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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 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from ____________ to ___________
Commission File Number: 000-23601
PATHFINDER BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1540137
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
214 WEST FIRST STREET, OSWEGO, NY 13126
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(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
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(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 ______ NO X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of February 28, 1998, there were issued and outstanding 2,874,999 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 February 28, 1998 ($20.875) was
$22,579,820.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (Parts II and IV).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders (Parts I and
III).
PART I
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ITEM 1. BUSINESS
- ------- --------
GENERAL
PATHFINDER BANCORP, INC.
Pathfinder Bancorp, Inc. (the "Company") is a Delaware corporation which
was organized in September 1997. The only significant asset of the Company is
its investment in Oswego City Savings Bank (the "Bank"). The Company is majority
owned by Pathfinder Bancorp, MHC, a New York-chartered mutual holding company
(the "Mutual Holding Company"). On December 30, 1997 the Company acquired all of
the issued and outstanding common stock of the Bank in connection with the
Bank's reorganization into the two-tier form of mutual holding company
ownership. At that time, each share of outstanding Bank common stock was
automatically converted into one share of Company common stock, par value $.l0
per share (the "Common Stock"). At February 28, 1998 the Mutual Holding Company
held 1,552,500 of Common Stock and the public held 1,322,499 of Common Stock
(the "Minority Shareholders").
The Company's executive office is located at 214 West First Street, Oswego,
New York and the telephone number at that address is (315) 343-0057.
OSWEGO CITY SAVINGS BANK
The Bank is a New York-chartered savings bank headquartered in Oswego, New
York. The Bank has five full-service offices located in its market area
consisting of Oswego County and the contiguous counties. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was
chartered as a New York savings bank in 1859 as Oswego City Savings Bank. The
Bank is a consumer-oriented institution dedicated to providing mortgage loans
and other traditional financial services to its customers. The Bank is committed
to meeting the financial needs of its customers in Oswego County, New York, the
county in which it operates. At December 31, 1997, the Bank had total assets of
$196.8 million, total deposits of $152.4 million, and shareholders' equity of
$23.6 million.
The Bank is primarily engaged in the business of attracting deposits from
the general public in the Bank's market area, and investing such deposits,
together with other sources of funds, in loans secured by one- to four-family
residential real estate. At December 31, 1997, $112.0 million, or 92.1% of the
Bank's total loan portfolio consisted of loans secured by real estate, of which
$82.7 million, or 73.8%, were loans secured by one- to four-family residences,
$17.5 million, or 15.6%, were secured by commercial real estate, $2.2 million,
or 2.0%, were secured by multi-family properties and $9.6 million, or 8.6%, of
total real estate loans, were secured by second liens on residential properties.
The Bank also originates consumer and other loans which totaled $10.8 million,
or 8.9%, of the Bank's total loan portfolio. The Bank invests a portion of its
assets in securities issued by the United States Government, state and municipal
obligations, corporate debt securities, mutual funds, and equity securities. The
Bank also invests in mortgage-backed securities primarily issued or guaranteed
by the United States Government or agencies thereof. The Bank's principal
sources of funds are deposits, principal and interest payments on loans and
borrowings from correspondent financial institutions. The principal source of
income is interest on loans and investment securities. The Bank's principal
expenses are interest paid on deposits, and employee compensation and benefits.
1
On September 5, 1997, the Bank entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Oswego County Savings Bank ("County Savings")
providing for the merger of County Savings with and into the Bank with the Bank
as the surviving institution (the "Merger"). County Savings is a New York
chartered mutual savings bank located in Oswego, New York. At December 31, 1997,
County Savings had assets of $112.1 million, deposits of $97.9 million and net
worth of $11.2 million.
The Merger Agreement provides that additional shares of the Company's
Common Stock equal to the fair value of County Savings will be issued in
connection with the Merger. The issuance of additional shares of the Common
Stock is intended to represent the value of the interest of the depositors of
County Savings that is being transferred to the Bank. Current minority
Shareholders' existing equity ownership interests will be diluted as a result of
the Merger. At this time however, it is impossible to quantify the extent of the
dilution Minority Shareholders will experience in their equity interest. Such
dilution will depend upon the fair value of County Savings as determined by an
independent appraisal, and the market price of the Common Stock preceding the
completion of the Merger, as well as the percentage of Common Stock sold in a
subscription and community offering if one is conducted. An independent
appraisal firm will determine the fair value of County Savings as if County
Savings were forming a mutual holding company and conducting a minority stock
offering.
The Merger is subject to various conditions, including receipt of
regulatory approvals from the Federal Reserve Board, the Federal Deposit
Insurance Corporation, and the New York Banking Department, as well as receipt
of approval of the Company's shareholders and if necessary County Savings'
depositors. As a result of regulatory review the terms of the Merger may be
significantly modified.
The Bank's executive office is located at 214 West First Street, Oswego,
New York, and its telephone number at that address is (315) 343-0057.
MARKET AREA AND COMPETITION
The economy in the Bank's market area is manufacturing-oriented and is also
significantly dependent upon the State University of New York College at Oswego.
The major manufacturing employers in the Bank's market area are Niagara Mohawk,
Alcan Aluminum, the New York Power Authority, Nestle and Sealright, a food
container manufacturer. The Bank is the second largest financial institution
headquartered in Oswego County. However, the Bank encounters competition from a
variety of sources. The Bank's business and operating results are significantly
affected by the general economic conditions prevalent in its market areas.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, savings
associations and credit unions in its market area. Competition for loans comes
from such financial institutions as well as mortgage banking companies. The Bank
expects continued strong competition in the foreseeable future, including
increased competition from "super-regional" banks entering the market by
purchasing large banks and savings banks. Many such institutions have greater
financial and marketing resources available to them than does the Bank. The Bank
competes for savings deposits by offering depositors a high level of personal
service and a wide range of competitively priced financial services. The Bank
competes for real estate loans primarily through the interest rates and loan
fees it charges and advertising, as well as by originating and holding in its
portfolio mortgage loans which do not necessarily conform to secondary market
underwriting standards.
2
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio primarily consists of
one- to four-family mortgage loans secured by residential and investment
properties, as well as mortgage loans secured by multi-family residences and
commercial real estate. To a lesser extent the Bank's loan portfolio also
includes consumer and business loans. The Bank generally originates loans for
retention in its portfolio, although during 1997 the Bank began originating
loans (primarily 15 year and 30 year fixed rate mortgages) for securitization
and possible sale to government sponsored enterprises. At December 31, 1997,
$1.5 million, or 1.8% of the Bank's total one- to four-family real estate
portfolio consisted of loans held for sale. In recent years, the Bank has not
purchased loans originated by other lenders. At December 31, 1997, 58.6% of the
Bank's loan portfolio consisted of one- to four-family adjustable rate mortgage
("ARM") loans.
3
ANALYSIS OF LOAN PORTFOLIO. The following table sets forth the composition
of the Bank's loan portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ---------------- ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Real estate loans:
First mortgage loans(1)(3).... $102,403 84.2% $ 90,761 83.5% $ 83,325 83.2% $76,275 85.1% $67,824 86.1%
Second mortgage loans(2)..... 9,561 7.9 9,082 8.3 8,303 8.3 7,931 8.8 7,025 8.9
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total real estate loans........ 111,964 92.1 99,843 91.8 91,628 91.5 84,206 93.9 74,849 95.0
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Consumer loans and other loans:
Consumer...................... 4,278 3.5 3,481 3.2 3,286 3.1 3,258 3.6 2,563 3.2
Student....................... 13 -- 58 0.1 63 0.1 1,085 1.3 864 1.1
Lease financing............... 564 0.5 1,153 1.1 2,013 2.0 835 0.9 708 0.9
Commercial business loans..... 5,908 4.9 5,482 5.0 3,860 3.9 1,028 1.2 616 0.8
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total consumer and other
loans....................... 10,763 8.9 10,174 9.4 9,222 9.2 6,206 7.0 4,751 6.0
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total loans receivable....... 122,727 101.0 110,017 101.2 100,850 100.7 90,412 100.9 79,600 101.0
Less:
Unearned discount and
origination fees............. (314) (0.3) (368) (0.4) (355) (0.4) (429) (0.5) (507) (0.6)
Allowance for loan losses..... (828) (0.7) (907) (0.8) (346) (0.3) (315) (0.4) (280) (0.4)
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total loans receivable,
net......................... $121,585 100.0% $108,742 100.00% $100,149 100.0% $89,668 100.0% $78,813 100.0%
======== ===== ======== ====== ======== ===== ======= ===== ======= =====
_______________________
(1) Includes $82.7 million, $17.5 million and $2.2 million of one- to four-
family residential loans, commercial real estate and multi-family loans,
respectively, at December 31, 1997.
