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UNITED STATES
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, 1999
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: 0-23975
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NIAGARA BANCORP, INC.
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(Exact Name of Registrant as specified in its Charter)
DELAWARE 16-1545669
- ---------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization
6950 SOUTH TRANSIT ROAD, P.O. BOX 514, LOCKPORT, NY 14095-0514
- --------------------------------------------------- -------------------------
(Address of Principal Executive Officer) (Zip Code)
(716)625-7500
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(Registrant's Telephone Number Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
----------------------------
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
---------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file reports) and (2) has been subject to such requirements for the
past 90 days.
YES X NO
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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. [ ]
As of March 22, 2000, there were issued and outstanding, exclusive of treasury
shares, 26,298,900 shares of the Registrant's Common Stock.
The aggregate market value of the 9,806,351 shares of voting stock held by
non-affiliates of the Registrant was $92,179,700, as computed by reference to
the last sales price on March 22, 2000, as reported by the Nasdaq National
Market. Solely for purposes of this calculation, all persons who are directors
and executive officers of the Registrant and all persons who are believed by the
Registrant to be beneficial owners of more than 5% of its outstanding stock have
been deemed to be affiliates.
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NIAGARA BANCORP, INC.
AND SUBSIDIARIES
DOCUMENTS INCORPORATED
BY REFERENCE
The following documents, in whole or in part, are specifically incorporated by
reference in the indicated Part of the Company's Proxy Statement:
Document Part
- ------------------------------------------------------ -----------------------------------------------------------------
Proxy Statement for the 2000 Annual Meeting of Part III, Item 10
Stockholders "Directors and Executive Officers of the Registrant"
Part III, Item 11
"Executive Compensation"
Part III, Item 12
"Security Ownership of Certain Beneficial Owners and Management"
Part III, Item 13
"Certain Relationships and Related Transactions"
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TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
- ---------------- -------------
PART I
1 Business.................................................................................. 4
2 Properties................................................................................ 23
3 Legal Proceedings......................................................................... 24
4 Submission of Matters to Vote of Security Holders......................................... 24
PART II
5 Market for Registrant's Common Equity and Related Stockholder Matters..................... 24
6 Selected Financial Data................................................................... 25
7 Management's Discussion and Analysis of Financial Condition and Results of Operations..... 27
7A Quantitative and Qualitative Disclosure about Market Risk................................. 35
8 Financial Statements and Supplementary Data............................................... 38
9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 68
PART III
10 Directors and Executive Officers of the Registrant........................................ 68
11 Executive Compensation.................................................................... 68
12 Security Ownership of Certain Beneficial Owners and Management............................ 68
13 Certain Relationships and Related Transactions............................................ 68
PART IV
14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 69
Signatures........................................................................................... 70
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PART I
ITEM 1. BUSINESS
GENERAL
NIAGARA BANCORP, INC.
Niagara Bancorp, Inc. (the "Company") is a Delaware corporation, which holds all
of the capital stock of First Niagara Bank (the "Bank"), formerly Lockport
Savings Bank. Approximately 38.7% of the shares of the Company's common stock is
held by the public and approximately 60.0% of its shares are held by Niagara
Bancorp, MHC (the "MHC"), a state-chartered mutual holding company incorporated
in the state of New York. Approximately 1.3% of the Company's shares of common
stock were issued to establish the First Niagara Bank Foundation (the
"Foundation"), which is dedicated exclusively to supporting charitable causes
and community development activities throughout Western New York.
The business and management of the Company consist primarily of the business and
management of the Bank. The Company neither owns nor leases any property, but
uses the premises, equipment and furniture of the Bank. At the present time, the
Company does not employ any persons other than certain officers of the Bank and
utilizes the support staff of the Bank from time to time. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
Pending shareholder approval at the Company's 2000 Annual Meeting, the name of
the holding company will be changed to First Niagara Financial Group, Inc. The
name change will link the entire organization under a common brand focused on
providing a unique array of financial services.
FIRST NIAGARA BANK (FORMERLY LOCKPORT SAVINGS BANK)
The Bank was organized in 1870 as a New York chartered mutual savings bank. The
Bank's deposits are insured by the Bank Insurance Fund ("BIF"), as administered
by the Federal Deposit Insurance Corporation (the "FDIC"), up to the maximum
amount permitted by law. The Bank operates as a wholly-owned subsidiary of the
Company and is a full-service, community-oriented savings bank that emphasizes
personal service and customer convenience in serving the financial needs of the
individuals, families and businesses residing in its traditional market area in
the Western New York counties of Niagara, Orleans, Erie and Genesee. The Bank's
business is primarily accepting deposits from customers through its branch
offices and investing those deposits, together with funds generated from
operations and borrowings, in one- to four-family residential, multi-family
residential and commercial real estate loans, commercial business loans,
consumer loans, and investment securities.
During 1999, the Bank expanded its strategic focus in both product offerings and
market area. To further enhance its growth as a complete financial services
provider, the Bank completed the acquisition of Warren-Hoffman & Associates,
Inc. ("WHA") and three of its affiliated companies in the first quarter of 1999.
These companies offer insurance products, on an agency basis, including personal
and business insurance, surety bonds, risk management, life, disability and
long-term coverage, as well as provides third-party administration of employee
benefit plans. Additionally, to supplement its product offerings to its
commercial business customers, the Bank acquired Empire National Leasing, Inc.
and Empire National Auto Leasing, Inc. (collectively "ENL") during January of
2000. ENL is a nationwide provider of equipment lease financing through a
network of well-established manufacturers, distributors, vendors and customers
in a variety of industries. Each operates as wholly-owned subsidiaries of the
Bank.
The Bank also recognized an opportunity to expand its market area beyond its
traditional Western New York counties. The Bank opened a loan production office
in Rochester during 1999 and a full service branch location during the first
quarter of 2000. To further this expansion, the Bank closed on its acquisition
of Albion Banc Corp. on March 24, 2000, merging the two branches of its
subsidiary, Albion Federal Savings and Loan, into the Bank's branch system. As a
supplement to this market expansion and to further enhance customer convenience,
the Bank implemented a home banking system during the third quarter of 1999.
In recognition of this expansion in geographic scope, as well as the continued
diversification of its financial services product offerings, the Bank received
approval from the New York Banking Department to change its name to First
Niagara Bank, effective February 21, 2000.
CORTLAND SAVINGS BANK
Relative to the expansion into the adjacent Rochester market during the fourth
quarter of 1999, the Company announced that it had reached an agreement to
acquire all of the stock of CNY Financial Corporation, the holding company for
Cortland Savings Bank ("CSB"). CSB, which was founded in 1866 and is
headquartered in Cortland, New York, engages in full service community banking
primarily to individuals and small-to-medium sized businesses through its three
branch locations in Cortland County and loan production offices in
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Liverpool, Onondaga County and Ithaca, Tompkins County. After the acquisition is
completed, which is expected to be during the second quarter of 2000, CSB will
operate as a wholly-owned, independently operated subsidiary of the Company.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K may contain certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1993, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that involve substantial risks and uncertainties.
When used in this report, or in the documents incorporated by reference herein,
the words "anticipate", "believe", "estimate", "expect", "intend", "may", and
similar expressions identify such forward-looking statements. Actual results,
performance or achievements could differ materially from those contemplated,
expressed or implied by the forward-looking statements contained herein. These
forward-looking statements are based largely on the expectations of the Company
or the Company's management and are subject to a number of risks and
uncertainties, including but not limited to economic, competitive, regulatory,
and other factors affecting the Company's operations, markets, products and
services, as well as expansion strategies and other factors discussed elsewhere
in this report filed by the Company with the Securities and Exchange Commission.
Many of these factors are beyond the Company's control.
MARKET AREA AND COMPETITION
The Company has been, and intends to continue to be, a holding company of
community-oriented institutions that offer a variety of financial services to
meet the needs of the communities where its full service banking offices are
located. The Company's primary lending area has also historically been
concentrated in the same counties as its branch offices.
The Company faces significant competition in both making loans and attracting
deposits. The Western and Central New York regions have a high density of
financial institutions, most of which are branches of significantly larger
institutions which have greater financial resources than the Company, and all of
which are competitors of the Company to varying degrees. The Company's
competition for loans comes principally from commercial banks, savings banks,
savings and loan associations, mortgage banking companies, credit unions,
insurance companies and other financial service companies. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Company
faces additional competition for deposits from non-depository competitors such
as the mutual fund industry, securities and brokerage firms and insurance
companies. Further competition may arise as a result of, among other things,
Internet banking, the elimination of restrictions on the interstate operations
of financial institutions, and the passage in November 1999 of financial
modernization legislation that permits affiliations between banks, securities
firms and insurance companies.
LENDING ACTIVITIES
General. The Company's principal lending activity has been the origination, for
retention in its portfolio, of fixed-rate and adjustable-rate mortgage loans
collateralized by one- to four-family residential real estate located within its
primary market area. The Company also originates multi-family residential real
estate loans, commercial real estate loans, consumer loans, construction and
commercial business loans. The Company generally sells in the secondary market a
limited amount of 20-30 year monthly and 25-30 year bi-weekly residential
mortgage loans, and retains for its portfolio adjustable-rate and fixed-rate
monthly residential mortgage loans with maturities of 15 years or less, together
with fixed-rate bi-weekly mortgage loans with maturities of 20 years or less.
However, the Company is primarily a portfolio lender and at any one time, the
Company holds only a nominal amount of loans identified as held-for-sale. The
Company retains the servicing rights on all mortgage loans it sells and realizes
monthly service fee income. The Company retains in its portfolio all
multi-family residential loans, commercial real estate loans, commercial
business loans, and consumer loans that it originates with the exception of
education loans which, as they enter their repayment phase, are sold to the
Student Loan Marketing Association ("Sallie Mae").
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Loan Portfolio Composition. Set forth below is selected information concerning
the composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for credit losses) as of the dates indicated.
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------- ----------------- ----------------- ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Real estate loans:
One- to four-family $609,742 61.55% $ 456,197 60.97% $ 392,846 61.47% $ 360,573 59.85% $319,340 59.31%
Home equity.......... 22,499 2.27 15,520 2.07 13,587 2.13 11,337 1.88 10,234 1.90
Multi-family......... 74,652 7.54 72,672 9.71 74,049 11.59 71,397 11.85 71,489 13.28
Commercial........... 120,758 12.19 98,693 13.19 77,217 12.08 68,601 11.38 62,005 11.52
Construction......... 28,413 2.87 19,476 2.60 10,791 1.69 12,493 2.07 7,891 1.47
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 856,064 86.42 662,558 88.54 568,490 88.96 524,401 87.03 470,959 87.48
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Consumer loans:
Mobile home.......... 25,957 2.62 24,983 3.34 22,747 3.56 21,406 3.55 20,630 3.83
Recreational vehicle. 23,389 2.36 8,906 1.19 1,553 0.24 1,602 0.26 1,517 0.29
Vehicle.............. 24,289 2.45 8,741 1.17 7,306 1.14 18,747 3.11 12,591 2.34
Personal............. 15,771 1.59 15,642 2.09 15,157 2.37 13,596 2.26 11,485 2.13
Home improvement..... 7,983 0.81 8,131 1.09 7,609 1.19 6,879 1.14 7,046 1.31
Guaranteed education. 12,564 1.27 12,314 1.65 10,975 1.72 10,702 1.78 9,874 1.83
Other consumer....... 280 0.03 342 0.05 321 0.05 335 0.06 181 0.03
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total consumer loans 110,233 11.13 79,059 10.58 65,668 10.27 73,267 12.16 63,324 11.76
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Commercial business loans 24,301 2.45 6,616 0.88 4,893 0.77 4,895 0.81 4,085 0.76
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans........ 990,598 100.00% 748,233 100.00% 639,051 100.00% 602,563 100.00% 538,368 100.00%
------- ====== -------- ====== ------- ====== ------- ====== ------- ======
Net deferred costs and
unearned discounts. 4,892 4,516 3,266 2,462 2,310
Allowance for credit losses (9,862) (8,010) (6,921) (6,539) (4,707)
-------- -------- -------- -------- ---------
Total loans, net... $985,628 $744,739 $635,396 $598,486 $ 535,971
======== ======== ======== ======== =========
One- to Four-Family Real Estate Lending. The Company's primary lending activity
has been the origination, for retention in the Company's portfolio, of mortgage
loans to enable borrowers to purchase one- to four-family, owner-occupied
properties located in its primary market area. The Company offers conforming and
non-conforming, fixed-rate and adjustable-rate, residential mortgage loans with
maturities up to 30 years and maximum loan amounts generally up to $500,000.
Over 61%, or $371.5 million, of the Company's residential portfolio consists of
fixed rate bi-weekly mortgages, which feature an accelerated payment structure.
The Company currently offers both fixed, and adjustable rate conventional and
government guaranteed Federal Housing Administration ("FHA"), Veterans
Administration ("VA"), Farmers Home Assistance ("FMHA") mortgage loans with
terms of 10-30 years that are fully amortizing with monthly or bi-weekly loan
payments. The Company generally originates both fixed-rate and adjustable-rate
loans in amounts up to the maximum conforming loan limits as established by
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") secondary market standards. Private mortgage insurance
("PMI") is required for loans with loan-to-value ratios in excess of 80%.
In an effort to provide financing for low and moderate income buyers, the
Company actively participates in residential mortgage programs and products
sponsored by FNMA, FHLMC, and the State of New York Mortgage Agency ("SONYMA").
The SONYMA mortgage programs provide low and moderate income households with
fixed-rate loans which are generally set below prevailing fixed-rate mortgage
loans and which allow below-market down payments. These loans are sold by the
Company to SONYMA, with the Company retaining the contractual servicing rights.
The Company currently offers several one- to four-family, adjustable-rate
mortgage loan ("ARMs") products secured by residential properties with rates
that adjust every one, three, or seven years. The one- to four-family ARMs are
offered with terms of up to 30 years. After origination, the interest rate on
one- to four-family ARMs is reset based upon a contractual spread or margin
above the average yield on United States Treasury Securities, adjusted to a
Constant Maturity (the "U.S. Treasury Constant Maturity Index"), as published
weekly by the Federal Reserve Board (the "FRB"). The appropriate index utilized
at each interest rate change date corresponds to the initial one, three, or
seven year adjustment period of the loan.
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ARMs are generally subject to limitations on interest rate increases of 2% per
adjustment period, and an aggregate adjustment of 6% over the life of the loan.
The ARMs require that any payment adjustment resulting from a change in the
interest rate be sufficient to result in full amortization of the loan by the
end of the loan term, and thus, do not permit any of the increased payment to be
added to the principal amount of the loan, commonly referred to as negative
amortization.
The retention of ARMs in the Company's portfolio help to reduce its exposure to
interest rate risk. However, ARMs generally pose credit risks different from the
credit risks inherent in fixed-rate loans primarily because as interest rates
rise, the underlying debt service payments of the borrowers rise, thereby
increasing the potential for default. In order to minimize this risk, borrowers
of one- to four-family one year adjustable-rate loans are qualified at the rate
which would be in effect after the first interest rate adjustment, if that rate
is higher than the initial rate. The Company believes that these risks, which
have not had a material adverse effect on the Company to date, generally are
less onerous than the interest rate risks associated with holding 25-30 year
fixed-rate loans. Certain of the Company's conforming ARMs can be converted at a
later date to a fixed-rate mortgage loan with interest rates based upon the
then-current market rates plus a predetermined margin or spread that was
established at the loan closing. The Company sells ARMs, which are converted to
25-30 year fixed-rate term loans, to either FNMA or FHLMC.
Commercial Real Estate and Multi-family Lending. The Company originates real
estate loans secured predominantly by first liens on apartment houses, office
complexes, and commercial and industrial real estate. The commercial real estate
loans are predominately secured by nonresidential properties such as office
buildings, shopping centers, retail strip centers, industrial and warehouse
properties and to a lesser extent, by more specialized properties such as
churches, mobile home parks, restaurants, motel/hotels and auto dealerships.
At December 31, 1999, approximately 76% of the Company's commercial real estate
and multi-family loans were secured by properties located in the Western New
York market area. The Company's current policy with regard to such loans is to
emphasize geographic distribution within its primary market area,
diversification of property type and minimization of credit risk.
As part of the Company's ongoing strategic initiatives to minimize interest rate
risk, commercial and multi-family real estate loans originated for the Company's
portfolio are generally limited to one, three or five year ARM products which
are priced at prevailing market interest rates. The initial interest rates are
subsequently reset after completion of the initial one, three or five year
adjustment period at new market rates that generally range between 200 and 300
basis points over the then, current one, three or five year United States
Treasury Constant Maturity Index. The maximum term for commercial real estate
loans is generally not more than 10 years, with a prepayment schedule based on
not more than a 25 year amortization schedule for multi-family loans, and 20
years for commercial real estate loans.
The Company also offers commercial real estate and multi-family construction
mortgage loans. Most construction loans are made as "construction/permanent"
loans, which provide for disbursement of loan funds during the construction
period and automatic conversion to a permanent loan upon completion of
construction and the attainment of either tenant lease-up provisions or
prescribed debt service coverage ratios. The construction phase of the loan is
made on a short-term basis, usually not exceeding two years, with floating
interest rate levels generally established at a spread in excess of either the
LIBOR or prime rate. The construction loan application process includes the same
criteria which are required for permanent commercial mortgage loans, as well as
a submission to the Company of completed plans, specifications and cost
estimates related to the proposed construction. These items are used as an
additional basis to determine the appraised value of the subject property.
The Company has increased its emphasis on commercial real estate and
multi-family lending desiring to invest in assets bearing interest rates which
are generally higher than those obtainable on residential mortgage loans and
which are more sensitive to changes in market interest rates. Commercial real
estate and multi-family loans, however, entail significant additional risk as
compared with one- to four-family residential mortgage lending, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment experience on loans
secured by income producing properties is typically dependent on the successful
operation of the related real estate project and thus may be subject to a
greater extent to adverse conditions in the real estate market or in the general
economy. Construction loans involve additional risks attributable to the fact
that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays arising from labor problems, material shortages, and
other unpredictable contingencies, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project and the related
loan-to-value ratios.
Home Equity Lending. The Company offers both fixed-rate, fixed-term, home equity
and second mortgage loans, and variable, prime rate home equity lines of credit
(HELOCs) in its market area. Both fixed rate and floating rate home equity loans
are offered in amounts up to 90%, with mortgage insurance, of the appraised
value of the property (including the first mortgage) with a maximum loan amount
of
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$100,000. Fixed-rate home equity loans are offered with repayment terms of up to
fifteen years and HELOCs are offered for terms up to thirty years. The line may
be drawn upon for ten years, during which principal and interest is paid on the
outstanding balance. Repayment of the remaining principal and interest is then
amortized over the remaining twenty years.
Consumer Loans. The Company originates a variety of consumer loans, including
home improvement loans, new and used automobile loans, mobile home loans,
education loans, boat and recreational vehicle ("RV") loans, personal unsecured
loans, including both fixed-rate installment loans and prime-based variable rate
lines-of-credit, and savings account "passbook" loans.
Mobile home loans have shorter terms to maturity than traditional 30-year
residential loans and higher yields than single-family residential mortgage
loans. The Company generally offers mobile home loans with fixed-rate, fully
amortizing loan terms of 10-20 years. The mobile home units, both new and used,
are located in well-managed mobile home parks, primarily located throughout New
York State and are reviewed and inspected by the Company's management team as
part of its ongoing underwriting process.
The Company has contracted with an independent third-party to generate all
mobile home loan applications. However, prior to funding, all mobile home loan
originations must be underwritten and approved by designated Company
underwriters. As part of a negotiated servicing contract, the third party
originator will, at the request of the Company, contact borrowers who become
delinquent in their payments and when necessary, will oversee the repossession
and sale of mobile homes on the Company's behalf. For such services, and as part
of the origination and servicing contract, the Company pays the originator a fee
at loan funding, of which generally 40% is deposited into a noninterest bearing
escrow account, and is under the sole control of the Company to absorb future
losses which may be incurred on the loans.
