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, 2003
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 (I.R.S. Employer
of Incorporation or Organization) Identification Number)
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|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES |_| NO|X|
As of June 30, 2003, there were issued and outstanding 7,399,953 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 June 30, 2003 ($15.79 ) was $48,794,305 .
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2003 (Parts II and IV).
2. Proxy Statement for the 2004 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. The Company is majority-owned by Oneida
Financial, MHC, a Federally-chartered mutual holding company (the "Mutual
Holding Company"). The Company and the mutual holding company are each subject
to regulation by the Office of Thrift Supervision ("OTS"). The Company's assets
consist primarily of its ownership in the shares of the Bank's common stock.
At December 31, 2003 the Company had consolidated assets and consolidated
stockholders' equity of $428.2 million and $50.8 million, respectively. Through
the Bank, the Company has deposits totaling $305.5 million. All disclosures and
financial information is presented on a consolidated basis.
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 seven full service branch offices and
using those deposits, together with funds generated from operations and
borrowings 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 Bailey & Haskell Associates, Inc., its
insurance agency subsidiary.
At December 31, 2003, $135.1 million, or 66.6%, of the Bank's loans were
secured by real estate. At December 31, 2003, $79.9 million, or 39.4%, of the
Bank's loans were secured by one-to-four family residential real estate, $38.2
million, or 18.8%, of the Bank's loans were secured by commercial real estate,
and $17.0 million, or 8.4%, of the Bank's loans were home equity loans. Consumer
loans totaled $36.1 million, or 17.8% of the Bank's loans, at December 31, 2003.
The Bank also originates commercial business loans which totaled $31.5 million,
or 15.6%, of loans at December 31, 2003. The Bank's investment securities and
mortgage-backed securities portfolios totaled $122.0 million and $51.8 million,
respectively, at December 31, 2003.
In April 1999 the Bank established Oneida Preferred Funding Corp. as the
Bank's wholly owned real estate investment trust subsidiary. At December 31,
2003 Oneida Preferred Funding Corp. held $40.9 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.
In October 2000, the Bank acquired Bailey & Haskell Associates, Inc.,
which is a wholly owned insurance and financial services subsidiary. Since the
acquisition of Bailey & Haskell Associates, Inc. we have acquired four insurance
agencies, all of which have been merged into Bailey & Haskell Associates, Inc.
1
On May 31, 2002, the Bank completed its acquisition of SBC Financial
Corporation ("SBC"), the holding company of State Bank of Chittenango
("Chittenango"), a New York State chartered commercial bank. The two banking
offices of Chittenango became banking offices of the Bank. The Bank has retained
Chittenango as a special purpose commercial bank subsidiary of the Bank.
Chittenango is permitted to accept municipal deposit accounts from the various
municipalities, school districts and other public sources, a source of funds not
available to the Bank under New York law. The Bank paid $11.9 million or $102.60
in cash for each of the 116,079 shares of SBC common stock. Assets acquired as a
result of the acquisition totaled $66.5 million and resulted in additional
goodwill of $5.6 million and a core deposit intangible of approximately $1.2
million. At December 31, 2003, no impairment adjustment has been made to
goodwill or other intangibles that were created in the transaction.
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. The average
household income of persons residing in Oneida and Madison counties was below
that of New York State and the United States.
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 adjustable rate mortgage ("
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 number 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 allowance for loan losses) as of the dates
indicated.
At December 31,
-------------------------------------------------------------------------
2003 2002 2001
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- -------- ---------- -------- ---------- --------
(Dollars in thousands)
Real Estate Loans:
One- to- four family...... $ 79,910 39.4% $ 85,581 42.8% $ 76,477 44.3%
Multi-family............... 2,378 1.2 1,983 1.0 1,003 0.6
Home equity................ 17,001 8.4 15,149 7.6 11,077 6.4
Commercial real estate..... 35,806 17.6 30,096 15.0 23,517 13.6
-------- -------- ---------- -------- ---------- --------
Total real estate loans.. 135,095 66.6 132,809 66.4 112,074 64.9
-------- -------- ---------- -------- ---------- --------
Consumer Loans:
Automobile loans.......... 30,042 14.8 28,857 14.4 29,569 17.1
Mobile home............... 205 0.1 280 0.1 381 0.2
Personal loans............ 4,326 2.1 6,842 3.4 2,691 1.6
Guaranteed student loans.. -- -- -- -- -- --`
Other consumer loans...... 1,549 0.8 1,442 0.8 1,465 0.9
-------- -------- ---------- -------- ---------- --------
Total consumer loans..... 36,122 17.8 37,421 18.7 34,106 19.8
Commercial business loans..... 31,494 15.6 29,775 14.9 26,385 15.3
-------- -------- ---------- -------- ---------- --------
Total consumer and commercial
business loans........... 67,616 33.4 67,196 33.6 60,491 35.1
-------- -------- ---------- -------- ---------- --------
Total loans.............. $202,711 100.00% $ 200,005 100.00% $ 172,565 100.00%
======== ========= ========== ========= ========== =========
Less:
Allowance for losses....... 2,115 2,109 1,672
-------- ---------- ----------
Total loans receivable, net $200,596 $ 197,896 $ 170,893
======== ========== ==========
At December 31,
----------------------------------------------
2000 1999
-------------------- ---------------------
Amount Percent Amount Percent
--------- -------- --------- --------
Real Estate Loans:
One- to- four family...... $ 84,386 50.7% $ 81,264 53.9%
Multi-family............... 1,134 0.7 1,358 0.9
Home equity................ 10,940 6.6 9,740 6.5
Commercial real estate..... 18,742 11.3 16,560 11.0
--------- -------- --------- --------
Total real estate loans.. 115,202 69.3 108,922 72.3
--------- -------- --------- --------
Consumer Loans:
Automobile loans.......... 25,818 15.5 16,768 11.1
Mobile home............... 526 0.4 595 0.4
Personal loans............ 3,450 2.1 6,901 4.6
Guaranteed student loans.. -- -- 305 0.2
Other consumer loans...... 1,432 0.8 1,451 1.0
--------- -------- --------- --------
Total consumer loans..... 31,226 18.8 26,020 17.3
Commercial business loans..... 19,865 11.9 15,727 10.4
--------- -------- --------- --------
Total consumer and commercial
business loans........... 51,091 30.7 41,747 27.7
--------- -------- --------- --------
Total loans.............. $ 166,293 100.00% $ 150,669 100.00%
========= ========= ========= =========
Less:
Allowance for losses....... 1,632 1,523
--------- ---------
Total loans receivable, net $ 164,661 $ 149,146
========= =========
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,
-------------------------------------------------------------------------
2003 2002 2001
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- -------- ---------- -------- ---------- --------
(Dollars in thousands)
FIXED-RATE LOANS:
Real Estate Loans:
One- to- four family...... $ 29,197 14.4% $ 27,848 13.9% $ 21,370 12.4%
Multi-family............... -- -- -- -- -- --
Home equity................ 10,543 5.2 10,423 5.2 6,634 3.8
Commercial real estate..... 4,174 2.0 1,799 0.9 1,248 0.7
