-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EwhPzIpf9E+FiTGUW3nLu79bu3p3cNodUy1XC9AWiA1ROwh3qiMJ6ZbJWG6ejdtT 5RkbTHCHmw9yZ0hvHfO6QA== 0000946275-99-000197.txt : 19990330 0000946275-99-000197.hdr.sgml : 19990330 ACCESSION NUMBER: 0000946275-99-000197 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LITTLE FALLS BANCORP INC CENTRAL INDEX KEY: 0001001427 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 223402073 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-27010 FILM NUMBER: 99575509 BUSINESS ADDRESS: STREET 1: 86 MAIN ST CITY: LITTLE FALLS STATE: NJ ZIP: 07424 BUSINESS PHONE: 9732566100 MAIL ADDRESS: STREET 1: 86 MAIN ST CITY: LITTLE FALLS STATE: NJ ZIP: 07424 10-K/A 1 FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ FORM 10-K/A (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended December 31, 1998 ---------------------------------------------- - or - _ |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________________ to ___________________ Commission Number: 0-27010 LITTLE FALLS BANCORP, INC. ------------------------------------------------------ (Exact name of Registrant as specified in its Charter) New Jersey 22-3402073 _______________________________________ ______________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 86 Main Street 07424 - ---------------------------------------- ---------------------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code: (973) 256-6100 ----------------- Securities registered pursuant to Section 12(b) of the Act: None --------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.10 par value per share --------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Registrant's Common Stock as quoted on the Nasdaq Stock Market, on March 11, was $40.0 million (2,023,824) shares at $19.75 per share). As of March 11, 1999 there were issued 3,041,750 and outstanding 2,470,551 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Annual Report to Stockholders for the Fiscal Year Ended December 31, 1998. (Parts I, II and IV) INDEX PART I Page ---- Item 1. Business...................................................... 1 Item 2. Properties................................................... 25 Item 3. Legal Proceedings............................................ 25 Item 4. Submission of Matters to a Vote of Security-Holders.......... 26 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 26 Item 6. Selected Financial Data...................................... 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 26 Item 8. Financial Statements and Supplementary Data.................. 26 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure..................... 26 PART III Item 10. Directors and Executive Officers of the Registrant........... 27 Item 11. Executive Compensation....................................... 30 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 37 Item 13. Certain Relationships and Related Transactions............... 38 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................ 38 PART I Little Falls Bancorp, Inc. (the "Company") may from time to time make written or oral "forward-looking statements", including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K, Form 10-K/A's and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the board of governors of the federal reserve system, inflation, interest rates, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks resulting from these factors. The Company cautions that the listed factors are not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. Item 1. Business - ----------------- General Little Falls Bancorp, Inc. (the "Company") is a New Jersey corporation organized in August 1995 at the direction of Little Falls Bank (the "Bank") for the purpose of becoming a savings and loan holding company and to acquire all of the capital stock issued by the Bank in its conversion from the mutual to stock form of ownership (the "Conversion"). On January 5, 1996, the Registrant sold 3,041,750 shares of its common stock, par value $0.10 per share (the "Common Stock") in a subscription offering as part of the Conversion. The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage provided that the Bank retains a specified amount of its assets in housing-related investments. References to the "Bank" herein, unless the context required otherwise, refer to the Company on a consolidated basis. The net conversion proceeds totaled approximately $26.8 million of which $14.6 million was invested in the Bank. 1 On November 5, 1998, Little Falls and Skylands Community Bank terminated the proposed merger between the two companies, which had been announced on August 12, 1998. This merger was terminated by mutual agreement as both companies recognized the possibility that certain conditions to the closing of the merger might not be satisfied. Accordingly, the boards of directors of both companies concluded that it was in the mutual interest of both companies to terminate the merger, and avoid any additional expense. The Bank is a federally chartered stock savings bank headquartered in Little Falls, New Jersey. The Bank was originally chartered in 1887 as the Little Falls Building and Loan Association. On December 2, 1993, the Bank converted its mutual charter from a federally chartered savings association to a New Jersey chartered savings bank, changing its name to Little Falls Savings Bank. Effective October 1995, the Bank converted its New Jersey mutual charter to a federal mutual charter and changed its name to "Little Falls Bank." The Bank's deposits are federally insured and the Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Company and the Bank are subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission ("SEC"). The Bank is a community oriented savings institution offering a variety of financial services to meet the needs of the communities it serves. The Bank conducts its business from its main office in Little Falls, New Jersey and five branch offices located in Passaic and Hunterdon Counties, New Jersey. The Bank attracts deposits from the general public and has historically used such deposits primarily to originate loans secured by first mortgages on owner-occupied one- to four-family residences in its market area and to purchase mortgage-backed securities. To a lesser extent, the Bank also originates a limited number of commercial real estate, residential construction and consumer loans, which mainly consist of home equity lines of credit. Further, the Bank also invests in mortgage-backed securities and investment securities. The principal sources of funds for the Bank's lending activities are deposits, the amortization, repayment and maturity of loans, mortgage-backed securities and investment securities. Principal sources of income are interest and fees on loans, mortgage-backed securities and investment securities. The Bank's principal expense is interest paid on deposits. Market Area and Competition The Bank focuses on serving its customers located in the New Jersey community of Little Falls and surrounding communities in Passaic and Hunterdon Counties, New Jersey. Economic growth in the Bank's market area remains dependent upon the local economy. The economy of the greater New York - New Jersey market has historically benefitted from having a large number of corporate headquarters and concentration of financial services-related industries. It also has a well-educated employment base and a large number of industrial, service and high technology businesses. Over the past few years, New Jersey's economy has slowly begun to recover from the effects of a prolonged decline in the national and regional economy, layoffs in the financial services industry and corporate relocations. Employment levels and real estate markets in the Bank's market area have stabilized and in some instances begun to improve. Whether such improvement will continue is dependent, in large part, upon the general economic health of the United States and other factors beyond the Bank's control and, therefore, cannot be estimated. In addition, the deposit and loan activity of the Bank is significantly affected by economic conditions in its 2 market area. The Bank's principal competitors are financial institutions and mortgage banking companies, many of which are significantly larger and have greater financial resources than the Bank. The Bank's competition for loans on a retail and wholesale basis comes principally from commercial banks, mortgage brokers, banking and insurance companies. The Bank's competition for deposits has historically come from commercial banks, thrift institutions and credit unions. In addition, the Bank faces increasing competition for deposits from non-bank institutions, such as brokerage firms and insurance companies in such areas as short-term money market funds, corporate and government securities funds, mutual funds and annuities. Lending Activities Analysis of Loan Portfolio. The following table sets forth information concerning the composition of the Bank's loan portfolio in dollar amounts and in percentages of the loan portfolio as of the dates indicated.
At December 31, ----------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------ ------------------- ------------------- ----------------- ------------------ Percent Percent Percent Percent Percent Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Type of Loans: One- to four-family......... $117,232 78.65% $118,254 80.42% $108,367 92.53% $88,828 92.31% $87,851 92.71% Multi-family and commercial real estate............... 17,436 11.69 17,362 11.81 3,659 3.13 4,639 4.82 4,463 4.71 Residential construction.... -- 350 0.24 525 0.45 1,098 1.14 521 0.55 Consumer: Savings account............. 752 0.50 807 0.55 889 0.76 824 0.86 866 .91 Second mortgages............ 14,811 9.94 11,630 7.91 5,028 4.29 2,540 2.64 2,694 2.84 Other....................... 15 0.01 12 0.01 25 0.02 42 0.04 52 .05 ------- ------ ------- ------ ------- ------ ----- ---- ------- ------ Total loans receivable (gross)................... 150,246 100.79 148,415 100.94 118,493 101.18 97,971 101.81 96,447 101.77 Less: Loans in process.......... -- -- 233 0.16 150 (0.13) 450 (0.47) 186 (.18) Deferred loan origination fees and costs........... (145) 0.10 (19) (0.01) 138 (0.12) 333 (0.35) 338 (.36) Allowance for loan losses. 1,329 (0.89) 1,168 0.79 1,090 (0.93) 958 (0.99) 1,169 (1.23) ------- ------ ------- ------ -------- ------ ------ ------ ------- ------ Total loans, net............ $149,062 100.00% $147,033 100.00% $117,115 100.00% $96,230 100.00% $94,754 100.00% ======= ====== ======= ====== ======= ====== ====== ====== ======= ======
3 Loan Maturity Tables The following table sets forth the contractual maturity of the Bank's loan portfolio at December 31, 1998. The table does not include prepayments or scheduled principal repayments. Prepayments and scheduled principal repayments on loans totaled $23.7 million for the year ended December 31, 1998. Adjustable-rate mortgage loans are shown as maturing based on contractual maturities rather than the period in which interest rates are next scheduled to adjust.
Multi-Family and One- to Four- Commercial Residential Family Real Estate Construction Consumer Total ------------- ------------ ------------ -------- ----- (In Thousands) Amounts Due: Within 1 year.................. $ 54 $ 250 $ -- $ 741 $ 1,045 1 to 5 years................. 2,432 495 -- 1,049 3,976 5 to 10 years................ 5,127 200 -- 2,849 8,176 Over 10 years................ 109,619 16,491 -- 10,939 137,049 ------- ------ ------ ------- Total amount due............... $117,232 $17,436 $15,578 $150,246 Less: Allowance for loan and lease loss................... 956 274 -- 99 1,329 Loans in process............... -- -- -- -- -- Deferred loan fees (costs)..... (123) -- -- (22) (145) ------- ------- -------- ------ ------- Loans receivable, net......... $116,399 $ 17,162 $ -- $15,501 $149,062 ======= ======= ======== ====== =======
The following table sets forth the dollar amount at December 31, 1998 of all loans due after December 31, 1999, which have pre-determined interest rates and which have floating or adjustable interest rates. Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- ----- (In Thousands) One- to four-family................ $45,201 $71,977 $117,178 Multi-family and commercial real estate........... 1,600 15,586 17,186 Consumer........................... 12,265 2,572 14,837 ------ ------ ------- Total............................ $59,066 $90,135 $149,201 ====== ====== ======= 4 One- to Four-Family Residential Loans. The Bank's primary lending activity consists of the origination of single-family residential mortgage loans secured by owner-occupied property. The Bank originates one- to four-family residential mortgage loans in amounts up to 80% of the appraised value of the mortgaged property and in amounts up to 70% of the appraised value on loans which exceed $200,000. No private mortgage insurance is obtained since loan to value ratios do not exceed 80%. All loans are held in the Bank's portfolio. The Bank has an agreement with a mortgage solicitation firm pursuant to which the Bank receives one- to four-family mortgage applications on a state-wide basis. The Bank then submits bids on the mortgage applications on which it is interested prior to making the final loan. The submission of a bid to provide the mortgage loan is not a firm commitment on the Bank's part, as the Bank applies its own underwriting standards before committing to the loan. All loans must be documented, including an original appraisal. This agreement has provided the majority of loan applications received by the Bank in the past year. Loan referrals are also obtained from local realtors or builders, existing or past customers and members of the local community. Mortgage loans generally include due-on sale clauses which provide the Bank with the contractual right to deem the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Bank's consent. The Bank primarily originates adjustable-rate mortgage loans with a guaranteed renewal for a thirty-year term. These loans adjust after one, three, five or ten years. The Bank's ARM loans are originated for its portfolio and do not conform to FNMA or FHLMC standards. Although the Bank's ARM loans have a 6% lifetime cap, at the adjustment period, interest rate changes are discretionary. Generally, ARM loans pose credit risks somewhat greater than the risk inherent in fixed-rate loans primarily because, as interest rates rise, the underlying payments of the borrower rise, increasing the potential for default. The Bank also offers fixed-rate loans with terms of 15 and 30 years. The Bank offers various loan programs with varying interest rates and fees which are competitively priced based on market conditions and the Bank's cost of funds. Multi-Family and Commercial Real Estate Loans. The Bank also originates and purchases multi-family and commercial real estate loans. These loans are generally adjustable-rate loans with maturities up to 25 years and are made in amounts up to 75% of the appraised value of the mortgaged property. In purchasing such loans, the Bank evaluates the mortgage primarily on the net operating income generated by the real estate to support the debt service. The Bank also considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar property, the marketability of the property and the Bank's prior lending experience with the borrower. The typical multi-family property in the Bank's multi-family lending portfolio has between 11 and 110 dwelling units with an average loan balance of approximately $550,000. Most loans originated or purchased are located in New Jersey and New York. To a lesser extent, the Bank's policy has been to originate commercial real estate loans. The loans are generally made in amounts up to 65% of the appraised value of the property. The Bank's commercial real estate loans primarily have rates equal to the prime rate plus a margin. In making such loans, the Bank primarily considers the net operating income generated by the real estate to support the debt service, the financial resources and income level and managerial resources of the borrower, the marketability of the property and the Bank's lending experience with the borrower. The Bank's commercial real estate loans typically are secured by properties such as mixed-use properties, retail stores, office buildings and strip shopping centers. The Bank's commercial real estate 5 portfolio includes multi-family loans. For a discussion of the Bank's largest commercial real estate loan, see "- Loans to One Borrower." Loans secured by multi-family and commercial real estate generally involve a greater degree of risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate. If the cash flow from the property is reduced, the borrower's ability to repay the loan may be impaired. Residential Construction Loans. The Bank's policy has been to originate residential construction loans to a lesser extent than other types of mortgages. Residential construction loans are made up to a maximum of 80% of the appraised value of the home, based upon the builder's plans. The rate charged is generally the prime rate plus 1% and one point. The loan proceeds are disbursed based upon work completed. Consumer Loans. The Bank's consumer loans primarily consist of home equity loans, and, to a much lesser extent, student loans, personal loans and loans secured by savings deposits. The home equity lines of credit are made with loan to value ratios of up to 80% on either a fixed or adjustable rate basis. The underwriting standards employed by the Bank for consumer loans include a determination of the applicant's payment history on other debts and an assessment of the borrower's ability to make payments on the proposed loan and other indebtedness. In addition to the creditworthiness of the applicant, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. The Bank's consumer loans tend to have higher interest rates and shorter maturities than one- to four-family mortgage loans, but are considered to entail a greater risk of default than mortgage loans. Loan Approval Authority and Underwriting. The Board of Directors generally approves all mortgage loans although the Bank's President has the authority to approve loans up to $500,000. Any loans exceeding that amount must be approved by the Board of Directors. The Bank uses board approved independent fee appraisers on real estate loans. It is the Bank's policy to obtain title insurance on all properties securing real estate loans and to obtain fire, flood and casualty insurance on all loans that require security. Loan Commitments. The Bank issues written commitments to prospective borrowers on all real estate approved loans. Generally, the commitment requires the loan to be closed within sixty days of issuance. At December 31, 1998, the Bank had $5.1 million of commitments to fund new mortgage loans and commitments on unused lines of credit relating to home equity loans of $4.6 million. Loan Purchases. The Bank has purchased and participated in loans, primarily in its market area. At December 31, 1998, the Bank had $3.9 million of purchased loans and $15.4 million in loan participations. The Bank purchases and participates in loans after applying its own underwriting standards. The Bank typically does not service the loans that it purchases or participates in with other financial institutions. 6 Loans to One Borrower. Savings associations are subject to the same limits as those applicable to national banks, which under current regulations limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and retained income on an unsecured basis and an additional amount equal to 10% of unimpaired capital and retained income if the loan is secured by readily marketable collateral (generally, financial instruments, not real estate) or $500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was approximately $4.5 million as of December 31, 1998. At December 31, 1998, the Bank's three largest lending relationships ranged from $1.0 million to $1.1 million. They are all performing loans on apartment buildings in New Jersey and New York in which the Bank has a participating interest. See also "-- Multi-Family and Commercial Real Estate." Non-Performing Loans and Classified Assets Loan Delinquencies. The Bank's collection procedures provide that when a mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is still delinquent after 30 days past due, the customer will receive a letter from the Bank. If the delinquency continues, similar subsequent efforts are made to eliminate the delinquency. If the loan continues in a delinquent status for 60 days or more and no repayment plan is in effect, the Bank's attorney will send a letter to the customer. After 90 days past due, the Board of Directors typically approves the initiation of foreclosure proceedings as soon as possible. Loans are reviewed on a monthly basis and are placed on a non-accrual and non-performing status when the loan becomes more than 90 days delinquent. The following table sets forth information regarding non-performing loans and real estate owned. During the periods indicated, the Bank had no restructured loans within the meaning of SFAS No. 15.
At December 31, ----------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands) Non-performing loans: Nonaccrual loans: One- to four-family residential........... $1,003 $1,036 $ 989 $1,059 $4,182 Multi-family and commercial real estate... -- 248 860 860 -- Consumer loans............................ -- -- 52 23 20 ----- ----- ----- ----- ----- Total nonaccrual loans....................... 1,003 1,284 1,901 1,942 4,202 Accruing one- to four-family residential.. -- -- -- 505 -- ----- ----- ----- ----- ----- Total non-performing loans................... 1,003 1,284 1,901 2,447 4,202 ----- ----- ----- ----- ----- Real estate owned............................ 297 604 857 1,501 1,765 ----- ----- ----- ----- ----- Total non-performing assets $1,300 $1,888 $2,758 $3,948 $5,967 ===== ===== ===== ===== ===== Total non-performing loans to net loans..... .67% .87% 1.62% 2.54% 4.43% ===== ===== ===== ===== ===== Total non-performing loans to total assets... .29% .39% .63% .79% 2.17% ===== ===== ===== ===== ===== Total non-performing assets to total assets.. .37% .57% .91% 1.27% 3.09% ===== ===== ===== ===== =====
Interest income that would have been recorded on nonaccrual loans had they been current under the original terms of such loans was approximately $89,000 and $111,000 for the years ended December 31, 1998 and 1997, respectively. Amounts included in the Bank's interest income attributable to non-performing loans for the years ended December 31, 1998 and 1997 were approximately $60,000 and $50,000, respectively. 7 Classified and Criticized Assets. OTS regulations provide for a classification system for problem assets of insured institutions which covers all problem assets. Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful," or "loss." An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the insured institution may sustain "some loss" if the deficiencies are not corrected. Loans classified as substandard may or may not be considered impaired under generally accepted accounting principals. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and as such, are charged off by the Bank. Assets which do not currently expose the Bank to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated "special mention" by management. When the Bank classifies problem assets as either substandard or doubtful, it may establish general allowances for loan and lease losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities. When the Bank classifies problem assets as loss, it is considered uncollectible and the Bank charges off such amount. The Bank's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining an institution's regulatory capital, while specific valuation allowances for loan losses generally do not qualify as regulatory capital. The following table provides further information about the Bank's classified assets as of the dates indicated. At December 31, -------------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------- (In Thousands) Criticized: Special Mention........ $1,573 $3,912 $2,931 $2,639 $2,094 Classified: Substandard............ 1,645 1,637 3,665 3,925 5,901 Doubtful............... -- -- -- -- -- Loss................... -- -- -- -- 123 ------ ------ ------ ------ ------ $3,218 $5,549 $6,596 $6,564 $8,118 ===== ===== ===== ===== ===== Real Estate Owned. Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is carried at the lower of the cost or fair value less selling costs. It is the policy of the Bank to obtain an appraisal on all real estate acquired through foreclosure as soon as practicable after it takes possession of the property. The Bank generally reassesses the value of real estate owned at least every eighteen months. These properties are subsequently evaluated and carried at the lower of the "new" cost or fair value minus selling costs of the underlying collateral. The Bank's real estate owned totaled approximately $297,000 at December 31, 1998. 8 Allowance for Loan Losses. A provision for loan losses is charged to operations based on management's evaluation of the potential losses that may be incurred in the Bank's loan portfolio. Such evaluation, which includes a review of certain loans of which full collectibility of interest and principal may not be reasonably assured, considers the Bank's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. Management will continue to review its loan portfolio to determine the extent, if any, to which further additional loss provisions may be deemed necessary. There can be no assurance that the allowance for losses will be adequate to cover losses which may in fact be realized in the future and that additional provisions for losses will not be required. As a result of the declines in regional real estate market values and the significant losses experienced by many financial institutions, there has been a greater level of scrutiny by regulatory authorities of the loan portfolios of financial institutions undertaken as part of the examination of the institution by the FDIC, OTS or other federal or state regulators. Results of recent examinations indicate that these regulators may be applying more conservative criteria in evaluating real estate market values, requiring significantly increased provisions for potential loan losses. While the Bank believes it has established an adequate allowance for loan losses, there can be no assurance that regulators, in reviewing the Bank's loan portfolio, will not request the Bank to significantly increase its allowance for loan losses, thereby negatively affecting the Bank's financial condition and earnings or that the Bank may not have to increase its level of loan loss allowance in the future. 9 Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Bank's allowance for loan losses at the dates indicated.
At December 31, ------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in Thousands) Total loans outstanding............... $150,246 $148,415 $118,493 $97,971 $96,447 ======= ======= ======= ====== ====== Allowance balances (at beginning of period)........................... $ 1,168 $ 1,090 $ 958 $ 1,169 $ 818 Provision: One- to four-family................. 79 168 136 87 340 Multi-family and commercial real estate(1).................... 39 35 38 35 13 Consumer............................ 43 37 9 9 3 ------- ------- ------- ----- ------ Total provision for loan losses....... 161 240 183 131 356 ------- ------- ------- ----- ------ Charge-offs net of recoveries: One- to four-family................. -- 154 51 342 5 Multi-family and commercial real estate....................... -- -- -- -- -- Consumer.............................. -- 8 -- -- -- ------- ------- ------- ------ ------ Total charge-offs..................... -- 162 51 342 5 ------- ------- ------- ------ ------ Allowance balance (at end of period)............................. $ 1,329 $ 1,168 $ 1,090 $ 958 $ 1,169 ======= ======= ======= ====== ====== Allowance for loan losses as a percent of total loans outstanding......................... 0.88% 0.79% 0.92% 0.98% 1.21% ======= ======= ======= ====== ======
- ------------------------ (1) Includes residential construction loans. 10 Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the Bank's allowance for loan and lease losses by loan category and the percentage of loans in each category to net loans receivable at the dates indicated. The portion of the loan loss allowance allocated to each loan category does not represent the total available for future losses which may occur within the loan category since the total loan loss allowance is a valuation reserve applicable to the entire loan portfolio.
At December 31, ------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------- ----------------- ----------------- ----------------- ------------------ Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans to Loan to Loan to Loan to Loan to Loan Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio Amount Portfolio ------ --------- ------ --------- ------ --------- ------ --------- ------ --------- (Dollars in Thousands) At end of period allocated to: One-to four-family.......... $ 956 78.03% $ 877 79.68% $ 863 91.66% $778 92.31% $1,033 92.71% Multi-family and commercial real estate(1)................ 274 11.60 235 11.93 200 3.27 162 4.82 127 4.71 Consumer ................... 99 10.37 56 8.39 27 5.07 18 3.54 9 3.80 ----- ------ ----- ------ ----- ------ --- ------ ----- ------ Total allowance............. $1,329 100.00% $1,168 100.00% $1,090 100.00% $958 100.00% $1,169 100.00% ===== ====== ===== ====== ===== ====== === ====== ===== ======
(1) Includes residential construction loans. 11 Investment Activities General. The investment policy of the Bank, which is approved by the Board of Directors and implemented by certain officers as authorized by the Board, is designed primarily to provide and maintain liquidity and to manage the interest rate sensitivity of its overall assets and liabilities, to generate a favorable return without incurring undue interest rate and credit risk, to provide a flow of earnings and a countercyclical balance to earnings and to provide a balance of quality and diversification of the Bank's assets. In establishing its investment strategies, the Bank considers its business and growth plans, the economic environment, its interest rate sensitivity position, the types of securities to be held, and other factors. Federally chartered savings institutions have authority to invest in various types of assets, including U.S. Treasury obligations, securities of various federal agencies, mortgage-backed and mortgage-related securities, certain certificates of deposit of insured banks and savings institutions, certain bankers acceptances, repurchase agreements, loans of federal funds, and, subject to certain limits, corporate securities, commercial paper and mutual funds. Current regulatory and accounting guidelines regarding investment portfolio policy require insured institutions to categorize securities as held for "investment," "sale," or "trading." At December 31, 1998, the Bank had no securities held available for sale or trading. The Bank's securities portfolio, which the Bank has the ability and intent to hold to maturity, are accounted for on an amortized cost basis. The Bank may purchase securities in the future to be held available for sale or trading. At December 31, 1998, the Bank's investment securities portfolio primarily consisted primarily of short and medium term agency securities, corporate bonds, trust preferred securities and preferred stock. In addition, at December 31, 1998, the Bank had federal funds sold of $23.0 million, resale agreements of $4.0 million and FHLB stock of $3.8 million. To supplement lending activities and to utilize excess liquidity, the Bank invests in residential mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. The mortgage-backed securities portfolio at December 31, 1998 consisted of both fixed-rate and adjustable rate certificates issued by the FHLMC, GNMA and FNMA. The fixed rate certificates provide the certificate holder principal payments while the adjustable rate securities provide protection against rising interest rates. Mortgage-backed securities represent a participation interest in a pool of single-family or multi-family mortgages, the principal and interest payments on which are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities, to investors such as the Bank. Such quasi-governmental agencies, which guarantee the payment of principal and interest to investors, primarily include FHLMC, FNMA, and GNMA. Mortgage-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The underlying pool of mortgages can be composed of either fixed-rate mortgages or adjustable-rate mortgage loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. As a result, the interest rate risk characteristics of the underlying pool of mortgages, fixed rate or adjustable rate, as well as prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. 12 All of the securities have a cap rate of either 9.0%, or 10.0% and all of the products meet the current FFIEC tests. The securities are tested on a quarterly basis. Investment and Mortgage-backed Securities Portfolio. The following table sets forth the carrying value of the Bank's investment and mortgage-backed securities portfolio. At December 31, --------------------------------------------- 1998(1) 1997 1996 ---------- ----------- ----------- (In Thousands) Investment Securities: U.S. Government securities................. $ -- $ -- $ 6,006 U.S. Agency securities....... 53,419 57,988 45,022 Corporate bonds.............. 1,990 -- -- Trust preferred securities... 11,496 -- -- Preferred stock.............. 13,095 -- -- Other securities............. -- -- 342 ------- ------ ------ Total investment securities............... 80,000 57,988 51,370 Federal funds sold............ 23,000 3,500 5,000 Resale agreements............. 4,000 -- -- FHLB Stock.................... 3,768 2,518 2,076 ------- ------ ------ Total investment securities, federal funds sold and FHLB stock................... $110,768 $64,006 $58,446 ======= ====== ====== - -------------------- (1) Includes held to maturity and available for sale (available for sale issues are reflected net of an unrealized loss of approximately $493,000). At December 31, --------------------------------------- 1998(2) 1997(2) 1996 -------- -------- -------- (Dollars in Thousands) Mortgage-backed securities: GNMA........................... $17,293 $ 26,337 $ 33,675 FNMA........................... 36,953 42,393 49,434 FHLMC.......................... 20,158 34,932 28,297 ------ ------- ------- Total...................... 74,404 103,662 111,406 Net premiums................... 941 1,224 1,067 ------- -------- ------- Net mortgage-backed securities..................... $75,345 $104,886 $112,473 ====== ======= ======= - --------------------- (2) Includes held to maturity and available for sale (available for sale issues are reflected net of unrealized losses of approximately $17,000 and $111,000 for 1998 and 1997, respectively). 13 Investment and Mortgage-backed Securities' Portfolios Maturities. The following table sets forth certain information regarding the carrying values, weighted average yields and maturities of the Bank's investment and mortgage-backed securities portfolios at December 31, 1998.
