SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 2001
OR
[ _ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transaction period from ___________________ to
______________________
Commission File Number: 000-25101
ONEIDA FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Federal 16-1561678
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
182 Main Street, Oneida, New York 13421-1676
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(315) 363-2000
------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
---------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [ X ] NO[ _ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X ]
As of March 15, 2002, there were issued and outstanding 3,219,632 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of March 15, 2002 ($24.01) was $34,640,151.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2001 (Parts II and IV).
2. Proxy Statement for the 2002 Annual Meeting of Stockholders (Parts I and
III).
PART I
ITEM 1. BUSINESS
Oneida Financial Corp.
Oneida Financial Corp. (the "Company") was organized in September 1998, for
the purpose of acquiring all of the capital stock of The Oneida Savings Bank
(the "Bank") upon completion of the Bank's reorganization into the two-tier form
of mutual holding company ownership and the minority stock offering. The Company
is majority owned by Oneida Financial, MHC, a Federal-chartered mutual holding
company (the "Mutual Holding Company"). The Company is a savings and loan
holding company subject to regulation by the Office of Thrift Supervision
("OTS"). Both the Company and the Mutual Holding Company converted to federal
charters effective on July 18, 2001. The Company's only assets consist of shares
of the Bank's common stock.
At December 31, 2001 the Company had consolidated assets and consolidated
stockholders' equity of $352.7 million and $45.0 million, respectively. Through
the Bank, the Company has deposits totaling $228.2 million.
The Company's executive office is located at the main office of the Bank,
at 182 Main Street, Oneida, New York 13421-1676. The Company's telephone number
is (315) 363-2000.
The Oneida Savings Bank
The Bank was organized in 1866 as a New York-chartered mutual savings bank.
The Bank's deposits are insured by the Bank Insurance Fund ("BIF"), as
administered by the FDIC, up to the maximum amount permitted by law. The Bank is
a community bank engaged primarily in the business of accepting deposits from
customers through its main office and five full service branch offices and using
those deposits, together with funds generated from operations and borrowing
proceeds to make one-to-four family residential and commercial real estate
loans, commercial business loans, consumer loans and to invest in mortgage-
backed and other securities. The Bank also sells insurance and other commercial
services and products through its insurance agency subsidiary.
At December 31, 2001, $112.1 million, or 64.9%, of the Bank's loans were
secured by real estate. At December 31, 2001, $76.5 million, or 44.3%, of the
Bank's loans were secured by one-to-four family residential real estate, $24.5
million, or 14.2%, of the Bank's loans were secured by commercial real estate,
and $11.1 million, or 6.4%, of the Bank's loans were home equity loans. Consumer
loans totaled $34.1 million, or 19.8% of the Bank's total loans, at December 31,
2001. The Bank also originates commercial business loans which totaled $26.4
million, or 15.3%, of total loans at December 31, 2001. The Bank's investment
securities and mortgage-backed securities portfolios totaled $78.4 million and
$53.7 million, respectively, at December 31, 2001.
In April 1999 the Bank established Oneida Preferred Funding Corp. as the
Bank's wholly-owned real estate investment trust subsidiary. At December 31,
2001 Oneida Preferred Funding Corp. held $39.8 million in mortgage and mortgage
related assets. All disclosures in the Form 10-K relating to the Bank's loans
and investments include loans and investments that are held by Oneida Preferred
Funding Corp.
1
In October 2000, the Bank acquired Bailey & Haskell Associates, Inc., which
is a wholly-owned insurance and financial services subsidiary. During 2001, two
additional insurance agencies were acquired, which were subsequently merged into
Bailey & Haskell Associates, Inc. All disclosures and financial information is
presented on a consolidated basis.
On November 22, 2001 the Company and Bank entered into an Agreement and
Plan of Merger to acquire SBC Financial Corp., the holding company parent of
State Bank of Chittenango. Pursuant to the Agreement, each share of SBC
Financial Corp.'s outstanding common stock will be converted into the right to
receive $102.60 in cash, for a total of approximately $11.9 million. As part of
the acquisition, the Bank will continue to operate the State Bank of Chittenango
as a special purpose bank limited to taking municipal deposits. The acquisition
of SBC Financial Corp., is subject to the receipt of regulatory approval and the
approval of SBC Financial Corp.'s stockholders. It is expected that the
acquisition will be completed during the second quarter of 2002.
The Bank's main office is located at 182 Main Street, Oneida, New York
13421-1676. The Bank's telephone number is (315) 363-2000.
Market Area
The Bank is a community-based savings institution that offers a variety of
financial products and services. The Bank's primary lending area is Madison
county, New York and surrounding counties, and most of the Bank's deposit
customers reside in Madison county and surrounding counties. The City of Oneida
is located approximately 30 miles from Syracuse and 20 miles from Utica. The
Bank's market area is characterized as rural, although the local economy is also
affected by economic conditions in Syracuse and Utica, New York. As of 1997, the
average household income of persons residing in Oneida and Madison counties was
below that of New York State and the United States. During the period 1980-1990
the population of Oneida county decreased by 1.04% while the population of
Madison county grew by 6.09%.
The Bank competes with commercial banks, savings banks and credit unions
for deposits and loans. In addition to the financial institutions operating in
Madison and Oneida counties, the Bank competes with a number of mortgage bankers
for the origination of loans. The largest employers in the Bank's market area
are Oneida Ltd. and The Oneida Indian Nation of New York.
Lending Activities
General. The principal lending activity of the Bank has been the
origination, for retention in its portfolio, of ARM loans collateralized by
one-to-four family residential real estate located within its primary market
area. In the current low interest rate environment, borrowers have shown a
preference for fixed-rate loans. Consequently, in recent periods the Bank has
originated fixed-rate one-to-four family loans for resale in the secondary
market without recourse and on a servicing retained basis. In order to
complement the Bank's traditional emphasis of one-to-four family residential
real estate lending, management has sought to increase the amount of higher
yielding commercial real estate loans, consumer loans and commercial business
loans. To a limited extent, the Bank will originate loans secured by
multi-family properties. The Bank does not view multi-family lending as a
significant aspect of its business.
2
Loan Portfolio Composition. Set forth below is selected information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process and allowance for loan
losses) as of the dates indicated.
At December 31,
----------------------------------------------------------------
2001 2000 1999
-------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Real estate loans:
One-to-four family ........................ $76,477 44.3% $84,386 50.7% $81,264 53.9%
Multi-family............................... 1,003 0.6 1,134 0.7 1,358 0.9
Home equity................................ 11,077 6.4 10,940 6.6 9,740 6.5
Commercial real estate..................... 23,517 13.6 18,742 11.3 16,560 11.0
------- ---- ------- ---- ------- ----
Total real estate loans.................. 112,074 64.9 115,202 69.3 108,922 72.3
---- ---- ----
Consumer loans:
Automobile loans........................... 29,569 17.1 25,818 15.5 16,768 11.1
Mobile home................................ 381 0.2 526 0.4 595 0.4
Personal loans............................. 2,691 1.6 3,450 2.1 6,901 4.6
Guaranteed student loans................... -- -- -- -- 305 0.2
Other consumer loans....................... 1,465 0.9 1,432 0.8 1,451 1.0
------- ---- ------- ---- ------- ----
Total consumer loans..................... 34,106 19.8 31,226 18.8 26,020 17.3
---- ---- ----
Commercial business loans.................... 26,385 15.3 19,865 11.9 15,727 10.4
Total consumer and commercial business loans 60,491 35.1 51,091 30.7 41,747 27.7
------- ---- ------- ---- ------- ----
Total loans.............................. 172,565 100.0% 166,293 100.0% 150,669 100.0%
======= ===== ======= ===== ======= =====
Less:
Loans in process........................... -- -- --
Allowance for loan losses.................. 1,672 1,632 1,523
------- ------- -------
Total loans receivable, net.............. $170,893 $164,661 $149,146
======== ======== ========
At December 31,
-----------------------------------------
1998 1997
-------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ ------
(Dollars in thousands)
Real estate loans:
One-to-four family ........................ $82,353 61.6% $96,792 67.0%
Multi-family............................... 1,468 1.1 2,714 1.9
Home equity................................ 9,377 7.0 8,829 6.1
Commercial real estate..................... 13,499 10.1 13,868 9.6
------- ---- ------- ----
Total real estate loans.................. 106,697 79.8 122,203 84.6
---- ----
Consumer loans:
Automobile loans........................... 10,405 7.8 6,683 4.6
Mobile home................................ 717 0.5 784 0.5
Personal loans............................. 2,438 1.8 2,580 1.8
Guaranteed student loans................... 446 0.3 1,659 1.2
Other consumer loans....................... 1,547 1.2 1,017 0.7
------- ---- ------- ----
Total consumer loans..................... 15,553 11.6 12,723 8.8
---- ----
Commercial business loans.................... 11,549 8.6 9,587 6.6
Total consumer and commercial business loans 27,102 20.2 22,310 15.4
------- ---- ------- ----
Total loans.............................. $133,799 100.0% $144,513 100.0%
======== ===== ======== =====
Less:
Loans in process........................... -- 352
Allowance for loan losses.................. 1,543 1,793
------- -------
Total loans receivable, net.............. $132,256 $142,368
======== ========
3
The following table sets forth the composition of the Bank's loan portfolio by
fixed and adjustable rates at the dates indicated.
