For purposes of the statement of cash flows, cash and cash equivalents
include cash and interest-bearing deposits. The Company maintains
cash deposits in other depository institutions which occasionally
exceed the amount of deposit insurance available. Management
periodically assesses the financial condition of these institutions.
The Company is required to maintain certain daily reserve balances in
accordance with Federal Reserve Board requirements. Aggregate
reserves (in the form of vault cash) were maintained to satisfy
federal regulatory requirements at March 31, 1996.
ASSETS AVAILABLE FOR SALE
Included in assets available for sale are any investments, loans,
debt, and/or mortgage-related securities which the Company believes
may be involved in interest rate risk, liquidity, or other
asset/liability management decisions which might reasonably result in
such assets not being held until maturity.
Investments, (including marketable equity securities) debt and/or
mortgage-related securities available for sale are carried at fair
value with net unrealized gains and losses included, net of income
taxes, in stockholders' equity.
During the years ended March 31, 1996 and 1995, the Company originated
certain short-term fixed and adjustable rate single family residential
mortgages specifically for inclusion in its portfolio. The Company
periodically reevaluates its policy and revises it as deemed
necessary.
Loans available for sale are accounted for at the lower of cost or
market which is determined on an aggregate basis, with depreciation,
if any, recorded in the statement of operations. Realized gains and
losses on assets available for sale are computed using the specific
identification method.
INVESTMENTS AND MORTGAGE-RELATED SECURITIES
Investments and mortgage-related securities, including equity
securities which are not readily marketable, are stated at cost,
adjusted for the amortization of premiums and the accretion of
discounts using a method which approximates level yield, because
management has the ability and the intent to hold such securities
until maturity. The Company is required to maintain stock in the
Federal Home Loan Bank of Pittsburgh ("FHLB") in an amount of 5% of
total borrowings from the FHLB. Such stock is carried by the Company
at cost.
Twenty-five
20
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
LOANS RECEIVABLE
Loans held to maturity are stated at the amount of the unpaid
principal balance net of loan origination fees and certain direct
origination costs. These fees and costs are deferred and amortized
over the contractual life of the related loans using a level yield
method over the period to maturity.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that management
considers adequate to provide for potential losses based upon an
evaluation of known and inherent risks in the loan portfolio.
Management believes that the allowance for loan losses is adequate.
Management's periodic evaluation is based upon analysis of the
portfolio, past loss experience, current economic conditions, and
other relevant factors. While management uses the best information
available to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially
from the assumptions used in making the evaluation. In addition,
various regulatory agencies as an integral part of their examination
process, periodically review the allowance for loan losses. Such
agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgments of information
which is available to them at the time of their examination.
ACCRUED INTEREST
Interest on loans is credited to income as it is earned. Generally,
interest income is not accrued for loans delinquent 90 days or
greater. Payments received on nonaccrual and impaired loans are
applied to the outstanding principal balance. The Company does not
recognize interest on impaired loans.
OTHER REAL ESTATE OWNED, NET
Real estate acquired through foreclosure is classified as other real
estate owned. Other real estate owned is carried at the lower of cost
or fair value, less estimated selling costs.
Fair value is generally determined through the use of independent
appraisals. In certain cases, internal cash flow analyses are used as
the basis for fair value, if such amounts are lower than the appraised
values.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost. Depreciation and
amortization are generally computed on the straight-line method. The
estimated useful lives used to compute depreciation and amortization
are 40 to 50 years for buildings and 3 to 10 years for furniture and
equipment. The cost of maintenance and repairs is charged to expense
as incurred. Significant renewals and betterments are capitalized.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights represent the carrying value of the rights
to service mortgage loans for others. The mortgage servicing rights
are amortized against loan servicing fee income on an accelerated
basis in proportion to, and over the period of, estimated net future
loan servicing fee income, which periods initially do not exceed seven
years. Service fee income is recognized when the related loan
payments are collected. Management on a quarterly basis evaluates and
makes necessary adjustments to the remaining balances of mortgage
servicing rights, if the fair value of the disaggregated servicing
rights indicate that the carrying value is not considered recoverable.
Assumptions utilized in the quarterly evaluations are based on
current prepayment and investor rates of return provided by an
independent investment advisor.
Effective April 1, 1995, the Company adopted SFAS No. 122 "Accounting
for Mortgage Servicing Rights." This standard prospectively requires
the Bank, which services mortgage loans for others in return for a
servicing fee, to recognize these servicing rights as assets,
regardless of how such assets were acquired. Additionally, the
Company is required to assess the fair value of these assets at each
reporting date to determine impairment. As a result of the adoption
of SFAS 122, the Company included $760,000 in income from mortgage
banking operations for the year ended March 31, 1996.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill, which represents the excess cost over fair value of assets
acquired and liabilities assumed, is being amortized to expense using
the straight-line method over periods not exceeding 15 years. Other
intangibles consisted of core deposit premium and are amortized over
the weighted average rate of maturity not to exceed 2 years.
INCOME TAXES
The Company and its subsidiaries file a consolidated federal income
tax return. The Company has adopted SFAS 109 "Accounting for Income
Taxes" effective April 1, 1992. Deferred tax assets and liabilities
are recognized for the future consequences attributable to differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, as well as operating
loss and tax credit carryforwards. Deferred tax assets are recognized
for future deductible temporary differences and tax loss and credit
carryforwards if their realization is "more likely than not."
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
Twenty-six
21
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995, and 1994
(2) INVESTMENTS
Investments at March 31, 1996 and 1995 consisted of the following:
(Dollars in Thousands)
March 31, 1996
-------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
value gains losses value
-------------------------------------------------
Equity securities:
Federal Home Loan Bank stock $ 18,802 - - $ 18,802
Other 140 - - 140
Debt securities:
U.S. government agency notes 6,000 $ 4 - 6,004
--------- --- ---- --------
$ 24,942 $ 4 - $ 24,946
========= === ==== ========
March 31, 1995
-------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
value gains losses value
-------------------------------------------------
Equity securities:
Federal Home Loan Bank stock $ 15,997 - - 15,997
Other 166 - - 166
Debt securities:
U.S. government agency notes 30,000 - $ (843) 29,157
--------- --- ------ --------
$ 46,163 - $ (843) $ 45,320
========= === ====== ========
Proceeds from the sales of investment securities during the years
ended March 31, 1996, 1995 and 1994 were $12,907,000, $16,382,000 and
$6,873,000, respectively. Such proceeds resulted from the mandatory
redemption of FHLB stock. No gains or losses were realized on those
sales.