Total Investment and One Year or Less One to Five Years More Than Five Years Mortgage-backed Securities ------------------ ------------------- -------------------- ----------------------------- Weighted Weighted Weighted Weighted Estimated Carrying Average Carrying Average Carrying Average Carrying Average Fair Value Yield Value Yield Value Yield Value Yield Value -------- -------- -------- -------- -------- -------- -------- -------- --------- (Dollars in Thousands) U.S. Agency securities(1).......... $ -- --% $ 2,000 6.74% $51,419 6.20% $53,419 6.22% $53,199 Corporate Bonds(1)................. -- --% -- -- 1,990 7.00 1,990 7.00 1,990 Trust preferred securities(1)...... 11,496 6.60 11,496 6.60 11,496 Preferred stock(1)................. $ 8,910 5.00 4,185 6.26 13,095 5.40 13,095 ----- ---- ------ ---- ------ ---- ------ ---- ------ Total investment securities(1).. $ -- --% $10,910 5.32% $69,090 6.29% $80,000 6.16% $79,780 ===== ==== ====== ==== ====== ==== ====== ==== ====== GNMA............................... $ -- --% $ 155 8.25% $17,488 7.04% $17,643 7.05% $17,498 FNMA(1)............................ 119 7.00 1,248 7.00 36,052 6.55 37,419 6.57 37,427 FHLMC(1)........................... 1,523 5.92 3,412 6.79 15,347 6.70 20,283 6.65 20,354 ----- ---- ------ ---- ------ ---- ------ ---- ------ Total mortgage-backed $1,642 6.00% $ 4,815 6.89% $68,887 6.71% $75,345 6.70% $75,279 securities...................... ===== ==== ====== ==== ====== ==== ====== ==== ======
- ---------------------- (1) Includes securities held to maturity and available for sale. 14 Sources of Funds General. Deposits are the major source of the Bank's funds for lending and other investment purposes. The Bank derives funds from amortization and prepayment of loans and maturities of investment securities, mortgage-backed securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. The Bank can obtain advances from the FHLB as an alternative to retail deposit funds. FHLB advances may also be used to acquire certain other assets as may be deemed appropriate for investment purposes. These advances are collateralized by the capital stock of the FHLB held by the Bank and by certain of the Bank's mortgage loans and mortgage-backed securities. Deposits. The Bank currently offers NOW Accounts, Super NOW accounts, regular passbook statement savings accounts and savings accounts, money market deposit accounts and term certificate accounts, primarily to consumers within its primary market area. Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit and the interest rate, among other factors. Although the Bank partially relies on customer service and relationships with customers to attract and retain deposits, market interest rates and rates offered by competing financial institutions significantly affect the Bank's ability to attract and retain deposits. The interest rates paid by the Bank on deposits are monitored regularly and are set as needed at the direction of the Board of Directors. The interest rates on deposit account products are determined by evaluating the interest rates offered by other local institutions, and the degree of competition the Bank wishes to maintain; the Bank's anticipated need for cash and the timing of that desired cash flow; the cost of borrowing from other sources versus the cost of acquiring funds through customer deposits; and the Bank's anticipation of future economic conditions and related interest rates. The Bank's interest rates typically are competitive with those offered by competitors in the Bank's primary market area. Regular savings accounts, money market accounts and NOW accounts including non-interest bearing deposits constituted $41.4 million, $7.0 million and $29.1 million, respectively, or 17.05%, 2.87%, and 11.98%, respectively. Certificates of deposit constituted $165.5 million or 68.10% of the deposit portfolio. As of December 31, 1998, the Bank had no brokered deposits. Jumbo Certificate Accounts. The following table indicates the amount of the Bank's certificates of deposit of greater than $100,000 by time remaining until maturity as of December 31, 1998. Certificates Maturity Period of Deposits - --------------- -------------- (In Thousands) Within three months................................. $ 1,971 Three through six months............................ 2,684 Six through twelve months........................... 6,468 Over twelve months.................................. 3,419 ------ $14,542 15 Savings Deposit Activity. The following table sets forth the savings activities of the Bank for the periods indicated. Year Ended December 31, ------------------------------------ 1998 1997 1996 ---- ---- ---- (In Thousands) Net increase (decrease) before interest credited, deposits purchased and deposits sold............ $ 2,411 $(8,507) $ (21,401) Deposits purchased....................... -- -- -- Deposits sold............................ -- -- (9,221) Interest credited........................ 10,504 10,328 11,083 ------ ------ -------- Net increase (decrease) in savings deposits....................... $12,915 $ 1,821 $ (19,539) ====== ====== ======== Borrowings At December 31, 1998, the Bank had $68.5 million of borrowings with the Federal Home Loan Bank. These consist of the following: (a) $9.0 million repurchase agreement with a rate of 5.82%, maturing December, 1999 and is callable quarterly on interest payment dates. As of March 6, the borrowing was still in place. (b) $25.0 million advance maturing March 2008, and with a rate of 5.35%. On March 12, 2001 and quarterly thereafter, the borrowing can be called with four days notice. (c) $25.0 million advance maturing November 2003, and with a rate of 4.93%. On November 19, 2001 and quarterly thereafter, the borrowing can be called with four days notice. (d) $9.5 million, 30 day repurchase agreement with a rate of 5.29%. This repurchase agreement was subsequently rolled over in January 1999 at a rate of 4.95%. In February, the repurchase agreement was paid down to $9.0 million and the rate became 4.92%. Subsidiary Activities As of December 31, 1998, the Bank was the sole subsidiary of the Company. The Bank has no active subsidiaries. Personnel As of December 31, 1998, the Bank had 37 full-time and 12 part-time employees. None of the Bank's employees are represented by a collective bargaining group. The Bank believes that its relationship with its employees is good. 16 Regulation Set forth below is a brief description of all materials laws and regulations which relate to the regulation of the Bank and the Company. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Company Regulation General. The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, should such subsidiaries be formed, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. This regulation and oversight is intended primarily for the protection of the depositors of the Bank and not for the benefit of stockholders of the Company. The Company is also required to file certain reports with, and otherwise comply with, the rules and regulations of the OTS and the SEC. Qualified Thrift Lender Test. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions, provided the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any other Savings Association Insurance Fund ("SAIF") insured savings association) would become subject to restrictions applicable to bank holding companies unless such other associations each also qualify as a QTL and were acquired in a supervisory acquisition. See "Regulation of the Bank -- Qualified Thrift Lender Test." Restrictions on Acquisitions. The Company must obtain approval from the OTS before acquiring control of any other SAIF-insured association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in OTS regulations, of a federally insured savings institution without giving at least 60 days' written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. In addition, no company may acquire control of such an institution without prior OTS approval. Federal Securities Law. The Company is subject to filing and reporting requirements by virtue of having its common stock registered under the Securities Exchange Act of 1934. Furthermore, Company stock held by persons who are affiliates (generally officers, directors and principal stockholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. 17 Regulation of the Bank General. As a federally chartered, SAIF-insured savings association, the Bank is subject to extensive regulation by the OTS and the FDIC. Lending activities and other investments must comply with various federal statutory and regulatory requirements. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines the Bank and prepares reports for the consideration of the Bank's Board of Directors on any deficiencies that they find in the Bank's operations. The Bank's relationship with its depositors and borrowers is also regulated to a great extent by federal law, especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. The Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other savings institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC or the Congress could have a material adverse impact on the Company, the Bank and their operations. Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. Two separate insurance funds, the Bank Insurance Fund ("BIF") for commercial banks, state savings banks and some federal savings banks, and the SAIF for savings associations, are maintained and administered by the FDIC. The Bank is a member of the SAIF and its deposit accounts are insured by the FDIC, up to the prescribed limits. The FDIC has examination authority over all insured depository institutions, including the Bank, and has under certain circumstances, authority to initiate enforcement actions against federally insured savings institutions to safeguard safety and soundness and the deposit insurance fund. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to its target level within a reasonable time and may decrease such assessment rates if such target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments are set within a range, based on the risk the institution poses to its deposit insurance fund. This risk level is determined based on the institution's capital level and the FDIC's level of supervisory concern about the institution. FDIC assessments on SAIF institutions currently range from 0 to 27 basis points. In addition, legislation requires the cost of prior thrift failures to be shared by both the SAIF and the Bank Insurance Fund ("BIF") (Fico Bond payments). The Fico Bond assessment for savings institutions in 1998 was approximately $0.61 per $100 in deposits. Examination Fees. In addition to federal deposit insurance premiums, savings institutions like the Bank are required by OTS regulations to pay assessments to the OTS to fund the operations of the 18 OTS. The general assessment is paid on a semi-annual basis and is computed based on total assets of the institution, including subsidiaries. Regulatory Capital Requirements. OTS capital regulations require savings institutions to meet three capital standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to at least 4% of total adjusted assets, and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted assets. Savings associations with a greater than "normal" level of interest rate exposure will, in the future, be subject to a deduction for an interest rate risk ("IRR") component which may be from capital for purposes of calculating their risk-based capital requirement. See "-- Net Portfolio Value Analysis." Tangible capital is defined as core capital less all intangible assets (including supervisory goodwill), plus purchased mortgage servicing rights valued at the lower of the maximum percentage established by the OTS or the amount includable in core capital. Core capital is defined as common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible assets. The OTS requires a core capital ratio of at least 3% for those savings associations in the strongest financial and managerial condition. All other savings associations are required to maintain minimum core capital of at least 4% of total adjusted assets, with a maximum core capital ratio requirement of 5%. In determining the required minimum core capital ratio, the OTS assesses the quality of risk management and the level of risk in each savings association on a case-by-case basis. The risk-based capital standard for savings institutions requires the maintenance of total risk-based capital (which is defined as core capital plus supplementary capital) of 8% of risk-weighted assets. The components of supplementary capital include, among other items, cumulative perpetual preferred stock, perpetual subordinated debt, mandatory convertible subordinated debt, intermediate-term preferred stock and the portion of the allowance for loan losses not designated for specific loan losses. The portion of the allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100% of core capital. A savings association must calculate its risk-weighted assets by multiplying each asset and off-balance sheet item by various risk factors as determined by the OTS, which range from 0% for cash to 100% for delinquent loans, property acquired through foreclosure, commercial loans and other assets. 19 As shown below, the Bank's regulatory capital exceeded all minimum regulatory capital requirements applicable to it as of December 31, 1998: Percent of Adjusted Amount Assets ------ ---------- (Dollars in Thousands) Tangible Capital: Actual capital................................ $28,740 8.33% Regulatory requirement........................ 5,176 1.50 ------- ---- Excess...................................... $23,564 6.83% ====== ==== Core Capital: Actual capital................................ $28,740 8.33% Regulatory requirement........................ 13,801 4.00 ------ ---- Excess...................................... $14,939 4.33% ====== ==== Risk-Based Capital: Actual capital................................ $29,988 20.45% Regulatory requirement........................ 11,729 8.00 ------ ----- Excess...................................... $18,259 12.45% ====== ===== The Bank is not under any agreement with regulatory authorities nor is it aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on liquidity, capital resources or operations of the Bank or the Company. Prompt Corrective Action. The FDICIA also established a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, which became effective December 19, 1992, the banking regulators are required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Under the OTS final rule implementing the prompt corrective action provisions, an institution is deemed to be (i) "well capitalized", (ii) "adequately capitalized", (iii) "undercapitalized", (iv) "significantly undercapitalized", or (v) "critically undercapitalized". In addition, under certain circumstances, a federal banking agency may reclassify a well capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized). Immediately upon becoming undercapitalized, an institution shall become subject to various restrictions and could be subject to additional supervisory actions. As of December 31, 1998, the Bank was a "well capitalized institution" as defined in the prompt corrective action regulations and as such is not subject to any prompt corrective action measures. Dividend and Other Capital Distribution Limitations. Federal law requires the Bank to give the OTS 30 days' advance notice of any proposed declaration of dividends to the Company, and the OTS has the authority under its supervisory powers to prohibit the payment of dividends to the Company. In addition, the Bank may not declare or pay a cash dividend on its capital stock if the effect thereof would 20 be to reduce the regulatory capital of the Bank below the amount required for the liquidation account to be established in connection with the Conversion. Finally, a savings association is prohibited from making a capital distribution if, after making the distribution, the savings association would be "undercapitalized" (not meet any one of its minimum regulatory capital requirements). OTS regulations also prohibit the Bank from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the regulatory (or total) capital of the Bank would be reduced below the amount required to be maintained for the liquidation account established by it for certain depositors in connection with its conversion from mutual to stock form. In addition, such regulations prohibit an institution from repurchasing any of its stock for a period of at least one year from the date of its conversion without a waiver of such prohibition by the OTS. Qualified Thrift Lender Test. Savings institutions are to meet a QTL test. If the Bank maintains an appropriate level of Qualified Thrift Investments (primarily residential mortgages and related investments, including certain mortgage-backed securities) ("QTIs") and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of New York. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the institution in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. The method for measuring compliance with the QTL test is on a monthly basis in nine out of every 12 months. As of December 31, 1998, the Bank was in compliance with its QTL requirement. A savings association that does not meet a QTL test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the savings association may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the savings association shall be restricted to those of a national bank; (iii) the savings association shall not be eligible to obtain any advances from its FHLB; and (iv) payment of dividends by the savings association shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the savings association ceases to be a QTL, it must cease any activity and not retain any investment not permissible for a national bank and immediately repay any outstanding FHLB advances (subject to safety and soundness considerations). Loans-to-One Borrower. See "Business -- Lending Activities -- Loans-to-One Borrower." Community Reinvestment. Under the Community Reinvestment Act ("CRA"), as implemented by OTS regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. Current law requires public disclosure of an institution's CRA rating and requires the OTS to provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system in lieu of the existing five-tiered numerical rating system. The Bank received a satisfactory rating as a result of its last evaluation in March, 1998. 21 Transactions With Affiliates. Generally, restrictions on transactions with affiliates require that transactions between a savings association or its subsidiaries and its affiliates be on terms as favorable to the Bank as comparable transactions with non-affiliates. In addition, certain of these transactions are restricted to an aggregate percentage of the Bank's capital; collateral in specified amounts must usually be provided by affiliates to receive loans from the Bank. Affiliates of the Bank include the Company and any company which would be under common control with the Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of any affiliate which is not a subsidiary. The OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case-by-case basis. The Bank's authority to extend credit to its officers, directors and 10% shareholders, as well as to entities that such persons control is currently governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O promulgated by the Federal Reserve Board. Among other things, these regulations require such loans to be made on terms substantially similar to those offered to unaffiliated individuals, place limits on the amount of loans the Bank may make to such persons based, in part, on the Bank's capital position, and require certain approval procedures to be followed. Recent legislation permits savings institutions to make loans to executive officers, trustees and principal shareholders ("insiders") on preferential terms, provided the extension of credit is made pursuant to a benefit or compensation program of the Bank that is widely available to employees of the Bank or its affiliates and does not give preference to any insider over other employees of the Bank or affiliate. Liquidity Requirements. All savings associations are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. The liquidity requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the required liquid asset ratio is 4%. At December 31, 1998 the Bank's liquidity ratio was 36.11%. Federal Home Loan Bank System. The Bank is a member of the FHLB of New York, which is one of 12 regional FHLBs that administer the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of New York in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. As of December 31, 1998, the Bank had $3.8 million in FHLB stock, which was in compliance with this requirement. For the fiscal year ended December 31, 1998, dividends paid by the FHLB of New York to the Bank totaled $256,000. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. 22 Item 2. Properties - -------------------- The Bank operates from its main office located at 86 Main Street, Little Falls, New Jersey and five branch offices, one of which is leased. This includes three branches purchased from an unaffiliated commercial bank in December 1996. The Bank's total investment in office property and equipment is $4.2 million with a net book value of $2.6 million at December 31, 1998. Item 3. Legal Proceedings - -------------------------- Neither the Company nor its subsidiaries are involved in any pending legal proceedings, other than routine legal matters occurring in the ordinary course of business, which in the aggregate involve amounts which are believed by management to be immaterial to the consolidated financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security-Holders - ------------------------------------------------------------ Not applicable. PART II Item 5. Market for Common Equity and Related Stockholder Matters - ----------------------------------------------------------------- Information relating to the market for Registrant's common equity and related stockholder matters appears under "Stock Market Information" in the Registrant's 1998 Annual Report to Stockholders ("Annual Report") on page 2, and is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- The above-captioned information appears in the Annual Report on pages 3 and 4, and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations - -------------------------------------------------------------------------------- The above-captioned information appears under Management's Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report on pages 5 through 10 and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosure About Market Risk - ------------------------------------------------------------------- The information contained in the Section captioned "Risk Management" in the Annual Report on page 10 is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The Financial Statements of the Bank, together with the report thereon by Radics & Co., LLC, appear in the Annual Report on pages 18 through 58 and are incorporated herein by reference. 23 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure - -------------------------------------------------------------------------------- Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The Certificate of Incorporation requires that the Board of Directors be divided into three classes, each of which contains approximately one-third of the members of the Board. The directors are elected by the stockholders of the Company for staggered three-year terms, or until their successors are elected and qualified. The Board of Directors currently consists of seven members. The following table sets forth the directors continuing in office, their name, age, the year they first became a director of the Company or the Bank, the expiration date of their current term as a director, and the number and percentage of shares of the Common Stock beneficially owned as of the March 22, 1999. Each director of the Company is also a member of the Board of Directors of the Bank.
Shares of Year First Current Common Stock Elected or Term to Beneficially Percent Name Age(1) Appointed Expire Owned(2)(3) of Class - ---- ------ ---------- ------- --------------------- -------- John P. Pullara 67 1995 1999 52,417(9)(10) 2.06% George Kuiken 78 1954 1999 25,166(4)(5)(11) 0.99% Raoul G. Barton 74 1970 2001 39,222(4)(5)(6)(7) 1.54% Albert J. Weite 64 1976 2001 38,666(4)(5)(8) 1.52% Norman A. Parker 85 1953 2000 34,366(4)(5)(6)(12) 1.35% Edward J. Seugling 62 1970 2000 26,666(4)(5)(6)(13) 1.05% All Directors and Executive Officers as a Group (9 persons) 268,296(14)(15)(16) 10.56%
24 - ------------------------ * Less than 1.0%. (1) As of December 31, 1998. (2) As of the March 22, 1999. (3) Pursuant to rules promulgated under the 1934 Act, an individual is considered to beneficially own shares of Common Stock if he or she directly or indirectly has or shares (1) voting power, which includes the power to vote or to direct the voting of the shares; or (2) investment power, which includes the power to dispose or direct the disposition of the shares. Unless otherwise indicated, a director has sole voting power and sole investment power with respect to the indicated shares. (4) Includes 6,083 shares of Common Stock that have been awarded under the Management Stock Bonus Plan ("MSBP"), 3,500 shares of Common Stock under the 1997 Directors Stock Compensation Plan ("1997 DSCP") and 3,500 shares of Common Stock under the 1998 Directors Stock Compensation Plan ("1998 DSCP") which are subject to forfeiture under certain circumstances. Shares awarded under the MSBP, 1997 DSCP and the 1998 DSCP vest equally over five year periods beginning July 9, 1997, April 17, 1998 and April 21, 1999, respectively. (5) Includes options to purchase 6,083 shares of Common Stock pursuant to the Little Falls Bancorp, Inc. 1996 Stock Option Plan Options ("1996 Stock Option Plan") which are immediately exercisable within 60 days of the Voting Record Date. See "Item 12. Director and Executive Officer Compensation - Director Compensation - Stock awards." (6) Excludes 241,979 unallocated shares of Common Stock held under the ESOP for which such individual serves as one of three ESOP trustees. Beneficial ownership is disclaimed with respect to such ESOP shares held in a fiduciary capacity. (7) Includes 4,190 shares held by Mr. Barton's IRA, 4,894 shares held by the IRA of Mr. Barton's wife and 118 shares held by Mr. Barton's wife, which Mr. Barton may be deemed to beneficially own. (8) Includes 14,000 shares held jointly with Mr. Weite's wife, with whom voting and dispositive power is shared, and 3,000 shares held by Mr. Weite's IRA and 2,500 shares held by the IRA of Mr. Weite's wife, which Mr. Weite may be deemed to beneficially own. Does not include 6,000 shares owned by DOB&K, LLC, a partnership between Mr. Weite's children, of which Mr. Weite disclaims beneficial ownership. (9) Includes options to purchase 12,167 shares of Common Stock pursuant to the Little Falls Bancorp, Inc. 1996 Stock Option Plan Options ("1996 Stock Option Plan") which are immediately exercisable within 60 days of the Voting Record Date. See "Item 12. Director and Executive Officer Compensation - Director Compensation - Stock Awards." (10) Includes 15,000 shares held jointly with Mr. Pullara's wife, with whom voting and dispositive power is shared. Includes options to purchase 12,167 shares of Common Stock pursuant to the 1996 Stock Option Plan which are immediately exercisable within 60 days of the Voting Record Date. Also includes 18,250 and 3,500 shares of restricted stock awarded pursuant to the MSBP, 1997 DSCP and 1998 DSCP, and awards vest equally over five year periods beginning July 9, 1997, April 17, 1998 and April 21, 1999, respectively. (11) Includes 1,000 shares owned by Mr. Kuiken's wife, which Mr. Kuiken may be deemed to beneficially own. (12) Includes 15,000 shares held in trust, which Mr. Parker may be deemed to beneficially own, and 200 shares held jointly with Mr. Parker's wife, with whom voting and dispositive power is shared. (13) Includes 7,390 shares held by Mr. Seugling's IRA and 110 shares held by Custom Graphics & Design, Inc., which Mr. Seugling may be deemed to beneficially own. (14) Includes 4,265 allocated shares of Common Stock held for individual employee participants under the ESOP. Excludes unallocated shares of Common stock held under the ESOP. See note (6). (15) Includes options to purchase 63,548 shares of Common Stock which are immediately exercisable within 60 days of the Voting Record Date. (16) Excludes 241,979 unallocated shares of Common Stock held under the ESOP for which such individual serves as two of three members of the ESOP Committee. Beneficial ownership is disclaimed with respect to such ESOP shares held in a fiduciary capacity. The following table sets forth the non-director executive officers of the Company, their name, age, the year they first became an officer of the Company or the Bank, and their current position with 25 the Company. Executive officers serve for a one-year term at the determination of the Board of Directors. Year First Appointed as Position with Name of Individual Age(1) Officer(2) the Company or Bank - ------------------ ------ ------------ ---------------------- Leonard G. Romaine 52 1967 President and Chief Executive Officer Richard A. Capone 49 1995 Vice President, Chief Financial Officer Anne Bracchitta 59 1997 Corporate Secretary - ------------------------ (1) As of December 31, 1998. (2) Refers to the year the individual first became an officer of the Company or the Bank. Biographical Information The business experience of each director and executive officer of the Company is set forth below. All persons have held their present positions for five years unless otherwise stated. Directors --------- Raoul G. Barton was elected Director of the Bank in 1970 and served as Chairman from 1982 to 1994. Mr. Barton is a member of the Little Falls Masonic Lodge. In 1990, Mr. Barton retired as owner of Barton Jewelers which he founded in 1949. George Kuiken has served as Director of the Bank since 1954. Mr. Kuiken retired as President of New Jersey Rental Equipment, Inc. Norman A. Parker has served as a Director since 1953. Mr. Parker was Chairman of the Board of the Bank from 1973 to 1981 and President of the Bank from 1965 to 1977. Mr. Parker is a retired funeral director. Mr. Parker is also past President of the Passaic County Funeral Directors Association, past President and charter member of the Passaic Valley Rotary Club, past member of the Passaic Valley School Board, Elder of the First Reformed Church, charter member of the Little Falls Parking Authority, charter member of the Mayor's Committee for Senior Citizens and member of the Little Falls Masonic Lodge. John P. Pullara was with the Bank from March 1955, serving as its President from 1977 until his retirement on October 5, 1997. Mr. Pullara was elected Director of the Bank in June of 1995. Mr. Pullara is also Director and Treasurer of the Passaic County Historical Society, Director of the Garden State Concert Band, Treasurer of the Little Falls Historical Society, Chairman of the Little Falls Parking Authority and a member of the Little Falls Business Association. Edward J. Seugling has served as a Director of the Bank since 1970 and became the Vice Chairman of the Board of Directors in 1994. Mr. Seugling is a retired teacher at Passaic Valley High School and the sole owner of the Little Falls Journal. He is a member of the Little Falls Business Association, the Little Falls Masonic Lodge, the Little Falls Historical Society, and the New Jersey Education Association. He is a member of the First Reformed Church of Little Falls, and he has served as an elder and deacon of the First Reformed Church. He was formerly Chairman of the Little Falls Rent Leveling Board and was an associate member of the Little Falls Main Street Development Corp. 26 Albert J. Weite has served as Chairman of the Board of Directors of the Bank since 1994 and as a Director since 1976. Mr. Weite is a real estate investor. Executive Officers who are not Directors ---------------------------------------- Leonard G. Romaine has been employed by the Bank since 1967. He served as Treasurer and Secretary of the Company and as Senior Vice President, Secretary and Treasurer of the Bank until he was appointed President of the Bank and Company on October 6, 1997. Mr. Romaine is a member of the Passaic County Attorney Ethics Committee. Richard A. Capone became employed by the Bank and Company in November 1995 as Chief Financial Officer. Prior to that, Mr. Capone was controller or Treasurer at four different local financial institutions over the past 20 years. Anne Bracchitta has been employed by the Bank since 1980. She was appointed Corporate Secretary in 1997. Item 11. Executive Compensation - -------------------------------- Director Compensation Directors Fees. For fiscal year 1998, each member of the Board of Directors received an attendance fee of $1,450 per regular meeting. Committee members received an additional $725 per Asset-Liability Committee meeting attended. No Committee fees are paid to Board members who are employees. For the year ended December 31, 1998, total fees paid by the Company and the Bank to directors were $141,000. Directors are also provided with broad medical insurance coverage. Directors Retirement and Consultation Plan. The Bank's Board adopted a Directors' Consultation and Retirement Plan (the "Consultation Plan") on May 9, 1995. Such Consultation Plan provides retirement benefits to directors. Management believes the Consultation Plan will help to insure that the Bank has the continued services of these persons as directors to assist in the conduct of the Bank's business affairs in the future. A director who has served as a director for at least twenty years shall be a participant in the Consultation Plan. A consulting director shall be paid a monthly retirement benefit under the Consultation Plan equal to half of the director fee in effect at the time of such retirement until the month following the date of death of the consulting director. At the expiration of the period for which the participant is entitled to benefits, his status as a consulting director shall cease. All benefits payable under the plan will be paid by the Bank from current assets. There are no tax consequences to either the director or the Bank prior to payment of benefits. Upon receipt of payment of benefits, the director will recognize taxable ordinary income in the amount of such payment received and the Bank will be entitled to recognize a tax-deductible compensation expense. In addition, the Bank has a policy of continuing medical benefits for its retired directors. For the year ended December 31, 1998, no benefits were paid under the Consultation Plan and approximately $45,000 was accrued as an expense for the Consultation Plan and the continuation of such medical benefits. Stock Awards. On July 9, 1996, the stockholders of the Company approved the Little Falls Bancorp 1996 Stock Option ("1996 Stock Option Plan") and the Little Falls Bank Management Stock Bonus Plan ("MSBP"). Pursuant to the terms of the 1996 Stock Option Plan, each non-employee director received, on the date of stockholder approval options to purchase 15,208 shares of Common Stock. Under the MSBP, the same non-employee directors received 6,083 shares of restricted stock on the date 27 of stockholder approval. The options granted to these non-employee directors become first exercisable at a rate of 20% one year from the date of grant and 20% annually thereafter. Restricted stock granted to these non-employee directors will vest 20% one year from the date awarded and an additional 20% annually, thereafter. In April 1997, the Company adopted the 1997 Directors Stock Compensation Plan authorizing the granting of up to 24,500 shares of Common Stock in the aggregate (representing less than 1% of total shares outstanding at such time). Each non-employee director (seven persons) was awarded 3,500 shares of Common Stock which shall vest over a five year period beginning April 17, 1997. In April 1998, the Company adopted the 1998 Directors Stock Compensation Plan authorizing the granting of up to 24,500 shares of Common Stock in the aggregate (representing less than 1% of total shares outstanding at such time). During 1998, all 24,500 shares were granted under the plan (3,500 shares to each non-employee director). Executive Compensation Summary Compensation Table. The following table sets forth the compensation paid to the chief executive officer during the fiscal year ended December 31, 1998. All compensation paid to directors, officers and employees is paid by the Bank. Except as listed below, no other executive officer received cash compensation in excess of $100,000 during the fiscal year ended December 31, 1998.