-------- -------- ---------- -------- ---------- --------
Total real estate loans.. 43,914 21.6 40,070 20.0 29,252 16.9
Consumer Loans:
Total consumer loans....... 35,211 17.4 36,704 18.4 33,371 19.4
Commercial business loans:
Total commercial loans..... 13,981 7.0 12,172 6.1 13,765 8.0
-------- -------- ---------- -------- ---------- --------
Total fixed-rate loans..... 93,106 46.0 88,946 44.5 76,388 44.3
-------- -------- ---------- -------- ---------- --------
ADJUSTABLE RATE LOANS:
Real Estate Loans:
One- to- four family...... $ 50,713 25.0% $ 57,733 28.9% $ 55,107 31.9%
Multi-family............... 2,378 1.2 1,983 1.0 1,003 0.6
Home equity................ 6,458 3.2 4,726 2.4 4,443 2.6
Commercial real estate..... 31,632 15.6 28,297 14.1 22,269 12.9
-------- -------- ---------- -------- ---------- --------
Total real estate loans.. 91,181 45.0 92,739 46.4 82,822 48.0
Consumer Loans:
Total consumer loans....... 911 0.4 717 0.3 735 0.4
Commercial business loans:
Total commercial business loans 17,513 8.6 17,603 8.8 12,620 7.3
-------- -------- ---------- -------- ---------- --------
Total adjustable-rate loans 109,605 54.0 111,059 55.5 96,177 55.7
-------- -------- ---------- -------- ---------- --------
Total loans................ 202,711 100.00% $ 200,005 100.00% $ 172,565 100.00%
======== ========= ========== ========= ========== =========
Less:
Allowance for loan losses.. 2,115 2,109 1,672
-------- ---------- ----------
Total loans receivable, net... $200,596 $ 197,896 $ 170,893
======== ========== ==========
At December 31,
----------------------------------------------
2000 1999
-------------------- ---------------------
Amount Percent Amount Percent
---------- -------- ---------- --------
FIXED-RATE LOANS:
Real Estate Loans:
One- to- four family...... $ 17,485 10.5% $ 18,208 12.1%
Multi-family............... -- -- -- --
Home equity................ 6,211 3.7 5,416 3.6
Commercial real estate..... 775 0.5 1,023 0.7
---------- -------- ---------- --------
Total real estate loans.. 24,471 14.7 24,647 16.4
Consumer Loans:
Total consumer loans....... 30,745 18.5 25,284 16.8
Commercial business loans:
Total commercial loans..... 12,965 7.8 10,027 6.6
---------- -------- ---------- --------
Total fixed-rate loans..... 68,181 41.0 59,958 39.8
---------- -------- ---------- --------
ADJUSTABLE RATE LOANS:
Real Estate Loans:
One- to- four family...... $ 66,901 40.2% $ 63,056 41.8%
Multi-family............... 1,134 0.7 1,358 0.9
Home equity................ 4,729 2.9 4,324 2.9
Commercial real estate..... 17,967 10.8 15,537 10.3
---------- -------- ---------- --------
Total real estate loans.. 90,731 54.6 84,275 55.9
Consumer Loans:
Total consumer loans....... 481 0.3 736 0.5
Commercial business loans:
Total commercial business loans 6,900 4.1 5,700 3.8
---------- -------- ---------- --------
Total adjustable-rate loans 98,112 59.0 90,711 60.2
---------- -------- ---------- --------
Total loans................ $ 166,293 100.00% $ 150,669 100.00%
========== ========= ========== =========
Less:
Allowance for loan losses.. 1,632 1523
---------- ----------
Total loans receivable, net... $ 164,661 $ 149,146
========== ==========
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. owever, the Bank will
originate one-to-four family loans with loan-to-value ratios of up to 97%,
provided the borrower obtains private mortgage insurance. 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 without recourse to the Bank. At December 31, 2003, loans serviced by the
Bank for others totaled $93.1 million. During the year ended December 31, 2003
and December 31, 2002, the Bank sold $50.2 million and $32.4 million,
respectively in fixed-rate one-to-four family loans. As of December 31, 2003 the
Bank has $2.0 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,
2003, 25.0% 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, 2003, approximately $79.9 million, or 39.4% of the Bank's
loan portfolio, consisted of one-to-four family residential loans. Approximately
$114,000 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 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
5
loans are originated with terms up to 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, 2003, the outstanding balances of home
equity loans totaled $17.0 million, or 8.4% of the Bank's loan portfolio.
Commercial Real Estate Loans. At December 31, 2003, $38.2 million, or
18.8% 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 terms of up to 20
years. The maximum loan-to-value ratio of commercial real estate loans is 80%.
At December 31, 2003, the largest commercial real estate loan had a principal
balance of $1.4 million and was secured by a medical building. This loan is
performing in accordance with its terms. As of December 31, 2003, there were no
commercial real estate loans 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. At December 31, 2003, consumer loans totaled $36.1
million, or 17.8% of the total loan portfolio. 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). 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, 2003, loans secured by automobiles totaled $30.0 million, of which
$24.2 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.
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
6
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,
at fixed rates of interest except for lines of credit which have variable rates
of interest. 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, 2003, the Bank
had $31.5 million of commercial business loans which represented 15.6% of the
total loan portfolio. On such date, the largest commercial business lending
relationship totaled $2.0 million, which was an unsecured demand note to a local
multi-national corporation. At December 31, 2003, unsecured commercial business
loans totaled $4.3 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, 2003, 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 Ten
Through Three Five Through Beyond
Within One Three Through Through Twenty-Five Twenty-Five
Year Years Five Years Ten Years Years Years Total
---------- -------- ---------- --------- ----------- ----------- --------
(In thousands)
Real estate loans:
One- to- four family..... $ 567 $ 778 $ 2,209 $ 11,120 $ 46,901 $ 18,335 $ 79,910
Home equity............... 176 1,129 3,031 12,276 291 98 17,001
Commercial real estate.... 2,198 264 1,024 7,407 27,291 -- 38,184
-------- -------- -------- -------- -------- -------- --------
Total real estate loans. 2,941 2,171 6,264 30,803 74,483 18,433 135,095
Consumer and other loans..... 1,341 11,432 20,020 2,752 340 237 36,122
Commercial business loans.... 15,330 6,442 5,843 3,186 689 4 31,494
-------- -------- -------- -------- -------- -------- --------
Total loans............. $ 19,612 $ 20,045 $ 32,127 $ 36,741 $ 75,512 $ 18,674 $202,711
======== ======== ======== ======== ======== ======== ========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth
at December 31, 2003, the dollar amount of all fixed-rate and adjustable-rate
loans due after December 31, 2004. Adjustable- and floating-rate loans are
included based on contractual maturities.
Due After December 31, 2004
----------------------------------
Fixed Adjustable Total
------- --------- --------
(In thousands)
Real estate loans
One- to- four family ............... $28,711 $50,632 $ 79,343
Home equity ......................... 10,444 6,381 16,825
Commercial real estate .............. 4,067 31,919 35,986
------- ------- --------
Total real estate loans ........... 43,222 88,932 132,154
Consumer and other loans ............... 34,136 645 34,781
Commercial business loans .............. 10,152 6,012 16,164
------- ------- --------
Total loans ....................... $87,510 $95,589 $183,099
======= ======= ========
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
except for those purchased as part of the acquisition of SBC.