The Company also participates in indirect lending programs with local Western
New York auto dealerships, a major national RV financing company, as well as an
auto leasing company, which allows the Company to purchase "A paper" quality RV
loans and auto leases. These loans are underwritten by the Company's consumer
lending officers in accordance with Company policy. The RV loans generally carry
a term of up to fifteen years and the auto leases generally have terms up to 36
months. While the Company retains the credit and collateral risk associated with
these loans and leases, by contract, repossessions and remarketing is the
responsibility of the financing and leasing companies.
The Company continues to be an active originator of education loans.
Substantially all of the loans are originated under the auspices of the New York
State Higher Education Services Corporation ("NYSHESC"). Under the terms of
these loans, no repayment is due until the student graduates, with 98% of the
principal guaranteed by NYSHESC. The Company's general practice is to sell these
education loans to Sallie Mae as the loans reach repayment status. The Company
generally receives a premium of .25% to 1% on the sale of these loans.
Commercial Business Loans. In an effort to expand its capacity to generate more
interest sensitive loan products, the Company has recently established a small
business lending unit, which offers commercial business loans to existing
customers in its market area, some of which are secured in part by additional
real estate collateral. Additionally, secured and unsecured commercial loans are
made for the purpose of financing equipment acquisition, expansion, working
capital and other general business purposes. The terms of these loans generally
range from less than one year to seven years. The loans are either negotiated on
a fixed-rate basis or carry variable interest rates indexed to the prime rate.
During 1999, the Company began purchasing installment leases through its
relationship with ENL. These leases, generally in amounts up to $100,000 with
terms no greater than 60 months are guaranteed by the principals of the lessee
and collaterized by the equipment.
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Loan Maturity and Repricing Schedule. The following table sets forth certain
information as of December 31, 1999, regarding the amount of loans maturing or
repricing in the Company's portfolio. Demand loans having no stated schedule of
repayment and no stated maturity and overdrafts are reported as due in one year
or less. 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 (including bi-weekly loans) are
included in the period in which the final contractual repayment is due.
ONE
WITHIN THROUGH AFTER
ONE FIVE FIVE
YEAR YEARS YEARS TOTAL
------------ ------------ ----------- -----------
(IN THOUSANDS)
Real estate loans:
One- to four-family..... $ 61,311 $ 20,685 $ 527,746 $ 609,742
Home equity.............. 14,434 1,284 6,781 22,499
Multi-family............. 28,077 38,905 7,670 74,652
Commercial............... 31,536 38,427 50,795 120,758
Construction............. 18,692 2,439 7,282 28,413
------------ ------------ ----------- -----------
Total real estate loans 154,050 101,740 600,274 856,064
------------ ------------ ----------- -----------
Consumer loans............... 22,224 32,416 55,593 110,233
Commercial business loans.... 15,315 7,236 1,750 24,301
------------ ------------ ----------- -----------
Total loans........... $ 191,589 $ 141,392 $ 657,617 $ 990,598
============ ============ =========== ===========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
December 31, 1999, the dollar amount of all fixed-rate and adjustable-rate loans
due after December 31, 2000. Adjustable and floating-rate loans are included
based on the next repricing date.
DUE AFTER DECEMBER 31, 2000
------------------------------------------------------
FIXED ADJUSTABLE TOTAL
---------------- --------------- --------------
(IN THOUSANDS)
Real estate loans:
One- to four-family..... $ 514,680 $ 33,751 $ 548,431
Home equity.............. 8,065 - 8,065
Multi-family............. 12,695 33,880 46,575
Commercial............... 37,750 51,472 89,222
Construction............. 3,402 6,319 9,721
------------- ------------ -----------
Total real estate loans 576,592 125,422 702,014
------------- ------------ -----------
Consumer loans............... 88,009 - 88,009
Commercial business loans.... 8,783 203 8,986
------------- ------------ -----------
Total loans........... $ 673,384 $ 125,625 $ 799,009
============= ============ ===========
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Non-Accruing Loans and Non-Performing Assets. The following table sets forth
information regarding non-accruing loans and other non-performing assets.
AT DECEMBER 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- --------------- -------------- -------------- -------------
(DOLLARS IN THOUSANDS)
Non-accruing loans (1):
Real estate:
One- to four-family........ $ 974 $ 1,459 $ 1,126 $ 473 $ 1,100
Home equity................ 130 13 - 58 34
Commercial and multi-family 640 1,706 1,364 1,822 2,436
Consumer ..................... 33 62 235 257 166
Commercial business........... 152 56 322 2,108 219
----------- ----------- ----------- ----------- ------------
Total.................... 1,929 3,296 3,047 4,718 3,955
----------- ----------- ----------- ----------- ------------
Non-performing assets:
Other real estate owned (2):
One- to four-family........ 238 175 21 155 -
Commercial and multi-family 835 414 202 162 257
Other non-performing assets:
Investments in affiliates.. - - - 157 264
Nationar receivable (3).... - - - - 5,053
----------- ----------- ----------- ----------- ------------
Total.................... 1,073 589 223 474 5,574
----------- ----------- ----------- ----------- ------------
Total non-performing assets..... $ 3,002 $ 3,885 $ 3,270 $ 5,192 $ 9,529
=========== =========== =========== =========== ============
Total non-performing assets as
a percentage of total assets.. 0.18% 0.26% 0.28% 0.48% 0.97%
=========== =========== =========== =========== ============
Total non-performing loans to
total loans (4) .............. 0.19% 0.43% 0.47% 0.78% 0.74%
=========== =========== =========== =========== ============
-----------------------
(1) Loans are placed on non-accrual status when they become 90 days or more
past due or if they have been identified by the Company as presenting
uncertainty with respect to the collectibility of interest or
principal.
(2) Other real estate owned balances are shown net of related allowances.
(3) On February 6, 1995, the Superintendent seized Nationar, a
check-clearing and trust company, freezing all of Nationar's assets. As
of December 31, 1995, the Company had $5.7 million in demand deposits
held in receivership by the New York State Banking Department. As of
December 31, 1996, the Company had received all funds due from
Nationar.
(4) Excludes loans that had matured and the Company had not formally
extended the maturity date. Regular principal and interest payments
continued in accordance with the original terms of the loan. The
Company continued to accrue interest on these loans as long as regular
payments received were less than 90 days delinquent. These loans
totaled $377,000, $180,000, $3.9 million, and $3.1 million at December
31, 1999, 1998, 1996 and 1995, respectively. There were no such loans
at December 31, 1997.
Loans are reviewed on a regular basis and are placed on nonaccrual status when,
in the opinion of management, the collection of additional interest is doubtful.
Loans are placed on nonaccrual status when either principal or interest is 90
days or more past due. Interest accrued and unpaid at the time a loan is placed
on a nonaccrual status is reversed from interest income.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as Real Estate Owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the carrying value of the loan, the
difference is charged against the allowance for credit losses. Any subsequent
write-down of REO is charged against earnings.
Classification of Assets. Consistent with regulatory guidelines, the Company
provides for the classification of loans and other assets such as investment
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 Company 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
10
11
expose the Company 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 the Company classifies problem assets as either substandard or doubtful, it
establishes a general valuation allowance 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 the Company classifies problem assets as a 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. The
Company's determination as to the classification of its assets and the amount of
its valuation allowance is subject to review by its regulatory agencies, which
can order the establishment of additional general or specific loss allowances.
The Company regularly reviews its asset portfolio to determine whether any
assets require classification in accordance with applicable regulations.
Analysis of the Allowance for Credit Losses. The following table sets forth the
analysis of the allowance for credit losses for the periods indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Balance at beginning of year..... $ 8,010 $ 6,921 $ 6,539 $ 4,707 $ 4,192
Charge-offs:
Real estate:
One- to four- family........ 101 14 46 28 17
Home equity................. 35 - - - -
Multi-family................ 84 177 173 122 215
Commercial.................. 62 581 198 35 108
Construction................ - - - - -
Consumer ...................... 447 428 388 251 216
Commercial business............ 6 52 557 - -
---------- ---------- ---------- ---------- --------
Total..................... 735 1,252 1,362 436 556
---------- ---------- ---------- ---------- --------
Recoveries:
Real estate:
One- to four- family........ - - - - -
Home equity................. - - - - -
Multi-family................ 37 - 149 - -
Commercial.................. 4 155 21 25 -
Construction................ - - - - -
Consumer....................... 80 98 81 56 55
Commercial business............ - 4 - - -
---------- ---------- ---------- ---------- --------
Total..................... 121 257 251 81 55
---------- ---------- ---------- ---------- --------
Net charge-offs.................. 614 995 1,111 355 501
Provision for credit losses...... 2,466 2,084 1,493 2,187 1,016
---------- ---------- ---------- ---------- --------
Balance at end of year........... $ 9,862 $ 8,010 $ 6,921 $ 6,539 $ 4,707
========== ========== ========== ========== ========
Ratio of net charge-offs to
average loans outstanding during
the year........................ 0.07% 0.15% 0.18% 0.06% 0.10%
========== ========== ========== ========== ========
Ratio of allowance for credit
losses to total loans........... 0.99% 1.06% 1.08% 1.09% 0.88%
========== ========== ========== ========== ========
Ratio of allowance for credit losses
to non-performing loans........ 511.27% 243.02% 227.14% 138.60% 119.01%
========== ========== ========== ========== ========
11
12
Allocation of Allowance for Credit Losses. The following table sets forth the
allocation of the allowance for credit losses by loan category for the periods
indicated.
AT DECEMBER 31,
----------------------------------------------------------------------------------------
1999 1998 1997
---------------------- ------------------------ --------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
AMOUNT OF IN EACH AMOUNT OF IN EACH AMOUNT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
FOR CREDIT TO TOTAL FOR CREDIT TO TOTAL FOR CREDIT TO TOTAL
LOSSES LOANS LOSSES LOANS LOSSES LOANS
-------- -------- ----------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
One- to four- family................ $ 1,522 62.15 % $ 1,155 61.34 % $ 955 61.95 %
Home equity......................... 352 2.26 237 2.06 204 2.12
Commercial real estate and
multi-family...................... 1,944 21.67 1,809 24.70 1,578 24.47
Consumer ........................... 1,739 11.58 1,177 11.02 1,040 10.70
Commercial business................. 1,790 2.34 599 0.88 666 0.76
Unallocated......................... 2,515 - 3,033 - 2,478 -
-------- -------- ----------- -------- ---------- --------
Total............................ $ 9,862 100.00 % $ 8,010 100.00 % $ 6,921 100.00 %
======== ======== =========== ======== ========== ========
AT DECEMBER 31,
---------------------------------------------------------------
1996 1995
------------------------------ -----------------------------
PERCENT PERCENT
OF LOANS OF LOANS
AMOUNT OF IN EACH AMOUNT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
FOR CREDIT TO TOTAL FOR CREDIT TO TOTAL
LOSSES LOANS LOSSES LOANS
------------ ----------- ------------- ------------
(DOLLARS IN THOUSANDS)
One- to four- family................ $ 893 60.62 % $ 795 59.93 %
Home equity......................... 169 1.87 150 1.89
Commercial real estate and
multi-family...................... 1,571 24.13 1,609 25.21
Consumer ........................... 1,130 12.57 928 12.21
Commercial business................. 1,628 0.81 482 0.76
Unallocated......................... 1,148 - 743 -
-------- -------- --------- ---------
Total............................ $ 6,539 100.00 % $ 4,707 100.00 %
======== ======== ========= =========
The allowance for credit losses is established through a provision for credit
losses based on management's evaluation of the risk inherent in the loan
portfolio and current economic conditions. Such evaluation, which includes a
review of all loans on which full collectibility may not be reasonably assured,
considers among other matters, the estimated net realizable value or the fair
value of the underlying collateral, economic conditions, historical loan loss
experience and other factors that warrant recognition in providing for an
adequate credit loss allowance. The Company continues to monitor and modify the
level of the allowance for credit losses in order to maintain a level which
management considers adequate to provide for potential credit losses. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for credit losses and
valuation of REO.
Management's evaluation of the allowance is based on a continuing review of the
loan portfolio. The methodology for determining the amount of the allowance for
possible loan losses consists of several elements. Nonperforming, impaired and
delinquent loans are reviewed individually and the value of any underlying
collateral is considered in determining estimates of possible losses associated
with those loans. Another element involves estimating losses inherent in
categories of loans, based primarily on historical experience, industry trends
and trends in the real estate market and the current economic environment in the
Company's primary market areas. The last element is based on management's
evaluation of various conditions, and involves a higher degree of uncertainty
because they are not identified with specific problem credits or portfolio
segments. The conditions evaluated in connection with this element include the
following: industry and regional conditions; seasoning of the loan portfolio and
changes in the composition of and growth in the loan portfolio; the strength and
duration of the current business cycle; existing general economic and business
conditions in the lending areas; credit quality trends, including trends in
nonperforming loans expected to result from changes in existing conditions;
historical loan charge-off experience; and the results of bank regulatory
examinations.
12
13
INVESTMENT ACTIVITIES
General. The Company's investment policy, established by its Board of Directors
("Board"), provides that investment decisions will be made based on the safety
of the investment, liquidity requirements, potential returns, cash flow targets,
and desired risk parameters. In pursuing these objectives, consideration is
given to the ability of an investment to provide earnings consistent with
factors of quality, maturity, marketability and risk diversification. All
transactions are reviewed and approved by the Investment Committee of the Board
on a monthly basis.
The Company's current policies generally limit securities investments to U.S.
Government and agency securities, municipal bonds, corporate debt obligations
and corporate equity securities. In addition, the policy permits investments in
mortgage related securities, including securities issued and guaranteed by FNMA,
FHLMC, Government National Mortgage Association ("GNMA") and privately-issued
collateralized mortgage obligations ("CMOs"). Also permitted are investments in
asset-backed securities ("ABSs"), backed by auto loans, credit card receivables,
home equity and home improvement loans. The current investment strategy utilizes
a risk management approach of diversified investing between short-,
intermediate- and long-term categories in order to increase overall investment
yields in addition to managing interest rate risk. To accomplish these
objectives, the Company's focus is on investments in mortgage related
securities, CMOs and ABSs, while U.S. Government and other non-amortizing
securities are utilized for call protection and liquidity purposes. As with U.S.
mortgage related securities, the Company attempts to maintain a high degree of
liquidity in its other securities and generally does not invest in debt
securities with terms to maturity in excess of 10 years. Additionally, the
Company has a limited covered call option program utilizing equity securities
intended to generate premium income. The Company does not invest in privately
issued securities, which are rated below investment grade.
13
14
Securities Portfolio. At December 31, 1999, all of the Company's security
investments were classified as available for sale in order to maintain
flexibility in satisfying future investment and lending requirements. Presently,
the Company does not have a trading or held to maturity portfolio. The following
table sets forth certain information with respect to the amortized cost and fair
values of the Company's portfolio as of the dates indicated.
1999 1998 1997
---------------------------- ------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- ------------ ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
Investment securities:
Securities held to maturity:
Money market preferred stock ......... $ - $ - $ - $ - $ 17,000 $ 17,000
--------- --------- --------- --------- --------- ---------
Total securities held to maturity . - - - - 17,000 17,000
--------- --------- --------- --------- --------- ---------
Debt securities available for sale:
U.S. Treasury ........................ 47,446 47,406 66,463 67,726 84,877 85,751
U.S. government agencies ............. 14,976 14,739 - - - -
Corporate ............................ 6,985 6,996 6,958 7,108 6,933 7,054
States and political subdivisions .... 2,449 2,336 1,095 1,191 1,760 1,870
--------- --------- --------- --------- --------- ---------
Total debt securities available
for sale ........................ 71,856 71,477 74,516 76,025 93,570 94,675
--------- --------- --------- --------- --------- ---------
Asset-backed securities available
for sale ............................. 85,768 84,133 94,015 94,018 74,973 74,922
--------- --------- --------- --------- --------- ---------
Equity securities available for sale:
Common stock ......................... 19,028 23,534 13,570 17,733 5,693 6,729
--------- --------- --------- --------- --------- ---------
Total equity securities
available for sale ............... 19,028 23,534 13,570 17,733 5,693 6,729
--------- --------- --------- --------- --------- ---------
Total investment securities ............ $ 176,652 $ 179,144 $ 182,101 $ 187,776 $ 191,236 $ 193,326
========= ========= ========= ========= ========= =========
Average remaining life of investment
securities (1) ....................... 2.79 years 1.42 years 1.61 years
========== ========== =========
Mortgage related securities:
Available for sale:
Freddie Mac ........................ $ 66,930 $ 65,299 $ 86,492 $ 87,576 $ 114,922 $ 115,909
GNMA ............................... 15,246 15,323 21,732 22,472 31,515 32,599
FNMA ............................... 13,379 13,074 18,126 18,360 24,282 24,483
CMOs ............................... 306,339 290,633 264,524 264,567 100,037 99,964
--------- --------- --------- --------- --------- ---------
Total mortgage related securities
available for sale .............. $ 401,894 $ 384,329 $ 390,874 $ 392,975 $ 270,756 $ 272,955
========= ========= ========= ========= ========= =========
Average remaining life of mortgage
related securities ................... 5.19 years 2.75 years 4.92 years
========== ========== ==========
Net unrealized gains (losses) on
available for sale securities ......... $ (15,073) $ 7,776 $ 4,289
--------- --------- ---------
Total securities ....................... $ 563,473 $ 563,473 $ 580,751 $ 580,751 $ 466,281 $ 466,281
========= ========= ========= ========= ========= =========
Average remaining life of
securities (1) ....................... 4.68 years 2.33 years 3.55 years
========== ========== ==========
- -----------------------------
(1) Average remaining life does not include common stock.
14
15
Security Yields, Maturities and Repricing Schedule. The following table sets
forth certain information regarding the carrying value, weighted average yields
and estimated maturities, including prepayment assumptions, of the Company's
available for sale securities portfolio as of December 31, 1999. Adjustable-rate
securities are included in the period in which interest rates are next scheduled
to adjust. No tax equivalent adjustments were made to the weighted average
yields. Amounts are shown at fair value.
AT DECEMBER 31, 1999
--------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS AFTER TEN YEARS TOTAL
----------------- ------------------ ------------------ ---------------- -----------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Mortgage related securities:
FHLMC .............................. $ 3,028 5.18% $ 40,912 6.66% $ 8,148 7.13% $ 13,211 7.12% $ 65,299 6.74%
GNMA ............................... 4 7.18 5,361 7.70 2,855 8.40 7,103 8.31 15,323
FNMA ............................... - - 13,074 6.70 - - - - 13,074
CMOs ............................... 34,729 6.71 161,178 6.54 27,717 6.84 67,009 6.50 290,633 6.58
-------- -------- -------- -------- --------
Total mortgage related securities 37,761 6.59 220,525 6.60 38,720 7.02 87,323 6.74 384,329 6.68
-------- -------- -------- -------- --------
Debt securities:
U.S. Treasury ...................... 21,510 6.25 25,896 5.98 - - - - 47,406 6.10
U.S. agency bonds .................. - - 14,739 5.57 - - - - 14,739 5.57
States and political subdivisions .. 146 5.00 614 8.66 1,324 4.70 252 4.25 2,336 5.71
Corporate bonds .................... 6,000 6.93 996 6.33 - - - - 6,996 6.84
-------- -------- -------- -------- --------
Total debt securities ........... 27,656 6.39 42,245 5.88 1,324 4.70 252 4.25 71,477 6.05
-------- -------- -------- -------- --------
Equity securities:
Common stock ....................... - - - - - - - - 23,534 1.63
-------- -------- -------- -------- --------
Total equity securities ......... - - - - - - - - 23,534 1.63
-------- -------- -------- -------- --------
Asset-backed securities .............. 31,345 6.20 21,666 6.36 31,122 6.97 - - 84,133 6.53
-------- -------- -------- -------- --------
Total securities available for sale .. $ 96,762 6.41% $284,436 6.48% $ 71,166 6.95% $ 87,575 6.74% $563,473 6.36%
======== ======== ======== ======== ========
15
16
SOURCES OF FUNDS
General. Deposits and borrowed funds, primarily Federal Home Loan Bank ("FHLB")
advances and reverse repurchase agreements, are the primary sources of the
Company's funds for use in lending, investing and for other general purposes. In
addition, repayments on loans, proceeds from sales of loans and securities, and
cash flows from operations have historically been additional sources of funds.
