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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 000-50105
BRIDGE STREET FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 13-4217332
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
300 State Route 104, Oswego NY 13126
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(315) 343-4100
(REGISTRANT TELEPHONE NUMBER INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Exchange Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01
par value per share
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ].
Check if there is no disclosure of delinquent files pursuant to Item 405 of
Regulation S-K is not contained in this form, and no disclosure 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule12b-2 of the Act). Yes [ ] No [x]
As of March 21, 2005, the registrant had 2,558,149 shares of common stock, $.01
par value, issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 21, 2005, was $40,467,008. This figure was based on the
closing price as of March 21, 2005 on The Nasdaq Stock Market for a share of the
registrant's common stock, which was $17.94 on March 21, 2005.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Annual Report to Stockholders for the year ended December 31,
2004 are incorporated by reference into Parts I and II of this Form 10-K.
BRIDGE STREET FINANCIAL, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2004
TABLE OF CONTENTS
ITEM PART I PAGE
1 BUSINESS 1
2 PROPERTIES 34
3 LEGAL PROCEEDINGS 34
PART II
4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 34
5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER 34
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
6 SELECTED FINANCIAL DATA 36
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 38
AND RESULTS OF OPERATIONS
7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 38
8 FINANCIAL STATEMENTS AND SUPPLIMENTARY DATA 38
9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING 39
AND FINANCIAL DISCLOSURE
9A CONTROLS AND PROCEDURES 39
9B OTHER INFORMATION 39
PART III
10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 39
11 EXECUTIVE COMPENSATION 41
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 46
AND RELATED STOCKHOLDER MATTERS
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 48
14 PRINCIPAL ACCOUNTING FEES AND SERVICES 49
15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES 49
i
FORWARD LOOKING STATEMENTS
This Annual Report on form 10-K contains "forward-looking statements"
which may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated," and "potential." Examples of
forward-looking statements include, but are not limited to, estimates with
respect to our financial condition and results of operation and business that
are subject to various factors which could cause actual results to differ
materially from these estimates. These factors include, but are not limited to:
o general and local economic conditions;
o changes in interest rates, deposit flows, demand for mortgages
and other loans, real estate values, and competition;
o changes in accounting principals, policies, or guidelines;
o changes in legislation or regulation; and
o other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing,
products, and services.
Any or all of our forward-looking statements in this Annual Report on
form 10-K and in any other public statements we make may turn out to be wrong.
They can be affected by inaccurate assumptions we might make or known or unknown
risks and uncertainties. Consequently, no forward-looking statements can be
guaranteed. The Company disclaims any obligation to update or revise any
forward-looking statements based on the occurrence of future events, the receipt
of new information, or otherwise.
ii
PART I
ITEM 1. BUSINESS
GENERAL
Bridge Street Financial, Inc. ("Bridge Street Financial," "us," or
"we") is a Delaware corporation organized in 2002 and is registered as a bank
holding company with the Federal Reserve Board. Bridge Street Financial serves
as the holding company for Oswego County National Bank, which converted from a
New York savings bank (Oswego County Savings Bank) to a national bank on January
15, 2003. Our common stock is quoted on the Nasdaq SmallCap Market under the
symbol "OCNB." Unless the context otherwise requires, all references herein to
Oswego County National Bank or Bridge Street Financial include Bridge Street
Financial and Oswego County National Bank on a consolidated basis.
Bridge Street Financial was formed to facilitate the reorganization of
Oswego County MHC, Oswego County Bancorp, Inc. and Oswego County Savings Bank
from the two-tier mutual holding company form to the stock holding company form
of organization. The "second step conversion" was completed on January 3, 2003.
Bridge Street Financial issued 1,510,733 shares of common stock in a
subscription offering at a price of $10.00 per share and issued 1,315,977 shares
of common stock in exchange for the stock held by the stockholders of Oswego
County Bancorp, Inc., the mid-tier holding company, based on a 1.02612 exchange
ratio for each share of Oswego County Bancorp, Inc. common stock.
As a result of the second step conversion, Bridge Street Financial
became the holding company for Oswego County Savings Bank, which was founded in
1870 as a New York Savings Bank and converted to a national bank on January 15,
2003. Oswego County MHC and Oswego County Bancorp, Inc. no longer exist
following the second step conversion and stockholders of Oswego County Bancorp,
Inc. became stockholders of Bridge Street Financial, based upon the exchange
ratio. All per share data and information prior to January 3, 2003 refers to
Oswego County Bancorp, Inc. and has been restated to reflect the effect of the
increased shares resulting from the share issuance and exchange resulting from
the second step conversion. Prior to the second step conversion, the common
stock of Oswego County Bancorp, Inc. traded under to symbol "OCSB.OB."
Oswego County National Bank conducts operations mainly through its
headquarters office in Oswego, New York and seven additional branch offices in
Oswego and Onondaga counties. The majority of loans and deposits held by Oswego
County National Bank are generated within Oswego and Onondaga counties, a region
consisting of a mixture of urban, suburban and rural areas and which includes
the cities of Oswego, Fulton and Syracuse.
Oswego County National Bank also invests in mortgage-backed and other
investment securities, consisting primarily of U.S. government and federal
agency securities, New York State municipal securities and corporate securities.
Oswego County National Bank also operates a charitable foundation, Oswego County
Charitable Foundation. The deposits of Oswego County National Bank are insured
by the Bank Insurance Fund of the FDIC and the primary federal regulator of
Oswego County National Bank is the Office of the Comptroller of the Currency
("OCC").
Since 1998, our strategy has been to broaden our line of banking
products, improve our asset quality and extend our market presence while
maintaining a well-capitalized, profitable and community-oriented financial
institution. Since implementing our strategy, we have:
o diversified our products by increasing the origination of
commercial and consumer loans;
o followed more stringent underwriting policies and procedures,
which has resulted in improved asset quality; and
o opened three new branches in the Syracuse market and acquired
one new branch in the Oswego market.
1
The benefits of our strategy include an improvement in net income,
decrease in non-performing assets and greater sources of income while continuing
to focus on serving the needs of our customers in Oswego and Onondaga counties.
Our business strategy, as discussed above, includes the diversification
of our banking products through the origination of commercial and consumer
loans. In addition to increasing our loan products for our commercial customers,
we are also continuing to diversify our deposit services for our commercial
customers. Additionally, during 2003 we developed deposit and loan products to
service municipal customers. This strategy is consistent with management's
decision to convert to a national bank so as to operate as a commercial bank.
Our president and chief executive officer, Gregory J. Kreis, who joined Oswego
County National Bank in January, 1997, has previous experience in operating a
national bank in Vermont. Mr. Kreis and his management team continue to
implement our operating strategy.
MARKET AREA
Oswego County National Bank conducts operations mainly through
headquarters in Oswego, New York and seven additional branch offices, including
new branches which opened in Onondaga County in May 2002 and September 2003. The
majority of loans and deposits held by Oswego County National Bank are generated
within Oswego and Onondaga counties, a region consisting of a mixture of urban,
suburban and rural areas and which includes the cities of Oswego, Fulton and
Syracuse.
The city of Oswego is located on Lake Ontario, 35 miles north of
Syracuse. Oswego County includes the cities of Oswego, Fulton and Pulaski.
Onondaga County includes the city of Syracuse, a major regional population
center for north-central New York. Oswego and Onondaga counties had a combined
population of approximately 580,000 as of 2001, with Oswego County containing
122,000 residents or 21% of the total. Oswego County has been historically and
continues to have a large concentration of employment in electrical power
generation and other industrial employment. The local employment base has been
diversified to a substantial extent from prior years as services,
wholesale/retail trade and government are all major employers. While the local
economy has been stable in recent years, it has not enjoyed the better economic
conditions experienced in other parts of the nation.
Unemployment in Onondaga County, however, has been lower than the
national average at 4.8% compared to 5.4% nationally for December 2004. Median
household income and the total number of households in Onondaga County have
increased 2.7% and 0.1% respectively from 1990 to 2001 and 2.2% and 0.7% in
Oswego County. While Oswego County's median household income has increased, it
is lower than the national average.
COMPETITION
Oswego County National Bank faces intense competition both in making
loans and attracting deposits. Its primary market area is highly competitive and
it faces direct competition from other financial institutions headquartered in
the counties served by us, many with a local, state-wide or regional presence
and, in some cases, a national presence. Many of these financial institutions
are significantly larger than and have greater financial resources than we do.
We held approximately 14% of the market share in deposits as of June
30, 2004 in Oswego County, New York. We were the fourth largest market share of
deposits in Oswego County.
Our competition for loans comes principally from commercial banks,
savings institutions, mortgage banking firms, credit unions, finance companies,
insurance companies and brokerage and investment banking firms. Our most direct
competition for deposits has historically come from commercial banks, savings
banks, co-operative banks and credit unions. We face additional competition for
deposits from short-term money market funds and other corporate and government
securities funds and from brokerage firms and insurance companies.
2
LENDING ACTIVITIES
GENERAL. At December 31, 2004, our total loans amounted to $134.6
million. Net of the $1.4 million allowance for loan losses, loans were $133.2
million at December 31, 2004 representing 60.9% of total assets. Oswego County
National Bank offers the following types of loans:
o one-to-four family residential mortgages;
o home equity loans;
o commercial mortgages;
o commercial loans; and
o consumer loans.
At December 31, 2004, $62.1 million or 46.2% of total loans consisted
of residential mortgage and home equity loans. Commercial mortgage loans totaled
$35.5 million on that date, representing 26.4% of total loans. Commercial loans
totaled $24.7 million or 18.4% of total loans and consumer loans totaled $12.2
million or 9.0% of total loans at December 31, 2004. Our strategy is to
diversify our banking products with an emphasis on increasing our commercial
loans, commercial mortgages and consumer loans.
The types of loans that we may originate are subject to federal laws
and regulations. Interest rates charged on loans are affected principally by
loan demand and the supply of money available for lending purposes and the rates
offered by its competitors. These factors are, in turn, affected by general
economic conditions, the monetary policy of the federal government, including
the Federal Reserve, legislative and tax policies, and governmental budgetary
matters.
A national bank generally may not make loans to one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. At December 31, 2004, our in-house policy limits
on loans to one borrower was $1.5 million.
3
LOAN PORTFOLIO. The following table sets forth the composition of our
loan portfolio by type of loan at the dates indicated.
AT DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003 2002
-------------------------- -------------------------- --------------------------
AMOUNT % AMOUNT % AMOUNT %
------------- ---------- ------------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
Residential mortgages and home equity
loans............................ $ 62,102 46.16% $ 60,744 51.15% $ 62,182 57.79%
Commercial mortgages................. 35,535 26.41 25,478 21.45 22,603 21.01
Commercial loans..................... 24,743 18.39 19,695 16.58 13,005 12.09
Consumer loans....................... 12,171 9.04 12,850 10.82 9,803 9.11
------------ --------- ------------ --------- ------------ ---------
Total loans.................... 134,551 100.00% 118,767 100.00% 107,593 100.00%
========= ========= =========
Allowance for loan losses...... (1,352) (1,183) (1,190)
------------ ------------ ------------
Net loans................. $ 133,199 $ 117,584 $ 106,403
============ ============ ============
AT DECEMBER 31,
-------------------------------------------------------
2001 2000
-------------------------- --------------------------
AMOUNT % AMOUNT %
------------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
Residential mortgages and home equity
loans............................ $ 67,004 63.91% $ 63,979 73.47%
Commercial mortgages................. 15,626 14.90 10,762 12.36
Commercial loans..................... 13,690 13.06 7,651 8.79
Consumer loans....................... 8,529 8.13 4,689 5.38
------------ --------- ------------ ---------
Total loans.................... 104,849 100.00% 87,081 100.00%
========= =========
Allowance for loan losses...... (932) (1,121)
------------ ------------
Net loans................. $ 103,917 $ 85,960
============ ============
LOAN MATURITY AND REPRICING. The following tables show the repricing
dates or contractual maturity dates as of December 31, 2004. The tables do not
reflect prepayments or scheduled principal amortization. Demand loans, loans
having no stated maturity, and overdrafts are shown as due in one year or less.
DECEMBER 31, 2004
----------------------------------------------------------------------------
RESIDENTIAL MORTGAGES AND COMMERCIAL COMMERCIAL CONSUMER
HOME EQUITY LOANS MORTGAGES LOANS LOANS TOTALS
------------------------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
AMOUNTS DUE:
Within one year...................... $ 10,187 $ 1 $ 13,324 $ 4,282 $ 27,794
After one year:
One to three years.............. 844 127 2,450 1,542 4,963
Three to five years............. 1,266 253 3,421 2,144 7,084
Five to fifteen years........... 20,669 15,730 2,338 2,743 41,480
Over fifteen years.............. 29,136 19,424 3,210 1,460 53,230
------------ ---------- ---------- ---------- ---------
Total due after one year............. 51,915 35,534 11,419 7,889 106,757
------------ ---------- ---------- ---------- ---------
TOTAL AMOUNT DUE: $ 62,102 $ 35,535 $ 24,743 $ 12,171 $ 134,551
============ ========== ========== ========== =========
4
The following tables present, as of December 31, 2004, the dollar
amount of all loans contractually due or scheduled to reprice after December 31,
2005 and whether such loans have fixed interest rates or adjustable interest
rates.
DUE AFTER DECEMBER 31, 2005
--------------------------------------
FIXED ADJUSTABLE TOTAL
------------ ---------- ----------
(IN THOUSANDS)
Residential mortgages and
home equity loans.................. $ 11,622 $ 40,293 $ 51,915
Commercial mortgages................. - 35,534 35,534
Commercial loans..................... 6,424 4,995 11,419
Consumer loans....................... 7,888 - 7,889
------------ ---------- ----------
Total loans........................ $ 28,511 $ 69,837 $ 106,757
============ ========== ==========
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of
Oswego County National Bank are subject to the written, non-discriminatory,
underwriting standards and loan origination procedures established by the Board
of Directors, management, secondary market investors such as Freddie Mac and
private mortgage insurance companies. Oswego County National Bank obtains loan
originations from a variety of sources, including referrals from real estate
brokers, developers, builders, existing customers, newspaper, radio and walk-in
customers. Loan applications are taken by lending personnel, and the loan
origination department supervises the procurement of credit reports, appraisals
and other documentation involved with a loan. Property valuations are performed
by independent outside appraisers licensed in New York State. Oswego County
National Bank requires borrowers to obtain hazard insurance on any property
securing a loan, and title insurance is normally required on all newly
originated mortgage loans.
The loan approval process is intended to assess the borrower's ability
to repay the loan, the viability of the loan and the adequacy of the value of
the property that will secure the loan. A loan application file is first
reviewed by a loan originator or branch manager and then underwritten to
established standards and policies. The Board has granted underwriting authority
to branch managers, loan underwriters, senior consumer and commercial loan
officers, and the president in varying levels. The Board's Loan Committee
usually must approve any loan made over $500,000, except those which conform to
standards permitting their resale into the secondary market (which must be
approved by one of four designated officers).
Historically, we have originated substantially all of the loans in the
portfolio and held them until maturity. However, in early 1998, because of
customer preference for fixed-rate mortgage loans, we began originating
long-term, fixed-rate residential mortgage loans with terms conforming to
secondary market standards. In 2000, we began acquiring newly originated
adjustable-rate residential mortgage loans from a real estate firm operating in
a nearby community outside our primary market area. Prior to purchase, these
loans are evaluated under our normal underwriting criteria.
5
The following table shows total loans originated and repaid during the
periods indicated.
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
2004 2003 2002
------------- ---------- -----------
(IN THOUSANDS)
LOANS:
Balance outstanding at beginning
of period...................... $ 118,767 $ 107,593 $ 104,849
LOAN ORIGINATIONS:
Residential mortgages and home
equity loans................... 33,248 76,099 49,572
Commercial mortgages............. 12,858 9,297 10,725
Commercial loans................. 15,181 9,725 7,814
Consumer loans................... 3,605 7,737 4,884
------------ --------- ----------
Total loans originated...... 64,892 102,858 72,995
------------ --------- ----------
COMMERCIAL LOANS PURCHASED........... - - -
LOAN PRINCIPAL REDUCTIONS:
Loans sold....................... 16,819 58,934 36,552
Payments received on loans....... 31,885 31,385 31,948
Loans held for sale.............. 334 722 1,555
Loans charged off or transferred
to other real estate........... 70 643 196
------------ --------- ----------
Total deductions............ 49,108 91,684 70,251
------------ --------- ----------
Ending balance.............. $ 134,551 $ 118,767 $ 107,593
============ ========= ==========
6
RESIDENTIAL LENDING
RESIDENTIAL MORTGAGES. Historically, we have concentrated our lending
activities on the origination of loans secured primarily by first mortgage liens
on existing one-to-four family residences and home equity loans secured by
second mortgages on one-to-four family residences. At December 31, 2004, $62.1
million or 46.2% of total loans consisted of such loans.
From the early 1980s until early 1998, we originated primarily
adjustable-rate residential mortgage loans in order to manage our interest-rate
risk. However, in February 1998, we commenced the origination of long-term,
fixed-rate one-to-four family residential mortgage loans in order to provide a
full range of products to our customers, but only under terms, conditions and
documentation which conform to standards which permit their resale in the
secondary market. Our fixed-rate loans range from terms of 15, 20, or 30 years.
Since September 2001, we have sold the majority of fixed-rate loans originated
in the secondary market with all servicing retained. Loans serviced for others
at December 31, 2004 totaled $99.5 million. For the year ended December 31,
2004, we sold 50.6% of residential mortgage loans originated. All residential
mortgage loans sold in the secondary market are sold to Freddie Mac. Loans sold
under Freddie Mac guidelines are sold with no right of recourse.