(2) Includes $4.2 million and $5.3 million of home equity line of credit loans
and home equity fixed rate, fixed term loans, respectively, at December 31,
1997.
(3) Includes $1.5 million of mortgage loans held for sale at December 31, 1997.
4
LOAN MATURITY SCHEDULE. The following table sets forth certain information
as of December 31, 1997, regarding the dollar amount of loans maturing in the
Bank's portfolio based on their contractual terms to maturity. Demand loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than the period in which they contractually mature, and fixed rate loans
are included in the period in which the final contractual repayment is due.
ONE THREE FIVE TEN BEYOND
WITHIN THROUGH THROUGH THROUGH THROUGH TWENTY
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS TWENTY YEARS YEARS TOTAL
-------- ----------- ---------- --------- ------------ ------ --------
(IN THOUSANDS)
Real estate loans:
First mortgage loans...... $44,173 $4,612 $14,561 $10,431 $24,165 $4,461 $102,403
Second mortgage loans..... 4,271 338 923 3,880 149 -- 9,561
Consumer and other loans.. 4,516 1,937 2,094 1,276 940 -- 10,763
------- ------ ------- ------- ------- ------ --------
Total loans.............. $52,960 $6,887 $17,578 $15,587 $25,254 $4,461 $122,727
======= ====== ======= ======= ======= ====== ========
The following table sets forth at December 31, 1997, the dollar amount of
all fixed rate and adjustable rate loans due or repricing after December 31,
1998.
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
Real estate loans:
First mortgage loans...... $38,282 $19,948 $58,230
Second mortgage loans..... 5,290 -- 5,290
Consumer and other loans.. 5,451 796 6,247
------- ------- -------
Total loans........... $49,023 $20,744 $69,767
======= ======= =======
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. The Bank's primary lending
activity is the origination of first mortgage loans secured by one- to four-
family residential properties. A portion of one-to four-family mortgage loans
originated by the Bank are secured by non-owner occupied homes which are
primarily used to furnish housing to students attending the SUNY College at
Oswego. The Bank generally retains in its portfolio all ARM loans that it
originates. However, the Bank generally underwrites its loans so as to be
eligible for resale in the secondary mortgage market. At December 31, 1997,
approximately 91.1% of the Bank's one- to four-family residential real estate
loans were secured by owner-occupied properties.
Fixed-rate one- to four-family residential mortgage loans originated by the
Bank are generally for terms of up to 20 years (although loans originated for
sale into the secondary market can have terms up to 30 years), amortize on a
monthly basis, and have principal and interest due each month. Such real estate
loans often remain outstanding for significantly shorter periods than their
contractual terms to maturity, particularly in a declining interest rate
environment. Borrowers may refinance or prepay loans at their option. One- to
four-family residential mortgage loans originated by the Bank customarily
contain "due-on-sale" clauses which permit the Bank to accelerate the
indebtedness of the loan upon transfer of ownership of the mortgaged property.
Due-on-sale clauses are an important means of increasing the interest rate on
existing mortgage loans during periods of rising interest rates. An origination
fee of up to 3% is charged on fixed-rate mortgage loans. As a result of the low
interest rate environment that has existed in recent years, many of the Bank's
borrowers have refinanced their mortgage loans with the Bank at
5
lower interest rates. During years ended December 31, 1997 and 1996, 38.2% and
49.2%, respectively, of the Bank's one- to four-family mortgage loan
originations consisted of fixed-rate loans.
The Bank also originates ARM loans which serve to reduce interest rate
risk. The Bank currently originates one-year ARM loans which adjust each year at
275 basis points (100 basis points equal 1%) above the adjusted six month moving
average of the six-month Treasury bill auction discount rate. The Bank also
offers a loan product whereby the interest is fixed for the first five years and
adjusts annually thereafter. This loan product typically is originated with
terms up to 30 years. ARM loans are originated with terms ranging from 5 to 30
years. ARM loans originated by the Bank provide for maximum periodic interest
rate adjustment of 2 percent per year and an overall maximum interest rate
increase which is determined at the time the loan is originated. However, ARM
loans may not adjust to a level below the initial rate. ARMs may be offered at
an initial rate below the prevailing market rate. The Bank's one- to four-family
ARM loan originations totaled $13.2 million, $8.7 million, and $8.2 million,
during the fiscal years 1997, 1996, and 1995, respectively. The Bank requires
that borrowers qualify for ARM loans based upon the loan's fully indexed rate.
At December 31, 1997, $48.4 million, or 58.6%, of the Bank's one- to four-
family loan portfolio consisted of ARM loans. ARM loans generally pose a credit
risk in that as interest rates rise, the amount of a borrower's monthly loan
payment also rises, thereby increasing the potential for delinquencies and loan
losses. At the same time, the marketability of such loans may be adversely
affected by higher rates.
The Bank also originates loans to finance the construction of one- to four-
family owner-occupied residences. Funds are disbursed as construction
progresses. Loans to finance one- to four-family construction typically provide
for a six-month construction phase during which interest accrues and which is
deducted from the funds disbursed. Upon completion of the construction phase the
loan automatically converts to permanent financing. At December 31, 1997, the
Bank held $1.6 million of one- to four-family construction loans.
The Bank's lending policies require private mortgage insurance for loan to
value ratios in excess of 80%.
COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate
constituted approximately $17.5 million, or 14.3%, of the Bank's total loan
portfolio at December 31, 1997. At December 31, 1997, substantially all of the
Bank's commercial real estate loans were secured by properties located within
the Bank's market area. At December 31, 1997, the Bank's commercial real estate
loans had an average principal balance of $203,000. At that date, the largest
commercial real estate loan had a principal balance of $1.2 million, and was
secured by a health care facility. This loan is currently performing in
accordance with the original terms. Commercial real estate loans are generally
offered with adjustable interest rates tied to a market index which currently is
the adjusted six month moving average of the six month Treasury bill auction
discount rate, with an overall interest rate cap which is determined at the time
the loan is originated. Commercial real estate loans may not adjust to a level
below the initial rate. The Bank generally offers commercial real estate loans
with from one to five year adjustment periods. The Bank generally makes
commercial real estate loans up to 75% of the appraised value of the property
securing the loan. An origination fee of up to 2% of the principal balance of
the loan is typically charged on commercial real estate loans. Commercial real
estate loans originated by the Bank generally are underwritten to mature between
5 and 20 years with an amortization schedule of between 10 and 30 years. The
Bank has in the past sold loan participations to other financial institutions
and expects to do so in the future as opportunities arise.
6
In underwriting commercial real estate loans the Bank reviews the expected
net operating income generated by the real estate to support debt service, the
age and condition of the collateral, the financial resources and income level of
the borrower and the borrower's experience in owning or managing similar
properties. The Bank generally obtains personal guarantees from all commercial
borrowers. Loans secured by commercial real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial real
estate is typically dependent upon the successful operation of the related real
estate. If the cash flow from the property is reduced, the borrower's ability to
repay the loan may be impaired.
MULTI-FAMILY REAL ESTATE LOANS. Loans secured by multi-family real estate
(real estate containing five or more dwellings) constituted approximately $2.2
million, or 1.8%, of the Bank's total loan portfolio at December 31, 1997. At
December 31, 1997, the Bank had a total of 14 loans secured by multi-family real
estate properties. The Bank's multi-family real estate loans are secured by
multi-family rental properties (primarily townhouses and walk-up apartments). At
December 31, 1997, substantially all of the Bank's multi-family real estate
loans were secured by properties located within the Bank's market area. At
December 31, 1997, the Bank's multi-family real estate loans had an average
principal balance of approximately $159,000 and the largest multi-family real
estate loan had a principal balance of $367,000, and was performing in
accordance with its terms. Multi-family real estate loans generally are offered
with adjustable interest rates tied to the adjusted six month moving average of
the six month Treasury Bill auction discount rate index with an overall interest
rate cap which is determined at the time the loan is originated. Multi-family
real estate loans may not adjust below the initial rate. Multi-family real
estate loans are underwritten to mature between 5 and 20 years, and to amortize
over 10 to 30 years. An origination fee of 1% is generally charged on multi-
family real estate loans.
In underwriting multi-family real estate loans, the Bank reviews the
expected net operating income generated by the real estate to support the debt
service, the age and condition of the collateral, the financial resources and
income level of the borrower and the borrower's experience in owning or managing
similar properties. The Bank generally requires a debt service coverage ratio of
at least 120% (net of operating expenses) of the monthly loan payment. The Bank
makes multi-family real estate loans up to 75% of the appraised value of the
property securing the loan. The Bank generally obtains personal guarantees from
all multi-family real estate borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate and commercial real estate is typically dependent upon the successful
operation of the related real estate property. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired.
