<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from ____________ to ___________
Commission File Number: 000-23601
PATHFINDER BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1540137
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(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
214 WEST FIRST STREET, OSWEGO, NY 13126
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(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
-----------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES ______ NO X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of February 28, 1998, there were issued and outstanding 2,874,999 shares
of the Registrant's Common Stock. The aggregate value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the average bid
and asked prices of the Common Stock as of February 28, 1998 ($20.875) was
$22,579,820.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (Parts II and IV).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders (Parts I and
III).
<PAGE>
PART I
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ITEM 1. BUSINESS
- ------- --------
GENERAL
PATHFINDER BANCORP, INC.
Pathfinder Bancorp, Inc. (the "Company") is a Delaware corporation which
was organized in September 1997. The only significant asset of the Company is
its investment in Oswego City Savings Bank (the "Bank"). The Company is majority
owned by Pathfinder Bancorp, MHC, a New York-chartered mutual holding company
(the "Mutual Holding Company"). On December 30, 1997 the Company acquired all of
the issued and outstanding common stock of the Bank in connection with the
Bank's reorganization into the two-tier form of mutual holding company
ownership. At that time, each share of outstanding Bank common stock was
automatically converted into one share of Company common stock, par value $.l0
per share (the "Common Stock"). At February 28, 1998 the Mutual Holding Company
held 1,552,500 of Common Stock and the public held 1,322,499 of Common Stock
(the "Minority Shareholders").
The Company's executive office is located at 214 West First Street, Oswego,
New York and the telephone number at that address is (315) 343-0057.
OSWEGO CITY SAVINGS BANK
The Bank is a New York-chartered savings bank headquartered in Oswego, New
York. The Bank has five full-service offices located in its market area
consisting of Oswego County and the contiguous counties. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was
chartered as a New York savings bank in 1859 as Oswego City Savings Bank. The
Bank is a consumer-oriented institution dedicated to providing mortgage loans
and other traditional financial services to its customers. The Bank is committed
to meeting the financial needs of its customers in Oswego County, New York, the
county in which it operates. At December 31, 1997, the Bank had total assets of
$196.8 million, total deposits of $152.4 million, and shareholders' equity of
$23.6 million.
The Bank is primarily engaged in the business of attracting deposits from
the general public in the Bank's market area, and investing such deposits,
together with other sources of funds, in loans secured by one- to four-family
residential real estate. At December 31, 1997, $112.0 million, or 92.1% of the
Bank's total loan portfolio consisted of loans secured by real estate, of which
$82.7 million, or 73.8%, were loans secured by one- to four-family residences,
$17.5 million, or 15.6%, were secured by commercial real estate, $2.2 million,
or 2.0%, were secured by multi-family properties and $9.6 million, or 8.6%, of
total real estate loans, were secured by second liens on residential properties.
The Bank also originates consumer and other loans which totaled $10.8 million,
or 8.9%, of the Bank's total loan portfolio. The Bank invests a portion of its
assets in securities issued by the United States Government, state and municipal
obligations, corporate debt securities, mutual funds, and equity securities. The
Bank also invests in mortgage-backed securities primarily issued or guaranteed
by the United States Government or agencies thereof. The Bank's principal
sources of funds are deposits, principal and interest payments on loans and
borrowings from correspondent financial institutions. The principal source of
income is interest on loans and investment securities. The Bank's principal
expenses are interest paid on deposits, and employee compensation and benefits.
1
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On September 5, 1997, the Bank entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Oswego County Savings Bank ("County Savings")
providing for the merger of County Savings with and into the Bank with the Bank
as the surviving institution (the "Merger"). County Savings is a New York
chartered mutual savings bank located in Oswego, New York. At December 31, 1997,
County Savings had assets of $112.1 million, deposits of $97.9 million and net
worth of $11.2 million.
The Merger Agreement provides that additional shares of the Company's
Common Stock equal to the fair value of County Savings will be issued in
connection with the Merger. The issuance of additional shares of the Common
Stock is intended to represent the value of the interest of the depositors of
County Savings that is being transferred to the Bank. Current minority
Shareholders' existing equity ownership interests will be diluted as a result of
the Merger. At this time however, it is impossible to quantify the extent of the
dilution Minority Shareholders will experience in their equity interest. Such
dilution will depend upon the fair value of County Savings as determined by an
independent appraisal, and the market price of the Common Stock preceding the
completion of the Merger, as well as the percentage of Common Stock sold in a
subscription and community offering if one is conducted. An independent
appraisal firm will determine the fair value of County Savings as if County
Savings were forming a mutual holding company and conducting a minority stock
offering.
The Merger is subject to various conditions, including receipt of
regulatory approvals from the Federal Reserve Board, the Federal Deposit
Insurance Corporation, and the New York Banking Department, as well as receipt
of approval of the Company's shareholders and if necessary County Savings'
depositors. As a result of regulatory review the terms of the Merger may be
significantly modified.
The Bank's executive office is located at 214 West First Street, Oswego,
New York, and its telephone number at that address is (315) 343-0057.
MARKET AREA AND COMPETITION
The economy in the Bank's market area is manufacturing-oriented and is also
significantly dependent upon the State University of New York College at Oswego.
The major manufacturing employers in the Bank's market area are Niagara Mohawk,
Alcan Aluminum, the New York Power Authority, Nestle and Sealright, a food
container manufacturer. The Bank is the second largest financial institution
headquartered in Oswego County. However, the Bank encounters competition from a
variety of sources. The Bank's business and operating results are significantly
affected by the general economic conditions prevalent in its market areas.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, savings
associations and credit unions in its market area. Competition for loans comes
from such financial institutions as well as mortgage banking companies. The Bank
expects continued strong competition in the foreseeable future, including
increased competition from "super-regional" banks entering the market by
purchasing large banks and savings banks. Many such institutions have greater
financial and marketing resources available to them than does the Bank. The Bank
competes for savings deposits by offering depositors a high level of personal
service and a wide range of competitively priced financial services. The Bank
competes for real estate loans primarily through the interest rates and loan
fees it charges and advertising, as well as by originating and holding in its
portfolio mortgage loans which do not necessarily conform to secondary market
underwriting standards.
2
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LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio primarily consists of
one- to four-family mortgage loans secured by residential and investment
properties, as well as mortgage loans secured by multi-family residences and
commercial real estate. To a lesser extent the Bank's loan portfolio also
includes consumer and business loans. The Bank generally originates loans for
retention in its portfolio, although during 1997 the Bank began originating
loans (primarily 15 year and 30 year fixed rate mortgages) for securitization
and possible sale to government sponsored enterprises. At December 31, 1997,
$1.5 million, or 1.8% of the Bank's total one- to four-family real estate
portfolio consisted of loans held for sale. In recent years, the Bank has not
purchased loans originated by other lenders. At December 31, 1997, 58.6% of the
Bank's loan portfolio consisted of one- to four-family adjustable rate mortgage
("ARM") loans.
3
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ANALYSIS OF LOAN PORTFOLIO. The following table sets forth the composition
of the Bank's loan portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ---------------- ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
First mortgage loans(1)(3).... $102,403 84.2% $ 90,761 83.5% $ 83,325 83.2% $76,275 85.1% $67,824 86.1%
Second mortgage loans(2)..... 9,561 7.9 9,082 8.3 8,303 8.3 7,931 8.8 7,025 8.9
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total real estate loans........ 111,964 92.1 99,843 91.8 91,628 91.5 84,206 93.9 74,849 95.0
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Consumer loans and other loans:
Consumer...................... 4,278 3.5 3,481 3.2 3,286 3.1 3,258 3.6 2,563 3.2
Student....................... 13 -- 58 0.1 63 0.1 1,085 1.3 864 1.1
Lease financing............... 564 0.5 1,153 1.1 2,013 2.0 835 0.9 708 0.9
Commercial business loans..... 5,908 4.9 5,482 5.0 3,860 3.9 1,028 1.2 616 0.8
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total consumer and other
loans....................... 10,763 8.9 10,174 9.4 9,222 9.2 6,206 7.0 4,751 6.0
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total loans receivable....... 122,727 101.0 110,017 101.2 100,850 100.7 90,412 100.9 79,600 101.0
Less:
Unearned discount and
origination fees............. (314) (0.3) (368) (0.4) (355) (0.4) (429) (0.5) (507) (0.6)
Allowance for loan losses..... (828) (0.7) (907) (0.8) (346) (0.3) (315) (0.4) (280) (0.4)
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total loans receivable,
net......................... $121,585 100.0% $108,742 100.00% $100,149 100.0% $89,668 100.0% $78,813 100.0%
======== ===== ======== ====== ======== ===== ======= ===== ======= =====
</TABLE>
_______________________
(1) Includes $82.7 million, $17.5 million and $2.2 million of one- to four-
family residential loans, commercial real estate and multi-family loans,
respectively, at December 31, 1997.
(2) Includes $4.2 million and $5.3 million of home equity line of credit loans
and home equity fixed rate, fixed term loans, respectively, at December 31,
1997.
(3) Includes $1.5 million of mortgage loans held for sale at December 31, 1997.
4
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LOAN MATURITY SCHEDULE. The following table sets forth certain information
as of December 31, 1997, regarding the dollar amount of loans maturing in the
Bank's portfolio based on their contractual terms to maturity. Demand loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than the period in which they contractually mature, and fixed rate loans
are included in the period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
ONE THREE FIVE TEN BEYOND
WITHIN THROUGH THROUGH THROUGH THROUGH TWENTY
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS TWENTY YEARS YEARS TOTAL
-------- ----------- ---------- --------- ------------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
First mortgage loans...... $44,173 $4,612 $14,561 $10,431 $24,165 $4,461 $102,403
Second mortgage loans..... 4,271 338 923 3,880 149 -- 9,561
Consumer and other loans.. 4,516 1,937 2,094 1,276 940 -- 10,763
------- ------ ------- ------- ------- ------ --------
Total loans.............. $52,960 $6,887 $17,578 $15,587 $25,254 $4,461 $122,727
======= ====== ======= ======= ======= ====== ========
</TABLE>
The following table sets forth at December 31, 1997, the dollar amount of
all fixed rate and adjustable rate loans due or repricing after December 31,
1998.
<TABLE>
<CAPTION>
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
First mortgage loans...... $38,282 $19,948 $58,230
Second mortgage loans..... 5,290 -- 5,290
Consumer and other loans.. 5,451 796 6,247
------- ------- -------
Total loans........... $49,023 $20,744 $69,767
======= ======= =======
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. The Bank's primary lending
activity is the origination of first mortgage loans secured by one- to four-
family residential properties. A portion of one-to four-family mortgage loans
originated by the Bank are secured by non-owner occupied homes which are
primarily used to furnish housing to students attending the SUNY College at
Oswego. The Bank generally retains in its portfolio all ARM loans that it
originates. However, the Bank generally underwrites its loans so as to be
eligible for resale in the secondary mortgage market. At December 31, 1997,
approximately 91.1% of the Bank's one- to four-family residential real estate
loans were secured by owner-occupied properties.
Fixed-rate one- to four-family residential mortgage loans originated by the
Bank are generally for terms of up to 20 years (although loans originated for
sale into the secondary market can have terms up to 30 years), amortize on a
monthly basis, and have principal and interest due each month. Such real estate
loans often remain outstanding for significantly shorter periods than their
contractual terms to maturity, particularly in a declining interest rate
environment. Borrowers may refinance or prepay loans at their option. One- to
four-family residential mortgage loans originated by the Bank customarily
contain "due-on-sale" clauses which permit the Bank to accelerate the
indebtedness of the loan upon transfer of ownership of the mortgaged property.
Due-on-sale clauses are an important means of increasing the interest rate on
existing mortgage loans during periods of rising interest rates. An origination
fee of up to 3% is charged on fixed-rate mortgage loans. As a result of the low
interest rate environment that has existed in recent years, many of the Bank's
borrowers have refinanced their mortgage loans with the Bank at
5
<PAGE>
lower interest rates. During years ended December 31, 1997 and 1996, 38.2% and
49.2%, respectively, of the Bank's one- to four-family mortgage loan
originations consisted of fixed-rate loans.
The Bank also originates ARM loans which serve to reduce interest rate
risk. The Bank currently originates one-year ARM loans which adjust each year at
275 basis points (100 basis points equal 1%) above the adjusted six month moving
average of the six-month Treasury bill auction discount rate. The Bank also
offers a loan product whereby the interest is fixed for the first five years and
adjusts annually thereafter. This loan product typically is originated with
terms up to 30 years. ARM loans are originated with terms ranging from 5 to 30
years. ARM loans originated by the Bank provide for maximum periodic interest
rate adjustment of 2 percent per year and an overall maximum interest rate
increase which is determined at the time the loan is originated. However, ARM
loans may not adjust to a level below the initial rate. ARMs may be offered at
an initial rate below the prevailing market rate. The Bank's one- to four-family
ARM loan originations totaled $13.2 million, $8.7 million, and $8.2 million,
during the fiscal years 1997, 1996, and 1995, respectively. The Bank requires
that borrowers qualify for ARM loans based upon the loan's fully indexed rate.
At December 31, 1997, $48.4 million, or 58.6%, of the Bank's one- to four-
family loan portfolio consisted of ARM loans. ARM loans generally pose a credit
risk in that as interest rates rise, the amount of a borrower's monthly loan
payment also rises, thereby increasing the potential for delinquencies and loan
losses. At the same time, the marketability of such loans may be adversely
affected by higher rates.
The Bank also originates loans to finance the construction of one- to four-
family owner-occupied residences. Funds are disbursed as construction
progresses. Loans to finance one- to four-family construction typically provide
for a six-month construction phase during which interest accrues and which is
deducted from the funds disbursed. Upon completion of the construction phase the
loan automatically converts to permanent financing. At December 31, 1997, the
Bank held $1.6 million of one- to four-family construction loans.
The Bank's lending policies require private mortgage insurance for loan to
value ratios in excess of 80%.
COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate
constituted approximately $17.5 million, or 14.3%, of the Bank's total loan
portfolio at December 31, 1997. At December 31, 1997, substantially all of the
Bank's commercial real estate loans were secured by properties located within
the Bank's market area. At December 31, 1997, the Bank's commercial real estate
loans had an average principal balance of $203,000. At that date, the largest
commercial real estate loan had a principal balance of $1.2 million, and was
secured by a health care facility. This loan is currently performing in
accordance with the original terms. Commercial real estate loans are generally
offered with adjustable interest rates tied to a market index which currently is
the adjusted six month moving average of the six month Treasury bill auction
discount rate, with an overall interest rate cap which is determined at the time
the loan is originated. Commercial real estate loans may not adjust to a level
below the initial rate. The Bank generally offers commercial real estate loans
with from one to five year adjustment periods. The Bank generally makes
commercial real estate loans up to 75% of the appraised value of the property
securing the loan. An origination fee of up to 2% of the principal balance of
the loan is typically charged on commercial real estate loans. Commercial real
estate loans originated by the Bank generally are underwritten to mature between
5 and 20 years with an amortization schedule of between 10 and 30 years. The
Bank has in the past sold loan participations to other financial institutions
and expects to do so in the future as opportunities arise.
6
<PAGE>
In underwriting commercial real estate loans the Bank reviews the expected
net operating income generated by the real estate to support debt service, the
age and condition of the collateral, the financial resources and income level of
the borrower and the borrower's experience in owning or managing similar
properties. The Bank generally obtains personal guarantees from all commercial
borrowers. Loans secured by commercial real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial real
estate is typically dependent upon the successful operation of the related real
estate. If the cash flow from the property is reduced, the borrower's ability to
repay the loan may be impaired.