Adjustable-rate, one-to-four family, residential mortgage loans
generally have up to 30-year terms and an interest rate which adjusts every
year, three years or five years in accordance with a designated index (currently
the weekly average yield on U.S. Treasury securities adjusted to a constant
comparable maturity of one year, three years or five years, respectively, as
made available by the Federal Reserve Board). Oswego County National Bank
generally does not offer deeply discounted interest rates. Loans generally have
a cap on the amount of any increase or decrease in the interest rate during the
applicable adjustment period, and various caps, depending on when the loan was
originated, on the amount which the interest rate can increase or decrease over
the life of the loan. Adjustable-rate loans currently being originated are not
assumable without Oswego County National Bank's consent, and do not contain
prepayment penalties.
Oswego County National Bank has not engaged in the practice of
establishing a cap on the payments that could allow the loan balance to increase
rather than decrease, resulting in negative amortization. Adjustable-rate loans
decrease the risks associated with changes in interest rates but involve other
risks, primarily because as interest rates rise, the payment by the borrower
rises to the extent permitted by the terms of the loan, thereby increasing the
potential for default. At the same time, the marketability of the underlying
property may be adversely affected by higher interest rates. Approximately $50.3
million or 81.1% of the permanent residential mortgage loans in the loan
portfolio at December 31, 2004 had adjustable interest rates.
The demand for adjustable-rate loans in Oswego County National Bank's
primary market area has been a function of several factors, including the level
of interest rates, the expectations for changes in the level of interest rates
and the difference between the interest rates and loan fees offered for
fixed-rate loans and adjustable-rate loans. The relative amount of fixed-rate
and adjustable-rate residential loans that can be originated at any time is
largely determined by the demand for each in a competitive environment. Through
mid-1999, interest rate levels were conducive to originations of our fixed rate
residential mortgages. As interest rates continued to rise in the latter part of
1999 and in 2000, borrowers have preferred adjustable rate loans and
originations of such loans continued to increase during 2000. During 2003, 2002,
and 2001, mortgage rates declined and as a result of the lower rate environment,
borrowers' preference shifted to fixed-rate loans. During 2004 a limited number
of borrowers' used adjustable rate mortgages.
Pursuant to underwriting guidelines adopted by the Board of Directors,
Oswego County National Bank lends up to 100% of the appraised value of the
property securing a one-to-four family residential loan, and generally requires
borrowers to obtain private mortgage insurance on the portion of the principal
amount of the loan that exceeds 80% of the appraised value of the security
property. Oswego County National Bank generally requires title insurance
insuring the priority and validity of its mortgage lien, as well as fire and
extended coverage casualty insurance in order to protect the properties securing
its residential and other mortgage loans. Borrowers may be required to advance
funds, with each monthly payment of principal and interest, to a loan escrow
account from which Oswego County National Bank makes disbursements for items
such as real estate taxes, hazard insurance premiums and mortgage insurance
premiums as they become due. The properties securing mortgage loans are
appraised by independent appraisers licensed in New York State.
7
Home equity loans are typically originated for up to 90% of the
appraised value, less the amount of any existing prior liens on the property.
Oswego County National Bank secures home equity loans with a mortgage on the
property (generally a second mortgage) and will originate the loan even if
another institution holds the first mortgage. There is a maximum term of ten
years on fixed-rate and 15 years on adjustable-rate home equity loans. At
December 31, 2004, home equity loans totaled $50,000 or 0.04% of total loans.
Oswego County National Bank also offers home equity lines of credit in
amounts of up to 80% of the appraised value, or 90% if Oswego County National
Bank already has a first lien on the property, less the amount of existing prior
liens. At December 31, 2004, home equity lines of credit totaled $10.2 million
or 7.6% of total loans.
COMMERCIAL LENDING
GENERAL. We view our emphasis on commercial lending as a natural
outgrowth of traditional community banking services. Since 1998, we have made a
major commitment to commercial lending (involving commercial loans and
commercial mortgages) as a means to increase the yield on our loan portfolio and
attract lower cost transaction deposit accounts. Oswego County National Bank has
worked to develop a niche of making commercial loans to the small and medium
sized companies in a wide variety of industries located in Oswego and Onondaga
counties and, to a lesser extent, Jefferson, Cayuga and Oneida counties. In
particular, Oswego County National Bank has expanded its lending to the business
community located in Onondaga County which comprises a growing sector of its
market area. Because of this strategy to expand our business banking on both the
lending and deposit side, we believe that our conversion to a national bank has
been beneficial for implementation of our business plan. Oswego County National
Bank offers these businesses a variety of traditional loan products and
commercial services administered by Oswego County National Bank's commercial
sales department which are designed to give business owners borrowing
opportunities for modernization, inventory, equipment, construction,
consolidation, real estate, working capital, vehicle purchases and the
refinancing of existing corporate debt. Oswego County National Bank also offers
a variety of deposit products to serve the needs of its commercial customers. In
addition, in 2002, to better serve the banking needs of its commercial
customers, Oswego County National Bank opened a new branch in Liverpool,
Onondaga County that offers 24-hour access to a business banking suite to make
deposits and/or obtain coin and currency, providing commercial customers with
24-hour convenience to make deposits to their accounts and get rolled coin for
opening the next morning.
We have staffed our commercial sales department with three officers
with considerable commercial lending expertise in our market area and have
developed a staff to support the commercial sales department. We also have a
product manager who works with each commercial loan officer to promote
complementary loan and deposit products.
Oswego County National Bank is also an approved lender of the Small
Business Administration ("SBA") in order to better serve the needs of local
businesses while simultaneously reducing credit risk. At December 31, 2004, the
commercial loan portfolio included $5.8 million of loans guaranteed by
government agencies.
COMMERCIAL MORTGAGE LOANS. The majority of commercial mortgage loans
are secured by mixed-use properties (partly commercial and partly residential)
and apartment buildings located in Oswego County National Bank's primary market
area. At December 31, 2004 all commercial mortgage loans were collateralized by
properties and approximately 24.4% of Oswego County National Bank's commercial
loans were collateralized by properties in the bank's lending area. Oswego
County National Bank originates commercial real estate loans to finance the
purchase of real property, which generally consists of apartment buildings,
business properties, multi-family investment properties and construction loans
to developers of commercial and residential properties. In underwriting
commercial real estate loans, consideration is given to the property's historic
cash flow, current and projected occupancy, location and physical condition. At
December 31, 2004, our commercial real estate loan portfolio consisted of 180
loans, totaling $35.5 million, or 26.4% of total loans.
Substantially all of the commercial real estate portfolio consists of
loans which are collateralized by properties in Oswego County National Bank's
normal lending area. Oswego County National Bank's commercial real estate loan
portfolio is diverse, and does not have any significant loan concentration by
type of property or borrower. Oswego County National Bank generally lends up to
a maximum loan-to-value ratio of 80% on
8
commercial properties and requires a minimum debt coverage ratio of 1.20x.
Oswego County National Bank's largest loan relationship consists of one
commercial mortgage loan of $1,938,594 at December 31, 2004
In addition to interest earned on loans, Oswego County National Bank
may receive loan origination fees or "points" on the origination of commercial
mortgage loans. Loan points are a percentage of the principal amount of the
mortgage loan which is charged to the borrower at the time the loan is
originated.
Commercial mortgage lending is generally considered to involve a higher
degree of risk than one-to-four family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the economy
generally.
Because of increased risks associated with commercial real estate
loans, Oswego County National Bank's commercial real estate loans generally have
higher rates and shorter maturities than residential mortgage loans. Oswego
County National Bank usually offers commercial real estate loans at adjustable
rates tied to the prime rate or to yields on U.S. Treasury securities. The terms
of such loans generally do not exceed 20 years.
COMMERCIAL LOANS. Oswego County National Bank offers commercial loan
products and services which are designed to give business owners borrowing
opportunities for modernization, inventory, equipment, consolidation, municipal
loans, working capital, vehicle purchases and the financing of existing
corporate debt. Oswego County National Bank offers business installment loans,
vehicle and equipment financing, lines of credit, equipment leasing and other
commercial loans. At December 31, 2004, our commercial loan portfolio consisted
of 272 loans, totaling $24.7 million or 18.4% of our total loans. Since December
31, 2000, commercial loans have grown $17.1 million from $7.7 million.
We had not been an active originator of such loans until 1998 when an
experienced commercial lending manager joined Oswego County Savings Bank and
began developing and promoting our related loan products. Since that time, we
have added three commercial loan officers and a support person. Oswego County
National Bank may hire additional commercial loan officers on an as needed basis
in connection with its potential branch expansion.
Oswego County National Bank concentrates its efforts on making
commercial loans in amounts of $50,000 to $1.0 million to small and medium-sized
entities located in Oswego County National Bank's market area. Oswego County
National Bank has targeted commercial loans for expansion because yields are
generally higher, terms are typically shorter and the prevalence of adjustable
or floating rates of interest is greater than in certain other types of lending.
As part of Oswego County National Bank's strategy of increasing its
emphasis on commercial lending, Oswego County National Bank seeks to attract its
business customers' entire banking relationship. Oswego County National Bank
also provides complementary commercial products and services, including an
equipment leasing program with a third party vendor, a variety of commercial
deposit accounts, cash management services, a broad ATM network and night
deposit services. Commercial loan officers are based in its main and branch
offices, and Oswego County National Bank views its recent and potential branch
expansion as a means of facilitating these commercial relationships. Oswego
County National Bank intends to use the proceeds of the stock offering to
continue to expand the volume of its business products and services within its
current underwriting standards.
Oswego County National Bank's commercial loan portfolio does not have
any significant loan concentration by type of property or borrower. At December
31, 2004, our largest commercial loan was $874,993.
Commercial loans are limited to terms of seven years but generally have
terms of five years or less. Although Oswego County National Bank does originate
fixed-rate commercial loans, substantially all of its commercial loans have
variable interest rates tied to the prime rate. Alternatively, Oswego County
National Bank may collateralize these loans with a lien on business assets and
equipment. In some cases, both types of liens are
9
required. Oswego County National Bank also generally requires the personal
guarantee of the business owner. Interest rates on commercial loans generally
have higher yields than residential or commercial mortgages.
Commercial loans are generally considered to involve a higher degree of
risk than residential or commercial real estate loans because the collateral may
be in the form of intangible assets and/or inventory subject to market
obsolescence. Commercial loans may also involve relatively large loan balances
to single borrowers or groups of related borrowers, with the repayment of such
loans typically dependent on the successful operation and income stream of the
borrower. These risks can be significantly affected by economic conditions. In
addition, business lending generally requires substantially greater oversight
efforts by Oswego County National Bank's staff compared to residential or
commercial real estate lending. In order to mitigate this risk, Oswego County
National Bank monitors its loan concentration and its loan policies generally
limit the amount of loans to a single borrower or group of borrowers. Oswego
County National Bank also utilizes the services of an outside consultant to
conduct on-site credit quality reviews of the commercial loan portfolio.
While commercial lending is relatively new to us, we have implemented
underwriting and collection policies and procedures, and third-party loan review
that management believes provides prudent control.
CONSUMER LENDING
Oswego County National Bank makes loans for a wide variety of personal
or consumer purposes. The consumer loans offered include secured and unsecured
personal lines of credit, home equity lines of credit, as well as loans secured
by deposit accounts, automobile loans, recreational vehicle loans, boat loans,
and manufactured home loans. At December 31, 2004, $12.2 million or 9.0% of
total loans consisted of consumer loans. Oswego County National Bank originates
consumer loans in order to provide a full range of financial services to
customers and because such loans generally have shorter terms and higher
interest rates than one-to-four family residential mortgage loans.
Loans secured by deposit accounts amounted to $168,000 or 0.2% of total
loans at December 31, 2004. Such loans are originated for up to 100% of the
account balance, with a hold placed on the account restricting the withdrawal of
the account balance. Oswego County National Bank offers automobile and
recreational vehicle loans on both new and used vehicles, with most of the loans
secured by used vehicles. Automobile and recreational vehicle loans have terms
of up to five years and have fixed interest rates. Such loans amounted to $3.9
million or 2.9% of total loans at December 31, 2004. Unsecured personal loans
amounted to $2.3 million or 1.7% of total loans at December 31, 2004. Unsecured
personal lines of credit amounted to $3.9 million or 2.9% of total loans at
December 31, 2004. Manufactured home loans amounted to $1.8 million or 1.3% of
total loans at December 31, 2004. Secured personal loans amounted to $50,000 of
total loans at December 31, 2004.
Consumer loans generally have shorter terms and higher interest rates
than residential mortgage loans but generally involve more credit risk than
residential mortgage loans because of the type and nature of the collateral and,
in certain cases, the absence of collateral. In addition, consumer lending
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be adversely affected by job loss, divorce, illness and
personal bankruptcy. In most cases, any repossessed collateral for a defaulted
consumer loan will not provide an adequate source of repayment of the
outstanding loan balance because of improper repair and maintenance of the
underlying security. The remaining deficiency often does not warrant further
substantial collection efforts against the borrower. At December 31, 2004, we
did not have any repossessed collateral on our books. Finally, the application
of various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans if a
borrower defaults.
ASSET QUALITY
GENERAL. When a borrower fails to make a required payment on a loan,
Oswego County National Bank attempts to cure the deficiency by contacting the
borrower and seeking payment. Late charges are generally imposed following the
tenth day after a payment is due on consumer and commercial loans and the
fifteenth day after a payment is due on residential mortgage loans. In most
cases, deficiencies are cured promptly. If a delinquency extends beyond 30 days,
the loan and payment history is reviewed and efforts are made to collect the
loan. While Oswego County National Bank generally prefers to work with borrowers
to resolve such problems, when the
10
account becomes 60 to 90 days delinquent, Oswego County National Bank institutes
foreclosure or other proceedings, as necessary, to minimize any potential loss.
A loan is placed on non-accrual status when it is 90 days or more past
due or sooner if there is doubt as to the collection of principal or interest.
In addition, Oswego County National Bank places any loan on non-accrual status
if any part of it is classified as doubtful or loss (or if any part has been
charged off). When a loan is placed on non-accrual status, total interest
accrued and unpaid to date is reversed and charged to interest income.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. Loans are removed from non-accrual status when they
become current as to principal and interest, or when, in the opinion of
management, the loans are expected to be fully collectible as to principal and
interest.
Real estate acquired by Oswego County National Bank as a result of
foreclosure or by deed-in-lieu of foreclosure is classified, under generally
accepted accounting principles, as real estate owned until sold. At December 31,
2004, other real estate owned was $6,000. Real estate owned properties are
carried at fair value minus estimated costs to sell the property. Write downs to
estimated fair value at the time of foreclosure are charged to the allowance for
loan losses. After the date of acquisition, all costs incurred in maintaining
the property are expensed and costs incurred for the improvement or development
of such property are capitalized. Adjustments to the carrying value of such
properties that result from subsequent declines in fair value are charged to
operations in the period in which the decline occurs.
ASSET QUALITY COMMITTEE AND DELINQUENT LOAN REVIEW. Oswego County
National Bank has an Asset Quality Committee that meets every other week to
review every delinquent loan. The Committee is chaired by Mr. Kreis, the
President and CEO, and the members include a full-time collection staff person,
the head of Retail/Commercial Banking, and the head of Sales Support
(operations). The Asset Quality Committee assesses the quality of the loan
portfolio, reviews trends, recommends and follows legal actions, reviews the
status of any real estate owned properties or other repossessed collateral,
reviews the "Watchlist" and any necessary loan grading changes, and assesses the
adequacy of the loan loss reserve. Any loan that is seriously delinquent has the
loan file pulled for a review of the original underwriting to see if a problem
could have been detected at the time of the loan.
In addition to its internal loan review, Oswego County National Bank
has contracted with an outside loan consultant to provide loan review and loan
loss allowance analysis of Oswego County National Bank's operations. Services
provided by the loan consultant include internal compliance with regulatory
requirements and documentation and a review of each loan on the "Watchlist." In
addition, the outside consultant performs a review of all new commercial
mortgage and commercial loans originated by Oswego County National Bank, and on
an annual basis reviews all commercial mortgage and commercial loans with a
balance of $50,000 or more.
LOAN APPROVAL PROCEDURES. Loan underwriting authorities are issued to
individual officers engaged in approving loans based on their experience and
track record and the authorities are approved by the Board. Loans over the
individual loan authorities are brought to the Officers' Loan Committee that
meets on an as needed basis. That Committee is chaired by the President and CEO
and the members include the head of Retail/Commercial Banking, the retail
banking underwriter and the five members of the Commercial Banking Department.
The Officers' Loan Committee has loan authority to $500,000. Minutes of the
Officers' Loan Committee meetings are reviewed by the Board of Directors. All
loan relationships over $500,000 go to the Directors' Loan Committee that
consists of two outside Directors and the President and CEO.
11
NON-PERFORMING ASSETS. The following table sets forth the amounts and
categories of Oswego County National Bank's nonperforming assets at the dates
indicated.