7
SECOND MORTGAGE LOANS. The Bank also offers home equity loans and equity
lines of credit collateralized by a second mortgage on the borrower's principal
residence. The Bank's home equity lines of credit are secured by the borrower's
principal residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans of 80%, or up to 90% where
the Bank has made the first mortgage loan. At December 31, 1997, the disbursed
portion of home equity lines of credit totaled $4.2 million. Home equity lines
of credit are offered on an adjustable rate basis with interest rates tied to
the prime rate as published in The Wall Street Journal, plus up to 175 basis
points and with terms of up to 15 years.
Home equity loans are fixed rate loans with terms generally up to 10 years,
although on occasion the Bank may originate a home equity loan with a term of up
to 15 years.
CONSUMER LOANS. As of December 31, 1997, consumer loans totaled $4.3
million, or 3.5%, of the Bank's total loan portfolio. The principal types of
consumer loans offered by the Bank are unsecured personal loans, and loans
secured by deposit accounts. Other consumer loans are offered on a fixed rate
basis with maturities generally of less than five years.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's credit history and an assessment of ability
to meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable
secondary income. Creditworthiness and the employment history of the applicant
are of primary consideration in originating consumer loans, and in the case of
home equity lines of credit, the Bank obtains a title guarantee, title search,
or an opinion as to the validity of title.
COMMERCIAL BUSINESS LOANS. The Bank currently offers commercial business
loans to businesses in its market area and to deposit account holders. At
December 31, 1997, the Bank had commercial business loans outstanding with an
aggregate balance of $6.5 million, of which $3.0 million consisted of commercial
lines of credit and $564,000 were lease financing arrangements. The average
commercial business loan balance was approximately $55,000. Commercial business
loans generally have fixed rates of interest. The loans are generally of short
duration with average terms of five years, but which may range up to 15 years.
Lease financing arrangements are loans which are secured by pools of leases for
medical or dental equipment or general business office equipment.
Underwriting standards employed by the Bank for commercial business loans
include a determination of the applicant's ability to meet existing obligations
and payments on the proposed loan from normal cash flows generated by the
applicant's business. The financial strength of each applicant also is assessed
through a review of financial statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Bank generally obtains guarantees from the borrower, a
third party, or the Small Business Administration, as a condition to originating
its commercial business loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as existing customers,
developers, walk-in customers, real estate broker referrals, and commissioned
mortgage loan originators. Upon receiving a loan application, the Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's
8
employment, income, and credit standing. In the case of a real estate loan, an
independent appraiser approved by the Bank appraises the real estate intended to
secure the proposed loan. A loan processor in the Bank's loan department checks
the loan application file for accuracy and completeness, and verifies the
information provided. Mortgage loans of up to $150,000 may be approved by any
designated loan officer; mortgage loans in excess of $150,000 must be approved
by the Board of Directors. Commercial loans of up to $35,000 unsecured, or
$50,000 (if secured by other than real estate) may be approved by the Bank's
President or either of the two lending Vice Presidents. These individuals may
join their limits to a total approval amount of $105,000 unsecured, and $150,000
secured. Loans in excess of these limits must be approved by either the entire
Board of Directors, or a subcommittee of the Board of Directors. The Board of
Directors, at their monthly meeting, will review and verify that management's
approvals of loans are made within the scope of management's authority. Fire and
casualty insurance is required at the time the loan is made and throughout the
term of the loan, and upon request of the Bank, flood insurance may be required.
After the loan is approved, a loan commitment letter is promptly issued to the
borrower. At December 31, 1997, the Bank had commitments to originate $14.0
million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
Title insurance, title search, or an opinion of counsel as to the validity of
title are required on all loans secured by real property. In recent years, the
Bank has not purchased loans originated by other lenders.
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the Bank's
loan origination, purchase and sales activity for the periods indicated.
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995 1994
-------- -------- -------- -------
(IN THOUSANDS)
Loan receivable, beginning of period.................. $110,017 $100,850 $ 90,412 $79,600
Originations:
Real estate:
First mortgage (1)(3)................................ 26,281 $ 23,496 18,219 19,739
Second mortgage (2).................................. 2,178 1,912 643 2,014
Consumer and other loans:
Consumer loans....................................... 2,306 3,442 2,747 3,510
Student.............................................. -- -- 438 954
Lease financing...................................... 300 -- 1,177 459
Commercial........................................... 3,525 1,850 2,756 716
-------- -------- -------- -------
Total originations.................................. 34,590 30,700 25,980 27,392
Transfer of mortgage loans to foreclosed real estate.. 374 445 645 120
Repayments............................................ 21,506 21,088 13,774 15,791
Loan sales............................................ -- -- 1,123 669
-------- -------- -------- -------
Net loan activity..................................... 12,710 9,167 10,438 10,812
Total loans receivable at end of period.............. $122,727 $110,017 $100,850 $90,412
======== ======== ======== =======
______________
(1) Includes $21.3 million, and $5.0 million in one- to four-family residential
loans and commercial real estate loans, respectively, for the year ended
December 31, 1997.
(2) Includes $2.1 million in home equity loans and a net change of $53,000 in
home equity lines of credit for the year ended December 31, 1997.
(3) Includes $1.5 million of mortgage loans held for sale originated during the
year ended December 31, 1997.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned on
loans, the Bank generally receives loan origination fees. To the extent that
loans are originated or acquired for the Bank's
9
portfolio, SFAS 91 requires that the Bank defer loan origination fees and costs
and amortize such amounts as an adjustment of yield over the life of the loan by
use of the level yield method. ARM loans originated below the fully indexed
interest rate will have a substantial portion of the deferred amount recognized
as income in the initial adjustment period. Fees deferred under SFAS 91 are
recognized into income immediately upon prepayment or the sale of the related
loan. At December 31, 1997, the Bank had $314,000 of net deferred loan
origination fees. Loan origination fees 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 for 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, late charges and income from REO operations. The Bank
recognized fees and service charges of $1.0 million, $873,000, and $771,000, for
the fiscal years ended December 31, 1997, 1996, and 1995, respectively.
LOANS-TO-ONE BORROWER. With certain limited exceptions, a New York
chartered savings bank may not make unsecured loans or extend unsecured credit
for commercial, corporate or business purposes (including lease financing) to a
single borrower, which in the aggregate exceed 15% of the Bank's net worth. At
December 31, 1997, the Bank's largest lending relationship totaled $1.6 million
and consisted of loans secured by retail businesses and properties. The Bank's
second largest lending relationship totaled $1.5 million and consisted of loans
secured by commercial real estate and marketable securities. The Bank's third
largest lending relationship totaled $1.5 million and consisted of loans secured
by retail businesses and properties. The Bank's fourth largest lending
relationship totaled $1.4 million and was secured by a retail office plaza,
retail business property and residence. The Bank's fifth largest lending
relationship totaled $1.4 million and consisted of loans secured by multi-family
residential housing and residence. At December 31, 1997 all of the
aforementioned loans were performing in accordance with their terms.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENCIES. The Bank's collection procedures provide that when a loan
is 15 days past due, a computer-generated late notice is sent to the borrower
requesting payment. If the delinquency continues, at 30 days a delinquent
notice is sent and personal contact efforts are attempted, either in person or
by telephone, to strengthen the collection process and obtain reasons for the
delinquency. Also, plans to arrange a repayment plan are made. If a loan
becomes 60 days past due, and no progress has been made in resolving the
delinquency, the Bank will send a 10-day demand letter and personal contact is
attempted, and the loan becomes subject to possible legal action if suitable
arrangements to repay have not been made. When a loan continues in a delinquent
status for 90 days or more, and a repayment schedule has not been made or kept
by the borrower, generally a notice of intent to foreclose is sent to the
borrower for mortgage loans, and a final demand letter is presented to the
borrower of non-real estate loans, giving 30 days to repay all outstanding
interest and principal. If not cured, foreclosure proceedings or other
appropriate legal actions are initiated to minimize any potential loss.
NON-PERFORMING ASSETS. Loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Loans are placed on non-accrual
status when either principal or interest is 90 days or more past due or less
than 90 days, in the event the loan has been referred to the Bank's legal
counsel for foreclosure. Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income. At December
31, 1997, the Bank had non-performing assets of $2.3 million, and a ratio of
non-performing
10
loans and real estate owned ("REO") of 1.2% total assets. Non-performing assets
decreased $393,000, or 14.6%, to $2.3 million in 1997 from $2.7 million in 1996.