Year Ended December 31,
------------------------------
2003 2002 2001
-------- ------- -------
(Dollars in thousands)
Originations by Type:
Adjustable Rate:
Real estate:
One- to- four family ................. $ 5,733 $ 6,540 $ 4,188
Home equity ........................... 6,570 2,857 2,350
Commercial and real estate ............ 8,873 7,977 4,562
-------- ------- -------
Total real estate loans ............... 21,176 17,374 11,100
Consumer loans ........................ 1,336 969 506
Commercial business loans ............. 6,532 4,270 9,969
-------- ------- -------
Total adjustable rate loans ....... $ 29,044 $22,613 21,575
-------- ------- -------
Fixed-Rate:
Real estate:
One- to- four family ................. $ 63,031 $36,989 $35,173
Home equity ........................... 2,564 3,551 2,135
Commercial and real estate ............ 1,890 1,172 4,029
-------- ------- -------
Total real estate loans ............... 67,485 41,712 41,337
Consumer loans ........................ 20,641 19,085 23,206
Commercial business loans ............. 17,127 13,568 11,651
-------- ------- -------
Total fixed rate loans ............ $105,253 $74,365 $76,194
-------- ------- -------
Total loans originated ....................... $134,297 $96,978 $97,769
-------- ------- -------
Purchased Adjustable Rate:
Real estate:
One- to- four family ................. $ -- $ 4,143 $ --
Home equity ........................... -- 354 --
Commercial and real estate ............ -- 1,940 --
-------- ------- -------
Total real estate loans ............... -- 6,437 --
Consumer loans ........................ -- 10 --
Commercial business loans ............. -- 3,964 --
-------- ------- -------
Total adjustable rate loans ....... $ -- $10,411 $ --
-------- ------- -------
Fixed-Rate:
Real estate:
One- to- four family ................. $ -- $ 8,080 $ --
Home equity ........................... -- 2,595 --
Commercial and real estate ............ -- -- --
-------- ------- -------
Total real estate loans ............... -- 10,675 --
Consumer loans ........................ -- 6,582 --
Commercial business loans ............. -- -- --
-------- ------- -------
Total fixed rate loans ............ $ -- $17,257 $ --
-------- ------- -------
Total loans purchased ........................ $ -- $27,668 $ --
-------- ------- -------
Sales:
Real estate:
One- to- four family ................. $ 50,222 $32,408 $26,597
Consumer loans ........................ -- 542 --
-------- ------- -------
Total loans sold ............................. $ 50,222 $32,950 $26,597
Repayments:
Real estate:
One- to- four family ................. $ 24,213 $14,240 $20,673
Home equity ........................... 7,282 5,285 4,348
Commercial and real estate ............ 4,658 3,530 3,947
-------- ------- -------
Total real estate loans ........... 36,153 23,055 28,968
Consumer loans .......................... 23,276 22,789 20,832
Commercial business loans ............... 21,940 18,412 15,100
-------- ------- -------
Total repayments .................. $ 81,369 $64,256 $64,900
-------- ------- -------
Total reductions .................. $131,591 $97,206 $91,497
-------- ------- -------
Net increases/(decreases)............... $ 2,706 $27,440 $ 6,272
======== ======= =======
9
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 $500,000 must be approved by the Bank Loan Committee
(consisting of two persons; the President and/or Executive Vice President in
charge of credit administration and either one of two senior lending officers
appointed to this committee). All loan relationships in excess of $500,000 and
up to $750,000 (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 $750,000 up to $1.5 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 $1.5 million must
be approved by the Board of Directors.
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's 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, and 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, 2003, the largest aggregate amount loaned by the Bank to
one borrower consisted of a line of credit and commercial loans to a
not-for-profit corporation with an outstanding balance totaling $2.4 million.
The loans are secured by business assets. At December 31, 2003 this lending
relationship was performing in accordance with its terms.
Delinquencies and Classified Assets
Collection Procedures. A computer generated late notice is sent when a
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 Bank's Collection Department Manager. Generally, after 90
days the Bank will commence legal action.
10
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, 2003, the Bank had
nonperforming loans of $181,000 and a ratio of nonperforming loans to total
assets of 0.04%. At December 31, 2003, the Bank's ratio of nonperforming assets
to total assets was 0.07%.
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.
The following table sets forth delinquencies in the Bank's loan portfolio
as of December 31, 2003. When a loan is delinquent 90 days or more, the Bank
fully reverses all interest accrued and ceases to accrue interest thereafter.
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 2 $ 70 3 $ 114 5 $ 184
Home equity......................... -- -- 1 34 1 34
Commercial real estate.............. -- -- -- -- -- --
Consumer ........................... 2 19 1 1 3 20
Commercial business................. -- -- 1 22 1 22
------ ------- ------- ------- ------- ------
Total ........................... 4 $ 89 6 $ 171 10 $ 260
====== ======= ======= ======= ======= ======
11
Nonaccrual Loans and Nonperforming Assets. The following table sets forth
information regarding nonaccrual loans and other nonperforming assets.
At December 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)
Non-accruing loans:
One-to-four family........................... $ 114 $ 49 $ 139 $ 112 $ 132
Multi-family................................. -- - - - -
Commercial real estate....................... -- - 69 75 -
Construction and land........................ -- - - - -
Consumer..................................... 11 - - -
Commercial business.......................... 22 - - - -
--------- --------- --------- --------- ---------
Total...................................... 147 49 208 187 132
--------- --------- --------- --------- ---------
Accruing loans delinquent more than 90 days:
One-to-four family........................... -- - - - -
Multi-family................................. -- - - - -
Commercial real estate....................... -- - - - -
Construction and land........................ -- - - - -
Consumer..................................... 34 - - - -
Commercial business.......................... -- - - - -
--------- --------- --------- --------- ---------
Total...................................... 34 - - - -
--------- --------- --------- --------- ---------
Total nonperforming loans....................... $ 181 $ 49 $ 208 $ 187 $ 132
========= ========= ========= ========= =========
Foreclosed assets:
One-to-four family........................... $ -- $ - $ 77 $ 55 $ 76
Multi-family................................. -- - - - -
Commercial real estate....................... 115 - - - 18
Construction and land........................ -- - - - -
Consumer..................................... -- - - - 1
Commercial business.......................... -- - - - -
--------- --------- --------- --------- ---------
Total...................................... 115 - 77 55 95
========= ========= ========= ========= =========
Total nonperforming loans as a percentage of
total assets.................................... 0.04% 0.01% 0.06% 0.06% 0.05%
========= ========= ========= ========= =========
Total nonperforming assets...................... $ 296 $ 49 $ 285 $ 242 $ 227
========= ========= ========= ========= =========
Total nonperforming assets as a percentage of
total assets.................................... 0.07% 0.01% 0.08% 0.08% 0.08%
========= ========= ========= ========= =========
During the years ended December 31, 2003 and 2002, respectively, gross
interest income of $7,000 and $3,700 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, 2003 and 2002.