As of March 31, 1996, the debt security totalling $2,000,000 has a
scheduled maturity date within one year, and the debt security
totalling $4,000,000 has a scheduled maturity date greater than 5
years but within 10 years.
The FHLB maintains a blanket lien on investment securities as
collateral for borrowings from the FHLB.
Accrued interest receivable on investment securities was $240,000 and
$828,000 at March 31, 1996 and 1995, respectively.
(3) MORTGAGE-RELATED SECURITIES
Mortgage-related securities at March 31, 1996 and 1995 consisted of
the following:
(Dollars in Thousands)
March 31, 1996
----------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
value gains losses value
----------------------------------------------------------
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 149,990 $ 762 $ 1,950 $ 148,802
Federal National Mortgage
Association (FNMA) 150,286 1,501 1,670 150,117
Government National Mortgage
Association (GNMA) 8,397 189 - 8,586
Privately issued 1,785 - 50 1,735
Collateralized mortgage obligations 93,692 - 1,701 91,991
------------ ------- ------- ---------
$ 404,150 $ 2,452 $ 5,371 $ 401,231
============ ======= ======= =========
March 31, 1995
----------------------------------------------------------
Gross Gross
Carrying unrealized unrealized Market
value gains losses value
----------------------------------------------------------
Mortgage-backed securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 194,970 $ 9 $ 6,837 $ 188,142
Federal National Mortgage
Association (FNMA) 190,085 - 5,865 184,220
Government National Mortgage
Association (GNMA) 27,014 40 103 26,951
Privately issued 2,043 - 91 1,952
Collateralized mortgage obligations 55,108 - 2,918 52,190
------------ ---- -------- ---------
$ 469,220 $ 49 $ 15,814 $ 453,455
============ ==== ======== =========
There were no sales of mortgage-related securities during the years
ended March 31, 1996, 1995 and 1994. In December 1995, the Company
transferred $56.8 million of mortgage-related securities to
mortgage-related, debt and equity securities available for sale. This
transfer was in accordance with a special reassessment provision
contained within a Special Report issued by the Financial Accounting
Standards Board ("FASB").
Certain mortgage-related securities are pledged to secure financings
as described in notes 8 and 9. Privately issued mortgage-backed
securities are rated AA or better by bond rating agencies. The loans
which collateralize the mortgage-related securities are geographically
disbursed throughout the United States.
Collateralized mortgage obligations totaling $78,384,000 and
$55,108,000 were pledged as additional collateral for municipal jumbo
certificate deposits at March 31, 1996 and 1995, respectively.
Accrued interest receivable on mortgage-related securities was
$2,916,000 and $3,464,000 at March 31, 1996 and 1995, respectively.
Twenty-seven
22
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995, and 1994
(4) ASSETS AVAILABLE FOR SALE
Assets available for sale at March 31, 1996 and 1995 consisted of the
following:
(Dollars in Thousands)
March 31, 1996
-------------------------------------------------------------
Gross Gross Carrying
unrealized unrealized (fair)
Cost gains losses value
-------------------------------------------------------------
Mortgage-related, debt and equity securities:
Mortgage-related securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 234,905 $ 1,768 $ 1,873 $ 234,800
Federal National Mortgage
Association (FNMA) 114,260 1,683 425 115,518
Government National Mortgage
Association (GNMA) 41,236 4 361 40,879
Privately-issued 39,376 387 405 39,358
Debt securities:
Asset Management Funds for
Financial Institutions, Inc. 12,242 - 416 11,826
U.S. Government agency debentures 18,084 - 322 17,762
Equity securities:
FHLMC preferred stock 5,000 60 - 5,060
FNMA stock 1,750 13 - 1,763
Other equity securities 2,256 99 - 2,355
--------------- ------- ------- ---------
$ 469,109 $ 4,014 $ 3,802 $ 469,321
=============== ======= ======= =========
March 31, 1995
-------------------------------------------------------------
Gross Gross Carrying
unrealized unrealized (fair)
Cost gains losses value
-------------------------------------------------------------
Mortgage-related, debt and equity securities:
Mortgage-related securities:
Federal Home Loan Mortgage
Corporation (FHLMC) $ 205,354 $ 651 $ 2,618 $ 203,387
Federal National Mortgage
Association (FNMA) 141,627 338 1,591 140,374
Government National Mortgage
Association (GNMA) 9,075 - 274 8,801
Privately-issued 22,071 - 200 21,871
Debt securities:
Asset Management Funds for
Financial Institutions, Inc. 11,496 - 545 10,951
U.S. Government agency debentures 21,136 7 857 20,286
Equity securities:
FHLMC preferred stock 5,000 - 350 4,650
FNMA stock - - - -
Other equity securities 671 74 - 745
--------------- ------- ------- ---------
$ 416,430 $ 1,070 $ 6,435 $ 411,065
=============== ======= ======= =========
March 31, 1996
-----------------------------------------------------
Gross Gross
Carrying unrealized unrealized Fair
value gains losses value
-----------------------------------------------------
Loans receivable:
Residential mortgage loans $ 84,501 - - $ 84,501
Consumer-education loans 10,532 - - 10,532
-------- ---- ---- --------
$ 95,033 - - $ 95,033
======== ==== ==== ========
March 31, 1995
-----------------------------------------------------
Gross Gross
Carrying unrealized unrealized Fair
value gains losses value
-----------------------------------------------------
Loans receivable:
Residential mortgage loans $ 17,624 - - $ 17,624
Consumer-education loans 7,643 - - 7,643
-------- --- --- --------
$ 25,267 - - $ 25,267
======== === === ========
Proceeds from sales of assets available for sale during the year ended
March 31, 1996 were $719,430,000. Gross gains of $6,291,000 and gross
losses of $4,811,000 were realized on those sales.