Non-performing assets, however, have increased $800,000, or 53%, from $1.5
million in 1995. While the changes in non-performing assets tend to be cyclical,
the increase over this two-year period is primarily due to higher delinquent
payments on one- to four-family and multi-family residential loans and a
$231,000 increase in commercial business loan delinquencies. The average loan-
to-value collateral ratios of the mortgages is approximately 65%. Commercial
business loans with payments due over 90 days represent two loans, one of which
has a principal balance of $220,000. This loan is in foreclosure and is 75%
guaranteed by the Small Business Administration.
Real estate acquired by the Bank as a result of foreclosure or by the deed
in lieu of foreclosure is classified as REO until such time as it is sold. These
properties are carried at the lower of their recorded amount or estimated fair
value less estimated costs to sell the property. REO totaled $767,000.
$700,000,and $586,000 at December 31, 1997, 1996,and 1995, respectively.
The largest component of REO consists of a real estate development project
which had a net book value of $483,000 at December 31, 1997. The Bank originally
entered into a $570,000 commercial real estate loan in 1988 for the development
of 49 single family residences. This loan was made under the "leeway provision"
of the New York State Banking Law. Under this provision of the Banking Law the
lending relationship was originally structured so that the Bank held title to
the property securing the loan subject to the fulfillment of the borrower's
obligations under the loan. In 1990, the developer became insolvent, was unable
to satisfy the terms of the loan and the Bank assumed control of the project.
During 1997, the Bank invested an additional $276,000 to further the land for
development. The Bank has developed and sold 25 lots through December 31, 1997.
The proceeds from the sale of the lots are used to reduce the outstanding
balance of REO. The Bank believes it will fully recover its investment in this
property.
11
DELINQUENT LOANS AND NON-PERFORMING ASSETS
The following table sets forth information regarding the Bank's loans
delinquent 90 days or more, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. When a loan is delinquent 90 days or more,
the Bank reverses all accrued interest thereon and ceases to accrue interest
thereafter. For all the dates indicated, the Bank did not have any material
restructured loans within the meaning of SFAS 15 and SFAS 114.
AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Loans delinquent 90 days or more:
Real estate loans..................................... $ 1,255 $ 1,953 $ 849 $ 1,045 $ 745
Consumer loans........................................ 283 45 70 69 43
-------- -------- -------- -------- --------
Total delinquent loans............................... 1,538 1,998 919 1,114 788
Total REO............................................... 767 700 586 610 809
-------- -------- -------- -------- --------
Total nonperforming assets (1)..................... $ 2,305 $ 2,698 $ 1,505 $ 1,724 $ 1,597
======== -------- ======== ======== ========
Total loans delinquent 90 days or more
to total loans receivable (2).......................... 1.0% 1.8% 0.9% 1.2% 1.0%
Total loans delinquent 90 days or more to total assets.. 0.8% 1.1% 0.5% 0.7% 0.6%
Total nonperforming assets to total assets.............. 1.2% 1.4% 0.8% 1.0% 1.2%
Net loans receivable(3)................................. 121,585 108,742 100,149 89,668 78,813
-------- -------- -------- -------- --------
Total assets............................................ $196,770 $189,937 $180,952 $170,715 $129,270
======== ======== ======== ======== ========
_______________
(1) Net of specific valuation allowances.
(2) Net of unearned discount, and the allowance for loan losses.
(3) Includes $1.5 million of mortgage loans held for sale at December 31, 1997.
During the year ended December 31, 1997, and year ended December 31, 1996,
respectively, additional gross interest income of $117,000 and $81,000 would
have been recorded on loans accounted for on a non-accrual basis if the loans
had been current throughout the period. No interest income on non-accrual loans
was included in income during the same periods.
The following table sets forth information with respect to loans past due
30-89 days in the Bank's portfolio at the dates indicated.
AT DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
Loans past due 30-89 days:
Real estate loans............ $2,232 $1,867 $2,465 $1,503 $1,537
Consumer and other loans..... 296 249 133 137 423
------ ------ ------ ------ ------
Total past due 30-89 days... $2,528 $2,116 $2,598 $1,640 $1,960
====== ====== ====== ====== ======
12
The following table sets forth information regarding the Bank's delinquent
loans 60 days and greater and REO at December 31, 1997.
AT DECEMBER 31, 1997
--------------------
BALANCE NUMBER
-------- ------
(IN THOUSANDS)
Residential real estate:
Loans 60 to 89 days delinquent.................................... $ 679 15
Loans more than 90 days delinquent................................ 1,255 30
Consumer and commercial business loans 60 days or more delinquent.. 404 31
Real estate owned.................................................. 767 7
------ --
Total........................................................... $3,105 83
====== ==
CLASSIFICATION OF ASSETS. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered to be of lesser quality as "substandard," "doubtful," or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the savings institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by federal and state regulatory authorities, which can order
the establishment of additional general or specific loss allowances. The Bank
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
13
The following table sets forth the aggregate amount of the Bank's
internally classified assets at the dates indicated.
AT DECEMBER 31,
------------------------------
1997 1996 1995 1994
------ ------ ------ ------
(IN THOUSANDS)
Substandard assets (1)...... $1,719 $1,980 $1,163 $1,534
Doubtful assets............. 55 59 34 11
Loss assets................. 16 6 5 2
------ ------ ------ ------
Total classified assets.. $1,790 $2,045 $1,202 $1,547
====== ====== ====== ======
___________
(1) Includes $483,000, $250,000, $292,000 and $421,000 for a real estate
development project classified as REO at December 31, 1997, 1996, 1995 and
1994, respectively.
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred. The Bank reviews on a quarterly basis the
loans in its portfolio which have demonstrated delinquencies, including problem
loans, to determine whether any loans require classification or the
establishment of appropriate reserves or allowances for losses. Such evaluation,
which includes a review of all loans of which full collectibility of interest
and principal may not be reasonably assured, considers, among other matters,
past loss experience, present economic conditions and other factors deemed
relevant by management. Management calculates the general allowance for loan
losses on past experience as well as current delinquencies and the composition
of the Bank's loan portfolio. While both general and specific loss allowances
are charged against earnings, general loan loss allowances are included, subject
to certain limitations, as capital in computing risk-based capital under federal
regulations.
In accordance with SFAS 114, a loan is considered impaired when each of the
following criteria are met: the loan is of a material size, the loan is
considered to be non-performing, and a loss is probable. The measurement of
impaired loans is generally based upon the present value of expected future cash
flows discounted at the historic effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loan loss provisions may be
deemed necessary. Management believes that the Bank's current allowance for loan
losses is adequate, however, there can be no assurance that the allowance for
loan losses will be adequate to cover losses that may in fact be realized in the
future or that additional provisions for loan losses will not be required.
14
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the analysis of the allowance for loan losses at or for the periods indicated.
AT OR FOR THE PERIOD ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
Total loans receivable, net................................ $121,585 $108,742 $100,149 $89,668 $78,813
Average loans outstanding.................................. 113,651 104,354 95,979 84,596 78,355
Allowance balance (at beginning of period)................. 906 346 315 280 296
Provision for losses:
Real estate............................................... 121 90 53 30 10
Consumer and other loans.................................. 140 546 50 35 23
Charge-offs:
Real estate............................................... -- -- 17 14 --
Consumer and other loans.................................. 358 93 64 80 146
Recoveries:
Real estate............................................... -- -- -- 6 --
Consumer and other loans.................................. 18 17 9 58 97
-------- -------- -------- ------- -------
Allowance balance (at end of period)....................... $ 827 $ 906 $ 346 $ 315 $ 280
======== ======== ======== ======= =======
Allowance for loan losses as a percent of net loans
receivable at end of period............................... 0.7% 0.8% 0.3% 0.4% 0.4%
Loans charged off as a percent of average loans
outstanding............................................... 0.3% 0.1% 0.1% 0.1% 0.2%
Ratio of allowance for loan losses to total nonperforming
loans at end of period (1)................................ 53.8% 45.3% 37.6% 28.3% 35.5%
Ratio of allowance for loan losses to total nonperforming
assets at end of period (1)............................... 35.9% 33.6% 23.0% 18.3% 17.5%
_____________
(1) Net of specific reserves.
15
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. The allocation of the allowance by category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any category.
AT DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------ --------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
----------- ------------ ----------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
Balance at end of period applicable to:
Real estate loans....................... $461 91.23% $340 90.66% $ 250 90.86%
Consumer and other loans................ 366 8.77 566 9.34 96 9.14
---- ------ ---- ------ ------ ------
Total allowance for loan losses (1).... $827 100.00% $906 100.00% $ 346 100.00%
==== ====== ==== ====== ====== ======
_________________
(1) Percentages include unearned discount and origination fees.