Classification of Assets. On the basis of management's review of its
assets, at December 31, 2003, the Bank had classified a total of $4.1 million of
loans as follows:
Amount
------
(in thousands):
Special mention......................... $ 2,000
Substandard............................. 1,376
Doubtful assets......................... --
Loss assets............................. --
Impaired assets......................... 700
---------
Total ............................. $ 4,076
=========
General loss allowance.................. $ 1,456
=========
Specific loss allowance................. 659
=========
Net charge-offs............................ 524
=========
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 probable and estimable
losses in the loan portfolio, the composition of the loan portfolio and other
quantitative and qualitative factors. Management's evaluation of the adequacy of
the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse circumstances that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and an analysis of the levels and trends of delinquencies, charge-offs, and the
risk rating of the various loan categories. 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 the Bank to recognize additions to the
allowance based on their judgment about information available to them at the
time of their examination. At December 31, 2003, the total allowance was $2.1
million, which amounted to 1.05% of loans, net and 1,168.5% of nonperforming
loans. Management considers whether the allowance should be adjusted to protect
against risks in the loan portfolio. Quarterly, management evaluates the
adequacy of the allowance and determines the appropriate level of provision for
loan losses by applying a range of estimated loss percentages to each category
of performing loans and classified loans. The allowance adjustment is based upon
the net change in each portfolio category, as well as an adjustment related to
impaired loans, since the prior quarter. A loan is considered impaired, based on
current information and events, if it is probable that the Bank will be unable
to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is generally based on the present value of expected future cash flows discounted
at the historical effective interest rate, except that all collateral-dependent
loans are measured for impairment based on the estimated fair value of the
collateral securing the loan. 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. 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, 2003 and
2002, the Bank had charge-offs of $725,000 and $807,000, respectively, against
this allowance.
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,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- --------- ---------- ----------
(Dollars in thousands)
Balance at beginning of period............ $ 2,109 $ 1,672 $ 1,632 $ 1,523 $ 1,543
Charge-offs:
One-to-four family..................... 13 19 8 7 91
Commercial real estate................. -- -- 25 -- --
Construction and land.................. -- -- -- -- --
Consumer............................... 509 382 294 260 246
Commercial business.................... 203 406 176 44 1
---------- ---------- --------- ---------- ----------
Total.................................. 725 807 503 311 338
---------- ---------- --------- ---------- ----------
Recoveries:
One-to-four family..................... -- 34 1 3 3
Commercial real estate................. -- -- -- -- --
Construction and land.................. -- -- -- -- --
Consumer............................... 95 62 50 66 85
Commercial business.................... 106 23 12 6 1
---------- ---------- --------- ---------- ----------
Total.................................. 201 119 63 75 89
---------- ---------- --------- ---------- ----------
Net charge-offs........................... (524) (688) (440) (236) (249)
Addition of allowance from acquisition.... -- 961 -- -- -
Additions charged to operations........... 530 164 480 345 229
---------- ---------- --------- ---------- ----------
Balance at end of period.................. $ 2,115 $ 2,109 $ 1,672 $ 1,632 $ 1,523
========== ========== ========= ========== ==========
Allowance for loan losses as a percentage
of total loans receivable, net............ 1.05% 1.07% 0.98% 0.99% 1.02%
========== ========== ========= ========== ==========
Ratio of net charge-offs to average loans. 0.26% 0.37% 0.26% 0.15% 0.18%
========== ========== ========= ========== ==========
Ratio of net charge-offs to non-performing
loans..................................... 289.50% 1,404.08% 211.54% 126.20% 188.64%
========== ========== ========= ========== ==========
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,
--------------------------------------------------------------------------------
2003 2002
------------------------------------- ---------------------------------------
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................... 330 $ 96,911 47.81% $ 459 $ 100,730 50.36%
Commercial real estate.................. 353 38,184 18.84 409 32,079 16.04
Consumer ............................... 675 36,122 17.82 538 37,421 18.71
Commercial business..................... 743 31,494 15.53 687 29,775 14.89
Unallocated............................. 14 -- -- 16 -- --
--------- --------- -------- -------- --------- ------
Total.......................... 2,115 $ 202,711 100.00% $ 2,109 $ 200,005 100.00%
========= ======== ======== ======== ========= ======
At December 31,
-------------------------------------
2001
-------------------------------------
Percent
of Loans
Amount of Loan In Each
Loan Loss Amounts Category to
Allowance by Category Total Loans
--------- ----------- -----------
Residential mortgages................... $ 382 $ 87,554 50.74%
Commercial real estate.................. 366 24,520 14.21
Consumer ............................... 437 34,106 19.76
Commercial business..................... 487 26,385 15.29
Unallocated............................. -- -- --
--------- -------- ------
Total.......................... $ 1,672 $172,565 100.00%
========= ======== ======
At December 31,
---------------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
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 to
Allowance by Category Total Loans Allowance by Category Total Loans
--------- ----------- ----------- --------- ----------- -----------
(Dollars in thousands)
Residential mortgages.................... $ 487 $ 95,326 57.3% $ 469 $ 91,004 60.40%
Commercial real estate................... 280 19,876 12.0 235 17,918 11.89
Consumer ................................ 422 31,226 18.8 358 26,020 17.27
Commercial business...................... 434 19,865 11.9 295 15,727 10.44
Unallocated.............................. 9 -- -- 166 -- --
--------- --------- --------- -------- --------- ----------
Total........................... $ 1,632 $ 166,293 100.00% $ 1,523 $ 150,669 100.00%
========= ========= ========== ======== ========= ===========
15
Securities Investment Activities
The securities investment policy is established by the Board of Directors
of the Bank. This policy dictates that investment decisions will be made based
on the safety of the investment, the Bank's liquidity needs, 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 Ginnie
Mae. 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 investment strategy 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, 2003, the Bank had $122.0 million,
or 28.5% 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 $5.4 million and an estimated market value of
$5.4 million at December 31, 2003. 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, 2003, the Bank's investment securities portfolio had a weighted
average life of 7.51 years.
16
Investment Securities. The following table sets forth certain information
regarding the investment securities and other interest earning assets as of the
dates indicated.