AT DECEMBER 31,
----------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
NONACCRUAL LOANS:
Residential mortgages and home
equity loans..................................... $ 870 $ 495 $ 604 $ 520 $ 335
Commercial mortgages and loans.................... 103 83 88 110 705
Consumer.......................................... 82 67 65 124 43
--------- ---------- --------- ---------- ---------
Total.......................................... 1,055 645 757 754 1,083
Restructured commercial mortgage loan................ - 200 200 220 220
--------- ---------- --------- ---------- ---------
Total nonperforming loans............................ 1,055 845 957 974 1,303
--------- ---------- --------- ---------- ---------
FORECLOSED ASSETS:
Residential real estate........................... 6 126 8 - 165
--------- ---------- --------- ---------- ---------
Total nonperforming assets........................... $ 1,061 $ 971 $ 965 $ 974 $ 1,468
========= ========== ========= ========== =========
Nonperforming assets to total assets................. 0.49% 0.46% 0.49% 0.60% 1.08%
========= ========== ========= ========== =========
Nonperforming loans to total assets.................. 0.48% 0.40% 0.49% 0.60% 0.95%
========= ========== ========= ========== =========
Oswego County National Bank had no accruing loans which were more than
90 days delinquent at December 31, 2004 and 2003. If all nonaccruing loans had
been current in accordance with their terms during the years ended December 31,
2004, 2003 and 2002 interest income on such loans would have amounted to
approximately $135,000, $216,000 and $327,000 respectively. Interest income on
those nonaccruing loans of $83,000, $144,000 and $286,000 was recognized during
the years ended December 31, 2004, 2003 and 2002, respectively.
CLASSIFIED ASSETS. Federal regulations require that each insured
savings bank classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets with the additional characteristic that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified loss is considered uncollectible and of such little value that
continuance as an asset of the institution is not warranted. Another category
designated "special mention" also must be established and maintained for assets
which do not currently expose an insured institution to a sufficient degree of
risk to warrant classification as substandard, doubtful or loss. Assets
classified as substandard or doubtful require the institution to establish
general allowances for losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for loan
losses in the amount of 100% of the portion of the asset classified loss, or
charge off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. Federal
examiners may disagree with an insured institution's classifications and amounts
reserved.
At December 31, 2004, $190,000 of the assets classified as substandard
were included as nonperforming assets. There are additional loans totaling
$408,000 which are classified as substandard. These loans remain in a performing
status due to a variety of factors, including payment history, the value of
collateral supporting the credits, and personal or government guarantees. These
factors, when considered in aggregate, give management reason to believe that
the current risk exposure on these loans is not significant. While in a
performing status as of December 31, 2004, these loans exhibit certain risk
factors, which have the potential to cause them to become nonperforming.
Accordingly, management's attention is focused on these credits, which are
reviewed on at least a quarterly basis.
12
At December 31, 2004 and 2003, there were no assets classified as loss.
At December 31, 2004 there were $34,000 of assets classified as doubtful. In
2003, there were no assets classified as doubtful. At December 31, 2004 and
2003, $653,000 and $795,000 of assets were classified as substandard,
respectively. At December 31, 2004 and 2003, $2.1 million and $1.3 million of
assets were classified as special mention, respectively. At December 31, 2004
and 2003, management established a general allowance of $76,000 and $131,000 for
losses for the assets classified as substandard and $80,000 and $73,000,
respectively for assets classified as special mention. At December 31, 2004 a
general allowance of $30,000 was established for assets classified as doubtful.
At December 31, 2004 and 2003, nonaccruing loans included $190,000 and
$231,000 of loans classified as substandard, and $510,000 and $277,000 of loans
classified as special mention. The following table sets forth the amounts of
classified assets and the associated allowance at the dates indicated.
AT DECEMBER 31,
-----------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- -----------------------
LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE
---------- --------- ---------- --------- ---------- ---------
(IN THOUSANDS)
LOSS:
Residential mortgages................ $ - $ - $ - $ - $ - $ -
Commercial mortgages................. - - - - - -
Commercial loans..................... - - - - - -
Consumer............................. - - - - - -
---------- --------- ---------- --------- ---------- ---------
- - - - - -
DOUBTFUL:
Residential mortgages................ - - - - - -
Commercial mortgages................. 11 7 - - - -
Commercial loans..................... - - - - - -
Consumer............................. 23 23 - - - -
---------- --------- ---------- --------- ---------- ---------
34 30 - - - -
SUBSTANDARD:
Residential mortgages................ 250 29 319 60 276 41
Commercial mortgages................. 345 38 476 71 453 68
Commercial loans..................... - - - - 89 20
Consumer............................. 58 9 - - - -
---------- --------- ---------- --------- ---------- ---------
653 76 795 131 818 129
SPECIAL MENTION:
Residential mortgages................ 1,515 74 981 56 815 61
Commercial mortgages................. 558 6 345 17 601 30
Commercial loans..................... - - - - - -
Consumer............................. - - - - - -
---------- --------- ---------- --------- ---------- ---------
2,073 80 1,326 73 1,416 91
Total..................... $ 2,760 $ 186 $ 2,121 $ 204 $ 2,234 $ 220
========== ========= ========== ========= ========== =========
13
AT DECEMBER 31,
--------------------------------------------------
2001 2000
----------------------- -----------------------
LOANS ALLOWANCE LOANS ALLOWANCE
---------- --------- ---------- ---------
(IN THOUSANDS)
LOSS:
Residential mortgages................ $ - $ - $ - $ -
Commercial mortgages................. - - - -
Commercial loans..................... - - - -
Consumer............................. - - - -
---------- --------- ---------- ---------
- - - -
DOUBTFUL:
Residential mortgages................ - - - -
Commercial mortgages................. - - - -
Commercial loans..................... - - 705 291
Consumer............................. - - - -
---------- --------- ---------- ---------
- - 705 291
SUBSTANDARD:
Residential mortgages................ 132 20 202 35
Commercial mortgages................. 231 35 220 33
Commercial loans..................... 110 20 - -
Consumer............................. - - - -
---------- --------- ---------- ---------
473 75 422 68
SPECIAL MENTION:
Residential mortgages................ 863 32 981 59
Commercial mortgages................. 649 32 801 40
Commercial loans..................... - - - -
Consumer............................. - - - -
---------- --------- ---------- ---------
1,512 64 1,782 99
Total...................... $ 1,985 $ 139 $ 2,909 $ 458
========== ========= ========== =========
ALLOWANCE FOR LOAN LOSSES. At December 31, 2004, the allowance for loan
losses amounted to $1.4 million or 1.0% of the total loan portfolio. Oswego
County National Bank's loan portfolio consists primarily of residential
mortgage, home equity, commercial mortgage loans and commercial loans and, to a
lesser extent, consumer loans. Management regularly reviews the loan portfolio
and makes provisions for loan losses in order to maintain the allowance at a
level to cover known and inherent losses in the loan portfolio that are both
probable and estimable. The allowance for loan losses consists of amounts
specifically allocated to nonperforming loans and potential problem loans (if
any) as well as allowances determined for each major loan category. Loan
categories such as one-to-four family residential mortgages and consumer loans
are generally evaluated on an aggregate or "pool" basis by applying loss factors
to the current balances of the various loan categories. The loss factors are
determined by management based on an evaluation of historical loss experience,
delinquency trends, volume and type of lending conducted, and the impact of
current economic conditions in Oswego County National Bank's market area. While
Oswego County National Bank uses the best information available to make
evaluations, future adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the evaluation. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses. Such agencies may
require Oswego County National Bank to recognize additions to the allowance
based on their judgments about information available to them at the time of
their examinations.
14
The following table sets forth an analysis of our allowance for loan
losses during the periods indicated.
AT OR FOR THE
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
2004 2003 2002 2001 2000
---------- ----------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Allowance for loan losses at beginning
of period........................................ $ 1,183 $ 1,190 $ 932 $ 1,121 $ 1,069
--------- ----------- --------- ---------- ---------
Charge-offs:
Residential loans................................ 4 11 8 35 113
Commercial and industrial loans.................. 205 115 1 318 -
Consumer loans................................... 417 365 179 35 49
--------- ----------- --------- ---------- ---------
Total charge-offs........................... $ 441 $ 491 $ 188 $ 388 $ 162
========= =========== ========= ========== =========
Recoveries:
Residential loans................................ - - 8 25 31
Commercial and industrial loans.................. 7 10 12 17 -
Consumer loans................................... 47 29 14 13 14
--------- ----------- --------- ---------- ---------
Total recoveries............................ $ 54 $ 39 $ 34 $ 55 $ 45
========= =========== ========= ========== =========
Net charge-offs ..................................... 387 452 154 333 117
Provision for loan losses............................ 556 445 412 144 169
--------- ----------- --------- ---------- ---------
Allowance for loan losses at end of period........... $ 1,352 $ 1,183 $ 1,190 $ 932 $ 1,121
--------- ----------- ========= ========== =========
Average loans outstanding............................ $ 124,054 $ 115,763 $ 110,534 $ 96,406 $ 80,594
========= =========== ========= ========== =========
Allowance for loan losses as a percent
of total loans outstanding....................... 1.00% 1.00% 1.11% 0.89% 1.29%
========= =========== ========= ========== =========
Ratio of net charge-offs to average
loans outstanding................................ 0.31% 0.39% 0.14% 0.35% 0.15%
========= =========== ========= ========== =========
15
The following table presents the allocation of our allowance for loan
losses by type of loan at each of the dates indicated.
AT DECEMBER 31,
---------------------------------------------------------------------------------
2004 2003 2002
------------------------- ------------------------- -------------------------
LOAN CATEGORY LOAN CATEGORY LOAN CATEGORY
AMOUNT OF AS A % OF AMOUNT OF AS A % OF AMOUNT OF AS A % OF
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ------------- --------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
Residential mortgages and home
equity loans ............. $ 350 46.16% $ 353 51.15% $ 324 57.79%
Commercial mortgages ......... 429 26.41 345 21.45 309 21.01
Commercial loans ............. 245 18.39 167 16.58 152 12.09
Consumer loans ............... 328 9.04 318 10.82 188 9.11
Unallocated .................. - - - - 217 -
--------- ------ --------- ------ ------ ------
Total ........................ $ 1,352 100.00% $ 1,183 100.00% $1,190 100.00%
========= ====== ========= ====== ====== ======
AT DECEMBER 31,
-----------------------------------------------------
2001 2000
------------------------- -------------------------
LOAN CATEGORY LOAN CATEGORY
AMOUNT OF AS A % OF AMOUNT OF AS A % OF
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
Residential mortgages and home
equity loans ............. $ 304 63.91% $ 290 73.47%
Commercial mortgages ......... 213 14.90 169 12.36
Commercial loans ............. 135 13.06 382 8.79
Consumer loans ............... 162 8.13 90 5.38
Unallocated .................. 118 - 190 -
--------- ------ --------- ------
Total ........................ $ 932 100.00% $ 1,121 100.00%
========= ====== ========= ======
SECURITIES
Oswego County National Bank has authority to invest in various types of
liquid assets, including United States Treasury obligations, securities of
various federal agencies and of state and municipal governments, certain
corporate securities, certificates of deposit at federally insured banks and
savings institutions and federal funds. Each purchase of a security is ratified
by the Board of Directors.
At December 31, 2004, Oswego County National Bank's securities
portfolio had an amortized cost of $55.4 million and a fair value of $56.2
million. Securities classified as available for sale at December 31, 2004 had a
fair value of $49.4 million and an amortized cost of $48.7 million. Securities
classified as held to maturity had a fair value and an amortized cost of $6.7
million. At December 31, 2004 Oswego County National Bank's securities
16
portfolio consisted of U.S. government sponsored agency obligations, New York
State municipalities, corporate securities, mortgage-backed securities and
equity securities.
Changes in the securities portfolio are the result of our continued
implementation of an investment strategy to preserve tax-equivalent yields
during the low interest rate environment and provide future cash flows that can
be reinvested as market interest rates increase. We began implementing this
strategy during 2001 with the purchase of mortgage-backed securities that will
be self-liquidating and provide future funds for reinvestment at higher rates.
During 2001 and 2002, we purchased mid-term municipal securities to provide
yield support for the short-term portion of the securities portfolio. During
2004, we continued with this investment strategy.
17
The following table presents the composition of our securities
portfolio at the dates indicated.
AT DECEMBER 31,
---------------------------------------------------------------------------------
2004 2003 2002
------------------------- ------------------------- -------------------------
CARRYING PERCENT OF CARRYING PERCENT OF CARRYING PERCENT OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL
---------- ------------ ---------- ------------ ---------- ------------
(DOLLARS IN THOUSANDS)
SECURITIES AVAILABLE FOR SALE (FAIR VALUE):
Debt securities:
United States Government agency obligations $ 4,216 8.53% $ 3,477 6.91% $ 850 2.14%
Corporate securities ...................... 1,832 3.71 3,262 6.49 4,528 11.41
Municipal securities ...................... 17,661 35.74 17,280 34.38 15,309 38.58
Mortgage-backed securities ................ 21,290 43.09 21,804 43.37 14,838 37.39
---------- ------ ---------- ------ ---------- ------
Total debt securities ............... 44,999 91.07 45,823 91.15 35,525 89.52
Equity securities ............................ 4,413 8.93 4,447 8.85 4,157 10.48
---------- ------ ---------- ------ ---------- ------
Total securities available for
sale ................................... 49,412 100.00% 50,270 100.00% 39,682 100.00%
---------- ------ ---------- ------ ---------- ------
SECURITIES HELD TO MATURITY (AMORTIZED COST):
Mortgage-backed securities ................... $ 6,686 100.00% 8,079 100.00% - -
---------- ------ ---------- ------ ---------- ------
Total securities held to maturity ........ 6,686 100.00 8,079 100.00 - -
---------- ------ ---------- ------ ---------- ------
Total securities ....................... $ 56,098 100.00% $ 58,349 100.00% $ 39,682 100.00%
========== ====== ========== ====== ========== ======
18
The following table presents information regarding the carrying value,
weighted average yields on a tax equivalent basis assuming a 40% combined
federal and state income tax rate and contractual maturities of our debt
securities including mortgage-backed securities, at December 31, 2004. Weighted
average yields are based on amortized cost.
AT DECEMBER 31, 2004
------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE
ONE YEAR OR LESS TO FIVE YEARS YEARS TO TEN YEARS
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Securities Available for sale (fair value):
U.S. Government Agency
obligations ............................ $ 1,006 5.41% $ 512 5.12% $ 1,725 4.37%
Corporate Securities ................... - - 1,832 6.12 - -
Municipal Securities ................... - - 1,631 5.83 8,876 6.66
Mortgage-backed securities ............. 4,569 4.39 10,119 4.24 4,940 4.20
-------- ---- -------- ---- -------- ----
Total ............................ $ 5,575 4.57 $ 14,095 4.70% $ 15,541 5.62%
======== ==== ======== ==== ======== ====
Securities held to maturity (amortized cost):
Mortgage-backed securities ............. $ 693 4.79% $ 2,355 4.79% $ 2,180 4.79%
-------- ---- -------- ---- -------- ----
Total
$ 693 4.79% $ 2,355 4.79% $ 2,180 4.79%
======== ==== ======== ==== ======== ====
[TABLE CONTINUED]
AT DECEMBER 31, 2004
-----------------------------------------
MORE THAN TEN YEARS TOTAL
------------------- -------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- --------
Securities Available for sale (fair value):
U.S. Government Agency
obligations ............................ $ 973 5.35% $ 4,216 4.93%
Corporate Securities ................... - - 1,832 6.12
Municipal Securities ................... 7,154 6.50 17,661 6.53
Mortgage-backed securities ............. 1,662 4.11 21,290 4.25
-------- ---- -------- ----
Total ............................ $ 9,789 6.00% $ 44,999 5.28%
======== ==== ======== ====
Securities held to maturity (amortized cost):
Mortgage-backed securities ............. $ 1,458 4.86% $ 6,686 4.81%
-------- ---- -------- ----
Total
$ 1,458 4.86% $ 6,686 4.81%
======== ==== ======== ====
19
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent a
participation interest in a pool of single-family mortgages, the principal and
interest payments on which are passed from the mortgage originators, through
intermediaries (generally U.S. Government agencies and government-sponsored
enterprises) that pool and repackage the participation interests in the form of
securities, to investors such as Oswego County National Bank. U.S. Government
agencies and government-sponsored enterprises, which guarantee the payment of
principal and interest to investors, primarily include Freddie Mac, Fannie Mae
and Ginnie Mae.
Freddie Mac, which is a corporation chartered by the U.S. Government,
issues participation certificates backed principally by conventional mortgage
loans. Freddie Mac guarantees the timely payment of interest and the ultimate
return of principal on participation certificates. Fannie Mae is a private
corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. Fannie Mae guarantees the timely payment of
principal and interest on Fannie Mae securities. Ginnie Mae is a government
agency within the Department of Housing and Urban Development which is intended
to help finance government-assisted housing programs. The timely payment of
principal and interest on Ginnie Mae securities is guaranteed by the Ginnie Mae
and backed by the full faith and credit of the U.S. Government. Because these
government sponsored agencies were established to provide support for low- and
middle-income housing, there are limits to the maximum size of loans that
qualify for these programs. To accommodate larger-sized loans and loans that,
for other reasons, do not conform to the agency programs, a number of private
institutions have established their own home-loan origination and securitization
programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages of varying
maturities with interest rates that are within a range. The underlying pool of
mortgages may be fixed-rate or adjustable-rate, and prepayment risk is passed on
to the certificate holder. The life of a mortgage-backed pass-through security
approximates the life of the underlying mortgages.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of payment guarantees or credit enhancements
and fees paid to servicers. Furthermore, mortgage-backed securities are
generally more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of Oswego County National Bank.
20
The following table sets forth the activity in our mortgage-backed
securities portfolio during the periods indicated (securities available for sale
and securities held to maturity).