Long Term Compensation Annual Compensation(1) Awards ------------------------------------------------- -------------------------------- Securities Restricted Underlying All Name and Other Annual Stock Options/ Other Principal Position Year Salary Bonus Compensation(2) Awards SARs(#) Compensation(6) - ------------------ ---- ------ ----- ------------ ------ ------- ------------ Leonard G. Romaine, 1998 $125,400 $ 9,000 $17,400 President(3) 1997 $115,000 $15,000 $20,200 -- 3,000(3) 42,660 1996 $ 89,420 $ 7,750 $15,000 $129,274(4) 30,417(5) 30,176
- ------------------------ (1) All compensation set forth above was paid by the Bank. (2) Consists of Board of Director's fees. For fiscal year 1998, there were no (a) perquisites over the lesser of $50,000 or 10% of the named executive officer's total salary and bonuses for the year; (b) payments of above-market preferential earnings on deferred compensation; (c) payments of earnings with respect to long term incentive plans prior to settlement or maturity: (d) tax payment reimbursements; or (e) preferential discounts on stock. (3) Options vest equally over a five year period beginning December 9, 1998. (4) Based upon 12,167 shares of restricted stock granted pursuant to the MSBP (fair market value on date of grant of $10.625). Restricted stock vest equally over a five year period beginning July 9, 1997. Dividends are paid on the restricted stock and are accrued and held in arrears until the restricted stock for which dividends were paid become vested. (5) Options vest equally over a five year period beginning July 9, 1997. (6) Includes 1,472 and 2,133 shares of stock held by the ESOP and allocated to Mr. Romaine's account for 1996 and 1997, respectively. Based on the closing price of the Common Stock ($20.00 per share) at December 31, 1998. As of the date of this proxy statement, shares had not yet been allocated for fiscal 1998. Employment Agreement. The Bank is a party to an employment agreement with President and Chief Executive Officer Leonard G. Romaine. The employment agreement is for a term of three years. Under the agreement, Mr. Romaine's employment is terminable by the Bank for "just cause" as defined in the agreement. If the Bank terminates Mr. Romaine without just cause, he will be entitled to a continuation of his salary from the date of termination through the remaining term of the agreement. The agreement contains a provision stating that in the event of termination of employment or diminution of employment in connection with, or within one year after, any change in control of the Bank, Mr. Romaine will be paid in a lump sum an amount equal to 2.99 times his five year average cash compensation. Had a change in control been deemed to have occurred at completion of the last fiscal 28 year, Mr. Romaine would have been entitled to a lump sum payment of approximately $388,000. The payment that would be made would be an expense to the Bank, thereby reducing net income and the Bank's capital by that amount. The agreement is reviewed annually by the Board of Directors and may be extended for additional one-year periods upon a determination of the Board and satisfactory job performance within the Board's sole discretion. The Bank also entered into similar employment agreements with eight officers of the Bank, with terms of three, two and one years and severance protection upon a termination of employment or diminution of employment following a change in control with such payment equalling between one and three times the current annual compensation of such individuals. Upon a change in control, payment to all executive officers as a group (seven persons), excluding Mr. Romaine, as of December 31, 1998, would have equalled approximately $1.0 million. Other Compensation Employee Stock Ownership Plan. The Bank maintains an ESOP for the exclusive benefit of participating employees. Participating employees are employees who have completed one year of service with the Bank or its subsidiary and have attained the age 21. The ESOP be funded by contributions made by the Bank in cash or the Common Stock. Benefits may be paid either in shares of the Common Stock or in cash. The ESOP borrowed funds with which to acquire 243,340 shares of the Common Stock issued in the Conversion, representing 8.0% of the Common Stock then outstanding. The loan is secured by the shares purchased and earnings of ESOP assets. Shares purchased with such loan proceeds will be held in a suspense account for allocation among participants as the loan is repaid. This loan is expected to be fully repaid in approximately 15 years. For the 1998 fiscal year, the Bank recognized an expense of $306,000 regarding the ESOP. 1996 Stock Option Plan. The Company's Board of Directors adopted a 1996 Stock Option Plan, which was approved by the Company's stockholders on July 9, 1996. Pursuant to the 1996 Stock Option Plan, a number of shares equal to 10% of the Common Stock issued in the Company's initial public offering (304,175 shares of Common Stock) were reserved for issuance by the Company upon exercise of stock options to be granted to officers, directors, and key employees of the Company (or any present of future parent or subsidiary of the Company), from time to time under the 1996 Stock Option Plan. The purpose of the 1996 Stock Option Plan is to provide additional incentive to certain officers, directors, and key employees by facilitating their purchase of a stock interest in the Company. The 1996 Stock Option Plan became effective on July 9, 1996 and provides for a term of ten years, after which no awards may be made, unless earlier terminated by the Board of Directors pursuant to the terms of the 1996 Stock Option Plan. An initial grant of stock options under the 1996 Stock Option Plan was made to officers, directors, and key employees upon the Company's receipt of stockholder approval on July 9, 1996, and the option exercise price is the closing price of the Common Stock on the date of stockholder approval. The initial grant of stock options were the only options granted to officers, directors, and key employees during the fiscal year ended December 31, 1996. In December 1997, certain officers and key employees were granted an aggregate of 16,000 additional options under the 1996 Stock Option Plan. The option exercise price is the closing price of the Company's Common Stock on the date of the grant. No options were granted to officers, directors and key employees during the fiscal year ended December 31, 1998. As of the Record Date, 15,208 stock options have been exercised pursuant to the 1996 Stock Option Plan. 29
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES - ------------------------------------------------------------------------------------------------------------------------------------ Number of Securities Underlying Unexercised Value of Unexercised Shares Options/SARs in-the-Money Options/SARs Acquired on Value at Fiscal Year-End at Fiscal Year-End Exercise Realized (#) ($) Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1) - ------------------------------------------------------------------------------------------------------------------------------------ Leonard G. Romaine 0 $0 12,767/20,650 114,066/171,094
(1) Based on an exercise price of $10.625 for options granted in the fiscal year ended December 31, 1996, and $20.00 for options granted in the fiscal year ended December 31, 1996 and the closing price of the Common Stock on December 31, 1998 of $20.00. Management Stock Bonus Plan. The board of directors of the Bank has adopted the MSBP as a method of providing directors, executive officers and key employees of the Bank with a proprietary interest in the Company in a manner designed to encourage such persons to remain in the employment or service with the Bank. Awards under the MSBP were made in recognition of prior and expected future services to the Bank to those directors, executive officers and key employees of the Bank responsible for implementation of the policies adopted by the board of directors of the Bank, the profitable operation of the Bank, and as a means of providing a further retention incentive and direct link between compensation and the profitability of the Bank. Awards under the MSBP vest at a rate of 20% per year beginning on the anniversary date of the date of grant. An initial grant of 82,732 shares of restricted stock was made on July 9, 1997, the date of stockholder approval of the MSBP. No awards were granted under the MSBP in 1998. Defined Benefit Plan. The Bank has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and employees' compensation. The Bank's funding policy is to fund pension costs accrued. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. All full-time employees of the Bank are eligible to participate after one year of service and attainment of age 21. A qualifying employee becomes fully vested in the Pension Plan upon completion of five years service or when the normal retirement age of 65 is attained. The Pension Plan is intended to comply with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Pension Plan provides for monthly payments to each participating employee at normal retirement age. The annual allowance payable under the Pension Plan is equal to 25% of an employee's average monthly salary, up to $650, plus 40% of average monthly salary in excess of $650, reduced for less than 25 years of service, plus 1/4 of 1% of average monthly salary times years of service. If benefits are paid prior to age 65, the benefit specified will be reduced by 1/15 for each of the first five years and 1/30 for each of the next five years and reduced actuarially for each additional year by which the starting date of such benefit precedes age 65. There is a minimum monthly benefit equal to 2% of monthly salary, times years of service up to 10 years. The Pension Plan also provides for payments in the event of disability or death. At December 31, 1998, Mr. Romaine had 29 years of credited service under the Pension Plan. The Bank had a pension expense of $216,000 for the fiscal year 1998. At December 31, 1998, the Pension Plan had projected benefit obligations greater than plan assets of approximately $1.2 million. 30 The following table shows the estimated annual benefits payable under the Pension Plan in calendar year 1998 based on the respective employee's years of benefit service and applicable average annual salary, as calculated under the Pension Plan. Benefits under the Pension Plan are not subject to offset for Social Security benefits. Years of Benefit Service ------------------------ 15 20 25 30 35 -- -- -- -- -- $ 20,000.................. $ 4,848 $ 6,464 $ 8,080 $ 8,330 $ 8,680 40,000.................. 10,398 13,864 17,330 17,830 18,330 60,000.................. 15,948 21,264 26,580 27,330 28,080 80,000.................. 21,498 28,664 35,830 36,830 37,830 100,000.................. 27,048 36,064 45,080 46,330 47,580 120,000.................. 32,598 43,464 54,330 55,830 57,330 150,000.................. 40,823 54,564 68,205 70,080 71,955 Report of the Compensation Committee on Executive Compensation The Bank Compensation Committee meets annually to review compensation paid to the chief executive officer. The Committee reviews various published surveys of compensation paid to employees performing similar duties for depository institutions and their holding companies, with a particular focus on the level of compensation paid by comparable stockholder institutions in and around the Bank's market area, including institutions with total assets of between $100 million and $300 million. Although the Committee does not specifically set compensation levels for executive officers based on whether particular financial goals have been achieved by the Bank, the Committee does consider the overall profitability of the Bank when making these decisions. During the year ended December 31, 1998, Leonard G. Romaine, President received an increase in his base salary from $115,000 to $125,400. The Committee will consider the annual compensation paid to the presidents and chief executive officers of publicly owned financial institutions nationally, in the State of New Jersey and surrounding Northeastern states with assets of between $100 million and $500 million and the individual job performance of such individual in consideration of its specific salary increase decision with respect to compensation to be paid to the president and chief executive officers in the future. Compensation Committee: Albert J. Weite Edward J. Seugling Raoul G. Barton Compensation Committee Interlocks and Insider Participation The Compensation Committee of the Bank during the year ended December 31, 1998 consisted of Directors Weite, Barton and Seugling, all members of the Board of Directors of the Company. Romaine was a member of the Compensation Committee during fiscal 1998 but did not participate in matters involving his personal compensation. 31 Performance Graph Set forth below is a stock performance graph comparing the cumulative total shareholder return on the Common Stock with (a) the cumulative total stockholder return on stocks included in the Nasdaq Stock Market index and (b) the cumulative total stockholder return on stocks included in the Nasdaq Bank index, as prepared for Nasdaq by the Center for Research in Securities Prices ("CRSP") at the University of Chicago. All three investment comparisons assume the investment of $100 as of the close of January 5, 1996 (the closing date of initial issuance of the Common Stock). All of these cumulative total returns are computed assuming the reinvestment of dividends. In the graph below, the periods compared were January 5, 1996 and the Company's fiscal years ending of December 31, 1996, 1997 and 1998. There can be no assurance that the Company's future stock performance will be the same or similar to the historical stock performance shown in the graph below. The Company neither makes nor endorses any predictions as to stock performance. [GRAPHIC OMITTED] ========================================================================== 1/5/96 12/31/96 12/31/97 12/31/98 - -------------------------------------------------------------------------- CRSP Nasdaq U.S. Index $100 $126 $161 $227 - -------------------------------------------------------------------------- CRSP Nasdaq Bank Index $100 $134 $224 $222 - -------------------------------------------------------------------------- Little Falls Bancorp, Inc. $100 $113 $184 $181 ========================================================================== 32 Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners. Persons and groups owning in excess of 5% of the Common Stock are required to file certain reports regarding such ownership pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"). The following table sets forth, as of the March 22, 1999, persons or groups who own more than 5% of the Common Stock and the ownership of all executive officers and directors of the Company as a group. The information provided is based upon documents supplied to the Company by the persons providing such information pursuant to the 1934 Act. The Company does not verify this information. Other than as noted below, management knows of no person or group that owns more than 5% of the outstanding shares of Common Stock at the Voting Record Date. Percent of Shares of Name and Address Amount and Nature of Common Stock of Beneficial Owner Beneficial Ownership Outstanding - ------------------- -------------------- ----------- First Manhattan Co. 437 Madison Avenue New York, NY 10022 198,000(1) 7.99% Wellington Management Co. LLP 75 State Street Boston, MA 02109 126,100(2) 5.09% Little Falls Bank Employee Stock Ownership Plan 86 Main Street Little Falls, NJ 07424 241,979(3) 9.77% John Hancock Advisors, Inc. Post Office Box 111 Boston, MA 02117 225,000(4) 9.49% - ------------------------------- (1) Information provided is based on a Schedule 13G/A dated February 11, 1999. (2) Information provided is based on a Schedule 13G/A dated February 8, 1999 filed by Wellington Management Co. LLP. (3) The ESOP purchased such shares for the exclusive benefit of plan participants with funds borrowed from the Company. These shares are held in a suspense account and will be allocated among ESOP participants annually on the basis of compensation as the ESOP debt is repaid. The Board of Directors has appointed a committee consisting of John P. Pullara, Leonard G. Romaine and Della Talerico to serve as the ESOP administrative committee ("ESOP Committee") and Directors Barton, Parker and Seugling to serve as the ESOP trustees ("ESOP Trustees"). The ESOP Committee or the Board instructs the ESOP Trustees regarding investment of ESOP plan assets. The ESOP Trustees must vote all shares allocated to participant accounts under the ESOP as directed by participants. Unallocated shares and shares for which no timely voting direction is received will be voted by the ESOP Trustees as directed by the ESOP Committee. As of March 11, 1999, 33,927 shares had been allocated under the ESOP to participant accounts. (4) Information provided is based on a Schedule 13G/A dated January 13, 1999. JHA has direct beneficial ownership of 225,000 shares of common stock. Through separate Advisory Agreements, JHA has sole power to vote 120,000 shares for the John Hancock Regional Fund and 105,000 shares for the John Hancock and Thrift Opportunity Fund. 33 (b) Security Ownership of Management. Included under Item 10 of this report. (c) Changes in Control. On January 26, 1999, the Registrant entered into a definitive merger agreement that will result in the acquisition of the Registrant by HUBCO, Inc. This acquisition is expected to occur during the third fiscal quarters of the Registrant's 1999 fiscal year. The Registrant has executed a stock option agreement with HUBCO, Inc. that provides HUBCO, Inc. with options that may be exercised for approximately 19.9% of the common stock of the Registrant at an exercise price of $19.25 per share in the event the planned acquisition does not occur. The planned acquisition is subject to numerous conditions. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- No directors, executive officers, or immediate family members of such individuals were engaged in transactions with the Bank or any subsidiary involving more than $60,000 during the year ended December 31, 1998. Furthermore, the Bank had no "interlocking" relationships existing during the year ended December 31, 1998 in which (i) any executive officer is a member of the Board of Directors/Trustees of another entity, one of whose executive officers is a member of the Bank's Board of Directors, or where (ii) any executive officer is a member of the compensation committee of another entity, one of whose executive officers is a member of the Bank's Board of Directors. The Bank, like many financial institutions, has followed a policy of granting various types of loans to officers, directors, and employees. All loans to executive officers and directors of the Bank have been made in the ordinary course of business and on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with the Bank's other customers, and do not involve more than the normal risk of collectibility nor present other unfavorable features. Recent legislation permits savings institutions to make loans to executive officers, trustees and principal shareholders ("insiders") on preferential terms, provided the extension of credit is made pursuant to a benefit or compensation program of the Bank that is widely available to employees of the Bank or its affiliates and does not give preference to any insider over other employees of the Bank or affiliate. All loans by the Bank to its directors and executive officers are subject to OTS regulations restricting loans and other transactions with affiliated persons of the Bank. 34 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a) The following documents are filed as a part of this report: (1) Financial Statements of the Company are incorporated by reference to the following indicated pages of the Annual Report. PAGE ---- Independent Auditors' Report......................................... 18 Consolidated Statements of Financial Condition as of December 31, 1998 and 1997......................................... 19 Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996................................... 20 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996............... 21 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996............... 22-23 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996................................... 24-25 Notes to Consolidated Financial Statements........................... 26-58 The remaining information appearing in the Annual Report is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits (a) The following exhibits are filed as part of this report. 2.0 Branch Sale Agreement** 3.1 Articles of Incorporation of Little Falls Bancorp, Inc.* 3.2 Bylaws of Little Falls Bancorp, Inc.* 4.0 Form of Stock Certificate of Little Falls Bancorp, Inc.* 10.1 Employment Agreement between the Bank and John P. Pullara** 10.2 Employment Agreement between the Bank and Leonard G. Romaine** 10.4 Form of Employment Agreement with Eight Employees of the Bank*** 10.6 1996 Management Stock Bonus Plan*** 10.7 1996 Stock Option Plan*** 10.8 1997 Directors Stock Compensation Plan 10.9 1998 Directors Stock Compensation Plan 10.10 Directors Retirement and Consultation Plan 13.0 1998 Annual Report to Stockholders 21.0 Subsidiary of the Registrant (See Item 1 - Business-Subsidiary Activities) 23.0 Consent of Accountants 27.0 Financial Data Schedule**** 35 (b) Reports on Form 8-K. On November 12, 1998 the Registrant filed a Current Report on Form 8-K (Items 5 and 7), announcing the termination of the Agreement of Merger between the Registrant and Skylands Community Bank. - ------------------------ * Incorporated herein by reference into this document from the Exhibits to Form S-1, Registration Statement, initially filed with the Securities and Exchange Commission on September 25, 1995 (Registration No. 33-97316). ** Incorporated by reference into this document from the Exhibits to Registrant's Annual Report on Form 10-K for the Year Ended December 31, 1995 (File No. 0-27010). *** Incorporated by reference into this document from the Exhibits to Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 0-27010). **** In electronic filing only. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LITTLE FALLS BANCORP, INC. Dated: March 19, 1999 By: /s/ Leonard G. Romaine ------------------------------------ Leonard G. Romaine President and Director (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/ Albert J. Weite By: /s/ Richard A. Capone --------------------------------- ---------------------------------- Albert J. Weite Richard A. Capone Chairman of the Board Chief Financial Officer and Director (Principal Financial and Accounting Officer) Date: March 19, 1999 Date: March 19, 1999 By: /s/ Edward J. Seugling By: --------------------------------- ---------------------------------- Edward J. Seugling John P. Pullara Vice Chairman of the Board Director and Director Date: March 19, 1999 Date: __________ ___, 1999 By: /s/ George Kuiken By: /s/ Norman A. Parker --------------------------------- --------------------------------- George Kuiken Norman A. Parker Director Director Date: March 19, 1999 Date: March 19, 1999 By: --------------------------------- Raoul G. Barton Director Date: __________ ___, 1999 EX-10.8 2 EXHIBIT 10.8 Little Falls Bancorp, Inc. 1997 Directors Stock Compensation Plan Article I --------- ESTABLISHMENT OF THE PLAN 1.01 Little Falls Bancorp, Inc. ("Company") hereby establishes the 1997 Directors Stock Compensation Plan (the "Plan") upon the terms and conditions hereinafter stated. Article II ---------- PURPOSE OF THE PLAN 2.01 The purpose of the Plan is to reward and to retain personnel of experience and ability as members of the Board of Directors of the Company by providing such members of the Board with an additional equity interest in the Company as compensation for their future professional contributions and service to the Company and its subsidiaries. Article III ----------- DEFINITIONS The following words and phrases when used in this Plan with an initial capital letter, unless the context clearly indicates otherwise, shall have the meaning as set forth below. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural. 3.01 "Beneficiary" means the person or persons designated by the Participant to receive any benefits payable under the Plan in the event of such Participant's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Participant's surviving spouse, if any, or if none, the Participant's estate. 3.02 "Board" means the Board of Directors of the Company, or any successor corporation thereto. 3.03 "Cause" means the personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profits, intentional failure to perform stated duties, willful violation of a material provision of any law, rule or regulation (other than traffic violations and similar offense), or a material violation of a final cease-and-desist order or any other action which results in a substantial financial loss to the Company or its Subsidiaries. 3.04 "Change in Control" shall mean: (i) the sale of all, or a material portion, of the assets of the Company or its Subsidiaries; (ii) the merger or recapitalization of the Company whereby the Company is not the surviving entity; (iii) a change in control of the Company as otherwise defined or determined by the Office of Thrift Supervision ("OTS") or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the 1934 Act and the rules and regulations promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Company by any person, 1 trust, entity or group. This limitation shall not apply to the purchase of shares of up to 25% of any class of securities of the Company by a tax-qualified employee stock benefit plan sponsored by the Company or its subsidiaries which is exempt from the approval requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or as may hereafter be amended. The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Committee as to whether a Change in Control has occurred shall be conclusive and binding. 3.05 "Committee" means the Board of Directors as a whole or the Executive Committee appointed by the Board from time to time, if such Executive Committee shall exist. 3.06 "Common Stock" means shares of the common stock, $.10 par value per share, of the Company or any successor thereto. 3.07 "Company" shall mean Little Falls Bancorp, Inc., the parent corporation of the Company. 3.08 "Director" means a member of the Board of the Company. 3.09 "Director Emeritus" means a person serving as an director emeritus, advisory director, consulting director, or other similar position as may be appointed by the Board of Directors of the Company from time to time. 3.10 "Disability" means any physical or mental impairment which renders the Participant incapable of continuing in the service of the Company in his current capacity as determined by the Committee. 3.11 "Employee" means any person who is employed by the Company or a Subsidiary. "Non- employee" shall refer to an individual that is not in the employ of the Company or its subsidiaries within the meaning of the Internal Revenue Code of 1986, as amended. 3.12 "Effective Date" shall mean the date of Board approval of the Plan on April 17, 1997. 3.14 "Participant" means a Non-employee Director who receives a Plan Share Award under the Plan. 3.15 "Plan Shares" means shares of Common Stock awarded to a Participant pursuant to the Plan. 3.16 "Plan Share Award" or "Award" means a right granted to a Participant under this Plan to earn or to receive Plan Shares. 3.17 "Plan Share Reserve" means the shares of Common Stock authorized for issuance in accordance with the Plan. 2 3.18 "Savings Bank" means Little Falls Bank, and any successor corporation thereto. 3.19 "Subsidiary" means the subsidiaries of the Company. Article IV ---------- ADMINISTRATION OF THE PLAN 4.01 Role of the Committee. The Plan shall be administered and interpreted by the Board of Directors of the Company or a Committee appointed by said Board, which shall consist of not less than two Non-employee members of the Board, which shall have all of the powers allocated to it in this and other sections of the Plan. All persons designated as members of the Committee shall be "Non-Employee Directors" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act"). The interpretation and construction by the Committee of any provisions of the Plan or of any Plan Share Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules, regulations and procedures as it deems appropriate for the conduct of its affairs. The Committee shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. 4.02 Role of the Board. The members of the Committee shall be appointed or approved by, and will serve at the pleasure of the Board. The Board may in its discretion from time to time remove members from, or add members to, the Committee. The Board shall have all of the powers allocated to it in this and other sections of the Plan, may take any action under or with respect to the Plan which the Committee is authorized to take, and may reverse or override any action taken or decision made by the Committee under or with respect to the Plan, provided, however, that the Board may not revoke any Plan Share Award already made except as provided in Section 7.01(a) herein. 4.03 Limitation on Liability. No member of the Board or the Committee shall be liable for any determination made in good faith with respect to the Plan or any Plan Share Awards granted. If a member of the Board or the Committee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by any reason of anything done or not done by him in such capacity under or with respect to the Plan, the Company shall indemnify such member against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Article V --------- PLAN SHARE RESERVE 5.01 Plan Share Reserve. The Committee is authorized to deliver Plan Share Awards representing up to 25,000 shares of Common Stock of the Company. Such Awards may be from authorized, but unissued shares, treasury shares or shares purchased by the Company for such purposes. 3 5.02 Effect of Allocations, Returns and Forfeitures Upon Plan Share Reserves. Upon the allocation of Plan Share Awards or the decision of the Committee to return Plan Shares to the Company, the Plan Share Reserve shall be reduced by the number of Shares subject to the Awards so allocated or returned. Any Shares subject to an Award which may not be earned because of forfeiture by the Participant shall be added to the Plan Share Reserve. Article VI ---------- ELIGIBILITY; ALLOCATIONS 6.01 Allocations. As of the Effective Date of the Plan, each Non-employee Director of the Company shall be granted a Plan Share Award under the Plan consisting of 3,500 shares of Common Stock, subjected to the terms and conditions specified hereinafter. Additionally, the Committee may make additional Plan Share Awards under the Plan from time to time, provided that such Awards in the agggregate do not exceed the limitations specified at Section 5.01. 6.02 Terms of Awards. Such Plan Share Awards shall be earned and non-forfeitable at the rate of one-fifth as of the one-year anniversary of the Effective Date and an additional one-fifth following each of the next four successive years during such periods of service as a Director or Director Emeritus. Further, such Plan Share Award shall be immediately 100% earned and non-forfeitable in the event of the death or Disability of such Director or Director Emeritus, or upon a Change in Control of the Company. Subsequent to the Effective Date, Plan Share Awards may be awarded to newly elected or appointed Directors of the Company by the Committee, provided that in no event shall Awards to any individual Non-employee Director exceed 20% of the aggregate authorized Plan Share Reserve. All actions by the Committee shall be deemed final, except to the extent that such actions are revoked by the Board. 6.03 Form of Allocation. As promptly as practicable after a determination is made that a Plan Share Award is to be made, the Committee shall notify the Participant in writing of the grant of the Award, the number of Plan Shares covered by the Award, and the terms upon which the Plan Shares subject to the award may be earned. The date on which the Committee makes its award determination or the date the Committee so notifies the Participant shall be considered the date of grant of the Plan Share Awards as determined by the Committee. The Committee shall maintain records as to all grants of Plan Share Awards under the Plan. 6.04 Allocations Not Required. Notwithstanding anything to the contrary, no Director shall have any right or entitlement to receive a Plan Share Award hereunder, such Awards being at the total discretion of the Committee and the Board. The Committee may, with the approval of the Board (or, if so directed by the Board) return all Common Stock in the Plan Share Reserve to the Company at any time, and cease issuing Plan Share Awards. 4 Article VII ----------- FORFEITURES; DIVIDENDS; DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS 7.01 Forfeitures. (a) Revocation for Misconduct. Notwithstanding anything herein to the contrary, the Board may, by resolution, immediately revoke, rescind and terminate any Plan Share Award, or portion thereof, previously awarded under this Plan, to the extent such Plan Shares have not been deemed earned and non- forfeitable in the case of a Participant who is discharged from the employ or service of the Company, Savings Bank or a Subsidiary for Cause, or who is discovered after termination of employment or service to have engaged in conduct that would have justified termination for Cause. A determination of Cause shall be made by the Board within its sole discretion. (b) Exception for Terminations Due to Death or Disability. All Plan Shares subject to a Plan Share Award held by a Participant whose service with the Company shall terminate due to death or Disability, shall be deemed 100% earned and nonforfeitable as of the Participant's last date of service with the Company. (c) Exception for Termination after a Change in Control. All Plan Shares subject to a Plan Share Award held by a Participant shall be deemed to be immediately 100% earned and non- forfeitable in the event of a Change in Control of the Company or Savings Bank. 7.02 Payment of Dividends. A holder of a Plan Share Award, whether or not earned, shall also be entitled to receive an amount equal to any cash dividends declared and paid with respect to shares of Common Stock represented by such Plan Share Award commencing on the date the Plan Shares are awarded. Such cash dividend amounts shall be paid directly to the Participant. 