MULTI-FAMILY REAL ESTATE LOANS. Loans secured by multi-family real estate
(real estate containing five or more dwellings) constituted approximately $2.2
million, or 1.8%, of the Bank's total loan portfolio at December 31, 1997. At
December 31, 1997, the Bank had a total of 14 loans secured by multi-family real
estate properties. The Bank's multi-family real estate loans are secured by
multi-family rental properties (primarily townhouses and walk-up apartments). At
December 31, 1997, substantially all of the Bank's multi-family real estate
loans were secured by properties located within the Bank's market area. At
December 31, 1997, the Bank's multi-family real estate loans had an average
principal balance of approximately $159,000 and the largest multi-family real
estate loan had a principal balance of $367,000, and was performing in
accordance with its terms. Multi-family real estate loans generally are offered
with adjustable interest rates tied to the adjusted six month moving average of
the six month Treasury Bill auction discount rate index with an overall interest
rate cap which is determined at the time the loan is originated. Multi-family
real estate loans may not adjust below the initial rate. Multi-family real
estate loans are underwritten to mature between 5 and 20 years, and to amortize
over 10 to 30 years. An origination fee of 1% is generally charged on multi-
family real estate loans.
In underwriting multi-family real estate loans, the Bank reviews the
expected net operating income generated by the real estate to support the debt
service, the age and condition of the collateral, the financial resources and
income level of the borrower and the borrower's experience in owning or managing
similar properties. The Bank generally requires a debt service coverage ratio of
at least 120% (net of operating expenses) of the monthly loan payment. The Bank
makes multi-family real estate loans up to 75% of the appraised value of the
property securing the loan. The Bank generally obtains personal guarantees from
all multi-family real estate borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate and commercial real estate is typically dependent upon the successful
operation of the related real estate property. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired.
7
<PAGE>
SECOND MORTGAGE LOANS. The Bank also offers home equity loans and equity
lines of credit collateralized by a second mortgage on the borrower's principal
residence. The Bank's home equity lines of credit are secured by the borrower's
principal residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans of 80%, or up to 90% where
the Bank has made the first mortgage loan. At December 31, 1997, the disbursed
portion of home equity lines of credit totaled $4.2 million. Home equity lines
of credit are offered on an adjustable rate basis with interest rates tied to
the prime rate as published in The Wall Street Journal, plus up to 175 basis
points and with terms of up to 15 years.
Home equity loans are fixed rate loans with terms generally up to 10 years,
although on occasion the Bank may originate a home equity loan with a term of up
to 15 years.
CONSUMER LOANS. As of December 31, 1997, consumer loans totaled $4.3
million, or 3.5%, of the Bank's total loan portfolio. The principal types of
consumer loans offered by the Bank are unsecured personal loans, and loans
secured by deposit accounts. Other consumer loans are offered on a fixed rate
basis with maturities generally of less than five years.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's credit history and an assessment of ability
to meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable
secondary income. Creditworthiness and the employment history of the applicant
are of primary consideration in originating consumer loans, and in the case of
home equity lines of credit, the Bank obtains a title guarantee, title search,
or an opinion as to the validity of title.
COMMERCIAL BUSINESS LOANS. The Bank currently offers commercial business
loans to businesses in its market area and to deposit account holders. At
December 31, 1997, the Bank had commercial business loans outstanding with an
aggregate balance of $6.5 million, of which $3.0 million consisted of commercial
lines of credit and $564,000 were lease financing arrangements. The average
commercial business loan balance was approximately $55,000. Commercial business
loans generally have fixed rates of interest. The loans are generally of short
duration with average terms of five years, but which may range up to 15 years.
Lease financing arrangements are loans which are secured by pools of leases for
medical or dental equipment or general business office equipment.
Underwriting standards employed by the Bank for commercial business loans
include a determination of the applicant's ability to meet existing obligations
and payments on the proposed loan from normal cash flows generated by the
applicant's business. The financial strength of each applicant also is assessed
through a review of financial statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Bank generally obtains guarantees from the borrower, a
third party, or the Small Business Administration, as a condition to originating
its commercial business loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as existing customers,
developers, walk-in customers, real estate broker referrals, and commissioned
mortgage loan originators. Upon receiving a loan application, the Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's
8
<PAGE>
employment, income, and credit standing. In the case of a real estate loan, an
independent appraiser approved by the Bank appraises the real estate intended to
secure the proposed loan. A loan processor in the Bank's loan department checks
the loan application file for accuracy and completeness, and verifies the
information provided. Mortgage loans of up to $150,000 may be approved by any
designated loan officer; mortgage loans in excess of $150,000 must be approved
by the Board of Directors. Commercial loans of up to $35,000 unsecured, or
$50,000 (if secured by other than real estate) may be approved by the Bank's
President or either of the two lending Vice Presidents. These individuals may
join their limits to a total approval amount of $105,000 unsecured, and $150,000
secured. Loans in excess of these limits must be approved by either the entire
Board of Directors, or a subcommittee of the Board of Directors. The Board of
Directors, at their monthly meeting, will review and verify that management's
approvals of loans are made within the scope of management's authority. Fire and
casualty insurance is required at the time the loan is made and throughout the
term of the loan, and upon request of the Bank, flood insurance may be required.
After the loan is approved, a loan commitment letter is promptly issued to the
borrower. At December 31, 1997, the Bank had commitments to originate $14.0
million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
Title insurance, title search, or an opinion of counsel as to the validity of
title are required on all loans secured by real property. In recent years, the
Bank has not purchased loans originated by other lenders.
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the Bank's
loan origination, purchase and sales activity for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995 1994
-------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan receivable, beginning of period.................. $110,017 $100,850 $ 90,412 $79,600
Originations:
Real estate:
First mortgage (1)(3)................................ 26,281 $ 23,496 18,219 19,739
Second mortgage (2).................................. 2,178 1,912 643 2,014
Consumer and other loans:
Consumer loans....................................... 2,306 3,442 2,747 3,510
Student.............................................. -- -- 438 954
Lease financing...................................... 300 -- 1,177 459
Commercial........................................... 3,525 1,850 2,756 716
-------- -------- -------- -------
Total originations.................................. 34,590 30,700 25,980 27,392
Transfer of mortgage loans to foreclosed real estate.. 374 445 645 120
Repayments............................................ 21,506 21,088 13,774 15,791
Loan sales............................................ -- -- 1,123 669
-------- -------- -------- -------
Net loan activity..................................... 12,710 9,167 10,438 10,812
Total loans receivable at end of period.............. $122,727 $110,017 $100,850 $90,412
======== ======== ======== =======
</TABLE>
______________
(1) Includes $21.3 million, and $5.0 million in one- to four-family residential
loans and commercial real estate loans, respectively, for the year ended
December 31, 1997.
(2) Includes $2.1 million in home equity loans and a net change of $53,000 in
home equity lines of credit for the year ended December 31, 1997.
(3) Includes $1.5 million of mortgage loans held for sale originated during the
year ended December 31, 1997.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned on
loans, the Bank generally receives loan origination fees. To the extent that
loans are originated or acquired for the Bank's
9
<PAGE>
portfolio, SFAS 91 requires that the Bank defer loan origination fees and costs
and amortize such amounts as an adjustment of yield over the life of the loan by
use of the level yield method. ARM loans originated below the fully indexed
interest rate will have a substantial portion of the deferred amount recognized
as income in the initial adjustment period. Fees deferred under SFAS 91 are
recognized into income immediately upon prepayment or the sale of the related
loan. At December 31, 1997, the Bank had $314,000 of net deferred loan
origination fees. Loan origination fees vary with the volume and type of loans
and commitments made and purchased, principal repayments, and competitive
conditions in the mortgage markets, which in turn respond to the demand for and
availability of money.
In addition to loan origination fees, the Bank also receives other fees,
service charges, and other income that consist primarily of deposit transaction
account service charges, late charges and income from REO operations. The Bank
recognized fees and service charges of $1.0 million, $873,000, and $771,000, for
the fiscal years ended December 31, 1997, 1996, and 1995, respectively.
LOANS-TO-ONE BORROWER. With certain limited exceptions, a New York
chartered savings bank may not make unsecured loans or extend unsecured credit
for commercial, corporate or business purposes (including lease financing) to a
single borrower, which in the aggregate exceed 15% of the Bank's net worth. At
December 31, 1997, the Bank's largest lending relationship totaled $1.6 million
and consisted of loans secured by retail businesses and properties. The Bank's
second largest lending relationship totaled $1.5 million and consisted of loans
secured by commercial real estate and marketable securities. The Bank's third
largest lending relationship totaled $1.5 million and consisted of loans secured
by retail businesses and properties. The Bank's fourth largest lending
relationship totaled $1.4 million and was secured by a retail office plaza,
retail business property and residence. The Bank's fifth largest lending
relationship totaled $1.4 million and consisted of loans secured by multi-family
residential housing and residence. At December 31, 1997 all of the
aforementioned loans were performing in accordance with their terms.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENCIES. The Bank's collection procedures provide that when a loan
is 15 days past due, a computer-generated late notice is sent to the borrower
requesting payment. If the delinquency continues, at 30 days a delinquent
notice is sent and personal contact efforts are attempted, either in person or
by telephone, to strengthen the collection process and obtain reasons for the
delinquency. Also, plans to arrange a repayment plan are made. If a loan
becomes 60 days past due, and no progress has been made in resolving the
delinquency, the Bank will send a 10-day demand letter and personal contact is
attempted, and the loan becomes subject to possible legal action if suitable
arrangements to repay have not been made. When a loan continues in a delinquent
status for 90 days or more, and a repayment schedule has not been made or kept
by the borrower, generally a notice of intent to foreclose is sent to the
borrower for mortgage loans, and a final demand letter is presented to the
borrower of non-real estate loans, giving 30 days to repay all outstanding
interest and principal. If not cured, foreclosure proceedings or other
appropriate legal actions are initiated to minimize any potential loss.
NON-PERFORMING ASSETS. Loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Loans are placed on non-accrual
status when either principal or interest is 90 days or more past due or less
than 90 days, in the event the loan has been referred to the Bank's legal
counsel for foreclosure. Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income. At December
31, 1997, the Bank had non-performing assets of $2.3 million, and a ratio of
non-performing
10
<PAGE>
loans and real estate owned ("REO") of 1.2% total assets. Non-performing assets
decreased $393,000, or 14.6%, to $2.3 million in 1997 from $2.7 million in 1996.
Non-performing assets, however, have increased $800,000, or 53%, from $1.5
million in 1995. While the changes in non-performing assets tend to be cyclical,
the increase over this two-year period is primarily due to higher delinquent
payments on one- to four-family and multi-family residential loans and a
$231,000 increase in commercial business loan delinquencies. The average loan-
to-value collateral ratios of the mortgages is approximately 65%. Commercial
business loans with payments due over 90 days represent two loans, one of which
has a principal balance of $220,000. This loan is in foreclosure and is 75%
guaranteed by the Small Business Administration.
Real estate acquired by the Bank as a result of foreclosure or by the deed
in lieu of foreclosure is classified as REO until such time as it is sold. These
properties are carried at the lower of their recorded amount or estimated fair
value less estimated costs to sell the property. REO totaled $767,000.
$700,000,and $586,000 at December 31, 1997, 1996,and 1995, respectively.
The largest component of REO consists of a real estate development project
which had a net book value of $483,000 at December 31, 1997. The Bank originally
entered into a $570,000 commercial real estate loan in 1988 for the development
of 49 single family residences. This loan was made under the "leeway provision"
of the New York State Banking Law. Under this provision of the Banking Law the
lending relationship was originally structured so that the Bank held title to
the property securing the loan subject to the fulfillment of the borrower's
obligations under the loan. In 1990, the developer became insolvent, was unable
to satisfy the terms of the loan and the Bank assumed control of the project.
During 1997, the Bank invested an additional $276,000 to further the land for
development. The Bank has developed and sold 25 lots through December 31, 1997.
The proceeds from the sale of the lots are used to reduce the outstanding
balance of REO. The Bank believes it will fully recover its investment in this
property.
11
<PAGE>
DELINQUENT LOANS AND NON-PERFORMING ASSETS
The following table sets forth information regarding the Bank's loans
delinquent 90 days or more, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. When a loan is delinquent 90 days or more,
the Bank reverses all accrued interest thereon and ceases to accrue interest
thereafter. For all the dates indicated, the Bank did not have any material
restructured loans within the meaning of SFAS 15 and SFAS 114.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Real estate loans..................................... $ 1,255 $ 1,953 $ 849 $ 1,045 $ 745
Consumer loans........................................ 283 45 70 69 43
-------- -------- -------- -------- --------
Total delinquent loans............................... 1,538 1,998 919 1,114 788
Total REO............................................... 767 700 586 610 809
-------- -------- -------- -------- --------
Total nonperforming assets (1)..................... $ 2,305 $ 2,698 $ 1,505 $ 1,724 $ 1,597
======== -------- ======== ======== ========
Total loans delinquent 90 days or more
to total loans receivable (2).......................... 1.0% 1.8% 0.9% 1.2% 1.0%
Total loans delinquent 90 days or more to total assets.. 0.8% 1.1% 0.5% 0.7% 0.6%
Total nonperforming assets to total assets.............. 1.2% 1.4% 0.8% 1.0% 1.2%
Net loans receivable(3)................................. 121,585 108,742 100,149 89,668 78,813
-------- -------- -------- -------- --------
Total assets............................................ $196,770 $189,937 $180,952 $170,715 $129,270
======== ======== ======== ======== ========
</TABLE>
_______________
(1) Net of specific valuation allowances.
(2) Net of unearned discount, and the allowance for loan losses.
(3) Includes $1.5 million of mortgage loans held for sale at December 31, 1997.
During the year ended December 31, 1997, and year ended December 31, 1996,
respectively, additional gross interest income of $117,000 and $81,000 would
have been recorded on loans accounted for on a non-accrual basis if the loans
had been current throughout the period. No interest income on non-accrual loans
was included in income during the same periods.
The following table sets forth information with respect to loans past due
30-89 days in the Bank's portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans past due 30-89 days:
Real estate loans............ $2,232 $1,867 $2,465 $1,503 $1,537
Consumer and other loans..... 296 249 133 137 423
------ ------ ------ ------ ------
Total past due 30-89 days... $2,528 $2,116 $2,598 $1,640 $1,960
====== ====== ====== ====== ======
</TABLE>
12
<PAGE>
The following table sets forth information regarding the Bank's delinquent
loans 60 days and greater and REO at December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------
BALANCE NUMBER
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Residential real estate:
Loans 60 to 89 days delinquent.................................... $ 679 15
Loans more than 90 days delinquent................................ 1,255 30
Consumer and commercial business loans 60 days or more delinquent.. 404 31
Real estate owned.................................................. 767 7
------ --
Total........................................................... $3,105 83
====== ==
</TABLE>
CLASSIFICATION OF ASSETS. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered to be of lesser quality as "substandard," "doubtful," or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the savings institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by federal and state regulatory authorities, which can order
the establishment of additional general or specific loss allowances. The Bank
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
13
<PAGE>
The following table sets forth the aggregate amount of the Bank's
internally classified assets at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1997 1996 1995 1994
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Substandard assets (1)...... $1,719 $1,980 $1,163 $1,534
Doubtful assets............. 55 59 34 11
Loss assets................. 16 6 5 2
------ ------ ------ ------
Total classified assets.. $1,790 $2,045 $1,202 $1,547
====== ====== ====== ======
</TABLE>
___________
(1) Includes $483,000, $250,000, $292,000 and $421,000 for a real estate
development project classified as REO at December 31, 1997, 1996, 1995 and
1994, respectively.
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred. The Bank reviews on a quarterly basis the
loans in its portfolio which have demonstrated delinquencies, including problem
loans, to determine whether any loans require classification or the
establishment of appropriate reserves or allowances for losses. Such evaluation,
which includes a review of all loans of which full collectibility of interest
and principal may not be reasonably assured, considers, among other matters,
past loss experience, present economic conditions and other factors deemed
relevant by management. Management calculates the general allowance for loan
losses on past experience as well as current delinquencies and the composition
of the Bank's loan portfolio. While both general and specific loss allowances
are charged against earnings, general loan loss allowances are included, subject
to certain limitations, as capital in computing risk-based capital under federal
regulations.