AT OR FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------------
2004 2003 2002
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Mortgage-backed securities at beginning of period
(amortized cost) ............................. $ 29,960 $ 14,661 $ 16,200
Purchases ....................................... 8,292 42,485 6,152
Repayments ...................................... (10,019) (26,705) (7,535)
Premium amortization, net ....................... (195) (481) (156)
Mortgage-backed securities at end of period
(amortized cost) ............................. $ 28,038 $ 29,960 $ 14,661
======== ======== ========
Mortgage-backed securities at end of period (fair
value) ....................................... $ 28,032 $ 29,965 $ 14,838
======== ======== ========
Weighted average yield at end of period ......... 4.38% 4.04% 4.85%
======== ======== ========
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Oswego County National
Bank's funds for lending and other investment purposes. In addition to deposits,
funds are derived from borrowings and principal and interest payments on loans
and mortgage-backed securities. Loan repayments are a relatively stable source
of funds, while deposit inflows and outflows are significantly influenced by
general interest rates and money market conditions. Oswego County National Bank
has also financed a portion of its asset growth with borrowings from the Federal
Home Loan Bank of New York and the Federal Reserve Bank of New York.
At December 31, 2004, we had total borrowings from the Federal Home
Loan Bank of New York of $29.8 million. Also available to Oswego County National
Bank are overnight and one-month borrowing facilities with the Federal Home Loan
Bank of New York, in the amount of $6.7 million and $10.4 million, respectively,
an overnight credit plus line of $9.0 million with the Federal Home Loan Bank of
New York and a $5.0 million overnight line of credit with a commercial bank.
Federal Home Loan Bank advances are collateralized by Federal Home Loan Bank
stock owned by us and mortgage-backed securities with a fair value of
approximately $6.5 million at December 31, 2004. In addition, the advances are
collateralized by a blanket lien on Oswego County National Bank's one-to-four
family mortgage loans.
DEPOSITS. Oswego County National Bank's deposit products include a
broad selection of deposit instruments, including demand deposits, money market
deposits, savings deposits and time deposits. Deposit account terms vary, with
the principal differences being the minimum balance required, the time periods
the funds must remain on deposit and the interest rate.
Oswego County National Bank's deposits are obtained primarily from
residents of Oswego County and Onondaga County in New York State. It is
estimated that less than 1% of current deposits are obtained from customers
residing outside New York State. Brokers are not retained to solicit funds for
deposit with Oswego County National Bank or to actively solicit negotiable-rate
certificates of deposit with balances of $100,000 or more.
Oswego County National Bank sets interest rates, maturity terms,
service fees and withdrawal penalties on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals and federal and state regulations.
21
The following table sets forth activity in our deposits during the
periods indicated.
FOR THE
YEAR ENDED DECEMBER 31,
---------------------------------------
2004 2003 2002
----------- ---------- ----------
(IN THOUSANDS)
Beginning balance................................ $ 151,652 $ 145,684 $ 129,183
Net (decrease) increase before interest credited. (356) 3,859 13,512
Interest credited................................ 1,951 2,109 2,989
---------- ---------- ----------
Net increase in deposits ........................ 1,595 5,968 16,501
---------- ---------- ----------
Ending balance................................... $ 153,247 $ 151,652 $ 145,684
========== ========== ==========
The following table sets forth the dollar amount of deposits in the
various types of programs offered by Oswego County National Bank at the dates
indicated.
AT DECEMBER 31,
------------------------------------------------------------------------------------
2004 2003 2002
------------------------ ------------------------ ------------------------
AMOUNT % AMOUNT % AMOUNT %
----------- ------- ----------- ------- ----------- -------
(DOLLARS IN THOUSANDS)
Time deposits:
0.00% - 1.49% ................ $ 6,472 4.22% $ 11,293 7.45% - -
1.50% - 3.99% ................ 35,607 23.24 29,498 19.45 $ 38,540 26.46%
4.00% - 5.99% ................ 8,503 5.55 9,574 6.31 12,579 8.63
6.00% - 7.99% ................ 514 .34 757 .50 3,336 2.29
----------- ------ ----------- ------ ----------- ------
Total time deposits: ..... 51,096 33.34 51,122 33.71 54,455 37.38
----------- ------ ----------- ------ ----------- ------
Transaction accounts:
Savings deposits ............. 41,756 27.25 41,986 27.69 40,444 27.76
Money market deposits ........ 21,996 15.86 24,052 15.86 22,863 15.69
NOW .......................... 7,886 4.55 6,904 4.55 5,154 3.54
Demand deposits .............. 30,513 18.19 27,588 18.19 22,768 15.63
----------- ------ ----------- ------ ----------- ------
Total transaction accounts 102,151 66.29 100,530 66.29 91,229 62.62
----------- ------ ----------- ------ ----------- ------
Total deposits ........... $ 153,247 100.00% $ 151,652 100.00% $ 145,684 100.00%
=========== ====== =========== ====== =========== ======
The following table presents the average balance of each type of
deposit and the average rate paid on each type of deposit for the periods
indicated.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- -----------------------
AVERAGE AVERAGE AVERAGE
AVERAGE RATE AVERAGE RATE AVERAGE RATE
BALANCE PAID BALANCE PAID BALANCE PAID
---------- ------- ---------- ------- ---------- --------
(DOLLARS IN THOUSANDS)
NOW .................... $ 7,216 0.69% $ 6,138 0.42% $ 3,880 1.28%
Savings deposits ....... 41,896 0.72 42,683 0.62 42,354 1.45
Demand deposits ........ 28,674 - 24,522 - 21,414 -
Money market deposits .. 28,296 1.19 22,965 1.15 22,139 2.18
Time deposits .......... 50,832 2.48% 53,538 2.90% 49,467 3.73%
---------- ---------- ----------
Total deposits: $ 156,914 $ 149,846 $ 139,254
========== ========== ==========
22
The following table shows the interest rate and maturity information
for our time deposits at December 31, 2004.
MATURITY DATE
----------------------------------------------------------------------------------
OVER SIX
SIX MONTHS MONTHS TO OVER 1 TO OVER 2 TO 3
OR LESS 1 YEAR 2 YEARS YEARS OVER 3 YEARS TOTAL
---------- --------- --------- ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
Amount........................ $ 18,848 $ 14,698 $ 9,393 $ 4,615 $ 3,542 $ 51,096
Average Rate.................. 1.96% 2.46% 3.09% 4.33% 3.61% 2.64%
The following table sets forth the maturities of certificates of
deposit with principal amounts of $100,000 or more at December 31, 2004.
MATURITY PERIOD: AMOUNT
(IN THOUSANDS)
Three months or less............................................................ $ 2,560
Over three months through six months............................................ 2,502
Over six months through 12 months............................................... 4,884
Over 12 months.................................................................. 6,206
---------
Total certificates of deposit with balances of $100,000 or more........ $ 16,152
=========
23
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Bridge Street Financial's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), and (ii)
changes in rate (change in rate multiplied by prior year volume). The combined
effect of changes in both rate and volume has been allocated proportionately to
the change due to rate and the change due to volume.
Twelve Months Ended Twelve Months Ended
December 31, 2004 December 31, 2003
Compared to Compared to
Twelve Months Ended Twelve Months Ended
December 31, 2003 December 31, 2002
Increase/(Decrease) Increase/(Decrease)
---------------------------- ---------------------------
Due to Due to
------------------ ------------------
Volume Rate Net Volume Rate Net
------- -------- ------- ------- -------- ------
(In thousands)
Interest income:
Loans....................... $ 497 $ (321) $ 176 $ 352 $ (925) $(573)
Securities.................. 364 160 524 668 (495) 173
Federal funds sold and other (57) (6) (63) 82 (6) 76
Total interest income.... 804 (167) 637 1,102 (1,426) (324)
Interest expense:
Savings, NOW and money
market deposits.......... 46 91 137 55 (647) (592)
Time deposits............... (76) (219) (295) 143 (431) (288)
Borrowings.................. 271 (121) 150 149 (72) 77
Total interest expense... 241 (249) (8) 347 (1,150) (803)
liabilities...................
Increase (decrease) in net
interest income............. $ 563 $ 82 $ 645 $ 755 $ (276) $ 479
PERSONNEL
As of December 31, 2004, we had 72 full-time employees and 19 part-time
employees. The employees are not represented by a collective bargaining unit,
and we consider our relationship with our employees to be excellent.
REGULATION
GENERAL
Bridge Street Financial is regulated as a financial holding company by
the Federal Reserve Board. Oswego County National Bank, as a national bank, is
subject to the regulation, examination and supervision by the Office of the
Comptroller of the Currency ("OCC") and is subject to the examination and
supervision of the Federal Deposit Insurance Corporation ("FDIC"). Oswego County
National Bank must file reports with the OCC concerning its activities and
financial condition. Bridge Street Financial must file reports with, and
otherwise comply with the rules and regulations of the Federal Reserve. Bridge
Street Financial is required to file reports with, and otherwise comply with,
the rules and regulations of the SEC under the federal securities laws.
Any change in such laws and regulations, whether by the OCC, the
Federal Reserve, or through legislation, could have a material adverse impact on
Bridge Street Financial and Oswego County National Bank and their operations and
stockholders.
REGULATION OF OSWEGO COUNTY NATIONAL BANK
24
The OCC has extensive authority over the operations of national banks.
As part of this authority, Oswego County National Bank is required to file
periodic reports with the OCC and is subject to periodic examinations by the
OCC. All national banks are subject to a semi-annual assessment, based upon the
bank's total assets, to fund the operations of the OCC.
The OCC also has extensive enforcement authority over all national
banks, including Oswego County National Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease-and-desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations as well as unsafe or unsound practices. Other actions or inactions
may provide the basis for enforcement action, including misleading or untimely
reports filed with the OCC. Except under certain circumstances, public
disclosure of final enforcement actions by the OCC is required.
The OCC, as well as the other federal banking agencies, have adopted
regulations and guidelines establishing safety and soundness standards on such
matters as loan underwriting and documentation, internal controls and audit
systems, interest rate risk exposure, asset quality and earnings, and
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan. A failure to submit a plan
or to comply with an approved plan will subject the institution to further
enforcement action.
DEPOSIT INSURANCE AND REGULATION BY THE FDIC. Pursuant to federal
banking law, the FDIC has established a system for setting deposit insurance
premiums based upon the risks a particular institution poses to its deposit
insurance fund. Under the risk-based deposit insurance assessment system, the
FDIC assigns an institution to one of three capital categories based on the
institution's financial information, as of the most recent quarterly report
filed with the applicable bank regulatory agency prior to the assessment period.
The three capital categories are (1) well capitalized, (2) adequately
capitalized and (3) undercapitalized using capital ratios that are substantially
similar to the prompt corrective action capital ratios discussed below. The FDIC
also assigns an institution to supervisory subgroup based on a supervisory
evaluation provided to the FDIC by the institution's primary federal regulator
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds (which may
include, if applicable, information provided by the institution's state
supervisor). An institution's assessment rate depends on the capital category
and supervisory category to which it is assigned. Any increase in insurance
assessments could have an adverse effect on the earnings of insured
institutions, including Oswego County National Bank.
The FDIC may terminate the insurance of an institution's deposits upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of Oswego County National Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
CAPITAL REQUIREMENTS. Oswego County National Bank is subject to the
capital regulations of the OCC. The OCC's regulations establish two capital
standards for national banks: a leverage requirement and a risk-based capital
requirement. In addition, the OCC may, on a case-by-case basis, establish
individual minimum capital requirements for a national bank that vary from the
requirements which would otherwise apply under OCC regulations. A national bank
that fails to satisfy the capital requirements established under the OCC's
regulations will be subject to such administrative action or sanctions as the
OCC deems appropriate.
The leverage ratio adopted by the OCC requires a minimum ratio of "Tier
1 capital" to adjusted total assets of 3% for national banks rated composite 1
under the CAMELS rating system for banks. National banks not rated composite 1
under the CAMELS rating system for banks are required to maintain a minimum
ratio of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the
level and nature of risks of their operations. For purposes of the OCC's
leverage requirement, Tier 1 capital generally consists of common stockholders'
equity and retained income and certain non-cumulative perpetual preferred stock
and related income, except that no intangibles and certain purchased mortgage
servicing rights and purchased credit card relationships may be included in
capital.
The risk-based capital requirements established by the OCC's
regulations require national banks to maintain "total capital" equal to at least
8% of total risk-weighted assets. For purposes of the risk-based capital
requirement, "total capital" means Tier 1 capital (as described above) plus
"Tier 2 capital," provided that the amount of Tier 2 capital may not exceed the
amount of Tier 1 capital, less certain assets. The components of Tier 2 capital
include certain permanent and maturing capital instruments that do not qualify
as core capital and general valuation loan and lease loss allowances up to a
maximum of 1.25% of risk-weighted assets.
25
SAFETY AND SOUNDNESS STANDARDS. Pursuant to federal banking law, each
federal banking agency, including the OCC, has adopted guidelines establishing
general standards relating to internal controls, information and internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, asset quality, earnings, and compensation, fees and benefits. In
general, the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts paid
are unreasonable or disproportionate to the services performed by an executive
officer, employee, director, or principal stockholder.
In addition, the OCC adopted regulations to require a bank that is
given notice by the OCC that it is not satisfying any of such safety and
soundness standards to submit a compliance plan to the OCC. If, after being so
notified, a bank fails to submit an acceptable compliance plan or fails in any
material respect to implement an accepted compliance plan, the OCC may issue an
order directing corrective and other actions of the types to which a
significantly undercapitalized institution is subject under the "prompt
corrective action" provisions. If a bank fails to comply with such an order, the
OCC may seek to enforce such an order in judicial proceedings and to impose
civil monetary penalties.
PROMPT CORRECTIVE ACTION. Federal banking law also established a system
of prompt corrective action to resolve the problems of undercapitalized
institutions. The OCC, as well as the other federal banking regulators, adopted
regulations governing the supervisory actions that may be taken against
undercapitalized institutions. The regulations establish five categories,
consisting of "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized." The severity
of the action authorized or required to be taken under the prompt corrective
action regulations increases as a bank's capital decreases within the three
undercapitalized categories. All banks are prohibited from paying dividends or
other capital distributions or paying management fees to any controlling person
if, following such distribution, the bank would be undercapitalized.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act (CRA),
any insured depository institution, including Oswego County National Bank 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. The CRA requires the OCC,
in connection with its examination of a national bank, to assess the depository
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, including applications for additional branches and acquisitions.
The CRA requires the OCC to provide a written evaluation of an
institution's CRA performance utilizing a four tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. Oswego County
National Bank (formerly Oswego County Savings Bank) received a "satisfactory"
rating on its last CRA exam.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. Oswego County
National Bank's ability to pay dividends is governed by the National Bank Act
and OCC regulations. Under such statute and regulations, all dividends by a
national bank must be paid out of current or retained net profits. The National
Bank Act further restricts the payment of dividends out of net profits by
prohibiting a national bank from declaring a cash dividend on its shares of
common stock until the surplus fund equals the amount of capital stock or, if
the surplus fund does not equal the amount of capital stock, until one-tenth of
the bank's net profits for the preceding half year in the case of quarterly or
semi-annual dividends, or the preceding two half-year periods in the case of
annual dividends, are transferred to the surplus fund. In addition, the prior
approval of the OCC is required for the payment of a dividend if the total of
all dividends declared by a national bank in any calendar year would exceed the
total of its net profits for the year combined with its net profits for the two
preceding years, less any required transfers to surplus or a fund for the
retirement of any preferred stock.
The OCC has the authority to prohibit the payment of dividends by a
national bank when it determines such payment to be an unsafe and unsound
banking practice. In addition, the bank would be prohibited by federal statute
and the OCC's prompt corrective action regulations from making any capital
distribution if, after giving effect to the distribution, the bank would be
classified as "undercapitalized" under OCC regulations. See "- Prompt Corrective
Action." Finally, Oswego County National Bank would not be able to pay dividends
on its capital stock if its capital would thereby be reduced below the remaining
balance of the liquidation account.
26
LIMITATIONS ON LOANS TO EXECUTIVE OFFICERS AND DIRECTORS. A bank's
loans to its executive officers, directors, any owner of 10% or more of its
stock (each, an insider) and any of certain entities affiliated to any such
person (an insider's related interest) are subject to the conditions and
limitations imposed by Section 22(h) of the Federal Reserve Act and the Federal
Reserve Board's Regulation O thereunder. Under these restrictions, the aggregate
amount of the loans to any insider and the insider's related interests may not
exceed the loans to one borrower limit applicable to national banks, which is
comparable to the loans to one borrower limit applicable to Oswego County
National Bank' loans. All loans by a bank to all insiders and insiders' related
interests in the aggregate may not exceed the bank's unimpaired capital and
unimpaired surplus. With certain exceptions, loans to an executive officer,
other than loans for the education of the officer's children and certain loans
secured by the officer's residence, may not exceed the lesser of (1) $100,000 or
(2) the greater of $25,000 or 2.5% of the bank's capital and unimpaired surplus.
Regulation O also requires that any proposed loan to an insider or a related
interest of that insider be approved in advance by a majority of the board of
directors of the bank, with any interested director not participating in the
voting, if such loan, when aggregated with any existing loans to that insider
and the insider's related interests, would exceed either (1) $500,000 or (2) the
greater of $25,000 or 5% of the bank's unimpaired capital and surplus.
Generally, such loans must be made on substantially the same terms as, and
follow credit underwriting procedures that are not less stringent than those
that are prevailing at the time for comparable transactions with other persons.
An exception is made for extensions of credit made pursuant to a
benefit or compensation plan of a bank that is widely available to employees of
the bank and that does not give any preference to insiders of the bank over
other employees of the bank.
Section 402 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley,
prohibits the extension of personal loans to directors and executive officers of
issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply
to mortgages advanced by an insured depository institution, such as Oswego
County National Bank, that are subject to the insider lending restrictions of
Section 22(h) of the FRA.
TRANSACTIONS WITH AFFILIATES. Oswego County National Bank's authority
to engage in transactions with its "affiliates" is limited by the OCC
regulations and by Sections 23A and 23B of the Federal Reserve Act (the "FRA").