At December 31,
------------------------------------------------------------------
2001 2000 1999
-------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
FIXED-RATE LOANS:
Real estate loans:
One-to-four family ....................... $21,370 12.4% $17,485 10.5% $18,208 12.1%
Multi-family.............................. -- -- -- -- -- --
Home equity............................... 6,634 3.8 6,211 3.7 5,416 3.6
Commercial real estate.................... 1,248 0.7 775 0.5 1,023 0.7
------- ---- ------- ---- ------- ----
Total real estate loans................. 29,252 16.9 24,471 14.7 24,647 16.4
------- ---- ------- ---- ------- ----
Consumer loans:
Total consumer loans...................... 33,371 19.4 30,745 18.5 25,284 16.8
Commercial business loans:
Total commercial loans.................... 13,765 8.0 12,965 7.8 10,027 6.6
------- ---- ------- ---- ------- ----
Total fixed-rate loans.................... $76,388 44.3 $68,181 41.0 $59,958 39.8
------- ---- ------- ---- ------- ----
ADJUSTABLE RATE LOANS:
Real estate loans:
One-to-four family........................ $55,107 31.9 $66,901 40.2 $63,056 41.8%
Multi-family.............................. 1,003 0.6 1,134 0.7 1,358 0.9
Home equity............................... 4,443 2.6 4,729 2.9 4,324 2.9
Commercial real estate.................... 22,269 12.9 17,967 10.8 15,537 10.3
------- ---- ------- ---- ------- ----
Total real estate loans................. 82,822 48.0 90,731 54.6 84,275 55.9
------- ---- ------- ---- ------- ----
Consumer loans:
Total consumer loans...................... 735 0.4 481 0.3 736 0.5
Commercial business loans:
Total commercial business loans........... 12,620 7.3 6,900 4.1 5,700 3.8
------- ---- ------- ---- ------- ----
Total adjustable-rate loans............... $96,177 55.7 $98,112 59.0 $90,711 60.2%
------- ---- ------- ---- ------- ----
Total loans............................... $172,565 100.0% $166,293 100.0% $150,669 100.0%
======== ===== ======== ===== ======== =====
Less:
Loans in process.......................... -- -- --
Allowance for loan losses................. 1,672 1,632 1,523
------- ---- ------- ---- ------- ----
Total loans receivable, net................. $170,893 $164,661 $149,146
======== ======== ========
At December 31,
-----------------------------------------
1998 1997
-------------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
FIXED-RATE LOANS:
Real estate loans:
One-to-four family ....................... $12,879 9.6% $11,563 8.0%
Multi-family.............................. -- -- -- --
Home equity............................... 4,626 3.5 2,804 1.9
Commercial real estate.................... 1,138 0.9 1,213 0.8
------- --- ------- ---
Total real estate loans................. 18,643 14.0 15,580 10.7
------- --- ------- ---
Consumer loans:
Total consumer loans...................... 14,475 10.8 12,723 8.8
Commercial business loans:
Total commercial loans.................... 5,355 4.0 1,628 1.1
------- --- ------- ---
Total fixed-rate loans.................... $38,473 28.8 $29,931 20.6
------- --- ------- ---
ADJUSTABLE RATE LOANS:
Real estate loans:
One-to-four family........................ $69,474 51.9% $85,229 59.0%
Multi-family.............................. 1,468 1.1 2,714 1.9
Home equity............................... 4,751 3.6 6,025 4.2
Commercial real estate.................... 12,361 9.2 12,655 8.8
------- --- ------- ---
Total real estate loans................. 88,054 65.8 106,623 73.9
------- --- ------- ---
Consumer loans:
Total consumer loans...................... $ 1,078 0.8 -- --
Commercial business loans:
Total commercial business loans........... 6,194 4.6 7,959 5.5
------- --- ------- ---
Total adjustable-rate loans............... $95,326 71.2 $114,582 79.4
------- --- ------- ---
Total loans............................... $133,799 100.0% $144,513 100.0%
======== ===== ======== =====
Less:
Loans in process.......................... -- 352
Allowance for loan losses................. 1,543 1,793
------- --- ------- ---
Total loans receivable, net................. $132,256 $142,368
======== ========
4
One-to-Four Family Residential Loans. The Bank's primary lending activity
is the origination of one-to-four family residential mortgage loans secured by
property located in the Bank's primary lending area. Generally, one-to-four
family residential mortgage loans are made in amounts up to 80% of the lesser of
the appraised value or purchase price of the property, however, the Bank will
originate one-to-four family loans with loan-to-value ratios of up to 97%, with
private mortgage insurance required. Generally, fixed-rate loans are originated
for terms of up to 30 years. One-to-four family fixed-rate loans are offered
with a monthly payment feature.
The Bank originates both adjustable rate and fixed-rate one-to-four family
loans. The interest rate on ARM loans is indexed to the one year Treasury Bill
rate. The Bank's ARM loans currently provide for maximum rate adjustments of 200
basis points per year and 600 basis points over the term of the loan. The Bank
offers ARM loans with initial interest rates that are below market, referred to
as "teaser rates." Residential ARM loans amortize over a maximum term of up to
30 years. ARM loans are offered with both monthly and bi-weekly payment
features. ARM loans are originated for retention in the Bank's portfolio.
As a result of the lower interest rate environment during the past year, a
greater percentage of the Bank's one-to-four family loan originations consisted
of fixed-rate one-to-four family mortgage loans. The Bank originates and
generally sells its fixed-rate one-to-four family loans on a servicing retained
basis. Such loans are sold without recourse to the Bank. At December 31, 2001,
loans serviced by the Bank for others totaled $55.5 million. During the year
ended December 31, 2001 and December 31, 2000, the Bank sold $26.6 million and
$7.8 million, respectively in fixed-rate one-to-four family loans. As of
December 31, 2001 the Company has $4.6 million of mortgage loan forward sale
commitments to hedge interest rate risk on certain committed originated loans.
The fair value of these commitments is not material.
ARM loans decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks. As interest rates
increase, the underlying required periodic payments by the borrower increase,
thus increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the terms of the ARM loans, and therefore, is potentially limited in
effectiveness during periods of rapidly rising interest rates. At December 31,
2001, 31.9% of the Bank's loan portfolio consisted of one-to-four family
residential loans with adjustable interest rates.
All one-to-four family residential mortgage loans originated by the Bank
include "due-on-sale" clauses, which give the Bank the right to declare a loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid.
At December 31, 2001, approximately $76.5 million, or 44.3% of the Bank's
loan portfolio, consisted of one-to-four family residential loans. Approximately
$139,000 of such loans (representing three loans) were included in nonperforming
loans as of that date.
Home Equity Loans. The Bank offers home equity loans that are secured by
the borrower's primary residence. The Bank offers a home equity line of credit
under which the borrower is permitted to draw on the home equity line of credit
during the first ten years after it is originated and repay the outstanding
balance over a term not to exceed 25 years from the date the line of credit is
originated. The interest rates on home equity lines of credit are fixed for the
first year and adjust monthly thereafter at a margin over the prime
5
interest rate. The Bank also offers a home equity product providing for a
fixed-rate of interest. Both adjustable rate and fixed-rate home equity loans
are underwritten under the same criteria that the Bank uses to underwrite
one-to-four family fixed-rate loans. Fixed-rate home equity loans are originated
with terms not to exceed ten years. Home equity loans may be underwritten with a
loan to value ratio of 85% when combined with the principal balance of the
existing mortgage loan. The maximum amount of a home equity loan may not exceed
$250,000 unless approved by the Board of Directors. The Bank appraises the
property securing the loan at the time of the loan application (but not
thereafter) in order to determine the value of the property securing the home
equity loans. At December 31, 2001, the outstanding balances of home equity
loans totaled $11.1 million, or 6.4% of the Bank's loan portfolio.
Commercial Real Estate Loans. At December 31, 2001, $24.5 million, or 14.2%
of the total loan portfolio consisted of commercial real estate loans.
Commercial real estate loans are secured by office buildings, mixed-use
properties, religious facilities and other commercial properties. The Bank
originates adjustable rate commercial mortgage loans with maximum terms of up to
20 years. The maximum loan-to- value ratio of commercial real estate loans is
80%. At December 31, 2001, the largest commercial real estate loan had a
principal balance of $1.0 million and was secured by a medical building. This
loan is performing in accordance with its terms. As of December 31, 2001,
approximately $69,000 of commercial real estate loans (representing one loan)
were included in nonperforming loans.
In underwriting commercial real estate loans, the Bank reviews the expected
net operating income generated by the real estate to ensure that it is at least
110% of the amount of the monthly debt service; the age and condition of the
collateral; the financial resources and income level of the borrower; and the
borrower's business experience. Personal guarantees are routinely obtained from
all commercial real estate borrowers.
Loans secured by commercial real estate generally are larger than
one-to-four family residential loans and involve a greater degree of risk.
Commercial mortgage loans often involve large loan balances to single borrowers
or groups of related borrowers. Payments on these loans depend to a large degree
on the results of operations and management of the properties or underlying
businesses, and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general. Accordingly, the nature of
commercial real estate loans makes them more difficult for Bank management to
monitor and evaluate.
Consumer Lending. The Bank's consumer loans consist of automobile loans,
mobile home loans, secured personal loans (secured by bonds, equity securities
or other readily marketable collateral), and other consumer loans (consisting of
passbook loans, unsecured home improvement loans and recreational vehicle
loans). At December 31, 2001, consumer loans totaled $34.1 million, or 19.8% of
the total loan portfolio. Consumer loans are originated with terms to maturity
of three to seven years. The Bank has sought to increase its level of consumer
loans primarily through increased automobile lending. The Bank participates in a
number of indirect automobile lending programs with local automobile
dealerships. All indirect automobile loans must satisfy the Bank's underwriting
criteria for automobile loans originated directly by the Bank to the borrower
and must be approved by one of the Bank's lending officers. At December 31,
2001, loans secured by automobiles totaled $29.6 million, of which $22.4 million
were originated through the Bank's indirect automobile lending program. The Bank
has also sought to increase its level of automobile loans directly to borrowers
by increasing its marketing efforts with existing customers. Automobile loans
generally do not have terms exceeding five years. The Bank does not provide
financing for leased automobiles.
6
Consumer loans generally have shorter terms and higher interest rates than
one-to-four family mortgage loans. In addition, consumer loans expand the
products and services offered by the Bank to better meet the financial services
needs of its customers. Consumer loans generally involve greater credit risk
than residential mortgage loans because of the difference in the underlying
collateral. Repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance because of the
greater likelihood of damage to, loss of or depreciation in the underlying
collateral. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower beyond obtaining a deficiency judgment.
In addition, consumer loan collections depend on the borrower's personal
financial stability. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans.
The Bank's underwriting procedures for consumer loans include an assessment
of the applicant's credit history and the ability to meet existing and proposed
debt obligations. Although the applicant's creditworthiness is the primary
consideration, the underwriting process also includes a comparison of the value
of the security to the proposed loan amount. The Bank underwrites its consumer
loans internally, which the Bank believes limits its exposure to credit risks
associated with loans underwritten or purchased from brokers and other external
sources.