In accordance with SFAS 114, a loan is considered impaired when each of the
following criteria are met: the loan is of a material size, the loan is
considered to be non-performing, and a loss is probable. The measurement of
impaired loans is generally based upon the present value of expected future cash
flows discounted at the historic effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loan loss provisions may be
deemed necessary. Management believes that the Bank's current allowance for loan
losses is adequate, however, there can be no assurance that the allowance for
loan losses will be adequate to cover losses that may in fact be realized in the
future or that additional provisions for loan losses will not be required.
14
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the analysis of the allowance for loan losses at or for the periods indicated.
<TABLE>
<CAPTION>
AT OR FOR THE PERIOD ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans receivable, net................................ $121,585 $108,742 $100,149 $89,668 $78,813
Average loans outstanding.................................. 113,651 104,354 95,979 84,596 78,355
Allowance balance (at beginning of period)................. 906 346 315 280 296
Provision for losses:
Real estate............................................... 121 90 53 30 10
Consumer and other loans.................................. 140 546 50 35 23
Charge-offs:
Real estate............................................... -- -- 17 14 --
Consumer and other loans.................................. 358 93 64 80 146
Recoveries:
Real estate............................................... -- -- -- 6 --
Consumer and other loans.................................. 18 17 9 58 97
-------- -------- -------- ------- -------
Allowance balance (at end of period)....................... $ 827 $ 906 $ 346 $ 315 $ 280
======== ======== ======== ======= =======
Allowance for loan losses as a percent of net loans
receivable at end of period............................... 0.7% 0.8% 0.3% 0.4% 0.4%
Loans charged off as a percent of average loans
outstanding............................................... 0.3% 0.1% 0.1% 0.1% 0.2%
Ratio of allowance for loan losses to total nonperforming
loans at end of period (1)................................ 53.8% 45.3% 37.6% 28.3% 35.5%
Ratio of allowance for loan losses to total nonperforming
assets at end of period (1)............................... 35.9% 33.6% 23.0% 18.3% 17.5%
</TABLE>
_____________
(1) Net of specific reserves.
15
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. The allocation of the allowance by category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------ --------------------
% OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
----------- ------------ ----------- ----------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
Real estate loans....................... $461 91.23% $340 90.66% $ 250 90.86%
Consumer and other loans................ 366 8.77 566 9.34 96 9.14
---- ------ ---- ------ ------ ------
Total allowance for loan losses (1).... $827 100.00% $906 100.00% $ 346 100.00%
==== ====== ==== ====== ====== ======
</TABLE>
_________________
(1) Percentages include unearned discount and origination fees.
16
<PAGE>
INVESTMENT ACTIVITIES
The investment policy of the Bank established by the Board of Directors
attempts to provide and maintain liquidity, maintain a high quality diversified
investment portfolio in order to obtain a favorable return on investment without
incurring undue interest rate and credit risk, provide collateral for pledging
requirements, and to complement the Bank's lending activities. At December 31,
1997, the Bank had investment securities with an aggregate amortized cost value
of $55.6 million and a market value of $56.8 million. At December 31, 1997, the
Bank's carrying value of investment securities consisted of $18.3 million of
corporate debt issues and $11.9 million of securities issued or guaranteed by
the United States Government or agencies thereof and state and municipal
obligations. The corporate debt issues primarily consist of financial
corporation debt and industrial debentures (the largest single issue was $1.0
million). These issues generally have maturities of between two and five years.
All corporate debt investments have been rated as investment grade by either
Moody's or Standard & Poor's. Typically, such investments yield 30-50 basis
points more than Treasury securities with comparable maturities. To a lesser
extent, the Bank also invests in mutual funds and equity securities. At December
31, 1997, the Bank held $1.1 in common stock and $1.8 million in an equity
mutual fund. At December 31, 1997, the Bank had invested $23.2 million in
mortgage-backed securities, net. Mortgage-backed securities, like mortgage
loans, amortize over the life of the security as the underlying mortgages are
paid down. The speed at which principal payments above normally scheduled
amortization occurs, is generally unpredictable. Historically, the securities
have paid down more rapidly in a falling interest rate environment, thereby
shortening the life of the security. Likewise, in a rising interest rate
environment, the life of the mortgage-backed security tends to extend. The
result is that, generally, the Bank will receive more investable funds in lower
interest rate environments and less investable funds during periods of higher
interest rates. The embedded option on the part of the underlying mortgagee to
prepay the loan, therefore, tends to impact the value of the security and can
adversely impact the Bank's net interest margin. The Bank's investments are,
generally, liquid, and therefore allow the Bank to respond more readily to
changing market conditions. The investment portfolio is accounted for in
accordance with FASB Statement 115. At December 31, 1997, the Bank's available-
for-sale and held-to-maturity portfolios had carrying values of $51.7 million
and $5.1 million, respectively.
The Bank generally has maintained a portfolio of liquid assets that exceeds
regulatory requirements. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of the yield that will be available in
the future, as well as management's projections as to the short term demand for
funds to be used in the Bank's loan origination and other activities. For
further information regarding the Bank's investments see Note 2 to the Notes to
Financial Statements.
17
<PAGE>
INVESTMENT PORTFOLIO. The following table sets forth the carrying value of
the Bank's investment portfolio at the dates indicated. At December 31, 1997,
the market value of the Bank's investments was approximately $56.8 million. The
market value of investments includes interest-earning deposits, and mortgage-
backed securities.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------
1997 1996 1995 1994
------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agency obligations................. $ 4,856 $ 5,879 $ 8,171 $ 6,070
State and municipal obligations........................ 6,636 6,172 5,297 3,072
Corporate debt issues.................................. 18,121 22,060 28,533 33,192
Equity securities...................................... 1,139 557 69 87
Mutual funds........................................... 1,785 1,178 1,865 5,872
------- ------- ------- -------
32,537 35,846 43,935 48,293
Unrealized gain (loss) on available for sale portfolio.. 1,126 827 996 (158)
------- ------- ------- -------
Total investment securities........................... 33,663 36,673 $44,931 $48,135
------- ------- ------- -------
Interest-earning deposits in other institutions......... -- -- -- 2,043
Federal funds sold...................................... -- 1,550 8,200 11,584
------- ------- ------- -------
Total investments.................................... $33,663 $38,223 $53,131 $61,762
======= ======= ======= =======
Mortgage-backed securities, net:
Adjustable rate........................................ 3,823 4,787 2,812 247
Fixed rate............................................. 19,200 18,179 5,100 769
------- ------- ------- -------
23,023 22,966 7,912 1,016
Unrealized gain (loss) on available for sale portfolio.. 135 (137) 41 (24)
------- ------- ------- -------
Total mortgage-backed securities, net................ $23,158 $22,829 $ 7,953 $ 992
======= ======= ======= =======
</TABLE>
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
carrying value, market value, average life in years, and annualized weighted
average yield of the Bank's investment portfolio at December 31, 1997.
<TABLE>
<CAPTION>
ANNUALIZED
AVERAGE WEIGHTED
CARRYING MARKET LIFE AVERAGE
VALUE VALUE YEARS YIELD
-------- ------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government treasury.............................. $ 220 $ 222 2.286 6.83%
U.S. Government agency................................ 4,636 4,662 6.480 6.97
State and municipal obligations....................... 6,636 7,060 7.433 5.73
Corporate debt issues................................. 18,121 18,345 2.791 7.07
Marketable equity securities.......................... 2,924 3,400 -- 6.85
------- ------- ----- -----
Total............................................. $32,537 $33,689 6.761
------- ======= =====
Unrealized gain on available for sale portfolio..... 1,126
-----
Carrying value of investment securities................. $33,663
=======
Investment securities held to maturity: (1)
Corporate debt obligations............................ $ 5,115 5,141 1.409 7.173
======= ======= ===== =====
</TABLE>
__________________
(1) The information is included above as a component of corporate debt issues.
18
<PAGE>
SECURITIES PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities at December 31, 1997. Yield is calculated on the
amortized cost to maturity.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
-------------------- -------------------- --------------------- --------------------
ANNUALIZED ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ---------- -------- ---------- -------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt investment securities:
U.S. Agency securities................... -- -- $1,084 7.010% $ 3,514 6.919% $ 38 9.429%
U.S. Government securities............... -- -- 201 6.420 -- -- 19 11.154
State and municipal obligations.......... 251 6.408 1,502 5.954 3,422 5.562 1,461 5.644
Corporate debt issues.................... 8,655 7.579 3,329 6.604 4,382 7.069 1,755 7.124
------- ----- ------ ----- ------- ----- ------- ------
Total.............................. $ 8,906 7.546 $6,116 6.510 $11,318 6.567 $ 3,273 6.514
======= ====== ======= =======
Equity and mortgage-backed securities:
Mutual funds............................. $ 1,785 0.700% $ -- --% $ -- --% $ -- --%
Mortgage-backed securities............... -- -- 1,249 6.789 4,236 7.048 17,538 6.957
Common stock............................. 1,139 6.153 -- -- -- -- -- --
------- ----- ------ ----- ------- ----- ------- ------
Total.............................. $ 2,924 2.824 $1,249 6.789 $ 4,236 7.048 $17,538 6.957
======= ====== ======= =======
Total investment securities........ $11,830 6.379 $7,365 6.558 $15,554 6.698 $20,811 6.887
======= ====== ======= =======
Unrealized gain on available for sale portfolio
Total carrying value.............
Investment securities held to maturity: (1)
Corporate debt obligations............... $ 4,271 7.328 -- -- $ 774 6.592 $ 70 4.131
------- ------ ------- -------
Total securities..................... $ 4,271 7.328 $ 0 0.000% $ 774 6.592 $ 70 4.131
======= ====== ======= =======
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------
TOTAL INVESTMENT SECURITIES
ANNUALIZED
WEIGHTED
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
-------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt investment securities:
U.S. Agency securities.............................. $ 4,636 $ 4,662 6.975%
U.S. Government securities.......................... 220 222 6.816
State and municipal obligations..................... 6,636 7,060 5.730
Corporate debt issues............................... 18,121 18,345 7.070
------- ------- -----
Total......................................... $29,613 $30,289 6.753
======= =======
Equity and mortgage-backed securities:
Mutual funds........................................ $ 1,785 $ 1,785 0.700%
Mortgage-backed securities.......................... 23,023 23,158 6.964
Preferred stock..................................... -- -- --
Common stock........................................ 1,139 1,615 6.153
------- ------- -----
Total......................................... $25,947 $26,558 6.497
======= =======
Total investment securities................... $55,560 $56,847 6.634
======= =======
Unrealized gain on available for sale portfolio....... 1,261
-------
Total carrying value.......................... $56,821
=======
Investment securities held to maturity: (1)
Corporate debt obligations.......................... $ 5,115 $ 5,141 7.173
------- -------
Total securities................................ $ 5,115 $ 5,141 7.173
======= =======
</TABLE>
____________________________________
(1) The information is included as a component of debt investment securities.
19
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from the amortization and prepayment of loans and mortgage-backed securities,
the maturity of investment securities and operations and from other borrowings.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including noninterest-bearing demand accounts, NOW accounts,
passbook and club accounts, money market deposit, term certificate accounts and
individual retirement accounts. While the Bank accepts deposits of $100,000 or
more, it generally does not currently offer premium rates for such deposits.
Deposit account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest rate,
among other factors. The Bank has a committee which meets weekly to evaluate the
Bank's internal cost of funds, surveys rates offered by competing institutions,
reviews the Bank's cash flow requirements for lending and liquidity and the
number of certificates of deposit maturing in the upcoming week. This committee
executes rate changes when deemed appropriate. The Bank does not obtain funds
through brokers, nor does it solicit funds outside its market area.
DEPOSIT PORTFOLIO. The following table sets forth information regarding
interest rates, terms, minimum amounts and balances of the Bank's savings and
other deposits as of December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED PERCENTAGE
AVERAGE MINIMUM OF TOTAL
INTEREST RATE MINIMUM TERM CHECKING AND SAVINGS DEPOSITS AMOUNT BALANCES DEPOSITS
- ------------- ------------ ----------------------------- ------ -------- --------
(IN THOUSANDS)
<C> <S> <C> <C> <C> <C>
0.000 None Non-interest demand account $ 50 $ 7,644 5.03%
2.560 None NOW accounts 500 13,306 8.75
3.010 None Passbook and club accounts 100 63,937 42.05
2.849 None Money market accounts 2,500 113 0.07
CERTIFICATES OF DEPOSIT
-----------------------
4.942 6 months Fixed term, fixed rate 2,500 5,247 3.45%
5.653 9 months Fixed term, fixed rate 1,000 100 0.07
5.608 12 months Fixed term, fixed rate 1,000 19,423 12.77
6.091 15 months Fixed term, fixed rate 1,000 10,025 6.59
4.969 18 months Fixed term, variable rate 1,000 1,856 1.22
5.557 18 months Fixed term, fixed rate 1,000 2,617 1.72
5.640 24 months Fixed term, fixed rate 1,000 3,445 2.27
5.820 30 months Fixed term, fixed rate 1,000 4,368 2.87
6.036 36 months Fixed term, fixed rate (1) 1,000 5,443 3.58
6.064 48 months Fixed term, fixed rate (1) 1,000 4,718 3.10
6.050 60 months Fixed term, fixed rate 1,000 1,627 1.07
6.779 84 months Fixed term, fixed rate 1,000 7,641 5.03
6.194 60 through 120 months Fixed term, fixed rate 1,000 549 0.36
-------- ------
TOTAL $152,059(2) 100.00
======== ======
</TABLE>
__________________
(1) This deposit product allows the depositor to elect to adjust the interest
rate paid once during the initial term of the deposit to the then prevailing
rate.
(2) Table excludes escrow accounts totalling $340,000 at December 31, 1997.
20
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
BALANCE PERCENT BALANCE PERCENT BALANCE PERCENT
AT OF INCR. AT OF INCR. AT OF INCR.
12/31/97 DEPOSITS (DECR) 12/31/96 DEPOSITS (DECR) 12/31/95 DEPOSITS (DECR)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Club accounts................... $ 792 0.52% $ 131 $ 661 0.42% $ 110 $ 551 0.3% $ (67)
Noninterest accounts............ 7,644 5.03 303 7,341 4.63 129 7,212 4.6 1,124
NOW accounts.................... 13,306 8.75 224 13,082 8.24 917 12,165 7.7 (912)
Passbooks....................... 63,145 41.53 (1,828) 64,973 40.94 (5,495) 70,468 44.6 (7,027)
Money market deposit accounts... 113 0.07 (61) 174 0.11 (78) 252 0.2 (532)
Time deposits which mature:
Within 12 months............... 38,860 25.56 (14,075) 52,935 33.36 15,011 37,924 24.0 10,762
Within 12-36 months............ 22,611 14.87 7,679 14,933 9.41 (5,968) 20,901 13.2 (1,977)
Beyond 36 months............... 5,588 3.67 990 4,598 2.90 (3,914) 8,512 5.4 850
-------- ------ -------- -------- ----- -------- -------- ----- --------
Total........................ $152,059 100.00% $ (6,637) $158,697 100.0% $ 712 $157,985 100.0% $ 2,221
======== ====== ======== ======== ===== ======== ======== ===== ========
<CAPTION>
BALANCE PERCENT BALANCE
AT OF INCR. AT
12/31/94 DEPOSITS (DECR) 12/31/93
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Club accounts................... $ 618 0.4% $ 304 $ 314
Noninterest accounts............ 6,088 3.9 1,056 5,032
NOW accounts.................... 13,077 8.4 6,208 6,869
Passbooks....................... 77,495 49.8 8,911 68,584
Money market deposit accounts... 784 0.5 546 238
Time deposits which mature:
Within 12 months............... 27,162 17.4 9,104 18,058
Within 12-36 months............ 22,878 14.7 15,718 7,160
Beyond 36 months............... 7,662 4.9 (1,427) 9,089
-------- ----- -------- --------
Total........................ $155,764(1) 100.0% $ 40,420 $115,344
======== ===== ======== ========
</TABLE>
- ------------------
(1) Table excludes escrow accounts totalling $340,000 at December 31, 1997.