Deposits. The Company offers a variety of deposit account products with a range
of interest rates and terms. The deposit accounts consist of savings, NOW
accounts, checking accounts, money market accounts, youth savings, club accounts
and certificates of deposit. The Company offers certificates of deposit with
balances in excess of $100,000 at preferential rates (jumbo certificates) and
also offers Individual Retirement Accounts ("IRAs") and other qualified plan
accounts. To enhance its deposit product offerings, the Company provides
commercial checking accounts for small-to-moderately sized commercial
businesses, as well as a low-cost checking account service for low-income
customers.
During 1999, the Company entered into interest rate swap agreements with third
parties with notional amounts totaling $30 million. Under these agreements, the
Company pays an annual fixed rate of 5.97% and 6.23% and receives a floating
three-month U.S. dollar LIBOR rate. The Company entered into these transactions
to match more closely the repricing of its money market demand product, as well
as provide greater flexibility in achieving a desired interest rate risk
profile.
Average Deposits and Rates. The following tables set forth information, by
various rate categories, regarding the average daily balance of deposits by type
for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------ ------------------------------
PERCENT PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
----------------------------- ------------------------------ ------------------------------
(DOLLARS IN THOUSANDS)
Money market accounts ............. $ 221,800 20.44% 4.38% $ 133,465 13.06% 4.39% $ 66,451 6.83% 3.86%
Savings accounts .................. 302,583 27.88 3.01 302,313 29.58 3.17 302,235 31.05 3.35
NOW accounts ...................... 84,828 7.82 1.40 71,861 7.03 1.37 61,425 6.31 1.82
Noninterest-bearing accounts ...... 31,921 2.94 - 28,242 2.76 - 25,982 2.67 -
Mortgagors' payments held in escrow 10,834 1.00 1.79 9,483 0.93 1.74 9,450 0.97 1.63
---------- ------ ---------- ------ ---------- ------
Total ........................... 651,966 60.08 3.10 545,364 53.36 3.04 465,543 47.83 3.00
---------- ------ ---------- ------ ---------- ------
Certificates of deposit:
Less than 6 months ................ 164,474 15.16 - 178,931 17.51 - 188,202 19.34 -
Over 6 through 12 months .......... 107,122 9.87 - 128,741 12.60 - 121,338 12.47 -
Over 12 through 24 months ......... 76,627 7.06 - 63,489 6.21 - 83,515 8.58 -
Over 24 months .................... 15,248 1.41 - 20,829 2.04 - 26,857 2.76 -
Over $100,000 ..................... 69,697 6.42 - 84,651 8.28 - 87,780 9.02 -
---------- ------ ---------- ------ ---------- ------
Total certificates of deposit ... 433,168 39.92 5.12 476,641 46.64 5.76 507,692 52.17 5.80
---------- ------ ---------- ------ ---------- ------
Total average deposits .......... $1,085,134 100.00% 3.91% $1,022,005 100.00% 4.31% $ 973,235 100.00% 4.46%
========== ====== ========== ====== ========== ======
16
17
Maturity Schedule of Certificates of Deposit. The following table indicates the
amount of the Company's certificates of deposit by time remaining until maturity
as of December 31, 1999.
AT DECEMBER 31, 1999
--------------------------------------------------------------
3 MONTHS OVER 3 TO 6 OVER 6 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
---------- --------- ---------- ---------- ----------
(IN THOUSANDS)
Certificates of deposit less than $100,000.. $ 64,316 $ 59,983 $ 157,949 $ 81,901 $ 364,149
Certificates of deposit of $100,000 or more. 9,369 9,994 27,447 16,221 63,031
---------- --------- ---------- ---------- ----------
Total certificates of deposit............ $ 73,685 $ 69,977 $ 185,396 $ 98,122 $ 427,180
========== ========= ========== ========== ==========
Borrowed Funds. Traditionally, the Company has made very limited use of
borrowings. During the latter stages of 1998 and into 1999 however, management
identified the ability to utilize borrowings to lock-in lower cost funding,
better match interest rates and maturities of certain assets and liabilities and
leverage its capital for the purpose of improving its return on equity. Such
borrowings consisted of advances and reverse repurchase agreements entered into
with the FHLB and with nationally recognized securities brokerage firms. The
following table sets forth certain information as to the Company's borrowings
for the years indicated.
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Year-end balance:
- -----------------
FHLB advances............................... $ 224,697 $ 65,539 $ 14,934
Securities sold under agreements
to repurchase.............................. 110,948 77,058 18,783
---------- ---------- ----------
Total borrowings........................ $ 335,645 $ 142,597 $ 33,717
========== ========== ==========
Maximum balance:
- ---------------
FHLB advances............................... $ 224,697 $ 65,539 $ 14,934
Securities sold under agreements
to repurchase.............................. 111,948 77,058 28,961
Average balance:
- ---------------
FHLB advances............................... 167,279 21,249 7,315
Securities sold under agreements
to repurchase.............................. $ 94,236 $ 48,237 $ 20,451
Weighted average interest rate:
- ------------------------------
FHLB advances............................... 5.81% 5.99% 5.95%
Securities sold under agreements
to repurchase.............................. 5.53% 5.51% 5.65%
SAVINGS BANK LIFE INSURANCE
Prior to December 31, 1999, the Company engaged in the sale of group life
insurance coverage for individuals, through its Savings Bank Life Insurance
("SBLI") servicing center. Effective January 1, 2000, SBLI reorganized into a
mutual life insurance company. The Company, by contract with SBLI, will continue
to provide life insurance policy servicing and will receive premium income
related to life insurance sales by the Company. The Company does not expect that
this reorganization will materially affect the Company's earnings.
17
18
SUBSIDIARIES
LSB ASSOCIATES, INC. LSB Associates, Inc., a wholly-owned subsidiary of the
Company incorporated in 1997, is engaged in the sale of annuities, mutual funds
and the sale and servicing of life insurance. LSB Associates, Inc. acts as an
agent for third party companies to sell and service their products.
FIRST NIAGARA FUNDING, INC. (FORMERLY LSB FUNDING, INC.) First Niagara Funding,
Inc., a wholly-owned real estate investment trust ("REIT"), incorporated in
1997, owns primarily commercial multi-family and real estate mortgage loans that
it originates. The REIT supplements its holdings of commercial real estate with
fixed rate residential mortgages and home equity loans and commercial business
loans.
FIRST NIAGARA SECURITIES, INC. (FORMERLY LSB SECURITIES, INC.) First Niagara
Securities, Inc., a wholly-owned subsidiary of the Company incorporated in 1984,
is a New York State Article 9A company which is primarily involved in the
investment in U.S. Treasury obligations.
FIRST NIAGARA REALTY, INC. (FORMERLY LSB REALTY, INC.) First Niagara Realty,
Inc. is a wholly-owned real estate development subsidiary of the Company which
was established in 1984 for the purpose of investing in and lending to real
estate development projects. The portfolio was developed in the 1980's with
other New York State savings banks and invested primarily in residential real
estate development partnerships in the Hudson Valley region of New York State.
At this time, the subsidiary is in the process of divesting its last five
projects and selling the remaining properties it has developed. As of December
31, 1999, there is no remaining asset value reflected in the Company's financial
statements for these projects.
WARREN-HOFFMAN & ASSOCIATES INC. AND FOOTE-MANDAVILLE AGENCY, INC.
Warren-Hoffman & Associates Inc. and Foote-Mandaville Agency, Inc. were acquired
by the Company as wholly-owned subsidiaries in January of 1999. Both
subsidiaries are full service insurance agencies engaged in the sale of
insurance products including personal and business insurance, surety bonds, risk
management, life, disability and long-term care coverage. Prior to January of
1999, there was no impact on the Company's financial statements for these
subsidiaries.
NOVA HEALTHCARE ADMINISTRATORS, INC. NOVA Healthcare Administrators, Inc. was
acquired by the Company in January of 1999 as a wholly-owned subsidiary of the
Company providing third-party administration of employee benefit plans. Prior to
January of 1999, there was no impact on the Company's financial statements for
this subsidiary.
EMPIRE NATIONAL LEASING, INC. AND EMPIRE NATIONAL AUTO LEASING, INC. Empire
National Leasing, Inc. and Empire National Auto Leasing, Inc. were acquired by
the Company as wholly-owned subsidiaries in January 2000. Both subsidiaries
provide point-of-sale financing in the national, commercial small ticket lease
market to the equipment industry. Prior to 2000, there was no impact on the
Company's financial statements for these subsidiaries.
REGULATION
GENERAL
The Company, as a bank holding company, is required to file certain reports
with, and otherwise comply with the rules and regulations of the FRB. The Bank
is a New York chartered stock savings bank and its deposit accounts are insured
up to applicable limits by the FDIC through the BIF. The Bank is subject to
extensive regulation by the New York State Banking Department (the
"Department"), as its chartering agency, and by the FDIC as its deposit insurer.
The Bank is required to file reports with, and is periodically examined by the
FDIC and the Superintendent of Banks of the State of New York (the
"Superintendent") concerning its activities and financial condition and must
obtain regulatory approvals prior to entering into certain transactions,
including, but not limited to, mergers with or acquisitions of other banking
institutions. The Bank is also a member of the FHLB of New York and is subject
to certain regulations by the Federal Home Loan Bank System.
NEW YORK BANK REGULATION
The Bank derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and the regulations of the
Department. The exercise by an FDIC-insured savings bank of the lending and
investment powers under the New York State Banking Law is limited by FDIC
regulations and other federal law and regulations. In particular, the applicable
provisions of New York State Banking Law and regulations governing the
investment authority and activities of an FDIC insured state-chartered savings
bank are substantially limited by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant
thereto.
18
19
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the BIF, which is administered by the FDIC. Deposits are
insured up to applicable limits by the FDIC and such insurance is backed by the
full faith and credit of the U.S. Government. As insurer, the FDIC imposes
deposit insurance premiums and is authorized to conduct examinations and to
require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Superintendent an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
REGULATORY CAPITAL REQUIREMENTS
The FRB and the FDIC have adopted risk-based capital guidelines for bank holding
companies and banks under their supervision. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations. The
Company and the Bank are required to maintain certain levels of regulatory
capital in relation to regulatory risk-weighted assets. The ratio of such
regulatory capital to regulatory risk-weighted assets is referred to as the
"risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.
These guidelines divide the Company's and the Bank's capital into two tiers. The
first tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for credit and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum Tier I
leverage ratio (Tier I capital to adjusted total assets as specified in the
regulations). These regulations provide for a minimum Tier I leverage ratio of
3% for banks that meet certain specified criteria, including that they have the
highest examination rating and are not experiencing or anticipating significant
growth. All other banks are required to maintain a Tier I leverage ratio of 3%
plus an additional cushion of at least 100 to 200 basis points. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
At December 31, 1999, the Bank and the Company substantially exceeded all
regulatory capital requirements. The current requirements and the actual levels
for the Company are detailed in footnote #11 of the Company's Financial
Statements, which is submitted herewith as an exhibit in Item 8.
The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less
than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances); "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%; and "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Federal law and
regulations also specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well capitalized"
savings institution.
STANDARDS FOR SAFETY AND SOUNDNESS
The federal banking agencies have adopted a final regulation and Interagency
Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to
implement the safety and soundness standards required under federal law. The
Guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital
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becomes impaired. The standards set forth in the Guidelines address internal
controls and information systems; internal audit system; credit underwriting;
loan documentation; interest rate risk exposure; asset growth; and compensation,
fees and benefits. The agencies also adopted additions to the Guidelines which
require institutions to examine asset quality and earnings standards. If the
appropriate federal banking agency determines that an institution fails to meet
any standard prescribed by the Guidelines, the agency may require the
institution to submit to the agency an acceptable plan to achieve compliance
with the standard, as required by federal law. The final regulations establish
deadlines for the submission and review of such safety and soundness compliance
plans.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The FDIC has the authority to use its enforcement powers to prohibit a savings
bank from paying dividends if, in its opinion, the payment of dividends would
constitute an unsafe or unsound practice. Federal law also prohibits the payment
of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. Under New York law the
Bank is prohibited from paying a dividend in excess of its income for the year
and the two preceding years, without the approval of the Superintendent.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things, acquiring or retaining a majority interest in a subsidiary;
investing as a limited partner in a partnership the sole purpose of which is the
direct or indirect investment in the acquisition, rehabilitation, or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets; acquiring
up to 10% of the voting stock of a company that solely provides or reinsures
directors', trustees', and officers' liability insurance coverage or bankers'
blanket bond group insurance coverage for insured depository institutions; and
acquiring or retaining the voting shares of a depository institution if certain
requirements are met.
Federal law and FDIC regulations permit certain exceptions to the foregoing
limitation. For example, certain state-chartered banks, such as the Bank, may
continue to invest in common or preferred stock listed on a National Securities
Exchange or the National Market System of NASDAQ, and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. As of December 31, 1999, the Bank had $23.5 million of securities
pursuant to this exception. As a savings bank, the Bank may also continue to
sell savings bank life insurance.
TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates. At December 31, 1999 there were $11.4 million of loans
outstanding from the Bank to the Company.
HOLDING COMPANY REGULATION
FEDERAL BANK HOLDING COMPANY REGULATION. The Company as the sole shareholder of
the Bank, is a bank holding company that is subject to comprehensive regulation
and regular examinations by the FRB under the Bank Holding Company Act of 1956,
as amended (the "BHCA"), and the regulations of the FRB. The FRB also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
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The Company is subject to capital adequacy guidelines for bank holding companies
(on a consolidated basis) which are substantially similar to those of the FDIC
for the Bank.
Under FRB policy, a bank holding company must serve as a source of strength for
its subsidiary bank. Under this policy the FRB may require, and has required in
the past, a holding company to contribute additional capital to an
undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before
acquiring, directly or indirectly, ownership or control of any voting shares of
another bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares); acquiring all or substantially all of the assets of
another bank or bank holding company; or merging or consolidating with another
bank holding company.
Under the Federal Change in Bank Control Act, a prior notice must be submitted
to the FRB if any person or group acting in concert seeks to acquire 10% or more
of the Company's common stock. Under the BHCA, any company would be required to
obtain prior approval from the FRB before obtaining control of the Company,
which is defined to include the acquisition of 25% or more of any class of
voting securities of the Company. In addition, a bank holding company, which
does not qualify as a "financial holding company" under the recently enacted
Gramm-Leach-Bliley Financial Services Modernization Act, 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 the
prohibition is for activities found by the FRB to be so closely related to
banking or managing or controlling banks as to be permissible. Some of the
principal activities that the FRB has determined by regulation to be so closely
related to banking as to be permissible are the making or servicing of loans;
performing certain data processing services; providing discount brokerage
services; acting as fiduciary, investment or financial advisor; leasing personal
or real property; making investments in corporations or projects designed
primarily to promote community welfare; and acquiring a savings and loan
association.
Bank holding companies that do qualify as a financial holding company may engage
in activities that are financial in nature or incidental to activities which are
financial in nature. Bank holding companies may qualify to become a financial
holding company if each of its depository institution subsidiaries is
"well-capitalized;" each of its depository institution subsidiaries is
"well-managed;" each of its depository institution subsidiaries has at least a
"satisfactory" CRA rating at its most recent examination; and the bank holding
company has filed a certification with the FRB that it elects to become a
financial holding company.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the holding
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The FRB
also indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized".
Bank holding companies are required to give the FRB prior written notice of any
purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of their consolidated net worth. The FRB may
disapprove such a purchase or redemption if it determines that the proposal
would constitute an unsafe or unsound practice or would violate any law,
regulation, FRB order, or any condition imposed by, or written agreement with,
the FRB. This notification requirement does not apply to any company that meets
the well-capitalized standard for commercial banks, has a safety and soundness
examination rating of at least a "2" and is not subject to any unresolved
supervisory issues.
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
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
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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.
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ITEM 2. PROPERTIES
- --------------------------------------------------------------------------------
Both the Company and the Bank maintain their executive offices at the Company's
Administrative Center, 6950 South Transit Road, Lockport, New York. The
Administrative Center has 76,000 square feet of space and was built in 1997. The
Company, as of December 31, 1999, conducts its business through eighteen full
service banking offices. At December 31, 1999, the Company's premises and
equipment had an aggregate net book value of approximately $25.9 million. The
following table sets forth the Company's offices as of December 31, 1999.
LEASED ORIGINAL LEASE
LOCATION OR OWNED YEAR EXPIRES
- -------------------------------------------------------------------------------------------------------
BRANCH LOCATIONS:
55 East Avenue, Lockport, NY 14094 Owned 1968 N/A
80 Washburn Street, Lockport, NY 14094 Owned 1968 N/A
(Drive Thru Facility)
5737 South Transit Road, Lockport, NY 14094 (1) Leased 1973 4/30/12
6210 Shimer Drive, Lockport, NY 14094 (1) Leased 1993 9/30/12
(Drive Thru Facility)
401 West Main Street, Batavia, NY 14020 Owned 1977 N/A
1455 French Road, Depew, NY 14043 Owned 1991 N/A
6409 Transit Road, East Amherst, NY 14051 Leased 1989 12/31/09
570 Dick Road, Depew, NY 14043 Leased 1996 12/31/09
2435 Grand Island Boulevard, Grand Island, NY 14072 Leased 1998 4/30/18
5751 South Park Avenue, Hamburg, NY 14075 Owned 1995 N/A
327 Main Street, Medina, NY 14103 Owned 1975 N/A
7200 Niagara Falls Blvd., Niagara Falls, NY 14304 Leased 1993 3/31/08
2141 Elmwood Avenue, Buffalo, NY 14207 Leased 1997 3/31/17
100 River Road, North Tonawanda, NY 14120 Owned 1994 N/A
3488 Amelia Drive, Orchard Park, NY 14127 (1) Leased 1998 6/30/18
2547 Youngstown/Lockport Rd., Ransomville, NY 14131 Owned 1985 N/A
Sheridan/Delaware Plaza, Tonawanda, NY 14223 Leased 1997 3/31/17
3035 Niagara Falls Blvd., Amherst, NY 14228 Leased 1993 9/30/08
1251 Union Road, West Seneca, NY 14224 Leased 1996 8/31/06
5190 Sheridan Drive, Williamsville, NY 14221 Leased 1998 6/30/18
INSURANCE LOCATIONS:
170 Northpointe Parkway, Amherst, NY 14228 Leased 1999 1/31/10
256 Third Street, Niagara Falls, NY 14303 Leased 1999 4/14/04
2680 Grand Island Boulevard, Grand Island, NY 14072 Leased 1999 12/31/01
2473 Main Street, Newfane, NY 14108 Leased 1999 12/31/03
OTHER LOCATIONS:
301 Cayuga Drive, Cheektowaga, NY 14225 Leased 1995 5/31/05
(Item Processing Center)
190 Linden Oaks Drive, Rochester, NY 14625 Leased 1999 1/31/00
(Loan Production Office)
---------------------
(1) The Company owns the building but leases the land.
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ITEM 3. LEGAL PROCEEDINGS
- --------------------------------------------------------------------------------
The Company is not involved in any legal proceedings other than immaterial
proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------------------------
No matters were submitted during the fourth quarter of the year ended December
31, 1999 to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The common stock of the Company is traded under the symbol of NBCP on the Nasdaq
National Market. At March 22, 2000, the Company had 26,298,900 shares of common
stock outstanding and had approximately 10,800 shareholders of record. During
1999, the high and low closing sales price of the common stock was $11.13 and
$9.00, respectively. The Company paid dividends of $0.14 per common share during
the year ended December 31, 1999. During the third quarter of 1999, the Company
revised its dividend payment schedule to better coincide with the Company's
Board of Director's review of quarterly results. As a result, the Company
declared the 1999 fourth quarter dividend of $0.06 per common share on January
26, 2000, which was payable on February 23, 2000 to shareholders of record on
February 9, 2000.