Commercial Business Loans. The Bank also originates commercial business
loans. Commercial business loans are originated with terms of up to seven years
and provide for rates that adjust on a monthly basis. Commercial business loans
are originated to persons with a prior relationship with the Bank or referrals
from persons with a prior relationship with the Bank. The decision to grant a
commercial business loan depends primarily on the creditworthiness and cash flow
of the borrower (and any guarantors) and secondarily on the value of and ability
to liquidate the collateral which generally consists of receivables, inventory
and equipment. The Bank generally requires annual financial statements and tax
returns from its commercial business borrowers and personal guarantees from the
commercial business borrowers. The Bank also generally requires an appraisal of
any real estate that secures the commercial business loan. At December 31, 2001,
the Bank had $26.4 million of commercial business loans which represented 15.3%
of the total loan portfolio. On such date, the largest commercial business
lending relationship totaled $2.0 million, which was an unsecured operating line
of credit advance to a local multi-national corporation. At December 31, 2001,
unsecured commercial business loans totaled $3.7 million.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based, with loan amounts based
on predetermined loan to collateral values and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of borrower default. Although commercial business loans may be collateralized by
equipment or other business assets, the liquidation of collateral in the event
of a borrower default is often an insufficient source of repayment because
equipment and other business assets may be obsolete or of limited use, among
other things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment.
7
Loan Maturity Schedule. The following table sets forth certain information
as of December 31, 2001, regarding the amount of loans maturing in the Bank's
portfolio. Demand loans having no stated schedule of repayment and no stated
maturity and overdrafts are reported as due in one year or less. All loans are
included in the period in which the final contractual repayment is due.
One Three Five Ten
Within Through Through Through Through Beyond
One Three Five Ten Twenty-Five Twenty-Five
Year Years Years Years Years Years Total
---- ----- ----- ----- ----- ----- -----
(In thousands)
Real estate loans:
One-to-four family............... $ 1,263 $ 702 $ 1,849 $10,747 $42,899 $19,017 $ 76,477
Home equity...................... 47 323 2,159 8,122 426 -- 11,077
Commercial real estate........... 1,025 1,148 621 5,237 16,489 -- 24,520
----- ----- --- ----- ------ ------
Total real estate loans........ 2,335 2,173 4,629 24,106 59,814 19,017 112,074
----- ----- ----- ------ ------ ------ -------
Consumer and other loans............ 1,627 9,422 20,699 2,139 219 -- 34,106
Commercial business loans........... 9,135 5,399 7,041 4,124 686 -- 26,385
----- ----- ----- ----- --- ------
Total loans.................... $13,097 $16,994 $32,369 $30,369 $60,719 $19,017 $172,565
======= ======= ======= ======= ======= ======= ========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
December 31, 2001, the dollar amount of all fixed-rate and adjustable-rate loans
due after December 31, 2002. Adjustable- and floating-rate loans are included
based on contractual maturities.
Due After December 31, 2002
----------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Real estate loans:
One-to-four family........................ $ 20,168 $ 55,046 $ 75,214
Home equity............................... 6,587 4,443 11,030
Commercial real estate.................... 1,125 22,370 23,495
---------- ---------- -----------
Total real estate loans............... 27,880 81,859 109,739
---------- ---------- -----------
Consumer and other loans ...................... 32,171 308 32,479
Commercial business loans...................... 12,384 4,866 17,250
---------- ---------- -----------
Total loans........................... $ 72,435 $ 87,033 $ 159,468
========== ========== ===========
8
Loan Origination, Sales and Repayments. The following table sets forth the
loan origination, sales and repayment activities of the Bank for the periods
indicated. The Bank did not purchase any loans during the periods presented.
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998
---- ---- ---- ----
(In thousands)
Originations by Type:
Adjustable Rate:
Real estate:
One-to-four family......................... $ 4,188 $ 7,351 $ 5,003 $ 5,417
Home equity................................ 2,350 2,552 1,507 2,883
Commercial real estate..................... 4,562 2,253 2,575 2,294
--------- --------- --------- --------
Total real estate loans.................. 11,100 12,156 9,115 10,594
Consumer loans................................ 506 195 370 770
Commercial business loans..................... 9,969 11,773 4,422 5,364
--------- --------- --------- --------
Total adjustable rate loans.............. 21,575 24,124 13,907 16,728
--------- --------- --------- --------
Fixed Rate:
Real estate:
One-to-four family......................... 35,173 13,136 14,989 19,113
Home equity................................ 2,135 1,362 1,985 1,656
Commercial real estate..................... 4,029 2,048 1,748 165
--------- --------- --------- --------
Total real estate loans.................. 41,337 16,546 18,722 20,934
Consumer loans................................ 23,206 25,510 22,721 13,327
Commercial business loans..................... 11,651 12,063 10,774 7,173
--------- --------- --------- --------
Total fixed-rate loans................... 76,194 54,119 52,217 41,434
--------- --------- --------- --------
Total loans originated........................... 97,769 78,243 66,124 58,162
--------- --------- --------- --------
Sales:
Real estate:
One-to-four family......................... 26,597 7,754 5,106 16,523
--------- --------- --------- --------
Consumer loans............................. -- 413 -- 2,027
--------- --------- --------- --------
Total loans sold.............................. 26,597 8,167 5,106 18,550
========= ========= ========= ========
Repayments:
Real estate:
One-to-four family......................... 20,673 9,611 16,005 22,446
Home equity................................ 4,348 2,714 3,129 3,991
Commercial real estate..................... 3,947 2,343 1,372 4,074
--------- --------- --------- --------
Total real estate loans.................. 28,968 14,668 20,506 30,511
Consumer loans................................ 20,832 20,086 12,624 9,240
Commercial business loans..................... 15,100 19,698 11,018 10,575
--------- --------- --------- --------
Total repayments......................... 64,900 54,452 44,148 50,326
--------- --------- --------- --------
Total reductions......................... 91,497 62,619 49,254 68,876
--------- --------- --------- --------
Net increases/(decreases)................ $ 6,272 $ 15,624 $ 16,870 $(10,714)
========= ========= ========= ========
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. Loan officers
generally have the authority to originate mortgage loans, consumer loans and
commercial business loans up to amounts established for each lending officer.
All residential loans over $300,000 must be approved by the Bank Loan Committee
(consisting of three persons; the President and/or Senior Vice President in
charge of credit administration and either one or two of the four directors
appointed to this committee). All loan relationships in excess of $300,000 and
up to $500,000 (exclusive of residential mortgages and home equity loans secured
by a lien on the borrower's primary residence) must be approved by the Bank Loan
Committee. All lending relationships in excess of $500,000 up to $1.0 million
(exclusive of residential mortgages and home equity loans secured by a lien on
the borrower's primary residence) must be approved by the Executive Committee of
the Board of Directors. All lending relationships in excess of $1.0 million must
be approved by the Board of Directors.
9
The Board annually approves independent appraisers used by the Bank. The
Bank requires an environmental site assessment to be performed by an independent
professional for all non-residential mortgage loans. It is the Bank policy to
require hazard insurance on all mortgage loans and title insurance on fixed-rate
one-to-four family loans.
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Bank receives loan origination fees. Such fees and costs vary with
the volume and type of loans and commitments made and purchased, principal
repayments and competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
In addition to loan origination fees, the Bank also receives other fees,
service charges and other income that consist primarily of deposit transaction
account service charges and late charges.
Loans-to-One Borrower. Savings banks are subject to the same loans-to-one
borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired net worth on an unsecured basis. An additional amount equal to 10% of
unimpaired net worth if the loan is secured by readily marketable collateral
(generally, financial instruments and bullion, but not real estate). The Bank's
policy provides that loans to one borrower (or related borrowers) should not
exceed 15% of the Bank's capital.
At December 31, 2001, the largest aggregate amount loaned by the Bank to
one borrower consisted of a line of credit with an outstanding balance totaling
$2.0 million. The total borrowing capacity under this line of credit is $3.0
million. This loan was performing in accordance with the terms of the loan.
Delinquencies and Classified Assets
Collection Procedures. A computer generated late notice is sent when the
loan's grace period ends. After the late notice has been mailed, accounts are
assigned to collectors for follow-up to determine reasons for delinquency and
explore payment options. Generally, loans that are 30 days delinquent will
receive a default notice from the Bank. With respect to consumer loans, the Bank
will commence efforts to repossess the collateral after the loan becomes 45 days
delinquent. Loans secured by real estate that are delinquent over 60 days are
turned over to the Collection Department Manager. Generally, after 90 days the
Bank will commence legal action.
Loans Past Due and Nonperforming Assets. Loans are reviewed on a regular
basis and are placed on nonaccrual status when, in the opinion of management,
the collection of additional interest is doubtful. Loans are placed on
nonaccrual status when either principal or interest is 90 days or more past due.
Interest accrued and unpaid at the time a loan is placed on a nonaccrual status
is reversed from interest income. At December 31, 2001, the Bank had
nonperforming loans of $208,000 and a ratio of nonperforming loans to total
assets of 0.06%. At December 31, 2001, the Bank's ratio of nonperforming assets
to total assets was 0.08%.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as Other Real Estate ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the loan, less any related specific
loan loss provisions, the difference is charged against the allowance for loan
losses. Any subsequent write-down of REO is charged against earnings.
10
The following table sets forth delinquencies in the Bank's loan portfolio
as of December 31, 2001. When a loan is delinquent 90 days or more, the Bank
fully reverses all accrued interest thereon and ceases to accrue interest
thereafter. The Bank did not have any restructured loans within the meaning of
SFAS 114.
Loans Delinquent for:
-------------------------------------------------------------------------
60-89 Days 90 Days or More Total delinquent Loans
------------------ ------------------- ----------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in thousands)
One-to-four family.................. -- $ -- 3 $ 139 3 $ 139
Home Equity......................... -- -- -- -- -- --
Commercial real estate.............. -- -- 1 69 1 69
Consumer Loans...................... -- -- -- -- -- --
Commercial Loans.................... -- -- -- --
------- ------- ------- ------- ------- ------
Total ........................... -- $ -- 4 $ 208 4 $ 208
======= ======= ======= ======= ======= ======
11
Nonaccrual Loans and Nonperforming Assets. The following table sets forth
information regarding nonaccrual loans and other nonperforming assets.