21
<PAGE>
The following table sets forth the certificates of deposit in the Bank
classified by rates as of the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1997 1996 1995 1994
------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
RATE
- ----
3.00% or less.......................... $ 139 $ 180 $ 274 $ 136
3.01 - 4.99%........................... 7,253 10,665 3,601 24,210
5.00 - 6.99%........................... 55,228 57,128 58,313 28,010
7.00 - 8.99%........................... 4,552 4,667 5,347 5,009
9.00 - 10.99%.......................... -- -- 53 337
-------- -------- -------- --------
$ 67,172 $ 72,640 $ 67,588 $ 57,702
======== ======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1997.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
AMOUNT DUE
LESS THAN 1-2 2-3 3-4 4-5 AFTER 5
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
---------- --------- -------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
RATE
3.00% or less............................. $ 139 $ -- $ -- $ -- $ -- $ -- $ 139
3.01 - 3.99%.............................. 6 10 -- -- -- -- 16
4.00 - 4.99%.............................. 6,475 755 6 -- -- -- 7,237
5.00 - 5.99%.............................. 27,770 14,113 2,609 1,645 549 1,454 48,140
6.00 - 6.99%.............................. 1,927 1,412 2,498 289 732 230 7,088
7.00 - 7.99%.............................. -- 3,669 -- -- 764 4,433
8.00% and above........................... -- 119 -- -- -- -- 119
------- ------- ------ ------ ------ ------ -------
$36,317 $20,078 $5,113 $1,934 $1,281 $2,448 $67,172
======= ======= ====== ====== ====== ====== =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1997.
<TABLE>
<CAPTION>
CERTIFICATES
OF DEPOSIT
OF $100,000
REMAINING MATURITY OR MORE
------------------ ---------------
(IN THOUSANDS)
<S> <C>
Three months or less................................................ $ 1,768
Three through six months............................................ 1,535
Six through twelve months........................................... 2,010
Over twelve months.................................................. 3,142
--------
Total............................................................ $ 8,455
========
</TABLE>
The following table sets forth the net changes in the deposit activities of
the Bank for the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1997 1996 1995 1994
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period................................................ $158,697 $157,985 $155,764 $115,344
Net deposits (withdrawals).................................................... (12,920) (5,611) (4,034) 35,727
Interest credited............................................................. 6,283 6,323 6,255 4,693
-------- -------- -------- --------
Ending balance................................................................ 152,060 158,697 157,985 155,764
-------- -------- -------- --------
Net increase (decrease) in deposits........................................... $ (6,637) $ 712 $ 2,251 $ 40,420
======== ======== ======== ========
</TABLE>
22
<PAGE>
BORROWINGS
Savings deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes. At December 31,
1997, the Bank had $7.9 million in funds obtained from repurchase agreements
outstanding, $5.8 million in an overnight line of credit, and $4.5 million in
term advances. The Bank is a member of the Federal Home Loan Bank System.
The following table summarizes the outstanding balance of short-term
borrowing of the Bank for the years indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -----
(In thousands)
<S> <C> <C> <C>
Overnight Line of Credit $ 5,750 $ -- $ --
Term borrowings (original term)
90 days or less 7,942 7,610 --
1 year 3,550 -- --
2 year 1,000 -- --
------- ------ -----
Balance at end of period $18,242 $7,610 $ --
======= ====== =====
Daily average during the year 10,212 1,472 --
Maximum month-end balance 18,892 7,610 --
Weighted average rate during the year 5.92% 5.90% --
Year-end average rate 5.84% 5.47% --
</TABLE>
PERSONNEL
As of December 31, 1997, the Bank had 59 full-time and 18 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good.
REGULATION AND SUPERVISION
GENERAL
The Bank is a New York State chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the FDIC. The Bank is subject
to extensive regulation by the State of New York Banking Department (the
"Department") as its chartering agency, and by the FDIC, as the deposit insurer.
The Bank must file reports with the Department and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as establishing
branches and mergers with, or acquisitions of, other depository institutions.
There are periodic examinations by the Department and the FDIC to assess the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings bank may engage, and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.
23
<PAGE>
Any change in such regulation, whether by the Department, the FDIC or through
legislation, could have a material adverse impact on the Holding Company, the
Bank, and their operations and stockholders. The Company is also required to
file certain reports with, and otherwise comply with the rules and regulations
of, the FRB and the Department and the FDIC which administers the provisions of
the Securities Exchange Act of 1934. Certain of the regulatory requirements
applicable to the Bank and to the Company are referred to below or elsewhere
herein.
The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by FDIC
regulations and other federal law and regulations. In particular, the
applicable provisions of New York State Banking Law and regulations governing
the investment authority and activities of an FDIC insured state-chartered
savings bank have been substantially limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued
pursuant thereto.
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Banking Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in common stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending
powers are not subject to percentage of assets limitations, although there are
limits applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance
with and reliance upon the specific investment authority set forth in the New
York State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of debt and equity securities as
compared to the types of investments permissible under such specific investment
authority. However, in the event a savings bank elects to utilize the "prudent
person" standard, it will be unable to avail itself of the other provisions of
the New York State Banking Law and regulations which set forth specific
investment authority. The Bank has not elected to conduct its investment
activities under the "prudent person" standard. A savings bank may also
exercise trust powers upon approval of the Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Department. Investment by a savings bank in the
stock, capital notes and debentures of its service corporations is limited to 3%
of the bank's assets, and such investments, together with the bank's loans to
its service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of directors
and the interested party must abstain from
24
<PAGE>
participating directly or indirectly in the voting on such loan, (ii) the loan
must be on terms that are not more favorable than those offered to unaffiliated
third parties, and (iii) the loan must not involve more than a normal risk of
repayment or present other unfavorable features.
Under the New York State Banking Law, the Superintendent of Banks (the
"Superintendent") may issue an order to a New York State chartered banking
institution to appear and explain an apparent violation of law, to discontinue
unauthorized or unsafe practices and to keep prescribed books and accounts.
Upon a finding by the Department that any director, trustee or officer of any
banking organization has violated any law, or has continued unauthorized or
unsafe practices in conducting the business of the banking organization after
having been notified by the Superintendent to discontinue such practices, such
director, trustee or officer may be removed from office after notice and an
opportunity to be heard. The Bank does not know of any past or current
practice, condition or violation that might lead to any proceeding by the
Superintendent or the Department against the Bank or any of its directors or
officers.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that provide excessive compensation, fees or benefits or could lead
to material financial loss. In addition the federal banking regulatory agencies
are required to prescribe by regulation standards specifying: (i) maximum
classified assets to capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; and (iii) to the extent feasible, a minimum
ratio of market value to book value for publicly traded shares of depository
institutions and depository institution holding companies. In November 1993,
the federal banking agencies, including the FDIC, proposed regulations regarding
the implementation of these standards.
OTHER DEPOSIT INSURANCE REFORMS. FDICIA amended the FDI Act to prohibit
insured depository institutions that are not well-capitalized from accepting
brokered deposits unless a waiver has been obtained from the FDIC. Deposit
brokers are required to register with the FDIC.
CONSUMER PROTECTION PROVISIONS. FDICIA enacted consumer oriented
provisions including a requirement of notice to regulators and customers for any
proposed branch closing and provisions intended to encourage the offering of
"lifeline" banking accounts and lending in distressed communities. FDICIA also
requires depository institutions to make additional disclosures to depositors
with respect to the rate of interest and the terms of their deposit accounts.
UNIFORM LENDING STANDARD. Under FDICIA, the federal banking agencies are
required to adopt uniform regulations prescribing standards for extensions of
credit that are secured by liens on interests in real estate or made for the
purpose of financing the construction of a building or other improvements to
real estate. Insured depository institutions must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit that are secured by liens or interests in real estate or are made for the
purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of
the Interagency
25
<PAGE>
Guidelines for Real Estate Lending Policies (the "Interagency Guidelines") that
have been adopted by the federal banking regulators.
The Interagency Guidelines, among other things, require depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by undeveloped land, the supervisory loan-to-value limit is 65% of the
value of the collateral; (ii) for land development loans, the supervisory limit
is 75%; (iii) for loans for the construction of commercial, multi-family or
other nonresidential property, the supervisory limit is 80%; (iv) for loans for
the construction of one- to four- family properties, the supervisory limit is
85%; and (v) for loans secured by other improved property (e.g. farmland,
commercial property and other income-producing property including non-owner-
occupied, one- to four- family property) the supervisory limit is 85%.
The Interagency Guidelines indicate that on a case-by-case basis it may be
appropriate to originate or purchase loans with loan-to-value ratios in excess
of the supervisory loan-to-value limits, based on the support provided by other
credit factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multi-family and other
non-one- to four- family residential properties should not exceed 30% of total
capital.
The supervisory loan-to-value limits do not apply to certain categories of
loans including loans insured or guaranteed by the United States Government and
its agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of state governments, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured in
connection with a workout, loans to facilitate sales of real estate acquired by
the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.
INSURANCE OF DEPOSIT ACCOUNTS
The Bank is a member of the Bank Insurance Fund ("BIF"). The BIF has
achieved the required reserve ratio of 1.25% of insured reserve deposits. At
December 31, 1997 the Bank held $24.6 million in deposits which are insured by
the Savings Association Insurance Fund. The Bank paid $33,000 in federal
deposit insurance premiums for the fiscal year ended December 31, 1997, as
compared to $236,000 in 1996.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance. At December 31, 1997, the
Bank's capital exceeded the capital requirements imposed by the FDIC.
CAPITAL MAINTENANCE
The FDIC has issued regulations that require BIF-insured banks, such as the
Bank, to maintain minimum levels of capital. The regulations establish a
minimum leverage capital ratio requirement of not less than 3.0% for banks in
the strongest financial and managerial condition, with a CAMEL Rating of 1 (the
highest examination rating of the FDIC for banks). For all other banks, the
minimum leverage capital
26
<PAGE>
requirement is 3% plus additional capital of at least 100 to 200 basis points.
Core capital (also referred to as "Tier 1 capital") is comprised of the sum of
common stockholders' equity, non-cumulative perpetual preferred stock (including
any related surplus) and minority interests in consolidated subsidiaries, minus
all intangible assets (other than qualifying servicing rights).
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as core capital and supplementary capital) to risk-
weighted assets of at least 8% and core capital to risk-weighted assets of at
least 4%. In determining the amount of risk-weighted assets, all assets, plus
certain off-balance sheet items, are multiplied by a risk-weight of 0% to 100%,
based on the risks the FDIC believes are inherent in the type of asset or off-
balance sheet item. The components of core capital are equivalent to those
discussed above under the leverage capital ratio requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
perpetual preferred stock, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan and lease losses.
Allowance for possible loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount
of capital counted toward supplementary capital cannot exceed 100% of core
capital.
LOANS-TO-ONE-BORROWER LIMITATIONS
With certain limited exceptions, a New York State chartered savings bank
may not make unsecured loans or extend credit for commercial, corporate or
business purposes (including lease financing) to a single borrower, the
aggregate amount of which would be in excess of 15% of the bank's net worth. In
addition, the Bank may make secured loans or extensions of credit to a single
borrower which aggregate 25% of the Bank's net worth provided that the
underlying collateral is valued in an amount equal to at least 10% of the Bank's
net worth. The Bank currently complies with all applicable loans-to-one-
borrower limitations.
COMMUNITY REINVESTMENT ACT
Federal Regulation. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") amended the CRA to require, effective July 1,
1990, public disclosure of an institution's CRA rating and require the FDIC to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system which replaced the five-tiered numerical
rating system.
New York State Regulation. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA") which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Banking Department. The
NYCRA requires the Banking Department to make an annual written assessment of a
bank's compliance with the NYCRA, utilizing a four-tiered rating
27
<PAGE>
system, and make such assessment available to the public. The NYCRA also
requires the Superintendent to consider a bank's NYCRA rating when reviewing a
bank's application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application. At December 31, 1997, the Bank complied with its NYCRA
requirements.
The Bank's CRA rating as of its latest examination was satisfactory.
FEDERAL RESERVE SYSTEM
Under Federal Reserve Board regulations, the Bank is required to maintain
noninterest-earning reserves against its transaction accounts (primarily NOW and
regular checking accounts). At December 31, 1997, the Bank complied with these
requirements.
HOLDING COMPANY REGULATION
The Company is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended (the "BHCA"). The Company is subject to
examination, regulation and periodic reporting under the BHCA, as administered
by the FRB. The FRB has adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially similar to those of the FDIC
for the Bank. The Company's consolidated capital exceeds these requirements.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of any company engaged in, non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking are: (i) making or servicing loans; (ii) performing certain data
processing services: (iii) providing securities brokerage services; (iv) acting
as fiduciary, investment or financial advisor; (v) leasing personal or real
property; (vi) making investments in corporations or projects designed primarily
to promote community welfare; and (vii) acquiring a savings and loan
association.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the FRA on any extension of credit to the bank holding
company or its subsidiaries, and on the acceptance of stocks or securities of
such holding company or its subsidiaries as collateral, and on the acceptance of
such stocks or securities as collateral for loans. In addition, related
provisions of the FRA and FRB regulations limit the amount of, and establish
required procedures and credit standards with respect to, loans and other
extensions of credit to officers, directors and principal stockholders of the
Bank, the Company, any subsidiary of the Company and related interests of such
persons. Moreover, subsidiaries of bank holding companies are prohibited from
engaging in certain tie-in arrangements (with the Company or any of its
subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
The Company and the Bank will be affected by the monetary and fiscal
policies of various agencies of the United States Government, including the
Federal Reserve System. In view of changing conditions in the national economy
and in the money markets, it is impossible for management of the Company to
accurately predict future changes in monetary policy or the effect of such
changes on the business or financial condition of the Company.
28
<PAGE>
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal
bank holding company regulations, a bank holding company organized or doing
business in New York State also may be subject to regulation under the New York
State Banking Law. The term "bank holding company," for the purposes of the New
York State Banking Law, is defined generally to include any person, company or
trust that directly or indirectly either controls the election of a majority of
the directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the Company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions. In general, a bank holding company
controlling, directly or indirectly, only one banking institution will not be
deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the
Banking Department is required before: (1) any action is taken that causes any
company to become a bank holding company; (2) any action is taken that causes
any banking institution to become or be merged or consolidated with a subsidiary
of a bank holding company; (3) any bank holding company acquires direct or
indirect ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate with another
bank holding company. Additionally, certain restrictions apply to New York
State bank holding companies regarding the acquisition of banking institutions
which have been chartered five years or less and are located in smaller
communities. Officers, directors and employees of New York State bank holding
companies are subject to limitations regarding their affiliation with securities
underwriting or brokerage firms and other bank holding companies and limitations
regarding loans obtained from its subsidiaries. Although the Company will not
be a bank holding company for purposes of New York State law, any future
acquisition of ownership, control, or the power to vote 10% or more of the
voting stock of another bank or bank holding company would cause it to become
such.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Company or the
Bank.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use
the specific charge off method in computing its bad debt deduction beginning
with its 1996 Federal tax return. In addition, the federal legislation requires
the recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may
29
<PAGE>
be used as credits against regular tax liabilities in future years. The Bank
has not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At December 31, 1997, the Bank had
no net operating loss carryforwards for federal income tax purposes.
The Internal Revenue Service has examined the federal income tax return for
the fiscal year ended 1992; the fiscal year-end tax returns for 1991, 1993, 1994
and 1995 remain open. See Note 12 to the Financial Statements.
STATE TAXATION
NEW YORK TAXATION. The Bank is subject to the New York State Franchise Tax
on Banking Corporations in an annual amount equal to the greater of (i) 9% of
the Bank's "entire net income" allocable to New York State during the taxable
year, or (ii) the applicable alternative minimum tax. The alternative minimum
tax is generally the greater of (a) 0.01% of the value of the Bank's assets
allocable to New York State with certain modifications, (b) 3% of the Bank's
"alternative entire net income" allocable to New York State, or (c) $250.