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ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
AS OF DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
- ----------------------------------
Total assets................................... $1,711,712 $1,508,734 $1,179,026 $1,093,358 $ 994,291
Securities available for sale:
Mortgage related............................. 384,329 392,975 272,955 284,860 261,543
Other........................................ 179,144 187,776 176,326 124,875 79,941
Securities held to maturity.................... - - 17,000 38,000 46,700
Loans, net..................................... 985,628 744,739 635,396 598,486 535,971
Deposits....................................... 1,113,302 1,060,897 995,621 928,845 871,254
Borrowings..................................... 335,645 142,597 33,717 32,008 -
Stockholders' equity (1)....................... $ 232,616 $ 263,825 $ 130,471 $ 115,664 $ 107,653
Treasury shares repurchased.................... 3,111 - - - -
Common shares outstanding:
Basic....................................... 25,658 28,716 - - -
Diluted..................................... 25,658 28,716 - - -
Ratio of stockholder's equity to total assets 13.59% 17.49% 11.07% 10.58% 10.83%
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS)
SELECTED OPERATIONS DATA:
- ------------------------
Interest income .............................. $107,814 $ 92,102 $ 82,363 $ 75,062 $ 69,856
Interest expense ............................. 57,060 47,966 44,978 40,655 39,034
-------- -------- -------- -------- --------
Net interest income ....................... 50,754 44,136 37,385 34,407 30,822
Provision for credit losses .................. 2,466 2,084 1,493 2,187 1,016
-------- -------- -------- -------- --------
Net interest income after provision 48,288 42,052 35,892 32,220 29,806
-------- -------- -------- -------- --------
Total noninterest income .................. 27,688 9,182 6,796 5,752 5,406
-------- -------- -------- -------- --------
Noninterest expenses ......................... 47,643 35,946(2) 25,178 20,926 20,143
-------- -------- -------- -------- --------
Income before income taxes ................... 28,333 15,288 17,510 17,046 15,069
Income taxes ................................. 9,893 4,906 6,259 6,278 5,144
-------- -------- -------- -------- --------
Net income ................................... $ 18,440 $ 10,382(2) $ 11,251 $ 10,768 $ 9,925
======== ======== ======== ======== ========
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
----------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
STOCK AND RELATED PER SHARE DATA:
- --------------------------------
Net income per share:
Basic....................................... $ 0.69 $ - (2) $ - $ - $ -
Diluted..................................... 0.69 - (2) - - -
Cash dividends................................ 0.14 (3) $ 0.06 $ - $ - $ -
Dividend payout ratio......................... 20.30%(3) 16.60% - - -
Book value.................................... $ 9.07 $ 9.19 $ - $ - $ -
Market price (NASDAQ:NBCP):
High........................................ 11.13 17.06 - - -
Low......................................... 9.00 8.38 - - -
Close....................................... $ 10.25 $ 10.50 $ - $ - $ -
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AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL RATIOS AND OTHER DATA (4):
- ---------------------------------------------
PERFORMANCE RATIOS:
Return on average assets .................... 1.13% 0.77%(2) 0.98% 1.03% 1.04%
Return on average equity .................... 7.52 4.65 (2) 9.16 9.84 10.25
Net interest rate spread:
Average during period ..................... 2.72 2.75 2.86 2.87 2.88
End of period ............................. 2.80 2.74 2.87 3.03 2.83
Net interest margin as a percent of interest-
earning assets ............................ 3.33 3.48 3.39 3.41 3.44
As a percentage of average assets:
Noninterest income (5) .................... 1.67 0.68 0.51 0.50 0.41
Noninterest expense ....................... 2.93 2.68(2) 2.20 2.01 2.10
--------- --------- --------- --------- ---------
Net overhead .............................. 1.26 2.00(2) 1.69 1.51 1.69
Average interest-earning assets
to average interest-bearing liabilities .. 116.10 119.38 113.12 113.30 113.92
Efficiency ratio ............................ 61.11% 67.59%(2) 58.19% 52.87% 57.96%
ASSET QUALITY RATIOS:
Total non-performing loans .................. $ 1,929 $ 3,296 $ 3,047 $ 4,718 $ 3,955
Other non-performing assets ................. 1,073 589 223 474 5,574
Allowance for credit losses ................. 9,862 8,010 6,921 6,539 4,707
Net loan charge-offs ........................ $ 614 $ 995 $ 1,111 $ 355 $ 501
Total non-performing loans to total loans ... 0.19% 0.43% 0.47% 0.78% 0.74%
Total non-performing assets as percentage of
total assets ............................. 0.18 0.26 0.28 0.48 0.97
Allowance for credit losses to non-
performing loans .......................... 511.27 243.02 227.14 138.60 119.01
Allowance for credit losses to total loans .. 0.99 1.06 1.08 1.09 0.88
Net charge-offs to average loans ............ 0.07% 0.15% 0.18% 0.06% 0.10%
OTHER DATA:
Number of full-service offices .............. 18 18 15 13 11
Full time equivalent employees .............. 624.5 401.5 356.5 325.0 276.5
- ---------------------------
(1) Amounts prior to 1998 represent retained earnings and unrealized
gains/losses on securities available for sale only.
(2) During the second quarter of 1998, Niagara Bancorp, Inc. contributed $4.0
million, net of applicable income taxes to the First Niagara Bank
Foundation. Noninterest expense includes $6.75 million for the one-time
contribution of cash and common stock. The following excludes the effect of
the contribution, and the earnings per share calcuation includes proforma
earnings of $0.10 per share for the period January 1, 1998 through April
17, 1998. Such calculations of proforma per share data do not include the
effect of estimated earnings on the proceeds raised from the Offering.
(Dollars in thousands):
As of December 31, 1998
-----------------------
Net income........................ $ 14,366
Net income per share:
Basic......................... $ 0.50
Diluted....................... $ 0.50
Return on average assets.......... 1.07%
Return on average equity.......... 6.43%
As a percentage of average assets:
Noninterest expense........... 2.18%
Net overhead.................. 1.50%
Efficiency ratio.................. 54.90%
(3) The dividend declaration date for the third and fourth quarters of 1999
was scheduled during the fourth quarter of 1999 and first quarter of 2000,
respectively, which coincided with the Company's Board of Director's
review of quarterly and/or yearly results. For 1999, three quarterly
dividends were declared.
(4) Averages presented are daily averages.
(5) Excluding net gain/loss on sale of securities available for sale.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
The following discussion should be read in conjunction with the consolidated
financial statements and related notes. The Company's results of operations are
dependent primarily on net interest income, which is the difference between the
income earned on loans and securities and the Company's cost of funds,
consisting of the interest paid on deposits and borrowings. Results of
operations are also affected by the provision for credit losses, investment
activities, loan origination, sale and servicing activities, service charges and
fees collected on deposit accounts, and insurance services and fees. Noninterest
expense primarily consists of salaries and employee benefits, occupancy and
equipment expense, marketing expenses, charitable contributions and other
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
ANALYSIS OF FINANCIAL CONDITION
OVERVIEW
Total assets increased 13% from $1.5 billion at December 31, 1998 to $1.7
billion at December 31, 1999. Asset growth was realized primarily due to
substantial loan growth of $242.4 million. The increase in the loan portfolio
was funded with an additional $193.0 million in borrowings, as well as a $52.0
million, or 5% increase in deposits. Similarly, total assets for the year ended
December 31, 1998 increased 28% from $1.2 billion at December 31, 1997,
primarily related to the proceeds generated from the Offering.
LENDING ACTIVITIES
The total loan portfolio increased 32% to $990.6 million at December 31, 1999
from $748.2 million at December 31, 1998. This increase resulted from growth in
all portfolios, but primarily in the one- to four-family residential and
commercial real estate portfolios, which increased $153.5 million and $22.1
million, respectively, as the Company continued to emphasize the expansion of
its real estate lending activities. As part of management's continued
asset/liability management efforts, particular emphasis was placed on the
origination of one- to four-family residential adjustable rate and bi-weekly
mortgage loans which represented 68% of the 1999 residential real estate loan
closings. In addition, approximately $53.6 million of the residential growth is
attributable to the repurchase of mortgages originally sold to the Savings Bank
Life Insurance Fund ("Fund"). These mortgages were repurchased as a result of
the reorganization of the Fund. Additionally, as a result of the Company's
continued focus on indirect lending products, total consumer loans increased 39%
to $110.2 million for the year ended December 31, 1999, primarily in the
recreational vehicle and automobile portfolios, which represented 61% of the
total consumer loans originated for the same period. During 1999, the Company
also established a Small Business Lending Unit that resulted in a 26%, or $17.7
million increase in commercial business loans, primarily in lines of credit and
the purchase of small ticket equipment leases.
The Company's focus on lending activities was also evident in 1998 as real
estate loans increased from $568.5 million at December 31, 1997 to $662.6
million at December 31, 1998, primarily in the one- to four-family residential
and commercial real estate portfolios, which increased $63.4 million and $21.5
million, respectively, during 1998. This increase was reflective of the
Company's emphasis on the expansion of its real estate lending activities, the
development of indirect lending products, primarily recreational vehicle and
automobile loans, as well as increased refinancing activity driven by the
declining interest rates throughout the year.
The loan growth during the last two years has been achieved without compromising
the credit quality of the Company's loan portfolio. At December 31, 1999, the
Company's allowance for credit losses as a percentage of total non-performing
loans increased to 511%, compared to 243% and 227% at December 31, 1998 and
December 31, 1997. Non-performing loans decreased from $3.3 million and $3.0
million at December 31, 1998 and 1997, respectively to $1.9 million at December
31, 1999. At December 31, 1999, the Company's allowance for credit losses as a
percentage of total loans was 0.99% compared to 1.06% and 1.08% at December 31,
1998 and 1997, respectively. While management uses available information to
recognize losses on loans, future credit loss provisions may be necessary based
on changes in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the allowance
for credit losses and may require the Company to recognize additional provisions
based on their judgement of information available to them at the time of their
examination.
INVESTING ACTIVITIES
The Company's securities available for sale portfolio decreased slightly from
$580.8 million at December 31, 1998 to $563.5 million at December 31, 1999. The
Company purchased $287.7 million of investment and mortgage related securities
during 1999. Approximately, $171.8 million of CMOs with three-to-ten year
weighted average lives were purchased as part of the Company's leveraging
strategy utilizing FHLB advances with comparable maturities. Approximately
$116.0 million in securities purchases were primarily in one-to-three year
weighted average life asset-backed securities backed by home equity loans, U.S.
agency bonds and equity securities. These
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28
purchases were funded with $179.7 million in mortgage related securities
prepayments, which were accelerated by the lower interest rate environment
during the first half of 1999. The remaining prepayments were utilized to fund
the expanding loan portfolio.
During 1998, the 29% increase in the securities available for sale portfolio
reflects the investing of funds primarily in one-to-three year weighted average
life asset-backed securities and two-to-four year weighted average life CMOs in
the mortgage related securities portfolio which were deemed to offer reduced
interest rate risk and more consistent cash flows in the low interest rate
environment. The flat interest rate yield curve was also the primary factor
behind the increase in federal funds sold as rates earned on these short-term
investments were comparable to those of longer-term securities that were subject
to greater interest rate risk. This increase in these securities was offset by
the maturities of $17.0 million of money market preferred stock in the held to
maturity portfolio whose yields declined below those of federal funds.
OTHER ACTIVITIES
During 1999, the Company redeployed its significant December 31, 1998 federal
funds sold position primarily into higher yielding loan portfolios and other
investment vehicles, such as the WHA acquisition and the purchase of an
additional $10.0 million purchase of bank-owned life insurance. Additionally,
the Company purchased $10.0 million in FHLB stock related to the increased
borrowings.
FUNDING ACTIVITIES
The Company's borrowed funds increased from $142.6 million at December 31, 1998
to $335.6 million at December 31, 1999. During 1999 the Company continued a
borrowing/reinvestment program initially begun in 1998 as management identified
an opportunity to utilize borrowings to lock-in lower cost funding, better match
its assets and liabilities, while leveraging its increased capital position.
Using FHLB advances and reverse repurchase agreements, the rates paid on these
additional borrowings range from 5.25% to 6.65% with varying maturities
extending through 2015.
Total deposits at December 31, 1999 were $1.113 billion, an increase of $52.4
million compared to $1.061 billion at December 31, 1998. The impact of the
continued lower interest rate yield curve during the first nine months of 1999
was reflected in the shift of deposit balances from longer-term certificates of
deposit, which decreased $30.8 million, into the Company's competitively priced
money market deposit account first introduced in June of 1997. Balances in these
money market accounts grew $72.3 million during 1999. Total deposits grew $65.3
million during 1998 from $995.6 million at December 31, 1997, primarily in the
money market demand accounts.
EQUITY ACTIVITIES
Stockholders' equity decreased to $232.6 million at December 31, 1999 from
$263.8 million at December 31, 1998. Despite net income of $18.4 million, the
decrease was primarily attributable to the repurchase of 3,110,850 shares of
treasury stock as part of capital management buy-back programs approved for
total repurchases of 3,457,499 shares. The purchases were made at an average
cost of $10.61 per share. In addition, as a result of the increase in overall
interest rates during the latter part of 1999, the market value of the Company's
available for sale investment portfolio decreased $13.5 million, net of
applicable taxes, during the year. Stockholders' equity increased during 1998
from $130.5 million at December 31, 1997, primarily due to the proceeds
generated from the Offering and an increase in the unrealized gain on the
Company's available for sale securities portfolio, as well as earnings of $10.4
million.
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Average Balance Sheet. The following table sets forth certain information
relating to the Company's consolidated statements of financial condition and
reflects the average yields earned on interest-earning assets, as well as the
average rates paid on interest-bearing liabilities for the years indicated. Such
yields and rates were derived by dividing interest income or expense by the
average balances of interest-earning assets or interest-bearing liabilities,
respectively, for the years shown. No tax equivalent adjustments were made. All
average balances are average daily balances. Non-accruing loans have been
excluded from the yield calculations in this table.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ----------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
------------- ------------- ------ ------------ ------------- ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements ... $ 21,804 $ 1,104 5.06% $ 59,646 $ 3,344 5.61%
Investment securities(1) .............. 191,222 10,972 5.74 196,571 11,586 5.89
Mortgage related securities(1) ........ 422,952 27,004 6.38 319,143 21,107 6.61
Loans(2) .............................. 867,630 67,398 7.77 681,164 55,326 8.12
Other interest-earning assets(3) ...... 22,750 1,336 5.87 12,760 739 5.79
------------- ------------- ------------- -------------
Total interest-earning assets ....... 1,526,358 107,814 7.06% 1,269,284 92,102 7.26%
------------- ------------- ------------- -------------
Allowance for credit losses ............. (9,160) (7,444)
Other noninterest-earning assets(4)(5) .. 109,851 78,713
------------- -------------
Total assets ........................ $ 1,627,049 $ 1,340,553
============= =============
Interest-bearing liabilities:
Savings accounts ...................... $ 302,583 $ 9,098 3.01% $ 302,313 $ 9,575 3.17%
Interest-bearing checking ............. 306,628 10,908 3.56 205,326 6,847 3.33
Certificates of deposit ............... 433,168 22,193 5.12 476,641 27,447 5.76
Mortgagors' payments held in escrow ... 10,834 194 1.79 9,483 165 1.74
Borrowed funds ........................ 261,515 14,667 5.61 69,485 3,932 5.66
------------- ------------- ------------- -------------
Total interest-bearing liabilities .. 1,314,728 57,060 4.34% 1,063,248 47,966 4.51%
------------- ------------- ------------- -------------
Noninterest-bearing demand deposits ..... 31,921 28,242
Other noninterest-bearing liabilities ... 35,301 25,778
------------- -------------
Total liabilities ................... 1,381,950 1,117,268
Stockholders' equity(4) ................. 245,099 223,285
------------- -------------
Total liabilities and stockholders'
equity ............................ $ 1,627,049 $ 1,340,553
============= =============
Net interest income ..................... $ 50,754 $ 44,136
============= =============
Net interest rate spread ................ 2.72% 2.75%
======= ========
Net earning assets ...................... $ 211,630 $ 206,036
============= =============
Net interest income as a percentage of
average interest-earning assets ....... 3.33% 3.48%
============= =============
Ratio of average interest-earning assets
to average interest-bearing liabilities 116.10% 119.38%
============= =============
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997
----------------------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
------------- ------------- ------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements ... $ 19,123 $ 1,079 5.64%
Investment securities(1) .............. 179,379 10,295 5.74
Mortgage related securities(1) ........ 283,142 18,972 6.70
Loans(2) .............................. 614,596 51,569 8.39
Other interest-earning assets(3) ...... 6,690 448 6.70
------------- -------------
Total interest-earning assets ....... 1,102,930 82,363 7.47%
------------- -------------
Allowance for credit losses ............. (6,529)
Other noninterest-earning assets(4)(5) .. 47,293
-------------
Total assets ........................ $ 1,143,694
=============
Interest-bearing liabilities:
Savings accounts ...................... $ 302,235 $ 10,124 3.35%
Interest-bearing checking ............. 127,876 3,681 2.88
Certificates of deposit ............... 507,692 29,426 5.80
Mortgagors' payments held in escrow ... 9,450 154 1.63
Borrowed funds ........................ 27,766 1,593 5.74
------------- -------------
Total interest-bearing liabilities .. 975,019 44,978 4.61%
------------- -------------
Noninterest-bearing demand deposits ..... 25,982
Other noninterest-bearing liabilities ... 19,799
-------------
Total liabilities ................... 1,020,800
Stockholders' equity(4) ................. 122,894
-------------
Total liabilities and stockholders'
equity ............................ $ 1,143,694
=============
Net interest income ..................... $ 37,385
=============
Net interest rate spread ................ 2.86%
=============
Net earning assets ...................... $ 127,911
=============
Net interest income as a percentage of
average interest-earning assets ....... 3.39%
=============
Ratio of average interest-earning assets
to average interest-bearing liabilities 113.12%
=============
- ---------------------------
(1) Amounts shown are amortized cost.
(2) Net of deferred loan fees and expenses, loan discounts, loans in
process and non-accruing loans.
(3) Includes FHLB stock and interest-bearing demand accounts.
(4) Includes unrealized gains/losses on securities available for sale.
(5) Includes bank-owned life insurance, earnings on which are reflected in
other noninterest income.
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30
Rate/Volume Analysis. The following table presents the extent to which changes
in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
---------------------------------- ---------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO TOTAL DUE TO TOTAL
--------------------- INCREASE ------------------ INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------ ---- ---------- ------ ---- ----------
(IN THOUSANDS)
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements. $ (1,946) $ (294) $ (2,240) $ 2,273 $ (8) $ 2,265
Investment securities .............. (311) (303) (614) 1,007 284 1,291
Mortgage related securities ........ 6,651 (754) 5,897 2,384 (249) 2,135
Loans............................... 14,576 (2,504) 12,072 5,449 (1,692) 3,757
Other interest-earning assets ...... 587 10 597 359 (68) 291
-------- -------- -------- -------- -------- --------
Total interest-earning assets .... 19,557 (3,845) 15,712 11,472 (1,733) 9,739
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Savings accounts ................... 9 (487) (478) 3 (552) (549)
Interest-bearing checking .......... 3,578 484 4,062 2,509 657 3,166
Certificates of deposit ............ (2,378) (2,876) (5,254) (1,789) (190) (1,979)
Mortgagors' payments held in escrow. 24 5 29 1 10 11
Borrowed funds...................... 10,770 (35) 10,735 2,361 (22) 2,339
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 12,003 $ (2,909) 9,094 $ 3,085 $ (97) 2,988
======== ======== ======== ======== ======== ========
Net interest income........... $ 6,618 $ 6,751
======== ========
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31,
1998
NET INCOME
Net income increased 28% to $18.4 million, or $0.69 per share for the year ended
December 31, 1999 compared to $14.4 million for the same period in 1998. The
1998 earnings are exclusive of a one-time, after-tax contribution of $4.0
million to fund the establishment of the First Niagara Bank Foundation during
1998.