At December 31,
------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accruing loans:
One-to-four family...................................... $ 139 $ 112 $ 132 $ 1,010 $ 588
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. 69 75 -- -- 242
Construction and land loans............................. -- -- -- -- --
Consumer................................................ -- -- -- 8 2
Commercial business..................................... -- -- -- 40 --
------- ------- ------- ------- ------
Total................................................. 208 187 132 1,058 832
------- ------- ------- ------- ------
Accruing loans delinquent more than 90 days:
One-to-four family...................................... $ -- $ -- $ -- $ -- 60
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. -- -- -- -- --
Construction and land loans............................. -- -- -- -- --
Consumer................................................ -- -- -- -- --
Commercial business..................................... -- -- -- -- 1
------- ------- ------- ------- ------
Total................................................. -- -- -- -- 61
------- ------- ------- ------- ------
Total nonperforming loans................................. $ 208 $ 187 $ 132 $ 1,058 $ 893
======= ======= ======= ======= =======
Foreclosed assets:
One-to-four family...................................... $ 77 $ 55 $ 76 $ 179 $ 263
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. -- -- 18 45 45
Construction and land loans............................. -- -- -- -- --
Consumer................................................ -- -- 1 -- --
Commercial business..................................... -- -- -- -- --
------- ------- ------- ------- ------
Total................................................. $ 77 $ 55 $ 95 $ 224 $ 308
======= ======= ======= ======= =======
Total nonperforming loans as a percentage of total assets. 0.06% 0.06% 0.05% 0.43% 0.42%
======= ======= ======= ======= =======
Total nonperforming assets................................ $ 285 $ 242 $ 227 $ 1,282 $ 1,201
======= ======= ======= ======= =======
Total nonperforming assets as a percentage of total assets 0.08% 0.08% 0.08% 0.52% 0.57%
======= ======= ======= ======= =======
During the years ended December 31, 2001 and 2000, respectively, gross
interest income of $6,300 and $7,500 would have been recorded on nonaccruing
loans under their original terms, if the loans had been current throughout the
period. No interest income was recorded on nonaccruing loans during the years
ended December 31, 2001 and 2000.
Classification of Assets. On the basis of management's review of its
assets, at December 31, 2001, the Bank had classified a total of $2.0 million of
loans as follows (in thousands):
Special Mention......................... $ 792
Substandard............................. 1,214
Doubtful assets......................... --
Loss assets............................. --
---------
Total ............................. $ 2,006
=========
General loss allowance.................. $ 1,450
=========
Specific loss allowance................. 222
=========
Net Charge-offs......................... 440
=========
12
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio and current economic conditions. The allowance is
established based upon management's evaluation of the risks inherent in the loan
portfolio, the composition of the loan portfolio and the general economy to
increase allowances for losses as a percentage of total loans. Such evaluation
also includes a review of all loans on which full collectibility may not be
reasonably assured, considering among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, geographic concentrations and other
factors that warrant recognition in providing for an adequate loan loss
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses and valuation of real estate owned. Such agencies may require us to
recognize additions to the allowance based on their judgment about information
available to them at the time of their examination. At December 31, 2001, the
total allowance was $1.7 million, which amounted to 0.98% of total loans, net
and 803.8% of nonperforming loans. Management considers whether the allowance
should be adjusted to protect against risks in the loan portfolio. Management
applies fixed percentages for each category of performing loans not designated
as problem loans to determine an additional component of the allowance to
protect against unascertainable risks inherent in any portfolio of performing
loans. Management monitors and modifies the level of the allowance for loan
losses in order to maintain it at a level which it considers adequate to provide
for potential loan losses. For the years ended December 31, 2001 and 2000, the
Bank had charge-offs of $503,000 and $311,000, respectively, against this
allowance.
The Bank evaluates the adequacy of the allowance for loan losses and
determines the appropriate level of provisions for loan losses by applying fixed
percentages to each category of performing loans and classified loans. The
allowance adjustment is based upon the net change in each portfolio category
since the prior quarter to reflect the ongoing shifts in the portfolio toward
higher risk loan categories, such as consumer loans, commercial business loans
and commercial real estate loans. Management believes the current method of
determining the adequacy of the allowance is prudent in light of the Bank's
intention to continue to diversify its lending operations through the increased
origination of consumer loans, commercial business loans and commercial real
estate loans.
13
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
December 31,
------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at the beginning of period........................ $1,632 $1,523 $1,543 $1,793 $1,546
Charge-offs:
One-to-four family..................................... 8 7 91 117 72
Commercial real estate................................. 25 -- -- -- 118
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 294 260 246 196 82
Commercial business.................................... 176 44 1 35 27
------ ------ ------ ------ ------
Total................................................ 503 311 338 348 299
------ ------ ------ ------ ------
Recoveries:
One-to-four family..................................... 1 3 3 15 14
Commercial real estate................................. -- -- -- 12 2
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 50 66 85 71 53
Commercial business.................................... 12 6 1 -- --
------ ------ ------ ------ ------
Total................................................ 63 75 89 98 69
------ ------ ------ ------ ------
Net charge-offs........................................... (440) (236) (249) (250) (230)
Additions charged to operations........................... 480 345 229 -- 477
------ ------ ------ ------ ------
Balance at end of period.................................. $1,672 $1,632 $1,523 $1,543 $1,793
====== ====== ====== ====== ======
Allowance for loan losses as a percentage of total loans
receivable, net........................................ 0.98% 0.99% 1.02% 1.17% 1.26%
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans................. 0.26% 0.15% 0.18% 0.18% 0.16%
====== ====== ====== ====== ======
Ratio of net charge-offs to nonperforming loans........... 211.54% 126.20% 188.64% 23.63% 25.76%
====== ====== ====== ====== ======
14
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the allowance for loan losses by loan category for the periods
indicated.
At December 31,
------------------------------------------------------------------------------
2001 2000
------------------------------------- ---------------------------------------
Percent Percent
of Loans of Loans
Amount of Loan in Each Amount of Loan In Each
Loan Loss Amounts Category to Loan Loss Amounts Category
Allowance by Category Total Loans Allowances by Category Total Loans
--------- ----------- ----------- ---------- ----------- -----------
(Dollars in thousands)
Residential mortgages................... $ 382 $ 87,554 50.74% $ 487 $ 95,326 57.3%
Commercial real estate.................. 366 24,520 14.21 280 19,876 12.0
Consumer ............................... 437 34,106 19.76 422 31,226 18.8
Commercial business..................... 487 26,385 15.29 434 19,865 11.9
Unallocated............................. -- -- -- 9 -- --
Total.......................... $ 1,672 $ 172,565 100.00% $ 1,632 $ 166,293 100.00%
At December 31,
--------------------------------------
1999
--------------------------------------
Percent
of Loans
Amount of Loan In Each
Loan Loss Amounts Category to
Allowance by Category Total Loans
--------- ----------- -----------
(Dollars in thousands)
Residential mortgages................... $ 469 $ 91,004 60.40%
Commercial real estate.................. 235 17,918 11.89
Consumer ............................... 358 26,020 17.27
Commercial business..................... 295 15,727 10.44
Unallocated............................. 166 -- --
Total.......................... $ 1,523 $ 150,669 100.00%
------------------------------------------------------------------------------
At December 31,
1998 1997
------------------------------------- ---------------------------------------
Percent Percent
of Loans of Loans
Amount of Loan in Each Amount of Loan In Each
Loan Loss Amounts Category to Loan Loss Amounts Category
Allowance by Category Total Loans Allowances by Category Total Loans
--------- ----------- ----------- ---------- ----------- -----------
(Dollars in thousands)
Residential mortgages................... $ 610 $ 91,730 68.56% $ 455 $ 105,621 73.09%
Commercial real estate.................. 231 14,967 11.19 260 16,582 11.47
Consumer ............................... 249 15,553 11.62 138 12,723 8.80
Commercial business..................... 250 11,549 8.63 171 9,587 6.64
Unallocated............................. 203 -- -- 769 -- --
Total.......................... $ 1,543 $ 133,799 100.00 $ 1,793 $ 144,513 100.00%
15
Securities Investment Activities
The securities investment policy is established by the Board of Directors.
This policy dictates that investment decisions will be made based on the safety
of the investment, liquidity requirements, potential returns, cash flow targets
and desired risk parameters. In pursuing these objectives, management considers
the ability of an investment to provide earnings consistent with factors of
quality, maturity, marketability and risk diversification.
The Bank's current policies generally limit securities investments to U.S.
Government and agency securities, tax-exempt bonds, public utilities debt
obligations, corporate debt obligations and corporate equity securities. In
addition, the Bank's policy permits investments in mortgage related securities,
including securities issued and guaranteed by Fannie Mae, Freddie Mac and GNMA.
In the past, the Bank invested in privately issued collateralized mortgage
obligations ("CMOs"), but has only invested in agency issued CMOs in recent
years. The Bank's current securities investment strategy utilizes a risk
management approach of diversified investing between three categories: short-,
intermediate- and long-term. The emphasis of this approach is to increase
overall investment securities yields while managing interest rate risk. The Bank
will only invest in securities rated as investment grade by a nationally
recognized investment rating agency. The Bank does not engage in any hedging
transactions, such as interest rate swaps or caps.
Investment Securities. At December 31, 2001, the Bank had $78.4 million, or
22.2% of total assets, invested in investment securities, which consisted
primarily of U.S. Government obligations, tax-exempt securities, public utility
and corporate obligations, a mutual fund and equity investments in corporate and
FHLB stock. The corporate debt obligations reported includes trust preferred
investments with a book value of $9.5 million and an estimated market value of
$9.1 million at December 31, 2001. SFAS No. 115 requires the Bank to designate
its securities as held to maturity, available for sale or trading, depending on
the Bank's ability and intent regarding its investments. The Bank does not have
a trading portfolio. Investment securities are classified as available for sale.
At December 31, 2001, the Bank's investment securities portfolio had a weighted
average life of 7.32 years.
16
Cost of Investment Securities. The following table sets forth certain
information regarding the investment securities and other interest earning
assets as of the dates indicated.