Entire net income is similar to federal taxable income, subject to certain
modifications (including the fact that net operating losses cannot be carried
back or carried forward) and alternative entire net income is equal to entire
net income without certain modifications.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
ITEM 2. PROPERTIES
- --------------------
The Bank conducts its business through its main office located in Oswego,
New York, and four full service branch offices located in Oswego County. The
following table sets forth certain information concerning the main office and
each branch office of the Bank at December 31, 1997. The aggregate net book
value of the Bank's premises and equipment was $3.7 million at December 31,
1997. For additional information regarding the Bank's properties, see Note 5 to
Notes to Financial Statements.
<TABLE>
<CAPTION>
LOCATION OPENING DATE OWNED/LEASED ANNUAL RENT
- -------- ------------ ------------- -----------
<S> <C> <C> <C>
Main Office 1874 Owned --
- -----------
214 West First Street
Oswego, New York 13126
Plaza Branch 1989 Owned (1) --
- ------------
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch 1978 Owned --
- -------------
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch 1994 Owned --
- ------------------
34 East Bridge Street
Oswego, New York 13126
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C>
Fulton Branch 1994 Owned --
- -------------
114 Oneida Street
Fulton, New York 13068
</TABLE>
_____________________________
(1) The property is owned; the underlying land is leased.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
There are various claims and lawsuits to which the Company is periodically
involved incident to the Company's business. In the opinion of management, such
claims and lawsuits in the aggregate are immaterial to the Company's
consolidated financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
- -------------------------------------------------------------------------------
The "Market for Common Stock" section of the Company's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
The selected financial information for the year ended December 31, 1997 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The financial statements are contained in the Company's Annual Report to
Stockholders and are incorporated herein by reference.
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------------------------------
(a) Information concerning the directors of the Company is incorporated by
reference hereunder in the Company's Proxy Materials for the Annual Meeting of
Stockholders.
(b) Set forth below is information concerning the Principal Officers of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD WITH THE COMPANY
- --------------------- --- ----------------------------------------
<S> <C> <C>
Chris C. Gagas 67 Chairman of the Board, President and Chief
Executive Officer
Anita J. Austin 48 Internal Auditor
Melissa A. Dashnau 40 Vice President, Secretary
James A. Dowd, CPA 30 Controller
Edgar J. Manwaring 52 Vice President--Lending
Gregory L. Mills 37 Vice President, Director of Marketing, Branch
Administrator
W. David Schermerhorn 37 Executive Vice President-Lending
Thomas W. Schneider 37 Executive Vice President and Chief Financial
Officer
Barry S. Thompson 43 Senior Vice President, Compliance Officer and
Security Officer
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information with respect to management compensation and transactions
required under this item is incorporated by reference hereunder in the Company's
Proxy Materials for the Annual Meeting of Stockholders under the caption
"Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information contained under the sections captioned "Stock Ownership of
Management" is incorporated by reference to the Company's Proxy Materials for
its Annual Meeting of Stockholders.
32
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is set forth under the caption
"Certain Transactions" in the Definitive Proxy Materials for the Annual Meeting
of Stockholders and is incorporated herein by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The exhibits and financial statement schedules filed as a part of this Form 10-
K are as follows:
(A) Independent Auditors' Report;
(B) Consolidated Statements of Condition - December 31, 1997
and 1996.
(C) Consolidated Statements of Income - years ended December 31,
1997, 1996 and 1995;
(D) Consolidated Statements of Stockholders' Equity - years ended
December 31, 1997, 1996 and 1995
(F) Consolidated Statements of Cash Flows - years ended December
31, 1997, 1996 and 1995; and
(G) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) Reports on Form 8-K
-------------------
The Company has not filed a Current Report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1997.
(c) Exhibits
--------
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc.
Incorporated herein by reference to the Company's
registration statement on S-4, file no. 333-36051 (the "
S-4")
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein
by reference to the Company's S-4
33
<PAGE>
4 Form of Stock Certificate of Pathfinder Bancorp, Inc.
Incorporated by reference to the Company's S-4
10.1 Form of Oswego City Savings Bank 1997 Stock Option Plan
Incorporated by reference to the Company's S-4
10.2 Form of Oswego City Savings Bank 1997 Recognition and
Retention Plan Incorporated by reference to the Company's
S-4
10.3 Employment Agreement between the Bank and Chris C. Gagas,
President and Chief Executive Officer Incorporated by
reference to the Company's S-4
10.4 Employment Agreement between the Bank and Thomas W.
Schneider, Vice President and Chief Financial Officer
Incorporated by reference to the Company's S-4
10.5 Employment Agreement between the Bank and W. David
Schermerhorn, Vice President - Loan Administration
Incorporated by reference to the Company's S-4
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PATHFINDER BANCORP, INC.
Date: March 30, 1998 By: /s/ Chris C. Gagas
-------------------------------------
Chris C. Gagas
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By:/s/ Chris C. Gagas By:/s/ Thomas W.Schneider
-------------------------------- ------------------------------------
Chris C. Gagas, President, Thomas W. Schneider, Executive
Chief Executive Officer and Vice President and Chief
Chairman of the Board Financial Officer (Principal
(Principal Executive Officer) Financial Officer)
Date: March 30, 1998 Date: March 30, 1998
By:/s/ James A. Dowd By:/s/ Chris R. Burritt
-------------------------------- ---------------------------------
James A. Dowd, Controller Chris R. Burritt, Director
(Principal Accounting Officer)
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Bruce E. Manwaring By:/s/ Raymond W. Jung
-------------------------------- ---------------------------------
Bruce E. Manwaring., Director Raymond W. Jung, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ L. William Nelson, Jr. By:/s/Victor S. Oakes
-------------------------------- ---------------------------------
L. William Nelson, Jr., Director Victor S. Oakes, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Lawrence W. O'Brien By:/s/ Corte J. Spencer
-------------------------------- ---------------------------------
Lawrence W. O'Brien, Director Corte J. Spencer, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Janette Resnick
--------------------------------
Janette Resnick, Director
Date: March 30, 1998
35
<PAGE>
EXHIBIT INDEX
-------------
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc.
Incorporated herein by reference to the Company's
registration statement on S-4, file no. 333-36051 (the "S-
4")
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by
reference to the Company's S-4
4 Form of Stock Certificate of Pathfinder Bancorp, Inc.
10.1 Form of Oswego City Savings Bank 1997 Stock Option Plan
Incorporated by reference to the Company's S-4
10.2 Form of Oswego City Savings Bank 1997 Recognition and
Retention Plan Incorporated by reference to the Company's S-
4
10.3 Employment Agreement between the Bank and Chris C. Gagas,
President and Chief Executive Officer Incorporated by
reference to the Company's S-4
10.4 Employment Agreement between the Bank and Thomas W.
Schneider, Vice President and Chief Financial Officer
Incorporated by reference to the Company's S-4
10.5 Employment Agreement between the Bank and W. David
Schermerhorn, Vice President - Loan Administration
Incorporated by reference to the Company's S-4
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
36
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
Letter to Shareholders 1
Progressive, Supportive, Reliable
Financial Highlights 2
Management Discussion and Analysis 3
Independent Auditors' Report.
Financial Statements
Statements of Conditions 19
Statements of Income 20
Statements of Changes in Shareholders' Equity 21
Statements of Cash Flows 22
Notes to Financial Statements 23
Officers, Directors and Managers 35
Services and Shareholder Information 36
</TABLE>
<PAGE>
It is with great pleasure that we present the Annual Report of Pathfinder
Bancorp, Inc., the newly-formed Stock Holding Company for Oswego City Savings
Bank, to our Shareholders. As we mature as a publicly owned Company, we continue
our tradition of growth and success.
The most significant change for your Bank was Shareholder approval for the
reorganization of your Bank into PATHFINDER BANCORP, INC., a Mid-Tier Holding
Company. This new form of organization will afford your Bank the expanded
ability to conduct broader activities. As a result of this advancement, our
stock is now registered as PATHFINDER BANCORP, INC. and can be found on the
NASDAQ SmallCap stock market listing as PathBcp s.
One of the many measures for the success of any investment is Total Return - or
the return to the investor, including stock price appreciation and dividends. In
recognition of the price appreciation and the desire to make more shares
available to the public, your Board of Directors on January 25, 1998 declared a
3 for 2 stock split payable February 5, 1998. The Bank not only placed in the
top 25 in the nation among Thrift Stocks for Total Return of 225% but, in fact,
we were number 3. In June 1997, the Bank increased the dividend to stockholders
by 40%.
Recognition of the efforts and the impact of individuals on our overall
performance was manifested in the promotion of Thomas Schneider and David
Schermerhorn as Executive Vice Presidents of your Bank. Tom continues as Chief
Financial Officer and David as the head of the Loan Department.
In September 1997, a Definitive Agreement was signed with Oswego County Savings
Bank whereby Oswego County Savings Bank will be merged into your Bank. We are in
the process of filing the necessary applications with the regulatory agencies
and anticipate the successful completion by early Fall 1998. This is a very
forward move and most appropriate for the Banks and the community. Your Bank
will grow in size to over $300 million in assets and eight offices as a result.
The benefits realized should manifest many times over in the future.
In our 139th year, we continue to offer the latest in financial services in an
efficient and customer-friendly manner. Again this year, we increased our
electronic banking facilities with the addition of an ATM at the newly-opened
Dunkin Donuts in Pulaski, N.Y. Our Loan Department has increased the scope and
size of its portfolio in every category including the origination of mortgages
with the intent to sell into the secondary market. Some of the new products
developed include an E-Z open CD which is our way of offering the benefits of
higher interest rates to people desirous of participating but not having the
necessary amount of money to begin. With as little as $25/month, an E-Z open CD
grows and the interest rate increases from the Regular Passbook rate plus 1% as
succeeding levels of deposit are attained.
Continuing our commitment to the economic well being of our community, your Bank
was recognized twice in 1997 - once by the Greater Oswego Chamber of Commerce
for our commitment to economic development and, again, as "The People's Choice"
as the best all around Bank by popular vote of the people conducted by The
Palladium-Times, our daily newspaper.
1998 represents our 150th year as a City (sesquicentennial) and our 139th year
as a State Chartered financial institution. We are proud to present the
financial details in this Annual Report which reflect our operating results and
our financial condition for the fiscal year ended December 3l, 1997. Total
assets increased $6.8 million to $196.8 million, while Shareholder's equity grew
to $23.6 million. Net income for the year was $1.9 million, an increase of
$583,000 or 45.8%.
While 1997 was a very successful year by all measures, we look forward to
continuing our long record of achievement in 1998. We reaffirm our commitment to
creating enhanced value for our Shareholders, employees, customers, and the
communities we serve. Our goals in 1998 include continued growth in assets,
expansion of products and services, increased employee and customer pride, and
maximum return for our Shareholders. We are confident of our success in the next
year.
Sincerely,
Chris C. Gagas
Chairman, President & CEO
1
<PAGE>
On January 14, 1997, the Board of Directors adopted an Agreement and Plan of
Reorganization to reorganize the Oswego City Savings Bank ("City Savings") and
its existing mutual holding company into a two-tier mutual holding company
structure (the "Reorganization") with the establishment of a Delaware chartered
corporation as the stock holding company parent of the Bank. Upon completion of
the Reorganization, Pathfinder Bancorp, MHC, City Savings' existing mutual
holding company, will own a majority of the common stock of the new stock
holding company (Pathfinder Bancorp,Inc., which will own 100% of the common
stock of Oswego City Savings Bank). On December 30, 1997, the Reorganization
was implemented pursuant to the Agreement and Plan of Reorganization approved by
the City Savings' stockholders and regulatory authorities. Pursuant to the
Reorganization, each share of City Savings' common stock held by existing
stockholders of City Savings was exchanged for a share of common stock of
Pathfinder Bancorp, Inc.. The Reorganization of City Savings was structured as
a tax-free reorganization and accounted for in a manner similar to a pooling of
interests.
As of December 31, 1997, the company's total assets and shareholders' equity
were $196.8 million and $23.6 million, respectively.
Pathfinder Bancorp, Inc.'s common stock currently trades on the NASDAQ SmallCap
Stock Market under the symbol "PBHC".
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR (In Thousands)
Interest Income $ 14,168 $ 13,213 $ 12,205 $ 10,443 $ 9,858
Interest Expense 6,892 6,414 6,259 4,697 4,062
Net Interest Income 7,276 6,799 5,946 5,746 5,796
Net Income 1,854 1,272 990 1,146 1,802
PER COMMON SHARE (b)
Net Income:
Basic and diluted 0.66 0.68 0.10 NA NA
Book Value 8.40 7.22 7.00 NA NA
Cash dividends declared 0.26 0.20 0.00 NA NA
Stock Price:
IOP --- --- 5.00
High 20.00 7.083 7.167 NA NA
Low 6.250 5.333 5.583 NA NA
Close 20.00 6.250 7.00 NA NA
YEAR END (In Thousands)
Total assets $196,770 $189,937 $180,752 $170,715 $129,270
Interest-earning deposits at
other financial institutions -- 1,550 8,200 13,627 7,962
Investment securities 33,663 36,673 44,932 48,135 33,776
Mortgage-backed securities 23,158 22,829 7,953 992 1,408
Loans Receivable, net:
Real estate 109,543 99,047 91,023 83,563 74,150
Consumer and other 10,495 9,695 9,126 6,105 4,663
Total loans receivable, net 120,038 108,742 100,149 89,668 78,813
Intangible assets 3,605 3,921 4,236 4,552 --
Deposits 152,399 158,998 158,324 155,764 115,344
Borrowed funds 18,242 7,610 -- -- --
Notes Payable ESOP 430 486 425 -- --
Equity 23,583 21,390 20,751 13,990 12,953
SELECTED PERFORMANCE RATIOS
Return on average assets 0.97% 0.69% 0.56% 0.74% 1.40%
Return on average equity 8.35 6.09 6.31 8.20 14.99
Return on tangible equity 9.28 7.28 5.99 12.14 13.91
Dividend payout ratio 26.19 29.37 -- N/A N/A
Average equity to average assets 11.59 11.32 8.74 9.00 9.33
Equity to total assets 11.98 11.26 11.47 8.19 10.02
Net interest rate spread 3.98 3.88 3.72 4.01 4.68
Non interest expense to total assets 2.94 2.82 2.94 2.83 2.72
Nonperforming loans to
net loans receivable 1.28 2.05 0.92 1.24 1.00
Nonperforming assets to
total assets 1.17 1.54 0.83 1.01 1.24
Allowance for loan losses
to net loans receivable 0.69 0.83 0.35 0.35 0.36
Number of full service offices 5 5 5 5 3
</TABLE>
(a) Earnings per share for 1995 are based on the period from November 15, 1995
to December 31, 1995.
(b) Per Common Share data has been retroactively restated to reflect the three
for two stock split paid on February 6, 1988 to Shareholders of record on
January 26, 1988.
2
<PAGE>
GENERAL
Throughout the Management's Discussion and Analysis the term, "the Bank", refers
to the consolidated entity of Pathfinder Bancorp, Inc. and Oswego City Savings
Bank. At December 31, 1997, Pathfinder Bancorp, Inc.'s only business was the
100% ownership of Oswego City Savings Bank.
When used in this Annual Report the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expression are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Bank's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Bank's market areas and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Bank wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. The Bank wishes to advise readers that the factors listed above could
affect the Bank's financial performance and could cause the Bank's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The Bank does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
The Bank's net income is primarily dependent on its net interest income, which
is the difference between interest income earned on its investments in mortgage
loans, investment securities and other loans, and its cost of funds consisting
of interest paid on deposits and other borrowings. The Bank's net income also is
affected by its provision for loan losses, as well as by the amount of non
interest income, including income from fees and service charges, net gains and
losses on sales of securities, and non interest expense such as employee
compensation and benefits, deposit insurance premiums, occupancy and equipment
costs, data processing costs and income taxes. Earnings of the Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Bank. In
particular, the general level of market rates tends to be highly cyclical.