16
INVESTMENT ACTIVITIES
The investment policy of the Bank established by the Board of Directors
attempts to provide and maintain liquidity, maintain a high quality diversified
investment portfolio in order to obtain a favorable return on investment without
incurring undue interest rate and credit risk, provide collateral for pledging
requirements, and to complement the Bank's lending activities. At December 31,
1997, the Bank had investment securities with an aggregate amortized cost value
of $55.6 million and a market value of $56.8 million. At December 31, 1997, the
Bank's carrying value of investment securities consisted of $18.3 million of
corporate debt issues and $11.9 million of securities issued or guaranteed by
the United States Government or agencies thereof and state and municipal
obligations. The corporate debt issues primarily consist of financial
corporation debt and industrial debentures (the largest single issue was $1.0
million). These issues generally have maturities of between two and five years.
All corporate debt investments have been rated as investment grade by either
Moody's or Standard & Poor's. Typically, such investments yield 30-50 basis
points more than Treasury securities with comparable maturities. To a lesser
extent, the Bank also invests in mutual funds and equity securities. At December
31, 1997, the Bank held $1.1 in common stock and $1.8 million in an equity
mutual fund. At December 31, 1997, the Bank had invested $23.2 million in
mortgage-backed securities, net. Mortgage-backed securities, like mortgage
loans, amortize over the life of the security as the underlying mortgages are
paid down. The speed at which principal payments above normally scheduled
amortization occurs, is generally unpredictable. Historically, the securities
have paid down more rapidly in a falling interest rate environment, thereby
shortening the life of the security. Likewise, in a rising interest rate
environment, the life of the mortgage-backed security tends to extend. The
result is that, generally, the Bank will receive more investable funds in lower
interest rate environments and less investable funds during periods of higher
interest rates. The embedded option on the part of the underlying mortgagee to
prepay the loan, therefore, tends to impact the value of the security and can
adversely impact the Bank's net interest margin. The Bank's investments are,
generally, liquid, and therefore allow the Bank to respond more readily to
changing market conditions. The investment portfolio is accounted for in
accordance with FASB Statement 115. At December 31, 1997, the Bank's available-
for-sale and held-to-maturity portfolios had carrying values of $51.7 million
and $5.1 million, respectively.
The Bank generally has maintained a portfolio of liquid assets that exceeds
regulatory requirements. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of the yield that will be available in
the future, as well as management's projections as to the short term demand for
funds to be used in the Bank's loan origination and other activities. For
further information regarding the Bank's investments see Note 2 to the Notes to
Financial Statements.
17
INVESTMENT PORTFOLIO. The following table sets forth the carrying value of
the Bank's investment portfolio at the dates indicated. At December 31, 1997,
the market value of the Bank's investments was approximately $56.8 million. The
market value of investments includes interest-earning deposits, and mortgage-
backed securities.
AT DECEMBER 31,
---------------------------------------
1997 1996 1995 1994
------- -------- -------- --------
(IN THOUSANDS)
Investment securities:
U.S. Government and agency obligations................. $ 4,856 $ 5,879 $ 8,171 $ 6,070
State and municipal obligations........................ 6,636 6,172 5,297 3,072
Corporate debt issues.................................. 18,121 22,060 28,533 33,192
Equity securities...................................... 1,139 557 69 87
Mutual funds........................................... 1,785 1,178 1,865 5,872
------- ------- ------- -------
32,537 35,846 43,935 48,293
Unrealized gain (loss) on available for sale portfolio.. 1,126 827 996 (158)
------- ------- ------- -------
Total investment securities........................... 33,663 36,673 $44,931 $48,135
------- ------- ------- -------
Interest-earning deposits in other institutions......... -- -- -- 2,043
Federal funds sold...................................... -- 1,550 8,200 11,584
------- ------- ------- -------
Total investments.................................... $33,663 $38,223 $53,131 $61,762
======= ======= ======= =======
Mortgage-backed securities, net:
Adjustable rate........................................ 3,823 4,787 2,812 247
Fixed rate............................................. 19,200 18,179 5,100 769
------- ------- ------- -------
23,023 22,966 7,912 1,016
Unrealized gain (loss) on available for sale portfolio.. 135 (137) 41 (24)
------- ------- ------- -------
Total mortgage-backed securities, net................ $23,158 $22,829 $ 7,953 $ 992
======= ======= ======= =======
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
carrying value, market value, average life in years, and annualized weighted
average yield of the Bank's investment portfolio at December 31, 1997.
ANNUALIZED
AVERAGE WEIGHTED
CARRYING MARKET LIFE AVERAGE
VALUE VALUE YEARS YIELD
-------- ------- ------- -----------
(DOLLARS IN THOUSANDS)
Investment securities:
U.S. Government treasury.............................. $ 220 $ 222 2.286 6.83%
U.S. Government agency................................ 4,636 4,662 6.480 6.97
State and municipal obligations....................... 6,636 7,060 7.433 5.73
Corporate debt issues................................. 18,121 18,345 2.791 7.07
Marketable equity securities.......................... 2,924 3,400 -- 6.85
------- ------- ----- -----
Total............................................. $32,537 $33,689 6.761
------- ======= =====
Unrealized gain on available for sale portfolio..... 1,126
-----
Carrying value of investment securities................. $33,663
=======
Investment securities held to maturity: (1)
Corporate debt obligations............................ $ 5,115 5,141 1.409 7.173
======= ======= ===== =====
__________________
(1) The information is included above as a component of corporate debt issues.
18
SECURITIES PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities at December 31, 1997. Yield is calculated on the
amortized cost to maturity.
AT DECEMBER 31, 1997
----------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
-------------------- -------------------- --------------------- --------------------
ANNUALIZED ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ---------- -------- ---------- -------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
Debt investment securities:
U.S. Agency securities................... -- -- $1,084 7.010% $ 3,514 6.919% $ 38 9.429%
U.S. Government securities............... -- -- 201 6.420 -- -- 19 11.154
State and municipal obligations.......... 251 6.408 1,502 5.954 3,422 5.562 1,461 5.644
Corporate debt issues.................... 8,655 7.579 3,329 6.604 4,382 7.069 1,755 7.124
------- ----- ------ ----- ------- ----- ------- ------
Total.............................. $ 8,906 7.546 $6,116 6.510 $11,318 6.567 $ 3,273 6.514
======= ====== ======= =======
Equity and mortgage-backed securities:
Mutual funds............................. $ 1,785 0.700% $ -- --% $ -- --% $ -- --%
Mortgage-backed securities............... -- -- 1,249 6.789 4,236 7.048 17,538 6.957
Common stock............................. 1,139 6.153 -- -- -- -- -- --
------- ----- ------ ----- ------- ----- ------- ------
Total.............................. $ 2,924 2.824 $1,249 6.789 $ 4,236 7.048 $17,538 6.957
======= ====== ======= =======
Total investment securities........ $11,830 6.379 $7,365 6.558 $15,554 6.698 $20,811 6.887
======= ====== ======= =======
Unrealized gain on available for sale portfolio
Total carrying value.............
Investment securities held to maturity: (1)
Corporate debt obligations............... $ 4,271 7.328 -- -- $ 774 6.592 $ 70 4.131
------- ------ ------- -------
Total securities..................... $ 4,271 7.328 $ 0 0.000% $ 774 6.592 $ 70 4.131
======= ====== ======= =======
AT DECEMBER 31, 1997
--------------------------------
TOTAL INVESTMENT SECURITIES
ANNUALIZED
WEIGHTED
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
-------- ------- -----------
(DOLLARS IN THOUSANDS)
Debt investment securities:
U.S. Agency securities.............................. $ 4,636 $ 4,662 6.975%
U.S. Government securities.......................... 220 222 6.816
State and municipal obligations..................... 6,636 7,060 5.730
Corporate debt issues............................... 18,121 18,345 7.070
------- ------- -----
Total......................................... $29,613 $30,289 6.753
======= =======
Equity and mortgage-backed securities:
Mutual funds........................................ $ 1,785 $ 1,785 0.700%
Mortgage-backed securities.......................... 23,023 23,158 6.964
Preferred stock..................................... -- -- --
Common stock........................................ 1,139 1,615 6.153
------- ------- -----
Total......................................... $25,947 $26,558 6.497
======= =======
Total investment securities................... $55,560 $56,847 6.634
======= =======
Unrealized gain on available for sale portfolio....... 1,261
-------
Total carrying value.......................... $56,821
=======
Investment securities held to maturity: (1)
Corporate debt obligations.......................... $ 5,115 $ 5,141 7.173
------- -------
Total securities................................ $ 5,115 $ 5,141 7.173
======= =======
____________________________________
(1) The information is included as a component of debt investment securities.
19
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from the amortization and prepayment of loans and mortgage-backed securities,
the maturity of investment securities and operations and from other borrowings.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including noninterest-bearing demand accounts, NOW accounts,
passbook and club accounts, money market deposit, term certificate accounts and
individual retirement accounts. While the Bank accepts deposits of $100,000 or
more, it generally does not currently offer premium rates for such deposits.