December 31,
----------------------------------------------------------------
2001 2000 1999
---------------- ---------------- -----------------
Percent of Percent of Percent of
Cost Total Cost Total Cost Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Investment securities available for sale:
U.S. government securities........................... $ -- --% $ -- 0.00% $ -- 0.00%
Federal agency securities............................ 25,035 31.63 47,795 52.23 54,803 61.73
Corporate debt securities............................ 31,663 40.00 17,189 18.78 11,420 12.86
Tax exempt bonds..................................... 3,480 4.40 2,569 2.81 3,624 4.08
Public utilities..................................... 200 0.25 200 0.22 200 0.23
Equity securities.................................... 14,944 18.88 19,806 21.64 16,183 18.23
-------- ------ -------- ------ --------- ------
Subtotal........................................... 75,322 95.16 87,559 95.68 86,230 97.13
FHLB stock........................................... 3,830 4.84 3,950 4.32 2,547 2.87
-------- ------ -------- ------ --------- ------
Total.............................................. $ 79,152 100.00% $ 91,509 100.00% $ 88,777 100.00%
======== ====== ======== ====== ========= ======
Average remaining life of investment securities........ 7.32 Years 6.40 Years 5.09 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 4,909 33.15 297 15.7 873 100.00
Federal funds sold................................... 9,900 66.85 1,600 84.3 -- --
-------- ------ -------- ------ --------- ------
Total............................................ $ 14,809 100.00% $ 1,897 100.00% $ 873 100.00%
======== ====== ======== ====== ========= ======
December 31,
----------------------------------------
1998 1997
---------------- -----------------
Percent of Percent of
Cost Total Cost Total
---- ----- ---- -----
(Dollars in thousands)
Investment securities available for sale:
U.S. government securities........................... 1,000 1.63 2,002 4.67
Federal agency securities............................ 37,346 60.93 24,504 57.19
Corporate debt securities............................ 15,580 25.42 11,833 27.62
Tax exempt bonds..................................... 3,919 6.40 2,162 5.05
Public utilities..................................... 300 0.49 750 1.75
Equity securities.................................... 1,918 3.13 1,288 3.02
--------- ------ --------- ------
Subtotal........................................... 60,063 98.00 42,539 99.30
FHLB stock........................................... 1,228 2.00 306 0.70
--------- ------ --------- ------
Total.............................................. $ 61,291 100.00% $ 42,845 100.00%
========= ====== ========= ======
Average remaining life of investment securities........ 3.92 Years 1.89 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 261 1.17 115 6.34
Federal funds sold................................... 22,100 98.83 1,700 93.66
--------- ------ --------- ------
Total............................................ $ 22,361 100.00% $ 1,815 100.00%
========= ====== ========= ======
17
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, cost, market value and weighted average yields for the
Bank's investment portfolio at December 31, 2001.
December 31, 2001
------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
------ ----- ----- -------- ----------------
Cost Cost Cost Cost Cost Market Value
---- ---- ---- ---- ---- ------------
(Dollars in thousands)
Federal agency obligations.......... $ -- $ 14,990 $ 8,498 $ 1,547 $ 25,035 $25,238
Corporate bonds..................... -- 2,391 3,793 25,479 31,663 30,285
Public utilities.................... -- -- 200 -- 200 201
Tax exempt bonds.................... 47 1,449 1,487 497 3,480 3,498
Other .............................. -- -- -- 18,774 18,774 19,168
------- -------- --------- -------- -------- -------
Total securities.................. $ 47 $ 18,830 $ 13,978 $ 46,297 $ 79,152 $78,390
======= ======== ========= ======== ======== =======
Weighted average yield(1)........... 10.50% 5.91% 5.34% 5.86% 5.78% 5.48%
________________
(1) Weighted average yield has not been adjusted to reflect tax equivalent
adjustments.
Mortgage-Backed Securities. The Bank purchases mortgage-backed securities
in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower the Bank's credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae, and GNMA; and (iii) increase
liquidity. At December 31, 2001, the amortized cost of mortgage-backed
securities totaled $53.2 million or 15.1% of total assets, all of which were
classified as available for sale. The mortgage-backed securities portfolio had
coupon rates ranging from 3.08% to 8.50%, a weighted average yield of 6.14% and
a weighted average life (including payment assumption) of 16.7 years at December
31, 2001. The estimated fair value of the Bank's mortgage-backed securities at
December 31, 2001 was $53.7 million which was $500,000 higher than the amortized
cost of $53.2 million.
Mortgage-backed securities are created by the pooling of mortgages and the
issuance of a security with an interest rate that is less than the interest rate
on the underlying mortgages. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage related securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including Fannie Mae,
Freddie Mac and GNMA) pool and resell the participation interests in the form of
securities to investors, such as the Bank, and guarantee the payment of
principal and interest to these investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage related
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. Management reviews prepayment estimates periodically
to ensure that prepayment assumptions are reasonable considering the underlying
collateral for the securities at issue and current interest rates and to
determine the yield and estimated maturity of the Bank's mortgage- backed
securities portfolio. Of the Bank's $53.2 million mortgage-backed securities
portfolio at December 31, 2001, $349,000 with a weighted average yield of 7.0%
had contractual maturities within five years, $2.0 million with a weighted
average yield of 6.37% had contractual maturities of five to ten years and $50.9
million with a weighted average yield of 6.13% had contractual maturities of
over ten years. However, the
18
actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and may result in a
loss of any premiums paid and thereby reduce the net yield on such securities.
Although prepayments of underlying mortgages depend on many factors, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of declining mortgage interest rates,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because, to the extent that the Bank's mortgage
related securities prepay faster than anticipated, the Bank may not be able to
reinvest the proceeds of such repayments and prepayments at a comparable rate of
return. Conversely, in a rising interest rate environment prepayments may
decline, thereby extending the estimated life of the security and depriving the
Bank of the ability to reinvest cash flows at the increased rates of interest.
19
Mortgage-Backed Securities. Set forth below is information relating to the
Bank's mortgage-backed securities for the periods indicated.
December 31,
----------------------------------------------------------------
2001 2000 1999
---------------- ---------------- -----------------
Percent of Percent of Percent of
Cost Total Cost Total Cost Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Mortgage-backed securities available for sale:
GNMA......................................... $14,661 27.57% $13,349 32.94 $ 7,023 25.60%
FNMA......................................... 16,105 30.28 13,336 32.91 14,824 54.05
FHLMC........................................ 19,395 36.47 13,793 34.03 5,518 20.12
CMOs......................................... 2,140 4.02 50 0.12 62 0.23
Small Business Administration................ 883 1.66 -- -- -- --
------- ------ ------- ------ ------- ------
Total.................................... $53,184 100.00% $40,528 100.00% $27,427 100.00%
======= ====== ======= ====== ======= ======
December 31,
----------------------------------------
1998 1997
----------------- -----------------
Percent of Percent of
Cost Total Cost Total
---- ----- ---- -----
(Dollars in thousands)
Mortgage-backed securities available for sale:
GNMA......................................... $ 12 0.06% $ 16 0.14%
FNMA......................................... 13,851 69.74 7,752 66.40
FHLMC........................................ 5,924 29.82 3,808 32.61
CMOs......................................... 76 0.38 99 0.85
Small Business Administration................ -- -- -- --
------- ------ ------- ------
Total.................................... $19,863 100.00% $11,675 100.00%
======= ====== ======= ======
20
Sources of Funds
General. The primary sources of the Bank's funds for use in lending,
investing and for other general purposes are deposits, repayments and
prepayments of loans and securities, proceeds from sales of loans and
securities, and proceeds from maturing securities and cash flows from
operations.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, NOW
accounts, noninterest-bearing checking accounts and money market accounts and
certificates of deposit. The Bank also offers IRAs and other qualified plan
accounts.
At December 31, 2001, deposits totaled $228.2 million. At December 31,
2001, the Bank had a total of $121.7 million in certificates of deposit, of
which $89.9 million had maturities of one year or less. Although the Bank has a
significant portion of its deposits in shorter term certificates of deposit,
management monitors activity on these accounts. Based on historical experience
and the Bank's current pricing strategy, management believes it will retain a
large portion of such accounts upon maturity. At December 31, 2001 certificates
of deposit with balances of $100,000 or more totaled $27.3 million.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Deposits are obtained predominantly from the areas in which the
Bank's branch offices are located. The Bank relies primarily on competitive
pricing of its deposit products and customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. The Bank
uses traditional means of advertising its deposit products, including radio and
print media and it generally does not solicit deposits from outside its market
area. While certificates of deposit in excess of $100,000 are accepted by the
Bank, and may be subject to preferential rates, the Bank does not actively
solicit such deposits as they are more difficult to retain than core deposits.
Historically, the Bank has not used brokers to obtain deposits.
The following table sets forth the deposit activities of the Bank for the
periods indicated.
Year Ended December 31,
------------------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Opening balance.................. $ 202,755 $ 189,120 $194,205
Deposits......................... 1,448,285 1,008,188 979,766
Withdrawals...................... (1,430,907) (1,002,146) (992,067)
Interest credited................ 8,030 7,593 7,216
--------- --------- --------
Ending balance................... $ 228,163 $ 202,755 $189,120
--------- --------- --------
Net increase (decrease).......... $ 25,408 $ 13,635 $ (5,085)
========= ========= ========
Percent increase (decrease)...... 12.53% 7.21% (2.62)%
========= ========= ========
21
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 2001.
Maturity
----------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
------- ------ ------ ------ -----
(In thousands)
Certificates of deposit less than $100,000........ $ 18,599 $ 17,982 $30,675 $27,094 $ 94,350
Certificates of deposit of $100,000 or more....... 8,532 4,754 9,389 4,651 27,326
-------- -------- ------- ------- --------
Total of certificates of deposit.................. $ 27,131 $ 22,736 $40,064 $31,745 $121,676
======== ======== ======= ======= ========
The following tables set forth information, by various rate categories,
regarding the dollar balance of deposits by types of deposit for the periods
indicated.
December 31,
--------------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
Amount Percent Amount Percent Amounts Percent
------ ------- ------ ------- ------- -------
(Dollars in thousands)
Transactions and savings deposits:
Noninterest-bearing......................... $ 29,882 13.10% $ 22,672 11.18% $ 19,560 10.35%
Savings accounts............................ 44,459 19.48 43,851 21.63 43,648 23.08
NOW accounts................................ 8,455 3.71 8,800 4.34 8,120 4.29
Money market accounts....................... 23,691 10.38 17,086 8.43 14,737 7.79
-------- ----- -------- ----- -------- -----
Total..................................... 106,487 46.67 92,409 45.58 86,065 45.51
-------- ----- -------- ----- -------- -----
Certificates of deposit:
0.00-3.99%.................................. 25,047 10.98 4,863 2.40 3,419 1.81
4.00-5.99%.................................. 50,732 22.23 57,027 28.12 87,850 46.45
6.00-7.99%.................................. 45,897 20.12 48,456 23.90 11,786 6.23
-------- ----- -------- ----- -------- -----
Total certificates of deposit............. 121,676 53.33 110,346 54.42 103,055 54.49
-------- ----- -------- ----- -------- -----
Total deposits.............................. $228,163 100.00% $202,755 100.00% $189,120 100.00%
======== ====== ======== ====== ======== ======
The following table sets forth the amount and remaining maturities of the
Bank's certificates of deposit accounts at December 31, 2001.