7.03 Distribution of Plan Shares. (a) Timing of Distributions: General Rule. Plan Shares shall be distributed to the Participant or his Beneficiary, as the case may be, as soon as practicable after the date of grant of the Plan Share Award; provided that such Common Stock representing such Plan Shares shall contain a restrictive legend detailing the applicable limitations of such shares with respect to transfer and forfeiture. (b) Form of Distribution. All Plan Shares, together with any shares representing stock dividends, shall be distributed in the form of Common Stock. One share of Common Stock shall be given for each Plan Share earned. (c) Regulatory Exceptions. No Plan Shares shall be distributed, however, unless and until all of the requirements of all applicable law and regulation shall have been fully complied with. 7.04 Voting of Plan Shares. The Participant shall be entitled to direct the voting of all Common Stock represented by a Plan Share Award once distributed. 5 Article VIII ------------ MISCELLANEOUS 8.01 Adjustments for Capital Changes. The aggregate number of Plan Shares available for issuance pursuant to the Plan Share Awards and the number of Shares to which any Plan Share Award relates shall be proportionately adjusted for any increase or decrease in the total number of outstanding shares of Common Stock issued subsequent to the effective date of the Plan resulting from any split, subdivision or consolidation of the Common Stock or other capital adjustment, change or exchange of the Common Stock, or other increase or decrease in the number or kind of shares effected without receipt or payment of consideration by the Company. 8.02 Amendment and Termination of the Plan. The Board may, by resolution, at any time, amend or terminate the Plan. 8.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not be transferable by a Participant prior to being deemed 100% earned and non-forfeitable, except in the event of death of the Participant. 8.04 No Employment Rights. Neither the Plan nor any grant of a Plan Share Award or Plan Shares hereunder nor any action taken by the Committee or the Board in connection with the Plan shall create any right, either express or implied, on the part of any Participant to continue in the employ or service of the Company, Savings Bank, or a Subsidiary thereof. 8.05 Voting and Dividend Rights. No Participant shall have any voting or dividend rights of a stockholder with respect to any Plan Shares covered by a Plan Share Award prior to the time said Plan Shares are actually distributed to such Participant. 8.06 Governing Law. The Plan shall be governed by and construed under the laws of the State of New Jersey, except to the extent that Federal Law shall be deemed applicable. 8.07 Effective Date. The Plan shall be effective as of April 17, 1997. 8.08 Term of Plan. This Plan shall remain in effect until the earlier of (i) termination by the Board, (ii) the distribution of all shares of Common Stock authorized under the Plan Share Award, or (iii) 10 years from the Effective Date. Termination of the Plan shall not effect any Plan Share Awards previously granted, and such Plan Share Awards shall remain valid and in effect until they have been earned and paid, or by their terms expire or are forfeited. 8.09 Non-Trust Status of Plan. It is intended that benefits under the Plan shall be awarded in the form of Common Stock of the Company. Prior to the time of delivery of such Common Stock to a Participant, no assets of the Company shall be deemed to constitute a trust hereunder. 6 EX-10.9 3 EXHIBIT 10.9 Little Falls Bancorp, Inc. 1998 Directors Stock Compensation Plan Article I --------- ESTABLISHMENT OF THE PLAN 1.01 Little Falls Bancorp, Inc. ("Company") hereby establishes the 1998 Directors Stock Compensation Plan (the "Plan") upon the terms and conditions hereinafter stated. Article II ---------- PURPOSE OF THE PLAN 2.01 The purpose of the Plan is to reward and to retain personnel of experience and ability as members of the Board of Directors of the Company by providing such members of the Board with an additional equity interest in the Company as compensation for their future professional contributions and service to the Company and its subsidiaries. Article III ----------- DEFINITIONS The following words and phrases when used in this Plan with an initial capital letter, unless the context clearly indicates otherwise, shall have the meaning as set forth below. Wherever appropriate, the masculine pronoun shall include the feminine pronoun and the singular shall include the plural. 3.01 "Beneficiary" means the person or persons designated by the Participant to receive any benefits payable under the Plan in the event of such Participant's death. Such person or persons shall be designated in writing on forms provided for this purpose by the Committee and may be changed from time to time by similar written notice to the Committee. In the absence of a written designation, the Beneficiary shall be the Participant's surviving spouse, if any, or if none, the Participant's estate. 3.02 "Board" means the Board of Directors of the Company, or any successor corporation thereto. 3.03 "Cause" means the personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profits, intentional failure to perform stated duties, willful violation of a material provision of any law, rule or regulation (other than traffic violations and similar offense), or a material violation of a final cease-and-desist order or any other action which results in a substantial financial loss to the Company or its Subsidiaries. 3.04 "Change in Control" shall mean: (i) the sale of all, or a material portion, of the assets of the Company or its Subsidiaries; (ii) the merger or recapitalization of the Company whereby the Company is not the surviving entity; (iii) a change in control of the Company as otherwise defined or determined by the Office of Thrift Supervision ("OTS") or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the 1934 Act and the rules and regulations promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Company by any person, 1 trust, entity or group. This limitation shall not apply to the purchase of shares of up to 25% of any class of securities of the Company by a tax-qualified employee stock benefit plan sponsored by the Company or its subsidiaries which is exempt from the approval requirements, set forth under 12 C.F.R. ss.574.3(c)(1)(vi) as now in effect or as may hereafter be amended. The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Committee as to whether a Change in Control has occurred shall be conclusive and binding. 3.05 "Committee" means the Board of Directors as a whole or the Executive Committee appointed by the Board from time to time, if such Executive Committee shall exist. 3.06 "Common Stock" means shares of the common stock, $.10 par value per share, of the Company or any successor thereto. 3.07 "Company" shall mean Little Falls Bancorp, Inc., the parent corporation of the Company. 3.08 "Director" means a member of the Board of the Company. 3.09 "Director Emeritus" means a person serving as an director emeritus, advisory director, consulting director, or other similar position as may be appointed by the Board of Directors of the Company from time to time. 3.10 "Disability" means any physical or mental impairment which renders the Participant incapable of continuing in the service of the Company in his current capacity as determined by the Committee. 3.11 "Employee" means any person who is employed by the Company or a Subsidiary. "Non- employee" shall refer to an individual that is not in the employ of the Company or its subsidiaries within the meaning of the Internal Revenue Code of 1986, as amended. 3.12 "Effective Date" shall mean the date of Board approval of the Plan on April 21, 1998. 3.14 "Participant" means a Non-employee Director who receives a Plan Share Award under the Plan. 3.15 "Plan Shares" means shares of Common Stock awarded to a Participant pursuant to the Plan. 3.16 "Plan Share Award" or "Award" means a right granted to a Participant under this Plan to earn or to receive Plan Shares. 3.17 "Plan Share Reserve" means the shares of Common Stock authorized for issuance in accordance with the Plan. 3.18 "Savings Bank" means Little Falls Bank, and any successor corporation thereto. 3.19 "Subsidiary" means the subsidiaries of the Company. 2 Article IV ---------- ADMINISTRATION OF THE PLAN 4.01 Role of the Committee. The Plan shall be administered and interpreted by the Board of Directors of the Company or a Committee appointed by said Board, which shall consist of not less than two Non-employee members of the Board, which shall have all of the powers allocated to it in this and other sections of the Plan. All persons designated as members of the Committee shall be "Non-Employee Directors" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("1934 Act"). The interpretation and construction by the Committee of any provisions of the Plan or of any Plan Share Award granted hereunder shall be final and binding. The Committee shall act by vote or written consent of a majority of its members. Subject to the express provisions and limitations of the Plan, the Committee may adopt such rules, regulations and procedures as it deems appropriate for the conduct of its affairs. The Committee shall report its actions and decisions with respect to the Plan to the Board at appropriate times, but in no event less than one time per calendar year. 4.02 Role of the Board. The members of the Committee shall be appointed or approved by, and will serve at the pleasure of the Board. The Board may in its discretion from time to time remove members from, or add members to, the Committee. The Board shall have all of the powers allocated to it in this and other sections of the Plan, may take any action under or with respect to the Plan which the Committee is authorized to take, and may reverse or override any action taken or decision made by the Committee under or with respect to the Plan, provided, however, that the Board may not revoke any Plan Share Award already made except as provided in Section 7.01(a) herein. 4.03 Limitation on Liability. No member of the Board or the Committee shall be liable for any determination made in good faith with respect to the Plan or any Plan Share Awards granted. If a member of the Board or the Committee is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by any reason of anything done or not done by him in such capacity under or with respect to the Plan, the Company shall indemnify such member against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she acted in good faith and in a manner he or she reasonably believed to be in the best interests of the Company, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Article V --------- PLAN SHARE RESERVE 5.01 Plan Share Reserve. The Committee is authorized to deliver Plan Share Awards representing up to 24,500 shares of Common Stock of the Company. Such Awards may be from authorized, but unissued shares, treasury shares or shares purchased by the Company for such purposes. 5.02 Effect of Allocations, Returns and Forfeitures Upon Plan Share Reserves. Upon the allocation of Plan Share Awards or the decision of the Committee to return Plan Shares to the Company, the Plan Share Reserve shall be reduced by the number of Shares subject to the Awards so allocated or returned. Any Shares subject to an Award which may not be earned because of forfeiture by the Participant shall be added to the Plan Share Reserve. 3 Article VI ---------- ELIGIBILITY; ALLOCATIONS 6.01 Allocations. As of the Effective Date of the Plan, each Non-employee Director of the Company shall be granted a Plan Share Award under the Plan consisting of 3,500 shares of Common Stock, subjected to the terms and conditions specified hereinafter. Additionally, the Committee may make additional Plan Share Awards under the Plan from time to time, provided that such Awards in the agggregate do not exceed the limitations specified at Section 5.01. 6.02 Terms of Awards. Such Plan Share Awards shall be earned and non-forfeitable at the rate of one-fifth as of the one-year anniversary of the Effective Date and an additional one-fifth following each of the next four successive years during such periods of service as a Director or Director Emeritus. Further, such Plan Share Award shall be immediately 100% earned and non-forfeitable in the event of the death or Disability of such Director or Director Emeritus, or upon a Change in Control of the Company. Subsequent to the Effective Date, Plan Share Awards may be awarded to newly elected or appointed Directors of the Company by the Committee, provided that in no event shall Awards to any individual Non-employee Director exceed 20% of the aggregate authorized Plan Share Reserve. All actions by the Committee shall be deemed final, except to the extent that such actions are revoked by the Board. 6.03 Form of Allocation. As promptly as practicable after a determination is made that a Plan Share Award is to be made, the Committee shall notify the Participant in writing of the grant of the Award, the number of Plan Shares covered by the Award, and the terms upon which the Plan Shares subject to the award may be earned. The date on which the Committee makes its award determination or the date the Committee so notifies the Participant shall be considered the date of grant of the Plan Share Awards as determined by the Committee. The Committee shall maintain records as to all grants of Plan Share Awards under the Plan. 6.04 Allocations Not Required. Notwithstanding anything to the contrary, no Director shall have any right or entitlement to receive a Plan Share Award hereunder, such Awards being at the total discretion of the Committee and the Board. The Committee may, with the approval of the Board (or, if so directed by the Board) return all Common Stock in the Plan Share Reserve to the Company at any time, and cease issuing Plan Share Awards. Article VII ----------- FORFEITURES; DIVIDENDS; DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS 7.01 Forfeitures. (a) Revocation for Misconduct. Notwithstanding anything herein to the contrary, the Board may, by resolution, immediately revoke, rescind and terminate any Plan Share Award, or portion thereof, previously awarded under this Plan, to the extent such Plan Shares have not been deemed earned and non- forfeitable in the case of a Participant who is discharged from the employ or service of the Company, Savings Bank or a Subsidiary for Cause, or who is discovered after termination of employment or service 4 to have engaged in conduct that would have justified termination for Cause. A determination of Cause shall be made by the Board within its sole discretion. (b) Exception for Terminations Due to Death or Disability. All Plan Shares subject to a Plan Share Award held by a Participant whose service with the Company shall terminate due to death or Disability, shall be deemed 100% earned and nonforfeitable as of the Participant's last date of service with the Company. (c) Exception for Termination after a Change in Control. All Plan Shares subject to a Plan Share Award held by a Participant shall be deemed to be immediately 100% earned and non- forfeitable in the event of a Change in Control of the Company or Savings Bank. 7.02 Payment of Dividends. A holder of a Plan Share Award, whether or not earned, shall also be entitled to receive an amount equal to any cash dividends declared and paid with respect to shares of Common Stock represented by such Plan Share Award commencing on the date the Plan Shares are awarded. Such cash dividend amounts shall be paid directly to the Participant within 30 calendar days of the payment of the respective dividend on the Common Stock. 7.03 Distribution of Plan Shares. (a) Timing of Distributions: General Rule. Plan Shares shall be distributed to the Participant or his Beneficiary, as the case may be, as soon as practicable after the date of grant of the Plan Share Award; provided that such Common Stock representing such Plan Shares shall contain a restrictive legend detailing the applicable limitations of such shares with respect to transfer and forfeiture. (b) Form of Distribution. All Plan Shares, together with any shares representing stock dividends, shall be distributed in the form of Common Stock. One share of Common Stock shall be given for each Plan Share earned. (c) Regulatory Exceptions. No Plan Shares shall be distributed, however, unless and until all of the requirements of all applicable law and regulation shall have been fully complied with. 7.04 Voting of Plan Shares. The Participant shall be entitled to direct the voting of all Common Stock represented by a Plan Share Award once the Common Stock is distributed to the Participant. Article VIII ------------ MISCELLANEOUS 8.01 Adjustments for Capital Changes. The aggregate number of Plan Shares available for issuance pursuant to the Plan Share Awards and the number of Shares to which any Plan Share Award relates shall be proportionately adjusted for any increase or decrease in the total number of outstanding shares of Common Stock issued subsequent to the effective date of the Plan resulting from any split, subdivision or consolidation of the Common Stock or other capital adjustment, change or exchange of the Common Stock, or other increase or decrease in the number or kind of shares effected without receipt or payment of consideration by the Company. 5 8.02 Amendment and Termination of the Plan. The Board may, by resolution, at any time, amend or terminate the Plan. 8.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not be transferable by a Participant prior to being deemed 100% earned and non-forfeitable, except in the event of death of the Participant. 8.04 No Employment Rights. Neither the Plan nor any grant of a Plan Share Award or Plan Shares hereunder nor any action taken by the Committee or the Board in connection with the Plan shall create any right, either express or implied, on the part of any Participant to continue in the employ or service of the Company, Savings Bank, or a Subsidiary thereof. 8.05 Voting Rights. No Participant shall have any voting rights of a stockholder with respect to any Plan Shares covered by a Plan Share Award prior to the time said Plan Shares are actually distributed to such Participant. 8.06 Governing Law. The Plan shall be governed by and construed under the laws of the State of New Jersey, except to the extent that Federal Law shall be deemed applicable. 8.07 Effective Date. The Plan shall be effective as of April 21, 1998. 8.08 Term of Plan. This Plan shall remain in effect until the earlier of (i) termination by the Board, (ii) the distribution of all shares of Common Stock authorized under the Plan Share Award, or (iii) 10 years from the Effective Date. Termination of the Plan shall not effect any Plan Share Awards previously granted, and such Plan Share Awards shall remain valid and in effect until they have been earned and paid, or by their terms expire or are forfeited. 8.09 Non-Trust Status of Plan. It is intended that benefits under the Plan shall be awarded in the form of Common Stock of the Company. Prior to the time of delivery of such Common Stock to a Participant, no assets of the Company shall be deemed to constitute a trust hereunder. 6 EX-10.10 4 EXHIBIT 10.10 * 4/13/95 * LITTLE FALLS SAVINGS BANK DIRECTORS CONSULTATION AND RETIREMENT PLAN WHEREAS, Little Falls Savings Bank ("Savings Bank") wishes to reward the years of extensive service provided by the current members of the Board of Directors and to continue to attract and to retain the best talent available to serve on its Board of Directors, and WHEREAS, it is deemed advisable and in the best interests of the Savings Bank to offer such members of the Boards of Directors additional financial incentives in the form of deferred compensation to encourage such participation and service to the Savings Bank, as directors, and following retirement as a director to encourage such individuals to continue to serve the Savings Bank as a consulting director for a period of time thereafter, NOW THEREFORE, BE IT RESOLVED that the Little Falls Savings Bank Directors Consultation and Retirement Plan ("Plan"), attached hereto and made a part of these minutes, be adopted and implemented effective May 9, 1995. ARTICLE I DEFINITIONS The following words and phrases as used herein shall, for the purpose of this Plan and any subsequent amendment thereof, have the following meanings unless a different meaning is plainly required by the content: 1.1 "Savings Bank" means Little Falls Savings Bank, Little Falls, New Jersey, or any successor thereto. 1.2 "Board" means the Board of Directors of the Savings Bank, as constituted from time to time and successors thereto. 1.3 "Change in Control" means the power to control proxies by any person, other than the Board of Directors of the Savings Bank to direct more than 25% of the outstanding votes of the Savings Bank, the control of the election of a majority of the Savings Bank's directors or the exercise of a controlling influence over the management or policies of the Savings Bank by any person or by persons acting as a group within the meaning of Section 13(d) of the Securities Exchange Act of 1934, as amended, ("Exchange Act"). In the event the Savings Bank converts in the future from mutual-to-stock form, the term "control" shall refer to the ownership, holding or power to vote more than 25% of the Savings Bank's (or any parent holding company's) outstanding voting stock by any person, the control of the election of a majority of the Savings Bank's (or any parent holding company's) directors, or the exercise of a controlling influence over the management or policies of the Savings Bank by any person or by persons acting as a group within the meaning of Section 13(d) of the Exchange Act. The term "person" means an individual other than the Employee, or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. Change of Control shall also mean: (i) the execution of an agreement for the sale of all, or a material portion, of the assets of the Savings Bank; (ii) the execution of an agreement for a merger or recapitalization of the Savings Bank or any merger or recapitalization whereby the Savings Bank is not the surviving entity; (iii) a change of control of the Savings Bank, as otherwise defined or determined by the New Jersey Department of Banking, or regulations promulgated by it; or (iv) the acquisition, directly or indirectly, of the beneficial ownership (within the meaning of that term as it is used in Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) of twenty-five percent (25%) or more of the outstanding voting securities of the Savings Bank by any person, trust, entity or group. This limitation shall not apply to the purchase of shares by underwriters in connection with a public offering of the Savings Bank stock (or a parent holding company's stock), or the purchase of shares of up to 25% of any class of securities of the Savings Bank by a tax-qualified employee stock benefit plan. The term "person" refers to an individual or a corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or any other form of entity not specifically listed herein. The decision of the Committee as to whether a change in control has occurred shall be conclusive and binding. A change in control shall not be deemed to have occurred as a result of a holding company reorganization of the Savings Bank and simultaneous acquisition of 100% of such stock by a parent savings and loan holding company or bank holding company. 1.4 "Committee" means the Executive Committee of the Board of the Savings Bank. 1.5 "Director" means a member of the Board of the Savings Bank. 1.6 "Disability" (total and permanent disability) means a mental or physical disability which prevents the Director from performing the normal duties of his or her position with the Savings Bank. Such disability must have prevented the Director from performing his or her duties for at least six months, and a physician satisfactory to both the Director and the Savings Bank must certify that the Director is disabled from performing his or her normal duties with the Savings Bank. 1.7 "Effective Date" means May 9, 1995. 1.8 "Participant" means a Director serving as such on or after the Effective Date. Such participation shall continue as long as such Participant fulfills all requirements for participation subject to the right of termination, amendment and modification of the Plan hereinafter set forth. 1.9 "Plan" means the Little Falls Savings Bank Directors Consultation and Retirement Plan herein set forth, as amended from time to time. 2 1.10 "Retirement Date" means the date of termination of service as a Director following the participant's completion of not less than 20 years of Board service and attainment of not less than age 60 while serving as a Director. 1.11 "Service" means all years of service as a member of the Board and all predecessor entities. ARTICLE II BENEFITS 2.1 Retirement. Upon a Participant's retirement from service as a Director of the Savings Bank on or after the Retirement Date, the Savings Bank shall pay to the participant a monthly pension in an amount approved by the Board and set forth herein at Article II, Section 2.4, on the first business day of each calendar month commencing on or after the Retirement Date. Except as provided at Article II, Sections 2.2 and 2.3 herein, upon a Participant's termination from service as a Director of the Savings Bank prior to the Retirement Date, the Savings Bank shall have no financial obligations to the Participant under the Plan. 2.2 Change in Control. All benefits payable, or that would become payable if a Director were to retire prior to such Change in Control, shall remain payable thereafter. Upon termination of service following a Change in Control, all benefits shall be deemed payable in accordance with Article II, Section 2.4; provided that if Participant has not yet attained the Retirement Date as of such date of termination of service, such Participant shall nevertheless be deemed to have served until the Retirement Date as of the date of such termination following a Change of Control, and in order to calculate benefits payable hereunder. Notwithstanding anything herein to the contrary, for purposes of calculation of benefits in accordance with this Section, in the event that a Participant shall not otherwise have commenced receipt of benefits as of the date of a Change of Control, it shall be presumed that such Participant shall have completed 20 years of service and attained age 60 as of such date of a Change of Control and benefits shall be immediately payable as of such date of a Change of Control. 2.3 Total and Permanent Disability. In the event of the Disability of the Participant, the Participant will be entitled to a monthly pension in the amount specified at Article II, Section 2.4, payable on the first day of the month following certification of such Disability without regard to the actual age of such Participant and presuming that the Participant shall have attained the age of not less than 60 as of the date of such Disability; provided, however, that such Participant shall have completed not less than 20 years of service as of the date of certification of such Disability. 2.4 Level of Benefit Payments. Participants that retire as a Director of the Savings Bank in accordance with Sections 2.1, 2.2 or 2.3 herein, shall be eligible to receive retirement benefits as follows: 3 A Participant who upon retirement on or after the Retirement Date enters into an agreement to be a consulting director of the Savings Bank (in a form similar to that contained at Schedule A hereto) shall be paid the retirement benefit equal to the product of 50% times the regular monthly Board fees in effect as of the date of retirement from the Board as a monthly sum until the month following the date of death of such Participant. ARTICLE III INSURANCE 3.1 Ownership of Insurance. The Savings Bank, in its sole discretion, may elect to purchase one or more life insurance policies on the lives of Participants in order to provide funds to the Savings Bank to pay part or all of the benefits accrued under this Plan. All rights and incidents of ownership in any life insurance policy that the Savings Bank may purchase insuring the life of the Participant (including any right to proceeds payable thereunder) shall belong exclusively to the Savings Bank or its designated Trust, and neither the Participant, nor any beneficiary or other person claiming under or through him or her shall have any rights, title or interest in or to any such insurance policy. The Participant shall not have any power to transfer, assign, hypothecate or otherwise encumber in advance any of the benefits payable thereunder, nor shall any benefits be subject to seizure for the benefit of any debts or judgments, or be transferable by operation of law in the event of bankruptcy, insolvency or otherwise. Any life insurance policy purchased pursuant hereto and any proceeds payable thereunder shall remain subject to the claims of the Savings Bank's general creditors. 3.2 Physical Examination. As a condition of becoming or remaining covered under this Plan, each Participant, as may be requested by the Savings Bank from time to time shall take a physical examination by a physician approved by an insurance carrier. The cost of the examination shall not be borne by the Participant. The report of such examination shall be transmitted directly from the physician to the insurance carrier designated by the Savings Bank to establish certain costs associated with obtaining insurance coverages as may be deemed necessary under this Plan. Such examination shall remain confidential among the Participant, the physician and the insurance carrier and shall not be made available to the Savings Bank in any form or manner. 3.3 Death of Participant. On death of the Participant, the proceeds derived from such insurance policy, if any, shall be paid to the Savings Bank or its designated Trust. ARTICLE IV TRUST 4.1 Trust. Except as may be specifically provided, nothing contained in this Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Savings Bank and the Participant or 4 any other person. Any funds which may be invested under the provisions of this Plan shall continue for all purposes to be a part of the general funds of the Savings Bank. No person other than the Savings Bank shall by virtue of the provisions of this Plan have any interest in such funds. The Savings Bank shall not be under any obligation to use such funds solely to provide benefits hereunder, and no representations have been made to a Participant that such funds can or will be used only to provide benefits hereunder. To the extent that any person acquires a right to receive payments from the Savings Bank under the Plan, such rights shall be no greater than the right of any unsecured general creditor of the Savings Bank. In order to facilitate the accumulation of funds necessary to meet the costs of the Savings Bank under this Plan (including the provision of funds necessary to pay premiums with respect to any life insurance policies purchase pursuant to Article III above and to pay benefits to the extent that the cash value and/or proceeds of any such policies are not adequate to make payments to a Participant or his or her beneficiary as and when the same are due under the Plan), the Savings Bank may enter into a Trust Agreement. The Savings Bank, in its discretion, may elect to place any life insurance policies purchased pursuant to Article III above into the Trust. In addition, such sums shall be placed in said Trust as may from time to time be approved by the Board of Directors, in its sole discretion. To the extent that the assets of said Trust and/or the proceeds of any life insurance policy purchased pursuant to Article III are not sufficient to pay benefits accrued under this Plan, such payments shall be made from the general assets of the Savings Bank. ARTICLE V VESTING 5.1 Vesting. All benefits under this Plan are deemed non-vested and forfeitable prior to the Retirement Date. Notwithstanding the foregoing, all benefits payable hereunder shall deemed 100% non-forfeitable by the Participant upon the Retirement Date, upon termination of service following a Change in Control of the Savings Bank, or upon the Disability of the Participant following not less than 20 years of prior Board service. No benefits shall be deemed payable hereunder for any time period prior to the time that such benefits shall be deemed 100% non-forfeitable. Notwithstanding anything herein to the contrary, in no event shall benefits payable hereunder be deemed vested and payable within 3 years of the Effective Date of the Plan except as follows: one-third of benefits payable hereunder shall be deemed vested following one year after the Effective Date of the Plan and one-third annually thereafter, except however in the event that a Participant shall have attained age 60 and shall have completed not less than 30 years of service, benefits shall be deemed 100% non-forfeitable and payable as of the date of retirement on or after the Effective Date. 5 ARTICLE VI TERMINATION 6.1 Termination. All rights of the Participant hereunder shall terminate immediately upon the Participant ceasing to be in the active service of the Savings Bank prior to the time that benefits payable under the Plan shall be deemed to be 100% non-forfeitable. A leave of absence approved by the Board shall not constitute a cessation of service within the meaning of this paragraph, within the sole discretion of the Committee. ARTICLE VII FORFEITURE OR SUSPENSION OF BENEFITS 7.1 Forfeiture or Suspension of Benefits. Notwithstanding any other provision of this Plan to the contrary, benefits shall be forfeited or suspended during any period of paid service with the Savings Bank following the commencement of benefit payments, within the sole discretion of the Committee. ARTICLE VIII GENERAL PROVISIONS 8.1 Other Benefits. Nothing in this Plan shall diminish or impair the Participant's eligibility, participation or benefit entitlement under any other benefit, insurance or compensation plan or agreement of the Savings Bank now or hereinafter in effect. 8.2 No Effect on Employment. This Plan shall not be deemed to give any Participant or other person in the employ or service of the Savings Bank any right to be retained in the employment or service of the Savings Bank, or to interfere with the right of the Savings Bank to terminate any Participant or such other person at any time and to treat him or her without regard to the effect which such treatment might have upon him or her as a Participant in this Plan. 8.3 Legally Binding. The rights, privileges, benefits and obligations under this Plan are intended to be legal obligations of the Savings Bank and binding upon the Savings Bank, its successors and assigns. 8.4 Modification. The Savings Bank, by action of the Board of Directors, reserves the exclusive right to amend, modify, or terminate this Plan. Any such termination, modification or amendment shall not terminate or diminish any rights or benefits accrued by any Participant prior thereto. The Savings Bank shall give thirty (30) days' notice in writing to any Participant prior to the effective date of any such amendment, modification or termination of this 6 Plan. Notwithstanding the foregoing, in no event shall such benefits payable under the Plan be reduced below those provided for in Section 2.4 herein. 