On January 14, 1997, the Board of Directors adopted an Agreement and Plan of
Reorganization to reorganize the Oswego City Savings Bank ("City Savings") and
its existing mutual holding company into a two-tier mutual holding company
structure (the "Reorganization") with the establishment of a Delaware chartered
corporation as the stock holding company parent of the Bank. Upon completion of
the Reorganization, Pathfinder Bancorp, MHC, City Savings' existing mutual
holding company, will own a majority of the common stock of the new stock
holding company (Pathfinder Bancorp,Inc., which will own 100% of the common
stock of Oswego City Savings Bank). On December 30, 1997, the Reorganization was
implemented pursuant to the Agreement and Plan of Reorganization approved by the
City Savings' stockholders and regulatory authorities. Pursuant to the
Reorganization, each share of City Savings' common stock held by existing
stockholders of City Savings was exchanged for a share of common stock of
Pathfinder Bancorp, Inc.. The Reorganization of City Savings was structured as a
tax-free reorganization and accounted for in a manner similar to a pooling of
interests.
On September 5, 1997, the Board of Directors of the Bank, in conjunction with
the Board of Trustees of Oswego County Savings Bank, a New York State chartered
mutual savings bank headquartered in Oswego, New York, announced the adoption of
a definitive merger agreement under which the banks will be combined. The
proposed transaction is subject to regulatory approval, as well as approval of
the shareholders of Pathfinder Bancorp, Inc.. The merger is expected to be
completed prior to the end of 1998. As of December 31, 1997, Oswego County
Savings Bank had total assets of approximately $112.1 million, deposits of $97.9
million and net worth of $11.2 million.
On January 13, 1998, the Board of Directors of Pathfinder Bancorp, Inc. declared
a three for two stock split in the form of a dividend on the holdings company's
outstanding common stock. The stock split was paid on February
3
<PAGE>
5, 1998 to shareholders of record as of January 26, 1998. The stock split has
been applied retroactively to all per share data reported in the financial
statements presented in this report.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Bank's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Left unresolved, the year 2000 issue
could result in a system failure or miscalculations causing disruptions of
operations including, but not limited to, a temporary inability to process
transactions, calculate interest, or engage in similar normal business
activities. In early 1997, the Bank formed a Year 2000 committee to address the
issues surrounding the problem. The committee has adopted a policy statement and
plan of action to identify, correct, test, and implement solutions to ensure
that the Bank's systems are ready to process in the year 2000 and beyond. The
policy statement comprises three phases: the assessment phase, the renovation
phase, and the validation phase. During 1997, the Bank completed its assessment
phase and has identified its computer and electronic software systems that will
require modification or replacement. The committee has determined that the
required changes are minimal, and that such changes will resolve the Bank's Year
2000 computer systems issues. Testing and implementation of solutions will
continue through 1998 with a goal to be fully tested by December 31, 1998. The
Bank will utilize both internal and external resources to program, replace, and
test the software for Year 2000 modifications. The Bank is also communicating
with its third party data processing vendors, as well as its significant
suppliers and commercial customers, to determine the Bank's exposure should any
of these parties fail to resolve their own significant Year 2000 issues. During
1998, the committee will evaluate the risk from these third parties and
establish action plans to reduce or eliminate the risk. In some cases, the Bank
will rely on third party information which may be inaccurate and unverifiable.
Should third party entities, including Federal and State governments and
agencies fail to resolve their own Year 2000 issues, an adverse effect on the
Bank could result. The costs of the remedial actions and the date on which the
Bank plans to complete the Year 2000 modifications, are based on management's
best estimates and assumptions including the continued availability of third
party services, their modification plans, and other factors. To date, the cost
of the project has been minimal, and the Bank expects the total cost of
completing the project to have no material affect on the Bank's results of
operations and financial condition.
On March 29, 1996, Bennett Funding Group, Inc., headquartered in Syracuse, NY
filed for Chapter 11 bankruptcy protection from its creditors. At March 29,
1996, Oswego City Savings Bank had credit extended on lease financing
investments through Bennett Funding Group, Inc. and its affiliates of
approximately $1.1 million, in the aggregate. In the third quarter of 1996, the
Bank established a specific reserve for loan losses of $420,000 to cover
potential losses associated with the Bennett lease investments. During 1996 and
1997 the Bank received payments totaling $470,000 and $356,000, respectively.
These payments reduced the Bank's outstanding balance in related lease
receivables to $319,000. This amount was charged off, in September 1997, against
the previously established reserve of $420,000. Any future receipts of
settlement funds, which are not expected to be significant, will be treated as
loan loss allowance recoveries.
BUSINESS STRATEGY
The Bank's business strategy is to operate as a well-capitalized, profitable and
independent community-oriented savings bank dedicated to providing quality
customer service. Generally, the Bank has sought to implement this strategy by
emphasizing retail deposits as its primary source of funds and maintaining a
substantial part of its assets in locally-originated residential first mortgage
loans and in investment securities. Specifically, the Bank's business strategy
incorporates the following elements: (i) operating as a community-oriented
financial institution, maintaining a strong customer base; (ii) maintaining
capital in excess of regulatory requirements; (iii) emphasizing investment in
one-to-four family residential mortgage loans, and investment securities; and
(iv) maintaining a strong retail deposit base.
Highlights of the Bank's business strategy are as follows:
COMMUNITY-ORIENTED INSTITUTION. The Bank is committed to meeting the financial
needs of its customers in Oswego County, New York, the county in which it
operates. The Bank believes it is large enough to provide a full range of
personal and business financial services, and yet is small enough to be able to
provide such services on a personalized and efficient basis. Management believes
that the Bank can be more effective in servicing its
4
<PAGE>
customers than many of its non-locally headquartered competitors because of the
Bank's ability to quickly and effectively provide senior management responses to
customer needs and inquiries. The Bank's ability to provide these services is
enhanced by the stability of the Bank's senior management, which has an average
tenure with the Bank of over 15 years.
Management believes that the following actions over the past four years have
helped to enhance and preserve its' presence as a community bank: the 1994
acquisition of two branches of the former Columbia Federal Savings located in
the cities of Oswego and Fulton (the "Acquisition"); the expansion of the Bank's
small business lending services, the introduction of an investment services
unit, the public offering and subsequent reorganization into the two-tier
holding company structure to further enhance growth and independence, and the
signing of a definitive merger agreement with Oswego County Savings Bank.
CAPITAL AND ASSET GROWTH. The Bank's net worth has increased from $13.0 million
at December 31, 1993 to $23.6 million at December 31, 1997. The Bank's ratio of
shareholders' equity to total assets was 12.0% at December 31, 1997. Total
assets have increased by $67.5 million, or 52.2%, since December 31, 1993. The
Bank's capital exceeds all regulatory capital requirements (see footnote # 13 of
the consolidated financial statements for Pathfinder Bancorp, Inc.).
EMPHASIS ON RESIDENTIAL MORTGAGE LENDING AND INVESTMENT SECURITIES. Since its
inception, the Bank has emphasized residential real estate financing and
anticipates a continued commitment to financing the purchase or improvement of
residential real estate in its market area. Historically, the Bank has not been
an active purchaser of loans or loan participations. To supplement local
mortgage loan originations, the Bank invests in investment securities consisting
primarily of investment grade corporate debt instruments, securities issued by
the United States Government, state and municipal obligations, mutual funds,
equity securities, and mortgage-backed securities. By investing in these types
of assets, the bank reduces the credit risk of its asset base but must accept
lower yields than would typically be available on commercial real estate loans
and multi-family real estate loans.
At December 31, 1997, 91.2% of the Bank's total loan portfolio consisted of
loans secured by real estate. In addition, at December 31, 1997, 28.9% of the
Bank's total assets consisted of investment securities. Generally, the yield on
mortgage loans originated by the Bank is greater than that of investment
securities and mortgage-backed securities purchased by the Bank.
STRONG RETAIL DEPOSIT BASE. The Bank has a relatively strong retail base drawn
from the five full-service offices in its market area. At December 31, 1997,
55.8% of the Bank's deposit base of $152.4 million consisted of core deposits,
which included non-interest-bearing demand accounts, NOW accounts, passbook and
club savings accounts and money market deposit accounts. In connection with the
Acquisition, in 1994 the Bank assumed $42.3 million of deposit liabilities of
which $24.5 million consisted of non-interest bearing checking, interest bearing
checking and savings deposit accounts, and $17.8 million consisted of
certificates of deposit. Core deposits are considered to be a more stable and
lower cost source of funds than certificates of deposit or outside borrowings.
The Bank will continue to emphasize retail deposits by maintaining its network
of full service offices, and providing depositors with a full range of accounts.
ASSET AND LIABILITY MANAGEMENT-INTEREST SENSITIVITY ANALYSIS
The extent to which such assets and liabilities are "interest rate sensitive"
can be measured by an institution'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 that amount of interest-
bearing liabilities maturing or repricing within that time period. 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. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to positively affect net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to positively affect
net interest income while a positive gap would tend to adversely affect net
interest income.
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The Bank does not maintain in its portfolio fixed interest rate loans with terms
exceeding 20 years. In addition, ARM loans are originated with terms that
provide that the interest rate on such loans cannot adjust below the initial
rate. Generally, the Bank tends to fund longer term loans and mortgage-backed
securities with shorter term time deposits, repurchase agreements, and advances.
The impact of this asset/liability mix creates an inherent risk to earnings in a
rising interest rate environment. In a rising interest rate environment, the
Bank's cost of shorter term deposits may rise faster than its earnings on longer
term loans and investments. Additionally, the prepayment of principal on real
estate loans and mortgage-backed securities tends to decrease as rates rise,
providing less available funds to invest in the higher rate environment.
Conversely, as interest rates decrease the prepayment of principal on real-
estate loans and mortgage-backed securities tends to increase, causing the Bank
to invest funds in a lower rate environment. The potential impact on earnings
from this mismatch, is mitigated to a large extent by the size and stability of
the Bank's savings accounts. Savings accounts have traditionally provided a
source of relatively low cost funding that have demonstrated historically a low
sensitivity to interest rate changes. The Bank generally matches a percentage of
these, which are deemed core, against longer term loans and investments. In
addition, the Bank has sought to extend the terms of its time deposits. In this
regard, the Bank has on occasion offered certificates of deposits with three and
four year terms which allow depositors to make a one-time election, at any time
during the term of the certificate of deposit, to adjust the rate of the
certificate of deposit to the then prevailing rate for a certificate of deposit
with the same term. The Bank has further sought to reduce the term of a portion
of its rate sensitive assets by originating one year ARM loans, five year/one
year ARM loans (mortgage loans which are fixed rate for the first five years and
adjustable annually thereafter), and by maintaining a relatively short term
investment securities (original maturities of three to five years) portfolio
with staggered maturities. The Bank manages its interest rate sensitivity by
monitoring (through simulation and net present value techniques) the impact on
it's GAP position, net interest income, and the market value of portfolio equity
to changes in interest rates on its current and forecast mix of assets and
liabilities. The Bank has an Asset-Liability Management Committee which is
responsible for reviewing the Bank's assets and liability policies, setting
prices and terms on rate-sensitive products, and monitoring and measuring the
impact of interest rate changes on the Bank's earnings. The Committee meets
monthly on a formal basis and reports to the Board of Directors on interest rate
risks and trends, as well as liquidity and capital ratios and requirements. The
Bank does not have a targeted gap range, rather the Board of Directors has set
parameters of percentage change by which net interest margin and the market
value of portfolio equity are affected by changing interest rates. The Board and
management deem these measures to be a more significant and realistic means of
measuring interest rate risk. The results of these techniques are outlined below
the GAP table.
At December 31, 1997, the total interest bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $13.8 million, representing a cumulative one-
year gap ratio of a negative 7.04%.
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
expected to reprice or mature based upon certain assumptions in each of the
future time periods shown. The Bank has assumed that its passbook savings, NOW,
and money market accounts which totalled $85.0 million at December 31, 1997 are
withdrawn at the annual percentage rates set forth below. These withdrawal rates
are based upon historical industry experience. Management believes that these
assumptions approximate actual experience and considers them appropriate and
reasonable.
<TABLE>
<CAPTION>
Amounts Maturing or Repricing
Within 3 to 12 1 to 3 3 to 5 5 to 10 More than
3 Months Months Years Years Years 10 Years Total
- ------------------------------------------------------------------------------------------------------------------------------
( Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Residential one-to-four family:
Market index ARM's $19,360 $ 18,131 $ 6,555 $ 3,801 $ 579 -- $ 48,426
Fixed rate 370 1,855 8,787 7,531 10,533 5,159 34,235
Commercial and multi-family:
ARM's 3,003 4,419 4,199 536 -- -- 12,157
Fixed 105 512 2,321 1,902 2,259 486 7,585
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity fixed rate loans 101 325 1,040 1,360 2,517 5,343
Home equity line of credit 4,219 -- -- -- -- -- 4,219
Consumer loans 347 1,229 2,271 428 16 -- 4,291
Commercial business loans 396 888 3,512 1,676 -- 2,888 6,472
Mortgage-backed securities (1) 2,931 4,659 3,076 4,112 5,357 2,888 23,023
Investment securities (1) 5,532 8,104 4,589 2,990 9,429 1,893 32,537
Interest earning deposits at other
financial institutions -- -- -- -- -- -- --
Total interest-earning assets $36,364 $ 40,122 $ 36,350 $ 24,336 $30,690 $10,426 $178,288
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook accounts $ 4,587 $ 14.629 $ 19,166 $ 25,555 -- -- $ 63,937
NOW accounts 2,536 6,586 4,524 -- -- -- 13,646
Money market accounts 113 -- -- -- -- -- 113
Certificate accounts 16,947 27,691 19,168 3,253 -- -- 67,059
Repurchase agreements 13,692 3,550 1,000 -- -- -- 18,242
Total interest-bearing liabilities $37,875 $ 52,456 $ 43,858 $ 28,808 $ 0 $ 0 $162,997
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets less interest-
bearing liabilities ("interest rate
sensitivity gap") (1,511) (12,334) (7,508) (4,472) 30,690 10,426
Cumulative excess (deficiency) of
interest-sensitive assets over
interest-sensitive liabilities (1,511) (13,845) (21,353) (25,825) 4,865 15,291
Interest sensitivity gap
to total assets -.77% -6.27% -3.82% -2.27% 15.60% 5.30%
Cumulative interest sensitivity gap
to total assets -.77% -7.04% -10.85% -13.12% 2.47% 7.77%
Ratio of interest-earning assets to
interest-bearing liabilities 96.01% 76.49% 82.88% 84.48% -- --
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 96.01% 84.67% 84.09% 84.16% 102.98% 109.38%
</TABLE>
(1) Mortgage backed and Investment Securities are presented at amortized cost.
- --------------------------------------------------------------------------------
NOW, passbook and money market accounts will decay at the following rates:
<TABLE>
<CAPTION>
Over 1 Over 3
1 Year through through Over
Or Less 3 Years 5 Years 5 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Now accounts..................... 66% 34% --- ---
Passbook, club account........... 30% 30% 40% ---
Money market deposit accounts.... 100% --- --- ---
</TABLE>
The above assumptions are annual percentage rates based on remaining balances
and should not be regarded as indicative of the actual withdrawals that may be
experienced by the Bank. Moreover, certain shortcomings are inherent in the
analysis presented by the foregoing table. For example, interest rates on
certain types of liabilities may fluctuate in advance of or lag behind changes
in market interest rates. Moreover, in the event of a change in interest rates,
withdrawal levels would likely deviate significantly from those assumed in
calculating the table.
CHANGES IN NET INTEREST INCOME AND NET PORTFOLIO VALUE. The following table
measures the Bank's interest rate risk exposure in terms of the percentage
change in its net interest income and net portfolio value as a result of
hypothetical changes in 100 basis point increments in market interest rates. Net
portfolio value (also referred to as market value of portfolio equity) represent
the fair value of net assets ( determined as the market value of assets minus
the market value of liabilities). The table quantifies the changes in net
interest income and net portfolio value to parallel shifts in the yield curve.