Proceeds from sales of assets available for sale during the year ended
March 31, 1995 were $284,773,000. Gross gains of $5,098,000 and gross
losses of $7,070,000 were realized on those sales.
Proceeds from sales of assets available for sale during the year ended
March 31, 1994 were $584,596,000. Gross gains of $12,526,000 and
gross losses of $9,123,000 were realized on those sales.
As of March 31, 1996, the U.S. government agency debt securities have
scheduled maturities of $13,000,000 due after one year but within five
years and $5,084,000 due after five years but within ten years.
Accrued interest receivable on assets available for sale was
$4,290,000 and $3,275,000 at March 31, 1996 and 1995, respectively.
Twenty-eight
23
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(5) LOANS RECEIVABLE
Loans receivable at March 31, 1996 and 1995 consisted of the
following:
(Dollars in Thousands)
March 31,
--------------------
1996 1995
--------------------
Real estate loans:
One- to four-family $ 344,713 $ 326,029
Construction and land:
Residential 110,693 59,112
Commercial 14,625 15,891
Commercial real estate 109,135 69,779
Multi-family 11,348 10,812
--------- ---------
Total real estate loans 590,514 481,623
--------- ---------
Other loans:
Consumer:
Home equity and equity lines of credit 92,139 76,393
Unsecured lines of credit 3,091 3,527
Automobile 5,926 7,710
Other 9,098 5,734
Commercial 69,647 33,328
--------- ---------
Total other loans 179,901 126,692
--------- ---------
770,415 608,315
Loans in process (construction loans) (61,389) (45,613)
Deferred loan fees (4,111) (3,578)
Allowance for loan losses (13,124) (9,111)
--------- ---------
$ 691,791 $ 550,013
========= =========
Included in loans receivable are loans past due 90 days or more in the
amounts of $8,402,000, $6,762,000 and $5,339,000 at March 31, 1996,
1995 and 1994, respectively. Interest income that would have been
recognized on these nonaccrual loans had they been current in
accordance with their original terms is $1,081,000, $642,000 and
$429,000, respectively. Interest income that was recognized on these
nonaccrual loans is $96,000, $227,000 and $77,000, respectively.
The Company is principally a local lender and, therefore, has a
significant concentration of loans to borrowers who reside in and/or
which are collateralized by real estate located in the suburban
Philadelphia area. In addition, the Company has a concentration of
residential and commercial construction real estate loans to five
local real estate developers totaling approximately $12,500,000 in
additional commitments outstanding and approximately $34,272,000 in
outstanding balances at March 31, 1996.
Activity in the allowance for loan losses for the years ended March
31, 1996, 1995 and 1994 consisted of the following:
(Dollars in Thousands)
March 31,
-------------------------
1996 1995 1994
--------------------------------------------------------------
Balance, beginning of year $ 9,111 $ 7,337 $ 7,488
Provision for loan losses 4,000 3,400 1,113
Charge-offs (1,188) (1,761) (1,318)
Recoveries 181 135 54
Allowance acquired from Suburban 1,020 - -
--------------------------------------------------------------
Balance, end of year $ 13,124 $ 9,111 $ 7,337
==============================================================
As of March 31, 1996 and 1995, the recorded investment in the loans
for which impairment has been recognized in accordance with SFAS 114
is $452,000 and $3,704,000, respectively. The average investment in
such impaired loans was $770,000, $4,715,000, and $3,927,000 for the
years ended March 31, 1996, 1995 and 1994, respectively. There is no
allowance for loan losses pertaining to these impaired loans because
the Company provided and charged-off $346,000 and $1,425,000 of such
loans during the years ended March 31, 1996 and 1995, respectively.
The aggregate amount of loans by the Company to its directors and
executive officers, including loans to related persons and entities,
was $674,000 and $601,000 at March 31, 1996 and 1995, respectively. As
of March 31, 1996 and 1995, two directors and four of the Company's
directors and executive officers had mortgage loans outstanding
totaling $356,000 and $254,000, respectively, with preferential
interest rate terms. These loans are charged a variable rate of
interest based on the Company's cost of deposits plus 1%. At March 31,
1996, the interest rate charged on these mortgage loans was 5.25%.
These loans were originated prior to August 1989, and therefore are
not subject to the restrictions on director and officer loans imposed
by the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA").
An analysis of the activity of loans to directors and executive
officers follows:
Year ended March 31,
----------------------------
1996 1995
------------------------------------------------------------------------------------
Balance, beginning of year $ 601 $ 946
Increase due to change in qualifying officers 118 -
New loans and line of credit advances 111 114
Repayments (156) (459)
------------------------------------------------------------------------------------
Balance, end of year $ 674 $ 601
====================================================================================
Accrued interest receivable on loans receivable was $4,639,000 and
$3,117,000 at March 31, 1996 and 1995, respectively.
Twenty-nine
24
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(6) MORTGAGE SERVICING ACTIVITIES
During the years ended March 31, 1996, 1995, and 1994, the Company
purchased the servicing rights of whole loans with balances of
$858,398,000, $801,920,000, and $54,287,000, respectively. A summary
of mortgage servicing rights activity follows:
(Dollars in Thousands)
Year ended March 31,
--------------------------------
1996 1995 1994
-------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 12,823 $ 2,042 $ 3,339
Acquisitions 11,985 12,316 772
Originated servicing rights 760 - -
Amortization (3,703) (1,535) (2,069)
-------------------------------------------------------------------------------------------------------------
Balance, end of year $ 21,865 $ 12,823 $ 2,042
=============================================================================================================
The Company services real estate loans for investors which are not
included in the consolidated financial statements. The total amount
of such loans serviced for others was approximately $2,411,685,000,
$1,683,089,000, and $907,505,000, at March 31, 1996, 1995, and 1994
respectively.