In general, these transactions must be on terms which are as favorable to Oswego
County National Bank as comparable transactions with non-affiliates. In
addition, certain types of these transactions are restricted to an aggregate
percentage of Oswego County National Bank's capital. Collateral in specified
amounts must usually be provided by affiliates in order to receive loans from
Oswego County National Bank.
Effective April 1, 2003, the FRB rescinded its interpretations of
Sections 23A and 23B of the FRA and replaced these interpretations with
Regulation W. In addition, Regulation W makes various changes to existing law
regarding Sections 23A and 23B, including expanding the definition of what
constitutes an affiliate subject to Sections 23A and 23B and exempting certain
subsidiaries of state-chartered banks from the restrictions of Sections 23A and
23B. Under Regulation W, all transactions entered into on or before December 12,
2002, which either became subject to Sections 23A and 23B solely because of
Regulation W, and all transactions covered by Sections 23A and 23B, the
treatment of which will change solely because of Regulation W, became subject to
Regulation W on July 1, 2003. All other covered affiliate transactions become
subject to Regulation W on April 1, 2003. The Federal Reserve Board expects each
depository institution that is subject to Sections 23A and 23B to implement
policies and procedures to ensure compliance with Regulation W.
Oswego County National Bank's authority to extend credit to its
directors, executive officers and 10% stockholders, as well as to entities
controlled by such persons, is currently governed by the requirements of
Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve
Board. Among other things, these provisions require that extensions of credit to
insiders: (i) be made on terms that are substantially the same as, and follow
credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated persons and that do not
involve more than the normal risk of repayment or present other unfavorable
features; and (ii) not exceed certain limitations on the amount of credit
extended to such persons, individually and in the aggregate, which limits are
based, in part, on the amount of Oswego County National Bank's capital. The
regulations allow small discounts on fees on residential mortgages for
directors, officers and employees. In addition, extensions for credit in excess
of certain limits must be approved by Oswego County National Bank's Board of
Directors.
Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension
of personal loans to directors and executive officers of issuers (as defined in
Sarbanes-Oxley). The prohibition, however, does not apply to mortgages
27
advanced by an insured depository institution, such as Oswego County National
Bank, that are subject to the insider lending restrictions of Section 22(h) of
the Federal Reserve Act.
HOLDING COMPANY REGULATION
FEDERAL BANK HOLDING COMPANY REGULATION. Bridge Street Financial is
regulated as a bank holding company. Bank holding companies are subject to
examination, regulation and periodic reporting under the Bank Holding Company
Act, as administered by the Federal Reserve Board. As part of the second step
conversion, Bridge Street Financial also elected to be treated as a financial
holding company.
Regulations of the Federal Reserve Board provide that a bank holding
company must serve as a source of strength to any of its subsidiary banks and
must not conduct its activities in an unsafe or unsound manner. Under the prompt
corrective action provisions of the FDIC Improvement Act, a bank holding company
parent of an undercapitalized subsidiary bank would be directed to guarantee,
within limitations, the capital restoration plan that is required of such an
undercapitalized bank if the undercapitalized bank fails to file an acceptable
capital restoration plan or fails to implement an accepted plan, the Federal
Reserve Board may prohibit the bank holding company parent of the
undercapitalized bank from paying a dividend or making any other form of capital
distribution without the prior approval of the Federal Reserve Board.
As a bank holding company, Bridge Street Financial is required to
obtain the prior approval of the Federal Reserve Board to acquire all, or
substantially all, of the assets of any bank or bank holding company. Prior
Federal Reserve Board approval is required for Bridge Street Financial to
acquire direct or indirect ownership or control of any voting securities of any
bank or bank holding company if, after giving effect to such acquisition, it
would, directly or indirectly, own or control more than 5% of any class of
voting shares of such bank or bank holding company.
A bank holding company is required to give the Federal Reserve Board
prior written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, will be equal to 10% or more of the company's
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would constitute an unsafe and
unsound practice, or would violate any law, regulation, Federal Reserve Board
order or directive, or any condition imposed by, or written agreement with, the
Federal Reserve Board. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the Federal Reserve Board, that has received a composite "1" or
"2" rating at its most recent bank holding company inspection by the Federal
Reserve Board, and that is not the subject of any unresolved supervisory issues.
As a financial holding company, Bridge Street Financial may engage in
activities that are financial in nature or incident to activities which are
financial in nature. Bank holding companies may qualify to become a financial
holding company if:
o each of its depository institution subsidiaries is "well
capitalized";
o each of its depository institution subsidiaries is "well
managed";
o each of its depository institution subsidiaries has at least a
"satisfactory" Community Reinvestment Act rating at its most
recent examination; and
o the bank holding company has filed a certification with the
Federal Reserve Board that it elects to become a financial
holding company.
Under the Federal Deposit Insurance Act, depository institutions are
liable to the FDIC for losses suffered or anticipated by the FDIC in connection
with the default of a commonly controlled depository institution or any
assistance provided by the FDIC to such an institution in danger of default.
This law would potentially be applicable to Bridge Street Financial if it ever
acquired as a separate subsidiary a depository institution in addition to Oswego
County National Bank.
28
OTHER FEDERAL REGULATION
THE USA PATRIOT ACT. Oswego County National Bank is subject to the USA
PATRIOT Act, which gives the federal government new powers to address terrorist
threats through enhanced domestic security measures, expanded surveillance
powers, increased information sharing, and broadened anti-money laundering
requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA
PATRIOT Act takes measures intended to encourage information sharing among bank
regulatory agencies and law enforcement bodies. Further, certain provisions of
Title III impose affirmative obligations on a broad range of financial
institutions, including banks, thrifts, brokers, dealers, credit unions, money
transfer agents, and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, ALL financial institutions must
establish anti-money laundering programs that include, at
minimum: (i) internal policies, procedures, and controls; (ii)
specific designation of an anti-money laundering compliance
officer; (iii) ongoing employee training programs; and (iv) an
independent audit function to test the anti-money laundering
program.
o Pursuant to Section 326, on May 9, 2003, the Secretary of the
Department of Treasury, in conjunction with other bank
regulators, issued Joint Final Rules that provide for minimum
standards with respect to customer identification and
verification. These rules, which became effective on October
1, 2003, require each financial institution to implement a
written customer identification program appropriate for its
size, location and type of business that includes certain
minimum requirements.
o Section 312 requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondent accounts in the United States for non-United
States persons or their representatives (including foreign
individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to
detect and report instances of money laundering through those
accounts.
o Section 318, which became effective December 25, 2001,
prohibits financial institutions from establishing,
maintaining, administering, or managing correspondent accounts
for foreign shell banks (foreign banks that do not have a
physical presence in any country), and requires financial
institutions to take reasonable steps to ensure that
correspondent accounted provided to foreign banks are not
being used to indirectly provide banking services to foreign
shell banks. .
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on
Bank Holding Company Act and Bank Merger Act applications.
THE SARBANES-OXLEY ACT. On July 30, 2002, President George W. Bush
signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act
implements a broad range of corporate governance and accounting measures for
public companies designed to promote honesty and transparency in corporate
America and better protect investors from the type of corporate wrongdoing that
occurred in Enron, WorldCom and similar companies. The Sarbanes-Oxley Act's
principal legislation includes:
o the creation of an independent accounting oversight board;
o auditor independence provisions which restrict non-audit
services that accountants may provide to their audit clients;
o additional corporate governance and responsibility measures,
including the requirement that the chief executive officer and
chief financial officer certify financial statements;
o a requirement that companies establish and maintain a system
of internal control over financial reporting and that a
company's management provide an annual report regarding its
assessment of the effectiveness of such internal control over
financial reporting to the company's independent
29
accountants and that such accountants provide an attestation
report with respect to management's assessment of the
effectiveness of the company's internal control over financial
reporting;
o the forfeiture of bonuses or other incentive-based
compensation and profits from the sale of an issuer's
securities by directors and senior officers in the twelve
month period following initial publication of any financial
statements that later require restatement;
o an increase the oversight of, and enhancement of certain
requirements relating to audit committees of public companies
and how they interact with the company's independent auditors.
o requirement that audit committee members must be independent
and are absolutely barred from accepting consulting, advisory
or other compensatory fees from the issuer;
o requirement that companies disclose whether at least one
member of the committee is a "financial expert" (as such term
will be defined by the Securities and Exchange Commission) and
if not, why not;
o expanded disclosure requirements for corporate insiders,
including accelerated reporting of stock transactions by
insiders and a prohibition on insider trading during pension
blackout periods;
o a prohibition on personal loans to directors and officers,
except certain loans made by insured financial institutions;
o disclosure of a code of ethics and filing a Form 8-K for a
change or waiver of such code;
o mandatory disclosure by analysts of potential conflicts of
interest; and
o a range of enhanced penalties for fraud and other violations.
Although we anticipate that we will incur additional expense in
complying with the provisions of the Sarbanes-Oxley Act and the resulting
regulations, management does not expect that such compliance will have a
material impact on our results of operations or financial condition.
RESTRICTIONS ON ACQUISITION OF OR CHANGE IN CONTROL
ACQUISITION OF BRIDGE STREET FINANCIAL. Under federal law, no person
may acquire control of Bridge Street Financial or Oswego County National Bank
without first obtaining, as summarized below, approval of such acquisition of
control by the Federal Reserve Board. Bridge Street Financial has committed to
the Office of Thrift Supervision that it will not be acquired for a period of
three years from the date of the conversion.
FEDERAL RESTRICTIONS. Under the federal Change in Bank Control Act, any
person (including a company), or group acting in concert, seeking to acquire 10%
or more of the outstanding shares of Bridge Street Financial's common stock will
be required to submit prior notice to the Federal Reserve Board, unless the
Federal Reserve Board has found that the acquisition of such shares will not
result in a change in control of Bridge Street Financial. Under the Change in
Bank Control Act, the Federal Reserve Board has 60 days within which to act on
such notices, taking into consideration factors, including the financial and
managerial resources of the acquiror, the convenience and needs of the
communities served by Bridge Street Financial or Oswego County National Bank,
and the anti-trust effects of the acquisition. Under the Bank Holding Company
Act, any company would be required to obtain prior approval from the Federal
Reserve Board before it may obtain "control," within the meaning of the Bank
Holding Company Act, of Bridge Street Financial. The term "control" is defined
generally under the Bank Holding Company Act to mean the ownership or power to
vote 25% more of any class of voting securities of an institution or the ability
to control in any manner the election of a majority of the institution's
directors. An existing bank holding company would require Federal Reserve Board
approval prior to acquiring more than 5% of any class of voting stock of Bridge
Street Financial.
30
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the
federal bank holding company regulations, a bank holding company organized or
doing business in New York State also may be subject to regulation under the New
York State Banking Law. The term "bank holding company," for the purposes of the
New York State Banking Law, is defined generally to include any person, company
or trust that directly or indirectly either controls the election of a majority
of the directors or owns, controls or holds with power to vote more than 10% of
the voting stock of a bank holding company or, if the bank holding company is a
banking institution, another banking institution, or 10% or more of the voting
stock of each of two or more banking institutions. In general, a bank holding
company controlling, directly or indirectly, only one banking institution will
not be deemed to be a bank holding company for the purposes of the New York
State Banking Law. Bridge Street Financial, therefore, is not a bank holding
company for purposes of New York State law.
OFFICE OF THRIFT SUPERVISION COMMITMENTS
In connection with the second step conversion, and as part of the
applications filed with the Office of Thrift Supervision, Bridge Street
Financial and Oswego County National Bank have made commitments to the Office of
Thrift Supervision in order to ensure that all Office of Thrift Supervision
conversion regulations may be enforced after the conversion and reorganization.
These commitments include, among others:
o For a period of three years following the conversion and
reorganization, no officer or director of Oswego County
National Bank or Bridge Street Financial or any of their
associates will, without the prior written approval of the
Office of Thrift Supervision, purchase common stock of Bridge
Street Financial, except from a broker-dealer registered with
the SEC, except that this paragraph shall not apply to: (i)
negotiated transactions involving more than one percent (1%)
of the outstanding common stock of Bridge Street Financial or
(ii) purchases of stock made and held by anyone or more
tax-qualified or non-tax-qualified employee stock benefit plan
which may be attributable to individual officers or directors.
o For a period of three years following the date of the
completion of the conversion and reorganization, no person
shall, directly or indirectly, offer to acquire or acquire the
beneficial ownership of more than ten percent of any class of
an equity security of Bridge Street Financial, without the
prior written approval of the Office of Thrift Supervision.
Where any person, directly or indirectly, acquires beneficial
ownership of more than ten percent of any class of any equity
security of Bridge Street Financial, without the prior written
approval of the Office of Thrift Supervision, the securities
beneficially owned by such person in excess of ten percent
shall not be counted as shares entitled to vote and shall not
be voted by any person or counted as voting shares in
connection with any matter submitted to the stockholders for a
vote.
In addition, Bridge Street Financial and Oswego County National Bank
have made the same commitments to the OCC and the Federal Reserve Board with the
understanding that such commitments became part of the approval orders of these
agencies. In doing so, compliance with such commitments have become a condition
to regulatory approvals and all such agencies will have the power to enforce
such commitments.
TAXATION
FEDERAL
GENERAL. The following discussion is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to Oswego County National Bank or Bridge Street Financial. For federal income
tax purposes, we report income on the basis of a taxable year ending December
31, using the accrual method of accounting, and are generally subject to federal
income taxation in the same manner as other corporations. Oswego County National
Bank and Bridge Street Financial constitute an affiliated group of corporations
and, therefore, are eligible to report their income on a consolidated basis.
Bridge Street Financial and Oswego County National Bank have not been audited by
the IRS to date. Oswego County Savings Bank has not been audited by the IRS in
the past five years and all current tax years are open for Oswego County
National Bank.
BAD DEBT RESERVES. Prior to the Small Business Job Protection Act of
1996 (1996 Act), Oswego County National Bank was permitted to establish a
reserve for bad debts and to make annual additions to the reserve. These
additions could, within specified formula limits, be deducted in arriving at
taxable income. Beginning in 1996,
31
Oswego County National Bank, as a "small bank" (one with assets having an
adjusted tax basis under $500 million) is permitted to maintain a federal tax
reserve for bad debts on the greater of the six-year average experience method
or the reserves established as of December 31, 1987 (base year reserve). The
1987 base year reserve of $1,107,000 was frozen as a result of the 1996 Act.
Oswego County National Bank was required to recapture any excess reserves over
the 1987 base year. The tax liability associated with the recapture of excess
reserves has been adequately provided for in the Oswego County Bancorp's
consolidated financial statements.
DISTRIBUTIONS. Savings banks may convert to a commercial bank charter,
diversify their lending, or be merged into a commercial bank without having to
recapture any of their 1987 base year reserves. (See New York State discussion
below.) However, to the extent that Oswego County National Bank makes
"non-dividend distributions" to stockholders, such distributions will be
considered to result in distributions from the unrecaptured tax bad debt reserve
as of December 31, 1987 and an amount based on the amount distributed, but not
more than the amount of those reserves, will be included in income. Non-dividend
distributions include distributions in excess of current and accumulated
earnings and profits, distributions in redemption of stock and distributions in
partial or complete liquidation. Dividends paid out of current or accumulated
earnings and profits, as calculated for federal income tax purposes, will not be
included in Oswego County National Bank's income. Oswego County National Bank
does not intend to make distributions, redeem stock or fail certain bank tests
that would result in the recapture of any portion of the base year bad debt
reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. Bridge Street Financial and Oswego
County National Bank are subject to the corporate alternative minimum tax to the
extent it exceeds regular income tax for the year. The alternative minimum tax
will be imposed at a rate of 20% of a specially computed tax base. Included in
this base are a number of preference items, an "adjusted current earnings"
computation which is similar to a tax earnings and profits computation and
includes tax exempt municipal income and increases in the cash surrender value
of bank-owned life insurance. Bridge Street Financial was subject to a tax on
alternative minimum taxable income for the years ended December 31, 2004 and
2003.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. At December 31, 2004, Bridge Street Financial, Inc.
had no net operating loss carryforwards for federal income tax purposes.
NEW YORK STATE TAXATION. Bridge Street Financial and Oswego County
National Bank report income on a combined calendar year basis to New York State.
New York State Franchise Tax on corporations is imposed in an amount equal to
the greater of (a) 7.5% for 2004 of OCNB's "entire net income" allocable to New
York State during the year, or (b) the alternative minimum tax. The alternative
minimum tax is generally the greatest of (i) 3% of "alternative entire net
income" allocable to New York State (ii) 0.01% of the average value of assets
allocable to New York State or (iii) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications. Alternative
entire net income is equal to net income with certain modifications.
BAD DEBT DEDUCTION. New York State enacted legislation in 1996, which
among other things, decoupled the federal and New York State laws regarding
thrift bad debt deductions and permits the continued use of the bad debt
provisions that applied under federal law prior to the enactment of the 1996
Act. As a commercial bank, Oswego County National Bank is permitted to continue
to use a reserve method for bad debt deductions. The deductible annual addition
to the state reserve may be computed using a specific formula based on the
greater of an institution's loss history (the "experience method") or an amount
to maintain the reserve at the 1987 base year reserve. Oswego County National
Bank's tax liability associated with recapture of their New York State reserve
in excess of the 1987 base year reserve has been adequately provided for in the
financial statements.
DELAWARE TAXATION. As a Delaware holding company not earning income in
Delaware, Bridge Street Financial is be exempt from Delaware corporate income
tax but is required to file an annual report with and pay an annual franchise
tax to the State of Delaware.