Net income represented a return on average assets in 1999 of 1.13% compared to
1.07% in 1998, excluding the one-time contribution. The return on average equity
in 1999 was 7.52% compared to 6.43% in 1998, excluding the one-time
contribution. The increase in the return on average equity in 1999 was enhanced
by the impact of treasury stock repurchases.
NET INTEREST INCOME
Net interest income, which is impacted by changes in the composition of the
interest-earning assets and interest-bearing liabilities, as well as changes in
market interest rates and spreads, increased 15% to $50.8 million in 1999 from
$44.1 million in 1998. This was mainly the result of the growth in average
interest-earning assets, which increased $257.1 million, or 20% to $1.526
billion in 1999 from $1.269 billion in 1998. Interest income on loans increased
22% to $67.4 million for the 1999 period from $55.3 million for the same period
in 1998. The increase resulted from a 27% increase in average loans outstanding
during 1999 compared to the same period in 1998, the benefits of which more than
offset a 35 basis point decrease in the average yield on loans over the same
periods. Interest income on investment and mortgage related securities in the
available for sale portfolio increased $5.3 million to $38.0 million for the
year ended December 31, 1999 compared to $32.7 million for the same period in
1998, resulting from a $98.5 million increase in the average balance of these
securities, partially offset by a 16 basis point decrease in the average yield
earned on these investments.
Interest expense on deposits decreased $1.6 million to $42.4 million for the
year ended December 31, 1999 from $44.0 million for the same period in 1998. A
41 basis point decrease in the average rate paid on deposits offset a $59.5
million increase in the average balances. Interest expense on borrowed funds
increased to $14.7 million for the year ended December 31, 1999, compared to
$3.9 million for the same period in 1998, as a result of significant additional
borrowings used to fund the loan growth.
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31
The net interest margin was 3.33% for the year ended December 31, 1999 compared
to 3.48% for the same period in 1998. The narrowing of the margin resulted
primarily from a 3 basis point decrease in the average interest rate spread to
2.72% in 1999 from 2.75% in 1998. The decrease in the average interest rate
spread, or the difference between the yield on interest-earning assets and the
rate paid on interest-bearing liabilities, reflects the general decline in
market yields early in 1999 on average interest-earning assets and the
additional funding costs of borrowed funds, as well as interest-bearing checking
accounts, primarily money market demand accounts, which carry a market-based
cost of funds that is slightly higher than the other interest-bearing
liabilities of the Company. The decline in the average interest rate spread was
partially offset by a 3% increase in average net interest-earning assets when
comparing the two periods.
PROVISION FOR CREDIT LOSSES
Reflecting the growth in the loan portfolio, specifically in higher risk
categories such as commercial real estate, commercial loans and indirect
consumer loans, the provision for credit losses increased to $2.5 million in
1999 compared to $2.1 million in 1998. The Company establishes provisions for
credit losses, which are charged to operations, in order to maintain the
allowance for credit losses at a level sufficient to absorb future charge-offs
of loans deemed non-collectable. However, the quality of the portfolio remained
high during 1999. Net charge-offs for 1999 totaled $614,000 compared to $1.0
million in 1998, with net charge-offs as a percentage of average loans
outstanding decreasing to 0.07% in 1999 from 0.15% in 1998. The provision is
based on management's quarterly assessment of the adequacy of the allowance for
credit losses with consideration given to such interrelated factors as the
composition and inherent risk within the loan portfolio, the level of
nonperforming loans and charge-offs, both current and historic economic
conditions, as well as current trends related to regulatory supervision. Based
upon the results of such review, management believes that the allowance for
credit losses at December 31, 1999 was adequate to absorb credit losses from
existing loans.
NONINTEREST INCOME
Noninterest income increased 201% to $27.7 million in 1999 from $9.2 million in
1998. Several factors, primarily the acquisition of the insurance subsidiaries
and the implementation of various treasury initiatives, furthered the Company's
efforts to be less reliant on net interest income. Approximately, $14.5 million
of noninterest income was recognized during 1999 relating to the new insurance
subsidiary activities. Additionally, premium income generated by a newly
implemented equity covered call option program, tax-exempt earnings on
bank-owned life insurance, as well as increased commissions received from the
sale of third party annuity and mutual fund products had a positive impact on
the year to date noninterest income. The Company's focus on generating core
checking accounts, fees associated with a revised relationship checking account
product, and continued growth in debit card usage also contributed to the
increase in fee income.
NONINTEREST EXPENSES
Noninterest expenses totaled $47.6 million for the year ended December 31, 1999
reflecting an $11.7 million increase over the year ended December 31, 1998 total
of $35.9 million. Included in the 1998 total was a one-time expense of $6.8
million related to funding the Bank's charitable Foundation. Approximately $13.6
million of the noninterest expense for the year ended December 31, 1999 was
attributable to the operation and acquisition of the insurance subsidiaries,
primarily in salaries and benefits, occupancy and equipment costs, as well as
goodwill amortization of $1.5 million. Salaries and employee benefits were $27.7
million in 1999, an increase of $11.8 million or 74% from $15.9 million in 1998.
In addition to the insurance subsidiary costs, salaries and benefits increased
due to newly implemented sales and incentive programs, new stock option award
plans and increased staffing related to the expansion of the residential and
commercial loan origination sales forces. The number of full-time equivalent
employees was 624.5 at December 31, 1999, up from 401.5 at December 31, 1998,
200 of which were in the insurance subsidiaries. Other increases relate to the
Company's ongoing upgrade of technology and communications systems, particularly
the implementation of a home banking product in 1999, expenses incurred for the
opening of two new branch locations scheduled for opening in early 2000, and
professional and legal costs related to the analysis of potential acquisitions.
INCOME TAXES
The effective tax rate increased to 34.9% in 1999 from 32.1% in 1998, primarily
due to the nondeductible goodwill related to the insurance subsidiary
acquisition.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31,
1997
NET INCOME
Net income in 1998 was $10.4 million, or 8% less than the $11.3 million in 1997.
This decrease resulted from the $6.8 million one-time contribution to fund the
First Niagara Bank Foundation, which consisted of $4.1 million of the Company's
common stock and $2.7 million of cash. This contribution resulted in a $4.0
million charge to earnings on an after tax basis. Excluding the effect of this
contribution, the 1998 net income was $14.4 million, or 28% higher than 1997 net
income.
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32
Net income represented a return on average assets in 1998 of 0.77%, or 1.07%
excluding the one-time contribution, compared to 0.98% in 1997. The return on
average equity in 1998 was 4.65%, or 6.43% excluding the one-time contribution,
compared to 9.16% in 1997. The conversion and Offering, which raised over $132.4
million in additional capital, was the primary reason for the decrease in the
return on average equity in 1998.
NET INTEREST INCOME
The growth in average interest-earning assets, which increased $166.4 million,
or 15% to $1.27 billion in 1998 from $1.10 billion in 1997, was a result of
proceeds generated from the Offering, as well as the increase in utilizing
wholesale borrowings. This increase was the primary factor that contributed to
an 18% increase in net interest income. The growth in average interest-earning
assets in 1998 was primarily attributable to increases in average loans
outstanding. Average loans totaled $681.2 million in 1998, up 11% from $614.6
million in 1997 reflective of the Company's strategic focus on increasing loan
originations.
The net interest spread was 2.75% in 1998, compared with 2.86% in 1997. A
slightly lower proportion of loans, which typically yield more than investment
securities, in the composition of the interest-earning asset portfolio, as well
as the lower interest rate environment in 1998 resulted in the yield on
interest-earning assets decreasing to 7.26% in 1998 from 7.47% in 1997. The rate
paid on interest-bearing liabilities decreased 10 basis points to 4.51% in 1998
from 4.61% in 1997 due to lower prevailing interest rates and the effect of the
new initiatives relating to borrowed funds and the money-market deposit account.
Interest-free funds, consisting largely of noninterest-bearing deposits and
equity, contributed 0.73% to the net interest margin in 1998, compared with
0.53% in 1997. Average interest-free funds were $251.5 million in 1998 and
$148.9 million in 1997. Largely due to the impact of interest-free funds, the
Company's net interest margin was 3.48% in 1998, compared with 3.39% in 1997.
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $2.1 million in 1998, compared to $1.5
million in 1997. Net charge-offs for 1998 were $1.0 million, compared to $1.1
million in 1997. Net charge-offs as a percentage of average loans outstanding at
0.15% in 1998 and 0.18% in 1997. Nonperforming loans totaled $3.3 million or
0.43% of total loans outstanding at December 31, 1998, compared to $3.0 million
or 0.47% of loans at December 31, 1997. The allowance for credit losses was $8.0
million or 1.06% of total loans at the end of 1998, compared to $6.9 million or
1.08% at December 31, 1997.
NONINTEREST INCOME
Noninterest income increased 35.1% to $9.2 million in 1998 from $6.8 million in
1997. Banking service charges and fees increased 23% to $3.8 million in 1998
from $3.1 million in 1997. Increased customer usage of the debit card product,
charges for insufficient funds on checking accounts, as well as a redesigned
relationship checking product were the primary contributors to the increased
income. Loan fees, which consist of residential mortgage loan servicing income,
loan origination and underwriting fees, commercial mortgage prepayment
penalties, and other residential and consumer loan-related income increased 51%
to $1.7 million in 1998, from $1.1 million in 1997. The low interest rate
environment throughout 1998 contributed to increased refinancing activities in
the residential and commercial mortgage portfolios, which resulted in
significant increases in loan origination, underwriting and document preparation
fees, along with commercial mortgage prepayment penalties.
All other noninterest income increased in 1998 due to insurance services and
fees relating to the servicing of savings bank life insurance products, income
earned on the sale of residential mortgages, recoveries on owned real estate,
commissions on the sale of third-party annuities and mutual funds, and other
investments such as bank owned life insurance all contributed to the increase in
other noninterest income during 1998.
NONINTEREST EXPENSES
Noninterest expenses totaled $35.9 million in 1998, up from $25.2 million in
1997. Included in the 1998 total was the one-time charge of $6.8 million related
to funding the Bank's charitable Foundation. Salaries and employee benefits were
$15.9 million in 1998, an increase of $2.8 million or 21% from $13.1 million in
1997. The increase was primarily the result of three new branch offices opened
in 1998, expansion of the residential real estate function, costs associated
with the employee stock ownership plan and normal merit salary increases. The
number of full-time equivalent employees was 401.5 at December 31, 1998, up from
356.5 at December 31, 1997.
All other noninterest expenses, excluding salaries and employee benefits and
charitable contributions, totaled $13.2 million in 1998, up 11% from $11.9
million in 1997. The increase in all other noninterest expenses in 1998 from
1997 was primarily attributable to increased
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33
occupancy and equipment costs which resulted from the new branch offices and the
Company's new administrative center which opened in the third quarter of 1997,
and costs associated with operating as a public company such as transfer agent
fees, franchise taxes, and legal and professional expenses.
INCOME TAXES
The effective tax rate decreased from 35.7% in 1997 to 32.1% in 1998. These
decreases reflect the benefit of the implementation of various tax planning
strategies during the second half of 1997.
LIQUIDITY AND CAPITAL RESOURCES
In addition to the Company's primary funding sources of deposits and borrowings,
additional funding is provided from the principal and interest payments on
loans, proceeds from the maturities and sale of investment securities, as well
as proceeds from the sale of fixed rate mortgage loans in the secondary market.
While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit outflows, mortgage prepayments, mortgage
loan sales, and borrowings are greatly influenced by general interest rates,
economic conditions and competition.
Accelerated principal repayments on mortgage related and other available for
sale securities provided an additional source of liquidity, totaling $179.7
million for the year ended December 31, 1999 compared to $154.7 million and
$47.4 million for the years ended December 31, 1998 and 1997, respectively.
Other borrowings, as a result of the implementation of the Company's
asset/liability and leveraging strategies, increased to $335.6 million during
the twelve month period ended December 31, 1999 compared to $142.6 million for
1998 and $33.7 million for 1997.
The primary investing activities of the Company are the origination of
residential one- to-four family mortgages, commercial real estate loans,
consumer loans, as well as the purchase of mortgage related and debt and equity
securities. During 1999, loan originations totaled $372.1 million compared to
$310.3 million and $171.7 million for 1998 and 1997, respectively. Purchases of
mortgage related securities, primarily CMOs, totaled $177.9 million at December
31, 1999 compared to $214.5 million and $67.3 million for the years ended
December 31, 1998 and 1997, respectively. Purchases of other available for sale
securities, primarily short-term asset-backed and equity securities, during the
years ended December 31, 1999, 1998 and 1997 totaled $109.8 million, $99.9
million, and $99.0 million, respectively. Also during the first quarter 1999,
the Company closed on the acquisition of WHA, utilizing existing liquid assets
and purchased $53.6 million from SBLI of one- to-four family residential
mortgages funded by FHLB advances with similar maturities.
At December 31, 1999, outstanding loan commitments totaled $74.8 million. These
commitments do not necessarily represent future cash requirements since certain
of these instruments may expire without being funded and others may not be fully
drawn upon. It is anticipated that there will be sufficient funds available to
meet the current loan commitments and other obligations.
Cash, interest-bearing demand accounts at correspondent banks, federal funds
sold and securities purchased under resale agreements are the Company's most
liquid assets. The level of these assets are monitored daily and are dependent
on operating, financing, lending and investing activities during any given
period. Excess short-term liquidity is usually invested in overnight federal
funds sold. In the event that funds beyond those generated internally are
required, additional sources of funds are available through the use of reverse
repurchase agreements and FHLB advances. As of December 31, 1999, the total of
cash, interest-bearing demand accounts, federal funds sold and securities
purchased under resale agreement was $41.9 million, or 2.5% of total assets.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivatives
embedded in other contracts, and for hedging activities. This statement requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This standard also requires an entity to establish a method, consistent with its
approach to managing risk, that it will use to assess the effectiveness of the
hedging derivative and the measurement approach for determining the ineffective
aspect of the hedge. This statement originally effective for fiscal years
beginning after June 15, 1999 has been delayed to fiscal years beginning after
June 15, 2000, with earlier application encouraged. The adoption of this
standard, at this time, will not have a significant impact on the Company's
financial condition or results of operations.
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34
In September 1999, the FASB issued an Exposure Draft, "Business Combinations and
Intangible Assets", which addresses new rules governing the accounting for
business combinations that will limit the accounting for all future acquisitions
to the purchase method. Additionally, new restrictions are being proposed on the
allowable amortization period of any related goodwill and purchased intangibles
recognized as a result of a business combination. The proposal also includes
disclosure requirements that would include a cash basis earnings and earnings
per share presentation that would exclude the impact of goodwill amortization
and other intangibles on earnings. Since the Company has accounted for all
previous acquisitions using the purchase method and intends to use it for all
acquisitions in process, the adoption of these new rules as they are being
proposed, currently do not impact the Company's financial condition or results
of operations.
34
35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The principal objective of the Company's interest rate risk management is to
evaluate the interest rate risk inherent in certain assets and liabilities,
determine the appropriate level of risk given the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board's approved guidelines
to reduce the vulnerability of operations to changes in interest rates. The
asset/liability committee is comprised of senior management and selected banking
officers under the direction of the Board, with senior management responsible
for reviewing with the Board its activities and strategies, the effect of those
strategies on the net interest margin, the fair value of the portfolio and the
effect that changes in interest rates will have on the portfolio and exposure
limits.
In recent years, the Company has used the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of residential
monthly and bi-weekly fixed-rate mortgage loans having terms to maturity of not
more than twenty years, residential and commercial adjustable-rate mortgage
loans, and consumer loans consisting primarily of mobile home loans, home equity
loans, education loans, and more recently, recreational vehicle loans; (2)
selling substantially all newly originated 25-30 year fixed-rate, residential
mortgage loans into the secondary market without recourse and on a servicing
retained basis; and (3) investing in shorter term securities which generally
bear lower yields as compared to longer term investments, but which better
position the Company for increases in market interest rates. During the latter
stages of 1998, the Company began to retain some of the newly originated 25-30
year fixed rate, residential mortgage loans in the portfolio and fund them with
long-term borrowings as long as an acceptable spread could be obtained.
Shortening the maturities of the Company's interest-earning assets by increasing
shorter term investments better matches the maturities of the Company's deposit
accounts, in particular its certificates of deposit that mature in one year or
less, which, at December 31, 1999 totaled $329.1 million, or 23% of total
interest-bearing liabilities. During 1999, the Company, on a limited basis,
began entering into interest rate swap agreements with a third party to match
more closely the repricing of its money market demand product. The Company
intends to continue to analyze the future utilization of swap agreements as part
of its overall asset/liability management process. These strategies may
adversely impact net interest income due to lower initial yields on these
investments in comparison to longer term, fixed rate loans and investments.
However, management believes that reducing the exposure to interest rate
fluctuations will enhance long-term profitability.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a Company's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within that
same time period. At December 31, 1999, the Company's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was a negative 18.61%. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position is likely to experience a decline in net interest income
as the cost of its interest-bearing liabilities increase at a rate faster than
its yield on interest-earning assets. In comparison, an institution with a
positive gap is likely to realize an increase in its net interest income in a
rising interest rate environment. Given the Company's existing liquidity
position and its ability to sell securities from its available for sale
portfolio, management believes that its negative gap position will not have a
material adverse effect on its operating results or liquidity position. If
interest rates decrease, there may be a positive effect on the Company's
interest rate spread and corresponding operating results.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of the
repricing date or the contractual maturity of the asset or liability. The table
sets forth an approximation of the projected repricing of assets and liabilities
at December 31, 1999, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within the selected time intervals.
While the Company believes such assumptions to be reasonable, there can be no
assurance that assumed prepayment rates and decay rates will approximate actual
future loan prepayment and deposit withdrawal activity.
35
36
AMOUNTS MATURING OR REPRICING AS OF DECEMBER 31, 1999
------------------------------------------------------------------------------------
LESS THAN 3-6 6 MONTHS
3 MONTHS MONTHS TO 1 YEAR 1-3 YEARS 3-5 YEARS 5-10 YEARS
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Federal funds sold .................... $ 17,500 $ -- $ -- $ -- $ -- $ --
Mortgage related securities(1) ........ 21,163 20,504 45,311 187,999 107,616 19,301
Investment securities(1) .............. 34,604 20,360 21,337 72,706 21,551 4,293
Loans(2) .............................. 115,932 44,999 111,861 217,457 159,984 251,188
Other(1)(3) ........................... 5,260 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets ....... 194,459 85,863 178,509 478,162 289,151 274,782
---------- ---------- ---------- ---------- ---------- ----------
Interest-bearing liabilities:
Savings accounts ...................... 9,450 9,450 19,340 53,487 42,367 71,281
Interest-bearing checking ............. 243,734 22,518 45,035 24,079 1,734 2,918
Certificate accounts .................. 73,686 69,976 185,396 91,236 3,579 3,293
Mortgagors' payments held in escrow ... 3,939 -- 4,815 -- -- --
Other borrowed funds .................. 71,114 8,653 10,238 19,549 17,606 134,701
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities .. 401,923 110,597 264,824 188,351 65,286 212,193
---------- ---------- ---------- ---------- ---------- ----------
Interest sensitivity gap ................ ($ 207,464) ($ 24,734) ($ 86,315) $ 289,811 $ 223,865 $ 62,589
========== ========== ========== ========== ========== ==========
Cumulative interest rate sensitivity gap. ($ 207,464) ($ 232,198) ($ 318,513) ($ 28,702) $ 195,163 $ 257,752
========== ========== ========== ========== ========== ==========
Ratio of interest-earning assets to
interest-bearing liabilities .......... 48.38% 77.64% 67.41% 253.87% 442.90% 129.50%
Ratio of cumulative gap to total assets . (12.12)% (13.57)% (18.61)% (1.68)% 11.40% 15.06%
AMOUNTS MATURING OR REPRICING AS OF DECEMBER 31, 1999
-----------------------------------------------------
OVER 10
YEARS TOTAL
---------- ----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Federal funds sold .................... $ -- $ 17,500
Mortgage related securities(1) ........ -- 401,894
Investment securities(1) .............. 1,801 176,652
Loans(2) .............................. 92,140 993,561
Other(1)(3) ........................... 16,595 21,855
---------- ----------
Total interest-earning assets ....... 110,536 1,611,462
---------- ----------
Interest-bearing liabilities:
Savings accounts ...................... 90,136 295,511
Interest-bearing checking ............. 3,690 343,708
Certificate accounts .................. 14 427,180
Mortgagors' payments held in escrow ... 3,000 11,754
Other borrowed funds .................. 73,785 335,646
---------- ----------
Total interest-bearing liabilities .. 170,625 1,413,799
---------- ----------
Interest sensitivity gap ................ ($ 60,089) $ 197,663
========== ==========
Cumulative interest rate sensitivity gap. $ 197,663
==========
Ratio of interest-earning assets to
interest-bearing liabilities .......... 64.78% 113.98%
Ratio of cumulative gap to total assets . 11.55%
- --------------------------------
(1) Amounts shown are amortized cost.