The Company is required to remit to investors the monthly principal
collected and scheduled interest payments on most mortgages, including
those for which no interest payments have been received due to
delinquency. As of March 31, 1996 and 1995, approximately $249,000
and $191,000, respectively, had been advanced on delinquent serviced
loans. Substantially all of these loans were sold without recourse
and are guaranteed by FHLMC or FNMA.
(7) DEPOSITS
The major types of savings deposits by weighted interest rates,
amounts, and the percentages of such types to total savings deposits
are as follows:
(Dollars in Thousands)
March 31, 1996 March 31, 1995
------------------------------ -------------------------------------
Weighted Weighted
interest % of interest % of
rate Amount total rate Amount total
----------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 0% $ 81,767 9.84% 0% $ 53,836 7.82%
Money market deposits and
NOW accounts 2.62 155,115 18.67 2.68 122,728 17.82
Passbook and statement
savings accounts 2.22 88,011 10.59 2.42 94,649 13.74
----------------------------------------------------------------------------------------------------------------
1.85 324,893 39.10 2.06 271,213 39.38
Certificates of deposit 5.80 506,104 60.90 5.63 417,465 60.62
----------------------------------------------------------------------------------------------------------------
4.25% $830,997 100.00% 4.22% $ 688,678 100.00%
================================================================================================================
A summary of certificates by maturity is as follows:
(Dollars in Thousands)
March 31,
----------------------
1996 1995
------------------------------------------------------------------
Within one year $ 318,107 $ 225,184
One to two years 100,745 97,283
Two to three years 29,817 43,820
Three to four years 32,046 17,187
Four to five years 19,132 31,153
Thereafter 6,257 2,838
------------------------------------------------------------------
$ 506,104 $ 417,465
==================================================================
Interest expense on savings deposits is as follows (dollars in
thousands):
Year ended March 31,
-------------------------------
1996 1995 1994
----------------------------------------------------------------------------
Money market deposits and NOW accounts $ 3,548 3,165 3,783
Passbook and statement savings accounts 1,933 2,752 3,760
Certificate accounts 26,304 19,709 16,073
----------------------------------------------------------------------------
$ 31,785 25,626 23,616
============================================================================
Included in deposits as of March 31, 1996 and 1995 are deposits
greater than $100,000 of approximately $151,243,000 and $104,444,000,
respectively.
Thirty
25
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(8) ADVANCES FROM FEDERAL HOME LOAN BANK
Under the terms of its collateral agreement with the FHLB, the Company
maintains otherwise unencumbered qualifying assets in an amount at
least as much as its advances from the FHLB. The Company's FHLB stock
is also pledged to secure these advances. At March 31, 1996 and 1995
such advances mature as follows (dollars in thousands):
Weighted Weighted
average March 31, average March 31
Due by March 31, interest rate 1996 interest rate 1995
------------------------------------------------------------------------
1996 - % $ - 5.82 % $160,847
1997 6.01 229,513 6.88 110,000
1998 6.53 77,000 6.69 37,000
1999 6.07 17,750 - -
2000 5.81 27,000 5.00 81
2001 - - - -
Thereafter 7.45 24,750 7.95 12,000
------------------------------------------------------------------------
6.21 % $ 376,013 6.36 % $319,928
========================================================================
The Company has an available line of credit ("Flexline") for borrowing
from the FHLB not to exceed 10% of total assets, of which $0 and
$30,000,000 were outstanding at March 31, 1996 and 1995, respectively.
The Flexline commitment was executed in December 1991 and expires in
September 1996.
The Company has entered into a warehouse loan participation program
for residential mortgage loan originations. Funds to purchase these
single-family residential loans are obtained from an available line of
credit from the FHLB totaling $96,000,000 at March 31, 1996, of which
$51,513,000 and $10,494,000 was outstanding at March 31, 1996 and
1995, respectively. This line of credit commitment expires in March
1997. The rate paid is determined by a daily variable advance rate in
effect at the FHLB and was 5.92% at March 31, 1996.
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Company entered into sales of securities under agreements to
repurchase (the Agreements), which are treated as financings. The
obligation to repurchase securities sold is reflected as a liability
in the consolidated statements of financial condition. The dollar
amount of securities underlying the Agreements remains in the
respective asset accounts as mortgage-related securities although the
securities underlying the Agreements are delivered to the broker who
arranged the transactions. The Agreements call for the repurchase of
the identical securities.
Information relating to the Agreements as of March 31, 1996 and 1995
is summarized as follows:
(Dollars in Thousands)
March 31, 1996
---------------------------------------------------------------------
Loan Asset Asset Weighted
maturity carrying market Loan average
Asset date value value amount loan rate
------------------------------------------------------------------------------------------------------------
FNMA and FHLMC certificates Overnight $ 33,489 $ 33,318 $ 30,019 4.75 %
FNMA and FHLMC certificates Within 30 days 114,347 114,824 111,605 5.34
FNMA and FHLMC certificates From 31-90 days 42,636 42,022 38,945 5.86
FNMA, FHLMC and GNMA certificates Over 90 days 251,594 251,952 221,643 5.90
------------------------------------------------------------------------------------------------------------
$ 442,066 $ 442,116 $ 402,212 5.65 %
============================================================================================================
March 31, 1995
---------------------------------------------------------------------
Loan Asset Asset Weighted
maturity carrying market Loan average
Asset date value value amount loan rate
------------------------------------------------------------------------------------------------------------
FNMA and FHLMC certificates Within 30 days $ 350,665 344,408 330,919 6.05 %
FNMA and FHLMC certificates From 31-90 days 32,525 32,638 31,048 6.07
FHLMC certificates Over 90 days 31,489 30,716 28,646 7.78
------------------------------------------------------------------------------------------------------------
$ 414,679 407,762 390,613 6.18 %
============================================================================================================
The maximum amount outstanding at any month-end of the Agreements
during fiscal years 1996 and 1995 was $406,310,000 and $394,503,000,
respectively. The average amount of outstanding Agreements during
fiscal years 1996 and 1995 was $357,064,000 and $161,777,000,
respectively.
Thirty-one
26
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates, methods, and assumptions are set forth below for
the Company's financial instruments whether or not recognized on the
balance sheet, for which it is practicable to estimate that value. The
fair values may not represent actual values of the financial
instruments that could have been realized as of year end or that will
be realized in the future.