Percent
2.00-3.99% 4.00-5.99% 6.00-7.99% Total of Total
--------- --------- --------- ----- ---------
(Dollars in thousands)
Certificate accounts maturing in quarter ending:
December 31, 2001........................... $ 4,011 $ -- $ -- $ 4,011 3.29%
March 31, 2002 ............................. 8,038 8,422 6,660 23,120 19.00
June 30, 2002............................... 4,507 12,355 5,874 22,736 18.68
September 30, 2002.......................... 852 9,178 14,669 24,699 20.30
December 31, 2002........................... 3,799 3,396 8,170 15,365 12.63
March 31, 2003.............................. 1,292 4,958 1,192 7,442 6.16
June 30, 2003............................... 733 2,901 1,589 5,223 4.29
September 30, 2003.......................... -- 1,884 227 2,111 1.73
December 31, 2003........................... 889 1,274 611 2,774 2.28
March 31, 2004.............................. -- 699 1,008 1,707 1.40
June 30, 2004............................... -- 1,015 173 1,188 0.97
September 30, 2004.......................... 250 1,321 824 2,395 1.96
December 31, 2004........................... 306 1,048 11 1,365 1.12
Thereafter.................................. 370 2,281 4,889 7,540 6.19
------ ------ ------ ------- ------
Total .................................... 25,047 50,732 45,897 121,676 100.00%
====== ====== ====== ======= ======
Percent of total............................ 20.58% 41.70% 37.72% 100.00%
====== ====== ====== =======
22
Borrowed Funds. Set forth below is a schedule detailing the Bank's borrowings.
At December 31,
------------------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Short-Term Borrowings:
Repurchase Agreements - FHLB......................................... $ -- $ 7,000 $14,000
Term Advances - FHLB................................................. 11,600 5,000 --
Overnight Advance - FHLB............................................. -- -- 200
Long-Term Borrowings:
Repurchase Agreements - FHLB......................................... 36,000 31,000 20,000
Term Advances - FHLB................................................. 29,000 29,100 16,000
-------- -------- -------
Total Borrowings................................................... $ 76,600 $ 72,100 $50,200
-------- -------- -------
Weighted Average interest cost of short-term borrowings during the year 5.02% 6.23% 5.71%
-------- -------- -------
Weighted Average interest cost of long-term borrowings during the year. 5.15% 6.03% 5.32%
-------- -------- -------
Average Balance of borrowings outstanding during the year.............. $ 74,904 $ 65,856 $32,841
-------- -------- -------
Trust Activities. The Bank provides trust and investment services, acts as
executor or administrator of estates and as trustee or custodian for various
types of trusts. Trust services are offered through the Bank's Trust Department.
Services include fiduciary services for trusts and estates, money management and
custodial services. At December 31, 2001, the Bank maintained 304
trust/fiduciary accounts, with total assets of $49.5 million under management as
compared to 307 trust/fiduciary accounts with $37.7 million total assets at
December 31, 2000. Management anticipates that in the future the Trust
Department will become a more significant component of the Bank's business.
Insurance Activities
On October 2, 2000, the Bank completed the acquisition of Bailey & Haskell
Associates, Inc., ("B&H"), an insurance agency located in Central New York
State. B&H has offices in Oneida, Canastota, New Hartford and Syracuse. B&H is a
full-service insurance and financial services firm with over 60 employees
providing services to over 10,000 customers. The addition of insurance and
financial services enables the Bank to continue evolving from a traditional
depository institution into a financial services organization. B&H offers
personal and commercial property insurance, life insurance, pension plan
services, mutual funds and annuity sales, and other products and services. B&H
represents many insurance companies including, Travelers, CNA, Hartford,
Progressive, Utica National, Chubb and many more. During 2001, the Bank also
completed the acquisition of two additional insurance agencies.
Competition
Competition in the banking and financial services industry is intense. The
Bank competes with commercial banks, savings institutions, mortgage banking
firms, credit unions, finance companies, mutual funds, insurance companies, and
brokerage and investment banking firms operating locally and elsewhere. Many of
these competitors have substantially greater resources and lending limits than
the Bank and may offer certain services that the Bank does not or cannot
provide. Moreover, credit unions which offer substantially the same services as
the Bank, are not subject to federal or state income taxation. Trends toward the
consolidation of the financial services industry, and the removal of
restrictions on interstate branching and banking powers may make it more
difficult for smaller institutions such as the Bank to compete effectively with
large national and regional banking institutions. The Bank's profitability
depends upon its continued ability to successfully compete in its market area.
23
Personnel
As of December 31, 2001, the Bank had 114 full-time employees and 12
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
Regulation
General. The Bank is a New York-chartered stock savings bank and its
deposit accounts are insured up to applicable limits by the FDIC through the
BIF. The Bank is subject to extensive regulation by the Department, as its
chartering agency, and by the FDIC, as its deposit insurer. The Bank is required
to file reports with, and is periodically examined by, the FDIC and the
Superintendent concerning its activities and financial condition and must obtain
regulatory approvals prior to entering into certain transactions, including, but
not limited to, mergers with or acquisitions of other banking institutions. The
Bank is a member of the FHLB of New York and is subject to certain regulations
by the Federal Home Loan Bank System. On July 18, 2001 the Company and the
Mutual Holding Company completed their conversion to federal charters.
Consequently, they are subject to regulations of the Office of Thrift
Supervision ("OTS") as savings and loan holding companies. Any change in such
regulations, whether by the Department, the FDIC, or the OTS could have a
material adverse impact on the Bank, the Company, or the Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual
Holding Company are referred to below or elsewhere herein.
New York Bank Regulation. The exercise by an FDIC-insured savings bank of
the lending and investment powers under the New York State Banking Law is
limited by FDIC regulations and other federal law and regulations. In
particular, the applicable provisions of New York State Banking Law and
regulations governing the investment authority and activities of an FDIC insured
state-chartered savings bank have been substantially limited by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the FDIC
regulations issued pursuant thereto.
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in Common Stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending powers
are not subject to percentage of assets limitations, although there are limits
applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance with
and reliance upon the specific investment authority set forth in the New York
State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of investment securities as compared
to the types of investments permissible under such specific
24
investment authority. However, in the event a savings bank elects to utilize the
"prudent person" standard, it will be unable to avail itself of the other
provisions of the New York State Banking Law and regulations which set forth
specific investment authority. The Bank has not elected to conduct its
investment activities under the "prudent person" standard. A savings bank may
also exercise trust powers upon approval of the Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Board. Investment by a savings bank in the stock,
capital notes and debentures of its service corporations is limited to 3% of the
bank's assets, and such investments, together with the bank's loans to its
service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Superintendent or the Department against the Bank or any of
its directors, trustees or officers.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member of
the BIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the U.S. Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings banks, after giving the Superintendent an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices or is in an unsafe or unsound condition.
25
The FDIC establishes deposit insurance premiums based upon the risks a
particular bank or savings association poses to its deposit insurance funds.
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 reporting period ending six months before the
assessment period, consisting of: (i) well capitalized; (ii) adequately
capitalized; or (iii) undercapitalized and one of three supervisory
subcategories within each capital group. With respect to the capital ratios,
institutions are classified as well capitalized or adequately capitalized using
ratios that are substantially similar to the prompt corrective action capital
ratios discussed above. Any institution that does not meet these two definitions
is deemed to be undercapitalized
for this purpose. The supervisory subgroup to which an institution is assigned
is 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. Under
the final risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied. Assessments rates for deposit
insurance currently range from 0 basis points to 27 basis points. The capital
and supervisory subgroup to which an institution is assigned by the FDIC is
confidential and may not be disclosed. The Bank's rate of deposit insurance
assessments will depend upon the category and subcategory to which the Bank is
assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on the earnings of the Bank.
Regulatory Capital Requirements. The FDIC has adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. The Bank is
required to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory risk-weighted assets is referred to as the Bank's "risk-based capital
ratio." Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet items to four risk-weighted categories ranging from
0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of at least 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC and the other federal banking regulators have proposed amendments to their
minimum capital
26
regulations to provide that the minimum leverage capital ratio
for a depository institution that has been assigned the highest composite rating
of 1 under the Uniform Financial Institutions Rating System will be 3% and that
the minimum leverage capital ratio for any other depository institution will be
4% unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
Limitations on Dividends and Other Capital Distributions. The FDIC has the
authority to use its enforcement powers to prohibit a savings bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice. Federal law also prohibits the payment of dividends
by a bank that will result in the bank failing to meet its applicable capital
requirements on a pro forma basis. New York law also restricts the Bank from
declaring a dividend which would reduce its capital below (i) the amount
required to be maintained by state law and regulation, or (ii) the amount of the
Bank's liquidation account established in connection with the Reorganization.
Prompt Corrective Action. The federal banking agencies have promulgated
regulations to implement the system of prompt corrective action required by
federal law. Under the regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal law and regulations also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution to comply with supervisory actions as if it were in the
next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
Activities and Investments of Insured State-Chartered Banks Acting as
Principal. Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, (i) acquiring or retaining a majority interest in a
subsidiary, the activities of which are limited to those permissible for a
subsidiary of a national bank; (ii) investing as a limited partner in a
partnership the sole purpose of which is the direct or indirect investment in
the acquisition, rehabilitation, or new construction of a qualified housing
project, provided that such limited partnership investments may not exceed 2% of
the bank's total assets; (iii) acquiring up to 10% of the voting stock of a
company that solely provides or reinsures directors', trustees', and officers'
liability insurance coverage or bankers' blanket bond group insurance coverage
for insured depository institutions; and (iv) acquiring or retaining the voting
shares of a depository institution if certain requirements are met.
Federal law and FDIC regulations permit certain exceptions to the foregoing
limitation. For example, certain state-chartered banks, such as the Bank, may
continue to invest in common or preferred stock listed on a National Securities
Exchange or the National Market System of Nasdaq, and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. As of December 31, 2001, the Bank had $14.5 million of securities
pursuant to this exception. As a savings bank, the Bank may also continue to
sell savings bank life insurance.