At December 31,
----------------------------------------------------------------------
2003 2002 2001
--------------------- ---------------------- ---------------------
Amortized Percent Amortized Percent Amortized Percent
Cost of Total Cost of Total Cost of Total
-------- --------- ---------- --------- ---------- --------
(Dollars in thousands)
Investment securities available for
sale:
U.S. Government securities.... $ -- --% $ -- --% $ -- --%
Federal agency securities..... 45,840 37.92 48,594 39.61 25,035 31.36
Corporate debt securities..... 31,175 25.79 42,751 34.84 31,663 40.00
Tax exempt bonds.............. 25,496 21.09 12,642 10.31 3,480 4.40
Public utilities.............. -- -- -- -- 200 0.25
Equity securities............. 15,020 12.42 15,020 12.24 14,944 18.88
-------- --------- ---------- --------- ---------- --------
Subtotal.................. 117,531 97.22 119,007 97.00 75,322 95.16
FHLB stock.................... 3,370 2.78 3,685 3.00 3,830 4.84
-------- --------- ---------- --------- ---------- --------
Total..................... 120,901 100.00% $ 122,692 100.00% $ 79,152 100.00%
======== ========= ========== ========= ========== ========
Average remaining life of
investment securities............ 7.51 years 6.07 Years 7.32 Years
Other interest earning assets:
Interest-bearing deposits with
banks....................... 1,340 100.00 2,092 46.57 4,909 33.15
Federal funds sold............ -- 2,400 53.43 9,900 66.85
-------- --------- ---------- --------- ---------- --------
Total loans............... 1,340 100.00% $ 4,492 100.00% $ 14,809 100.00%
======== ========= ========== ========= ========== ========
At December 31,
----------------------------------------------
2000 1999
---------------------- ---------------------
Amortized Percent Amortized Percent
Cost of Total Cost of Total
---------- --------- ---------- --------
(Dollars in thousands)
Investment securities available for
sale:
U.S. Government securities.... $ -- 0.00% $ -- 0.00%
Federal agency securities..... 47,795 52.23 54,803 61.73
Corporate debt securities..... 17,189 18.78 11,420 12.86
Tax exempt bonds.............. 2,569 2.81 3,624 4.08
Public utilities.............. 200 0.22 200 0.23
Equity securities............. 19,806 21.64 16,183 18.23
---------- --------- ---------- --------
Subtotal.................. 87,559 95.68 86,230 97.13
FHLB stock.................... 3,950 4.32 2,547 2.87
---------- --------- ---------- --------
Total..................... $ 91,509 100.00% $ 88,777 100.00%
========== ========= ========== ========
Average remaining life of
investment securities............ 6.40 Years 5.09 Years
Other interest earning assets:
Interest-bearing deposits with
banks....................... 297 15.7 873 100.00
Federal funds sold............ 1,600 84.3 -- --
---------- --------- ---------- --------
Total loans............... $ 1,897 100.00% $ 873 100.00%
========== ========= ========== ========
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, 2003.
December 31, 2003
----------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
--------- --------- --------- --------- --------- ---------
Amortized Amortized Amortized Amortized Amortized Carrying
Cost Cost Cost Cost Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
U.S. Government securities.... $ -- $ -- $ -- $ -- $ -- $ --
Federal agency securities..... -- 13,201 21,153 11,486 45,840 45,500
Corporate debt securities..... -- 5,299 4,023 21,853 31,175 31,736
Tax exempt bonds.............. 1,183 2,775 8,405 13,133 25,496 26,109
Public utilities.............. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Equity securities............. -- -- -- 18,390 18,390 18,704
--------- --------- --------- --------- --------- ---------
Total securities............. $ 1,183 $ 21,275 $ 33,581 $ 64,862 $ 120,901 $ 122,049
========= ========= ========= ========= ========= =========
Weighted average yield (1)........ 2.30% 3.89% 4.14% 5.16% 4.60% 5.11%
- ----------
(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 Ginnie Mae; and (iii)
increase liquidity. At December 31, 2003, the amortized cost of mortgage-backed
securities totaled $51.7 million or 12.1% of total assets, all of which were
classified as available for sale. The mortgage-backed securities portfolio had
coupon rates ranging from 1.5% to 8.5%, a weighted average yield of 4.68% and a
weighted average life (including payment assumption) of 13.6 years at December
31, 2003. The estimated fair value of the Bank's mortgage-backed securities at
December 31, 2003 was $51.8 million which was $100,000 higher than the amortized
cost of $51.7 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 Ginnie Mae) 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 $51.7 million mortgage-backed securities
portfolio at December 31, 2003, $1.1 million with a weighted average yield of
5.51% had contractual maturities within five years, $3.2 million with a weighted
average yield of 4.82% had contractual maturities of five to ten years and $47.4
million with a weighted average yield of 4.65% had contractual maturities of
over ten years. However, the actual
18
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,
-----------------------------------------------------------------
2003 2002 2001
------------------ ------------------- -------------------
Amortized Percent Amortized Percent Amortized Percent
Cost of Total Cost of Total Cost of Total
--------- -------- --------- -------- -------- --------
(Dollars in thousands)
Mortgage-backed securities available for sale:
GinnieMae.................................... $ 1,504 2.90% $ 4,256 11.02% $14,661 27.57%
FannieMae.................................... 21,863 42.30 12,628 32.68 16,105 30.28
FreddieMac................................... 22,795 44.10 18,914 48.95 19,395 36.47
CMOs......................................... 4,961 9.60 2,127 5.50 2,140 4.02
Small business administration................ 565 1.10 713 1.85 883 1.66
------- -------- ------- ------- ------- ------
Total.................................... $51,688 100.00% $38,638 100.00% $53,184 100.00%
======= ====== ======== ====== ======= ======
December 31,
-------------------------------------------
2000 1999
------------------ -------------------
Amortized Percent Amortized Percent
Cost of Total Cost of Total
--------- -------- --------- --------
(Dollars in thousands)
Mortgage-backed securities available for sale:
GinnieMae.................................... $13,349 32.94% 7,023 25.60%
FannieMae.................................... 13,336 32.91 14,824 54.05
FreddieMac................................... 13,793 34.03 5,518 20.12
CMOs......................................... 50 0.12 62 0.23
Small business administration................ ------- ------ ------- -----
Total.................................... $40,528 100.00% $ 27,427 100.0%
======= ====== ======== =====
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, 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. Through our special purpose subsidiary at December 31, 2003 the Bank
held $6.0 million in municipal deposits.
At December 31, 2003, deposits totaled $305.5 million. At December 31,
2003, the Bank had a total of $126.7 million in certificates of deposit, of
which $79.5 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, 2003 certificates
of deposit with balances of $100,000 or more totaled $32.5 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,
-------------------------------------------
2003 2002 2001
------------ ---------- -----------
(Dollars in thousands)
Opening balance........................................ $ 291,779 $ 228,163 $ 202,755
Deposits acquired from acquisition of SBC.............. -- 60,146 --
Deposits............................................... 2,249,912 1,915,273 1,448,285
Withdrawals............................................ (2,241,116) (1,918,344) (1,430,907)
Interest credited...................................... 4,940 6,541 8,030
------------ ---------- -----------
Ending balance......................................... $ 305,515 $ 291,779 $ 228,163
------------ ---------- -----------
Net increase........................................... $ 13,736 $ 63,616 $ 25,408
============ ========== ===========
Percent increase....................................... 4.71% 27.88% 12.53%
============ ========== ===========
21
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 2003.