CASH AND CASH EQUIVALENTS: For these short-term instruments, the
carrying amount is a reasonable estimate of fair value.
INVESTMENTS AND MORTGAGE-RELATED SECURITIES AND ASSETS AVAILABLE FOR
SALE: The fair value of investments and mortgage-related securities
is estimated based on bid prices published in financial newspapers or
bid quotations received from securities dealers. The carrying amounts
of stocks with no stated maturity approximate fair value because
shares may be redeemed at par. The fair value of loans available for
sale is estimated based on forward commitments to sell.
LOANS RECEIVABLE: The fair value of performing loans receivable is
estimated by discounting future cash flows using rates as of March 31,
1996 and 1995 for which similar loans would be made to borrowers with
similar credit history and maturities.
The fair value for nonperforming loans was derived through a
discounted cash flow analysis, which includes the opportunity costs of
carrying a nonperforming asset. Estimated discount rates were based
on the probability of loss and the expected time to recovery. Loans
with a higher probability of loss were assigned higher risk premiums
and were discounted over longer periods of time, resulting in lower
values.
DEPOSIT LIABILITIES: The fair value of deposits with no stated
maturity, such as noninterest-bearing deposits, savings and NOW
accounts, and money market and checking accounts is equal to the
amount payable on demand as of March 31, 1996 and 1995. The fair
value of certificates of deposit is based on the present value of
contractual cash flows. The discount rates used to compute present
values are estimated using the rates currently offered for deposits of
similar maturities in the Company's marketplace.
BORROWED FUNDS: Rates available to the Company for debt with similar
terms and remaining maturities at the dates presented are used to
estimate the fair value of existing debt.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT: The
Company does not normally charge fees for commitments to extend
credit. Interest rates on commitments to extend credit are normally
committed for periods of less than one month. Fees charged on standby
letters of credit and other financial guarantees are deemed to be
immaterial and these guarantees are expected to be settled at face
amount or expire unused. It is impracticable to assign any fair value
to these commitments.
The carrying amount and estimated fair value of the Company's
financial instruments are as follows:
(Dollars in Thousands)
=======================================================================================
March 31,
----------------------------------------
1996 1995
------------------ --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------
Financial assets:
Cash $ 23,323 $ 23,323 $ 20,007 $ 20,007
Investments and mortgage-related
securities 429,092 426,177 515,383 498,775
Assets available for sale 564,354 564,354 436,332 436,332
Loans receivable, net 691,791 678,726 550,013 539,765
Financial liabilities:
Deposits 830,997 839,329 688,678 688,608
Borrowed funds 778,225 777,226 710,541 708,987
=======================================================================================
Thirty-two
27
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(11) INCOME TAXES
On December 29, 1995, the Company acquired Suburban in a tax-free
acquisition. As a result of this acquisition, the Company was able to
record a net deferred tax asset of approximately $1,622,000, primarily
due to unrecorded net operating loss benefits of Suburban. As part of
the acquisition, the Company has established a deferred tax liability
for Suburban's entire tax bad debt reserves. The amount of such
reserves were approximately $3,175,000.
For federal tax purposes, the Company has approximately $4,613,000 of
net operating loss carryforwards as of March 31, 1996. The net
operating loss will expire March 31, 2010 if not utilized.
For state tax purposes, the Company has approximately $5,795,000 and
$4,391,000 of net operating loss carryforwards as of March 31, 1996
and 1995, respectively. $3,780,000 of the net operating loss
carryforward will expire March 31, 1998 if not utilized, while
$2,015,000 will expire March 31, 1999 if not utilized.
Income tax expense (benefit) for the years ended March 31, 1996, 1995,
and 1994 is comprised of the following (in thousands):
Year ended March
------------------------
1996 1995 1994
-------------------------------------------------------------
Current:
Federal $ 7,812 6,018 3,835
State - 178 230
-------------------------------------------------------------
7,812 6,196 4,065
-------------------------------------------------------------
Deferred:
Federal (1,396) (1,220) 3,176
State (144) (2) 220
-------------------------------------------------------------
(1,540) (1,222) 3,396
-------------------------------------------------------------
$ 6,272 4,974 7,461
=============================================================
The significant components of deferred income tax expense (benefit)
attributable to income for the years ended March 31, 1996, 1995 and
1994 are as follows (Dollars in Thousands):
Year ended March 31,
-----------------------------
1996 1995 1994
----------------------------------------------------------------------------------------
Deferred tax expense (benefit)
(exclusive of the effects of
the components listed below) $ (840) (895) 3,176
Decrease in beginning of year balance of the
valuation allowance for deferred tax assets (700) (700) -
Adjustment to deferred tax assets and
liabilities for change in tax rates - 68 -
State tax net operating loss utilization - 305 220
----------------------------------------------------------------------------------------
$ (1,540) (1,222) 3,396
========================================================================================
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
March 31, 1996 and 1995, in accordance with SFAS 109, are presented
below (dollars in thousands):
March 31,
---------------------------
1996 1995
---------------------------------------------------------------------------------------------------
Deferred tax assets:
Uncollected interest $ 267 111
Deferred loan fees 272 68
Employee benefits 974 670
Unearned fees - 61
Net unrealized loss on mortgage-related, debt and equity securities - 487
REO rental income - 105
Real estate valuation allowance 578 121
Book bad debt reserves 4,330 3,023
Tax basis in excess of book basis - investment in stock 187 -
Tax basis in excess of book basis for investment in subsidiaries - 698
Purchased mortgage servicing rights 923 82
Other reserves 367 -
Federal tax net operating loss carryforwards 1,614 -
State tax net operating loss carryforwards 452 307
---------------------------------------------------------------------------------------------------
Total gross deferred tax assets 9,964 5,733
Less valuation allowance - (700)
---------------------------------------------------------------------------------------------------
Net deferred tax assets 9,964 5,033
---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Tax bad debt reserve recapture (6,212) (4,553)
Prepaid expenses (599) (312)
Loss on mortgages sold (956) (1,060)
Depreciation (254) (136)
Deferred Income (231) -
Deferred loan costs (264) (271)
Net unrealized gain of mortgage-related, debt and equity securities (70) -
Originated mortgage servicing rights (262) -
IRC Sec. 475 mark-to-market items (192) (383)
---------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (9,040) (6,715)
---------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 924 (1,682)
===================================================================================================
The effective income tax rates of 35%, 36%, and 80%, for the years
ended March 31, 1996, 1995, and 1994, respectively, equal or exceed
the applicable statutory federal income tax rate of 35%, 35% and 34%,
respectively.