27
Transactions With Affiliates. Under current federal law, transactions
between depository institutions and their affiliates are governed by Sections
23A and 23B of the Federal Reserve Act. An affiliate of a savings bank is any
company or entity that controls, is controlled by, or is under common control
with the savings bank, other than a subsidiary of the savings bank. In a holding
company context, at a minimum, the parent holding company of a savings bank and
any companies which are controlled by such parent holding company are affiliates
of the savings bank. Generally, Section 23A limits the extent to which the
savings bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such savings bank's capital stock and
surplus and contains an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The term
"covered transaction" includes the making of loans or other extensions of credit
to an affiliate; the purchase of assets from an affiliate, the purchase of, or
an investment in, the securities of an affiliate; the acceptance of securities
of an affiliate as collateral for a loan or extension of credit to any person;
or issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and stockholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal stockholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
28
Federal Holding Company Regulation.
General. The Company and the Mutual Holding Company are nondiversified
mutual savings and loan holding companies within the meaning of the Home Owners'
Loan Act. As such, the Company and the Mutual Holding Company are registered
with the OTS and are subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Company and the Mutual Holding Company, and their subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution.
Permitted Activities. Under OTS regulation and policy, a mutual holding
company and a federally chartered mid-tier holding company such as the Company
may engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; (x) any activity permissible
for financial holding companies under Section 4(k) of the Bank Holding Company
Act, including securities and insurance underwriting; and (xi) purchasing,
holding, or disposing of stock acquired in connection with a qualified stock
issuance if the purchase of such stock by such savings and loan holding company
is approved by the Director. If a mutual holding company acquires or merges with
another holding company, the holding company acquired or the holding company
resulting from such merger or acquisition may only invest in assets and engage
in activities listed in (i) through (xi) above, and has a period of two years to
cease any nonconforming activities and divest of any nonconforming investments.
The Home Owners' Loan Act prohibits a savings and loan holding company,
directly or indirectly, or through one or more subsidiaries, from acquiring
another savings association or holding company thereof, without prior written
approval of the OTS. It also prohibits the acquisition or retention of, with
certain exceptions, more than 5% of a nonsubsidiary savings association, a
nonsubsidiary holding company, or a nonsubsidiary company engaged in activities
other than those permitted by the Home Owners' Loan Act; or acquiring or
retaining control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings association, the OTS must
consider the financial and managerial resources, future prospects of the company
and association involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings association in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target
29
savings institution specifically permit such acquisitions. The states vary
in the extent to which they permit interstate savings and loan holding company
acquisitions.
Waivers of Dividends by Mutual Holding Company. Office of Thrift
Supervision regulations require the Mutual Holding Company to notify the OTS of
any proposed waiver of its receipt of dividends from the Company. The OTS
reviews dividend waiver notices on a case-by-case basis, and, in general, does
not object to any such waiver if: (i) the mutual holding company's board of
directors determines that such waiver is consistent with such directors'
fiduciary duties to the mutual holding company's members; (ii) for as long as
the savings association subsidiary is controlled by the mutual holding company,
the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under OTS capital distribution regulations. The
Mutual Holding Company intends to waive dividends paid by the Company. Under OTS
regulations, our public stockholders would not be diluted because of any
dividends waived by the Mutual Holding Company (and waived dividends would not
be considered in determining an appropriate exchange ratio) in the event the
Mutual Holding Company converts to stock form.
Conversion of the Mutual Holding Company to Stock Form. OTS regulations
permit the Mutual Holding Company to convert from the mutual form of
organization to the capital stock form of organization (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion Transaction
will occur, and the Board of Directors has no current intention or plan to
undertake a Conversion Transaction. In a Conversion Transaction a new holding
company would be formed as the successor to the Company (the "New Holding
Company"), the Mutual Holding Company's corporate existence would end, and
certain depositors of the Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock held by stockholders other than the Mutual Holding Company
("Minority Stockholders") would be automatically converted into a number of
shares of common stock of the New Holding Company determined pursuant an
exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in the Company
immediately prior to the Conversion Transaction. Under OTS regulations, Minority
Stockholders would not be diluted because of any dividends waived by the Mutual
Holding Company (and waived dividends would not be considered in determining an
appropriate exchange ratio), in the event the Mutual Holding Company converts to
stock form. The total number of shares held by Minority Stockholders after a
Conversion Transaction also would be increased by any purchases by Minority
Stockholders in the stock offering conducted as part of the Conversion
Transaction.
New York State Bank Holding Company Regulation. In addition to the federal
regulation, a holding company controlling a state chartered savings bank
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
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,
30
only one banking institution will not be deemed to be a bank holding company for
the purposes of the New York State Banking Law. Under New York State Banking
Law, the prior approval of the Banking Board is required before: (1) any action
is taken that causes any company to become a bank holding company; (2) any
action is taken that causes any banking institution to become or be merged or
consolidated with a subsidiary of a bank holding company; (3) any bank holding
company acquires direct or indirect ownership or control of more than 5% of the
voting stock of a banking institution; (4) any bank holding company or
subsidiary thereof acquires all or substantially all of the assets of a banking
institution; or (5) any action is taken that causes any bank holding company to
merge or consolidate with another bank holding company. Additionally, certain
restrictions apply to New York State bank holding companies regarding the
acquisition of banking institutions which have been chartered five years or less
and are located in smaller communities. Officers, directors and employees of New
York State bank holding companies are subject to limitations regarding their
affiliation with securities underwriting or brokerage firms and other bank
holding companies and limitations regarding loans obtained from its
subsidiaries.
Financial Services Modernization Act. On November 12, 1999, the
Gramm-Leach-Bliley Act was signed into law, repealing provisions of the
depression-era Glass-Steagall Act, which prohibited commercial banks, securities
firms, and insurance companies from affiliating with each other and engaging in
each other's businesses. The major provisions of the Act took effect on March
12, 2000.
The Act creates a new type of financial services company called a
"Financial Holding Company" (an "FHC"), a bank holding company with dramatically
expanded powers. FHCs may offer virtually any type of financial service,
including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. The Federal Reserve serves as the primary
"umbrella" regulator of FHCs. Balanced against the attractiveness of these
expanded powers are higher standards for capital adequacy and management, with
heavy penalties for noncompliance.
Bank holding companies that wish to engage in expanded activities but do
not wish to become financial holding companies may elect to establish "financial
subsidiaries," which are subsidiaries of national banks with expanded powers.
The Act permits financial subsidiaries to engage in the same types of activities
permissible for nonbank subsidiaries of financial holding companies, with the
exception of merchant banking, insurance underwriting and real estate investment
and development. Merchant banking may be permitted after a five-year waiting
period under certain regulatory circumstances.
Implementing regulations under the Act have not yet been promulgated, and
though the Company cannot predict the full impact of the new legislation, there
is likely to be consolidation among financial services institutions and
increased competition for the Company. The Company expects to remain a bank
holding company for the time being and access its options as circumstances
change.
Federal Securities Law. The Common Stock of the Company is registered with
the SEC under the Exchange Act, prior to completion of the Offering and
Reorganization. The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
The Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
31
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain noninterest-bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 2001, the Bank was in compliance with these
reserve requirements.
Federal Regulation. Under the Community Reinvestment Act, as amended (the
"CRA"), as implemented by FDIC regulations, a savings 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, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating was "outstanding."
New York State Regulation. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA") which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Department. The NYCRA
requires the Department to make a biennial written assessment of a bank's
compliance with the NYCRA, utilizing a four-tiered rating system and make such
assessment available to the public. The NYCRA also requires the Superintendent
to consider a bank's NYCRA rating when reviewing a bank's application to engage
in certain transactions, including mergers, asset purchases and the
establishment of branch offices or automated teller machines, and provides that
such assessment may serve as a basis for the denial of any such application.
The Bank's NYCRA rating as of its latest examination was "satisfactory."
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs, that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB. These policies
and procedures are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. As of December 31, 2001, the Bank had $3.8 million of FHLB
stock. The dividend yield from FHLB stock was 4.39% at December 31, 2001. No
assurance can be given that such dividends will continue in the future at such
levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects.
32
These contributions have affected adversely the level of FHLB dividends paid and
could continue to do so in the future. These contributions could also have an
adverse effect on the value of FHLB stock in the future. A reduction in value of
the Bank's FHLB stock may result in a corresponding reduction in the Bank's
capital.
Federal Taxation
General. The Mutual Holding Company, the Company and the Bank are subject
to federal income taxation in the same general manner as other corporations,
with some exceptions discussed below. The following discussion of federal
taxation is intended only to summarize certain pertinent federal income tax
matters and is not a comprehensive description of the tax rules applicable to
the Bank.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the 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 the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The Bank did
not have any such reserves subject to recapture.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
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. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At December 31, 2001, the Bank had
no net operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Because the Mutual Holding Company owns less
than 80% of the outstanding common stock of the Company it is not permitted to
file a consolidated federal income tax return with the Company and the Bank. The
corporate dividends-received deduction is 80% in the case of dividends received
from corporations with which a corporate recipient does not file a consolidated
return.
33
State Taxation
New York State Taxation. The Company and the 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) 9% of "entire
net income" allocable to New York State (b) 3% of "alternative entire net
income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications. Alternative
entire net income is equal to entire net income without certain modifications.
The IRS and New York State Department of Taxation have recently completed
their audit of the Bank's 1993, 1994 and 1995 federal and state income tax
returns.
Executive Officers of the Registrant
Listed below is information, as of December 31, 2001, concerning the
Company's executive officers. There are no arrangements or understandings
between the Registrant and any of persons named below with respect to which he
or she was or is to be selected as an officer.
Name Age Position and Term
---- --- -----------------
Michael R. Kallet 51 President and Chief Executive Officer since 1990
Eric E. Stickels 40 Senior Vice President and Chief Financial Officer since
1998
Thomas H. Dixon 47 Senior Vice President\Credit Administration since 1996
34
ITEM 2. PROPERTIES
The Bank conducts its business through its main office located in Oneida,
New York, and five additional full service branch offices. The following table
sets forth certain information concerning Company property and equipment at
December 31, 2001. The aggregate net book value of the Company's premises and
equipment was $8.0 million at December 31, 2001. The insurance subsidiary
conducts its business through five leased facilities with lease expirations not
exceeding five years.