Maturity
-----------------------------------------------
3 Months Over 3 to Over 6 to Over 12
or Less 6 Months 12 Months Months Total
-------- --------- --------- ------- --------
(In thousands)
Certificates of deposit less than $100,000........ $ 19,723 $ 15,867 $23,749 $34,943 $ 94,282
Certificates of deposit of $100,000 or more....... 9,776 3,373 7,053 12,265 32,467
-------- -------- ------- ------- ---------
Total of certificates of deposit.................. $ 29,499 $ 19,240 $30,802 $47,208 $126,749
======== ======== ======== ======= ========
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,
----------------------------------------------------------------------
2003 2002 2001
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- ---------
(Dollars in thousands)
Transactions and savings deposits:
Noninterest-bearing..................... $ 49,644 16.25% $ 45,951 15.75% $ 29,882 13.10%
Savings accounts........................ 69,177 22.64 64,946 22.26 44,459 19.48
NOW accounts............................ 19,907 6.51 12,118 4.15 8,455 3.71
Money market accounts................... 40,038 13.11 35,206 12.07 23,691 10.38
-------- -------- -------- -------- -------- ---------
Total.............................. 178,766 58.51 158,221 54.23 106,487 46.67
-------- -------- -------- -------- -------- ---------
Certificates of deposit:
Less than 2.00%......................... 59,380 19.44 26,014 8.91 11,550 5.06
2.00-3.99%.............................. 38,156 12.49 59,481 20.39 13,497 5.92
4.00-5.99%.............................. 20,187 6.61 35,309 12.10 50,732 22.23
6.00-7.99%.............................. 9,026 2.95 12,754 4.37 45,897 20.12
-------- -------- -------- -------- -------- ---------
Total certificates of deposit...... 126,749 41.49 133,558 45.77 121,676 53.33
-------- -------- -------- -------- -------- ---------
Total deposits.................. $305,515 100.00% $291,779 100.00% $228,163 100.00%
======== ======== ======== ======== ======== =========
The following table sets forth the amount and remaining maturities of the
Bank's certificates of deposit accounts at December 31, 2003.
Percent
<2.00% 2.00-3.99% 4.00-5.99% 6.00-7.99% Total of Total
------------ --------- ---------- ---------- ----------- --------
(Dollars in thousands)
Certificate accounts maturing
in quarter ending:
March 31, 2004............. $ 24,470 $ 3,063 $ 781 $ 1,185 $ 29,499 23.27%
June 30, 2004.............. 13,146 3,793 2,080 221 19,240 15.18
September 30, 2004......... 9,650 4,586 1,767 248 16,251 12.82
December 31, 2004.......... 8,256 4,904 1,377 14 14,551 11.48
March 31, 2005............. 263 3,363 455 1,678 5,759 4.54
June 30, 2005.............. 640 2,523 294 2,254 5,711 4.51
September 30, 2005......... 774 2,900 176 1,404 5,254 4.14
December 31, 2005.......... 1,452 1,645 46 590 3,733 2.95
Thereafter................. 729 11,379 13,211 1,432 26,751 21.11
------------ ---------- --------- -------- ----------- ------
Total................... $ 59,380 $ 38,156 $ 20,187 $ 9,026 $ 126,749 100.00%
============ ========== ========= ======== =========== ======
Percent of total........ 46.85% 30.10% 15.93% 7.12% 100.00%
22
Borrowed Funds. Set forth below is a schedule detailing the Bank's
borrowings.
At December 31,
-------------------------------------
2003 2002 2001
--------- --------- ----------
(Dollars in thousands)
Short-term borrowings:
Overnight line of credit............................................. $ 2,500 $ 2,000 $ --
Repurchase agreements - FHLB......................................... --
Term advances - FHLB................................................... 13,500 16,500 11,600
Long-term borrowings:
Repurchase agreements - FHLB......................................... 32,000 34,000 36,000
Term advances - FHLB................................................. 19,400 21,000 29,000
-------- -------- -------
Total borrowings................................................... $ 67,400 $ 73,500 $76,600
-------- -------- -------
Weighted Average interest cost of short-term borrowings
during the year........................................................ 4.38% 4.63% 5.02%
-------- -------- -------
Weighted Average interest cost of long-term borrowings
during the year........................................................ 4.75% 4.89% 5.15%
-------- -------- -------
Average Balance of borrowings outstanding during the year.............. $ 68,757 $ 72,912 $ 74,904
-------- -------- -------
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, 2003, the Bank maintained 435
trust/fiduciary accounts, with total assets of $79.9 million under management as
compared to 380 trust/fiduciary accounts with $55.6 million total assets at
December 31, 2002. Management anticipates that in the future the Trust
Department will become a more significant component of the Bank's business.
Limited Purpose Commercial Bank
In connection with the acquisition of SBC on May 31, 2002, the Bank holds
The State Bank of Chittenango as a limited purpose commercial bank. At December
31, 2003, The State Bank of Chittenango held $8.4 million in assets, consisting
primarily of U.S. Government obligations and mortgage-backed securities and $6.0
million in deposits.
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, Cazenovia, New Hartford and
Syracuse. B&H is a full-service insurance and financial services firm with over
90 employees providing services to over 19,000 customers. Adding B&H insurance
and financial services business has enabled the Bank to continue evolving from a
traditional depository institution into a full-service 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.
On January 2, 2001, the Bank completed its acquisition of Noyes and
LaLonde, Inc., an insurance agency. The Bank paid $667,500 in cash and
established a note payable for $612,500 to be paid over 24 months with interest
at 7.5% per annum to acquire certain tangible and intangible assets of the
agency. Noyes and LaLonde, Inc. was subsequently merged into B&H. Additionally,
effective as of January 1, 2001, the Bank also completed its acquisition of The
Dunn Agency. The Bank paid $247,500 in cash and established a note payable for
$247,500 to be paid over 24 months with interest at 7.5% per annum to acquire
100% of the capital stock of The Dunn Agency. The Dunn Agency was merged into
B&H as of January 1, 2002.
23
On July 1, 2002, the Bank completed its acquisition of Kennedy & Clarke,
Inc., an insurance agency. The Bank paid $200,855 in cash and established a note
payable for $195,500 to be paid over 24 months with interest at 6.0% per annum
for fixed assets and other intangible assets. Kennedy & Clarke, Inc. has been
subsequently merged into B&H.
On October 1, 2003, the Bank completed it acquisition of MacDonald/Yando
Agency, Inc., an insurance agency. The Bank paid $219,783 in cash and
established a note payable for $219,783 to be paid over 24 months with interest
at 5.0% per annum to acquire the capital stock of the MacDonald/Yando Agency,
Inc. The MacDonald/Yando Agency, Inc. has been merged into B&H.
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.
Personnel
As of December 31, 2003, the Bank had 139 full-time employees and 14
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 its
Bank Insurance Fund. The Bank is subject to extensive regulation by the New York
State Banking Department (the "Department"), and by the FDIC. The Bank is
required to file reports with, and is periodically examined by, the FDIC and the
Department 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 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
24
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 sStock.
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 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 directors
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
25
institution has engaged or is engaging in unsafe or unsound practices or is in
an unsafe or unsound condition.
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 may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating
26
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, 2003, the Bank had $14.7 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 and its implementing regulations. 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 and its implementing
regulation restricts a savings bank with respect to loans to directors,
executive officers, principal stockholders, and their related interests. 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
disinterested directors on 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.
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
28
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 of the OTS, 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 of OTS. 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 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 continue to waive dividends paid by the
Company. Under OTS
29
regulations, the Company's 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 to 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, 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.
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.
30
The USA PATRIOT Act
In response to the events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 ("Sarbanes-Oxley"), which implemented legislative reforms intended to
address corporate and accounting fraud. In addition to the establishment of a
new accounting oversight board that will enforce auditing, quality control and
independence standards and will be funded by fees from all publicly traded
companies, Sarbanes-Oxley places certain restrictions on the scope of services
that may be provided by accounting firms to their public company audit clients.