Thirty-three
28
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(11) CONTINUED
The reasons for these differences for the years ended March 31, 1996,
1995, and 1994 are as follows:
Dollars in Thousands
---------------------------------------------------------------
YEAR ENDED MARCH 31,
--------------------------
1996 1995 1994
===============================================================
Computed expected
tax expense $6,262 $4,784 $3,170
---------------------------------------------------------------
Increase (decrease) resulting from:
Decrease in valuation allowance
for deferred tax assets (700) (700) --
---------------------------------------------------------------
Change in federal
income tax rates -- 68 --
---------------------------------------------------------------
Tax-exempt income (584) (360) (206)
---------------------------------------------------------------
State tax expense,
net of Federal benefit (144) 113 372
---------------------------------------------------------------
Subsidiary related items 1,007 888 723
---------------------------------------------------------------
Recapture of tax bad
debt reserves -- -- 3,268
---------------------------------------------------------------
Non-deductible ESOP
amortization expense 169 -- --
---------------------------------------------------------------
Other, net 262 181 134
---------------------------------------------------------------
Income tax expense $6,272 $4,874 $7,461
===============================================================
The valuation allowance represents management's estimate of the
portion of its deferred tax assets that may not be realized. The
March 31, 1995 valuation allowance of $700,000 relates to the
realization of benefits for investment in subsidiaries. The reduction
in the valuation allowance for deferred tax assets is due to the
liquidation of various subsidiaries during the year.
In order to fully realize the net deferred tax asset at March 31, 1996
and 1995, the Company will need to generate future taxable income.
Based upon the Company's tax history and the anticipated level of
future taxable income, management of the Company believes the existing
net deductible temporary differences will, more likely than not,
reverse in future periods in which the Company generates net taxable
income. There can be no assurance, however, that the Company will
generate any earnings or any specific level of continuing earnings.
The Company had current taxes payable of $1,485,000 and $6,247,000 as
of March 31, 1996 and March 31, 1995, respectively.
In accordance with SFAS No. 109, the Company has established a
deferred tax liability representing the estimated taxes that would be
payable in the event of the conversion of the Company's charter to
that of a commercial bank, based on the intent of the Company's Board
of Directors to accomplish such a charter conversion. If the Bank
were to convert to a commerical bank charter, it would be required to
recapture and pay taxes on approximately $17,750,000 in bad debt
deductions previously taken while the Company was a "domestic building
and loan association" for tax purposes.
(12) EMPLOYEE BENEFITS
During the year ended March 31, 1995, the Company restructured its
defined benefit Pension Plan ("Pension Plan"). Prior to August 1,
1994, the Company participated in a multi-employer Pension Plan.
Actuarial valuations were not computed separately for the Company and
consequently, information required by SFAS No. 87 Is not available for
the years ending March 31, 1994.
Beginning on August 1, 1994, the Company withdrew from this
multi-employer Pension Plan and started a single-employer Pension
Plan. Employees hired by the Company on or after August 1, 1993 are
not currently eligible to participate in the new Pension Plan. Each
active participant was given the option to transfer their accrued
benefit as of this date to the new pension plan or leave it in the
multi-employer Pension Plan. For those electing to transfer their
benefits, additional benefits would accrue under the new Pension Plan
for future service. Assets accumulated for the past and future
benefits of those transferring benefits were calculated and a schedule
determined for transfer into the new Pension Plan.
The Pension Plan provides retirement benefits based on years of
service and average compensation during the years of plan
participation. The Company's funding policy is to contribute an
amount which meets the minimum funding requirements of ERISA and which
can be deducted for Federal Income Tax purposes. The methods and
assumptions used to determine the Pension Plan contribution may differ
from those used for financial reporting purposes.
The following table sets forth the Company's plan accumulated funded
status for the years ended March 31, 1996 and 1995 and the amounts
recognized in the consolidated balance sheet as of March 31, 1996 and
1995:
Dollars in Thousands
----------------------------------------------------------------------------------------
March 31,
------------------------------
1996 1995
----------------------------------------------------------------------------------------
Projected benefit obligation:
Accumulated benefit obligation:
Vested benefits $ 1,512 $ 1,110
Nonvested benefits - -
----------------------------------------------------------------------------------------
Accumulated benefit obligation total 1,512 1,110
Effect of projected future compensation levels 150 54
----------------------------------------------------------------------------------------
Projected benefit obligation total 1,662 1,164
Plan assets at fair value 2,836 2,490
----------------------------------------------------------------------------------------
Projected plan assets in excess of
benefit obligation 1,174 1,326
Unrecognized transition asset 1,493 1,594
Unrecognized loss (41) (6)
----------------------------------------------------------------------------------------
Accrued pension cost included on
consolidated balance sheet $ 278 $ 262
========================================================================================
Thirty-four
29
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(12) CONTINUED
Net pension cost for the years ended March 31, 1996 and 1995 includes
the following components:
Dollars in Thousands
----------------------------------------------------------------
Year ended March 31,
--------------------
1996 1995
----------------------------------------------------------------
Service cost $ 217 $ 154
Interest cost 99 51
Actual return on plan assets (383) (125)
Amortization of transition asset (101) (68)
Asset gain 184 -
----------------------------------------------------------------
Net pension cost $ 16 $ 12
================================================================
In determining the estimated costs of the Pension Plan, the weighted
average discount rate used was 8.00% and the weighted average rate of
increase in compensation levels was 5.50% compounded annually for the
years ended March 31, 1996 and 1995. The weighted average expected
long-term rate of return on Pension Plan assets used in determining
net periodic pension cost was 8.00%. The Pension Plan's assets
consist primarily of bond and stock funds administered by an
independent bank plus the value of future transfers from the prior
plan.