Deposit account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest rate,
among other factors. The Bank has a committee which meets weekly to evaluate the
Bank's internal cost of funds, surveys rates offered by competing institutions,
reviews the Bank's cash flow requirements for lending and liquidity and the
number of certificates of deposit maturing in the upcoming week. This committee
executes rate changes when deemed appropriate. The Bank does not obtain funds
through brokers, nor does it solicit funds outside its market area.
DEPOSIT PORTFOLIO. The following table sets forth information regarding
interest rates, terms, minimum amounts and balances of the Bank's savings and
other deposits as of December 31, 1997:
WEIGHTED PERCENTAGE
AVERAGE MINIMUM OF TOTAL
INTEREST RATE MINIMUM TERM CHECKING AND SAVINGS DEPOSITS AMOUNT BALANCES DEPOSITS
- ------------- ------------ ----------------------------- ------ -------- --------
(IN THOUSANDS)
0.000 None Non-interest demand account $ 50 $ 7,644 5.03%
2.560 None NOW accounts 500 13,306 8.75
3.010 None Passbook and club accounts 100 63,937 42.05
2.849 None Money market accounts 2,500 113 0.07
CERTIFICATES OF DEPOSIT
-----------------------
4.942 6 months Fixed term, fixed rate 2,500 5,247 3.45%
5.653 9 months Fixed term, fixed rate 1,000 100 0.07
5.608 12 months Fixed term, fixed rate 1,000 19,423 12.77
6.091 15 months Fixed term, fixed rate 1,000 10,025 6.59
4.969 18 months Fixed term, variable rate 1,000 1,856 1.22
5.557 18 months Fixed term, fixed rate 1,000 2,617 1.72
5.640 24 months Fixed term, fixed rate 1,000 3,445 2.27
5.820 30 months Fixed term, fixed rate 1,000 4,368 2.87
6.036 36 months Fixed term, fixed rate (1) 1,000 5,443 3.58
6.064 48 months Fixed term, fixed rate (1) 1,000 4,718 3.10
6.050 60 months Fixed term, fixed rate 1,000 1,627 1.07
6.779 84 months Fixed term, fixed rate 1,000 7,641 5.03
6.194 60 through 120 months Fixed term, fixed rate 1,000 549 0.36
-------- ------
TOTAL $152,059(2) 100.00
======== ======
__________________
(1) This deposit product allows the depositor to elect to adjust the interest
rate paid once during the initial term of the deposit to the then prevailing
rate.
(2) Table excludes escrow accounts totalling $340,000 at December 31, 1997.
20
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
AT OF INCR. AT OF INCR. AT OF INCR.
12/31/97 DEPOSITS (DECR) 12/31/96 DEPOSITS (DECR) 12/31/95 DEPOSITS (DECR)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Club accounts................... $ 792 0.52% $ 131 $ 661 0.42% $ 110 $ 551 0.3% $ (67)
Noninterest accounts............ 7,644 5.03 303 7,341 4.63 129 7,212 4.6 1,124
NOW accounts.................... 13,306 8.75 224 13,082 8.24 917 12,165 7.7 (912)
Passbooks....................... 63,145 41.53 (1,828) 64,973 40.94 (5,495) 70,468 44.6 (7,027)
Money market deposit accounts... 113 0.07 (61) 174 0.11 (78) 252 0.2 (532)
Time deposits which mature:
Within 12 months............... 38,860 25.56 (14,075) 52,935 33.36 15,011 37,924 24.0 10,762
Within 12-36 months............ 22,611 14.87 7,679 14,933 9.41 (5,968) 20,901 13.2 (1,977)
Beyond 36 months............... 5,588 3.67 990 4,598 2.90 (3,914) 8,512 5.4 850
-------- ------ -------- -------- ----- -------- -------- ----- --------
Total........................ $152,059 100.00% $ (6,637) $158,697 100.0% $ 712 $157,985 100.0% $ 2,221
======== ====== ======== ======== ===== ======== ======== ===== ========
BALANCE PERCENT BALANCE
AT OF INCR. AT
12/31/94 DEPOSITS (DECR) 12/31/93
-------- -------- -------- --------
Club accounts................... $ 618 0.4% $ 304 $ 314
Noninterest accounts............ 6,088 3.9 1,056 5,032
NOW accounts.................... 13,077 8.4 6,208 6,869
Passbooks....................... 77,495 49.8 8,911 68,584
Money market deposit accounts... 784 0.5 546 238
Time deposits which mature:
Within 12 months............... 27,162 17.4 9,104 18,058
Within 12-36 months............ 22,878 14.7 15,718 7,160
Beyond 36 months............... 7,662 4.9 (1,427) 9,089
-------- ----- -------- --------
Total........................ $155,764(1) 100.0% $ 40,420 $115,344
======== ===== ======== ========
- ------------------
(1) Table excludes escrow accounts totalling $340,000 at December 31, 1997.
21
The following table sets forth the certificates of deposit in the Bank
classified by rates as of the dates indicated:
AT DECEMBER 31,
------------------------------------------
1997 1996 1995 1994
------- -------- ------- --------
(IN THOUSANDS)
RATE
- ----
3.00% or less.......................... $ 139 $ 180 $ 274 $ 136
3.01 - 4.99%........................... 7,253 10,665 3,601 24,210
5.00 - 6.99%........................... 55,228 57,128 58,313 28,010
7.00 - 8.99%........................... 4,552 4,667 5,347 5,009
9.00 - 10.99%.......................... -- -- 53 337
-------- -------- -------- --------
$ 67,172 $ 72,640 $ 67,588 $ 57,702
======== ======== ======== ========
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1997.
---------------------------------------------------------------------
AMOUNT DUE
LESS THAN 1-2 2-3 3-4 4-5 AFTER 5
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
---------- --------- -------- -------- ------- -------- -------
(IN THOUSANDS)
RATE
3.00% or less............................. $ 139 $ -- $ -- $ -- $ -- $ -- $ 139
3.01 - 3.99%.............................. 6 10 -- -- -- -- 16
4.00 - 4.99%.............................. 6,475 755 6 -- -- -- 7,237
5.00 - 5.99%.............................. 27,770 14,113 2,609 1,645 549 1,454 48,140
6.00 - 6.99%.............................. 1,927 1,412 2,498 289 732 230 7,088
7.00 - 7.99%.............................. -- 3,669 -- -- 764 4,433
8.00% and above........................... -- 119 -- -- -- -- 119
------- ------- ------ ------ ------ ------ -------
$36,317 $20,078 $5,113 $1,934 $1,281 $2,448 $67,172
======= ======= ====== ====== ====== ====== =======
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997.
CERTIFICATES
OF DEPOSIT
OF $100,000
REMAINING MATURITY OR MORE
------------------ ---------------
(IN THOUSANDS)
Three months or less................................................ $ 1,768
Three through six months............................................ 1,535
Six through twelve months........................................... 2,010
Over twelve months.................................................. 3,142
--------
Total............................................................ $ 8,455
========
The following table sets forth the net changes in the deposit activities of
the Bank for the periods indicated:
AT DECEMBER 31,
------------------------------------------
1997 1996 1995 1994
-------- -------- -------- ---------
(IN THOUSANDS)
Balance at beginning of period................................................ $158,697 $157,985 $155,764 $115,344
Net deposits (withdrawals).................................................... (12,920) (5,611) (4,034) 35,727
Interest credited............................................................. 6,283 6,323 6,255 4,693
-------- -------- -------- --------
Ending balance................................................................ 152,060 158,697 157,985 155,764
-------- -------- -------- --------
Net increase (decrease) in deposits........................................... $ (6,637) $ 712 $ 2,251 $ 40,420
======== ======== ======== ========
22
BORROWINGS
Savings deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes. At December 31,
1997, the Bank had $7.9 million in funds obtained from repurchase agreements
outstanding, $5.8 million in an overnight line of credit, and $4.5 million in
term advances. The Bank is a member of the Federal Home Loan Bank System.
The following table summarizes the outstanding balance of short-term
borrowing of the Bank for the years indicated.
AT DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -----
(In thousands)
Overnight Line of Credit $ 5,750 $ -- $ --
Term borrowings (original term)
90 days or less 7,942 7,610 --
1 year 3,550 -- --
2 year 1,000 -- --
------- ------ -----
Balance at end of period $18,242 $7,610 $ --
======= ====== =====
Daily average during the year 10,212 1,472 --
Maximum month-end balance 18,892 7,610 --
Weighted average rate during the year 5.92% 5.90% --
Year-end average rate 5.84% 5.47% --
PERSONNEL
As of December 31, 1997, the Bank had 59 full-time and 18 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good.