Original Date of Net Book Value
Year Lease of Property and Equipment
Location Acquired Expiration at December 31, 2001
-----------------------------------------------------------------------------------------
(In thousands)
Main Office:
182 Main Street 1889 N/A $ 2,608
Oneida, New York 13421
Branch Offices:
Camden Branch 1997 N/A 943
41 Harden Boulevard
Camden, New York 13316
Canastota Branch 1999 N/A 1,033
104 S. Peteboro St.
Canastota, New York 13032
Cazenovia Branch 1971 N/A 1,327
48 Albany Street
Cazenovia, New York 13035
Hamilton Branch 1976 N/A 34
35 Broad Street
Hamilton, New York 13346
Convenience Center 1988 N/A 242
585 Main Street
Oneida, New York 13421
Mortgage Center
126 Lenox Avenue 1989 N/A 96
Oneida, New York 13421
Operations Center
169 Main Street 2001 N/A 1,171
Oneida, New York 13421
Bailey & Haskell Associates, Inc.
Various locations 2000 Various 347
(Headquarters)
131 Main Street
Oneida, New York 13421
Other Bank Property
102 S. Peterboro St. 2000 N/A 214
Canastota, New York 13032
35
ITEM 3. LEGAL PROCEEDINGS
Much of the Bank's market area is included in the 270,000-acre land claim
of the Oneida Indian Nation ("Oneidas"). The land claim area is held primarily
by private persons. Over 15 years ago, the United States Supreme Court ruled in
favor of the Oneidas in a lawsuit which management believes was intended to
encourage the State of New York to negotiate an equitable settlement in a land
dispute that has existed for 200 years.
In June 1998, the United States Justice Department intervened in the action
on behalf of the Oneidas against Madison County and Oneida County in New York
State. In September 1998, a United States District Court removed a stay of
litigation, having been in place since the late 1980's pending settlement
negotiations. In December 1998, both the Oneidas and the United States Justice
Department filed motions to amend the long outstanding claim against the State
of New York. The motions attempts to include in the claim, various named and
20,000 unnamed additional defendants, who own real property in parts of Madison
and Oneida counties, thereby including the additional defendants in the original
suit. The U.S. District Court granted the motions to add as a defendant the
State of New York, but denied the motions to add the private landowners. Neither
the Bank nor the Company is a named defendant in the motion. The Court further
rejected as not being viable the remedies of ejectment and/or of monetary
damages against private landowners. In January 2001, amended complaints were
served by the Oneidas and the United States, which seek to eject the Counties of
Madison and Oneida from lands owned by the counties, and the Oneidas also seek a
declaration that they have the right to possess all land within the land claim
area. In June 2001, the Court determined that certain land purchased by the
Oneidas in 1997 and 1998 are exempt from real estate taxes, accepting the
Oneidas argument that the acquired parcels lie within the boundaries of the
"reservation" established in 1794 by the Federal Government. The State of New
York, Counties of Madison and Oneida and the City of Sherrill have appealed the
Courts decision with a court date set for March 2002. In February 2002, a joint
statement was issued by the Oneidas, State of New York and the counties of
Madison and Oneida, indicating that the framework for a settlement had been
agreed upon subject to the approval by the State legislature and the Federal
Government.
To date neither the original claim nor the motion to amend has had an
adverse impact on the local economy or real property values. In addition, title
insurance companies continue to underwrite policies in the land claim area with
no change in premiums or underwriting standards. The Bank requires title
insurance on all residential real estate loans, excluding home equity loans.
Both the State of New York and the Oneidas have indicated in their respective
communications that individual landowners will not be adversely affected by the
ongoing litigation. The Company continues to monitor the situation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 2001 to a vote of securityholders.
36
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
For information concerning the market for the Company's common stock, the
section captioned "Stockholder Information" in the Company's Annual Report to
Stockholders for the Year Ended December 31, 2001 (the "Annual Report to
Stockholders") is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The "Selected Consolidated Financial and Other Data" section of the
Company's Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest Rate Risk. In recent years, the Bank has used the following
strategies to manage interest rate risk: (i) emphasizing the origination and
retention of residential monthly and bi-weekly adjustable-rate mortgage loans,
commercial adjustable-rate mortgage loans, other business purpose loans and
consumer loans consisting primarily of auto loans; (ii) selling substantially
all newly originated longer-term fixed-rate one-to-four family residential
mortgage loans into the secondary market without recourse and on a servicing
retained basis; and (iii) managing the Company's investment activities in a
prudent manner in the context of overall balance sheet asset/liability
management. Investing in shorter-term securities will generally bear lower
yields as compared to longer-term investments, but which better position the
Bank for increases in market interest rates and better matches the maturities of
the Bank's certificate of deposit accounts. Certificates of deposit that mature
in one year or less, at December 31, 2001 totaled $89.9 million, or 32.7% of
total interest-bearing liabilities. The wholesale arbitrage strategy of
investing allows the Company to invest in longer-term assets by hedging the
additional interest rate risk with liabilities of similar maturity or repricing
characteristics. Borrowed funds that mature in one year or less, at December 31,
2001 totaled $11.6 million, or 4.2% of total interest-bearing liabilities.
Management believes that this balanced approach to investing will reduce the
exposure to interest rate fluctuations will enhance long-term profitability.
Net Income and Portfolio Value Analysis. The Company's interest rate
sensitivity is monitored by management through the use of a net income model and
a net portfolio value ("NPV") model which generates estimates of the change in
the Company's net income and NPV over a range of interest rate scenarios. NPV is
the present value of expected cash flows from assets and liabilities. The model
assumes estimated loan prepayment rates; reinvestment rates. The following sets
forth the Company's net income and NPV as of December 31, 2001.
37
Change in
Interest Rates Net Interest IncomeNet Portfolio Value
--------------------------------------------------------
In Basis Points Dollar Dollar Percent Dollar Dollar Percent
(Rate Shock) Amount Change Change Amount Change Change
------------ ------ ------ ------ ------ ------ ------
(Dollars in thousands)
+300 $10,614 $ 264 2.6% $ 37,544 $ (10,724)(22.2)%
+200 10,582 232 2.2% 40,321 (7,947)(16.5)%
+100 10,535 185 1.8% 43,349 (4,919)(10.2)%
Static 10,350 -- -- 48,268 --
-100 10,320 (30) (0.3)% 50,691 2,423 5.0%
-200 10,081 (269) (2.6)% 49,265 997 2.1%
-300 9,858 (492) (4.8)% 48,413 145 0.3%
There are certain shortcomings are inherent in the methodology used in the
above interest rate risk measurements. Modeling changes in Net Income and NPV
requires the making of certain assumptions, which may or may not reflect the
manner in which actual yields and costs respond to changes in market interest
rates. In this regard, the Net Interest Income and NPV Table presented assumes
that the composition of the Company's interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly, although
the Net Income and NPV Table provides an indication of the Company's interest
rate risk exposure at a particular point in time, such measurements are not
intended to and do not provide a precise forecast of the effect of changes in
market interest rates on the Company's net interest income and will differ from
actual results.
ITEM 8. FINANCIAL STATEMENTS
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants in the Company's
accounting and financial disclosure during 2001.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information concerning Directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement dated March 25, 2002,
(the "Proxy Statement"), specifically the section captioned "Proposal
I--Election of Directors." In addition, see Item 1. "Executive Officers of the
Registrant" for information concerning the Company's executive officers.
38
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Registrant's Proxy Statement, specifically the sections
captioned "Proposal I--Election of Directors--Executive Compensation,"
"--Directors' Compensation," and "--Benefits."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Company's Proxy Statement.
ITEM 13. CERTAIN TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The exhibits and financial statement schedules filed as a part of this Form
10-K are as follows:
(a)(1) Financial Statements
o Report of Independent Accountants
o Consolidated Statements of Condition, December 31, 2001
and 2000
o Consolidated Statements of Income, Years Ended December
31, 2001, 2000 and 1999
o Consolidated Statements of Changes in Stockholders'
Equity, Years Ended December 31, 2001, 2000 and 1999
o Consolidated Statements of Cash Flows, Years Ended
December 31, 2001, 2000 and 1999
o Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated
financial statements or related notes.
39
(a)(3) Exhibits
3.1 Certificate of Incorporation of Oneida Financial Corp.**
3.2 Bylaws of Oneida Financial Corp.**
4 Form of Stock Certificate.**
10.1 Employee Stock Ownership Plan.**
10.2 Stock Option Plan
10.3 Recognition and Retention Plan
13 Annual Report to Stockholders.
21 Subsidiaries of the Company.
** Incorporated by Reference to the Company's Registration Statement on Form S-1
filed on September 17, 1998.
(b) Reports on Form 8-K:
None
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
40
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.
ONEIDA FINANCIAL CORP.
Date: March 19, 2002 By: /s/ Michael R. Kallet
Michael R. Kallet
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Michael R. Kallet By: /s/ Eric E. Stickels
Michael R. Kallet, President and Chief Eric E. Stickels, Senior Vice President and Chief
Executive Officer Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 19, 2002 Date: March 19, 2002
By: /s/ Thomas H. Dixon By: /s/ Nicholas J. Christakos
Thomas H. Dixon, Senior Vice President Nicholas J. Christakos, Director
Date: March 19, 2002 Date: March 19, 2002
By: /s/ Patricia D. Caprio By: /s/ Edward J. Clarke
Patricia D. Caprio, Director Edward J. Clarke, Director
Date: March 19, 2002 Date: March 19, 2002
By: /s/ James J. Devine, Jr. By: /s/ John E. Haskell
James J. Devine, Jr., Director John E. Haskell, Director
Date: March 19, 2002 Date: March 19, 2002
By: /s/ Rodney D. Kent By: /s/ William D. Matthews
Rodney D. Kent, Director William D. Matthews, Director
Date: March 19, 2002 Date: March 19, 2002
By: /s/ Michael W. Milmoe By: /s/ Richard B. Myers
Michael W. Milmoe, Director Richard B. Myers, Director
Date: March 19, 2002 Date: March 19, 2002
By: /s/ Frank O. White, Jr.
Frank O. White, Jr., Director
Date: March 19, 2002
41
EXHIBIT 13
2001 ANNUAL REPORT TO STOCKHOLDERS
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent Company Subsidiary Company State of Incorporation
-------------- ------------------ ----------------------
Oneida Financial Corp The Oneida Savings Bank New York
The Oneida Savings Bank Oneida Preferred Funding Corp. New York
The Oneida Savings Bank Bailey & Haskell Associates, New York
Inc.
The Oneida Savings Bank The Dunn Agency, Inc. New York