Pension expense for the year ended March 31, 1994 was $164,000.
COMMON STOCK ACQUIRED BY THE EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
In connection with the Conversion, the Company established the ESOP
for the benefit of eligible employees. The Company purchased 509,166
shares of common stock on behalf of the ESOP in the Conversion, of
which, as of March 31, 1996, 100,778 shares were committed to be
released and allocated to participants. The Company accounts for its
ESOP in accordance with Statement of Position 93-6, "Employers'
Accounting For Employee Stock Ownership Plans" which requires the
Company to recognize compensation expense equal to the fair value of
the ESOP shares during the periods in which they become committed to
be released. To the extent that the fair value of ESOP shares differs
from the cost of such shares, this differential will be charged or
credited to equity. Management expects the recorded amount of expense
to fluctuate as continuing adjustments are made to reflect changes in
the fair value of the ESOP shares. The Company recorded compensation
and employee benefit expense related to the ESOP of $1.4 million and
$483,000 for the years ended March 31, 1996 and 1995, respectively.
COMMON STOCK ACQUIRED BY THE RECOGNITION AND RETENTION PLAN AND TRUST
("RRP")
An aggregate of 188,700 shares, net of forfeitures, have been awarded
to the Company's Board of Directors and executive officers as of March
31, 1996, subject to vesting and other provisions of the RRP.
At March 31, 1996, the deferred cost of unearned RRP shares totaled
$3,369,000 and is recorded as a charge against stockholders' equity.
Compensation expense will be recognized ratably over the five year
vesting period only for those shares awarded. The Company recorded
compensation and employee benefit expense related to the RRP of
$829,000 and $373,000 for the years ended March 31, 1996 and 1995,
respectively.
STOCK OPTION PLAN
Common stock totalling 727,380 shares has been reserved for issuance
for the Option Plan. An aggregate of 593,700 stock options, net of
forfeitures, have been granted and are exercisable to the Bank's
executive officers, non-employee directors, and other key employees
through March 31, 1996, subject to vesting and other provisions of the
Option Plan. The exercise price per share ranges from $14.94 to
$23.63, and has a weighted average per share exercise price of $15.16.
Such options were dilutive during the year ended March 31, 1996, and
affected earnings per share by $0.01. During the year ended March 31,
1996, 45,500 options were granted and 9,800 options were exercised at
an exercise price of $14.94.
(13) COMMITMENTS AND CONTINGENCIES
As of March 31, 1996, the Company is committed to the funding of
residential and commercial construction loans of approximately
$1,000,000 with an average interest rate of 8.56%, first mortgage
loans of approximately $29,852,000 with an average interest rate of
7.29%, and consumer and other loans of approximately $10,628,000 with
an average interest rate of 9.17%. Approximately $27,074,000 is
committed to fixed rate loans and $14,406,000 committed to variable
rate loans. These commitments are generally outstanding for 45 days.
As of March 31, 1996, the Company is committed to purchase
mortgage-related securities totaling $15,030,000 with a weighted
average interest rate of 5.67% and investment securities totaling
$5,000,000 with a weighted average interest rate of 7.07%.
The Company has commitments outstanding of $51,080,000 at March 31,
1996 to sell fixed rate mortgage loans and $7,649,000 of
adjustable-rate mortgage loans.
Thirty-five
30
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, and 1994
(13) CONTINUED
The Company had the following off-balance-sheet financial instruments
as follows:
Dollars in Thousands
----------------------------------------------------------------------------------------------------
March 31
-----------------------
1996 1995
----------------------------------------------------------------------------------------------------
Amounts representing credit risk:
Secured consumer lines of credit $ 55,727 $ 49,813
Unsecured consumer lines of credit 9,917 9,713
Commercial lines of credit 11,939 5,411
Commercial letters of credit 163 329
Notional or contract amounts of off-balance-sheet financial instruments
not constituting credit risk:
Forward committments to sell in the secondary market $ 58,729 $ 15,833
====================================================================================================
In the past, the Company pooled and sold with recourse certain
mortgage-backed securities through federal agencies which were
collateralized substantially by residential mortgage loans. At March
31, 1996 and 1995, the remaining outstanding balance subject to
recourse was $3,316,000 and $3,711,000 respectively.
The Company is party to certain claims and litigation arising in the
ordinary course of business. In the opinion of management, the
resolution of such claims and litigation will not materially affect
the Company's consolidated financial position or results of
operations.
DERIVATIVE FINANCIAL INSTRUMENTS
The Bank has limited involvement with derivative financial
instruments and does not use them for trading purposes. Derivatives,
such as forward committments to sell in the secondary market, are
primarily used to manage well-defined interest rate risks.
In the ordinary course of business, the Bank may expose a portion
of its available for sale mortgage loan portfolio, including its
pipeline, to interest rate risk, as volume and market conditions
warrant. This exposure represents those loans which have closed or
are expected to close which are not hedged at a given point in time.
At March 31, 1996, the Company's exposure is $3.7 million and the
maximum exposure position authorized by the Company is $20.0 million.
The Company produces a daily exposure report summarizing the exposure
which is reviewed and to the extent considered necessary by
management, adjustments are made.
(14) PREMISES AND EQUIPMENT
Premises and equipment are comprised of the following at March 31,
1996 and 1995:
Dollars in Thousands
-------------------------------------------------------------
March 31,
-----------------------
1996 1995
-------------------------------------------------------------
Premises owned $ 11,778 $ 11,248
Furniture and fixtures 13,271 11,442
Leasehold improvements 3,068 2,685
Accumulated depreciation (13,774) (11,704)
-------------------------------------------------------------
$ 14,343 $ 13,671
=============================================================
The Company has entered into operating leases for several of its
branch facilities. The minimum annual rental payments under these
leases at March 31, 1996 are as follows (dollars in thousands):
Minimum
lease
Year payments
-------------------------------------------------------
1997 $ 822
1998 714
1999 502
2000 356
2001 and after 1,860
=======================================================
Rent expense under these leases was $487,000, $248,000 and $206,000
for the years ended March 31, 1996, 1995 and 1994, respectively.