ITEM 2. PROPERTIES
We conduct our business through our executive offices and six other
banking offices in our primary market area. The properties are owned or leased
by us and are listed below:
32
NET BOOK
LEASE VALUE AT DEPOSITS AT
OWNED OR EXPIRATION DECEMBER 31, DECEMBER 31,
LEASE DATE 2004 2004
-------- ---------- ------------ ------------
(IN THOUSANDS)
EXECUTIVE OFFICE:
300 State Route 104
Oswego, New York 13126 .............. Owned - $ 3,136 $ -
BRANCH OFFICES:
4879 North Jefferson Street
Pulaski, New York 13142.............. Owned - 333 38,518
1930 State Route 3
Fulton, New York 13069............... Owned - 129 15,893
State Route 104 East
Oswego, New York 13126............... Leased December 124 6,310
31, 2005
30 West Utica Street
Oswego, New York 13126............... Owned - 991 69,126
700 Main Street
N. Syracuse, New York 13212.......... Owned - 562 19,563
7799 Oswego Road
Liverpool, New York 13090............ Owned - 1,011 4,545
9556 Brewerton Road
Brewerton, New York 13029............ Owned - 1,353 3,379
ITEM 3. LEGAL PROCEEDINGS
We are involved in routine legal proceedings occurring in the ordinary
course of business which, in the aggregate, are expected to be resolved for
amounts that would not be material to our financial condition or results of
operations.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUED PURCHASES OF EQUITY SECURITES
Our common stock is listed on the Nasdaq SmallCap Market under the
symbol "OCNB." At March 21, 2005, there were 2,558,149 shares of common stock
issued and outstanding, and there were approximately 1,008 holders of record,
not including the number of persons or entities whose stock is held in "street"
name through various brokerage firms and banks.
On January 3, 2003, Oswego County Savings Bank, Oswego County Bancorp,
Inc. and Oswego County MHC completed a reorganization and conversion to a stock
form holding company. As a result of the second step conversion, Bridge Street
Financial issued 1,510,733 shares of common stock in a subscription offering and
issued additional hares of its common stock in exchange for the stock held by
the stockholders of Oswego County Bancorp, Inc., the former mid-tier holding
company, based on a 1.02612 exchange ratio for each share of Oswego County
Bancorp, Inc. common stock.
The continued payment of dividends will also depend upon our debt and
equity structure, earnings and financial condition, need for capital in
connection with possible future acquisitions and other factors, including
economic conditions, regulatory restrictions and tax considerations. We cannot
guarantee that we will continue to pay dividends or, if we pay dividends, the
amount and frequency of these dividends.
33
The only funds available for the payment of dividends on our capital
stock are cash and cash equivalents held by us, earnings from the investment of
proceeds from the sale of common stock in the second step conversion retained by
us, dividends paid by Oswego County National Bank to us, and borrowings. Oswego
County National Bank will be prohibited from paying cash dividends to us to the
extent that any such payment would reduce Oswego County National Bank's capital
below required capital levels or would impair the liquidation accounts
established for the benefit of the Oswego County National Bank's eligible
account holders and supplemental eligible account holders at the time of the
second step conversion.
Oswego County National Bank's ability to pay dividends is governed by
the National Bank Act and the regulations of the Office of the Comptroller of
the Currency. Under such statute and regulations, all dividends by a national
bank must be paid out of current or retained net profits. In addition, the prior
approval of the Office of the Comptroller of the Currency is required for the
payment of a dividend if the total of all dividends declared by a national bank
in any calendar year would exceed the total of its net profits for the year
combined with its net profits for the two preceding years, less any required
transfers to surplus or a fund for the retirement of any preferred stock.
STOCK REPURCHASE PROGRAM
In January of 2004 the Board of Directors of Bridge Street Financial
approved a stock repurchase plan. Under this plan, the Company may repurchase up
to 128,900 shares of common stock, or 5% of its outstanding shares. The plan
will be in effect until the Stock Repurchase Plan is complete. The repurchases
may be made from time to time at the discretion of management of the Company. As
of March 21, 2005 the Company has purchased 128,700 shares at an average price
of $16.15 per share under this plan.
The following table reports the Company's repurchase of the Company's stock made
during the fourth quarter of 2004.
MAXIMUM NUMBER (OR APPROXIMATE
TOTAL NUMBER OF SHARES DOLLAR VALUE) OF SHARES THAT
TOTAL NUMBER OF AVERAGE PRICE PURCHASED AS PART OF PUBLICLY MAY YET BE PURCHASED UNDER THE
PERIOD SHARES PURCHASED PAID PER SHARE ANNOUNCED PLANS OR PROGRAM PLANS OR PROGRAMS
- ------------------------------------------------------------------------------------------------------------------------
October 1 -
October 31, 2004
November 1 -
November 30, 2004
December 1 - 3,700 $18.59 3,700 63,700
December 31, 2004
TOTAL 3,700 $18.59 3,700 63,700
ITEM 6. SELECTED FINANCIAL DATA
The summary information presented below at or for each of the five
years in the period ended December 31, 2004 is derived in part from and should
be read in conjunction with the consolidated financial statements of Bridge
Street Financial and the notes thereto presented elsewhere in this report.
AT DECEMBER 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL CONDITION
DATA:
Total assets ................ $ 218,875 $ 210,652 $ 194,923 $ 162,985 $ 136,460
Cash and due from banks ..... 7,956 15,272 32,827 6,478 7,119
Securities available for sale 49,412 50,270 39,682 41,160 19,859
Securities held to maturity . 6,686 8,079 - - 13,308
Loans, net .................. 133,199 117,584 106,403 103,917 85,960
34
Deposits .................... 153,247 151,652 145,684 129,183 105,887
Borrowings .................. 29,752 23,250 13,700 14,874 12,200
Stockholders' equity ........ 31,246 31,288 16,936 15,817 14,732
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Total interest income ...... $ 9,948 $ 9,344 $ 9,752 $ 10,011 $ 9,150
Total interest expense ..... 3,009 3,017 3,820 4,700 4,150
-------- -------- -------- -------- --------
Net interest income ........ 6,939 6,327 5,932 5,311 5,000
Provision for loan losses .. 556 445 412 144 169
-------- -------- -------- -------- --------
Net interest income after .. 6,383
provision for loan losses 5,882 5,520 5,167 4,831
Total noninterest income ... 3,392 3,437 2,810 2,005 1,338
Total noninterest expense .. 8,526 8,422 7,068 5,750 5,310
-------- -------- -------- -------- --------
Income before income taxes . 1,249 897 1,262 1,422 859
Income tax expense ......... 140 66 177 297 244
-------- -------- -------- -------- --------
Net income .............. $ 1,109 $ 831 $ 1,085 $ 1,125 $ 615
======== ======== ======== ======== ========
PER SHARE DATA:
Basic income per share ..... $ .43 $ .32 $ .43 $ .45 $ .24
Diluted income per share ... .42 .31 .42 .44 .23
Cash dividends per share ... $ .19 $ .16 $ .14 $ .10 $ .03
Dividend payout ratio(1) ... 44% 50% 44% 22% 13%
Book value per share ....... $ 12.26 $ 12.14 $ 6.63 $ 6.24 $ 5.86
- ----------
(1) Dividend payout ratio is calculated by dividing the cash dividend per
share by basic income per share.
AT OR FOR THE YEAR ENDED DECEMBER 31,
2004 2003 2002 2001 2000
SELECTED FINANCIAL RATIOS AND
OTHER DATA (1):
PERFORMANCE RATIOS:
Return on average assets ........ 0.51% 0.41% 0.63% 0.75% 0.47%
Return on average equity ........ 3.54 2.67 6.57 7.33 4.29
Average equity to average assets. 14.56 15.47 9.56 10.20 11.00
Equity to assets at end of
period .......................... 14.33 14.86 8.69 9.70 10.80
Average interest rate spread .... 3.57 3.40 3.72 3.55 3.66
Net interest margin(2) .......... 3.97 3.83 4.13 4.11 4.31
Average interest earning assets
to average interest bearing
liabilities ..................... 124.98 125.67 116.63 116.23 118.30
Total noninterest expense to
average assets .................. 4.02 4.23 4.09 3.82 4.07
Efficiency ratio(3) ............ 78.76 82.93 77.82 76.54 82.44
REGULATORY CAPITAL RATIOS:
Tangible capital ................ 14.0 15.2 9.5 10.2 11.3
35
Core capital .................... 22.1 24.0 13.6 14.8 15.0
Risk-based capital .............. 23.1 24.9 14.6 15.7 16.1
ASSET QUALITY RATIOS:
Nonperforming loans as a percent
of total loans ................ 0.78 0.71 0.89 0.93 1.50
Nonperforming assets as a
percent of total assets ....... 0.49 0.46 0.49 0.60 1.08
Allowance for loan losses as a
percent of total loans ........ 1.00 1.00 1.11 0.89 1.29
Allowance for loan losses as
percent of nonperforming assets 128.15% 140.00% 124.35% 95.69% 76.36%
NUMBER OF:
Banking offices .............. 8 8 7 6 5
Full-time equivalent employees 84 86 75 67 52
- ----------
(1) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios.
(2) Net interest margin represents net interest income as a percentage of
average interest earning assets.
(3) The efficiency ratio represents the ratio of operating expenses divided by
the sum of tax equivalent net interest income and noninterest income less
gains and losses on sale of securities.
36
2004 2003
------------------------------------------- ------------------------------------------
Fourth Third Second First Fourth Third Second First
-------- --------- -------- --------- -------- --------- -------- ---------
(In thousands except share and per share data)
Unaudited
Selected Quarterly Data:
Interest income $ 2,560 $ 2,523 $ 2,458 $ 2,407 $ 2,398 $ 2,354 $ 2,282 $ 2,310
Interest expense 772 772 753 712 736 739 749 793
-------- --------- -------- --------- -------- -------- -------- ---------
Net interest income 1,788 1,751 1,705 1,695 1,662 1,615 1,533 1,517
Provision for loan losses 154 151 161 90 175 90 90 90
-------- --------- -------- --------- -------- -------- -------- ---------
Net interest income after
provision for loan losses 1,634 1,600 1,544 1,605 1,487 1,525 1,443 1,427
Noninterest income 804 834 909 845 745 1,049 775 868
Noninterest expense 2,096 2,092 2,069 2,269 2,055 2,277 2,044 2,046
-------- --------- -------- --------- -------- -------- -------- ---------
Income before income tax expense 342 342 384 181 177 297 174 249
Income tax expense 41 37 42 20 -20 45 3 38
-------- --------- -------- --------- -------- -------- -------- ---------
Net income $ 301 $ 305 $ 342 $ 161 $ 197 $ 252 $ 171 $ 211
======== ========= ======== ========= ======== ======== ======== =========
Earnings per share:
Basic $ 0.12 $ 0.12 $ 0.13 $ 0.08 $ 0.08 $ 0.10 $ 0.07 $ 0.08
Diluted 0.12 0.12 0.13 0.07 0.07 0.10 0.06 0.08
Market price (NASDAQ: OCNB):
High $ 19.01 $ 15.90 $ 15.45 $ 16.20 $ 15.30 $ 14.24 $ 12.75 $ 11.00
Low 14.91 13.55 13.65 14.50 13.73 12.26 10.52 10.18
Close 18.70 15.12 13.66 15.20 14.47 13.49 12.37 10.28
Cash Dividend per share $ 0.05 $ 0.05 $ 0.05 $ 0.04 $ 0.04 $ 0.04 $ 0.04 $ 0.04
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain of the above-captioned information appears under "Management's
Discussion and Analysis" in the Registrant's 2004 Annual Report to Shareholders
on pages 9 through 19 and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Certain of the above-captioned information appears under "Management's
Discussion and Analysis" in the Registrant's 2004 Annual Report to Shareholders
on pages 17 through 19 and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are incorporated by reference to the
indicated pages of the 2004 Annual Report to Stockholders.
37
Page(s) in
Annual Report
-------------
o Report of Independent Registered Public Accounting Firm 21
o Consolidated Statements of Financial Condition, December 31,
2004 and 2003 22
o Consolidated Statements of Income, Years Ended December 31,
2004, 2003,and 2002
o Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 2004, 2003 and 2002 24-25
o Consolidated Statements of Cash Flows, Years Ended December
31, 2004, 2003, and 2002 26
o Notes to Consolidated Financial Statements 27-48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
Management, including Bridge Street Financial's President and Chief
Executive Officer and Senior Vice President and Treasurer, has evaluated the
effectiveness of Bridge Street Financial's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report. Based upon that evaluation, Bridge Street
Financial's President and Chief Executive Officer and Senior Vice President and
Treasurer concluded that the disclosure controls and procedures were effective,
in all material respects, to ensure that information required to be disclosed in
the reports Bridge Street Financial files and submits under the Exchange Act is
recorded, processed, summarized and reported as and when required.
There have been no changes in Bridge Street Financial's internal
control over financial reporting identified in connection with the evaluation
that occurred during Bridge Street Financial's last fiscal quarter that has
materially affected, or that is reasonably likely to materially affect, Bridge
Street Financial's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Bridge Street Financial's Board of Directors currently consists of
seven (7) members. The Board of Directors of Bridge Street Financial also acts
as the Board of Directors of Oswego County National Bank. Our directors fulfill
their duties and responsibilities by attending regular meetings of the board
which are held on a monthly basis. Our directors also discuss business and other
matters with key executives and our principal external advisers (legal counsel,
auditors, financial advisors and other consultants).
Bridge Street Financial held 12 regular meetings and 5 special meetings
during fiscal year 2004. In addition, the Board of Directors of Oswego County
National Bank held 12 regular meetings during fiscal year 2004. Each incumbent
director attended at least 75% of the meetings of the Board of Directors, plus
meetings of committees on which that particular director served.
The directors are as follows:
38
Term Position(s) Held with Director
Director Age(1) Expires Bridge Street Financial Since(2)
- -------------------- ------ ----------- --------------------------- -----------
Richard McKean 62 2005 Director 2003
Lowell A. Seifter 52 2005 Director 2002
Gregory J. Kreis 58 2006 President and CEO, Director 1997
Paul W. Schneible 56 2006 Director 1996
Bruce P. Frassinelli 65 2007 Director 1995
Paul J. Heins 65 2007 Vice-Chair of the Board 1989
Deborah F. Stanley 55 2007 Chair of the Board 2000
- ----------
(1) At December 31, 2004.
(2) Includes terms served on the Board of Directors of Oswego County Savings
Bank and Oswego County Bancorp. All members of the current Board of
Directors of Bridge Street Financial except Mr. McKean have served as
directors since Bridge Street Financial's inception in November 2002.
Bruce P. Frassinelli. Mr. Frassinelli retired as of January 1, 1999 as
the publisher and editor of the Palladium Times Newspaper, Oswego, New York. Mr.
Frassinelli is currently an adjunct instructor in the Communication Studies and
Journalism Departments at Oswego State University.
Paul J. Heins. Mr. Heins owned Paul's Big M Grocery Store, located in
Oswego, New York, from 1977 through 1999.
Gregory J. Kreis. Mr. Kreis has served as President and Chief Executive
Officer of Oswego County National Bank and its predecessor since January 1997.
Since the conversion, Mr. Kreis has held the same positions with Bridge Street
Financial. Previously, Mr. Kreis served as president and chief executive officer
of Factory Point National Bank, Manchester, Vermont.
Richard McKean. Mr. McKean is President and Chief Financial Officer of
Eastern Shore Insurance Associates, a property casualty insurance
agency/brokerage firm headquartered in Fulton, New York, a position he has held
since 1993.
Lowell A. Seifter. Mr. Seifter is an attorney and a certified public
accountant. Since 1981, Mr. Seifter has been a principal in Green & Seifter
Attorneys, PLLC in Syracuse, New York, for which he also serves as a member of
the executive committee.
Paul W. Schneible. Mr. Schneible is a certified public accountant and
has owned of Paul W. Schneible, CPA, Auditors, Accountants and Consultants,
located in Oswego, New York, since 1975.
Deborah F. Stanley. Mrs. Stanley has served as the President of the
State University of New York at Oswego since 1995.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
The executive officers of Bridge Street Financial and Oswego County
National Bank are, in addition to Mr. Kreis:
Mary E. Lilly, age 49. Ms. Lilly has been Senior Vice President, Sales
Support since April 2001. Most recently she has served in loan operations and
prior to that as security and compliance officer. She has worked in most areas
of Oswego County Savings Bank since April 1974.
Judith S. Percy, age 54. Ms. Percy was promoted to Senior Vice
President in December 1998. She is responsible for management information
systems as well as facilities management. Previously, she served
39
as vice president of operations and has held a variety of positions at Oswego
County Savings Bank since June 1979.
Eugene R. Sunderhaft, age 57. Mr. Sunderhaft was appointed as Senior
Vice President and Treasurer in November 2000 when he joined Oswego County
Bancorp. Previously, he served as Chief Financial Officer, Secretary and
Treasurer at The Pietrafesa Corporation and prior to that as Chief Financial
Officer of The Penn Traffic Company.
Ronald Tascarella, age 46. Mr. Tascarella was promoted to Senior Vice
President, Sales in January 2004. He previously served as Senior Vice President,
Commercial Sales and Vice President, Commercial Sales from June 1998 until his
promotion in January 2004. He has also worked at several banks in Central New
York in the commercial lending area since 1979. Most recently he had worked at
Skaneateles Savings Bank and The Savings Bank of Utica.