8.5 Arbitration. Any controversy or claim arising out of or relating to any contract or the breach thereof shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, with such arbitration hearing to be held at the offices of the American Arbitration Association ("AAA") nearest to the home office of the Savings Bank, unless otherwise mutually agreed to by the Participant and the Savings Bank, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 8.6 Limitation. No rights of any Participant are assignable by any Participant, in whole or in part, either by voluntary or involuntary act or by operation of law. Rights of Participants hereunder are not subject to anticipation, alienation, sale, transfer, assignment, pledge, hypothecation, encumbrance or garnishment by creditors of the Participant. Such rights are not subject to the debts, contracts, liabilities, engagements, or torts of any Participant. No Participant shall have any right under this Plan or any Trust referred to in Article IV or against any assets held or acquired pursuant thereto other than the rights of a general, unsecured creditor of the Savings Bank pursuant to the unsecured promise of the Savings Bank to pay the benefits accrued hereunder in accordance with the terms of this Plan. The Savings Bank has no obligation under this Plan to fund or otherwise secure its obligations to render payments hereunder to Participants. No Participant shall have any voice in the use, disposition, or investment of any asset acquired or set aside by the Savings Bank to provide benefits under this Plan. 8.7 ERISA and IRC Disclaimer. It is intended that the Plan be neither an "employee welfare benefit plan" nor an "employee pension benefit plan" for purposes of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Further, it is intended that the Plan will not cause the interest of a Participant under the Plan to be includable in the gross income of such Participant prior to the actual receipt of a payment under the Plan for purposes of the Internal Revenue Code of 1986, as amended ("IRC"). No representation is made to any Participant to the effect that any insurance policies purchased by the Savings Bank or assets of any Trust established pursuant to this Plan will be used solely to provide benefits under this Plan or in any way shall constitute security for the payment of such benefits. Benefits payable under this Plan are not in any way limited to or governed by the proceeds of any such insurance policies or the assets of any such Trust. No Participant in the Plan has any preferred claim against the proceeds of any such insurance policies or the assets of any such Trust. 8.8 Conduct of Participants. Notwithstanding anything contained herein to the contrary, no payment of any then unpaid benefits shall be made and all rights under the Plan payable to a Participant, or any other person, to receive payments thereof shall be forfeited if the Participant shall engage in any activity or conduct which in the opinion the Board of the Savings Bank is inimical to the best interests of the Savings Bank. 7 8.9 Incompetency. If the Savings Bank shall find that any person to whom any payment is payable under the Plan is deemed unable to care for his or her personal affairs because of illness or accident, any payment due (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be paid to the spouse, a child, a parent, or a brother or sister, or to any person deemed by the Savings Bank to have incurred expense for such person otherwise entitled to payment, in such manner and proportions as the Board may determine in its sole discretion. Any such payments shall constitute a complete discharge of the liabilities of the Savings Bank under the Plan. 8.10 Construction. The Savings Bank shall have full power and authority to interpret, construe and administer this Plan and the Savings Bank's interpretations and construction thereof, and actions thereunder, shall be binding and conclusive on all persons for all purposes. Directors of the Savings Bank shall not be liable to any person for any action taken or omitted in connection with the interpretation and administration of this Plan unless attributable to his own willful, gross misconduct or lack of good faith. 8.11 Plan Administration. The Board of Directors of the Savings Bank shall administer the Plan; provided, however, that the Board may appoint an administrative committee ("Committee") to provide administrative services or perform duties required by this Plan. The Committee shall have only the authority granted to it by the Board. 8.12 Governing Law. This Plan shall be construed in accordance with and governed by the laws of the State of New Jersey, except to the extent that Federal law shall be deemed to apply. No payments of benefits shall be made hereunder if the Board of the Savings Bank, or counsel retained thereby, shall determine that such payments shall be in violation of applicable regulations, or likely result in imposition of regulatory action, by the New Jersey Department of Banking, Federal Deposit Insurance Corporation or other appropriate banking regulatory agencies. 8.13 Successors and Assigns. The Plan shall be binding upon any successor or successors of the Savings Bank, and unless clearly inapplicable, reference herein to the Savings Bank shall be deemed to include any successor or successors of the Savings Bank. 8.14 Sole Agreement. The Plan expresses, embodies, and supersedes all previous agreements, understandings, and commitments, whether written or oral, between the Savings Bank and any Participants hereto with respect to the subject matter hereof. 8 SCHEDULE A Little Falls Savings Bank Little Falls, New Jersey ----------------------------------------------- DIRECTORS CONSULTATION AND RETIREMENT PLAN ----------------------------------------------- WHEREAS, the Board of Directors of Little Falls Savings Bank, Little Falls, New Jersey ("Savings Bank") has previously adopted the Directors Consultation and Retirement Plan ("Plan"); and WHEREAS, upon retirement as a Director, I am eligible to elect to participant in such Plan; My signature below hereby evidences my request to the Savings Bank of my election to participate in the Plan, as follows: 1. This election to participate in the Plan is being delivered to the Savings Bank effective ________________; 2. I hereby resign as a director of the Savings Bank as of _____________; ("Retirement Date"). 3. Upon retirement from the Board as of the Retirement Date, I shall be appointed as a Consulting Director to the Savings Bank and shall advise the Savings Bank from time to time on business and community relations matters as may be requested; 4. As a Consulting Director, I will not have any specific duties or responsibilities, except as may be specifically requested from time to time by the Board; 5. Compensation as a Consulting Director shall be as specified at Section II of the Plan as a consulting retainer and retirement benefit. 6. I understand that the above listed items constitutes the only benefits that shall be delivered to me as a participant in the Plan. EX-13.0 5 EXHIBIT 13.0 Little Falls Bancorp, Inc. Annual Report - 1998 - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- Letter to Stockholders ........................................ 1 Corporate Profile and Stock Market Information................. 2 Selected Financial and Other Data.............................. 3 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 4 Management Responsibility Statement............................ 17 Independent Auditors' Report................................... 18 Consolidated Statements of Financial Condition................. 19 Consolidated Statements of Income.............................. 20 Consolidated Statements of Comprehensive Income................ 21 Consolidated Statements of Changes in Stockholders' Equity..... 22 Consolidated Statements of Cash Flows.......................... 23 Notes to Consolidated Financial Statements..................... 26 Other Corporate Information.................................... 59 Little Falls Bancorp, Inc. 86 Main Street Little Falls, New Jersey 07424 To Our Stockholders: On behalf of our directors, officers and employees, we are pleased to present to you our fourth annual stockholders' report. Last year was quite eventful. As you know, we had initially hoped to combine with Skylands Community Bank to form a more diversified institution with a wider customer base. However, the agreement was mutually terminated in November 1998. As previously reported, on January 26, 1999, we signed an agreement with HUBCO, Inc., Mahwah, New Jersey, whereby HUBCO would acquire Little Falls. If the required shareholder and regulatory approvals are obtained, we expect to close the transaction in the second quarter of 1999. We look forward to the proposed transaction and the opportunities that it presents. Your Board of Directors and management team are committed to protecting and enhancing the value of your investment in the Company. We appreciate the confidence, support and loyalty of our customers, employees, and stockholders. Sincerely, /s/Leonard G. Romaine - ------------------------ Leonard G. Romaine President 1 Little Falls Bancorp, Inc. Corporate Profile Little Falls Bancorp, Inc. (the "Company") is a New Jersey corporation organized in August 1995 at the direction of the Board of Directors of the Little Falls Bank (the "Bank") to acquire all of the capital stock of the Bank issued upon its conversion from the mutual to stock form of ownership on January 5, 1996 (the "Conversion"). The Company is a unitary savings and loan holding company which, under existing laws, generally is not restricted in the types of business activities in which it may engage provided that the Bank retains a specified amount of its assets in housing-related investments. At the present time, because the Company does not conduct any active business, the Company does not intend to employ any persons other than officers of the Bank but utilizes the support staff of the Bank from time to time. The Bank is a federally chartered stock savings bank headquartered in Little Falls, New Jersey. The Bank was founded in 1887 and its deposits are federally insured by the Savings Association Insurance Fund ("SAIF") and the Bank is a member of the Federal Home Loan Bank ("FHLB") System. The Bank is a community oriented, full service retail savings institution offering traditional mortgage loan products. The Bank attracts deposits from the general public and uses such deposits primarily to originate loans secured by first mortgages on owner-occupied one- to four-family residences in its market area, purchase loans to diversify its loan portfolio, and to purchase mortgage-backed and investment securities. The Bank also originates a limited number of commercial real estate, residential construction, and consumer loans, which consists mainly of second mortgages and home equity lines of credit. Stock Market Information Since its issuance on January 5, 1996, the Company's common stock has traded on the Nasdaq National Market. The following table reflects the stock price as published by the Nasdaq National Market. The quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions. HIGH LOW ------- ------- October 1, 1998 - December 31, 1998 $21 1/2 $11 1/2 July 1, 1998 - September 30, 1998 22 14 April 1, 1998 - June 30, 1998 22 1/4 18 1/4 January 1, 1998 - March 31, 1998 20 1/2 17 1/2 October 1, 1997 - December 31, 1997 20 1/2 16 1/4 July 1, 1997 - September 30, 1997 18 1/2 15 1/4 April 1, 1997 - June 30, 1997 15 7/8 12 5/8 January 5, 1997 - March 31, 1997 14 1/8 12 1/4 The number of stockholders of record of common stock as of the record date of March 19, 1999 ("Record Date"), was 376. This does not reflect the number of persons or entities who held stock in nominee or "street" name through various brokerage firms. As of the Record Date, there were 2,470,551 shares outstanding. 2 The Company's ability to pay dividends to stockholders is subject to the requirements of New Jersey law. No dividend may be paid by the Company unless its board of directors determines that the Company will be able to pay its debts in the ordinary course of business after payment of the dividend. In addition, the Company's ability to pay dividends is dependent, in part, upon the dividends it receives from the Bank. The Bank may not declare or pay a cash dividend on any of its stock if the effect thereof would cause the Bank's regulatory capital to be reduced below (1) the amount required for the liquidation account established in connection with the Bank's conversion from mutual to stock form, or (2) the regulatory capital requirements imposed by the Office of Thrift Supervision ("OTS"). Selected Financial Condition Data
- ------------------------------------------------------------------------------------------------------------------------------------ December 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) Total Assets......................... $350,617 $328,522 $303,518 $310,355 $193,385 Loans receivable (net)............... 149,062 147,033 117,116 96,230 94,754 Mortgage-backed securities held to maturity......................... 61,373 90,957 112,473 118,020 51,664 Mortgage-backed securities available for sale.................. 13,971 13,929 -- -- -- Investment securities - held to maturity............................ 40,577 57,988 51,370 29,999 36,146 Investment securities - available for sale........................... 39,423 -- -- -- -- Cash and cash equivalents............ 33,393 6,788 10,374 53,419 4,065 Deposits............................. 243,048 230,133 228,312 247,851 176,173 Stockholders' equity................. 37,445 38,295 40,448 16,223 15,715
Selected Operating Data
- ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- (In Thousands) Total interest income.................. $22,746 $ 21,064 $ 18,776 $13,813 $13,075 Total interest expense................. 14,695 12,920 11,258 9,314 7,170 ------- ------- ------- ------ ------ Net interest income.................. 8,051 8,144 7,518 4,499 5,905 Provision for loan losses.............. 161 240 183 131 356 ------- ------- ------- ------ ------ Net interest income after provision for loan losses........... 7,890 7,904 7,335 4,368 5,549 ------- ------- ------- ------ ------ Total non-interest income............ 404 427 409 178 143 ------- ------- Total non-interest expense........... 5,702 5,403 6,747(1) 3,840(2) 2,912 ------- ------- ------- ------ Income before provision for income taxes ......................... 2,592 2,928 996 705 2,781 Income tax expense..................... 844 1,072 385 241 1,066 ------- ------- ------- ------ ------ Net income........................... $ 1,748 $ 1,856 $ 611 $ 464 $ 1,715 ======= ======= ======= ====== ======
(footnotes on following page) 3 Other Selected Data
- ----------------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Return on average assets...................... 0.51% 0.60% 0.21%(1) 0.22%(2) 0.86% Return on average equity...................... 4.65% 4.74% 1.44%(1) 2.89%(2) 11.62% Average equity to average assets.............. 10.92% 12.57% 14.78% 7.64% 7.62% Net interest rate spread...................... 2.03% 2.27% 2.22% 1.97% 2.86% Per Share Information: Diluted earnings per share (1) (2) (3)...... $ 0.76 $ 0.75 $0.22 N/A N/A Dividends per share (3)..................... $ 0.22 $ 0.155 $0.05 N/A N/A Tangible book value per share (3)................................... $14.11 $13.59 $13.56 N/A N/A Dividend payout ratio (1) (2) (3)............. 28.94% 20.62% 22.28% N/A N/A Non-performing assets to total assets......... 0.37% 0.57% 0.91% 1.27% 3.09% Non-performing loans to total assets.......... 0.29% 0.39% 0.63% 0.79% 2.18% Allowance for loan losses to total loans...... 0.88% 0.79% 0.92% 0.98% 1.21%
- ------------------------ (1) Includes one-time special assessment of $1,167,000 to recapitalize the SAIF. (2) Includes a non-recurring expense of $195,000 due to the implementation of a directors' medical plan. (3) No shares of common stock were outstanding until January 5, 1996. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The largest components of the Bank's net income are net interest income, which is the difference between interest income and interest expense, and noninterest income derived primarily from fees. Consequently, the Bank's earnings are dependent on its ability to originate loans, net interest income, and the relative amounts of interest-earning assets and interest-bearing liabilities. The Bank's net income is also affected by its provision for loan losses and foreclosed real estate as well as the amount of non-interest expenses, such as compensation and benefit expense, occupancy and equipment expense and deposit insurance premium expenses. Earnings of the Bank also are affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. Financial Condition The Bank's total assets increased by $22.1 million to $350.6 million at December 31, 1998 from $328.5 million at December 31, 1997. Total loans receivable increased by $2.0 million due to loan originations of $25.5 million, offset somewhat by loan repayments. Investment securities held to maturity decreased by $17.4 million due to maturing or called securities of $52.0 million and the sale of $3.0 million of securities which were within three months of their maturity, offset somewhat by purchases of $37.6 million. Investment securities available for sale increased by $39.4 million due to purchases of $45.9 million, offset somewhat by maturing or called securities of $5.3 million and the sale of $1.0 million of securities. Mortgage-backed securities held to maturity decreased by $29.6 million due to repayments of principal. Total cash and cash equivalents increased by $26.6 million due in part to the increase in deposits of $12.9 million. Total deposits increased by $12.9 million. Borrowed funds increased by $9.8 million as the Bank took advantage of lower interest rates to fund investing and lending activities. Total stockholders' equity decreased by $849,000 primarily due to the repurchase of shares of Company stock pursuant to the Company's stock repurchase program (130,396 shares at a total price of approximately $2.6 million), a $247,000 unrealized loss on securities available for sale net of deferred taxes and dividends paid, offset somewhat by earnings for the year. 5 Average Balance, Net Interest Income, Yields Earned and Rates Paid The following table sets forth certain information relating to the Bank's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from month-end balances. Management does not believe that the use of month-end balances instead of daily average balances has caused any material difference in the information presented.
1998 1997 1996 ------------------------------- ------------------------------- ----------------------------- Average Average Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- ------- -------- ---------- (Dollars in Thousands) Interest-earning assets: Loans receivable(1)............... $150,345 $11,381 7.57% $131,625 $10,081 7.66% $105,794 $ 8,255 7.80% Mortgage-backed securities(5)..... 90,582 5,481 6.05 107,304 7,118 6.63 119,684 7,972 6.64 Investment securities(2)(5)....... 79,604 5,236 6.64 55,615 3,624 6.52 40,316 2,164 5.37 Other interest-earning assets..... 11,390 598 5.25 4,596 241 5.24 7,431 385 5.18 ------- ------ ------- ------ ------- ------ Total interest-earning assets......................... 331,921 22,746 6.85 299,140 21,064 7.04 273,225 18,776 6.87 ------ ------ ------ Non-interest-earning assets........ 12,284 12,566 14,223 ------- ------- ------- Total assets..................... $344,205 $311,706 $287,448 ======= ======= ======= Interest-bearing liabilities: Savings accounts.................. $ 42,848 1,277 2.98 $ 45,724 1,440 3.15 $ 51,633 1,860 3.60 Now and money market.............. 33,639 607 1.80 32,788 642 1.96 39,270 1,155 2.94 Certificates of deposit........... 156,216 8,620 5.52 148,122 8,246 5.57 147,707 8,068 5.46 Borrowed funds.................... 72,357 4,191 5.79 43,975 2,592 5.89 3,173 175 5.52 ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities.................... 305,060 14,695 4.82 270,609 12,920 4.77 241,783 11,258 4.66 ------ ------ ------ Non-interest bearing liabilities...................... 1,546 1,928 3,171 ------- ------- ------- Total liabilities................. 306,606 272,537 244,954 Stockholders' equity............... 37,599 39,169 42,494 ------- ------- ------- Total liabilities and stockholders' equity............. $344,205 $311,706 $287,448 ======= ======= ======= Net interest income................ $ 8,051 $ 8,144 $ 7,518 ====== ====== ====== Interest rate spread(3)............ 2.03% 2.27% 2.21% ==== ==== ==== Net yield on interest- earning assets(4)................ 2.42% 2.72% 2.75% ==== ==== ==== Ratio of average interest- earning assets to average interest-bearing liabilities..... 108.81% 110.54% 111.00% ======= ====== ======
- --------------------------------- (1) Average balances include non-performing loans. (2) Includes interest-bearing deposits in other financial institutions and FHLB stock. (3) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. (5) Includes both held to maturity and available for sale. 6 The table below sets forth certain information regarding changes in interest income and interest expense of the Bank for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (changes in average volume multiplied by prior rate); (ii) changes in rates (changes in rate multiplied by prior average volume); (iii) changes in rate-volume (changes in rate multiplied by the change in average volume).
Year Ended December 31, ---------------------------------------------------------------------------------------- 1998 vs. 1997 1997 vs. 1996 ----------------------------------------- ------------------------------------------- Increase (Decrease) Increase (Decrease) Due to Due to ----------------------------------------- ------------------------------------------- Rate/ Rate/ Volume Rate Volume Net Volume Rate Volume Net ------ ------ ------ ----- ------ ------ ------ ----- (In Thousands) Interest income: Loans receivable................ $ 1,434 $ (117) $ (17) $ 1,300 $2,016 $(152) $ (38) $1,826 Mortgage-backed securities...... (1,109) (625) 97 (1,637) (825) (33) 4 (854) Investment securities........... 1,453 149 60 1,662 821 463 176 1,460 Other interest-earning assets... 569 (63) (149) 357 (147) 5 (2) (144) ------ ----- ----- ------ ----- ---- ---- ----- Total interest-earning assets.. 2,347 (656) ( 9) 1,682 1,865 283 140 2,288 ------ ----- ----- ------ ----- ---- ---- ----- Interest expense: Savings accounts................ (91) (77) 5 (163) (213) (234) 27 (420) Now and money market............ 17 (51) (1) (35) (191) (386) 64 (513) Certificates of deposit......... 450 (72) (4) 374 23 155 - 178 Borrowed funds.................. 1,774 (104) (71) 1,599 2,250 12 155 2,417 ------ ----- ----- ------ ----- ---- ---- ----- Total interest-bearing liabilities.................. 2,150 (304) (71) 1,775 1,869 (453) 246 1,662 ------ ----- ----- ------ ----- ---- ---- ----- Net change in net interest income......................... $ 197 $ (352) $ 62 $ (93) $ (4) $ 736 $(106) $ 626 ====== ===== ===== ====== ===== ==== ==== =====
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997 General. Net income decreased by $108,000, or 5.84% to $1.7 million for the year ended December 31, 1998 from $1.9 million for the year ended December 31, 1997. The decrease in earnings for the year was due in part to the costs associated with terminating a merger agreement with Skylands Community Bank, the expense incurred due to the immediate vesting of stock awards to a deceased director during the fourth quarter of fiscal 1998, and an increase in losses on foreclosed real estate, offset somewhat by a decrease in taxes. Interest Income. Interest income increased $1.7 million, or 7.99% to $22.7 million for the year ended December 31, 1998 from $21.1 million for the year ended December 31, 1997. The increase was primarily due to increases of $18.7 million, $24.0 million and $6.8 million in the average balance of loans, investment securities, both held to maturity and available for sale and other interest earning assets, respectively, offset somewhat by a decrease of $16.7 million in mortgage-backed securities, both held to maturity and available for sale. Also, the average yield on all interest earning assets decreased by 19 basis points (100 basis points equals 1%) to 6.85%. 7 Interest Expense. Interest expense increased $1.8 million to $14.7 million for the year ended December 31, 1998 from $12.9 million for the year ended December 31, 1997. This was due to an increase in the average balance of borrowed funds of $28.4 million and an increase of $6.1 million in the average balance of deposits coupled with an increase in the average rate paid on interest-bearing liabilities of 5 basis points to 4.82%. Net Interest Income. Net interest income decreased by $93,000 or 1.14% for the year ended December 31, 1998 as compared to the year ended December 31, 1997. The increase was due to the reasons noted above. Provision for Losses on Loans. The Bank maintains an allowance for loan losses based upon management's periodic evaluation of known and inherent risks in the loan portfolio, the Bank's past loss experience, adverse situations that may affect the borrowers' ability to repay loans, estimated value of the underlying collateral and current and expected market conditions. The provision for loan losses decreased $79,000 or 32.86% to $161,000 for the year ended December 31, 1998 from $240,000 for the year ended December 31, 1997, primarily due to a decrease in the Bank's non-performing loans. While the Bank maintains its allowance for losses at a level which it considers to be adequate, there can be no assurance that further additions will not be made to the loss allowances and that such losses will not exceed the estimated amounts. Non-Interest Income. Non-interest income decreased by $24,000 or 5.66% to $403,000 at December 31, 1998 from $428,000 at December 31, 1997. A gain of $125,000 was recorded on the sale of the Bank's Frenchtown office building in 1997. The Frenchtown branch was closed in 1996, and the related deposits were transferred to the Bank's other Hunterdon County offices. This was offset by $47,000 of gains recorded in 1998 on the sales of investment and mortgage-backed securities and an $81,000 increase in service fee income. Non-Interest Expense. Non-interest expense increased $299,000, or 5.53% to $5.7 million at December 31, 1998 from $5.4 million for the year ended December 31, 1997. This increase was due to the recording of $106,000 of expenses connected with the terminated merger agreement with Skylands Community Bank and $140,000 of expense for the immediate vesting of stock awards for a director who died during the fourth quarter of 1998. Exclusive of the aforementioned items, non-interest expense increased $53,000, or 0.98%. Income Tax Expense. Income tax expense decreased $229,000 or 21.31% to $844,000 for the year ended December 31, 1998 from $1.1 million for the year ended December 31, 1997. This increase was due to a decrease in pre-tax income of $337,000 and an increase in investments in assets that are taxed at a reduced federal income tax rate. Comparison of Operating Results for Years Ended December 31, 1997 and 1996 General. Net income increased by $1.2 million, or 203.8% to $1.9 million for the year ended December 31, 1997 from $611,000 for the year ended December 31, 1996. The increase in earnings for the year was due in part to the $1.2 million charge in the third quarter of 1996 connected with a one time special assessment from the Savings Association Insurance Fund ("SAIF"). This one time assessment was the result of legislation that was effective on September 30, 1996 for the purpose of recapitalizing the SAIF. Other factors for the increase in earnings 8 were an increase of $569,000 in net interest income after the provision for loan losses, a decrease of $62,000 in the loss on foreclosed real estate and an additional decrease of $270,000 in deposit insurance premiums offset somewhat by increases in the provision for income taxes of $687,000, and miscellaneous expense of $184,000. Interest Income. Interest income increased $2.3 million, or 12.2% to $21.1 million for the year ended December 31, 1997 from $18.6 million for the year ended December 31, 1996. The increase was primarily due to increases of $25.8 million and $15.3 million in the average balances of loans and investment securities, respectively, offset somewhat by decreases of $12.4 million and $2.8 million in the average balances of mortgage-backed securities and other interest earnings assets, respectively. Also, the average yield on all interest earning assets increased by 17 basis points to 7.04%. In addition, the payoff of two problem loans resulted in the recording of approximately of $170,000 of income previously reserved for. Interest Expense. Interest expense increased $1.7 million to $12.9 million for the year ended December 31, 1997 from $11.3 million for the year ended December 31, 1996. This was due to an increase in the average balance of borrowed funds of $40.8 million coupled with an increase in the average rate paid on interest-bearing liabilities of 11 basis points to 4.77% partially, offset by a decrease in the average balance of interest-bearing deposits of $12.0 million. Net Interest Income. Net interest income increased by $626,000, or 8.3% for the year ended December 31, 1997 as compared to the year ended December 31, 1996. The increase was due to the reasons noted above. Provision for Losses on Loans. The Bank maintains an allowance for loan losses based upon management's periodic evaluation of known and inherent risks in the loan portfolio, the Bank's past loss experience, adverse situations that may affect the borrowers' ability to repay loans, estimated value of the underlying collateral and current and expected market conditions. The provision for loan losses increased $57,000 or 31.2% to $240,000 for the year ended December 31, 1997 from $183,000 for the year ended December 31, 1996, primarily due to the increase in the loan portfolio. The allowance for loan losses was $1.2 million at December 31, 1997. While the Bank maintains its allowance for losses at a level which it considers to be adequate, there can be no assurance that further additions will not be made to the loss allowances and that such losses will not exceed the estimated amounts. Non-Interest Income. Non-interest income increased by $19,000, or 4.7% to $428,000 at December 31, 1997 from $409,000 at December 31, 1996. A gain of $125,000 was recorded on the sale of the Bank's Frenchtown office building in 1997. The Frenchtown branch was closed in 1996, and the related deposits were transferred to the Bank's other Hunterdon County offices. This offset a gain of $138,000 recorded in 1996 on the sale of the deposits of the Bank's Mount Holly office to an unaffiliated financial institution. Non-Interest Expense. Non-interest expense decreased $1.3 million, or 19.9% to $5.4 million at December 31, 1997 from $6.7 million for the year ended December 31, 1996. This decrease was primarily due to the $1.2 million charge in the third quarter of 1996 connected with a one time special assessment from the Savings Association Insurance Fund ("SAIF"). This one time assessment was the result of legislation that was effective on September 30, 1996 for the purpose of recapitalizing the SAIF. Other factors for the decrease in non-interest expense were the additional decrease in deposit insurance 9 premiums of $270,000, a decrease of $62,000 in the loss on foreclosed real estate offset somewhat by an increase of $184,000 in miscellaneous expense. The decrease on the loss on foreclosed real estate was primarily due to a gain of $11,000 being recorded on the sales of a foreclosed properties for the year ended December 31, 1997, compared to a loss of $28,000 on the sale of foreclosed properties for the year ended December 31, 1996. Miscellaneous expense increased by $184,000 due in most part to the expense connected with the director's management stock bonus plan, which increased to $139,000 in 1997 from $39,000 for 1996 due to a full year of vesting, an increase in legal expense of $50,000 and a loss of $19,000 on the sale of the Bank's Mount Holly office. The deposits of this branch were sold in 1996. Income Tax Expense. Income tax expense increased $687,000, or $178.2% to $1.1 million for the year ended December 31, 1997 from $385,000 for the year ended December 31, 1996. This increase was due to an increase in pre-tax income of $1.9 million. Risk Management In an effort to reduce interest rate risk and protect it from the negative effect of rapid increases and decreases in interest rates, the Bank has instituted certain asset and liability management measures including emphasizing the origination of three, five and ten year adjustable-rate mortgage loans and investing excess funds in short- and medium-term mortgage-backed and investment securities. The Bank retains an asset/liability consultant, FinPro, Inc., to assist it in analyzing its asset liability position. With the consultant's assistance, the Bank undertakes a quarterly extensive study of various trends, conducts separate deposit and asset analyses and prepares various asset/liability tables including contractual interest rate gap, interest rate gap with prepayment assumptions, margin/spread and duration tables. Interest rate gap analysis measures the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of times and their sensitivity to changing interest rates. The Bank, like many other thrift institutions, is exposed to interest rate risk as a result of the difference in the maturity of interest-bearing liabilities and interest-earning assets and the volatility of interest rates. Most deposit accounts react more quickly to market interest rate movements than do the existing mortgage loans because of the deposit accounts' shorter terms to maturity; sharp decreases in interest rates would typically increase the Bank's earnings. Conversely, this same mismatch will generally adversely affect the Bank's earnings during periods of increasing interest rates. The extent of movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Bank. Volatility in interest rates can also result in disintermediation, which is the flow of funds away from savings institutions (such as the Bank) and into other investments, such as U.S. Government and corporate securities and other investment vehicles. Because of the absence of federal insurance premiums and reserve requirements, such investments may pay higher rates of return than investment vehicles offered by savings institutions. In order to encourage monitor its interest rate risk, the Company utilizes the services of an outside consultant to calculate the sensitivity of its net portfolio value ("NPV") to changes in interest rates. NPV is the difference between incoming and outgoing discounted cash flows from assets, 10 liabilities, and off-balance sheet contracts. The Company's interest rate risk ("IRR") is measured as the change to its NPV as a result of hypothetical 100 basis point ("bp") changes in market interest rates.