Any non-audit services being provided to a public company audit client will
require preapproval by the company's audit committee. In addition,
Sarbanes-Oxley makes certain changes to the requirements for audit partner
rotation after a period of time. Sarbanes-Oxley requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the Securities and Exchange Commission,
subject to civil and criminal penalties if they knowingly or willingly violate
this certification requirement. The Company's Chief Executive Officer and Chief
Financial Officer have signed certifications to this Form 10-K as required by
Sarbanes-Oxley. In addition, under Sarbanes-Oxley, counsel will be required to
report evidence of a material violation of the securities laws or a breach of
fiduciary duty by a company to its chief executive officer or its chief legal
officer, and, if such officer does not appropriately respond, to report such
evidence to the audit committee or other similar committee of the board of
directors or the board itself.
Under Sarbanes-Oxley, longer prison terms will apply to corporate
executives who violate federal securities laws; the period during which certain
types of suits can be brought against a company or its officers is extended; and
bonuses issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from trading the company's
securities during retirement plan "blackout" periods, and loans to company
executives (other than loans by financial institutions permitted by federal
rules and regulations) are restricted. In addition, a provision directs that
civil penalties levied by the Securities and Exchange Commission as a result of
any judicial or administrative action under Sarbanes-Oxley be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution provision also requires the Securities and Exchange Commission to
develop methods of improving collection rates. The legislation accelerates the
time frame for disclosures by public companies, as they must immediately
disclose any material changes in their financial condition or operations.
Directors and executive officers must also provide information for most changes
in ownership in a company's securities within two business days of the change.
Sarbanes-Oxley also increases the oversight of, and codifies certain
requirements relating to audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term is defined by the Securities and Exchange Commission) and if not,
why not. Under Sarbanes-Oxley, a company's registered public accounting firm is
prohibited from performing statutorily mandated audit services for a
31
company if such company's chief executive officer, chief financial officer,
comptroller, chief accounting officer or any person serving in equivalent
positions had been employed by such firm and participated in the audit of such
company during the one-year period preceding the audit initiation date.
Sarbanes-Oxley also prohibits any officer or director of a company or any other
person acting under their direction from taking any action to fraudulently
influence, coerce, manipulate or mislead any independent accountant engaged in
the audit of the company's financial statements for the purpose of rendering the
financial statements materially misleading. Sarbanes-Oxley also requires the
Securities and Exchange Commission to prescribe rules requiring inclusion of any
internal control report and assessment by management in the annual report to
shareholders. Sarbanes-Oxley requires the company's registered public accounting
firm that issues the audit report to attest to and report on management's
assessment of the company's internal controls.
Although the Company has incurred some additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
Federal Securities Law. The Common Stock of the Company is registered with
the SEC under the Exchange Act. 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.
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, 2003, the Bank was in compliance with these
reserve requirements.
Federal Regulation. Under the Community Reinvestment Act, as amended (the
"CRA"), and its implementing 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 imposes 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
32
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, 2003, the Bank had $3.4 million of FHLB
stock. The dividend yield from FHLB stock was 3.96% at December 31, 2003. Due to
significant losses in its investment portfolio, the FHLB of New York did not pay
any dividends to its members for the quarter ended September 30, 2003, and no
assurance can be given that the FHLB will pay any dividends in the future.
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. 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.
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.
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
33
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.
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) 7.5% 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 Bank's most recent IRS audit was relative to the Bank's 1993, 1994 and
1995 federal and state income tax returns. New York State Department of Taxation
recently completed their audit of the Company's state income tax returns for the
years of 1999, 2000 and 2001.
Executive Officers of the Registrant
Listed below is information, as of December 31, 2003, 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 53 President and Chief Executive Officer since 1990
Eric E. Stickels 42 Executive Vice President and Chief Financial Officer since 1998
Thomas H. Dixon 49 Executive Vice President and Chief Credit Officer since 1996
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
ENDED DECEMBER 31, 2003 IS AVAILABLE FOR REVIEW ON OUR WEBSITE AT
www.oneidabank.com AND WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS UPON
WRITTEN OR TELEPHONIC REQUEST TO ERIC E. STICKELS, SECRETARY, ONEIDA FINANCIAL
CORP., 182 MAIN STREET, ONEIDA, NEW YORK 13421, OR CALL (315) 363-2000.
34
ITEM 2. PROPERTIES
The Bank conducts its business through its main office located in Oneida,
New York, and seven additional full service branch offices. The following table
sets forth certain information concerning Company property and equipment at
December 31, 2003. The aggregate net book value of the Company's premises and
equipment was $10.3 million at December 31, 2003. The insurance subsidiary
conducts its business through one owned and four 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, 2003
- ------------------------------------------------------------------------------------------------------
(In thousands)
Main Office:
182 Main Street 1889 N/A $1,978
Oneida, New York 13421
Branch Offices:
Camden Branch 1997 N/A 854
41 Harden Boulevard
Camden, New York 13316
Canastota Branch 1999 N/A 917
104 S. Peteboro St.
Canastota, New York 13032
Cazenovia Branch 1971 N/A 2,055
48 Albany Street
Cazenovia, New York 13035
Hamilton Branch 1976 N/A 241
35 Broad Street
Hamilton, New York 13346
Convenience Center 1988 N/A 254
585 Main Street
Oneida, New York 13421
Chittenango Branch 2002 N/A 841
101 Falls Boulevard
Chittenango, New York 13037
Bridgeport Branch 2002 November 2006 100
8786 State Route 31
Bridgeport, New York 13030
Mortgage Center
126 Lenox Avenue 1989 N/A 157
Oneida, New York 13421
Operations Center
169 Main Street 2001 N/A 1,204
Oneida, New York 13421
Bailey & Haskell Associates, Inc.
Various locations 2000 Various 1,457
(Headquarters)
169 Main Street
Oneida, New York 13421
Other Bank Property
102 S. Peterboro St. 2000 N/A 200
Canastota, New York 13032
35
ITEM 3. LEGAL PROCEEDINGS
Much of the Bank's market area is included in the 250,000-acre land claim
of the Oneida Indian Nation ("Oneidas"). The land claim area is held primarily
by private persons. Over 16 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 attempt 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. In July 2003, the United States Court of Appeals affirmed the
decision of the lower court against the City of Sherrill but appeals continue
relative to the decision against the Counties of Madison and Oneida.
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, 2003 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, 2003 (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 Bank'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 will 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, 2003 totaled $79.5 million, or 24.6% of total
interest-bearing liabilities. The wholesale arbitrage strategy of investing
allows the Bank 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,
2003 totaled $16.0 million, or 4.95% 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 Bank'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 Bank'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 Bank's net income and NPV as of December 31, 2003.