Audit Committee
The Board of Directors of Bridge Street Financial has established an
Audit Committee. The Audit Committee oversees and monitors our financial
reporting process and internal control system, reviews and evaluates the audit
performed by our outside auditors and reports any substantive issues found
during the audit to the Board. The Audit Committee is directly responsible for
the appointment, compensation and oversight of the work of our independent
auditors. The Audit Committee also reviews and approves all transactions with
affiliated parties. The board of directors has adopted a written charter for the
Audit Committee. All members of the Audit Committee are independent directors as
defined under The Nasdaq Stock Market listing standards. The Audit Committee
consists of three of the outside directors of Bridge Street Financial: Directors
Heins, McKean and Schneible (Chair). We believe that Mr. Schneible qualifies as
an Audit Committee Financial Expert as the term is defined by SEC regulations,
and our Board of Directors has designated him as such. The Audit Committee of
Bridge Street Financial met five times during the 2004 fiscal year.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Bridge Street Financial's directors and executive officers, and persons
who own more than 10% of Bridge Street Financial's common stock, to report to
the Securities and Exchange Commission their initial ownership of Bridge Street
Financial's common stock and any subsequent changes in that ownership. Specific
due dates for these reports have been established by the Securities and Exchange
Commission and Bridge Street Financial is required to disclose any late filings
or failures to file.
Based solely on its review of the copies of such reports furnished to
Bridge Street and written representations that no other reports were required
during the fiscal year ended December 31, 2004, all Section 16(a) filing
requirements applicable to Bridge Street Financial's executive officers and
directors during fiscal year 2004 were met.
CODE OF ETHICS
Bridge Street Financial has adopted a Conflict of Interest Policy and
Code of Conduct, which applies to all employees and officers of Bridge Street
Financial and Oswego County National Bank. Bridge Street Financial has also
adopted a Code of Ethics for Senior Financial Officers of Bridge Street
Financial, which applies to Bridge Street Financial's principal executive
officer, principal financial officer, principal accounting officer or controller
or person performing similar functions for Bridge Street Financial and Oswego
County National Bank, and which requires compliance with the Conflict of
Interest Policy and Code of Conduct. The Code of Ethics for Senior Financial
Officers of Bridge Street Financial meets the requirements of a "code of ethics"
as defined by Item 406 of Regulation S-K. (Incorporated by reference to Form
10-KSB for 2003).
40
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash and
certain other compensation paid by Oswego County National Bank for services
rendered in all capacities during the fiscal years ended December 31, 2004,
2003, and 2002 to Gregory J. Kreis as President and Chief Executive Officer, and
Eugene R. Sunderhaft, Senior Vice President and Treasurer, of Bridge Street
Financial and Oswego County National Bank. No other executive officer had an
annual salary and bonus for fiscal 2004 in excess of $100,000. We refer to these
individuals as "named executive officers" in this Annual Report on Form 10-K.
The named executive officers do not receive separate compensation for service as
an officer of Bridge Street Financial.
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
---------------------- --------------------------
SECURITIES
RESTRICTED UNDERLYING
NAME AND FISCAL STOCK OPTIONS/SARS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(2) AWARDS(3) (IN SHARES) COMPENSATION(4)
- ------------------------- -------- --------- --------- ---------- ------------ ---------------
Gregory J. Kreis 2004 $ 200,000 $ 35,000 - - $ 21,546
President and Chief
Executive Officer
2003 $ 185,000 $ 10,000 $ 188,838 37,768 $ 20,146
2002 $ 185,000 $ 65,000 - - $ 15,443
Eugene R. Sunderhaft, 2004 $ 105,000 $ 16,550 - - $ 11,757
Senior Vice President
and Treasurer
2003 $ 100,000 - $ 5,580 2,500 $ 10,737
2002 $ 85,000 $ 12,456 $ 4,956 - $ 8,505
- ----------
(1) Oswego County Savings Bank also provides Mr. Kreis with the use of an
automobile, club membership dues and certain other personal benefits, the
value of which is not shown on the table. The aggregate amount of other
benefits to Mr. Kreis and Mr. Sunderhaft did not exceed the lesser of
$50,000 or 10% of Mr. Kreis's salary and bonus.
(2) Reflects the bonuses received by Mr. Kreis and Mr. Sunderhaft in 2005 for
performance in fiscal 2004, the bonuses received by Mr. Kreis and Mr.
Sunderhaft in 2004 for performance in fiscal 2003, and the bonuses received
by Mr. Kreis and Mr. Sunderhaft in 2003 for performance in fiscal 2002.
(3) Pursuant to the Restricted Stock Plan, Mr. Kreis and Mr. Sunderhaft were
awarded 15,107 shares and 450 shares, respectively, of restricted stock,
which vest in 20% increments on an annual basis. Awards to Mr. Kreis were
as of July 24, 2003, and awards to Mr. Sunderhaft were as of March 15,
2003. Mr. Sunderhaft was awarded 461 shares of restricted stock on May 16,
2002, which vested on May 16, 2003. Dividends attributable to such shares
shall be paid to the award recipients on a current basis. At December 31,
2003, the aggregate fair market value of the restricted stock award to Mr.
Kreis was $17,036 and to Mr. Sunderhaft was $282,501 based on a closing
price of $18.70 per share.
(4) The column "All Other Compensation" reflects: (i) matching contributions to
Mr. Kreis of $5,092, $6,000 and $5,500 and to Mr. Sunderhaft of $3,165,
$3,500 and $2,975 made by the Bank under the 401(k) plan in 2004, 2003 and
2002, respectively; (ii) an allocation under the ESOP in 2004, 2003 and
2002 to Mr. Kreis having a value of $14,650 $12,430 and $8,023,
respectively, and to Mr. Sunderhaft having a value of $7,691 $6,207 and
$4,655, respectively; and (iii) life insurance premiums of $1,804, $1,716
and $1,920 on behalf of Mr. Kreis in 2004, 2003 and 2002, respectively, and
of $901, $1,030 and $875 on behalf of Mr. Sunderhaft in 2004, 2003 and
2002, respectively.
EMPLOYMENT AGREEMENTS
Bridge Street Financial and Oswego County National Bank are each
parties to parallel employment agreements with Mr. Gregory J. Kreis to secure
his services as President and Chief Executive Officer. The employment agreements
have a fixed term of three years beginning as of the effective date of the
conversion and reorganization and may be renewed annually after a review of the
executive's performance. These agreements provide for a minimum annual salary of
$200,000, discretionary cash bonuses, and participation on generally applicable
terms and conditions in other compensation and fringe benefit plans. The
agreements also guarantee customary corporate indemnification and errors and
omissions insurance coverage throughout the employment term and for six years
after termination and also provide uninsured death and disability benefits.
41
Bridge Street Financial and Oswego County National Bank may terminate
the executive's employment, and the executive may resign, at any time with or
without cause. However, in the event of termination during the term without
cause, the executive will be owed severance benefits generally equal to the
value of the cash compensation and fringe benefits that the executive would have
received had the executive worked for the remaining unexpired term of the
agreements. The same severance benefits would be payable if the executive
resigns during the term following:
o a loss of title, office or membership on the board of
directors;
o a material reduction in duties, functions or responsibilities;
o involuntary relocation of the executive's principal place of
employment to a location over 50 miles in distance from Oswego
National Bank's principal office in Oswego, New York and over
50 miles from the executive's principal residence;
o other material breach of contract by Bridge Street Financial
or Oswego County National Bank which is not cured within 30
days; or
o a reduction in base salary of more than 10% per year or
certain other reductions in benefits.
In the event of a termination of employment or resignation of the
executive following a change of control (as defined in the employment
agreements), the executive would be entitled to a severance payment equal to a
lump sum payment equal to 2.99 times the executive's base amount as defined in
Section 280G of the Code.
Each employment agreement provides that, in the event that any of the
payments to be made thereunder or otherwise upon termination of employment are
deemed to constitute "parachute payments" within the meaning of Section 280G of
the Code, then such payments and benefits received thereunder shall be reduced
by the amount which is the minimum necessary to result in the payments not
exceeding three times the recipient's average annual compensation which was
includable in the recipient's gross income during the most recent five taxable
years. As a result, none of the severance payments will be subject to a 20%
excise tax, and such payments will be deductible to Bridge Street Financial and
Oswego County National Bank as compensation expense for federal income tax
purposes.
Change of Control Agreements
Bridge Street Financial and Oswego County National Bank have jointly
entered into one-year change of control agreements with Mary Lilly, Judith
Percy, Eugene Sunderhaft and Ronald Tascarella. The term of these agreements is
perpetual until Bridge Street Financial or Oswego County National Bank gives
notice of non-extension, at which time the term is fixed for one year.
Generally, Bridge Street Financial and Oswego County National Bank may
terminate the employment of any officer covered by these agreements, with or
without cause, at any time prior to a change of control without obligation for
severance benefits. However, if Bridge Street Financial or Oswego County
National Bank signs a merger or other business combination agreement, or if a
third party makes a tender offer or initiates a proxy contest, it could not
terminate an officer's employment without cause without liability for severance
benefits. The severance benefits would generally be equal to the value of the
cash compensation that the officer would have received if he or she had
continued working for one year with continued insurance coverage for one year.
Bridge Street Financial and Oswego County National Bank would pay the same
severance benefits if the officer resigns after a change of control following a
loss of title, office or membership on the board of directors, material
reduction in duties, functions or responsibilities, involuntary relocation of
his or her principal place of employment to a location over 50 miles from Oswego
County National Bank's principal office on the day before the change of control
and
42
over 50 miles from the officer's principal residence or other material breach of
contract which is not cured within 30 days. These agreements also provide
uninsured death and disability benefits.
Each change of control agreement provides that, in the event that any
of the payments to be made thereunder or otherwise upon termination of
employment are deemed to constitute "parachute payments" within the meaning of
Section 280G of the Code, then such payments and benefits received thereunder
shall be reduced by the amount which is the minimum necessary to result in the
payments not exceeding three times the recipient's average annual compensation
which was includable in the recipient's gross income during the most recent five
taxable years. As a result, none of the severance payments will be subject to a
20% excise tax, and such payments will be deductible to Bridge Street Financial
and Oswego County National Bank as compensation expense for federal income tax
purposes.
Benefit Plans
401(K) PLAN. Oswego County National Bank has a tax-qualified savings
plan with a salary deferral feature. Generally, a full-time employee who has
attained the age of 21 and completed one year of employment is eligible to
participate. A participant may make a deferral from 1% to 15% of his or her
compensation up to $13,000 for 2004 for individuals under age 50 and $16,000 for
2004 for individuals who are at least 50 years old, indexed annually. Oswego
County National Bank makes matching contributions of 50% of each participant's
annual deferrals up to a maximum of 3% of compensation.
A participant is fully vested for his own deferrals, and vests over six
years in any matching contributions, other permissible discretionary
contributions, and reallocations of plan forfeitures. The plan allows a
participant to direct the investment of his or her individual plan accounts
among several investment options.
The 401(k) Plan permits investments in a fund established to invest
primarily in the common stock of Bridge Street Financial. The participant's
common stock is held by the 401(k) Plan's trustee for the benefit of the
individual participants who choose to direct their investments into the
newly-created fund. Generally, a participant controls the exercise of the voting
and tendering rights relating to the common stock held for his benefit.
DEFINED BENEFIT PENSION PLAN. Oswego County National Bank maintains a
non-contributory defined benefit pension plan covering substantially all of its
full-time employees who have attained age 21 and completed one year of service.
A participant is fully vested in the plan upon reaching five years of service
after obtaining the age of 18.
The normal retirement benefit is based upon a participant's highest
three-year average annual base earnings during the participant's final ten years
of service, subject to certain limitations required by the plan and the Internal
Revenue Code. The annual benefit provided to a participant at normal retirement
age (generally age 65) is determined as follows: 2% of the participant's average
annual earnings multiplied by the participant's years of credited service
(limited to 60% of the participant's average annual earnings). The plan also
provides for early retirement benefits which are calculated in the same manner
as normal retirement benefits. However, benefits are reduced when the
participant chooses to begin the receipt of his benefits prior to normal
retirement age.
The following table indicates the annual employer-provided retirement
benefits that would be payable under the pension plan upon retirement at age 65
to a participant electing to receive his pension benefit in the standard form of
benefit, assuming various specified levels of plan compensation and various
specified years of credited service. Under the Internal Revenue Code, maximum
annual benefits under the pension plan are limited to $165,000 per year and
annual compensation for benefit calculation purposes is limited to $205,000 per
year for the 2004 calendar year.
43
YEARS OF SERVICE
------------------------------------------------------------------------
AVERAGE ANNUAL
COMPENSATION 10 15 20 25 30
- -------------- -------- -------- -------- -------- --------
$100,000 $ 20,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000
125,000 $ 25,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000
150,000 $ 30,000 $ 45,000 $ 60,000 $ 75,000 $ 90,000
170,000 $ 34,000 $ 51,000 $ 68,000 $ 85,000 $102,000
200,000 $ 40,000 $ 60,000 $ 80,000 $100,000 $120,000
225,000(1) $ 45,000 $ 67,500 $ 90,000 $112,500 $135,000
- ----------
(1) Amounts reflect that no more than $205,000 of compensation is
recognized in 2004 for purposes of computing benefits.
The benefits listed on the table above for the pension plan are not
subject to a reduction for Social Security benefits or any other offset amount.
As of December 31, 2004, Mr. Kreis and Mr. Sunderhaft had 8 years and 4 years,
respectively, of credited service for purposes of the pension plan.
Supplemental Retirement Plan. The President and Chief Executive Officer
of Oswego County National Bank is covered by a supplemental retirement income
agreement designed to provide the amount of retirement benefits which cannot be
paid from the defined benefit pension plan by reason of certain Internal Revenue
Code limitations on qualified plan benefits. In the event of termination of
employment following a change in control, the agreement provides for annual
payments of $152,033 over a period equal to the longer of 180 months or life.
Employee Stock Ownership Plan. Bridge Street Financial has established
the Employee Stock Ownership Plan ("ESOP") for employees of Bridge Street
Financial and Oswego County National Bank. Full-time employees of Bridge Street
Financial or Oswego County National Bank who have been credited with at least
1,000 hours of service during a twelve-month period and have attained age 21 are
eligible to participate in the ESOP.
The ESOP has a loan outstanding with Bridge Street Financial, the
proceeds of which have been used to purchase common stock. The loan amount
equals 100% of the aggregate purchase price of the common stock acquired by the
ESOP. The loan by the ESOP will be repaid principally from Bridge Street
Financial's and Oswego County National Bank's contributions to the ESOP over a
period of not less than 10 years. The collateral for the loan is the common
stock purchased by the ESOP. Although it is anticipated that Oswego County
National Bank will continue to make contributions to the ESOP, it is under no
obligation to make those contributions. The interest rate for the ESOP loan is
8.50%. Bridge Street Financial may, in any plan year, make additional
discretionary contributions for the benefit of plan participants in either cash
or shares of common stock. These purchases would be funded through additional
borrowings by the ESOP or additional contributions from Bridge Street Financial.
The timing, amount and manner of future contributions to the ESOP will be
affected by various factors, including prevailing regulatory policies, the
requirements of applicable laws and regulations and market conditions.
Shares purchased by the ESOP with the proceeds of the loan are held in
a suspense account and released to participants' accounts as debt service
payments are made. Shares released from the ESOP are allocated to each eligible
participant's ESOP account based on the ratio of each such participant's
compensation to the total compensation of all eligible ESOP participants.
Forfeitures are reallocated among remaining participating employees and
may reduce any amount Bridge Street Financial might otherwise have contributed
to the ESOP. Upon the completion of five years of service, the account balances
of participants within the ESOP will become 100% vested. Credit is given for
44
years of service with Oswego County National Bank prior to adoption of the ESOP.
In the case of a "change in control," as defined, however, participants will
become immediately fully vested in their account balances. Benefits may be
payable upon retirement or separation from service. Bridge Street Financial's
contributions to the ESOP are not fixed, so benefits payable under the ESOP
cannot be estimated.
Messrs. Kreis and Sunderhaft serve as trustees of the ESOP. Under the
ESOP, the trustees must vote all allocated shares held in the ESOP in accordance
with the instructions of the participating employees, and unallocated shares
will be voted in the same ratio on any matter as those allocated shares for
which instructions are given.
The ESOP is subject to the requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and the regulations of the
IRS and the Department of Labor thereunder.
STOCK OPTION PLAN. Bridge Street Financial currently maintains two
stock option plans. The first stock option plan was approved by the stockholders
of Oswego County Bancorp at an Annual Meeting on April 20, 2000 and was assumed
by Bridge Street Financial. The second stock option plan was approved by
stockholders of Bridge Street Financial at a Special Meeting on June 20, 2003.
The purpose of the stock option plans is to encourage the retention of key
employees and directors by facilitating their purchase of a stock interest in
Bridge Street Financial. The stock option plans are not subject to ERISA and are
not tax-qualified plans. Bridge Street Financial has reserved an aggregate of
252,494 shares of common stock for issuance upon the exercise of stock options
granted under the plans. All options vest following an option holder's death,
disability or a change of control of Bridge Street Financial.
We may amend or terminate the stock option plans, in whole or in part,
at any time, subject to the requirements of all applicable laws and regulations.
No grants of options were made to the named executive officer during
fiscal year 2004.
The following table provides the value for "in-the-money" options,
which represent the positive spread between the exercise price of any such
existing stock options and the closing price per share of the common stock on
December 31, 2004 which was $18.70 per share.
FISCAL YEAR-END OPTIONS/SAR VALUES
------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES ACQUIRED VALUE REALIZED FISCAL YEAR-END FISCAL YEAR-END
ON EXERCISE ON EXERCISE (#) ($)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
- ---------------------------- --------------- -------------- ------------------------- ---------------------------------
Gregory J. Kreis............ - - 32,146/36,361 435,806/284,554
Eugene R. Sunderhaft........ - - 6,656/ 3,540 100,469/ 36,742
- ----------
(1) The values shown reflect the difference between the exercise price of each
option and the closing price per share of common stock on December 31,
2004, which was $18.70.