The column "Net Interest Income Percent Change" measures the change to the next
twelve month's projected net interest income, due to parallel shifts in the
yield curve. The column "Net Portfolio Value Percent Change" measures changes in
the current net mark-to-market value of
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<PAGE>
assets and liabilities due to parallel shifts in the yield curve. The base case
assumes December 31, 1997 interest rates. The Bank uses these percentage changes
as a means to measure interest rate risk exposure and quantifies those changes
against guidelines set by the Board of Directors as part of the Bank's Interest
Rate Risk policy. The bank's current interest rate risk exposure is within those
guidelines set forth.
<TABLE>
<CAPTION>
CHANGE IN INTEREST RATES
INCREASE(DECREASE)
BASIS POINTS NET INTEREST INCOME NET PORTFOLIO VALUE
(Rate Shock) PERCENTAGE CHANGE PERCENTAGE CHANGE
-------------- ------------------- -------------------
<S> <C> <C>
300 -13.47% -28.60%
200 -8.58 -19.27
100 -4.07 -9.45
Base Case - -
(100) 3.37 6.87
(200) 6.80 13.11
(300) 10.31 20.32
</TABLE>
CHANGES IN FINANCIAL CONDITION
COMPARISON AT DECEMBER 31, 1997 AND DECEMBER 31, 1996.
Total assets increased $6.8 million, or 3.6%, to $196.8 million at December 31,
1997 from $189.9 million at December 31, 1996. The increase in assets is
primarily the result of increases in the balance of net loans receivable to
$120.0 million from $108.7 million, an increase of $11.3 million, or 10.4%. This
increases was primarily attributable to the continued deployment of maturing
short term investments and excess liquidity to fund the demand for the Bank's
loan products, principally one to four family mortgage loans and commercial real
estate loans. Additionally, the Bank began originating mortgage loans
underwritten to conform to the standards of the Federal National Mortgage
Association ("FNMA") for the purpose of securitizing and selling such loans into
the secondary market. These originations consist of 15 year and 30 year fixed
rate mortgages. The purpose of undertaking this strategy is to further penetrate
the mortgage market in the Bank's market area and expand mortgage underwriting
into new geographic regions without incurring the credit risk of holding such
loans in the Banks portfolio. The Bank intends to service these mortgages and
will recognize fee income from the amortization of mortgage servicing rights. At
December 31, 1997, the Bank's mortgage loans-held for sale was $1.5 million.
Increases also occurred in the following areas: mortgage-backed securities
increased $329,000, premises and equipment increased $336,000, other real estate
owned increased $67,000, and other assets increased $626,000. These increases
were partially offset by decreases in cash and due from banks and interest-
earning deposits at other financial institutions of $4.0 million to $4.3 million
from $8.3 million, investment securities of $2.9 million to $33.7 million from
$36.5 million, and intangible assets of $316,000 to $3.6 million from 3.9
million.
Non-performing loans (defined as loans past due 90 days or more) decreased
$460,000, or 23.0%, to $1.5 million at December 31, 1997, from $2.0 million at
the end of the prior year. The non-performing loans to total loans ratio at
December 31, 1997 was 1.3% compared to 1.8% at December 31, 1996. The Bank's
allowance for loan losses to total loans and non-performing loans was .67% and
53.8%, respectively, at December 31, 1997.
Total liabilities increased $4.6 million, or 2.8%, to $173.2 million from $168.5
million. The increase was primarily attributable to a $10.6 million increase in
borrowed funds to $18.2 million at December 31, 1997, from $7.6 million at
December 31, 1996. The increase in borrowing was partially offset by a decrease
in deposits of $6.6 million, or 4.2%, to $152.4 million from $159.0 million. The
borrowings, consisting of 1 and 2 year term advances, 90 day reverse repurchase
agreements, and an overnight line of credit, were utilized to fund the Bank's
growth in its loan portfolio. The decrease in deposits is primarily attributable
to a shift in consumer preferences from lower fixed rate deposits to the higher
potential returns of equity securities. The Bank's investment unit, an agency
relationship with a third party vendor, participated in a portion of this shift.
Investments by Bank depositors in the Bank's investment unit totaled
approximately $1.5 million during 1997. The Bank recognizes fee income on these
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<PAGE>
transactions. The decrease in deposits, especially passbook savings accounts,
has caused the Bank to rely, at times, on overnight borrowings for liquidity
purposes. A significant decrease in deposits in the future could result in the
Bank having to seek other sources of funds for liquidity purposes. Such sources
could include, but are not limited to, additional borrowings, brokered deposits,
negotiated time deposits, the sale of "available-for-sale" investment
securities, the sale of securitized loans, or the sale of whole loans. Such
actions could result in higher interest expense costs and/or losses on the sale
of securities or loans. Other liabilities increased $663,000, or 45.6%, to $2.1
million at December 31, 1997 from $1.5 million at the prior fiscal year end.
Shareholders' equity increased $2.2 million, or 10.3%, to $23.6 million at
December 31, 1997 from $21.4 million at December 31, 1996. The increase is
attributable to net income of $1.9 million, an increase in the unrealized
appreciation on investment securities available for sale of $330,000, a net
decrease in unearned ESOP shares of $127,000, and in unearned stock based
compensation plans of $367,000, partially offset by dividends declared of
$486,000.
COMPARISON AT DECEMBER 31, 1996 AND DECEMBER 31, 1995.
Total assets increased $9.0 million, or 5.0%, to $189.9 million at December 31,
1996 from $180.9 million at December 31, 1995. The increase in assets is
primarily the result of increases in the balance of net loans receivable to
$108.7 million from $100.1 million and mortgage-backed securities to $22.8
million from $8.0 million. These increases were primarily attributable to the
continued deployment of maturing short term investments and excess liquidity
into higher yielding assets. These increases were partially offset by decreases
in interest-earning deposits at other financial institutions to $1.6 million
from $8.2 million, and investment securities to $36.7 million from $44.9
million.
Non-performing loans increased $1.1 million, or 117.4%, to $2.0 million at
December 31, 1996, from $919,000 at the end of the prior year. The increase in
non-performing loans is primarily the result of higher delinquent payments on
one-to-four family and multi-family real estate mortgages. The average loan-to-
value collateral ratios on these mortgage is approximately 65%. The non-
performing loans to total loans ratio at December 31, 1996 was 1.8% compared to
.9% at December 31, 1995. The Bank's allowance for loan losses to total loans
and non-performing loans was .82% and 45.4%, respectively, at December 31, 1996.
While it is management's intention to improve these coverage ratios, it is not
anticipated that the level of non-performing loans will significantly impact the
Bank's future earnings. Management plans to continue regular increases in the
allowance for loan loss while controlling the level of non-performing loans
through collections management.
Total liabilities increased $8.3 million, or 5.2%, to $168.5 million from $160.2
million. The increase was primarily attributable to a $7.6 million increase in
borrowed funds, and a $674,000, or .4%, increase in deposits. The bank had no
borrowed funds at December 31, 1995. The borrowed funds were obtained from a
repurchase agreement with Morgan Stanley and Company. The total contractual line
with Morgan Stanley and Company was $10 million at December 31, 1996. The
increase in total liabilities was also attributable to an increase in notes
payable on an ESOP loan of $61,000, or 14.4%, to $486,000 and an increase of
$2,000 in other liabilities to $1.4 million at December 31, 1996.
Shareholders' equity increased $639,000 to $21.4 million at December 31, 1996
from $20.8 million at December 31, 1995. The increase is attributable to net
income of $1.3 million, partially offset by a decrease in the unrealized
appreciation on investment securities available for sale of $209,000, dividends
declared of $373,000, and a net increase in unearned ESOP shares of $60,000.
RESULTS OF OPERATIONS
GENERAL
The Bank had net income of $1.9 million, $1.3 million, and $990,000 for the
fiscal years ended December 31, 1997, 1996 and 1995, respectively. The increase
in net income for the year ended December 31, 1997, compared to 1996 resulted
primarily from increases in net interest income of $477,000, or 7.0%, to $7.3
million, and non-interest income of $400,000, or 40.8%, to $1.4 million, as well
as a $375,000 decrease in the provision for loan losses. The increased income
was partially offset by an increase in non-interest expense of $413,000, or
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<PAGE>
7.7%, and an increase in the provision for income taxes of $256,000. The Bank's
return on average assets and return on shareholders' equity for the years ended
December 31, 1997, 1996 and 1995 were .97% and 8.35%, .69% and 6.09%, and .56%
and 6.31% , respectively. These performance ratios tend to be below the Bank's
peer group during the period. The peer group is derived from the FDIC Uniform
Bank Performance Report and comprises all FDIC insured savings banks having
assets between $100 million and $300 million. The peer groups return on average
assets for the periods ended September 30, 1997 and December 31, 1996 and 1995
were .97%, .82%, and .94%, respectively. The peer groups return on average
equity for the periods ended September 30, 1997 and December 31, 1996 and 1995
were 9.10%, 7.72%, and 8.89%, respectively. The primary reasons for lower than
peer returns are higher operating expenses, as a percent of total assets, and
higher levels of shareholders' equity to total assets. Management is committed
to decreasing it's operating expenses as a percentage of total assets and
effectively leveraging it's equity to provide results which meet or exceed the
Bank's peers group. Management believes that a well structured and executed
merger with Oswego County Savings Bank will create a combined organization with
a level of critical mass and synergies of operation to allow the Bank to achieve
these goals.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
INTEREST INCOME
Interest income increased by $955,000, or 7.2%, to $14.2 million for the year
ended December 31, 1997 from $13.2 million for the year ended December 31, 1996.
The increase in interest income was principally attributable to an increase of
$9.9 million, or 6.0%, in the average balance of interest earning-assets, to
$176.0 million from $166.0 million, and an increase in the average yield on
interest-earning assets to 8.16% from 8.06%. The increase in average interest-
earning assets was primarily attributable to the deployment of an additional
$10.6 million in borrowed funds, partially offset by a reduction in deposits of
$6.6 million. The utilization of borrowed funds, and a re-deployment of short
term investments resulted in a $9.5 million increase in the average balance of
real estate loans, a $6.9 million increase in the average balance of mortgage-
backed securities, and decreases of $2.5 million in the average balance of
investment securities and $3.8 million in the average balance of interest-
earning deposits in other financial institutions. The average balance on
consumer and other loans decreased by $177,000. The increase in the average
yield on interest-earning assets was primarily attributable to the restructuring
of the balance sheet from short term investments into higher yielding, longer
term mortgage backed securities and real estate loans, including commercial real
estate, and the origination of commercial business loans at rates higher than
the existing real estate loan portfolio. The shift in earning assets from
shorter to longer-term investments increases the Bank's interest rate
sensitivity. More specifically, in a rising rate environment, the cost of
interest-bearing liabilities is likely to rise more rapidly than the yield on
interest earning assets resulting in a compression of net interest rate spread.
(For more information regarding the impact of changes in interest rates on the
Bank's earnings see "Asset and Liability Management - Interest Sensitivity
Analysis")
Interest income on real estate loans increased $721,000, or 8.7%, to $9.0
million for the year ended December 31, 1997, from $8.3 million for the year
ended December 31, 1996. The increase was due to a $9.5 million, or 10.1%,
increase in the average balance of real estate loans, partially offset by a
decrease in the average yield on real estate loans of 10 basis points to 8.66%
from 8.76%. The increase in the average balance on real estate loans was
principally due to the origination of fixed rate mortgages with terms from 10 to
30 years, adjustable rate mortgages with a fixed rate of interest for the first
five years adjustable annually thereafter, and commercial real estate loans.
Fixed rate mortgages with terms greater than 20 years are principally originated
with the intent to sell those loans into the secondary market. The decrease in
the average yield on real estate loans was principally due to the reduction in
medium and long term market interest rates that occurred during the second half
of 1997.
Interest income on consumer and other loans increased $87,000, or 8.6%, to $1.1
million for the year ended December 31, 1997 from $1.0 million for the year
ended December 31, 1996. The increase was due to an increase in the average
yield on consumer and other loans to 10.87% from 9.84%, partially offset by a
decrease in the average balance on consumer and other loans of $177,000, or
1.7%, to $10.1 million from $10.2 million. The increase in the average yield on
consumer and other loans reflects the Bank's continuing efforts to provide
lending to qualified local businesses, which tend to carry higher interest
rates. The decrease in the average balance on consumer and other loans results
from softer demand in consumer lending for higher rate unsecured loans.
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<PAGE>
Interest income on mortgage-backed securities increased $496,000, or 45.2%, to
$1.6 million from $1.1 million. The increase was attributable to a $6.9 million,
or 42.5%, increase in the average balance on mortgage-backed securities to $23.2
million from $16.3 million, as well as an increase in the average yield on
mortgage-backed securities to 6.84% from 6.71%. The increase in the average
balance on mortgage-backed securities was due to the deployment of borrowed
funds into mortgage-backed securities as part of a strategy, during the first
half of 1997, to leverage the Bank's strong capital position to increase
incrementally net interest income. The use of short term borrowings for
investment into longer term securities, such as mortgage-backed securities,
increases the sensitivity of the Bank's earnings to future increases in interest
rates. As part of engaging in such a strategy, the Bank performed extensive
analysis on the interest rate sensitivity of its entire balance sheet.
Historically, savings account deposit interest rates have not adjusted
commensurate with market interest rate movements and, more specifically, has
tended to lag upward adjustments in market interest rates. The Bank's large base
of savings account deposits tends to mitigate the otherwise potential negative
ramifications of rising market interest rates. Bank policy on leverage
transactions dictates that such transactions be "unwound" (by selling the
security and paying down the borrowing) if interest rate movements result in a
compression of the original spread beyond certain levels. The unwinding of such
transactions during a period of sharply rising interest rates would likely
result in the realization of losses on sales of securities.
Interest income on investment securities decreased $105,000, or 4.0%, to $2.5
million for the year ended December 31, 1997 from $2.6 million for the year
ended December 31, 1996, notwithstanding an increase in the average yield on
investment securities to 7.10% from 6.91%, on a tax equivalent basis. The
decrease in interest income was primarily attributable to a $2.5 million, or
6.6%, decrease in the average balance of investment securities to $35.6 million
at December 31, 1997 from $38.1 million at the end of the prior year. The
decrease in the average balance of investment securities is the result of funds
from maturities and redemptions being reinvested in the Bank's real estate loan
portfolio rather than reinvested in investment securities. The increase in the
average yield on investment securities, on a tax equivalent basis, was primarily
due to the maturity and redemption of securities with lower interest rates than
those securities remaining in the portfolio. Interest income on interest-earning
deposits decreased $221,000, or 56.1%, to $173,000 for the year ended December
31, 1997 from $394,000 for the prior year. The decrease was due to a $3.8
million, or 52.4%, decrease in the average balance on interest-earning deposits
and a decrease in the average yield on such deposits to 5.05% from 5.47%.
INTEREST EXPENSE
Interest expense increased $478,000 or 8.0%, to $6.9 million for the year ended
December 31 1997, from $6.4 million for the prior year. The increase was
primarily attributable to a shift in passbook savings accounts to higher rate
certificates of deposit and an increase in interest expense associated with
borrowings. Interest expense on savings and club accounts decreased $117,000, or
5.6%, while the interest expense on term deposits increased $89,000, or 2.3%.
The average balance on savings and club accounts decreased $4.0 million, to
$65.4 million for the year ended December 31, 1997 from $69.4 for the prior
year, while the average cost of such deposits remained 3.01%. The average
balance on time deposits increased $1.1 million, or 1.6%, to $70.6 for the year
ended December 31, 1997 from $69.5 million at December 31, 1996, while the
average cost of time deposits increased to 5.63% from 5.59%. The Bank's
borrowings consist of term and overnight advances from the Federal Home Loan
Bank of New York, funds obtained through repurchase agreements("repos"), and a
loan by another financial institution to finance the purchase of shares of the
Bank's common stock for the Employee Stock Ownership Plan ("ESOP"). The average
balance on the term and overnight advances for the year ended December 31, 1997
was $1.1 million, at an average cost of 6.93%, resulting in interest expense of
$66,000. The average balance on the repos for the year ended December 31, 1997
was $8.4 million, at an average cost of 5.68%, resulting in interest expense of
$475,000. The ESOP loan had an average balance of $465,000, at an average cost
of 7.41%, resulting in $34,000 in interest expense for the year.