Net Portfolio Equity Value NPV as % of PV of Assets ----------------------------------------------------- --------------------------------- Change in Interest Rates $ Change in Basis Points in Market % Change (Rate Shock) Amount Value(1) From Base NPV Ratio(2) Changes(3) --------------- -------- ---------- ----------- ------------ ------------ (Dollars in Thousands) 300 29,875 (12,238) (29) 9.04% (287)bp 200 34,118 (7,995) (19) 10.08% (183)bp 100 38,197 (3,916) (9) 11.04% (87)bp 0 42,113 -- -- 11.91% -- (100) 45,866 3,753 9 12.71% 80 bp (200) 49,454 7,341 17 13.44% 153 bp (300) 52,879 10,766 26 14.11% 220 bp
- ------------------------------------------------------- (1) Represents the increase (decrease) of the estimated NPV at the indicated change in interest rates compared to the NPV assuming no change in interest rates. (2) Calculated as the estimated NPV divided by the present value of total assets. The Company's PV is the estimated present value of total assets. (3) Calculated as the increase (decrease) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates. Certain assumptions utilized by the Company in assessing its interest rate risk were employed in preparing the previous table. These assumptions related to interest rates, loan prepayment rates, core deposit duration, and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates will not change as a result of changes in interest rates although there can be no assurance that this will be the case. The calculation methodology used by the Company has certain shortcomings which include, among others, that the repricing of both loans and deposits is often discretionary and under the control of the Bank's customers. Even if interest rates change in the designated amounts, there can be no assurance that the Company's assets and liabilities would perform as projected. Generally, net interest income should decrease with an instantaneous 100 basis point increase in interest rates while net interest income should increase with instantaneous declines in interest rates. Generally, during periods of increasing interest rates, the Company's liabilities are expected to reprice faster than its assets, causing a decline in the Company's interest rate spread. This would result from an increase in the Company's cost of funds that would not be immediately offset by an increase in its 11 yield on earning assets. An increase in the cost of funds without an equivalent increase in the yield on interest-earning assets would tend to reduce net interest income. Liquidity and Capital Resources The Bank is required under applicable federal regulations to maintain specified levels of "liquid" investments in qualifying types of U.S. Government, federal agency and other investments. OTS regulations require that a savings association maintain liquid assets of not less than 4% of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. At December 31, 1998, the Bank's liquidity was in excess of the minimum requirement. The Bank adjusts liquidity as appropriate to meet its asset/liability objectives. The Bank's primary sources of funds are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and funds provided from operations. While scheduled loan repayments are a relatively predictable source of funds, deposit flows and loan and mortgage-backed security prepayments are significantly influenced by general interest-rates, economic conditions and competition. In addition, the Bank invests excess funds in overnight deposits which provide liquidity to meet lending requirements. The Bank's most liquid asset is cash, which includes investments in highly liquid short-term investments. The level of these assets are dependent on the Bank's operating, financing and investing activities during any given period. At December 31, 1998, cash and cash equivalents totaled $33.4 million. The Bank has other sources of liquidity if a need for additional funds arises. Another source of liquidity is the repayment and prepayment of mortgage-backed and investment securities. Additional sources of funds include the ability to utilize FHLB of New York advances and the ability to borrow against mortgage-backed and investment securities. At December 31, 1998 the Bank had a $9.0 million repurchase agreement with a rate of 5.82%. The repurchase agreement matures in December 1999 and is callable quarterly on interest payment dates. As of March 6, 1999, the borrowing was still in place. The repurchase agreement was used to fund the sale of the Mount Holly branch deposits which were sold in December 1996. In an effort to increase earnings, reduce the Company's interest rate sensitivity, and to better match its interest rate position, in November 1998, the Company entered into a financial transaction whereby it purchased two fixed rate agency securities at an average rate of 6.17%, with terms of 15 years, and each is callable after one year. The funds for the purchase of these securities came from a Federal Home Loan Bank of New York convertible advance. The borrowing has a rate of 4.93% and matures November 19, 2003, but is callable quarterly on interest payment dates starting November 19, 2001. At December 31, 1998, the Bank had a 30-day $9.5 million repurchase agreement with a rate of 5.29% and maturing on January 14, 1999. (This repurchase agreement subsequently rolled over in January 1999, at a rate of 4.95%. In February, the repurchase agreement was paid down to $9.0 million and the rate became 4.92%.) On March 10, 1998, the Bank took advantage of low interest rates to increase its borrowings to fund investing and lending activities, and to allow for the maturing and withdrawal of high yielding savings deposits, to borrow $25.0 million from the Federal Home Loan Bank of New York. This convertible advance has a rate of 5.35%, with a maturity date of March 11, 2008. On March 12, 2001, and quarterly thereafter, the Federal Home Loan Bank of New York has the right to call this advance. The Bank's cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities and financing activities. Cash flows from operating activities, consisting primarily of net income adjusted for depreciation, amortization and provisions for loan and real estate 12 owned losses, were $3.0, $3.4 million and $1.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. Net cash provided by (used in) investing activities, which consisted primarily of disbursement of loan originations, loan purchases, mortgage-backed security purchases and investment security purchases, offset by principal collections on loans and mortgage-backed securities and proceeds from the maturities of investment securities, were $3.9 million, $(29.5) million and $(37.2) million for fiscal 1998, 1997 and 1996, respectively. Net cash provided by (used in) financing activities consisting primarily of proceeds from stock subscriptions, net activity in deposit and escrow accounts, and activity in borrowed funds were $19.7 million, $22.5 million and $(7.5) million for the years ended December 31, 1998, 1997 and 1996, respectively. Operating activities in 1998 provided $3.0 million in cash due in most part to income of $1.7 million adjusted for $180,000 in the provision for loan and real estate owned losses, $361,000 of goodwill amortization and $352,000 in the amortization of deferred fees, premiums and discounts. Investing activities in 1998 provided funds of $3.9 million due to maturities of $52.0 million and $5.0 million of investment securities held to maturity and investment securities available for sale, respectively, repayments of $29.4 million of mortgage backed securities held to maturity, $6.6 million of repayments of mortgage-backed securities available for sale and $8.4 million in proceeds from the sale of mortgage-backed securities available for sale, offset somewhat by purchases of $45.9 million, $37.6 million and $15.0 million in investment securities available for sale, investment securities held to maturity and mortgage-backed securities available for sale, respectively. Financing activities in 1998 provided $19.7 million primarily due to an increase of $50.0 million in long term borrowed funds and a net change of $13.0 million in deposits offset somewhat by a decrease of $40.2 million in short term borrowings. Operating activities in 1997 provided $3.4 million in cash primarily due to income of $1.9 million adjusted for $149,000 in depreciation, $367,000 in the provision for loan and real estate owned losses and $361,000 of goodwill amortization. Investing activities in 1997 used $29.5 million due to $16.0 million, $14.0 million and $15.1 million in purchases of investment securities held to maturity, mortgage-backed securities available for sale, and loans, respectively, and the $15.0 million increase in loans receivable, offset somewhat by $21.4 million from principal collections on mortgage-backed securities held to maturity and $9.3 million from the maturity of investment securities held to maturity. Financing activities in 1997 provided $22.5 million due to a $1.8 million change in deposits and $25.1 million increase in borrowed funds offset somewhat by $1.7 million and $2.4 million for the repurchase of stock for the MSBP program and stock repurchase program, respectively. Operating activities in 1996 provided $1.6 million in cash primarily due to net income of $611,000 adjusted for $153,000 in depreciation, a $183,000 provision for loan and real estate owned losses, $361,000 of goodwill amortization. Investing activities in 1996 used $37.2 million due to $16.1 million and $32.3 million in purchases of mortgage-backed and investment securities, respectively, and a $21.3 million increase in loans receivable, $11.0 million from the maturity of investment securities held to maturity, and $21.5 million from principle collections on mortgage-backed securities held to maturity. Financing activities used $7.8 million due to a $7.5 million decrease in deposits, a $19.7 million refunding of oversubscribed deposits related to the initial public offering completed in January 1996, $9.1 million used to fund the sale of the deposits of the Mount Holly branch, and $3.3 million for the repurchase of common stock, offset somewhat by an increase in borrowed funds of $33.6 million. The Bank anticipates that it will have sufficient funds available to meet its current commitments. As of December 31, 1998, the Bank had mortgage commitments to fund loans of $5.1 million. Also, at December 31, 1998, there were commitments on unused lines of credit relating to home equity loans of $4.6 million. Certificates of deposit scheduled to mature in one year or less at December 31, 1998 13 totaled $125.7 million. Based on historical deposit withdrawals and outflows, and on internal monthly deposit reports monitored by management, management believes that a majority of such deposits will remain with the Bank. As a result, no adverse liquidity effects are expected. At December 31, 1998, the Bank exceeded each of the three regulatory capital requirements on a fully phased-in basis. See Note 11 to the Consolidated Financial Statements. Year 2000 Readiness The following discussion of the implications of the Year 2000 problem for the Company, contains numerous forward looking statements based on inherently uncertain information. The cost of the project and the date on which the Company plans to complete the internal Year 2000 modifications are based on management's assumptions of future events including the continued availability of internal and external resources, third party modifications and other factors. However, there can be no guarantee that these statements will be achieved and actual results could differ. Moreover, although management believes it will be able to make the necessary modifications in advance, there can be no guarantee that failure to modify the systems would not have a material adverse effect on the Company. During fiscal 1998, the Bank adopted a Year 2000 Compliance Plan (the "Plan") and established a Year 2000 Compliance Committee (the "Committee"). The objectives of the Plan and the Committee are to prepare the Bank for the millennium. As recommended by the Federal Financial Institutions Examination Council, the Plan encompasses the following phases: Awareness, Assessment, Renovation, Validation and Implementation. These phases will enable the Bank to identify risks, develop an action plan, perform adequate testing and complete certification that its processing systems will be Year 2000 ready. The Bank is currently in Phase 3, Renovation, (which includes code enhancements, program changes, hardware and software upgrades, system replacements and third party vendor monitoring) and Phase 4, Validation, (which includes testing of incremental changes to hardware and software, testing connections with third-party vendors and establishing controls to ensure timely completion of all hardware and software prior to final implementation). Prioritization of the most critical applications has been addressed, along with contract and service agreements. The primary operating software for the Bank is obtained and maintained by an external provider of software (the "External Provider"). The Bank has maintained ongoing contact with this vendor so that modification of the software is a top priority and is expected to be accomplished, though there is no assurance, by March 31, 1999. The Bank has contacted all other material vendors and suppliers regarding their Year 2000 readiness. Each of these third parties has delivered written assurance to the Bank that they expect to be Year 2000 compliant prior to the Year 2000. Due to the announcement of the Company's potential acquisition by HUBCO, the Renovation and Valuation phases targeted completion dates have been changed to April 30, 1999 and May 31, 1999, respectively. The Implementation phase is to certify that systems are Year 2000 ready, along with assurances that any new systems are compliant on a going forward basis. The implementation phase is targeted for completion by September 30, 1999. The Bank expects to incur consulting and other expenses related to testing and enhancements to prepare the systems for the Year 2000. The Bank does not anticipate that the related costs will be material in any single year. In total, the Bank estimates that it's cost for compliance will amount to approximately $100,000 over the two year period from 1998 - 1999. As of December 31, 1998 approximately $65,000 of these costs have been incurred. No assurance can be given that the Year 2000 Compliance Plan will be completed successfully by the Year 2000, in which event the Bank could incur significant costs. If the External Provider is unable to resolve the potential problem in time, the Bank would likely experience significant data processing delays, mistakes or failures. These delays, mistakes or failures could have a significant adverse impact on the financial statements of the Company. 14 The Company does not separately track the internal costs incurred for the Year 2000 project because such costs are principally the related payroll costs. Successful and timely completion of the Year 2000 project is based on management's best estimates derived from various assumptions of future events, which are inherently uncertain, including the progress and results of the Bank's External Provider, testing plans, and all vendors, suppliers and customer readiness. Despite the best efforts of management to address this issue, the vast number of external entities that have direct and indirect business relationships with the Company, such as public utilities, customers, vendors, payment systems providers and other financial institutions, makes it impossible to assure that a failure to achieve compliance by one or more of these entities would not have material adverse impact on the operations of the Company. Impact of Inflation and Changing Prices The financial statements of the Bank and notes thereto, presented elsewhere herein, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Bank's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Bank are monetary. As a result, interest rates have a greater impact on the Bank's performance than do the effects of general levels of inflation. Interest rates do not necessary move in the same direction or to the same extent as the price of goods and services. 15 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS (With Independent Auditor's Report Thereon) December 31, 1998 -------------------------------------------------------- INDEX ----- Page --------- Management Responsibility Statement 17 Independent Auditors' Report 18 Consolidated Statements of Financial Condition as of December 31, 1998 and 1997 19 Consolidated Statements of Income for Each of the Years in the Three Year Period Ended December 31, 1998 20 Consolidated Statements of Comprehensive Income for Each of the Years in the Three Year Period Ended December 31, 1998 21 Consolidated Statements of Changes in Stockholders' Equity for Each of the Years in the Three Year Period Ended December 31, 1998 22 Consolidated Statements of Cash Flows for Each of the Years in the Three Year Period Ended December 31, 1998 23 - 24 Notes to Consolidated Financial Statements 25 - 58 All schedules are omitted because the required information is either not applicable or not required or the required information is included in the consolidated financial statements or notes thereto. 16 [LOGO] LITTLE FALLS BANCORP, INC. Little Falls Bancorp, Inc. 86 Main Street Little Falls, NJ 07424-1493 973-256-6100 January 22, 1999 MANAGEMENT RESPONSIBILITY STATEMENT ----------------------------------- Management of Little Falls Bancorp, Inc. is responsible for the preparation of the consolidated financial statements and all other financial information in this report. The consolidated financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis. All financial information included in the report agrees with the consolidated financial statements. In preparing the consolidated financial statements, management makes informed estimates and judgments, with consideration given to materiality, about the expected results of various events and transactions. Management maintains a system of internal accounting control that includes personnel selection, appropriate division of responsibilities, and formal procedures and policies consistent with high standards of accounting and administrative practice. Consideration has been given to the necessary balance between the costs of systems of accounting and internal control and the benefits derived. Management reviews and modifies its systems of accounting and internal control in light of changes in conditions and operations as well as in response to recommendations from the independent certified public accountants. Management believes the accounting and internal control systems provide reasonable assurance that assets are safeguarded and financial information is reliable. The Board of Directors is responsible for determining that management fulfills its responsibilities in the preparation of the consolidated financial statements and the control of operations. The Board appoints the certified public accountants. The Board meets with management and the independent certified public accountants, approves the overall scope of audit work and related fee arrangements and reviews audit reports and findings. /s/Leonard G. Romaine /s/Richard A. Capone - ---------------------------------- ------------------------------------- Leonard G. Romaine Richard A. Capone President Chief Financial Officer and Treasurer 17 INDEPENDENT AUDITORS' REPORT ---------------------------- To The Board of Directors and Stockholders Little Falls Bancorp, Inc. Little Falls, New Jersey We have audited the consolidated statements of financial condition of Little Falls Bancorp, Inc. (the "Company") and subsidiary as of December 31, 1998 and 1997 and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to in the second preceding paragraph present fairly, in all material respects, the consolidated financial position of Little Falls Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997 and the results of their operations and cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/Radics & Co., LLC Pine Brook, New Jersey January 22, 1999, except for the last two paragraphs of Note 2, as to which the date is January 26, 1999. 18 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ----------------------------------------------
December 31, -------------------------------------- Assets Notes 1998 1997 - ------ ------------------ ------------------ ------------------ Cash and due from banks $ 5,780,361 $ 2,737,709 Interest-bearing deposits in other banks 612,931 550,522 Federal funds sold and securities purchased under agreements to resell 27,000,000 3,500,000 -------------- -------------- Total cash and cash equivalents 1 and 17 33,393,292 6,788,231 Investment securities available for sale 1,4, 10 and 17 39,422,602 - Investment securities held to maturity 1,4, 10 and 17 40,577,457 57,987,644 Mortgage-backed securities available for sale 1,5, 10 and 17 13,971,394 13,929,048 Mortgage-backed securities held to maturity 1,5, 10 and 17 61,373,296 90,957,446 Loans receivable 1,6, 10 and 17 149,061,512 147,033,259 Premises and equipment 1 and 7 2,601,679 2,617,175 Investment in real estate 1 and 8 81,281 427,317 Foreclosed real estate 1 297,000 604,219 Interest receivable 1 and 17 1,961,170 2,079,091 Federal Home Loan Bank of New York stock 10 3,767,600 2,517,600 Excess of cost over assets acquired 1 2,495,443 2,856,230 Other assets 13 1,613,221 725,234 -------------- -------------- Total assets $ 350,616,947 $ 328,522,494 ============= ============= Liabilities and stockholders' equity - ------------------------------------ Liabilities - ----------- Deposits 9 and 17 $ 243,048,053 $ 230,132,675 Borrowed money 10 and 17 68,500,000 58,719,500 Accounts payable and other liabilities 12 and 13 1,623,438 1,375,658 -------------- -------------- Total liabilities 313,171,491 290,227,833 -------------- -------------- Commitments 16 and 17 - - Stockholders' equity 1,2,3,11,12 and 13 - -------------------- Preferred stock $.10 par value, 5,000,000 shares authorized; none issued and outstanding - - Common stock $.10 par value, 10,000,000 shares authorized; 3,041,750 shares issued; shares outstanding 2,477,525 (1998) and 2,607,921 (1997) 304,175 304,175 Additional paid in capital 29,204,431 29,067,633 Retained earnings - substantially restricted 19,517,521 18,275,517 Common stock acquired by employee stock ownership plan ("ESOP") (1,936,741) (2,106,432) Unearned restricted Management Stock Bonus Plan ("MSBP") stock, at cost (855,791) (1,329,167) Treasury stock, at cost; 564,225 shares (1998) and 433,829 shares (1997) (8,191,308) (5,632,286) Accumulated other comprehensive income (596,831) (284,779) -------------- -------------- Total stockholders' equity 37,445,456 38,294,661 -------------- -------------- Total liabilities and stockholders' equity $ 350,616,947 $ 328,522,494 ============== ==============
See notes to consolidated financial statements. 19 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME ---------------------------------
Year Ended December 31, ----------------------------------------------------- Notes 1998 1997 1996 -------- ----------- ----------- ----------- Interest income: Loans receivable 5 $11,380,802 $10,081,393 $ 8,255,040 Mortgage-backed securities 5,481,359 7,117,907 7,972,069 Investment securities and other interest-earning assets 5,884,145 3,864,885 2,549,230 ----------- ----------- ----------- Total interest income 22,746,306 21,064,185 18,776,339 ----------- ----------- ----------- Interest expense: Deposits 8 10,504,020 10,327,779 11,082,926 Borrowings 4,190,912 2,592,479 175,324 ----------- ----------- ----------- Total interest expense 14,694,932 12,920,258 11,258,250 ----------- ----------- ----------- Net interest income 8,051,374 8,143,927 7,518,089 Provision for loan losses 5 161,132 240,000 182,900 ----------- ----------- ----------- Net interest income after provision for loan losses 7,890,242 7,903,927 7,335,189 ----------- ----------- ----------- Non-interest income: Service fees 228,722 147,818 169,678 Other 4 and 5 174,774 279,877 238,893 ----------- ----------- ----------- Total non-interest income 403,496 427,695 408,571 ----------- ----------- ----------- Non-interest expenses: Compensation and employee benefits 12 2,679,782 2,622,159 2,608,587 Occupancy, net 6 290,877 295,305 334,406 Equipment 6 432,893 430,366 401,510 Deposit insurance premiums 15 117,613 126,987 1,596,307 Loss on foreclosed real estate 44,017 26,900 88,981 Amortization of deposit premium 1 360,787 360,787 360,783 Other 12 1,776,203 1,540,603 1,356,853 ----------- ----------- ----------- Total non-interest expenses 5,702,172 5,403,107 6,747,427 ----------- ----------- ----------- Income before provision for income taxes 2,591,566 2,928,515 996,333 Provision for income taxes 13 843,850 1,072,400 385,444 ----------- ----------- ----------- Net income $ 1,747,716 $ 1,856,115 $ 610,889 =========== =========== =========== Net income per common share: 1 and 14 Basic $ 0.79 $ 0.78 $ 0.22 =========== =========== =========== Diluted $ 0.76 $ 0.75 $ 0.22 =========== =========== ===========
See notes to consolidated financial statements. 20 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME -----------------------------------------------
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 ------------ ------------ ---------- Net income $ 1,747,716 $ 1,856,115 $ 610,889 ----------- ----------- --------- Other comprehensive income, net of income taxes: Unrealized holding gains on securities available for sale, net of income taxes of $134,235 and $39,938 in 1998 and 1997, respectively (217,386) (71,062) - Reclassification adjustment for realized gains on securities available for sale, net of income taxes of $16,754 in 1998 (29,810) - - ----------- ----------- --------- (247,196) (71,062) - Minimum pension liability adjustment, net of income taxes of $36,450, $72,590 and $(10,964), respectively (64,856) (129,162) 19,508 ----------- ----------- --------- Other comprehensive income (312,052) (200,224) 19,508 ----------- ----------- --------- Comprehensive income $ 1,435,664 $ 1,655,891 $ 630,397 =========== =========== =========
See notes to consolidated financial statements. 21 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ----------------------------------------------------------
Retained Common Additional Earnings - Stock Common Paid in Substantially Acquired Stock Capital Restricted By ESOP ---------- ------------ ------------- -------------- Balance - December 31, 1995 $ - $ - $ 16,327,286 $ - Net income - - 610,889 - Net proceeds from issuance of common stock 304,175 28,959,347 - - Acquisition of common stock by ESOP - - - (2,433,400) ESOP shares committed to be released - 15,452 - 162,227 Purchase of 296,570 shares of treasury stock - - - - Decrease in minimum pension liability, net of deferred income taxes - - - - Dividends paid - - (136,119) - --------- ----------- ------------ ------------- Balance - December 31, 1996 304,175 28,974,799 16,802,056 (2,271,173) Net income - - 1,856,115 - Acquisition of common stock by MSBP - - - - ESOP shares committed to be released - 92,834 - 164,741 Amortization of MSBP stock - - - - Purchase of 137,259 shares of treasury stock - - - - Unrealized (loss) on securities available for sale, net - - - - (Increase) in minimum pension liability, net of deferred income taxes - - - - Dividends paid - - (382,654) - --------- ----------- ------------ ------------- Balance - December 31, 1997 304,175 29,067,633 18,275,517 (2,106,432) Net income - - 1,747,716 - ended December 31, 1998 ESOP shares committed to be released - 136,798 - 169,691 Amortization of MSBP stock - - - - Purchase of 130,396 shares of treasury stock - - - - Unrealized (loss) on securities available for sale, net - - - - (Increase) in minimum pension liability, net of deferred income taxes - - - - Dividends paid - - (505,712) - --------- ----------- ------------ ------------- Balance - December 31, 1998 $ 304,175 $29,204,431 $ 19,517,521 $ (1,936,741) ========= =========== ============ =============
22 - -----------------2nd half of table follows-------------------------------------- - -----------------2nd half of table below----------------------------------------
Unearned Accumulated Restricted Other MSBP Treasury Comprehensive Stock Stock Income Total ---------- ------------ ------------- ------------- Balance - December 31, 1995 $ - $ - $ (104,063) $ 16,223,223 Net income - - - 610,889 Net proceeds from issuance of common stock issuance of common stock - - - 29,263,522 Acquisition of common stock by ESOP - - - (2,433,400) ESOP shares committed to be released - - - 177,679 Purchase of 296,570 shares of treasury stock - (3,277,004) - (3,277,004) Decrease in minimum pension liability, net of deferred income taxes - - 19,508 19,508 Dividends paid - - - (136,119) --------- ----------- ------------ ------------- Balance - December 31, 1996 - (3,277,004) (84,555) 40,448,298 Net income - - - 1,856,115 Acquisition of common stock by MSBP (1,600,268) - - (1,600,268) ESOP shares committed to be released - - - 257,575 Amortization of MSBP stock 271,101 - - 271,101 Purchase of 137,259 shares of treasury stock - (2,355,282) - (2,355,282) Unrealized (loss) on securities available for sale, net - - (71,062) (71,062) (Increase) in minimum pension liability, net of deferred income taxes - - (129,162) (129,162) Dividends paid - - - (382,654) --------- ----------- ------------ ------------- Balance - December 31, 1997 (1,329,167) (5,632,286) (284,779) 38,294,661 Net income ended December 31, 1998 - - - 1,747,716 ESOP shares committed to be released - - - 306,489 Amortization of MSBP stock 473,376 - - 473,376 Purchase of 130,396 shares of treasury stock - (2,559,022) - (2,559,022) Unrealized (loss) on securities available for sale, net - - (247,196) (247,196) (Increase) in minimum pension liability, net of deferred income taxes - - (64,856) (64,856) Dividends paid - - - (505,712) --------- ----------- ------------ ------------- Balance - December 31, 1998 $(855,791) $(8,191,308) $ (596,831) $ 37,445,456 ========= =========== ============ =============
See notes to consolidated financial statements. 22 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
Year Ended December 31, -------------------------------------------------- 1998 1997 1996 ------------ ------------- ----------- Cash flows from operating activities: Net income $ 1,747,716 $ 1,856,115 $ 610,889 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 131,395 149,187 153,207 Provision for loan and real estate owned losses 180,000 367,356 182,900 Amortization of intangibles 360,787 360,787 360,783 Amortization of deferred fees, premiums and discounts, net 352,432 117,732 40,903 Gain on sales of investment securities available for sale (16,654) - - Gain on sales of mortgage-backed seucrities available for sale (29,910) - - Gain on sale of branch - - (138,320) Gain on sale of investment in real estate (37,911) (106,318) - Loss (gain) on sale of foreclosed real estate 19,875 (11,086) 28,418 Deferred income taxes (148,250) (35,527) (243,005) Decrease (increase) in interest receivable 117,921 (343,800) (17,942) (Increase) decrease in other assets (566,063) 366,147 (2,447) (Decrease) increase in interest payable (54,160) 92,789 180,501 Increase in accounts payable and other liabilities 127,036 55,364 256,012 ESOP shares committed to be released 306,489 257,575 177,679 Amortization of MSBP cost 501,237 271,101 - ----------- ----------- --------- Net cash provided by operating activities 2,991,940 3,397,422 1,589,578 ----------- ----------- --------- Cash flows from investing activities: Purchases of: Investment securities available for sale (45,929,794) - - Investment securiites held to maturity (37,583,247) (15,977,500) (32,347,937) Mortgage-backed seucriites available for sale (15,035,553) (14,048,125) - Mortgage-backed securities held to maturity - - (16,073,205) Loans - (15,096,510) - Premises and equipment (112,479) (102,193) (159,246) Federal Home Loan Bank of New York stock (1,250,000) (441,900) (680,500) Proceeds from maturities of and repayments on: Investment securities available for sale 5,000,000 - - Investment securities held to maturity 52,000,000 9,342,000 11,000,000 Mortgage-backed securities available for sale 6,615,242 - - Mortgage-backed securities held to maturity 29,375,738 21,444,380 21,500,221 Proceeds from sales of: Investment securities available for sale 1,028,100 - - Investment securities held to maturity 3,000,000 - - Mortgage-backed securities available for sale 8,352,991 - - Investment in real estate 380,527 42,125 - Foreclosed real estate 268,476 394,486 849,629 Net (increase) in loans receivable (2,187,526) (15,023,967) (21,265,657) ----------- ----------- --------- Net cash provided by (used in) investing activities 3,922,475 (29,467,204) (37,176,695) ----------- ----------- ---------
See notes to consolidated financial statements. 23 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS ------------------------------------
Year Ended December 31, --------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Cash flows from financing activities: Net increase (decrease) in deposits $12,974,880 $ 1,814,156 $(7,464,225) Decrease in advances from borrowers for taxes - - (701,773) (Refunds of) proceeds from stock subscriptions - - 19,706,653) Net change in short-term borrowings (40,219,500) 10,096,000 24,623,500 Proceeds of long-term borrowings 50,000,000 15,000,000 9,000,000 Costs of issuance of common stock - - (731,348) Dividends paid (505,712) (382,654) (136,119) Cash paid in connection with branch sales - - (9,064,385) Cost of MSBP shares - (1,688,171) - Treasury stock acquired (2,559,022) (2,355,282) (3,277,004) ----------- ----------- ----------- Net cash provided by (used in) financing activities 19,690,646 22,484,049 (7,458,007) ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents 26,605,061 (3,585,733) (43,045,124) Cash and cash equivalents - beginning 6,788,231 10,373,964 53,419,088 ----------- ----------- ----------- Cash and cash equivalents - ending $33,393,292 $ 6,788,231 $10,373,964 =========== =========== =========== Supplemental disclosures: Cash paid during the period for: Interest $14,749,082 $12,827,469 $11,077,749 =========== =========== =========== Income taxes, net of refunds $ 1,305,745 $ 957,808 $ 410,701 =========== =========== =========== Unrealized loss on securities available for sale, net of deferred income taxes $ 247,196 $ 71,062 $ - =========== =========== =========== Loans to facilitate sales of investment in real estate $ - $ 215,000 $ - =========== =========== =========== Loans receivable transferred to foreclosed real estate $ - $ 157,818 $ 406,379 =========== =========== =========== Loans to facilitate sales of foreclosed real estate $ - $ - $ 172,000 =========== =========== =========== Increase (decrease) in minimum pension liability, net of deferred income taxes $ 64,856 $ 129,162 $ (19,508) =========== =========== =========== Property transferred to investment in real estate $ - $ 9,629 $ 145,478 =========== =========== =========== Issuance of common stock: Deposits used for stock purchases $ - $ - $ 2,859,458 Stock subscriptions used for stock purchases - - 25,124,642 Deferred costs - - (422,630) ----------- ----------- ----------- $ - $ - $27,561,470 Reduction in MSBP liability in connection with purchase of MSBP shares $ - $ (87,903) $ - =========== =========== =========== Liabilities assigned in connection with branch sales: Deposits $ - $ - $ 9,221,324 =========== =========== =========== Assets sold in connection with branch sales: Loans $ - $ - $ 18,619 =========== =========== ===========