RESTRICTED STOCK PLAN. Bridge Street Financial currently maintains two
restricted stock plans ("RRP"). The first such plan was approved by the
stockholders of Oswego County Bancorp at an Annual Meeting on April 20, 2000 and
was assumed by Bridge Street Financial. The second restricted stock plan was
approved by stockholders of Bridge Street Financial at a Special Meeting on June
20, 2003. Similar to the stock option plans, the RRP function as long-term
incentive compensation programs for eligible officers, employees and outside
directors of Bridge Street Financial and Oswego County National Bank. The
members of the Board's Personnel and Compensation Committee who are
disinterested directors ("RRP Committee") administer the RRP. Bridge Street
Financial pays all costs and expenses of administering the RRP.
45
The RRP are not subject to ERISA and are not tax-qualified plans.
Bridge Street Financial has reserved an aggregate of 97,323 shares of common
stock for issuance under the plans. All awards vest following an award
recipient's death, disability or a change of control of Bridge Street Financial.
We may amend or terminate the restricted stock plans, in whole or in
part, at any time, subject to the requirements of all applicable laws and
regulations.
DIRECTOR COMPENSATION
MEETING FEES. The Chairman of the Board receives $1,150 per board
meeting while the other non-employee directors receive $950 per regular meeting
and $500 per special meeting. A quarterly retainer of $1,500 is also paid to
each non-employee director. The outside directors also receive $450 per
committee meeting and the Chairs of the Audit Committee and the Personnel and
Compensation Committee receive an additional $100 per meeting. Directors receive
a fee only for the board and committee meetings that they attend. The aggregate
amount of fees paid to such directors for the year ended December 31, 2004 was
approximately $149,400.
DIRECTORS' DEFERRED COMPENSATION PLAN. Oswego County National Bank
maintains a nonqualified deferred compensation plan for directors who may elect
to defer all or part of their directors' fees to fund the plan. The plan
provides that deferred fees are to be invested in mutual funds, as selected by
the individual directors. At December 31, 2004, the value of the amounts
credited to this plan aggregated approximately $833,900.
DIRECTORS' RETIREMENT PLAN. Each director participates in Oswego County
National Bank's Directors' Retirement Plan. Under this plan, upon reaching the
benefit eligibility date, defined individually for each director, a director
becomes entitled to 120 monthly payments, each equal to the projected value of
75% of the highest three-year average of projected monthly fees at retirement. A
director fully vests in the plan after 10 years of continued service with Oswego
County National Bank, commencing March 14, 2001, or upon a change in control of
Oswego County National Bank.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
None of the executive officers of Bridge Street Financial served as a
member of another entity's Board of Directors or as a member of the Compensation
Committee (or other board committee performing equivalent functions) during
2004, which entity had an executive officer serving on the Board of Directors or
as a member of the Personnel and Compensation Committee of Bridge Street
Financial. There are no interlocking relationships between Bridge Street
Financial and other entities that might affect the determination of the
compensation of our executive officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table contains common stock ownership information for
persons known to us to "beneficially own" 5% or more of Bridge Street
Financial's common stock as of March 21, 2005. In general, beneficial ownership
includes those shares that a person has the power to vote, sell or otherwise
dispose of. Beneficial ownership also includes that number of shares that an
individual has the right to acquire within 60 days (such as stock options) after
March 21, 2005. Two or more persons may be considered the beneficial owner of
the same shares. Bridge Street Financial obtained the information provided in
the following table from filings with the SEC and from Bridge Street Financial.
NAME AND ADDRESS AMOUNT AND NATURE OF
TITLE OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ----------------------- ------------------------------- -------------------- ----------------
Common Stock, par value Lawrence B. Seidman(1) 173,300(2) 6.62%
$0.01 per share
Lanidex Center
100 Misty Lane
46
Parsippany, New Jersey 07054
Common Stock, par value Anton V. Schutz 227,500(3) 8.68%
$0.01 per share Mendon Capital Advisors Corp.
150 Allens Creek Road
Rochester, New York 14618
Common Stock, par value Burnham Financial Services Fund 163,100(4) 6.1%
$0.01 per share 1325 Avenue of the Americas
26th Floor
New York, New York 10019
- ----------
(1) Beneficial ownership is held by Mr. Seidman and his affiliates, which
include: Dennis Pollack; Seidman and Associates, L.L.C., a New Jersey
limited liability company; Seidman Investment Partnership, L.P., a New
Jersey limited partnership; Seidman Investment Partnership II , L.P., a New
Jersey limited partnership; Kerrimat, L.P., a New Jersey limited
partnership; Federal Holdings, L.L.C., a New Jersey limited liability
company; Pollack Investment Partnership, L.P., a New Jersey limited
partnership; and Broad Park Investors, LLC, a New Jersey limited liability
company.
(2) As reported by Mr. Seidman and his affiliates on a Schedule 13D filed with
the SEC on November 16, 2004. Mr. Seidman has sole voting power and sole
dispositive power with respect to 148,387 shares, and shared voting power
and shared dispositive power with Dennis Pollack with respect to 24,913
shares.
(3) As reported by Mendon Capital Advisors Corp. and Anton V. Schutz on an
amended Schedule 13G filed with the SEC on February 14, 2005. Mr. Schutz
reported sole voting power and sole dispositive power with respect to
227,500 shares. Mr. Schutz is the President and sole shareholder of Mendon
Capital Advisors Corporation, which is the investment advisor of, and has
the right to dispose of and vote the shares owned by various persons,
including Burnham Financial Services Fund, a registered investment company
that beneficially owns 6.1% of the common stock of Bridge Street Financial.
(4) As reported by Burnham Financial Services Fund on a Schedule 13G filed with
the SEC on February 17, 2004. The Fund has sole voting power and sole
dispositive power with respect to 163,100 shares. The sole right to vote
and dispose of such shares has been delegated by the Fund's investment
adviser, Burnham Asset Management Corporation, to Mendon Capital Advisors
Corp. in its capacity as an investment subadviser.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information about the shares of common
stock beneficially owned by each director and nominee for director of Bridge
Street Financial, by each named executive officer of Bridge Street Financial
identified in the Summary Compensation Table included elsewhere in this Annual
Report on Form 10-K, and all directors and executive officers of Bridge Street
Financial or Oswego County National Bank as a group as of March 21, 2005. Except
as otherwise indicated, each person and each group shown in the table has sole
voting and investment power with respect to the shares of common stock
indicated.
NAME OF BENEFICIAL NUMBER OF SHARES
OWNER(1) OWNED (2) PERCENT OF CLASS(3)
- ------------------------------------------------------ ----------------- -------------------
Gregory J. Kreis,
President and Chief Executive Officer............ 135,970(4) 5.24%
Bruce P. Frassinelli, Director........................ 12,375(5) *
Paul J. Heins, Director............................... 24,816(6) *
Richard McKean, Director.............................. 5,586(7) *
Paul W. Schneible, Director........................... 35,343(8) 1.38%
Lowell A. Seifter, Director........................... 11,269(9) *
Deborah F. Stanley,
Chair of the Board and Director.................. 18,219(10) *
Eugene R. Sunderhaft, Senior Vice President and
Treasurer(11).................................... 11,022(11) *
All directors and executive officers
as a group (11 persons).......................... 302,463(12) 11.45%
47
- ---------------------
* Less than 1.00% of common stock outstanding.
(1) The mailing address for each person listed is 44 East Bridge Street,
Oswego, New York 13126.
(2) A director or executive officer owning Company common stock in the Bank's
401(k) plan has sole voting power and sole power to sell ("investment
power") with respect to such stock. An executive officer owning stock held
by the Employee Stock Ownership Plan ("ESOP") has sole voting power with
respect to such stock but does not have the investment power with respect
to such stock. A director or executive officer who has been awarded a
restricted stock award under the Restricted Stock Plan has sole voting
power, but no investment power except in limited circumstances, over the
common stock covered by the award.
(3) Percentages with respect to each person or group of persons have been
calculated on the basis of 2,558,149 shares of common stock, the total
number of shares of common stock outstanding as of March 21, 2005, plus
shares of common stock which such person or group has the right to acquire
within 60 days after March 21, 2005, by the exercise of stock options.
(4) Includes 63,996 shares in the 401(k) plan, 5,665 shares have been allocated
under the ESOP, 38,293 shares exercisable within 60 days after March 21,
2005 under the Stock Option Plan and 13,929 unvested shares under the
Restricted Stock Plan and 10,400 vested shares under the Restricted Stock
Plan.
(5) Includes 2,565 shares exercisable within 60 days after March 21, 2005 under
the Stock Option Plan and 2,732 unvested shares under the Restricted Stock
Plan.
(6) Includes 2,565 shares exercisable within 60 days after March 21, 2005 under
the Stock Option Plan, 2,732 unvested shares under the Restricted Stock
Plan and 11,233 shares held in the name of Mr. Heins' spouse.
(7) Includes 2,565 shares exercisable within 60 days after March 21, 2005 under
the Stock Option Plan and 2,732 unvested shares under the Restricted Stock
Plan.
(8) Includes 2,565 shares exercisable within 60 days after March 21, 2005 under
the Stock Option Plan, 2,732 unvested shares under the Restricted Stock
Plan, 18,470 shares held jointly with his spouse and 3,000 shares held
indirectly by Lighthouse Capital Advisors, LLC of which Mr. Schneible is
Principal Member and Chief Executive Officer.
(9) Includes 2,565 shares exercisable within 60 days after March 21, 2005 under
the Stock Option Plan and 2,629 unvested shares under the Restricted Stock
Plan.
(10) Includes 2,565 shares exercisable within 60 days after March 21, 2005 under
the Stock Option Plan, 2,732 unvested shares under the Restricted Stock
Plan and 7,155 shares owned jointly with her spouse.
(11) Includes 667 shares in the 401(k) plan, 1,826 shares allocated under the
ESOP, 6,656 shares exercisable within 60 days after March 21, 2005 under
the Stock Option Plan and 860 unvested shares under the Restricted Stock
Plan.
(12) The amount of shares for all directors and executive officers as a group
includes 42,925 shares held by the ESOP Trust that have not been allocated
to eligible participants as of March 21, 2005, over which Messrs. Kreis and
Sunderhaft, as trustees, may be deemed to have sole "investment power,"
thereby causing each to be deemed a beneficial owner. Messrs. Kreis and
Sunderhaft disclaim beneficial ownership of these shares. The individual
participants in the ESOP have shared voting power with the ESOP trustees
with respect to the unallocated shares held in the ESOP Trust. It also
includes any shares exercisable within 60 days after March 21, 2005.
The following table sets forth the aggregate information of Bridge
Street Financial's equity compensation plans in effect as of December 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING
TO BE ISSUED WEIGHTED-AVERAGE EXERCISE AVAILABLE FOR FUTURE ISSUANCE
UPON EXERCISE OF PRICE OF OUTSTANDING UNDER EQUITY COMPENSATION
OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND PLANS (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN (A))
- ------------- -------------------- ------------------------- ------------------------------
(A) (B) (C)
Equity compensation plans
approved by security
holders................. 152,142 $8.99 84,743
Equity compensation plans
not approved by
security holders........ - - -
------- ----- ------
Total................. 152,142 $8.99 84,743
======= ===== ======
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Oswego County National Bank makes loans to its officers and directors
and to companies with which its officers and directors are affiliated. As of
December 31, 2004, there were loans to one director with a total balance of
$41,362. The loans were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more than normal risk of
collectibility or present other unfavorable features. All future loans to
officers and directors will be made on the same terms and conditions as made to
unaffiliated third parties.
Bridge Street Financial also retained Green & Seifert Attorneys, PLLC
during fiscal year 2004 to assist with the acquisition of Ladd's Insurance
Agency. Lowell A. Seifter, a member of our Board of Directors, is a principal in
Green & Seifert. In 2004, we paid $7,198 to Green & Seifert for legal services
in connection with the Ladd's Insurance Agency acquisition.
All related party transactions were approved by the Audit Committee.
ITEM 14. PRINCIPAL ACCOUNTNG FEES AND SERVICES
During the fiscal year ended December 31, 2004, Bridge Street Financial
retained and paid KPMG LLP to provide audit and other services. The following
table displays the aggregate fees for professional audit services for the audit
of the financial statements for the years ended December 31, 2004 and 2003 and
fees billed for other services during those periods by our independent auditors.
2004 2003
Audit fees (1)....................... 68,500 77,800
Audit-related fees .................. - -
Tax fees (2)......................... 20,560 21,452
All other fees....................... - -
------------ ------------
Total............................ 89,060 99,252
============ ============
- ----------
(1) Audit fees consisted of audit work performed in the preparation of
financial statements as well as work generally only the independent
auditors can reasonably be expected to provide, such as statutory
audits.
(2) Tax fees consisted of assistance with matters related to tax compliance
and consulting.
PREAPPROVAL POLICIES AND PROCEDURES
The Audit Committee shall preapprove all auditing services and
permitted non-audit services (including the fees and terms) to be performed for
the Company by its independent auditor, subject to the de minimis exception for
non-audit services described below which, if not pre-approved, are approved by
the Committee prior to completion of the audit.
The preapproval requirement set forth above, shall not be applicable
with respect to non-audit services if:
(i) The aggregate amount of all such services provided constitutes
no more than five percent of the total amount of revenues paid
by the Company to its auditor during the fiscal year in which
the services are provided;
(ii) Such services were not recognized by the Company at the time
of the engagement to be non-audit services; and
49
(iii) Such services are promptly brought to the attention of the
Committee and approved prior to the completion of the audit by
the Committee or by one or more members of the Committee who
are members of the Board of Directors to whom authority to
grant such approvals has been delegated by the Committee.
DELEGATION. The Committee may delegate to one or more designated
members of the Committee the authority to grant required preapprovals. The
decisions of any member to whom authority is delegated under this paragraph to
preapprove activities under this subsection shall be presented to the full
Committee at its next scheduled meeting.
During 2004, the Audit Committee pre-approved 100% of the services
performed by KPMG LLP for Bridge Street Financial.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) LIST OF EXHIBITS. (Filed herewith unless otherwise noted)
2.1 Amended Plan of Conversion and Agreement and Plan of
Reorganization.*
3.1 Certificate of Incorporation of Bridge Street Financial, Inc.*
3.2 Bylaws of Bridge Street Financial, Inc.*
3.3 Articles of Association of Oswego County National Bank.*
3.4 Bylaws of Oswego County National Bank.*
4.1 Certificate of Incorporation of Bridge Street Financial, Inc.*
4.2 Bylaws of Bridge Street Financial, Inc.*
4.3 Form of Stock Certificate of Bridge Street Financial, Inc.*
10.1 Employee Stock Ownership Plan of Oswego County Bancorp, Inc.*
10.2 Reserved
10.3 Form of Employment Agreement between Bridge Street Financial,
Inc. and Gregory J. Kreis.*
10.4 Form of One Year Change in Control Agreement by and among
certain officers and Bridge Street Financial, Inc. and Oswego
County National Bank.*
10.5 Directors Supplemental Retirement Benefit Plan, dated March
15, 2000**
10.6 Executive Supplemental Retirement Income Agreement, dated
March 15, 2000, between Oswego County National Bank and
Gregory J. Kreis.**
10.7 Trust Agreement dated as of February 1, 2000 between Oswego
County National Bank and Security Federal Savings Bank.**
10.8 First Amendment to the Executive Supplemental Retirement
Income Agreement between Oswego County National Bank and
Gregory J. Kreis, dated May 18, 2000.*
10.9 Oswego County Bancorp, Inc. Stock Option Plan.*
10.10 Oswego County Bancorp, Inc. Restricted Stock Plan.*
13.1 2004 Annual Report to Shareholders.
14.1 Code of Ethics for Senior Financial Officers ***
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Independent Registered Public Accounting Firm.
31.1 Rule 13a-14(a)/15d-14(a) Certifications.
32.1 Section 1350 Certifications.
----------
* Incorporated herein by reference to the Registration Statement
No. 333-99347, on Form S-1 of Bridge Street Financial filed
with the SEC on September 9, 2002, as amended.
** Incorporated herein by reference to the Registration Statement
No. 333-101421, on Form S-8, filed with the SEC on November
22, 2002, as amended.
*** Incorporated by reference to Form 10-KSB, filed with the SEC
on March 30, 2004.
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules have been omitted as not applicable or not required under
the rules of Regulation S-X.
50
51
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, on March 29, 2005.
BRIDGE STREET FINANCIAL, INC.
By: /s/ Gregory J. Kreis
-------------------------
Gregory J. Kreis
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
and any rules and regulations promulgated thereunder, this Annual Report on Form
10-K, has been signed by the following persons in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----
President, Chief Executive Officer and
/s/ Gregory J. Kreis Director March 29, 2005
- -----------------------------------
Gregory J. Kreis
Senior Vice President and
/s/ Eugene R. Sunderhaft Treasurer March 29, 2005
- -----------------------------------
Eugene R. Sunderhaft
/s/ Deborah F. Stanley Chair of the Board March 29, 2005
- -----------------------------------
Deborah F. Stanley
/s/ Paul J. Heins Vice Chair March 29, 2005
- -----------------------------------
Paul J. Heins
/s/ Bruce P. Frassinelli Director March 29, 2005
- -----------------------------------
Bruce P. Frassinelli
/s/ Richard McKean Director March 29, 2005
- -----------------------------------
Richard McKean
/s/ Paul W. Schneible Director March 29, 2005
- -----------------------------------
Paul W. Schneible
/s/ Lowell A. Seifter Director March 29, 2005
- -----------------------------------
Lowell A. Seifter
52