(2) Amounts shown include principal balance net of deferred loan fees and
expenses, unamortized premiums and discounts, and non-accruing loans.
(3) Includes demand balances held at correspondent banks and FHLB stock.
Certain shortcomings are inherent in the method of analysis presented in the GAP
Table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features, which restrict changes in interest rates, both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.
As a result of these shortcomings, the Company focuses more attention on
simulation modeling, such as the Net Income and Portfolio Value Analysis
discussed below, rather than Gap Analysis. Even though the Gap Analysis reflects
a ratio of cumulative gap to total assets within the Company's targeted range of
acceptable limits, the net income and net portfolio value simulation modeling is
considered by management to be more informative in forecasting future income and
economic value trends.
36
37
Net Income and Portfolio Value Analysis. The accompanying table as of December
31, 1999 and 1998 sets forth the estimated impact on the Company's net income
resulting from changes in the interest rates during the next twelve months.
These estimates require making certain assumptions including loan and
mortgage-related investment prepayment speeds, reinvestment rates, and deposit
maturities and decay rates. These assumptions are inherently uncertain and, as a
result, the Company cannot precisely predict the impact of changes in interest
rates on net income. Actual results may differ significantly due to timing,
magnitude and frequency of interest rate changes and changes in market
condition.
CALCULATED INCREASE (DECREASE) AT
---------------------------------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------------- ------------------------------
NET NET
CHANGES IN PORTFOLIO PORTFOLIO
INTEREST RATES NET INCOME VALUE NET INCOME VALUE
-------------------- ----------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS)
+200 basis points $ (2,105) $ (25,301) $ (942) $ (11,719)
+100 basis points (1,038) (13,193) (452) (4,084)
-100 basis points 986 8,518 401 557
-200 basis points $ 1,878 $ 14,057 $ 700 $ 2,911
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in net income and NPV requires the making of certain assumptions which may or
may not reflect the manner in which actual yields and costs respond to changes
in market interest rates. In this regard, the net income and NPV Table presented
assumes that the composition of the Company's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities. Accordingly,
although the net income and NPV Table provides an indication of the Company's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Company's net interest income and will differ
from actual results.
37
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Niagara Bancorp, Inc.:
We have audited the accompanying consolidated statements of condition of Niagara
Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Niagara Bancorp,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in three-year period ended
December 31, 1999, in conformity with generally accepted accounting principles.
[LOGO KPMG]
January 11, 2000
Buffalo, New York
38
39
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Condition
December 31, 1999 and 1998
(Dollars in thousands)
ASSETS 1999 1998
----------- -----------
Cash and cash equivalents:
Cash and due from banks $ 24,449 29,063
Federal funds sold and securities purchased under
resale agreements 17,500 82,200
----------- -----------
Total cash and cash equivalents 41,949 111,263
Securities available for sale 563,473 580,751
Loans, net 985,628 744,739
Premises and equipment, net 25,886 25,247
Other assets 94,776 46,734
----------- -----------
$ 1,711,712 1,508,734
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 1,113,302 1,060,897
Short-term borrowings 90,005 5,549
Long-term borrowings 245,640 137,048
Other liabilities 30,149 41,415
----------- -----------
1,479,096 1,244,909
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 45,000,000 shares authorized,
29,756,250 shares issued and outstanding 298 298
Additional paid-in capital 135,964 136,114
Retained earnings 151,341 136,602
Accumulated other comprehensive income (loss) (8,893) 4,587
Common stock held by ESOP (13,076) (13,776)
Treasury stock, at cost, (3,110,850 shares) (33,018) --
----------- -----------
232,616 263,825
----------- -----------
$ 1,711,712 1,508,734
=========== ===========
See accompanying notes to consolidated financial statements.
39
40
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
-------- -------- --------
Interest income:
Real estate loans $ 57,669 47,860 44,540
Other loans 9,729 7,466 7,029
Securities 37,976 32,693 29,267
Federal funds sold and securities purchased
under resale agreements 1,104 3,344 1,079
Other 1,336 739 448
-------- -------- --------
Total interest income 107,814 92,102 82,363
Interest expense:
Deposits 42,393 44,034 43,385
Borrowings 14,667 3,932 1,593
-------- -------- --------
Total interest expense 57,060 47,966 44,978
-------- -------- --------
Net interest income 50,754 44,136 37,385
Provision for credit losses 2,466 2,084 1,493
-------- -------- --------
Net interest income after provision
for credit losses 48,288 42,052 35,892
-------- -------- --------
Noninterest income:
Banking service charges and fees 4,816 3,791 3,085
Loan fees 1,684 1,736 1,147
Insurance services and fees 15,723 1,120 1,007
Bank-owned life insurance income 1,581 769 --
Annuity and mutual fund commissions 1,382 741 433
Covered call option premium 1,378 -- --
Net gain on sale of securities available for sale 478 138 910
Other 646 887 214
-------- -------- --------
Total noninterest income 27,688 9,182 6,796
-------- -------- --------
Noninterest expense:
Salaries and employee benefits 27,708 15,900 13,119
Occupancy and equipment 4,506 3,388 2,587
Technology and communications 4,481 3,577 3,464
Marketing and advertising 1,893 1,543 1,398
Goodwill amortization 1,494 -- --
Charitable contributions 122 6,849 176
Other 7,439 4,689 4,434
-------- -------- --------
Total noninterest expense 47,643 35,946 25,178
-------- -------- --------
Income before income taxes 28,333 15,288 17,510
Income taxes 9,893 4,906 6,259
-------- -------- --------
Net income $ 18,440 10,382 11,251
======== ======== ========
Earnings per common share (see note 14):
Basic and diluted 0.69 -- --
Cash dividends per common share 0.14 -- --
Weighted average common shares outstanding
Basic and diluted 26,744 -- --
See accompanying notes to consolidated financial statements.
40
41
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
-------- -------- --------
Net income $ 18,440 10,382 11,251
Other comprehensive income (loss), net of income taxes:
Unrealized gains (losses) on securities available
for sale (13,198) 2,138 4,093
Less: Reclassification adjustment for gains
included in net income 282 81 537
-------- -------- --------
Total other comprehensive income (loss) (13,480) 2,057 3,556
-------- -------- --------
Total comprehensive income $ 4,960 12,439 14,807
======== ======== ========
See accompanying notes to consolidated financial statements.
41
42
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
(In thousands)
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE ESOP
STOCK CAPITAL EARNINGS INCOME (LOSS) SHARES
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1996 $ -- -- 116,690 (1,026) --
Net income -- -- 11,251 -- --
Unrealized gain on securities available for sale,
net of reclassification adjustment -- -- -- 3,556 --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1997 $ -- -- 127,941 2,530 --
Net income -- -- 10,382 -- --
Unrealized gain on securities available for
sale, net of reclassification adjustment -- -- -- 2,057 --
Issuance of common stock (29,351,204 shares) 298 132,092 -- -- --
Charitable contribution of common stock to
First Niagara Bank Foundation
(405,046 shares) -- 4,051 -- -- --
Common stock acquired by ESOP
(1,080,124 shares) -- -- -- -- (14,298)
ESOP shares released (39,406 shares) -- (29) -- -- 522
Common stock dividends of $.03 per share -- -- (1,721) -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1998 $ 298 136,114 136,602 4,587 (13,776)
Net income -- -- 18,440 -- --
Unrealized loss on securities available
for sale, net of reclassification adjustment -- -- -- (13,480) --
ESOP shares released (52,908 shares) -- (150) -- -- 700
Purchase of treasury stock
(3,110,850 shares) -- -- -- -- --
Common stock dividend of $.14 per share -- -- (3,701) -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 1999 $ 298 135,964 151,341 (8,893) (13,076)
============ ============ ============ ============ ============
TREASURY
STOCK TOTAL
------------ ------------
Balances at December 31, 1996 -- 115,664
Net income -- 11,251
Unrealized gain on securities available for sale,
net of reclassification adjustment -- 3,556
------------ ------------
Balances at December 31, 1997 -- 130,471
Net income -- 10,382
Unrealized gain on securities available for
sale, net of reclassification adjustment -- 2,057
Issuance of common stock (29,351,204 shares) -- 132,390
Charitable contribution of common stock to
First Niagara Bank Foundation
(405,046 shares) -- 4,051
Common stock acquired by ESOP
(1,080,124 shares) -- (14,298)
ESOP shares released (39,406 shares) -- 493
Common stock dividends of $.03 per share -- (1,721)
------------ ------------
Balances at December 31, 1998 -- 263,825
Net income -- 18,440
Unrealized loss on securities available
for sale, net of reclassification adjustment -- (13,480)
ESOP shares released (52,908 shares) -- 550
Purchase of treasury stock
(3,110,850 shares) (33,018) (33,018)
Common stock dividend of $.14 per share -- (3,701)
------------ ------------
Balances at December 31, 1999 (33,018) 232,616
============ ============
See accompanying notes to consolidated financial statements.
42
43
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income $ 18,440 10,382 11,251
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization (accretion) of fees and discounts, net 894 519 (279)
Depreciation of premises and equipment 3,139 2,482 2,256
Provision for credit losses 2,466 2,084 1,493
Amortization of goodwill 1,494 -- --
Other provisions for losses (recoveries) 94 (48) 339
Net gain on sale of securities available for sale (478) (138) (910)
ESOP compensation expense 550 493 --
Charitable contribution to First Niagara Bank Foundation -- 4,051 --
Deferred income taxes (191) (2,380) (324)
Increase in other assets (1,659) (1,302) (3,234)
Increase (decrease) in other liabilities (4,838) 7,385 2,378
--------- --------- ---------
Net cash provided by operating activities 19,911 23,528 12,970
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 67,212 5,266 75,158
Proceeds from maturities of securities:
Available for sale 35,040 26,212 11,175
Held to maturity -- 17,000 220,100
Principal payments received on securities available for sale 179,705 154,692 47,379
Purchases of securities:
Available for sale (301,078) (300,443) (166,345)
Held to maturity -- -- (199,100)
Net increase in loans (243,100) (110,438) (36,394)
Purchase of bank-owned life insurance (10,000) (25,000) --
Purchase of Warren-Hoffman & Associates, Inc.,
net of cash acquired (11,260) -- --
Other, net (14,816) (7,554) (13,034)
--------- --------- ---------
Net cash used by investing activities (298,297) (240,265) (61,061)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposits 52,405 65,276 66,776
Proceeds from (repayments) of short-term borrowings 84,427 (13,234) (13,173)
Proceeds from long-term borrowings 109,060 122,509 14,948
Repayments of long-term borrowings (439) (395) (66)
Net proceeds from issuance of common stock -- 132,390 --
Purchase of common stock by ESOP -- (14,298) --
Purchase of treasury stock (31,820) -- --
Dividends paid on common stock (4,561) (861) --
--------- --------- ---------
Net cash provided by financing activities 209,072 291,387 68,485
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (69,314) 74,650 20,394
Cash and cash equivalents at beginning of year 111,263 36,613 16,219
--------- --------- ---------
Cash and cash equivalents at end of year $ 41,949 111,263 36,613
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 16,013 3,554 3,870
Interest expense 55,317 49,589 44,693
========= ========= =========
Treasury stock purchases not settled $ 1,198 -- --
========= ========= =========
Acquisition of Warren-Hoffman & Associates, Inc.:
Fair value of:
Assets acquired $ 2,889 -- --
Liabilities assumed 3,655 -- --
Purchase price payable 2,919 -- --
========= ========= =========
See accompanying notes to consolidated financial statements.
43
44
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(1) BASIS OF PRESENTATION
Niagara Bancorp, Inc. (the Company), a Delaware incorporated bank holding
company, is the parent of First Niagara Bank (formerly Lockport Savings
Bank (the Bank)), a New York chartered FDIC insured savings bank, and
subsidiaries. The accounting and reporting policies of the Company
conform to general practices within the banking industry and to generally
accepted accounting principles. The following is a description of the
more significant accounting policies.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, and the Bank and its subsidiaries: LSB Associates, Inc.,
an agent for third party mutual fund and annuity sales; First
Niagara Realty, Inc. (formerly LSB Realty, Inc.), a real estate
development company; First Niagara Funding, Inc. (formerly LSB
Funding, Inc.), a real estate investment trust; First Niagara
Securities, Inc. (formerly LSB Securities, Inc.), a securities
investment company; Warren-Hoffman and Associates, Inc. and Foote
Mandaville Agency, Inc., full service commercial and personal
insurance agencies, and NOVA Healthcare Administrators, Inc., a
provider of third-party administration of employee benefit plans.
All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from
banks, federal funds generally sold for one day and securities
purchased under resale agreements generally sold within 90 days.
(c) INVESTMENT SECURITIES
All debt and marketable equity securities are classified as
available for sale. The securities are carried at fair value, with
unrealized gains and losses, net of the related deferred income
tax effect, reported as a component of accumulated other
comprehensive income. Realized gains and losses are included in
the consolidated statement of income and are determined using the
specific identification method.
(d) LOANS
Loans are stated at the principal amount outstanding, adjusted for
net unamortized deferred fees and costs which are accrued to
income on the interest method. Accrual of interest income on loans
is discontinued after payments become more than ninety days
delinquent, unless the status of a particular loan clearly
indicates earlier discontinuance is more appropriate. All
uncollected interest income previously recognized on non-accrual
loans is reversed and subsequently recognized only to the extent
payments are received. In those instances where there is doubt as
to the collectibility of principal, interest payments are applied
to principal. Loans are generally returned to accrual status when
principal and interest payments are current, full collectibility
of principal and interest is reasonably assured and a consistent
record of performance, generally six months, has been
demonstrated.
Purchased loans are recorded at cost with realized premiums or
discounts amortized to expense or accreted to income using the
interest method over the estimated life of the loans. Mortgage
loans originated and intended for sale in the secondary market are
carried at the lower of cost or market. Net unrealized losses are
recognized through a valuation allowance by charges to earnings.
45
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(e) REAL ESTATE OWNED
Real estate owned consists of property acquired in settlement of
loans which are initially valued at the lower of cost or fair
value based on appraisals at foreclosure and are periodically
adjusted to the lower of adjusted cost or net realizable value
throughout the holding period.
(f) ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is established through charges to
earnings. Management's determination of the amount of the
allowance is based on many factors, including credit evaluation of
the loan portfolio, current and expected economic conditions and
past loss experience. While management uses available information
to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for
credit losses and may require the Bank to recognize additions to
the allowance based on their judgment of information available to
them at the time of their examination.
A loan is considered impaired when, based on current information
and events, it is probable that a creditor will be unable to
collect all amounts of principal and interest under the original
terms of the agreement. Such loans are measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, the
loan's observable market price or the fair value of the underlying
collateral if the loan is collateral dependent. The Company
excludes smaller-balance homogeneous loans that are collectively
evaluated for impairment, including one- to four-family
residential mortgage loans, student loans and consumer loans,
other than those modified in a troubled debt restructuring.
(g) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, net of accumulated
depreciation and amortization. Depreciation is computed on the
straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized on the straight-line
method over the lesser of the life of the improvements or the
lease term.
(h) GOODWILL
The excess of the cost of acquired entities over the fair value of
identifiable assets acquired less liabilities assumed is recorded
as goodwill. All of the Company's goodwill is being amortized on a
straight-line basis over ten years. The Company periodically
assesses whether events or changes in circumstances indicate that
the carrying amount of goodwill may be impaired. Impairment is
measured using estimates of future cash flows or earnings
potential of the acquired entities.
(i) EMPLOYEE BENEFITS
The Company maintains a non-contributory, qualified, defined
benefit pension plan that covers substantially all full time
employees of the Bank. The actuarially determined pension benefits
in the form of a life annuity are based on the employee's combined
years of service, age and compensation. The Company's policy is to
fund the minimum amount required by government regulations.
45
46
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
The Company also provides certain post-retirement benefits,
principally health care and group life insurance, to employees and
their beneficiaries and dependents. The Company accrues for the
expected cost of providing these post-retirement benefits during
an employee's active years of service.
(j) STOCK-BASED COMPENSATION
During 1999, the Company adopted a fixed award stock option plan
and a restricted stock plan for certain officers, directors, key
employees and other persons providing services to the Company. The
Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretation, in accounting for its fixed plan stock options. As
such, compensation expense would have been recorded on the date of
grant only if the current market price of the underlying stock
exceeded the exercise price.
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation", established accounting
and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. As allowed
under SFAS No. 123, the Company has elected to continue to apply
the intrinsic value-based method of accounting described above,
and has adopted the disclosure requirements of SFAS No. 123.
Compensation expense equal to the market value of the Company's
stock on the grant date is accrued ratably over the vesting period
for shares granted under the restricted stock plan.
(k) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the
provision for income taxes.
(l) EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then
shared in the earnings of the Company. EPS is only presented in
these financial statements for 1999 since the Company completed
its offering on April 17, 1998.
(m) NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging
activities. This statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
This standard also requires an entity to establish a method,
consistent with its approach to managing risk, that it will use to
assess the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the
hedge. This statement, originally effective for fiscal years
beginning after June 15, 1999, has been delayed to fiscal years
beginning after June 15, 2000, with earlier application
encouraged. The adoption of this standard, at this time, does not
have a material impact on the Company's financial condition or
results of operations.
46
47
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(n) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(2) REORGANIZATION AND STOCK OFFERING
The Company was organized in December 1997 by the Bank in connection with
the conversion from a New York chartered mutual savings bank to a New
York chartered stock savings bank and the reorganization to a two-tiered
mutual holding company. The Company was formed for the purpose of
acquiring all of the capital stock of the Bank upon completion of the
reorganization. As part of the reorganization, the Company sold
approximately 43.5% of the shares of its common stock to eligible
depositors of the Bank (the Offering) and issued approximately 53.3% of
the Company's shares of common stock to Niagara Bancorp, MHC (the MHC), a
state-chartered mutual holding company incorporated in New York.
Concurrent with the close of the offering, 1.9% of the shares were issued
to the Bank's employee stock ownership plan (ESOP) and 1.3% of the shares
were issued to the First Niagara Bank Foundation (the Foundation). The
reorganization and offering were completed on April 17, 1998. Prior to
that date, the Company had no assets and no liabilities.
Completion of the Offering resulted in the issuance of 29,756,250 shares
of common stock at $10.00 per share. Costs related to the Offering,
primarily marketing fees paid to investment banking firms, professional
fees, registration fees, and printing and mailing costs, were $2.5
million. Net offering proceeds were $132.4 million. The Company used 50%
of that amount, or $66.2 million, to purchase all of the common stock of
the Bank. The remaining proceeds were used to fund a $14.3 million loan
to the ESOP and to acquire $51.9 million in short-term investments.