The Company has executed various operating leases covering portions of
its buildings with various unrelated lessees. Annual minimum lease
payments to be received by the Company are as follows (dollars in
thousands):
Minimum
lease
Year payments
---------------------------------------------------------
1997 $ 375
1998 143
1999 87
2000 23
2001 and after 580
=========================================================
Thirty-six
31
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(15) PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of MLF Bancorp, Inc. (parent company)
are shown below. The parent company has no significant operating
activities.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
DOLLARS IN THOUSANDS
=========================================================================
March 31,
--------------------------
Assets 1996 1995
-------------------------------------------------------------------------
Cash $ 282 $ 414
Equity securities available for sale 2,355 745
Investment in subsidiaries 137,347 141,949
Other assets 528 1
-------------------------------------------------------------------------
Total assets $ 140,512 $ 143,109
=========================================================================
Liabilities and Equity
-------------------------------------------------------------------------
Other liabilities $ 175 $ 1,809
-------------------------------------------------------------------------
Total liabilities 175 1,809
-------------------------------------------------------------------------
Stockholders' equity 140,337 141,300
-------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 140,512 $ 143,109
=========================================================================
CONDENSED STATEMENTS OF OPERATIONS
DOLLARS IN THOUSANDS
==================================================================================================================
Period from
For the August 11, 1994
year ended to
March 31, 1996 March 31, 1995
------------------------------------------------------------------------------------------------------------------
Income:
Dividends from subsidiaries $ 21,201 $ 6,000
Gain on sales of equity securities available for sale 197 -
Other 54 95
------------------------------------------------------------------------------------------------------------------
Total income 21,452 6,095
Expenses:
Compensation and employee benefits 10 16
Professional fees 389 86
Other 240 17
------------------------------------------------------------------------------------------------------------------
Total expenses 639 119
------------------------------------------------------------------------------------------------------------------
Income before (return of) equity in undistributed
income of subsidiaries and income tax benefit 20,813 5,976
Income tax benefit (124) -
------------------------------------------------------------------------------------------------------------------
Income before (return of) equity in undistributed
income of subsidiaries 20,937 5,976
(Return of) equity in undistributed income of subsidiaries (9,317) 517
------------------------------------------------------------------------------------------------------------------
Net income $ 11,620 $ 6,493
==================================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
=============================================================================================
Period from
For the year August 11, 1994
ended to
March 31, 1996 March 31, 1995
---------------------------------------------------------------------------------------------
Operating activities:
Net income $ 11,620 $ 6,493
Adjustments to reconcile net
income to net cash provided by
operating activities:
Return of (equity in) income of subsidiaries 9,317 (517)
Amortization of common stock acquired
by stock benefit plans 2,326 856
Net gain on sale of equity securities
available for sale (197) -
Increase in investment in subsidiaries (22,596) -
(Decrease) increase in liabilities (1,634) 1,809
Increase in other assets (527) (1)
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Net cash (used) provided by operating activities (1,691) 8,640
Investing activities:
Purchase of common stock of subsidiaries - (91,959)
Purchase of assets available for sale (2,890) (745)
Proceeds from sales of assets available for sale 1,477 -
Dividends received from subsidiaries 21,201 6,000
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Net cash provided (used) by investing activities 19,788 (86,704)
Financing activities:
Net proceeds from issuance of common stock - 95,572
Common stock acquired by stock benefit plans - (11,446)
Purchase of treasury stock (15,035) (5,648)
Dividends paid (3,194)
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Net cash (used) provided by financing activities (18,229) 78,478
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Net (decrease) increase in cash (132) 414
---------------------------------------------------------------------------------------------
Cash, beginning of period 414 -
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Cash, end of period $ 282 $ 414
=============================================================================================
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32
MLF BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1996, 1995 and 1994
(16) BUSINESS COMBINATIONS
During the year ended March 31, 1996, the Company completed its
acquisition of Hart Mortgage Co., A privately-held mortgage banking
company, and Suburban, a $66.0 Million in assets community bank
headquartered in Collingdale, Delaware County, Pennsylvania. Both
acquisitions were accounted for using the purchase method of
accounting. These acquisitions were completed during the fourth
fiscal quarter of 1996, and as such, the effect on the Company's
results of operations was not material.
On April 1, 1996, the Company completed its acquisition of
Philadelphia Mortgage Corporation, ("PMC") a privately held mortgage
banking company.
(17) REGULATORY MATTERS
Retained earnings are substantially restricted in connection with
regulations related to the insurance of savings accounts, which
require the Company to maintain certain statutory reserves.
On January 19, 1994, the Board of Directors of the Company adopted a
Plan of Conversion to convert from a federally chartered mutual
savings bank to a federally chartered capital stock savings bank with
the concurrent formation of a holding company, which was consumated on
August 11, 1994. At the date of the Conversion, the Company
established a liquidation account in an amount equal to its retained
income as of March 31, 1994. The liquidation account will be
maintained for the benefit of eligible account holders who continue to
maintain their accounts at the Company after the Conversion. The
liquidation account will be reduced annually to the extent that
eligible account holders have reduced their qualifying deposits as of
each anniversary date. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the
event of a complete liquidation of the Company, each eligible account
holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any
of its share of common stock if the effect thereof would cause equity
to be reduced below applicable regulatory capital maintenance
requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Under the Office of Thrift Supervison capital regulations, savings
institutions must maintain "tangible" capital equal to 1.5% of
adjusted total assets, "core" capital equal to 3.0% of adjusted total
assets, and "risk-based" capital equal to 8.0% of risk-weighted
assets. At March 31, 1996, the Bank was in compliance with all such
requirements and is deemed a "well-capitalized" institution for
regulatory purposes.
(18) SUBSEQUENT EVENT
On May 21, 1996, the Board of Directors of the Company declared a cash
dividend of $0.19 per common share payable on June 25, 1996 to
stockholders of record on June 6, 1996.
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