REGULATION AND SUPERVISION
GENERAL
The Bank is a New York State chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the FDIC. The Bank is subject
to extensive regulation by the State of New York Banking Department (the
"Department") as its chartering agency, and by the FDIC, as the deposit insurer.
The Bank must file reports with the Department and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as establishing
branches and mergers with, or acquisitions of, other depository institutions.
There are periodic examinations by the Department and the FDIC to assess the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings bank may engage, and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.
23
Any change in such regulation, whether by the Department, the FDIC or through
legislation, could have a material adverse impact on the Holding Company, the
Bank, and their operations and stockholders. The Company is also required to
file certain reports with, and otherwise comply with the rules and regulations
of, the FRB and the Department and the FDIC which administers the provisions of
the Securities Exchange Act of 1934. Certain of the regulatory requirements
applicable to the Bank and to the Company are referred to below or elsewhere
herein.
The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by FDIC
regulations and other federal law and regulations. In particular, the
applicable provisions of New York State Banking Law and regulations governing
the investment authority and activities of an FDIC insured state-chartered
savings bank have been substantially limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued
pursuant thereto.
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Banking Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in common stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending
powers are not subject to percentage of assets limitations, although there are
limits applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance
with and reliance upon the specific investment authority set forth in the New
York State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of debt and equity 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 Department. 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
24
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 of Banks (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 or
officers.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that provide excessive compensation, fees or benefits or could lead
to material financial loss. In addition the federal banking regulatory agencies
are required to prescribe by regulation standards specifying: (i) maximum
classified assets to capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; and (iii) to the extent feasible, a minimum
ratio of market value to book value for publicly traded shares of depository
institutions and depository institution holding companies. In November 1993,
the federal banking agencies, including the FDIC, proposed regulations regarding
the implementation of these standards.
OTHER DEPOSIT INSURANCE REFORMS. FDICIA amended the FDI Act to prohibit
insured depository institutions that are not well-capitalized from accepting
brokered deposits unless a waiver has been obtained from the FDIC. Deposit
brokers are required to register with the FDIC.
CONSUMER PROTECTION PROVISIONS. FDICIA enacted consumer oriented
provisions including a requirement of notice to regulators and customers for any
proposed branch closing and provisions intended to encourage the offering of
"lifeline" banking accounts and lending in distressed communities. FDICIA also
requires depository institutions to make additional disclosures to depositors
with respect to the rate of interest and the terms of their deposit accounts.
UNIFORM LENDING STANDARD. Under FDICIA, the federal banking agencies are
required to adopt uniform regulations prescribing standards for extensions of
credit that are secured by liens on interests in real estate or made for the
purpose of financing the construction of a building or other improvements to
real estate. Insured depository institutions must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit that are secured by liens or interests in real estate or are made for the
purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of
the Interagency
25
Guidelines for Real Estate Lending Policies (the "Interagency Guidelines") that
have been adopted by the federal banking regulators.
The Interagency Guidelines, among other things, require depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by undeveloped land, the supervisory loan-to-value limit is 65% of the
value of the collateral; (ii) for land development loans, the supervisory limit
is 75%; (iii) for loans for the construction of commercial, multi-family or
other nonresidential property, the supervisory limit is 80%; (iv) for loans for
the construction of one- to four- family properties, the supervisory limit is
85%; and (v) for loans secured by other improved property (e.g. farmland,
commercial property and other income-producing property including non-owner-
occupied, one- to four- family property) the supervisory limit is 85%.
The Interagency Guidelines indicate that on a case-by-case basis it may be
appropriate to originate or purchase loans with loan-to-value ratios in excess
of the supervisory loan-to-value limits, based on the support provided by other
credit factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multi-family and other
non-one- to four- family residential properties should not exceed 30% of total
capital.
The supervisory loan-to-value limits do not apply to certain categories of
loans including loans insured or guaranteed by the United States Government and
its agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of state governments, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured in
connection with a workout, loans to facilitate sales of real estate acquired by
the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.
INSURANCE OF DEPOSIT ACCOUNTS
The Bank is a member of the Bank Insurance Fund ("BIF"). The BIF has
achieved the required reserve ratio of 1.25% of insured reserve deposits. At
December 31, 1997 the Bank held $24.6 million in deposits which are insured by
the Savings Association Insurance Fund. The Bank paid $33,000 in federal
deposit insurance premiums for the fiscal year ended December 31, 1997, as
compared to $236,000 in 1996.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance. At December 31, 1997, the
Bank's capital exceeded the capital requirements imposed by the FDIC.
CAPITAL MAINTENANCE
The FDIC has issued regulations that require BIF-insured banks, such as the
Bank, to maintain minimum levels of capital. The regulations establish a
minimum leverage capital ratio requirement of not less than 3.0% for banks in
the strongest financial and managerial condition, with a CAMEL Rating of 1 (the
highest examination rating of the FDIC for banks). For all other banks, the
minimum leverage capital
26
requirement is 3% plus additional capital of at least 100 to 200 basis points.
Core capital (also referred to as "Tier 1 capital") is comprised of the sum of
common stockholders' equity, non-cumulative perpetual preferred stock (including
any related surplus) and minority interests in consolidated subsidiaries, minus
all intangible assets (other than qualifying servicing rights).
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as core capital and supplementary capital) to risk-
weighted assets of at least 8% and core capital to risk-weighted assets of at
least 4%. In determining the amount of risk-weighted assets, all assets, plus
certain off-balance sheet items, are multiplied by a risk-weight of 0% to 100%,
based on the risks the FDIC believes are inherent in the type of asset or off-
balance sheet item. The components of core capital are equivalent to those
discussed above under the leverage capital ratio requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
perpetual preferred stock, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan and lease losses.
Allowance for possible loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount
of capital counted toward supplementary capital cannot exceed 100% of core
capital.
LOANS-TO-ONE-BORROWER LIMITATIONS
With certain limited exceptions, a New York State chartered savings bank
may not make unsecured loans or extend credit for commercial, corporate or
business purposes (including lease financing) to a single borrower, the
aggregate amount of which would be in excess of 15% of the bank's net worth. In
addition, the Bank may make secured loans or extensions of credit to a single
borrower which aggregate 25% of the Bank's net worth provided that the
underlying collateral is valued in an amount equal to at least 10% of the Bank's
net worth. The Bank currently complies with all applicable loans-to-one-
borrower limitations.
COMMUNITY REINVESTMENT ACT
Federal Regulation. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings institution 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 Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") amended the CRA to require, effective July 1,
1990, public disclosure of an institution's CRA rating and require the FDIC to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system which replaced the five-tiered numerical
rating system.
New York State Regulation. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA") which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Banking Department. The
NYCRA requires the Banking Department to make an annual written assessment of a
bank's compliance with the NYCRA, utilizing a four-tiered rating
27
system, and make such assessment available to the public. The NYCRA also
requires the Superintendent to consider a bank's NYCRA rating when reviewing a
bank's application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application. At December 31, 1997, the Bank complied with its NYCRA
requirements.
The Bank's CRA rating as of its latest examination was satisfactory.
FEDERAL RESERVE SYSTEM
Under Federal Reserve Board regulations, the Bank is required to maintain
noninterest-earning reserves against its transaction accounts (primarily NOW and
regular checking accounts). At December 31, 1997, the Bank complied with these
requirements.
HOLDING COMPANY REGULATION
The Company is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended (the "BHCA"). The Company is subject to
examination, regulation and periodic reporting under the BHCA, as administered
by the FRB. The FRB has adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially similar to those of the FDIC
for the Bank. The Company's consolidated capital exceeds these requirements.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of any company engaged in, non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking are: (i) making or servicing loans; (ii) performing certain data
processing services: (iii) providing securities brokerage services; (iv) acting
as fiduciary, investment or financial advisor; (v) leasing personal or real
property; (vi) making investments in corporations or projects designed primarily
to promote community welfare; and (vii) acquiring a savings and loan
association.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the FRA on any extension of credit to the bank holding
company or its subsidiaries, and on the acceptance of stocks or securities of
such holding company or its subsidiaries as collateral, and on the acceptance of
such stocks or securities as collateral for loans. In addition, related
provisions of the FRA and FRB regulations limit the amount of, and establish
required procedures and credit standards with respect to, loans and other
extensions of credit to officers, directors and principal stockholders of the
Bank, the Company, any subsidiary of the Company and related interests of such
persons. Moreover, subsidiaries of bank holding companies are prohibited from
engaging in certain tie-in arrangements (with the Company or any of its
subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
The Company and the Bank will be affected by the monetary and fiscal
policies of various agencies of the United States Government, including the
Federal Reserve System. In view of changing conditions in the national economy
and in the money markets, it is impossible for management of the Company to
accurately predict future changes in monetary policy or the effect of such
changes on the business or financial condition of the Company.