The Foundation is dedicated exclusively to supporting charitable causes
and community development activities in Western New York. In addition to
the $4.1 million (405,046 shares) of common stock contributed by the
Company, the Bank contributed $2.7 million in cash to the Foundation. As
a result, a one-time charge of $6.8 million is reflected in the 1998
consolidated statement of income for this contribution, which is tax
deductible, subject to an annual limitation based upon the Company's
taxable income.
The Bank established a liquidation account, as of the date of conversion,
in the amount of $126.7 million, equal to its net worth as of the date of
the latest consolidated statement of financial condition appearing in the
final prospectus. The liquidation account is maintained for the benefit
of eligible pre-conversion account holders who continue to maintain their
accounts at the Bank after the date of conversion. The liquidation
account, which is reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary
date, totaled $54.4 million at December 31, 1999. In the event of a
complete liquidation, each eligible account holder will be entitled,
under New York State Law, to receive a distribution from the liquidation
account in an amount equal to their current adjusted account balances for
all such depositors then holding qualifying deposits in the Bank.
Accordingly, retained earnings of the Company are deemed to be restricted
up to the balance of the liquidation account at December 31, 1999.
47
48
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(3) RECENT AND PENDING ACQUISITIONS
In January 1999, the Company completed the acquisition of 100% of the
common stock of Warren-Hoffman & Associates, Inc. (WHA), one of the
largest full-service insurance agencies in Western New York and three of
its affiliated companies. The acquisition has been accounted for as a
purchase transaction, with the $14.9 million excess of the purchase price
over the fair value of identifiable assets acquired less liabilities
assumed recorded as goodwill and amortized on a straight-line basis over
ten years.
In August 1999, the Company reached a definitive agreement to
purchase all of the outstanding common stock of Albion Banc Corp.
("Albion"), the holding company for Albion Federal Savings and Loan
Association for $15.75 per share resulting in an aggregate purchase price
of approximately $12.4 million. Albion, with assets of approximately
$80.2 million and two branch locations will merge its operations with the
Bank's branch network. The transaction will be accounted for using the
purchase method of accounting and is scheduled to close in the first
quarter of 2000.
In January 2000, the Company acquired all of the common stock of Empire
National Leasing, Inc. and Empire National Auto Leasing, Inc., nationwide
providers of equipment lease financing. The acquisition will be accounted
for using the purchase method, with the $4.6 million excess of the
purchase price over the fair value of identifiable assets acquired less
liabilities assumed recorded as goodwill. The acquired companies will
operate as wholly-owned subsidiaries of the Bank.
In December 1999, the Company reached a definitive agreement to acquire
all the stock of CNY Financial Corporation ("CNY"), the holding company
for Cortland Savings Bank. Cortland Savings Bank, with approximately
$296.3 million in assets, will retain its current name and charter and
operate as a wholly owned subsidiary of the Company. The Company will pay
$18.75 per share in cash for each of outstanding shares of CNY common
stock with an aggregate purchase price of $87.9 million. The acquisition,
which will be accounted for using the purchase method of accounting, is
scheduled to be completed during the second quarter of 2000 and is
subject to approval by CNY shareholders and various regulatory agencies.
(4) SECURITIES PURCHASED UNDER RESALE AGREEMENTS
The Company enters into agreements with large securities dealers to
purchase residential and commercial mortgage loans, mortgage-backed
securities and U.S. Treasury Notes and to resell substantially identical
securities, generally within 90 days. However, no such agreements were in
place at December 31, 1999. At December 31, 1998, $15.0 million of these
agreements were outstanding and consisted of mortgage loans and U.S.
Treasury Notes, having a weighted average rate of 5.95% and original
maturities of 90 days or less.
The securities underlying the agreements are book-entry securities and
were delivered into the Company's account maintained at the Federal Home
Loan Bank of New York, or into a third-party custodian's account
designated by the Company under a written custodial agreement that
explicitly recognizes the Company's interest in the securities. Mortgage
loans underlying the agreements are held in safekeeping by the seller on
behalf of the Company. Securities purchased under resale agreements
averaged approximately $3.3 million during 1999 and $18.0 million during
1998. The maximum amount outstanding at any month-end during 1999 and
1998 was $51.0 million and $25.0 million, respectively.
48
49
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(5) SECURITIES AVAILABLE FOR SALE
The amortized cost, unrealized gains and losses and approximate fair
value of securities available for sale at December 31, 1999 are
summarized as follows (in thousands):
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
Debt securities:
U.S. Treasury $ 47,446 61 (101) 47,406
U.S. government agencies 14,976 -- (237) 14,739
Corporate 6,985 17 (6) 6,996
States and political subdivisions 2,449 70 (183) 2,336
------------- ------------- ------------- -------------
71,856 148 (527) 71,477
------------- ------------- ------------- -------------
Mortgage-backed securities:
Collateralized mortgage obligations 306,339 -- (15,706) 290,633
Freddie Mac 66,930 52 (1,683) 65,299
Government National Mortgage
Association 15,246 204 (127) 15,323
Federal National Mortgage
Association 13,379 -- (305) 13,074
------------- ------------- ------------- -------------
401,894 256 (17,821) 384,329
------------- ------------- ------------- -------------
Asset-backed securities:
Home equity 80,271 -- (1,608) 78,663
Student Loans 5,497 -- (27) 5,470
------------- ------------- ------------- -------------
85,768 -- (1,635) 84,133
------------- ------------- ------------- -------------
Equity securities - common stock 19,028 6,486 (1,980) 23,534
------------- ------------- ------------- -------------
$ 578,546 6,890 (21,963) 563,473
============= ============= ============= =============
49
50
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
Scheduled contractual maturities of debt securities, at December 31, 1999
are as follows (in thousands):
AMORTIZED FAIR
COST VALUE
----------------- ----------------
Within one year $ 31,475 31,456
After one year through five years 69,064 68,389
After five years through ten years 35,677 34,966
After ten years 423,302 405,128
----------------- ----------------
$ 559,518 539,939
================= ================
The amortized cost, unrealized gains and losses and approximate fair
value of securities available for sale at December 31, 1998 are
summarized as follows (in thousands):
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ------------- ------------- -------------
Debt securities:
U.S. Treasury $ 66,463 1,263 -- 67,726
Corporate 6,958 150 -- 7,108
States and political subdivisions 1,095 99 (3) 1,191
------------- ------------- ------------- -------------
74,516 1,512 (3) 76,025
------------- ------------- ------------- -------------
Mortgage-backed securities:
Collateralized mortgage obligations 264,524 867 (824) 264,567
Freddie Mac 86,492 1,109 (25) 87,576
Government National Mortgage
Association 21,732 741 (1) 22,472
Federal National Mortgage
Association 18,126 234 -- 18,360
------------- ------------- ------------- -------------
390,874 2,951 (850) 392,975
------------- ------------- ------------- -------------
Asset-backed securities:
Home equity 86,571 136 (60) 86,647
Student Loans 7,444 -- (73) 7,371
------------- ------------- ------------- -------------
94,015 136 (133) 94,018
------------- ------------- ------------- -------------
Equity securities - common stock 13,570 4,563 (400) 17,733
------------- ------------- ------------- -------------
$ 572,975 9,162 (1,386) 580,751
============= ============= ============= =============
50
51
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
Gross realized gains and losses on sales of securities available for sale
are summarized as follows (in thousands):
1999 1998 1997
------------------ ------------------ ------------------
Realized gains $ 2,157 138 1,195
Realized losses (1,679) -- (285)
=================== =================== ===================
At December 31, 1999, approximately $5.0 million of U.S. Treasury Notes
were pledged under a collateral agreement with the Federal Reserve
Treasury, Tax and Loan Program and $5.0 million of U.S. Treasury Notes
and $177.8 million of mortgage related securities were pledged as
collateral under reverse repurchase agreements.
(6) LOANS
Loans receivable at December 31, 1999 and 1998 consist of the following
(in thousands):
1999 1998
----------------- ------------------
Real estate:
Residential conventional $ 609,742 456,197
Residential home equity 22,499 15,520
Commercial and multifamily 195,410 171,365
Construction 28,413 19,476
----------------- ------------------
Total real estate loans 856,064 662,558
Consumer installment 110,233 79,059
Commercial business 24,301 6,616
----------------- ------------------
Total loans 990,598 748,233
Net deferred costs and discounts 4,892 4,516
Allowance for credit losses (9,862) (8,010)
----------------- ------------------
Loans, net $ 985,628 744,739
================= ==================
Non-accrual loans amounted to $1,929,000, $3,296,000 and $3,047,000 at
December 31, 1999, 1998, and 1997, respectively, representing .19%, .43%
and .47% of total loans. Interest income that would have been recorded if
the loans had been performing in accordance with their original terms
amounted to $161,000, $286,000 and $245,000 in 1999, 1998 and 1997,
respectively.
Mortgages serviced for others by the Bank amounted to $124.6 million and
$170.1 million at December 31, 1999 and 1998, respectively. Mortgage
loans sold amounted to $28.6 million, $52.2 million and $33.8 million for
the years ending December 31, 1999, 1998, and 1997, respectively.
Servicing fee income, net of mortgage servicing rights amortization,
included in loan fees in the consolidated statements of income amounted
to $352,000, $482,000 and $424,000 in 1999, 1998, and 1997, respectively.
During 1999, $53.6 million of one-to-four family residential real estate
loans serviced by the Bank for the Savings Bank Life Insurance Fund
("Fund") were repurchased. These loans were underwritten by the Bank and
were repurchased in conjunction with the reorganization of the Fund in
order to retain the servicing function on these loans.
51
52
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
At December 31, 1999, the Company had outstanding commitments to
originate loans of approximately $74.8 million with $20.7 million at
fixed rates and $54.1 million at variable rates.
Changes in the allowance for credit losses in 1999, 1998 and 1997 were as
follows (in thousands):
1999 1998 1997
------------------ ------------------ -----------------
Balance, beginning of year $ 8,010 6,921 6,539
Provision for credit losses 2,466 2,084 1,493
Charge-offs (735) (1,252) (1,362)
Recoveries 121 257 251
------------------ ------------------ -----------------
Balance, end of year $ 9,862 8,010 6,921
================== ================== ==================
Approximately 97% of the Company's mortgage and consumer loans are in New
York State. Accordingly, the ultimate collectibility of a substantial
portion of the Company's loan portfolio is susceptible to changes in
market conditions in this primary market area.
(7) PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31, 1999 and 1998 follows
(in thousands):
1999 1998
----------------- ----------------
Land $ 1,049 1,049
Buildings and improvements 19,861 19,281
Furniture and equipment 21,867 17,127
Property under capital leases 1,365 963
----------------- ----------------
44,142 38,420
Less accumulated depreciation and
amortization 18,256 13,173
----------------- ----------------
Premises and equipment, net $ 25,886 25,247
================= =================
Future minimum rental commitments for premises and equipment under
noncancellable operating leases at December 31, 1999 were $1.3 million in
2000 and 2001; $1.2 million in 2002 and 2003; $1.1 million in 2004 and
$7.3 million in years thereafter through 2022. Real estate taxes,
insurance and maintenance expenses related to these leases that are
obligations of the Company. Rent expense was $1.1 million, $597,000 and
$534,000 in 1999, 1998, and 1997, respectively, and is included in
occupancy and equipment expense.
52
53
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(8) OTHER ASSETS
A summary of accrued interest receivable and other assets at December 31,
1999 and 1998 follows (in thousands):
1999 1998
----------------- -----------------
Bank owned life insurance $ 37,349 25,769
Goodwill, net 13,450 -
Federal Home Loan Bank stock 16,595 6,627
Net deferred tax assets 10,589 1,008
Accrued interest receivable 7,677 7,796
Other 9,116 5,534
----------------- -----------------
$ 94,776 46,734
================= =================
(9) DEPOSITS
Deposits consist of the following at December 31, 1999 and 1998 (in
thousands):
1999 1998
-------------------------------- ---------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
Savings accounts $ 295,511 3.00% 297,654 3.00%
Certificates maturing:
Within one year 329,058 5.02 383,472 5.53
After one year, through
two years 81,727 5.14 51,133 5.53
After two years, through
three years 9,509 5.27 15,542 5.94
After three years, through
four years 1,826 5.20 3,555 5.43
After four years, through
five years 1,753 6.04 792 5.38
After five years 3,307 5.25 3,451 5.84
--------------- -----------------
427,180 5.06 457,945 5.54
--------------- -----------------
Checking accounts:
Non-interest bearing 35,149 -- 32,914 --
Interest-bearing:
NOW accounts 89,658 1.50 81,249 1.50
Money market accounts 254,050 4.63 181,789 4.25
--------------- -----------------
378,857 295,952
--------------- -----------------
Mortgagors' payments held in
escrow 11,754 2.00 9,346 2.00
--------------- -----------------
$ 1,113,302 3.94% 1,060,897 4.0%
=============== =========== ================= ==============
53
54
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
Interest rates on certificates of deposit generally range from 4.16% to
8.55% at December 31, 1999. Interest expense on deposits in 1999, 1998
and 1997 is summarized as follows (in thousands):
1999 1998 1997
-------------------- -------------------- ---------------------
Certificates of deposit 22,193 27,447 29,426
Money market accounts 9,726 5,863 2,561
Savings accounts $ 9,097 9,575 10,124
NOW accounts 1,183 984 1,120
Mortgagors' payments
held in escrow 194 165 154
-------------------- -------------------- ---------------------
$ 42,393 44,034 43,385
==================== ==================== =====================
Certificates of deposit issued in amounts over $100,000 amounted to $63.0
million, $80.5 million and $88.6 million at December 31, 1999, 1998 and
1997, respectively. Interest expense thereon approximated $3.3 million,
$4.9 million and $5.2 million in 1999, 1998 and 1997, respectively.
During 1999 the Company entered into interest rate swap agreements with
third parties with notional amounts totaling $30 million. Under these
agreements, the Company pays an annual fixed rate of 5.97% to 6.23% and
receives a floating three month U.S. dollar LIBOR rate. The Company
entered into these transactions to hedge the repricing of its money
market accounts. During 1999, $21,000 of interest expense related to
these swaps was reflected in money market account interest. At December
31, 1999 the fair value of these swaps was $278,000.
(10) OTHER BORROWED FUNDS
Information relating to outstanding borrowings at December 31, 1999 and
1998 is summarized as follows (in thousands):
1999 1998
------------------ ---------------
Short-term borrowings:
Current portion of long-term FHLB advances $ 51,005 439
Reverse repurchase agreements 39,000 5,110
------------------ ------------------
$ 90,005 5,549
================== ==================
Long-term borrowings:
Long-term FHLB advances, excluding current
portion, bearing fixed interest rates ranging
from 5.04% to 6.65% at December 31, 1999 $ 173,692 65,100
Reverse repurchase agreements 71,948 71,948
------------------ ------------------
$ 245,640 137,048
================== ==================
The Company has a $420.8 million line of credit with the Federal Home
Loan Bank (FHLB), secured by the residential mortgage portfolio, which
provides a secondary funding source for lending, liquidity, and
asset/liability management. The Company has $196.1 million available
under this line at December 31, 1999.
The Company also pledged, to the FHLB and to broker-dealers, U.S.
Treasury Notes and various mortgage related securities as collateral
under reverse repurchase agreements. These are treated as financing
transactions and the obligations to repurchase are reflected as a
liability in the consolidated financial statements. The dollar amount of
securities underlying the agreements are included in securities available
for sale in the consolidated statements of condition. However, the
securities are delivered to the dealer with whom each transaction is
executed. The dealers may sell, loan or otherwise dispose of such
securities to other parties in the normal course of their business, but
agree
54
55
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
to resell to the Bank the same securities at the maturities of the
agreements. The Company also retains the right of substitution of
collateral throughout the terms of the agreements.
Information relating to the reverse repurchase agreements as of and for
the years ended December 31, 1999 and 1998 is summarized as follows (in
thousands):
1999 1998
------------------ ------------------
Weighted average interest rate at year end 5.53% 5.35%
Maximum amount outstanding at any month end $ 111,948 77,058
Average amount outstanding during the year 94,236 48,237
================== ==================
The average amounts outstanding are computed using daily average
balances. Related interest expense in 1999, 1998 and 1997 was $5,513,000,
$2,658,000 and $1,158,000, respectively.
The aggregate maturities of long-term borrowings at December 31, 1999 are
as follows (in thousands):
2001 $ 9,000
2002 7,981
2003 2,568
2004 17,606
Thereafter 208,485
--------------
$ 245,640
==============
(11) CAPITAL
The Company is subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
guidelines that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital to risk-weighted
assets and of Tier 1 capital to average assets. As of December 31, 1999,
the Company meets all capital adequacy requirements to which it is
subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios.
55
56
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
The Company's actual capital amounts and ratios are presented in the
following table (in thousands):
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- ------------------ ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
As of December 31, 1999:
Total capital to
risk-weighted assets $239,992 23.56% * 81,483 * 8.00% * 101,854 * 10.00%
Tier 1 capital to
risk-weighted assets 228,102 22.40 * 40,741 * 4.00 * 61,112 * 6.00
Tier 1 capital to
average assets 228,102 13.51 * 50,634 * 3.00 * 84,390 * 5.00
As of December 31, 1998:
Total capital to
risk-weighted assets $269,177 32.88% * 65,489 * 8.00% * 81,861 * 10.00%
Tier 1 capital to
risk-weighted assets 259,294 31.67 * 32,745 * 4.00 * 49,117 * 6.00
Tier 1 capital to
average assets 259,294 18.05 * 43,082 * 3.00 * 71,803 * 5.00
* greater than or equal too
In 1999, the Company received authorization from its Board of Directors
and bank regulatory agencies to repurchase up to 3,457,500 shares of its
common stock outstanding. During 1999, the Company purchased 3,110,850
shares at an average cost of $10.61 per share.
(12) STOCK BASED COMPENSATION
In 1999, the Company adopted a stock option plan pursuant to which the
Company's Board of Directors may grant options to officers and key
employees. The plan authorizes grants of options to purchase up to
1,390,660 shares of authorized but unissued common stock. Stock options
are granted with an exercise price equal to the stock's fair market value
at the date of grant. All options have a 10-year term and become fully
vested and exercisable after 5 years from the grant date.
At December 31, 1999, there were 783,250 shares granted pursuant to the
plan and 600,910 additional shares available for grant under the plan.
The per share weighted-average fair value of stock options granted during
1999 was $4.28 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1999 expected dividend yield of 1.86%, risk-free interest rate of 5.58%,
an expected life of 7.5 years, and expected volatility of 35.3%. The
Company also deducted 10% to reflect an estimate of the probability of
forfeiture prior to vesting.
56
57
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock
options in the financial statements. Had the Company determined
compensation cost based on fair value at the grant date for its stock
options under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below:
1999
-----------------
Net income As reported $ 18,493,704
Pro forma 18,263,010
Earnings per share As reported $ 0.69
Pro forma 0.68
Stock option activity during 1999 is as follows:
Number of Weighted average
shares exercise price
------------------ -------------------
Balance at January 1, 1999 -- $ --
Granted 789,750 10.75
Exercised -- --
Forfeited 6,500 10.75
Expired -- --
------------------ -------------------
Balance at December 31, 1999 783,250 10.75
================== ===================
At December 31, 1999, none of the options are exercisable.
During 1999, the Company allocated 556,264 shares for issuance under the
Restricted Stock Plan. Shares granted in 1999 totaled 179,500 and are due
to vest as follows: 39,585 shares in 2000; 36,235 shares in 2001; and
34,560 shares in 2002 through 2004. Compensation expense related to this
plan amounted to $248,000 in 1999.