37
Change in Net Interest Income Net Portfolio Value
Interest Rates ----------------------------------------------------------------
In Basis Points Dollar Dollar Percent Dollar Dollar Percent
(Rate Shock) Amount Change Change Amount Change Change
----------------------------------------------------------------
(Dollars in thousands)
+300 $13,394 $ 30 0.2% $45,487 $(11,366) (20.0)%
+200 $13,431 $ 67 0.5% $49,402 $ (7,451) (13.1)%
+100 $13,425 $ 61 0.5% $53,459 $ (3,394) (6.0)%
Static $13,364 $ -- --% $ -- $ -- --%
-100 $13,352 $ (12) (0.1)% $ 3,028 $ 3,028 5.3%
There are certain shortcomings inherent in the methodology used in the
above interest rate risk measurements. Modeling changes in net interest 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 tTable assumes that
the composition of the Bank'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 table provides an
indication of the Bank'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 Bank's net
interest income and will differ from actual results.
ITEM 8. FINANCIAL STATEMENTS
The financial statements identified in Item 15(a)(1) hereof are
incorporated by reference hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 26, 2003, the Company's Audit Committee of the Board of
Directors approved a change in auditors. The Audit Committee approved the
engagement of Crowe Chizek and Company LLC to serve as the Company's independent
public accountants and the dismissal of PricewaterhouseCoopers LLP ("PwC") as
the Company's independent public accountants, effective immediately.
PwC performed audits of the consolidated financial statements for the two
years ended December 31, 2002 and 2001. Their reports did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the two years ended December 31, 2002 and from December 31, 2002
through the effective date of the PwC termination, there were no disagreements
between the Company and PwC on any matter of accounting principles or practice,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PwC, would have caused PwC
to make reference to the subject matter of such disagreements in connection with
its reports on the financial statements for such years.
During the two years ended December 31, 2002, and from December 31, 2002
until the effective date of the dismissal of PwC, PwC did not advise the Company
of any of the following matters:
1. That the internal controls necessary for the Company to develop reliable
financial statements did not exist;
38
2. That information had come to PwC's attention that had lead it to no longer
be able to rely on management's representations, or that had made it
unwilling to be associated with the financial statements prepared by
management;
3. That there was a need to expand significantly the scope of the audit of
the Company, or that information had come to PwC's attention that if
further investigated: (i) may materially impact the fairness or
reliability of either a previously-issued audit report or underlying
financial statements, or the financial statements issued or to be issued
covering the fiscal periods subsequent to the date of the most recent
financial statement covered by an audit report (including information that
may prevent it from rendering an unqualified audit report on those
financial statements) or (ii) may cause it to be unwilling to rely on
management's representation or be associated with the Company's financial
statements and that, due to its dismissal, PwC did not so expand the scope
of its audit or conduct such further investigation;
4. That information had come to PwC's attention that it had concluded
materially impacted the fairness of reliability of either: (i) a
previously-issued audit report or the underlying financial statements or
(ii) the financial statements issued or to be issued covering the fiscal
period subsequent to the date of the most recent financial statements
covered by an audit report (including information that, unless resolved to
the accountant's satisfaction, would prevent it from rendering an
unqualified report on those financial statements), or that, due to its
dismissal, there were no such unresolved issues as of the date of its
dismissal.
The Company requested that PwC furnish a letter to the SEC indicating
whether it agreed with the above statements, and this letter is filed herewith
as Exhibit 16 to this Annual Report on Form 10-K.
During the two years ended December 31, 2002, and from December 31, 2002
through the engagement of Crowe Chizek and Company LLC as the Company's
independent accountant, neither the Company nor anyone on its behalf had
consulted Crowe Chizek and Company LLC with respect to any accounting, auditing
or financial reporting issues involving the Company. In particular, there was no
discussion with the Company regarding the application of accounting principles
to a specified transaction, the type of audit opinion that might be rendered on
the financial statement, or any related item.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end
of the fiscal year (the "Evaluation Date"). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us (or our consolidated
subsidiaries) required to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
39
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information concerning Directors of the Company is incorporated by
reference from the Company's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders (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.
The Company has adopted a Code of Ethics that applies to the Company's
principal executive officer, principal financial officer, principal accounting
officer or controller or persons performing similar functions. The Code of
Ethics may be accessed on the Company's website at www.oneidabank.com.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated 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 by reference from the Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated by
reference from the Company's Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is
incorporated by reference from the Company's Proxy Statement.
PART IV
ITEM 15. 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, 2003, 2002 and 2001
o Consolidated Statements of Income,
Years Ended December 31, 2003, 2002 and 2001
o Consolidated Statements of Changes in Stockholders' Equity,
Years Ended December 31, 2003, 2002 and 2001
o Consolidated Statements of Cash Flows,
Years Ended December 31, 2003, 2002 and 2001
o Notes to Consolidated Financial Statements.
40
(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.
(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
14 Code of Ethics
16 Letter regarding change in certifying accountant***
21 Subsidiaries of the Company
23 Consent of Auditor to incorporate financial statements
into Form S-8
23.1 Consent of Independent Auditors - Crowe Chizek and
Company LLC
23.2a Consent of Independent Auditors - Princewaterhouse
Coopers LLP
23.2b Report of Independent Auditors - Princewaterhouse
Coopers LLP
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Incorporated by reference to the Company's Current Report on Form 8-K filed on
July 20, 2001. (File No. 000-25101).
** Incorporated by reference to the Company's Registration Statement on Form S-1
filed on September 17, 1998. (File No. 333-63603).
***Incorporated by reference to the Company's Current Report on Form 8-K, Item
4. Changes in Registrant's Certifying Accountant, filed on September 3, 2003.
41
(b) Reports on Form 8-K:
On October 21, 2003, the Company filed a Current Report on Form
8-K, Item 12. Results of Operations and Financial Condition, in
which the Company announced its September 30, 2003 financial
results.
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
42
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 26, 2004 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, Executive Vice President and
Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 26, 2004 Date: March 26, 2004
By: /s/ Thomas H. Dixon By: /s/ Patricia D. Caprio
------------------------------------------------- ---------------------------------------------------
Thomas H. Dixon, Executive Vice President Patricia D. Caprio, Director
Date: March 26, 2004 Date: March 26, 2004
By: /s/ Edward J. Clarke By: /s/ Marlene C. Denney
------------------------------------------------- ---------------------------------------------------
Edward J. Clarke, Director Marlene C. Denney, Director
Date: March 26, 2004 Date: March 26, 2004
By: /s/ James J. Devine, Jr. By: /s/ John E. Haskell
------------------------------------------------- ---------------------------------------------------
James J. Devine, Jr., Director John E. Haskell, Director
Date: March 26, 2004 Date: March 26, 2004
By: /s/ Rodney D. Kent By: /s/ William D. Matthews
------------------------------------------------- ---------------------------------------------------
Rodney D. Kent, Director William D. Matthews, Director
Date: March 26, 2004 Date: March 26, 2004
By: /s/ Michael W. Milmoe By: /s/ Richared B. Myers
------------------------------------------------- ---------------------------------------------------
Michael W. Milmoe, Director Richard B. Myers, Director
Date: March 26, 2004 Date: March 26, 2004
By: /s/ Gerald N. Volk By: /s/Frank O. White, Jr.
------------------------------------------------- --------------------------------------------------
Gerald N. Volk, Director Frank O. White, Jr., Director
Date: March 26, 2004 Date: March 26, 2004