See notes to consolidated financial statements. 24 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - ----------------------------------------------- Basis of financial statement presentation ----------------------------------------- The consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles, include the accounts of Little Falls Bancorp, Inc. (the "Company") and its wholly owned subsidiary, Little Falls Bank (the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities as of the dates of the consolidated statements of financial condition and revenues and expenses for the periods then ended. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, the assessment of prepayment risks associated with mortgage-backed securities and the determination of the amount of deferred tax assets that are more likely than not to be realized. Management believes that the allowance for loan losses is adequate, foreclosed real estate is appropriately valued, prepayment risks associated with mortgage-backed securities are properly recognized and all deferred tax assets are more likely than not to be recognized. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to allowance for loan losses or further writedowns of foreclosed real estate may be necessary based on changes in economic conditions in the market area. Additionally, assessments of prepayment risks related to mortgage- backed securities are based upon current market conditions, which are subject to frequent change. Finally, the assessment of the amount of deferred tax assets more likely than not to be realized is based on projected future taxable income, which is subject to continual revisions for updated information. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowance or additional writedowns on real estate based on their judgments about information available to them at the time of their examination. Comprehensive income -------------------- Effective January 1, 1998, the Company and the Bank adopted Statement of Financial Accounting Standards ("Statement") No. 130, " Reporting Comprehensive Income". Statement No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. As required, the provisions of Statement No. 130 have been retroactively applied to previously reported periods. The application of Statement No. 130 had no material effect on the Company's consolidated financial condition or operations. At December 31, 1998 and 1997, accumulated other comprehensive income includes unrealized losses on securities available for sale, net of deferred income taxes, of $(318,258) and $(71,062), respectively, and additional minimum pension liability, net of deferred income taxes, of $(213,717) and $(278,573), respectively. 25 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.) - ----------------------------------------------- Cash and cash equivalents ------------------------- Cash and cash equivalents include cash and amounts due from banks, federal funds sold and interest-bearing deposits in other banks having original maturities of three months or less. Generally, federal funds sold are sold for one day periods. Investment and mortgage-backed securities ----------------------------------------- Debt securities for which there is the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized holding gains and losses included in earnings. Debt and equity securities not classified as trading securities nor as held-to maturity securities are classified as available for sale securities and reported at fair value, with unrealized holding gains or losses, net of deferred income taxes, included in accumulated other comprehensive income. Premiums are amortized and discounts are accreted to interest income using the interest method. Gains or losses on the sale of securities are based on specifically identifiable cost and are accounted for on a trade date basis. Loans receivable ---------------- Loans receivable are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees and costs and discounts. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost accreted or amortized as an adjustment of yield using the interest method over the contractual lives of the related loans. Unearned interest on consumer loans is recognized over the contractual lives of the loans using a method which approximates the interest method. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments is reestablished, in which case the loan is returned to accrual status. Allowance for loans losses -------------------------- An allowance for loan losses is maintained at a level considered adequate to absorb future loan losses. Management of the Bank, in determining the allowance for loan losses, considers the risks inherent in its loan portfolio and changes in the nature and volume of its loan activities, along with the general economic and real estate market conditions. 26 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.) - ----------------------------------------------- Allowance for loan losses (Cont'd.) ------------------------- The Bank utilizes a two tier approach: (1) identification of impaired loans and the establishment of specific loss allowances on such loans; and (2) establishment of general valuation allowances on the remainder of its loan portfolio. The Bank maintains a loan review system which allows for a periodic review of its loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, types of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified loans based on a review of such information and/or appraisals of the underlying collateral. General loan loss allowances are based upon a combination of factors including , but not limited to, actual loan loss experience, composition of the loan portfolio, current economic conditions and management's judgment. Although management believes that adequate specific and general loan loss allowances are established, actual losses are dependent upon future events and, as such, further additions to the level of the loan loss allowance may be necessary. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. A loan evaluated for impairment is deemed to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. An insignificant payment delay, which is defined by the Bank as up to ninety days, will not cause a loan to be classified as impaired. A loan is not impaired during a period of delay in payment if the Bank expects to collect all amounts due, including interest accrued at the contractual interest rate for the period of delay. Thus, a demand loan or other loan with no stated maturity is not impaired if the Bank expects to collect all amounts due, including interest accrued at the contractual interest rate, during the period the loan is outstanding. All loans identified as impaired are evaluated independently. The Bank does not aggregate such loans for evaluation purposes. Payments received on impaired loans are applied first to interest receivable and then to principal. Premises and equipment ---------------------- Land is carried at cost. Buildings and improvements, leasehold improvements and furniture, fixtures and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the lesser of the estimated useful lives of the assets or, if applicable, the term of lease. Significant renovations and additions are capitalized. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations for the period. Maintenance and repairs are charged to expense as incurred. Rental income is netted against occupancy expense. Investment in real estate ------------------------- Investments in real estate are carried at the lower of cost less accumulated depreciation or fair value less estimated disposal costs. 27 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.) - ------------------------------------------------ Foreclosed real estate ---------------------- Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at the lower of cost or fair value at the date of foreclosure. Subsequent valuations are periodically performed and an allowance for losses established by a charge to operations if the carrying value of a property exceeds its fair value less estimated selling costs. Costs relating to development and improvement of properties are capitalized, whereas income and expenses relating to the operating and holding of properties are recorded in operations as earned or incurred. Gains and losses from sales of these properties are recognized as they occur. Excess of cost over assets acquired ----------------------------------- The cost in excess of the fair value of net assets acquired through the acquisition of certain assets and assumption of certain liabilities of branch offices is being amortized to expense over a ten year period by use of the straight-line method. Income taxes ------------ The Company and its subsidiary file a consolidated federal income tax return and separate state income tax returns. Income taxes are allocated to the Company and its subsidiary based upon the contribution of their respective income or loss to the consolidated return. Federal and State income taxes have been provided on the basis of reported income. The amounts reflected on the tax returns differ from these provisions due principally to temporary differences in the reporting of certain items for financial reporting and tax reporting purposes. Deferred income tax expense or benefit is determined by recognizing deferred tax assets and liabilities for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary difference are expected to be recovered or settled. The realization of deferred tax assets is assessed and a valuation allowance provided, when necessary, for that portion of the asset which more likely than not will not be realized. Management believes, based upon current facts, that it is more likely than not that there will be sufficient taxable income in future years to realize all deferred tax assets. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Accounting for stock-based compensation --------------------------------------- In October 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 123 "Accounting for Stock-Based Compensation". Statement No. 123 establishes financial accounting and reporting standards for stock-based employees compensation plans. While all entities are encouraged to adopt the "fair value based method" of accounting for employee stock compensation plans, Statement No. 123 also allows an entity to continue to measure compensation cost under such plans using the "intrinsic value based method" specified in Accounting Principles Board Opinion No. 25. 28 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.) - ----------------------------------------------- Accounting for stock-based compensation (Cont'd.) --------------------------------------- Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, usually the vesting period. Fair value is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividends on it, and the risk free interest rate over the expected life of the option. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. The accounting requirements of Statement No. 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995. The Company has elected to account for compensation cost under the intrinsic value based method. Included in Note 12 to consolidated financial statements are the pro forma disclosures required by Statement No. 123. Net income per common share --------------------------- Basic net income per common share is calculated by dividing net income by the weighted average number of shares of common stock outstanding, adjusted for the unallocated portion of shares held by the ESOP in accordance with the American Institute of Certified Public Accountants' ("AICPA") Statement of Position ("SOP") 93-6. Diluted net income per share is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effect of stock options, stock-based compensation grants and other securities, if dilutive, using the treasury stock method. See Note 14 to consolidated financial statements for a reconciliation of such amounts. Per share amounts for the year ended December 31, 1996 have been calculated based on the net income for the entire year. The calculation of the weighted average number of common shares outstanding from the date of conversion to stock form (January 5, 1996) through December 31, 1996, assumes such shares were outstanding for the entire year (as if the conversion had taken place on January 1, 1996). Nature of operations and interest rate risk ------------------------------------------- The Company is a holding company whose principal activity is the ownership and management of the Bank. The Bank is principally engaged in the business of attracting deposits from the customers located primarily in northern New Jersey and using these deposits, along with borrowings and other funds, to make loans secured by real estate located primarily in northern New Jersey and to purchase mortgage-backed and investment securities. The potential for interest-rate risk exists as a result of the generally shorter duration of the Bank's interest-sensitive liabilities compared to the generally longer duration of its interest-sensitive assets. In a rising interest rate environment, liabilities will reprice faster than assets, thereby reducing the market value of long-term assets and net interest income. For this reason, management regularly monitors the maturity structure of the Bank's interest-earning assets and interest-bearing liabilities in order to measure its level of interest-rate risk and to plan for future volatility. 29 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.) - ----------------------------------------------- Concentration of risk --------------------- The Bank's lending and real estate activity is concentrated in real estate and loans secured by real estate located in the State of New Jersey. In general, the Bank's loan portfolio performance is dependent upon local economic conditions. Reclassification ---------------- Certain amounts for the year ended December 31, 1997 and 1996 have been reclassified to conform to the current year's presentation. 2. REORGANIZATION AND STOCKHOLDERS' EQUITY - -------------------------------------------- On January 5, 1996, the Bank converted from a federally chartered mutual savings bank to a federally chartered stock savings bank, with the concurrent formation of a holding company. The holding company, Little Falls Bancorp, Inc., a New Jersey corporation organized in August 1995, acquired all of the capital stock of the Bank upon the completion of the conversion. On January 5, 1996, the conversion and initial public stock offering were completed with the issuance of 3,041,750 shares of the Company's common stock, par value $.10 per share, for net proceeds, after conversion costs and the effect of the shares acquired by the ESOP, of $26,830,022. Concurrently with the issuance of the Company's common stock, the Company utilized $14,671,962 of the net proceeds to purchase all of the outstanding capital stock of the Bank. At the time of the conversion, the Bank, in order to grant priority to eligible depositors in the event of future liquidation, established a liquidation account of $15,488,000, an amount equal to its total net worth as of September 30, 1995, the date of the latest statement of financial condition appearing in the final prospectus. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases in the deposit account will not restore an eligible account holder's interest in the liquidation account. In the unlikely event of a complete liquidation, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to their current adjusted qualifying balances. The balance of the liquidation account on December 31, 1998 has not been determined. The ability of the Company to pay dividends to stockholders is dependent upon the receipt of income from the subsidiary Bank. The Bank may not declare or pay any dividend on or repurchase any of its capital stock if the effect thereof would cause its net worth to be reduced below: (1) the amount required for the liquidation account, or (2) the net worth requirements contained in section 563.13 (b) of the rules and regulation of the Office of Thrift Supervision (the "OTS"). During the years ended December 31, 1998, 1997 and 1996, the Company approved plans to repurchase 130,396, 137,259 and 296,570 shares, respectively, of its common stock outstanding, up to five percent (5%) of the shares outstanding at any single instance. In accordance therewith, during the years ended December 31, 1998, 1997 and 1996, 130,396, 137,259 and 296,570 shares, respectively, at an aggregate cost of $2,599,022, $2,355,282, and $3,277,004, respectively, were purchased in the open market. 30 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 3. PENDING MERGER - -------------------- On January 26, 1999, the Company signed a definitive merger agreement under which HUBCO, Inc. ("HUBCO") will acquire the Company in a combination stock and cash transaction. Under the terms of the agreement, Company shareholders will receive either 0.65 shares of HUBCO common stock or $20.64 in cash or a combination of shares of HUBCO common stock and cash. The shares of HUBCO common stock offered in this transaction will be in an amount equal to approximately 51% of the outstanding shares of the Company multiplied by the exchange ratio. The remaining 49% of the outstanding shares will be purchased for cash at the fixed per share price of $20.64. The exchange ratio of 0.65 shares of HUBCO common stock is based upon HUBCO's median common stock price being between $34.43 and $29.23 during a pre-determined pricing period. If the median pre-closing price of HUBCO common stock is $29.00 or less, the exchange ratio shall be increased in increments to a maximum exchange ratio of 0.70 effective if the HUBCO median common stock price is $27.14 or lower. If the median pre-closing price of HUBCO common stock is $34.50 or more, the exchange ratio will be decreased in increments to a minimum exchange ratio of 0.60 at $37.50. In connection with the execution of the merger agreement, the Company has issued an option to HUBCO, which would enable HUBCO to purchase up to 493,000 shares of Company common stock under certain circumstances. As part of the transaction, the Company will be merged into Hudson United Bank. The merger is subject to approval, by Federal and New Jersey bank regulatory authorities and Company shareholders, as well as other customary conditions. The transaction is expected to close in the second quarter of 1999. 4. INVESTMENT SECURITIES - -------------------------- Available for sale:
December 31, 1998 ------------------------------------------------------ Gross Unrealized Amortized -------------------------- Carrying Cost Gains Losses Value ------------ ------------ ------------ ------------ U.S. Government (including agencies): Due after five years through ten years $ 7,002,442 $ 10,370 $ 4,600 $ 7,008,212 Due after ten years 5,751,429 81,696 -- 5,833,125 ----------- ----------- ----------- 12,753,871 92,066 4,600 12,841,337 Corporate bonds due after ten years 2,001,080 -- 11,080 1,990,000 Trust preferred securities 11,960,918 36,876 501,529 11,496,265 Preferred stock 13,199,307 10,000 114,307 13,095,000 ----------- ----------- ----------- ----------- $39,915,176 $ 138,942 $ 631,516 $39,422,602 =========== =========== =========== ===========
Held to maturity:
December 31, 1998 ------------------------------------------------------ Gross Unrealized Amortized -------------------------- Estimated Cost Gains Losses Fair Value ------------ ------------ ------------ ------------ U.S. Government (including agencies): Due after one year through five years $ 5,685,303 $ 47,187 $ -- $ 5,732,490 Due after five years through ten years 5,002,894 14,606 -- 5,017,500 Due after ten years 29,889,260 -- 281,447 29,607,813 ----------- ----------- ----------- ----------- $40,577,457 $ 61,793 $ 281,447 $40,357,803 =========== =========== =========== ===========
31 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 4. INVESTMENT SECURITIES (Cont'd.) - ---------------------------
December 31, 1997 ------------------------------------------------------ Gross Unrealized Amortized -------------------------- Estimated Cost Gains Losses Fair Value ------------ ------------ ------------ ------------ U.S. Government (including agencies): Due in one year or less $10,005,774 $ -- $ 69,571 $ 9,936,203 Due after one year through five years 11,000,000 26,270 46,875 10,979,395 Due after five years through ten years 30,981,870 239,337 -- 31,221,207 Due after ten years 6,000,000 2,500 10,000 5,992,500 ----------- ----------- ----------- ----------- $57,987,644 $ 268,107 $ 126,446 $58,129,305 =========== =========== =========== ===========
During the year ended December 31, 1998, proceeds from sales of investment securities available for sale totaled $1,028,100 and resulted in gross gains of $16,654. During the year ended December 31, 1998, proceeds from the sale of an investment security held to maturity, which was within three months of final maturity, totaled $3,000,000 and did not result in any gain or loss. There were no sales of investment securities available for sale or held to maturity during the years ended December 31, 1997 and 1996. Investment securities held to maturity with a carrying value of approximately $2,000,000 at both December 31, 1998 and 1997, were pledged to secure public funds. 5. MORTGAGE-BACKED SECURITIES - ------------------------------- Available for sale:
December 31, 1998 ------------------------------------------------------ Gross Unrealized Amortized -------------------------- Carrying Cost Gains Losses Value ------------ ------------ ------------ ------------ Federal Home Loan Mortgage Corporation $ 5,324,055 $ -- $ 4,761 $ 5,319,294 Federal National Mortgage Association 8,663,950 51 11,901 8,652,100 ----------- ----------- ----------- ----------- $13,988,005 $ 51 $ 16,662 $13,971,394 =========== =========== =========== ===========
December 31, 1997 ------------------------------------------------------ Gross Unrealized Amortized -------------------------- Carrying Cost Gains Losses Value ------------ ------------ ------------ ------------ Federal Home Loan Mortgage Corporation $12,512,965 $ -- $ 104,516 $12,408,449 Federal National Mortgage Association 1,527,083 -- 6,484 1,520,599 ----------- ----------- ----------- ----------- $14,040,048 $ -- 111,000 13,929,048 =========== =========== =========== ===========
32 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 5. MORTGAGE-BACKED SECURITIES (Cont'd.) - ------------------------------- Held to maturity:
December 31, 1998 ------------------------------------------------------ Gross Unrealized Amortized -------------------------- Estimated Cost Gains Losses Fair Value ------------ ------------ ------------ ------------ Government National Mortgage Association $17,643,283 $ 37,940 $ 183,033 $17,498,190 Federal Home Loan Mortgage Corporation 14,963,351 119,208 48,363 15,034,196 Federal National Mortgage Association 28,766,662 126,559 118,173 28,775,048 ----------- ----------- ----------- ----------- $61,373,296 $ 283,707 $ 349,569 $61,307,434 =========== =========== =========== ===========
December 31, 1997 ------------------------------------------------------ Gross Unrealized Amortized -------------------------- Estimated Cost Gains Losses Fair Value ------------ ------------ ------------ ------------ Government National Mortgage Association $26,771,595 $ 215,909 $ 35,973 $26,951,531 Federal Home Loan Mortgage Corporation 22,853,912 219,635 143,405 22,930,142 Federal National Mortgage Association 41,331,939 200,891 168,976 41,363,854 ----------- ----------- ----------- ----------- $90,957,446 $ 636,435 $ 348,354 $91,245,527 =========== =========== =========== ===========
December 31, 1998 ------------------------------------------------------ Principal Unamortized Unearned Carrying Balance Premium Discounts Value ------------ ------------ ------------ ------------ Government National Mortgage Association $17,293,334 $ 355,946 $ 5,997 $17,643,283 Federal Home Loan Mortgage Corporation 14,856,408 119,872 12,929 14,963,351 Federal National Mortgage Association 28,436,352 349,880 19,570 28,766,662 ----------- ----------- ----------- ----------- $60,586,094 $ 825,698 $ 38,496 $61,373,296 =========== =========== =========== ===========
December 31, 1997 ------------------------------------------------------ Principal Unamortized Unearned Carrying Balance Premium Discounts Value ------------ ------------ ------------ ------------ Government National Mortgage Association $26,336,892 $ 442,503 $ 7,800 $26,771,595 Federal Home Loan Mortgage Corporation 22,725,681 185,390 57,159 22,853,912 Federal National Mortgage Association 40,898,959 460,159 27,179 41,331,939 ----------- ----------- ----------- ----------- $89,961,532 $ 1,088,052 $ 92,138 $90,957,446 =========== =========== =========== ===========
During the year ended December 31, 1998, proceeds from sales of mortgage-backed securities available for sale totaled $8,352,991 and resulted in gross gains of $29,910. There were no sales of mortgage-backed securities available for sale during the years ended December 31, 1997 and 1996 and there were no sales of mortgage-backed securities held to maturity during the years ended December 31, 1998, 1997 and 1996. 33 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 6. LOANS RECEIVABLE - --------------------- December 31, ------------------------------ 1998 1997 ------------- -------------- Real estate mortgage: One-to-our family $ 117,232,070 $ 118,254,242 Commercial and multi-family 17,435,462 17,361,751 ------------ ------------ 134,667,532 135,615,993 ------------ ------------ Construction - 350,000 ------------ ------------ Consumer: Second mortgage 14,811,424 11,629,689 Passbook or certificate 752,217 807,062 Other 14,615 12,451 ------------ ------------ 15,578,256 12,449,202 ------------ ------------ Total loans 150,245,788 148,415,195 ------------ ------------ Less: Loans in process - 233,125 Allowance for loan losses 1,329,292 1,168,160 Deferred loan fees, costs and discounts, net (145,016) (19,349) ------------ ------------ 1,184,276 1,381,936 ------------ ------------ $149,061,512 $147,033,259 ============ ============ An analysis of the allowance for loan losses follows: Year Ended December 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ----------- Balance - beginning $1,168,160 $1,089,828 $ 958,149 Provisions charged to operations 161,132 240,000 182,900 Loans charged off, net of recoveries - (161,668) (51,221) ---------- ---------- ---------- Balance - ending $1,329,292 $1,168,160 $1,089,828 ========== ========== ========== 34 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 6. LOANS RECEIVABLE (Cont'd.) - --------------------- Impaired loans and related amounts recorded in the allowance for loan losses are summarized as follows (in thousands): December 31, -------------------------------- 1998 1997 1996 --------- --------- ---------- Recorded investment in impaired loans: With recorded allowances $ 367 $ 744 $1,777 Without recorded allowance - - - Total impaired loans 367 744 1,777 ------ ------ ------ Related allowance for loan losses 55 111 404 ------ ------ ------ Net impaired loans $ 312 $ 633 $1,373 ====== ====== ====== Average recorded investment in impaired loans $ 596 $1,509 $1,717 ====== ====== ====== Interest income recognized on impaired loans during the period each loan was impaired: Total $ 43 $ 214 $ 57 ====== ====== ====== Cash basis $ 43 $ 197 $ 57 ====== ====== ====== At December 31, 1998, 1997 and 1996, nonaccrual loans for which the accrual of interest had been discontinued totaled approximately $1,003,000, $1,284,000 and $1,901,000, respectively. Interest income that would have been recorded under the original terms of such loans and the interest income actually recognized is summarized as follows (in thousands): Year Ended December 31, ------------------------- 1998 1997 1996 ------- ------- ------- Interest income that would have been recorded $ 89 $111 $198 Interest income recognized 60 50 84 The activity with respect to loans to directors, executive officers and associates of such persons is as follows: Year Ended December 31, --------------------------- 1998 1997 ------------ ------------ Balance - beginning $ 1,448,625 $ 1,168,277 Loans originated 57,252 242,128 Collection of principal (46,580) (14,879) Other additions -- 53,099 ----------- ----------- Balance - ending $ 1,459,297 $ 1,448,625 =========== =========== 35 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTE TO CONSOLIDATED FINANCIAL STATEMENTS ----------------------------------------- 7. PREMISES AND EQUIPMENT - --------------------------- December 31, ----------------------------- 1998 1997 ------------- ------------ Land $ 614,714 $ 614,714 Buildings and improvements 2,294,053 2,301,063 Furniture, fixture and equipment 1,184,423 1,071,944 Leasehold improvements 61,132 54,122 ---------- ---------- 4,154,322 4,041,843 Less accumulated depreciation and amortization 1,552,643 1,424,668 ---------- ---------- $2,601,679 $2,617,175 ========== ========== Depreciation and amortization expense totaled $127,975, $134,628 and $143,997 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. INVESTMENT IN REAL ESTATE - ------------------------------ The Bank owns real estate originally acquired for a future office site which is no longer to be used for that purpose. During the year ended December 31, 1997, a $100,000 impairment loss was recorded on a parcel of land to reduce its carrying value from $243,667 to $143,667. A portion of that land was sold in 1998 for $62,386, with no gain or loss resulting. Property adjoining the Bank's main office, which had been rented, was sold in 1998 for proceeds of $318,141, resulting in a gain of $37,911. During the years ended December 31, 1997 and 1996, as a result of the relocation of a branch office and the sale of deposits in another branch office, properties with a carrying value of $9,629 and $145,478, respectively, were transferred from premises and equipment to investment in real estate. These properties were sold during the year ended December 31, 1997 at a gain of $106,318. The income received from the properties, net of expenses, is included in other income. The properties are summarized as follows: December 31, ------------------------- 1998 1997 ---------- ----------- Land $ 81,281 $143,667 Buildings and improvements - 363,452 -------- -------- 81,281 507,119 Less accumulated depreciation and amortization - 79,802 -------- -------- $ 81,281 $427,317 ======== ======== 36 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 9. DEPOSITS - ------------- December 31, 1998 -------------------------------- Weighted Average Rate Amount Percent ------ ------------ ------- NOW accounts and non-interest-bearing deposits 1.55 % $ 29,110,521 11.98 Money Market accounts 2.73 6,995,025 2.87 Passbook and club accounts 2.97 41,427,787 17.05 Certificates of deposit 5.44 165,514,720 68.10 ------------ ------ 4.48 $243,048,053 100.00 ============ ====== December 31, 1997 -------------------------------- Weighted Average Rate Amount Percent ------ ------------ ------- NOW accounts and non-interest-bearing deposits 1.33 % $ 21,338,938 9.27 Money Market accounts 2.94 9,952,885 4.33 Passbook and club accounts 3.08 44,468,893 19.32 Certificates of deposit 5.63 154,371,959 67.08 ------------ ------ 4.62 $230,132,675 100.00 ============ ====== The aggregate amount of certificates of deposit with a minimum denomination of greater than $100,000 was approximately $14,542,000 and $10,020,000 at December 31, 1998 and 1997, respectively. These certificates of deposit do not receive a preferential interest rate. Deposits in excess of $100,000 are not federally insured. The scheduled maturities of certificates of deposit are as follows: December 31, -------------------------- 1998 1997 ---------- ----------- (In Thousands) Three months or less $ 31,395 $ 40,847 Over three months to one year 94,352 89,942 Over one year to three years 34,287 21,296 Over three years 5,481 2,287 -------- -------- $165,515 $154,372 ======== ======== 37 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 9. DEPOSITS (Cont'd.) - ------------- A summary of interest on deposits follows: Year Ended December 31, ------------------------------------------ 1998 1997 1996 ------------- ------------- -------------- NOW accounts $ 263,010 $ 260,813 $ 366,984 Money Market 344,020 380,732 788,001 Passbook and club 1,276,998 1,440,145 1,859,939 Certificates of deposit 8,619,992 8,246,089 8,068,002 ----------- ----------- ----------- $10,504,020 $10,327,779 $11,082,926 =========== =========== =========== 10. BORROWED MONEY - ------------------- The Bank has an available line of credit with the Federal Home Loan Bank of New York ("FHLB"), subject to the terms and conditions of the lenders' overnight advances program, in the amount of $34,807,900 at December 31, 1998. Borrowings under this line of credit, which expires on November 23, 1999, are made for one day periods and are secured by the Bank's investment in FHLB stock and an assignment of the Bank's unpledged, qualifying one-to-four family mortgage loans. During the year ended December 31, 1998, the Bank did not borrow funds under this program. The following table presents borrowed money at the dates indicated:
Interest December 31, ----------------------------------- Lender Maturity Rate 1998 1997 - ------ ----------------------- ------------ ----------------- ---------------- Securities sold under agreement to repurchase: FHLB January 30, 1998 6.05% $ - $ 10,000,000 FHLB February 17, 1998 5.74% - 8,175,000 Security broker dealer February 18, 1998 5.77% - 8,368,500 FHLB February 19, 1998 5.76% - 8,176,000 FHLB January 14, 1999 5.29% 9,500,000 - Advance: FHLB August 3, 1998 5.80% 15,000,000 FHLB (a) December 20, 1999 5.82% 9,000,000 9,000,000 FHLB (b) November 19, 2003 4.93% 25,000,000 - FHLB (b) March 11, 2008 5.35% 25,000,000 - ------------ ------------ $ 68,500,000 $ 58,719,500 ============ ============
(a) Lender has option to terminate the advance on March 20, 1999, and quarterly thereafter, upon four days advance notice. (b) Convertible at lender option to replacement funding at then current rates on November 19, 2001 and March 12, 2001. 38 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 10. BORROWED MONEY (Cont'd.) - ------------------- Certain information concerning borrowed money is summarized as follows:
Year Ended December 31, --------------------------------------------------- 1998 1997 1996 -------------- ------------- --------------- Average balance during the year $ 72,357,000 $ 43,974,600 $ 3,173,000 Average interest rate during the year 5.79% 5.89% 5.53% Maximum month-end balance during the year $ 83,877,000 $ 58,719,500 $ 33,625,000 Average interest rate at year end 5.25% 5.83% 6.02%
At December 31, 1998 and 1997, borrowed money is collateralized by the Bank's investment in FHLB stock, a blanket assignment of the Bank's unpledged, qualifying one-to-four family mortgage loans and securities as follows:
December 31, ----------------------------------- 1998 1997 ---------------- ---------------- Investment securities held to maturity $ 5,002,894 $ 18,700,000 Mortgage-backed securities available for sale 593,718 9,749,213 Mortgage-backed securities held to maturity 41,425,704 21,500,903 ------------- ------------ $ 47,022,316 $ 49,950,116 ============= ============
11. REGULATORY CAPITAL - ----------------------- The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to met minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material adverse effect on the Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. 39 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 11. REGULATORY CAPITAL (Cont'd.) - ----------------------- The following table sets forth the capital position of the Bank:
To Be Well Capitalized Under Prompt Minimum Capital Corrective Actual Requirements Actions Provisions ----------------------- ------------------------ ------------------------ Amount Ratio Amount Ratio Amount Ratio ------------ ---------- ------------ ---------- ------------ ---------- (Dollars in Thousands) December 31, 1998 ----------------- Total Capital (to risk-weighted assets) $ 29,988 20.45% $ 11,729 8.00% $ 14,661 10.00% Tier I Capital (to risk-weighted assets) 28,740 19.60% - - 8,797 6.00% Core (Tier I) Capital (to adjusted total assets) 28,740 8.33% 13,801 4.00% 17,252 5.00% Tangible Capital (to adjusted total assets) 28,740 8.33% 5,176 1.50% - - December 31, 1997 ----------------- Total Capital (to risk-weighted assets) 27,138 23.83% 9,112 8.00% 11,390 10.00% Tier I Capital (to risk-weighted assets) 26,416 23.20% - - 6,834 6.00% Core (Tier I) Capital (to adjusted total assets) 26,416 8.10% 13,040 4.00% 16,300 5.00% Tangible Capital (to adjusted total assets) 26,416 8.10% 4,890 1.50% - -
As of June 23, 1997, the most recent notification from the OTS, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. There are no conditions existing or events which have occurred since notification, that management believes have changed the institution's category. 40 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 12. BENEFIT PLANS - ---------------------- Employee pension plan --------------------- The Bank has a defined benefit pension plan covering all eligible employees. The benefits are based on years of service and employees' compensation. The Bank's funding policy is to contribute the maximum amount deductible for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Plan assets are composed primarily of certificates of deposit, savings accounts and insurance contracts. The following tables present the plan's funded status and the components of net periodic pension cost:
December 31, ------------------------------ 1998 1997 -------------- -------------- Actuarial present value of benefit obligations: Vested $ 2,126,247 $ 1,873,615 Non-vested 37,156 16,195 ----------- ----------- Total benefit obligation $ 2,163,403 $ 1,889,810 =========== =========== Projected benefit obligation - beginning $ 2,410,463 $ 1,919,617 Service cost 88,844 94,253 Interest cost 167,472 168,152 Actuarial loss 101,359 280,229 Benefits paid (19,344) - Settlements (59,936) (51,788) ----------- ----------- Projected benefit obligation - ending 2,688,858 2,410,463 ----------- ----------- Plan assets at fair value - beginning 1,245,710 1,222,245 Actual return on assets 37,126 26,654 Employer's contributions 291,033 73,432 Benefits paid (19,344) - Settlements (59,936) (51,788) ----------- ----------- Plan assets at fair value - ending 1,494,589 1,270,543 ----------- ----------- Plan benefit obligation in excess of plan assets 1,194,269 1,139,920 Unrecognized net transition obligation being amortized over fifteen years (68,820) (82,585) Unrecognized net loss (960,589) (842,511) Additional minimum liability 503,954 416,413 ----------- ----------- Accrued pension cost included in accounts payable and other liabilities $ 668,814 $ 631,237 =========== ===========
41 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 12. BENEFIT PLANS (Cont'd.) - ---------------------- Employee pension plan (Cont'd.) ---------------------
Year Ended December 31, ------------------------------------- 1998 1997 1996 ----------- ------------ ----------- Net periodic pension cost included the following components: Service cost $ 88,844 $ 94,253 $ 87,161 Interest cost 167,472 168,152 127,080 Expected return on plan assets (107,863) (103,159) (82,697) Amortization of transition obligation 13,765 13,765 13,765 Amortization of unrecognized loss 54,018 67,904 55,419 --------- --------- --------- Net periodic pension cost included in compensation and employee benefits $ 216,236 $ 240,915 $ 200,728 ========= ========= =========
Significant actuarial assumptions used in determining plan benefits are:
Year Ended December 31, ----------------------------------------------------- 1998 1997 1996 ---------------- ---------------- --------------- Annual salary increase 5.50% 5.50% 5.00% Long-term return on assets 8.00% 8.00% 8.00% Discount rate 7.25% 7.50% 7.00%
Directors retirement plan ------------------------- The Bank has a directors retirement plan, which provides that any director with twenty or more years of service may retire and continue to be paid at the rate of 50% of regular directors fees. These payments will continue for the directors' lifetime. This plan is unfunded. The following tables present the status of the plan and the components of net periodic plan cost:
December 31, ----------------------------- 1998 1997 ------------- ----------- Actuarial present value of benefit obligation: Vested $ 339,498 $ 253,159 Non-vested - 57,394 $ 339,498 $ 310,553 ========= ========= Projected benefit obligation - begining $ 366,691 $ 357,661 Service cost 843 784 Interest cost 26,585 26,825 Actuarial gain (16,753) (18,579) --------- --------- Projected benefit obligation - ending 377,366 366,691 Unrecognized past service cost (201,322) (218,618) Unrecognized net (loss) (6,805) (23,558) Accrued plan cost included in accounts payable and other liabilities $ 169,239 $ 124,515 ========= =========
42 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 12. BENEFIT PLANS (Cont'd.) - ---------------------- Directors retirement plan (Cont'd.) -------------------------
Year Ended December 31, ---------------------------------------------------- 1998 1997 1996 --------------- ---------------- --------------- Net periodic plan cost included the following components: Service cost $ 843 $ 784 $ 6,380 Interest cost 26,585 26,825 20,972 Amortization of past service cost 17,296 17,296 17,296 Amortization of unrecognized net loss - 4,682 21 --------- -------- -------- Net periodic plan cost included in other expense $ 44,724 $ 49,587 $ 44,669 ========= ======== ========
Significant actuarial assumptions used in determining plan benefits are:
Year Ended December 31, ---------------------------------------------------- 1998 1997 1996 --------------- ---------------- --------------- Annual compensation increase 4.50% 7.00% 7.00% Discount rate 6.50% 7.25% 7.50%
Directors health benefits plan ------------------------------ The Bank has a directors health benefit plan which provides for the continuation of the directors' medical insurance coverage for their lifetime after retirement. Benefits under this plan are available to directors retiring after attainment of age 60 and twenty years of service. This plan is unfunded. The following tables present the status of the plan and the net components of net periodic plan cost:
December 31, ---------------------- 1998 1997 ---------- ---------- Accumulated postretirement benefit obligation - beginning $ 158,388 $ 160,094 Service cost 204 190 Interest cost 11,483 12,007 Actuarial loss (gain) 4,987 (13,903) --------- --------- Accumulated postretirement benefit obligation - ending 175,062 158,388 Unrecognized net gain 45,709 55,426 --------- --------- Accrued plan cost included in accounts payable and other liabilities $ 220,771 $ 213,814 ========= =========
Year Ended December 31, ---------------------------------------------------- 1998 1997 1996 ---------------- ---------------- -------------- Net periodic plan cost included the following components: Service cost $ 204 $ 190 $ 2,866 Interest cost 11,483 12,007 10,969 Amortization of unrecognized gain (4,730) (3,384) (4,016) --------- ------- ------- Net periodic plan cost included in other expense $ 6,957 $ 8,813 $ 9,819 ========= ======= =======
43 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 12. BENEFIT PLANS (Cont'd.) - ------------------ Directors health benefit plan (Cont'd.) ----------------------------- A discount rate of 6.50%, 7.25% and 7.50% was assumed for the years ended December 31, 1998, 1997 and 1996, respectively. For the years ended December 31, 1998 1997and 1996, a medical cost trend rate of 6.5%, 7.0% and 7.5%, respectively, decreasing 0.5% per year thereafter until an ultimate rate of 5.0% is reached, was used in the plan's valuation. Increasing the assumed medical cost trend by one percent in each year would increase the accumulated postretirement benefit obligation as of December 31, 1998, by $15,335 and the aggregate of the service and interest components of net periodic postretirement benefit cost for the year ended December 31, 1998 by $1,392, while a one percent decrease in the assumed medical cost trend would result in comparable decreases of $13,475 and $1,299, respectively. ESOP ---- Effective upon conversion, an ESOP was established for all eligible employees. The ESOP used $2,433,400 of proceeds from a term loan from the Company to purchase 243,340 shares of Company common stock in the initial offering. The term loan from the Company to the ESOP, including interest, is payable over one-hundred-eighty (180) equal monthly installments. The initial interest rate is 8.25% and is subject to semi-annual adjustment based on the prime rate. The Bank intends to make contributions to the ESOP which will be equal to the principal and interest payment required from the ESOP on the term loan. Shares purchased with the loan proceeds are pledged as collateral for the term loan and are held in a suspense account for future allocation among participants. Contributions to the ESOP and shares released from the suspense account will be allocated among the participants on the basis of compensation, as described by the plan, in the year of allocation. The ESOP is accounted for in accordance with SOP 93-6, which was issued by the AICPA in November 1993. Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP shares in the consolidated statements of financial condition. As shares are committed to be released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for basic net income per common share computations. ESOP compensation expenses were $306,489, $257,575 and $177,679 for the years ended December 31, 1998, 1997 and 1996, respectively. 44 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 12. BENEFIT PLANS (Cont'd.) - ------------------ ESOP (Cont'd.) ---- The ESOP shares were as follows: December 31, ----------------------------- 1998 1997 ------------- ------------ Allocated shares 33,927 16,223 Shares committed to be released 15,739 16,474 Unreleased shares 193,674 210,643 ----------- ----------- Total ESOP shares 243,340 243,340 =========== =========== Fair value of unreleased shares $ 3,873,480 $ 4,318,182 =========== =========== MSBP ---- On July 3, 1996, the Bank established a MSBP to provide both key employees and outside directors with a proprietary interest in the Company in a manner designed to encourage such persons to remain with the Bank. The Bank, during the year ended December 31, 1997 contributed $1,688,171 to the MSBP to allow the MSBP to purchase 121,670 shares of common stock of the Company in the open market at an average cost of $13.875 per share. Under the MSBP, awards are granted in the form of common stock held by the MSBP Trust. The awards vest over a period of time not more than five years, commencing one year from the date of award. The awards become fully vested upon termination of employment due to death or disability. At December 31, 1998 and 1997, 103,798 shares and 79,248 shares, respectively, had been granted to directors and, at both December 31, 1998 and 1997, 26,767 shares had been granted to officers and employees. 37,522 shares and 16,311 shares were vested at December 31, 1998 and 1997, respectively. $501,237, $271,101 and $87,903 of expense related to the MSBP shares was recorded during the years ended December 31, 1998, 1997 and 1996, respectively. 45 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 12. BENEFIT PLANS (Cont'd.) - ---------------------- Stock Option Plan ----------------- The Company adopted the 1996 Stock Option Plan (the "Plan") authorizing the grant of stock options equal to 304,175 shares of common stock to officers, directors and key employees of the Bank or the Company. Options granted under the Plan may be either options that qualify as incentive stock options as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or non-statutory options. Options granted will vest and will be exercisable on a cumulative basis in equal installments at the rate of 20% per year commencing one year from the date of grant. All options granted will be exercisable in the event the optionee terminates his employment due to death or disability. The options expire ten years from the date of grant. In the event of change in control of the Bank or Company, the optionee will be given: (1) substitute options by the acquiring or succeeding corporation, (2) shares of stock issueable upon the exercise of such substitute options or (3) cash for each option granted, equal to the difference between the exercise price of the option and the fair market value or merger price equivalent to cash payment for each share of common stock exchanged in the change of control transaction. Shares of common stock have been granted under the plan as non-incentive stock options to directors and incentive stock options to officers and employees, respectively, as follows:
Shares Weighted -------------------------------------- Average Non- Exercise Exercise Incentive Incentive Total Price Price ----------- ------------ ----------- ------------ ----------- Granted in 1996 121,665 109,496 231,161 $ 10.625 $ 10.625 Granted in 1997 - 16,000 16,000 20.000 20.000 ------- ------- ------- Balance at December 31, 1997 121,665 125,496 247,161 11.232 Cancelled - (304) (304) 10.625 10.625 Forfeited - (6,083) (6,083) 10.625 10.625 ------- ------- ------- Balance at December 31, 1998 121,665 119,109 240,774 11.248 ======= ======= =======
No options have been exercised. Options for 93,110 shares were excercisable at December 31, 1998 at a weighted average exercise price of $10.947. Options for 46,232 shares were exercisable at December 31, 1997 at a weighted average exercise price of $10.625. 46 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 12. BENEFIT PLANS (Cont'd.) - ---------------------- Stock Option Plan (Cont'd.) ----------------- The Company, as permitted by Statement No. 123, recognizes compensation cost for stock options granted based on the intrinsic value method instead of the fair value based method. The weighted-average grant-date fair value of options granted during 1997 and 1996, all of which have exercise prices equal to the market price of the Company's common stock at the grant date, were estimated using the Black-Scholes option-pricing model. Such fair values and the assumptions used for estimating fair values are as follows:
December 31, ----------------------- 1997 1996 ------------ ---------- Weighted average grant-date fair value per share $ 5.87 $ 2.81 Expected common stock dividend yield 1.00% 0.94% Expected volatility 23.29% 13.90% Expected option life 5 years 5 years Risk-free interest rate 5.88% 6.875%
Had the Company used the fair value based method, net income for the years ended December 31, 1998, 1997 and 1996 would have been decreased to $1,616,000, $1,736,000 and $574,000, respectively, and basic and diluted net income per common share would have been reduced to $0.73 and $0.70, respectively, for the year ended December 31, 1998, $0.73 and $0.70, respectively, for the years ended December 31, 1997 and $0.21 each during the year ended December 31, 1996. 13. INCOME TAXES - --------------------- The Bank qualifies as a Savings Institution under the provisions of the Internal Revenue Code and was therefore, prior to January 1, 1996, permitted to deduct from taxable income an allowance for bad debts based on the greater of: (1) actual loan losses (the "experience method"); or (2) eight (8) percent of taxable income before such bad debt deduction less certain adjustments (the "percentage of taxable income method"). On August 21, 1996, legislation was signed into law which repealed the percentage of taxable income method for tax bad debt deductions. The repeal is effective for the Bank's taxable year beginning January 1, 1996. In addition, the legislation requires the Bank to include in taxable income its bad debt reserves in excess of its base year reserves over a six, seven, or eight year period depending upon the attainment of certain loan origination levels. Since the percentage of taxable income method for Federal tax bad debt deductions and the corresponding increase in the Federal tax bad debt reserve in excess of the base year have been reflected as temporary differences pursuant to FASB Statement No. 109, with deferred income taxes recorded thereon, this change in the tax law did not have a material adverse effect on the Company's consolidated financial position or operations. 47 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 13. INCOME TAXES (Cont'd.) - --------------------- Retained earnings at December 31, 1998 includes approximately $2.4 million of tax bad debt deductions which, in accordance with FASB Statement No. 109, are considered a permanent difference between the book and income tax basis of loans receivable, and for which income taxes have not been provided. If such amount is used for purposes other than bad debt losses, including distributions in liquidation, it will be subject to income tax at the then current rate. The provision for income taxes is summarized as follows: Year Ended December 31, ---------------------------------------------- 1998 1997 1996 -------------- -------------- ------------- Current: Federal $ 887,989 $ 990,405 $ 540,688 State 104,111 117,522 87,761 --------- ---------- --------- 992,100 1,107,927 628,449 --------- ---------- --------- Deferred: Federal (135,889) (32,405) (222,744) State (12,361) (3,122) (20,261) --------- ---------- --------- (148,250) (35,527) (243,005) --------- ---------- --------- $ 843,850 $1,072,400 $ 385,444 ========= ========== ========= The provision for income taxes differs from that computed at the federal statutory rate of 34% as follows:
Year Ended December 31, ----------------------------------------------- 1998 1997 1996 -------------- --------------- ------------- Tax at the statutory rate $ 881,132 $ 995,695 $ 338,753 New Jersey Savings Institution Tax, net of federal income tax effect 60,555 75,504 44,550 Dividends received deduction (96,381) - - Other (1,456) 1,201 2,141 --------- ----------- --------- $ 843,850 $ 1,072,400 $ 385,444 ========= =========== =========
48 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 13. INCOME TAXES (Cont'd.) - --------------------- The tax effects of existing temporary differences which give rise to significant portions of deferred tax assets and liabilities are as follows:
December 31, ----------------------------- 1998 1997 ------------- ------------- Deferred tax assets: Allowance for loan losses $ 380,915 $ 316,151 Deferred loan origination fees, net 63,821 63,821 Deferred compensation 176,979 115,025 Minimum pension liability 156,561 120,111 Goodwill 133,544 90,101 MSBP 4,757 15,513 Unrealized loss on securities available for sale 190,927 39,938 ---------- --------- Total deferred tax assets 1,107,504 760,660 ---------- --------- Deferred tax liabilities: Depreciation of premises and equipment 81,671 67,944 Other - 2,572 ---------- --------- Total deferred tax liabilities 81,671 70,516 ---------- --------- Net deferred tax asset included in other assets $1,025,833 $ 690,144 ========== =========
At December 31, 1998 and 1997, current income taxes receivable of $309,549 and $25,526, respectively, are included in other assets. At December 31, 1998 and 1997, income taxes payable of $95,242 and $119,876, respectively, are included in other liabilities. 49 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 14. NET INCOME PER COMMON SHARE - ------------------------------------ Year Ended December 31, 1998 ----------------------------------------- Weighted Net Average Per Share Income Shares Amounts ------------ ------------- ---------- Basic net income per share $ 1,747,716 2,207,591 $ 0.79 ====== Effect of dilutive securities: Stock options - 96,875 MSBP unearned shares - 6,774 ----------- ----- Diluted net income per share $ 1,747,716 2,311,240 $ 0.76 =========== ========== ====== Year Ended December 31, 1997 ----------------------------------------- Weighted Net Average Per Share Income Shares Amounts ------------ -------------- ---------- Basic net income per share $ 1,856,115 2,389,063 $ 0.78 ====== Effect of dilutive securities: Stock options - 71,296 MSBP unearned shares - 6,531 ----------- --------- Diluted net income per share $ 1,856,115 2,466,890 $ 0.75 =========== ========= ====== Year Ended December 31, 1996 ----------------------------------------- Weighted Net Average Per Share Income Shares Amounts ------------ ------------ ---------- Basic net income pre share $ 610,889 2,727,627 $ 0.22 ====== Effect of dilutive securities: Stock options - 7,336 MSBP unearned shares - 1,681 ----------- --------- Diluted net income per share $ 610,889 2,736,644 $ 0.22 =========== ========= ====== 50 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 15. LEGISLATIVE MATTERS - ------------------------ On September 30, 1996, legislation was enacted which, among other things, imposed a special one-time assessment on Savings Association Insurance Fund ("SAIF") member institutions, including the Bank, to recapitalize the SAIF and spread the obligation for payment of Financial Corporation ("FICO") bonds across all SAIF and Bank Insurance Fund ("BIF") members. The special assessment levied amounted to 65.7 basis points on SAIF assessable deposits held as of March 31, 1995. The special assessment was recognized in the third quarter of 1996 and is tax deductible. The Bank took a charge of $1,167,427 as a result of the special assessment. This legislation eliminated the substantial disparity between the amount that BIF and SAIF members had been paying for deposit insurance premiums. Currently, the Federal Deposit Insurance Corporation ("FDIC") has estimated that, in addition to normal deposit insurance premiums, BIF members will pay a portion of the FICO payment equal to 1.3 basis points on BIF-insured deposits compared to 6.4 basis points by SAIF members on SAIF-insured deposits. The FDIC has lowered SAIF assessments to a range comparable to that of BIF members, although SAIF members must also make the FICO payments described above. Management cannot predict the precise level of FDIC insurance assessments on an ongoing basis. 16. COMMITMENTS - ---------------- The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are comprised of the undisbursed portion of construction loans, unused amounts of lines of credit and residential loan originations. The Bank's exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Collateral, usually in the form of residential real estate, is generally required to support financial instruments with credit risk. At December 31, 1998, the Bank had commitments outstanding to originate mortgage loans of $5,128,000, of which $1,251,000 were for adjustable rate loans with initial rates over the first ten years of the loan terms ranging from 6.25% to 6.75% and $3,877,000 were for fixed rate loans with rates ranging from 6.25% to 7.00%. The commitments are due to expire within sixty days. The rates at which the Bank has committed to fund these loans are set based on the rate in effect when the borrower accepts the commitment in writing. At December 31, 1998, outstanding commitments related to unused home equity lines of credit totaled $4,618,000. These amounts, when used, will carry interest rates that will float at rates ranging from the prime rate plus 1/4% to the prime rate plus 1 3/4%. 51 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 16. COMMITMENTS (Cont'd.) - -------------------- Rental expenses related to the occupancy of premises totaled approximately $68,000, $30,000 and $38,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Minimum non-cancellable obligations under lease agreements with original terms of more than one year are as follows: December 31, Amount ------------ ---------- 1999 $ 36,360 2000 36,360 2001 36,360 2002 15,150 -------- $124,230 ======== 17. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------- The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than a forced or liquidation sale. Significant estimations were used for the purposes of this disclosure. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value: Cash and cash equivalents and interest receivable ------------------------------------------------- For cash and cash equivalents and interest receivable, the carrying amounts approximate fair value. Investment and mortgage-backed securities ----------------------------------------- For investment and mortgage-backed securities, both available for sale and held to maturity, fair value is estimated using quoted market prices. Loans receivable ---------------- The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits -------- The fair value of demand, savings and money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. 52 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 17. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.) - --------------------------------------------------------------- Borrowed money -------------- The fair value of advances and securities sold under agreements to repurchase is estimated by discounting cash flows using rates currently available for borrowings of similar remaining securities. Commitments to extend credit ---------------------------- The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
December 31, ----------------------------------------------------- 1998 1997 -------------------------- -------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Financial assets: Cash and cash equivalents $ 33,393 $ 33,393 $ 6,788 $ 6,788 Investment securities available for sale 39,423 39,423 - - Investment securities held to maturity 40,577 40,358 57,988 58,129 Mortgage-backed securities available for sale 13,971 13,971 13,929 13,929 Mortgage-backed securities held to maturity 61,373 61,307 90,957 91,246 Loans receivable 149,062 154,536 147,033 148,534 Interest receivable 1,961 1,961 2,079 2,079 Financial liabilities: Deposits 243,048 244,613 230,133 226,113 Borrowed money 68,500 68,488 58,720 58,708 Commitments: To fund loans 9,746 9,746 7,306 7,306
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, fair value estimates are based on existing on-and-off balance sheet financial instruments without attempting to estimate the value of anticipated future business and exclude the value of assets and liabilities that are not considered financial instruments. Other significant assets that are not considered financial assets include premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Finally, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates which must be made given the absence of active secondary markets for many of the financial instruments. The lack of uniform valuation methodologies introduces a greater degree of subjectivity to those estimated fair values. 53 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 18. PARENT ONLY FINANCIAL INFORMATION - -------------------------------------- The Company operates one wholly owned subsidiary, the Bank. The earnings of the Bank are recognized by the Company using the equity method of accounting. Accordingly, the earnings of the Bank are recorded as increases in the Company's investment in the subsidiary. The following are the condensed financial statements for the Company (parent company only) as of December 31, 1998, 1997 and for the periods ended December 31, 1998, 1997 and 1996. The Company had no operations prior to the Bank's conversion to stock form on January 5, 1996.
December 31, --------------------------------- Statements of Financial Condition 1998 1997 --------------------------------- --------------- -------------- Assets ------ Cash and due from banks $ 1,167,896 $ 1,167,965 Securities available for sale 6,331,875 - Loan receivable from subsidiary - 6,044,666 ESOP loan receivable 2,049,555 2,213,081 Investment in subsidiary 31,273,275 29,200,841 Other assets 127,965 18,000 ----------- ----------- Total assets $40,950,566 $38,644,553 =========== =========== Liabilities and stockholders' equity Liabilities Due to subsidiary $ 3,405,982 $ 257,783 Other liabilities 99,128 92,109 ----------- ----------- 3,505,110 349,892 ----------- ----------- Stockholders' equity Common stock 304,175 304,175 Additional paid in capital 29,204,431 29,067,633 Retained earnings 19,517,521 18,275,517 Common stock acquired by ESOP (1,936,741) (2,106,432) Unearned restricted MSBP stock (855,791) (1,329,167) Treasury stock (8,191,308) (5,632,286) Accumulated other comprehensive income (596,831) (284,779) ----------- ----------- Total stockholders' equity 37,445,456 38,294,661 ----------- ----------- Total liabilities and stockholders equity $40,950,566 $38,644,553 =========== ===========
54 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT ----------------------------------------- 18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.) - -------------------------------------- STATEMENTS OF INCOME --------------------
From Inception January 5, Year Ended December 31, 1996 to --------------------------------- December 31, 1998 1997 1996 ------------- ------------ ------------- Interest income $ 543,398 $ 666,225 $ 880,582 Equity in undistributed earnings of subsidiary 1,591,741 1,598,621 248,247 ----------- ----------- ---------- 2,135,139 2,264,846 1,128,829 Expenses 336,173 235,731 274,940 ----------- ----------- ---------- Income before income taxes 1,798,966 2,029,115 853,889 Income taxes 51,250 173,000 243,000 ----------- ----------- ---------- Net income $ 1,747,716 $ 1,856,115 $ 610,889 =========== =========== ==========
55 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENT ----------------------------------------- 18. PARENT ONLY FINANCIAL INFORMATION (Cont'd.) - -------------------------------------- STATEMENTS OF CASH FLOWS ------------------------
From Inception January 5, Year Ended December 31, 1996 to ----------------------------------- December 31, 1998 1997 1996 ----------------- ------------- --------------- Cash flows from operating activities: Net income $ 1,747,716 $ 1,856,115 $ 610,889 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of premiums 1,044 - - Equity in undistributed earnings of subsidiary (1,591,741) (1,598,620) (248,247) (Increase) in other assets (100,764) (5,833) (12,167) Increase in other liabilities 7,019 30,327 61,782 ----------- ----------- ----------- Net cash provided by operating activities 63,274 281,989 412,257 ----------- ----------- ----------- Cash flows from investing activities: Purchase of all outstanding stock of the Bank - - (14,638,780) Purchase of securities available for sale (6,355,000) - - Loan to the Bank - - (12,205,380) Repayments of loan by the Bank 6,044,666 2,809,598 3,351,116 Loan to ESOP - - (2,433,400) Repayments of loan by ESOP 163,526 129,841 90,478 ----------- ----------- ----------- Net cash (used in) provided by investing activities (146,808) 2,939,439 (25,835,966) ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock - - 29,263,522 Increase in due from subsidiary 3,148,199 128,891 128,892 Acquisition of treasury stock (2,559,022) (2,355,282) (3,277,004) Dividends paid (505,712) (382,654) (136,119) ----------- ----------- ----------- Net cash provided by (used in) financing activities 83,465 (2,609,045) 25,979,291 ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents (69) 612,383 555,582 Cash and cash equivalents - beginning 1,167,965 555,582 - ----------- ----------- ----------- Cash and cash equivalents - ending $ 1,167,896 $ 1,167,965 $ 555,582 =========== =========== ===========
56 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 19. QUARTERLY FINANCIAL DATA (UNAUDITED) - -----------------------------------------
Year Ended December 31, 1998 -------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- (In thousands, except per share data) Interest income $ 5,608 $ 5,898 $ 5,651 $ 5,589 Interest expense 3,518 3,768 3,745 3,664 ------- ------- ------- ------- Net interest income 2,090 2,130 1,906 1,925 Provision for loan losses 60 60 60 (19) Non-interest income 63 102 116 122 Non-interest expenses 1,387 1,432 1,253 1,629 Income taxes 247 246 226 125 ------- ------- ------- ------- Net income $ 459 $ 494 $ 483 $ 312 ======= ======= ======= ======= Net income per common share: Basic $ 0.20 $ 0.23 $ 0.22 $ 0.14 ======= ======= ======= ======= Diluted $ 0.19 $ 0.22 $ 0.21 $ 0.14 ======= ======= ======= =======
Year Ended December 31, 1998 -------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter --------- --------- --------- --------- (In thousands, except per share data) Interest income $ 4,981 $ 4,971 $ 5,348 $ 5,764 Interest expense 2,995 3,034 3,322 3,569 ------- ------- ------- ------- Net interest income 1,986 1,937 2,026 2,195 Provision for loan losses 60 60 60 60 Non-interest income 61 215 68 84 Non-interest expenses 1,272 1,307 1,348 1,477 Income taxes 270 316 229 257 ------- ------- ------- ------- Net income $ 445 $ 469 $ 457 $ 485 ======= ======= ======= ======= Net income per common share: Basic $ 0.18 $ 0.20 $ 0.19 $ 0.21 ======= ======= ======= ======= Diluted $ 0.17 $ 0.19 $ 0.19 $ 0.20 ======= ======= ======= =======
57 LITTLE FALLS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 20. IMPACT OF RECENT ACCOUNTING STANDARDS - ---------------------------------------------- In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities". Statement No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statements of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency-denominated forecasted transaction. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. At the date of initial application of Statement No. 133, an entity may transfer any held-to-maturity security into the available-for-sale category or the trading category. An entity will then be able in the future to designate a security transferred into the available-for-sale category as the hedged item, or its variable interest payments as the cash flow hedged transactions, in a hedge of the exposure to changes in market interest rates, changes in foreign currency exchange rates, or changes in the overall fair value. (Statement No. 133 precludes a held-to-maturity security from being designated as the hedged item in a fair value hedge of market interest rate risk or the risk of changes in its overall fair value and precludes the variable cash flows of a held-to-maturity security from being designated as the hedged transaction in a cash flow hedge of market interest rate risk). Statement No. 133 provides that such transfers from the held-to-maturity category at the date of initial adoption shall not call into question an entity's intent to hold other debt securities to maturity in the future. Statement No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, the quarter ended March 31, 2000 for the Company and Bank. Initial application shall be as of the beginning of an entity's fiscal quarter. Earlier application of all of the provisions of Statement No. 133 is permitted only as of the beginning of a fiscal quarter. Earlier application of selected provisions or retroactive application of provisions of Statement No. 133 are not permitted. Management of the Company and Bank has not yet determined when Statement No. 133 will be implemented, but does not believe the ultimate implementation of Statement No. 133 will have a material impact on their consolidated financial position or results of operations. 58 Board of Directors of Little Falls Bancorp, Inc. and Little Falls Bank Albert J. Weite, Chairman of the Board Edward J. Seugling, Vice Chairman of Leonard G. Romaine (Bank only) the Board John P. Pullara Raoul G. Barton George Kuiken Norman A. Parker Executive Officers of Little Falls Bancorp, Inc. and/or Little Falls Bank Leonard G. Romaine Richard A. Capone Anne Bracchitta President Chief Financial Officer and Treasurer Secretary Michael J. Allen Mary Denise Hopper Vice President Vice President ------------------------------------------------ Corporate Counsel: Independent Auditors: Vincent Marino Radics & Co., LLC 86 Main Street 55 US Highway #46 Little Falls, New Jersey 07424 Pine Brook, New Jersey 07058 Special Counsel: Transfer Agent and Registrar: Malizia, Spidi, Sloane & Fisch, P.C. Chase Mellon Shareholder One Franklin Square Services, L.L.C. 1301 K Street, N.W., Suite 700 East 4 50 West 33rd Street Washington, D.C. 20005 New York, New York 10001-2697 ------------------------------------------------ The Company's Annual Report for the Year Ended December 31, 1998 filed with the Securities and Exchange Commission on Form 10-K without exhibits is available without charge upon written request. For a copy of the Form 10-K or any other investor information, please write the Secretary of the Company at 86 Main Street, Little Falls, New Jersey. Copies of any exhibits to the Form 10-K are available at cost. 59 OFFICE LOCATIONS LITTLE FALLS BANCORP, INC. 86 Main Street Little Falls, New Jersey 07424 (973) 256-6100 LITTLE FALLS BANK Main Office 86 Main Street Little Falls, New Jersey 07424 (973) 256-6100 Branch Offices West Paterson Route 46 & McBride Avenue West Paterson, New Jersey 07424 Spruce Run 220 Main Street Glen Gardner, New Jersey 08826 Milford 34 Bridge Street Milford, New Jersey 08848 Alexandria 636 Milford-Frenchtown Road Alexandria Township, New Jersey 08848 Kingwood Route 12 and 519 Baptistown, New Jersey 08825 EX-23.1 6 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference into the previously filed Registration Statement on Form S-8 (No. 333-39897) of Little Falls Bancorp, Inc. (the "Company") of our report dated January 22, 1999, except for the last two paragraphs of Note 2, as to which the date is January 26, 1999, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. /s/Radics & Co., LLC ----------------------------------- Radics & Co., LLC - ------------------------- Pine Brook, New Jersey March 22, 1999 EX-27 7 FDS
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION. 1000 12-MOS DEC-31-1998 DEC-31-1998 5,780 613 27,000 0 53,394 101,951 101,665 150,391 1,329 350,617 243,048 18,500 1,623 50,000 0 0 304 37,141 350,617 11,381 11,365 0 22,746 10,504 14,695 8,051 161 47 5,702 2,592 1,748 0 0 1,748 0.79 0.76 2.42 1,003 0 0 3,218 1,329 0 0 1,329 1,329 0 1,329
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