(13) INCOME TAXES
Total income taxes in 1999, 1998 and 1997 were allocated as follows (in
thousands):
1999 1998 1997
------------ ----------- ----------
Income from operations $ 9,893 4,906 6,259
Stockholders' equity, for unrealized
gain/loss on securities available for sale (9,367) 1,429 2,472
============ =========== ==========
57
58
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
The components of income taxes attributable to income from operations in
1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
------------------ ------------------ ------------------
Current:
Federal $ 9,430 6,936 5,858
State 654 350 725
------------------ ------------------ ------------------
10,084 7,286 6,583
------------------ ------------------ ------------------
Deferred:
Federal (330) (2,120) (312)
State 139 (260) (12)
------------------ ------------------ ------------------
(191) (2,380) (324)
------------------ ------------------ ------------------
$ 9,893 4,906 6,259
================== ================== ==================
Income tax expense attributable to income from operations in 1999, 1998
and 1997 differs from the expected tax expense (computed by applying
the Federal corporate tax rate of 35% to income before income taxes) as
follows (in thousands):
1999 1998 1997
------------------ ------------------ ------------------
Expected tax expense $ 9,917 5,351 6,129
Increase (decrease) attributable to:
State income taxes, net of
Federal benefit and deferred
state tax 564 (34) 471
Bank-owned life
insurance income (553) (269) --
Goodwill amortization 523 -- --
Dividends received deduction (65) (59) (375)
Decrease in valuation allowance
for deferred tax assets (552) -- --
Other 59 (83) 34
------------------ ------------------ ------------------
$ 9,893 4,906 6,259
================== ================== ==================
58
59
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are presented below (in thousands):
1999 1998
------------------ ------------------
Deferred tax assets:
Unrealized loss on securities available for sale $6,180 --
Financial reporting allowance for credit losses 4,043 3,284
Charitable contributions 739 1,920
Deferred compensation 1,047 915
Post-retirement benefit obligation 817 739
Losses on investments in affiliates 502 520
Purchase accounting adjustment 23 --
Other 393 402
------------------ ------------------
Total gross deferred tax assets 13,744 7,780
Valuation allowance (834) (1,386)
------------------ ------------------
Net deferred tax assets 12,910 6,394
------------------ ------------------
Deferred tax liabilities:
Tax allowance for credit losses, in excess
of base year amount (1,341) (1,721)
Unrealized gain on securities available for sale -- (3,187)
Excess of tax depreciation over financial reporting
depreciation (331) (128)
Prepaid pension costs (164) (269)
Gains under covered call options (349) --
Other (136) (81)
------------------ ------------------
Total gross deferred tax liabilities (2,321) (5,386)
------------------ ------------------
Net deferred tax asset $ 10,589 1,008
================== ==================
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, availability of operating loss
carrybacks, projected future taxable income, and tax planning
strategies in making this assessment. Based upon the level of
historical taxable income, the opportunity for net operating loss
carrybacks, and projections for future taxable income over the periods
which deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these
deductible differences, net of the existing valuation allowance, at
December 31, 1999.
59
60
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(14) EARNINGS PER SHARE
The computation of basic and diluted earnings per share for the year ended
December 31, 1999 is as follows:
Net income available to common shareholders $ 18,439,704
Weighted average shares outstanding:
Total shares issued 29,756,250
Unallocated ESOP shares (1,040,573)
ESOP shares committed to be released 20,349
Treasury shares (1,992,167)
----------------
Total weighted average shares outstanding 26,743,859
---------------
Basic/diluted earnings per share $ 0.69
===============
(15) BENEFIT PLANS
PENSION PLAN
The reconciliations of the change in the projected benefit obligation,
the fair value of the plan assets and the funded status of the
Company's pension plan as of December 31, 1999 and 1998 are as follows
(in thousands):
1999 1998
----------------- -----------------
Change in projected benefit obligation:
Projected benefit obligation at beginning
of year $ 8,307 6,936
Service cost 413 400
Interest cost 554 488
Actuarial (gain) loss (1,023) 731
Benefits paid (284) (248)
----------------- -----------------
Projected benefit obligation at end of year 7,967 8,307
----------------- -----------------
Change in fair value of plan assets:
Fair value of plan assets at beginning
of year 8,959 9,195
Actual return on plan assets 1,609 12
Benefits paid (284) (248)
----------------- -----------------
Fair value of plan assets at end of year 10,284 8,959
----------------- -----------------
Funded status:
Plan assets in excess of projected
benefit obligation at end of year 2,317 652
Unrecognized net gain (2,062) (136)
Prior service cost not yet recognized in
net periodic pension costs 2 6
----------------- -----------------
Prepaid pension costs, included in other assets $ 257 522
================= =================
60
61
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
Net pension cost in 1999, 1998, and 1997 is comprised of the following
(in thousands):
1999 1998 1997
------------------ ------------------ ------------------
Service cost, benefits earned during
the year $ 413 400 383
Interest cost on projected benefit
obligation 544 488 452
Expected return on plan assets (706) (725) (600)
Net amortization and deferral 4 (129) (75)
------------------ ------------------ ------------------
Net periodic pension cost $ 265 34 160
================== ================== ==================
The principal actuarial assumptions used in 1999, 1998 and 1997 were as
follows:
1999 1998 1997
------------------ ------------------ ---------------
Discount rate 7.75% 6.50% 7.25%
Expected long-term rate of return
on assets 8.00% 8.00% 8.00%
Assumed rate of future
compensation increase 5.50% 4.50% 5.00%
=================== ================== =================
The plan assets are in mutual funds consisting primarily of listed stocks
and bonds, government securities and cash equivalents.
OTHER POST-RETIREMENT BENEFITS
In addition to providing pension and other benefits, the Company provides
post-retirement health care and life insurance benefits for substantially
all full-time employees of the Bank and their beneficiaries (and
dependents) if they reach normal retirement age while working for the
Company.
A reconciliation of the change in the benefit obligation and the accrued
benefit cost of the Company's accumulated post-retirement benefit
obligation as of December 31, 1999 and 1998 is as follows (in thousands):
1999 1998
----------------- -----------------
Change in accumulated post-retirement benefit
obligation
Accumulated post-retirement benefit
obligation at beginning of year $ 1,968 1,607
Service cost 126 90
Interest cost 126 114
Plan participants contributions 5 --
Actuarial (gain) loss (274) 211
Benefits paid (66) (54)
----------------- -----------------
Accumulated post-retirement benefit obligation at
end of year $ 1,885 1,968
================= =================
Accrued post-retirement benefit cost:
Accrued post-retirement benefit cost
at beginning of year $ 1,885 1,968
Unrecognized net actuarial (gain) loss 109 (164)
----------------- -----------------
Accrued post-retirement benefit cost
at end of year, included in other liabilities $ 1,994 1,804
================= =================
61
62
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
The components of net periodic post-retirement benefit cost for the years
ended December 31, 1999, 1998, and 1997 are as follows (in thousands):
1999 1998 1997
------------------- ------------------- --------------------
Service cost $ 126 90 64
Interest cost 126 114 99
Net amortization and deferral -- -- (11)
------------------ ------------------ ------------------
Total cost $ 252 204 152
================== ================== ==================
The post-retirement benefit obligation was determined using a discount
rate of 7.75% for 1999 and 6.50% for 1998. The assumed health care cost
trend rate used in measuring the accumulated post-retirement benefit
obligation initially ranged from 5.5% for healthcare maintenance
organizations to 13.0% for the traditional medical coverage in 2000, both
of which decreased to 5.0% in the year 2004 and thereafter, over the
projected payout of benefits. The health care cost trend rate assumption
can have a significant effect on the amounts reported. If the health care
cost trend rate were increased one percent, the accumulated
post-retirement benefit obligation as of December 31, 1999 would have
increased by 13.9%, and the aggregate of service and interest cost would
increase by 17.5%. If the health care cost trend rate were decreased one
percent, the accumulated post-retirement benefit obligation as of
December 31, 1999 would have decreased by 14.9%, and the aggregate of
service and interest cost would have decreased by 15.6%.
401(k) PLAN
All employees are also eligible to participate in Company sponsored
401(k) plans. Participants may make contributions to the Plan in the form
of salary reductions of up to 15% of their eligible compensation subject
to the Internal Revenue Code limit. The Company contributes an amount to
the Plan equal to 25% or 50% of employee contributions, dependent upon
the specific plan, up to a maximum of 6% of the employee's eligible
compensation. The Company's contribution was $421,000, $254,000 and
$196,000 in 1999, 1998 and 1997, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1998, the Bank established an ESOP and accounts for the plan in
accordance with Statement of Position 93-6, "Employers' Accounting for
Employee Stock Ownership Plans". All Bank employees with one year of
service, who work at least 1,000 hours per year and who have attained the
age of 21, are eligible to participate. The ESOP holds 1,080,124 shares
of the Company's common stock with 549,954 shares purchased in the
Offering, and 530,530 shares purchased in the open market. The purchased
shares were funded by a loan from the Company payable in equal quarterly
installments over 30 years bearing an interest rate that is adjustable
with the prime rate. Loan payments are funded by cash contributions from
the Bank and dividends on Company stock held by the ESOP. The loan can be
prepaid without penalty. Shares purchased by the ESOP are maintained in a
suspense account and held for allocation among the participants. As
quarterly loan payments are made, shares are committed to be released and
subsequently allocated to employee accounts at each calendar year end.
Compensation expense is recognized in an amount equal to the average
market price of the committed to be released shares during the respective
quarterly period. Compensation expense of $550,000 and $493,000 was
recognized for the years ended December 31, 1999 and 1998, respectively,
in connection with the 52,908 and 39,406 shares allocated to participants
during each year.
62
63
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
OTHER PLANS
The Company also sponsors various non-qualified compensation plans for
officers and employees. Awards are payable if certain earnings and
performance objectives are met. Awards under these plans were $1,540,000,
$1,181,000 and $1,153,000 in 1999, 1998 and 1997, respectively.
The Company also maintains a supplemental benefit plan for certain
executive officers that is funded by the Company through life insurance
contracts.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair value of the Company's financial
instruments are as follows (in thousands):
CARRYING ESTIMATED FAIR
VALUE VALUE
----- -----
December 31, 1999:
Financial assets:
Cash and cash equivalents $ 41,949 41,949
Securities available for sale 563,473 563,473
Loans 985,628 960,479
Other assets 61,621 61,475
Financial liabilities:
Deposits $ 1,113,302 1,113,140
Borrowings 335,645 326,155
Other liabilities 2,751 2,751
Unrecognized financial instruments:
Interest rate swaps $ -- 278
Commitments to extend credit 74,779 74,779
December 31, 1998:
Financial assets:
Cash and cash equivalents $ 111,263 111,263
Securities available for sale 580,751 580,751
Loans 744,739 757,619
Other assets 40,192 40,276
Financial liabilities:
Deposits $ 1,060,897 1,063,775
Borrowings 142,597 146,526
Other liabilities 1,008 1,008
Unrecognized financial instruments:
Commitments to extend credit $ 65,469 65,469
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have not
been considered in these estimates. Fair value estimates, methods, and
assumptions are set forth below for each type of financial instrument.
63
64
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument, including judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
CASH AND CASH EQUIVALENTS
The carrying value approximates the fair value because the instruments
have original maturities of 90 days or less.
SECURITIES
The carrying value and fair value are estimated based on quoted market
prices.
LOANS
Residential revolving home equity and personal and commercial open ended
lines of credit reprice as the prime rate changes. Therefore, the
carrying values of such loans approximates their fair value.
The fair value of fixed-rate performing loans is calculated by
discounting scheduled cash flows through estimated maturity using current
origination rates. The estimate of maturity is based on the contractual
cash flows adjusted for prepayment estimates based on current economic
and lending conditions. Fair value for significant nonperforming loans is
based on carrying value which does not exceed recent external appraisals
of any underlying collateral.
DEPOSITS
The fair value of deposits with no stated maturity, such as savings,
money market, checking, as well as mortgagors' payments held in escrow,
is equal to the amount payable on demand. The fair value of certificates
of deposit is based on the discounted value of contractual cash flows,
using rates currently offered for deposits of similar remaining
maturities.
BORROWINGS
The fair value of borrowings is calculated by discounting scheduled cash
flows through the estimated maturity using current market rates.
OTHER ASSETS AND LIABILITIES
The fair value of accrued interest receivable on loans and investments
and accrued interest payable on deposits and borrowings approximates the
carrying value because all interest is receivable or payable in 90 to 120
days. The fair value of bank-owned life insurance is calculated by
discounting scheduled cash flows through the estimated maturity using
current market rates. FHLB stock carrying value approximates fair value.
COMMITMENTS TO EXTEND CREDIT
The fair value of commitments to extend credit approximates the notional
amount of the agreements because of the short-term (90 to 120 days)
commitment period or because they reprice as market rates change.
64
65
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(17) SEGMENT INFORMATION
Based on the "Management Approach" model, the Company has determined that
it has two primary business segments, its banking franchise and its
insurance activities conducted through WHA and the Savings Bank Life
Insurance ("SBLI") department. Information about the Company's segments
is presented in the following table for the year ended December 31, 1999:
BANKING INSURANCE
ACTIVITIES ACTIVITIES TOTAL
---------- ---------- -----
Net interest income $ 50,727 27 50,754
Provision for credit losses 2,466 -- 2,466
------------------ ------------------ -----------------
Net interest income after
provision for credit losses 48,261 27 48,288
Noninterest income 11,487 15,723 27,210
Net securities gains 478 -- 478
Noninterest expense 33,995 13,648 47,643
------------------ ------------------ -----------------
Income before income taxes 26,231 2,102 28,333
Income tax expense 8,528 1,365 9,893
------------------ ------------------ -----------------
Net income $ 17,703 737 18,440
================== ================== =================
For the years ending December 31, 1998 and 1997, the Company determined
that its business was comprised of banking activities only.
65
66
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
18) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of condition as of December 31, 1999
and 1998 and the condensed statements of income and statements of cash
flows for the year ended December 31, 1999 and for the period from April
17, 1998 through December 31, 1998 should be read in conjunction with the
consolidated financial statements and related notes (in thousands):
DECEMBER 31,
----------------------------
Condensed Statements of Condition 1999 1998
------------- -------------
Assets:
Cash and cash equivalents $ 3,733 6,672
Securities available for sale 37,151 46,516
Loan receivable from ESOP 13,464 13,941
Investment in Bank 190,580 195,899
Other assets 1,736 2,297
------------- -------------
$ 246,665 265,325
============= =============
Liabilities:
Accounts payable and other liabilities 2,641 1,500
Loan payable to Bank 11,408 --
Stockholders' equity 232,616 263,825
------------- -------------
$ 246,665 265,325
============= =============
Condensed Statements of Income
Interest income $ 3,911 2,985
Dividend received from Bank 10,000 --
------------- -------------
Interest income 13,911 2,985
Interest expense 238 --
------------- -------------
Net interest income 13,673 2,985
Net loss on securities available for sale (33) --
Noninterest expenses 781 4,373
------------- -------------
Income (loss) before income taxes
and equity in earnings of Bank 12,859 (1,388)
Income tax expense (benefit) 1,148 (625)
------------- -------------
Income (loss) before equity in
earnings of Bank 11,711 (763)
Net income of Bank 16,729 11,145
Less dividend received from Bank (10,000) --
------------- -------------
Equity in undisbursed income of Bank 6,729 11,145
------------- -------------
Net income $ 18,440 10,382
============= =============
66
67
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
NIAGARA BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
Condensed Statements of Cash Flows 1999 1998
----------- -------------
Cash flows from operating activities:
Net income $ 18,440 10,382
Adjustments to reconcile net income to net
cash provided by operating activities:
Charitable contribution of Niagara Bancorp,
Inc. common stock to First Niagara
Bank Foundation -- 4,051
Accretion of fees and discounts, net (6) (5)
Equity in undisbursed earnings of Bank (6,729) (11,145)
Net loss on securities available for sale 33 --
Deferred income taxes 284 (1,140)
(Increase) decrease in other assets 889 (1,234)
Increase in liabilities 190 640
------------- --------------
Net cash provided by operating activities 13,101 1,549
------------- --------------
Cash flow from investing activities:
Proceeds from sales of securities available for sale 3,968 --
Purchases of securities available for sale (5,965) (47,648)
Principal payments on securities available for sale 10,453 1,328
Purchase of Bank common stock -- (66,245)
Funding of ESOP loan receivable -- (14,298)
Repaymets of ESOP loan receivable 477 357
------------- --------------
Net cash provided by (used for) investing
activities 8,933 (126,506)
------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 132,490
Purchase of treasury stock (31,820) --
Proceeds from loan from the Bank 11,408 --
Dividends paid on common stock (4,561) (861)
------------- --------------
Net cash provided (used) by financing
activities (24,973) 131,629
------------- --------------
Net increase (decrease) in cash and cash
equivalents (2,939) 6,672
Cash and cash equivalents at beginning of period 6,672 --
------------- --------------
Cash and cash equivalents at end of period $ 3,733 6,672
============= ==============
67
68
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL
DISCLOSURE
- --------------------------------------------------------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- --------------------------------------------------------------------------------
Information regarding directors and executive officers of the Company on
pages 3 to 6 of the Proxy Statement for the 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------------------------------------------------------
Information regarding executive compensation on pages 8 to 10 and 11 to 15
of the Proxy Statement for the 2000 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- --------------------------------------------------------------------------------
Information regarding security ownership of certain beneficial owners of
the Company's management on page 3 of the Proxy Statement for the 2000
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
Information regarding certain relationships and related transactions on
pages 16 to 17 of the Proxy Statement for the 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
68
69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
(a) Reports on Form 8-K
Niagara Bancorp, Inc. filed on January 11, 2000 a Current Report on Form
8-K dated December 28, 1999 disclosing under Item 5 that Niagara Bancorp,
Inc. had reached an agreement to acquire CNY Financial Corporation. Such
Current Report, as an Item 7 exhibit also included the Agreement and Plan
of Merger dated December 28, 1999.
(b) Exhibits
The exhibits listed below are filed herewith or are incorporated by
reference to other filings.
Exhibit Index to Form 10-K
--------------------------
Exhibit 3.1 Articles of Incorporation **
Exhibit 3.2 Bylaws **
Exhibit 10.1 Form of Employment Agreement **
Exhibit 10.2 First Niagara Bank Deferred Compensation Plan **
Exhibit 11 Calculations of Basic Earnings Per Share and Diluted Earnings Per Share
(See Note 14 to Notes to Consolidated Financial Statements)
Exhibit 21 Subsidiaries of Niagara Bancorp, Inc. (See Part I, Item 1 of Form 10-K)
Exhibit 27.1 Financial Data Schedule - Fiscal Year End 1999
** Incorporated by reference from Niagara Bancorp, Inc., Form S-1,
filed on December 22, 1997.
69
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NIAGARA BANCORP, INC.
Date: March 29, 2000 By: /s/ William E. Swan
-------------------------------------
William E. Swan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ William E. Swan President, Chief Executive Officer March 29, 2000
- ----------------------- (Principal Executive Officer)and Director
William E. Swan
/s/ Paul J. Kolkmeyer Executive Vice President and Chief Financial March 29, 2000
- ---------------------- Officer (Principal Accounting Officer)
Paul J. Kolkmeyer
/s/ Gordon P. Assad Director March 29, 2000
- --------------------
Gordon P. Assad
/s/ Christa P. Caldwell Director March 29, 2000
- -----------------------
Christa P. Caldwell
/s/ James W. Currie Director March 29, 2000
- -------------------
James W. Currie
/s Gary B. Fitch Director March 29, 2000
- ----------------
Gary B. Fitch
/s/ David W. Heinrich Director March 29, 2000
- ---------------------
David W. Heinrich
70
71
/s/ Daniel W. Judge Director March 29, 2000
- -------------------
Daniel W. Judge
/s/ B. Thomas Mancuso Director March 29, 2000
- ---------------------
B. Thomas Mancuso
/s/ James Miklinski Director March 29, 2000
- -------------------
James Miklinski
/s/ Barton G. Smith Director March 29, 2000
- -------------------
Barton G. Smith
/s/ Robert G. Weber Director March 29, 2000
- -------------------
Robert G. Weber
71