28
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal
bank holding company regulations, a bank holding company organized or doing
business in New York State also may be subject to regulation under the New York
State Banking Law. The term "bank holding company," for the purposes of the New
York State Banking Law, is defined generally to include any person, company or
trust that directly or indirectly either controls the election of a majority of
the directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the 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 Department 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. Although the Company will not
be a bank holding company for purposes of New York State law, any future
acquisition of ownership, control, or the power to vote 10% or more of the
voting stock of another bank or bank holding company would cause it to become
such.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. 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 Company or the
Bank.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use
the specific charge off method in computing its bad debt deduction beginning
with its 1996 Federal tax return. In addition, the federal legislation requires
the recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions.
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
29
be used as credits against regular tax liabilities in future years. The Bank
has not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At December 31, 1997, the Bank had
no net operating loss carryforwards for federal income tax purposes.
The Internal Revenue Service has examined the federal income tax return for
the fiscal year ended 1992; the fiscal year-end tax returns for 1991, 1993, 1994
and 1995 remain open. See Note 12 to the Financial Statements.
STATE TAXATION
NEW YORK TAXATION. The Bank is subject to the New York State Franchise Tax
on Banking Corporations in an annual amount equal to the greater of (i) 9% of
the Bank's "entire net income" allocable to New York State during the taxable
year, or (ii) the applicable alternative minimum tax. The alternative minimum
tax is generally the greater of (a) 0.01% of the value of the Bank's assets
allocable to New York State with certain modifications, (b) 3% of the Bank's
"alternative entire net income" allocable to New York State, or (c) $250.
Entire net income is similar to federal taxable income, subject to certain
modifications (including the fact that net operating losses cannot be carried
back or carried forward) and alternative entire net income is equal to entire
net income without certain modifications.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
ITEM 2. PROPERTIES
- --------------------
The Bank conducts its business through its main office located in Oswego,
New York, and four full service branch offices located in Oswego County. The
following table sets forth certain information concerning the main office and
each branch office of the Bank at December 31, 1997. The aggregate net book
value of the Bank's premises and equipment was $3.7 million at December 31,
1997. For additional information regarding the Bank's properties, see Note 5 to
Notes to Financial Statements.
LOCATION OPENING DATE OWNED/LEASED ANNUAL RENT
- -------- ------------ ------------- -----------
Main Office 1874 Owned --
- -----------
214 West First Street
Oswego, New York 13126
Plaza Branch 1989 Owned (1) --
- ------------
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch 1978 Owned --
- -------------
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch 1994 Owned --
- ------------------
34 East Bridge Street
Oswego, New York 13126
30
Fulton Branch 1994 Owned --
- -------------
114 Oneida Street
Fulton, New York 13068
_____________________________
(1) The property is owned; the underlying land is leased.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
There are various claims and lawsuits to which the Company is periodically
involved incident to the Company's business. In the opinion of management, such
claims and lawsuits in the aggregate are immaterial to the Company's
consolidated financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
- -------------------------------------------------------------------------------
The "Market for Common Stock" section of the Company's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
The selected financial information for the year ended December 31, 1997 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
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 DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The financial statements are contained in the Company's Annual Report to
Stockholders and are incorporated herein by reference.
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------------------------------
(a) Information concerning the directors of the Company is incorporated by
reference hereunder in the Company's Proxy Materials for the Annual Meeting of
Stockholders.
(b) Set forth below is information concerning the Principal Officers of the
Company.
NAME AGE POSITIONS HELD WITH THE COMPANY
- --------------------- --- ----------------------------------------
Chris C. Gagas 67 Chairman of the Board, President and Chief
Executive Officer
Anita J. Austin 48 Internal Auditor
Melissa A. Dashnau 40 Vice President, Secretary
James A. Dowd, CPA 30 Controller
Edgar J. Manwaring 52 Vice President--Lending
Gregory L. Mills 37 Vice President, Director of Marketing, Branch
Administrator
W. David Schermerhorn 37 Executive Vice President-Lending
Thomas W. Schneider 37 Executive Vice President and Chief Financial
Officer
Barry S. Thompson 43 Senior Vice President, Compliance Officer and
Security Officer
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information with respect to management compensation and transactions
required under this item is incorporated by reference hereunder in the Company's
Proxy Materials for the Annual Meeting of Stockholders under the caption
"Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information contained under the sections captioned "Stock Ownership of
Management" is incorporated by reference to the Company's Proxy Materials for
its Annual Meeting of Stockholders.
32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is set forth under the caption
"Certain Transactions" in the Definitive Proxy Materials for the Annual Meeting
of Stockholders and is incorporated herein by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The exhibits and financial statement schedules filed as a part of this Form 10-
K are as follows:
(A) Independent Auditors' Report;
(B) Consolidated Statements of Condition - December 31, 1997
and 1996.
(C) Consolidated Statements of Income - years ended December 31,
1997, 1996 and 1995;
(D) Consolidated Statements of Stockholders' Equity - years ended
December 31, 1997, 1996 and 1995
(F) Consolidated Statements of Cash Flows - years ended December
31, 1997, 1996 and 1995; and
(G) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) Reports on Form 8-K
-------------------
The Company has not filed a Current Report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1997.
(c) Exhibits
--------
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc.
Incorporated herein by reference to the Company's
registration statement on S-4, file no. 333-36051 (the "
S-4")
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein
by reference to the Company's S-4
33
4 Form of Stock Certificate of Pathfinder Bancorp, Inc.
Incorporated by reference to the Company's S-4
10.1 Form of Oswego City Savings Bank 1997 Stock Option Plan
Incorporated by reference to the Company's S-4
10.2 Form of Oswego City Savings Bank 1997 Recognition and
Retention Plan Incorporated by reference to the Company's
S-4
10.3 Employment Agreement between the Bank and Chris C. Gagas,
President and Chief Executive Officer Incorporated by
reference to the Company's S-4
10.4 Employment Agreement between the Bank and Thomas W.
Schneider, Vice President and Chief Financial Officer
Incorporated by reference to the Company's S-4
10.5 Employment Agreement between the Bank and W. David
Schermerhorn, Vice President - Loan Administration
Incorporated by reference to the Company's S-4
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
34
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PATHFINDER BANCORP, INC.
Date: March 30, 1998 By: /s/ Chris C. Gagas
-------------------------------------
Chris C. Gagas
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/ Chris C. Gagas By:/s/ Thomas W.Schneider
-------------------------------- ------------------------------------
Chris C. Gagas, President, Thomas W. Schneider, Executive
Chief Executive Officer and Vice President and Chief
Chairman of the Board Financial Officer (Principal
(Principal Executive Officer) Financial Officer)
Date: March 30, 1998 Date: March 30, 1998
By:/s/ James A. Dowd By:/s/ Chris R. Burritt
-------------------------------- ---------------------------------
James A. Dowd, Controller Chris R. Burritt, Director
(Principal Accounting Officer)
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Bruce E. Manwaring By:/s/ Raymond W. Jung
-------------------------------- ---------------------------------
Bruce E. Manwaring., Director Raymond W. Jung, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ L. William Nelson, Jr. By:/s/Victor S. Oakes
-------------------------------- ---------------------------------
L. William Nelson, Jr., Director Victor S. Oakes, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Lawrence W. O'Brien By:/s/ Corte J. Spencer
-------------------------------- ---------------------------------
Lawrence W. O'Brien, Director Corte J. Spencer, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Janette Resnick
--------------------------------
Janette Resnick, Director
Date: March 30, 1998
35
EXHIBIT INDEX
-------------
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc.
Incorporated herein by reference to the Company's
registration statement on S-4, file no. 333-36051 (the "S-
4")
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by
reference to the Company's S-4
4 Form of Stock Certificate of Pathfinder Bancorp, Inc.
10.1 Form of Oswego City Savings Bank 1997 Stock Option Plan
Incorporated by reference to the Company's S-4
10.2 Form of Oswego City Savings Bank 1997 Recognition and
Retention Plan Incorporated by reference to the Company's S-
4
10.3 Employment Agreement between the Bank and Chris C. Gagas,
President and Chief Executive Officer Incorporated by
reference to the Company's S-4
10.4 Employment Agreement between the Bank and Thomas W.
Schneider, Vice President and Chief Financial Officer
Incorporated by reference to the Company's S-4
10.5 Employment Agreement between the Bank and W. David
Schermerhorn, Vice President - Loan Administration
Incorporated by reference to the Company's S-4
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
36