11
<PAGE>
Average Balance Sheet
The following table sets forth certain information concerning average interest
earning assets and interest-bearing liabilities and the yields and rates
thereon. Interest income and resultant yield information in the table is on a
fully tax-equivalent basis for the three years ended December 31, 1997, using
marginal federal income tax rates of 34%. Averages are computed on the daily
average balance for each month in the period divided by the number of days in
the period. Yields and amounts earned include loan fees. Non-accrual loans have
been included in interest-earning assets for purposes of these calculations.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Real Estate Loans $103,600 $ 8,971 8.66% $ 94,126 $ 8,250 8.76% $ 88,163 $ 7,533 8.54%
Consumer & Other Loans 10,051 1,093 10.87% 10,228 1,006 9.84% 7,816 792 10.13%
Mortgage-backed Securities 23,244 1,591 6.84% 16,312 1,095 6.71% 3,292 231 7.02%
Taxable investment
securities 29,160 1,974 6.77% 32,643 2,148 6.58% 44,865 2,834 6.32%
Non-taxable investment
securities 6,432 554 8.61% 5,471 485 8.86% 4,561 417 9.14%
Interest-earning deposits 3,426 173 5.05% 7,206 394 5.47% 9,445 539 5.71%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $175,913 $14,356 8.16% $165,986 $ 13,378 8.06% $158,142 $12,346 7.81%
Non Interest Earning Assets:
Other assets 16,017 18,671 19,240
Allowance for loan losses (936) (492) (329)
Net unrealized gains
(losses)
on available for sale
portfolio 648 366 402
Total Assets $191,642 $184,531 $177,455
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
Liabilities:
Now accounts $ 13,346 $ 341 2.56% $ 12,709 $ 322 2.53% $ 12,830 $ 357 2.78%
Savings and club accounts 65,383 1,971 3.01% 69,354 2,088 3.01% 75,270 2,256 3.00%
Time deposits 70,591 3,975 5.63% 69,470 3,886 5.59% 65,047 3,643 5.60%
Borrowings 10,677 639 5.98% 1,894 118 6.23% 35 3 8.57%
Total Interest bearing
liabilities $159,997 $ 6,926 4.33% $153,427 $ 6,414 4.18% $153,182 $ 6,259 4.09%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Interest-Bearing
Liabilities:
Demand deposits 7,633 7,869 6,789
Other liabilities 1,798 2,345 1,793
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 169,428 163,641 161,764
Shareholder's equity 22,214 20,890 15,691
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities &
shareholder's equity $191,642 $184,531 $177,455
Net interest income $ 7,430 $ 6,964 $ 6,087
Net interest rate spread 3.83% 3.88% 3.72%
Net interest margin 4.22% 4.20% 3.85%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities 109.95% 108.19% 103.24%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
RATE/VOLUME ANALYSIS
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest earning assets and interest-bearing liabilities have
affected the Bank'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 (change 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.
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
- -----------------------------------------------------------------------------------------------------------------------------
Total
Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Real estate loans $ 817 ($96) $ 721 $ 519 $198 $ 717
Consumer and other loans (17) 104 87 238 (24) 214
Mortgage-backed securities 474 22 496 875 (11) 864
Taxable investment securities (235) 61 (174) (800) 114 (686)
Non-taxable investment securities 83 (14) 69 82 (14) 68
Interest-earning deposits (193) (28) (221) (123) (22) (145)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 929 49 978 791 241 1,032
Interest Expense:
Now and escrow accounts 15 4 19 (3) (32) (35)
Savings and club accounts (117) 0 (117) (181) 13 (168)
Time deposits 62 27 89 250 (7) 243
Borrowings 493 (6) 487 116 (1) 115
Total Interest expense: 453 25 478 182 (27) 155
- -----------------------------------------------------------------------------------------------------------------------------
Net change in interest
income $ 476 $ 24 $ 500 $ 609 $268 $ 877
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST INCOME
Net interest income increased $478,000, on a tax equivalent basis, for the year
ended December 31, 1997 as compared to December 31, 1996. The increase occurred
due to an increase in the ratio of average interest-earning assets to average
interest bearing liabilities to 110.27% from 108.19%, partially offset by a
decrease in the Bank's net interest rate spread to 3.84% from 3.88%. These
ratios are the result of a $9.9 million, or 6.0%, increase in average interest-
earning assets, and an increase in the average yield on interest-earning assets
to 8.16% from 8.06%. These increases were offset in part by an increase in the
average balance of interest bearing liabilities of $6.1 million, or 4.0%, and an
increase in the average cost on interest bearing liabilities to 4.32% from
4.18%.
PROVISION FOR LOAN LOSSES.
The Bank maintains an allowance for loan losses based upon a quarterly
evaluation of known and inherent risks in the loan portfolio, which includes a
review of the balances and composition of the loan portfolio as well as
analyzing the level of delinquencies in each segment of the loan portfolio.
Loan loss provisions are based upon management's estimate of the fair value of
the collateral and the bank's actual loss experience, as well as standards
applied by the FDIC. The Bank established a provision for possible loan losses
for the year ended December 31, 1997 of $261,000 as compared to a provision of
$636,000 for the year ended December 31, 1996. The decrease in the provision
for loan losses was partially attributable to a $420,000 specific reserve
established in September 1996 for the Bank's investments in lease finance
packages acquired from the Bennett Funding Group. The Bank's loan loss
provision for 1997 increased $45,000 over the prior year, after adjusting for
the specific provision in 1996. The Bank's allowance for loan losses as a
percentage of net loans receivable at December 31, 1997 was .68%.
13
<PAGE>
NON INTEREST INCOME
Non interest income consists of servicing income and fee income, gains (losses)
on the sale of investment securities and other operating income.
Non interest income increased $400,000, or 40.8%, to $1.4 million for the year
ended December 31, 1997, as compared to $979,000 for the year ended December 31,
1996. The increase in non interest income was primarily attributable to an
increase in fees and service charges of $52,000, or 9.1%, to $622,000 from
$570,000 additional gains on the sale of investment securities of $228,000, an
increase in other charges, commissions, and fees to $371,000 from $265,000, and
an increase in mortgage servicing fees of $12,000. The increase in fees and
service charges is primarily attributable to higher fees on checking accounts
and increased mortgage servicing activity, as well as a $56,000 increase in fees
generated by the Bank's investment unit. The gains on the sale of investment
securities is the result of the recognition of the unrealized increased market
value on the Bank's investment in the IIMF mutual fund. The increase in other
charges and commissions is primarily the result of the recognition of increases
in the cash surrender value on life insurance policies used to fund deferred and
supplemental compensation plans.
NON INTEREST EXPENSE
Non interest expense increased $413,000, or 7.7%, to $5.8 million for the year
ended December 31, 1997 from $5.4 million for the prior year. The increase in
non interest expense was primarily attributable to increases in employee
compensation and benefits of $573,000, or 24.4%, data processing costs of
$12,000, or 3.2%, professional service expense increases of $7,000, and other
expense increases of $48,000, or 5.5%. The increases in the employee
compensation and benefits is primarily the result of recognition of the impact
of the increase in the market value on the Bank's common stock on the stock
based compensation plans. The increases were partially offset by a decrease in
occupancy costs of $25,000, or 3.6%, and a reduction, in deposit insurance
premiums of $203,000. The Bank's overhead and efficiency ratios for the years
ended December 31, 1996 were 3.01% and 60.45%, respectively. The stock based
compensation plan expenses and the Bank's amortization of goodwill represent
non-cash expenses. If these non-cash expenses were deducted from the Bank's
overhead and efficiency ratios, those adjusted ratios for the year ended
December 31, 1997, would be 2.69% and 51.83%, respectively. The Bank's efforts
to prepare its data processing systems for the impact of the Year 2000 were not
a significant component of expense in 1997 and are not expected to materially
impact earnings in the future.
INCOME TAX EXPENSE
Income tax expense increased $256,000, or 50.7% to $762,000 for the year ended
December 31, 1997 from $506,000 for the prior year. The increase in income tax
expense reflected higher pre-tax income during the year.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1995
INTEREST INCOME
Interest income increased by $1.0 million, or 8.3%, to $13.2 million for the
year ended December 31, 1996 from $12.2 million for the year ended December 31,
1995. The increase in interest income was principally attributable to an
increase of $7.8 million, or 5.0%, in the average balance of interest earning-
assets, to $166.0 million from 158.1 million, and an increase in the average
yield on interest-earning assets to 8.06% from 7.81%. The increase in average
interest-earning assets was primarily attributable to the deployment of $7.6
million in borrowed funds and increased deposits of $674,000. The utilization
of these additional funds, and a re-deployment of short term investments
resulted in a $5.9 million increase in the average balance of real estate loans,
a $2.4 million increase in the average balance of consumer and other loans, a
$13.0 million increase in the average balance of mortgage-backed securities, and
decreases of $11.3 million in the average balance of investment securities and
$2.2 million in the average balance of interest-earning deposits in other
financial institutions. The increase in the average yield on interest-earning
assets was primarily attributable to this deployment of short term investments
14
<PAGE>
into higher yielding investments, upward rate increases on adjustable rate
mortgages, and the origination of commercial loans at rates higher than the
existing real estate loan portfolio.
Interest income on real estate loans increased $717,000, or 9.5%, to $8.3
million for the year ended December 31, 1996, from $7.5 million for the year
ended December 31, 1995. The increase was due to a $6.0 million, or 6.8%,
increase in the average balance on real estate loans, combined with an increase
in the average yield on real estate loans to 8.76% from 8.54%. The increase in
the average balance on real estate loans was principally due to the origination
of fixed rate mortgages with terms from 10 to 20 years and commercial real
estate loans.
Interest income on consumer and other loans increased $214,000, or 27.0%, to
$1.0 million for the year ended December 31, 1996 from $792,000 for the year
ended December 31, 1995. The increase was due to an increase in the average
balance on consumer and other loans of $2.4 million, or 30.9%, partially offset
by a decrease in the average yield to 9.84% from 10.13%. The increase in the
average balance on consumer and other loans reflects the Bank's continuing
efforts to provide lending to qualified local businesses and an increased focus
on the consumer loan portfolio. The decrease in the average yield on these loans
reflects the Bank's pricing to the competitive rates provided on business loans
in response to the interest rate environment in the market area.
Interest income on mortgage-backed securities increased $864,000, or 374.5%, to
$1.1 million from $231,000. The increase was attributable to a $13.0 million,
or 395.5%, increase in the average balance of mortgage-backed securities to
$13.0 million from $3.3 million, partially offset by a decrease in the average
yield on mortgage-backed securities to 6.71% from 7.02%. The increase in the
average balance of mortgage-backed securities was due to the deployment of
borrowed funds and cash flows from maturing short term corporate and government
agency bonds, into higher yielding asset-backed securities. The emphasis on
mortgage-backed securities is part of a strategic realignment and
diversification of the securities portfolio to utilize loan surrogate products
to increase interest income without accepting undue interest rate risk.
Mortgage-backed securities, however, do contain embedded options in that the
mortgagee may pre-pay principal at any time during the life of the loan.
Historically, prepayments have tended to occur more rapidly in lower interest
rate environments, which may cause the Bank to invest these cash flows in lower
yielding alternatives.
Interest income on investment securities decreased $642,000, or 20.6%, to $2.5
million for the year ended December 31, 1996 from $3.1 million for the year
ended December 31, 1995, notwithstanding an increase in the average yield on
investment securities to 6.91% from 6.58%, on a tax equivalent basis. The
decrease in interest income was primarily attributable to an $11.3 million, or
22.9%, decrease in the average balance on investment securities to $38.1 million
at December 31, 1996 from $49.4 million at the end of the prior year. The
decrease in the average balance of investment securities and the increase in the
average yield earned on investment securities is consistent with the Bank's
strategy of divesting the portfolio of shorter term, lower yielding corporate
and agency bonds. Interest income on interest-earning deposits decreased
$145,000, or 26.9%, to $394,000 for the year ended December 31, 1996 from
$539,000 for the prior year. The decrease was due to a $2.2 million, or 23.7%,
decrease in the average balance on interest-earning deposits and a decrease in
the average yield on such deposits to 5.47% from 5.71%.
INTEREST EXPENSE
Interest expense increased $155,000, or 2.5%, to $6.4 million for the year ended
December 31 1996, from $6.3 million for the prior year. The increase was
primarily attributable to an increase in interest expense on borrowings. The
borrowings consist of a loan by another financial institution to finance the
purchase of shares of the Bank's common stock for the Employee Stock Ownership
Plan("ESOP"), and funds obtained through repurchase agreements("repos"). The
average balance on the repos for the year ended December 31, 1996 was $1.5
million, at an average cost of 5.90%, resulting in interest expense of $87,000.
The ESOP loan had an average balance of $422,000, at an average rate of 7.34%,
resulting in $31,000 in interest expense for the year. Interest expense on
deposits increased $40,000, or .6%. The decrease in the average balance on
deposits of $1.6 million to $151.5 million at December 31, 1996 from $153.1
million for the prior year, was more than offset by an increase in the average
cost of deposits to 4.15% from 4.08%.
15
<PAGE>
NET INTEREST INCOME
Net interest income, on a tax equivalent basis, increased $877,000 for the year
ended December 31, 1996 as compared to December 31, 1995. The increase in net
interest income resulted from a $7.8 million increase in average interest-
earning assets, and an increase in the average yield on interest-earning assets
to 8.06% from 7.81%. These increases were offset in part by an increase in the
average cost on interest bearing liabilities to 4.18% from 4.09%. The result is
that the Bank's net interest rate spread rose to 3.88% from 3.72%.
PROVISION FOR LOAN LOSSES.
The Bank established a provision for possible loan losses for the year ended
December 31, 1996 of $636,000 as compared to a provision $103,000 for the year
ended December 31, 1995. The increase in the provision for loan losses was
partly attributable to a $420,000 specific reserve established for the Bank's
investments in lease finance packages acquired from the Bennett Funding Group.
The Bank's allowance for loan losses as a percentage of net loans receivable at
December 31, 1996 was .83%.
NON INTEREST INCOME
Non interest income consists of servicing income and fee income, gains (losses)
on the sale of investment securities and other operating income.
Non interest income increased $164,000, or 20.0%, to $979,000 for the year ended
December 31, 1996, as compared to $816,000 for the year ended December 31, 1995.
The increase in non interest income was primarily attributable to an increase in
fees and service charges to $608,000 from $472,000, an increase of 28.8%,
additional gains on the sale of investment securities of $62,000, and an
increase in other charges, commissions, and fees to $265,000 from $245,000.
These increases for the year ended December 31, 1996 were partially offset by a
rebate received on FDIC insurance of $54,000 in the prior year. The overall
increase in non interest income reflects the Bank's strategy to diversify and
increment its sources of income. One such strategy was the introduction of
investment services, initiated in June 1996, which resulted in additional income
of $53,000 for the year ended December 31, 1996.
NON INTEREST EXPENSE
Non interest expense increased $55,000, or 1.0%, to $5.4 million for the year
ended December 31, 1996 from $5.3 million for the prior year. The increase in
non interest expense was primarily attributable to increases in employee
compensation and benefits of $64,000, or 2.3%, building occupancy expense
increases of $31,000, professional service expense increases of $226,000, and
other expense increases of $98,000. The increases in the professional service
expenses were the result of additional attorney fees, consulting fees and
advertising expense. A portion of these additional fees are attributable to
events which are not considered to be recurring. These increase were partially
offset by reductions in expense associated with data processing of $34,000, and
a reduction of deposit insurance premiums of $90,000 to $236,000 from $325,000.
Non interest expense for the year ended December 31, 1995 was also impacted by a
$240,000 reserve against possible losses due to the liquidation of Nationar.
The Bank's overhead ratio for the year ended December 31, 1996 improved to 2.82%
from 2.93%. Continued reduction of the overhead ratio is a primary strategic
objective of the Bank.
INCOME TAX EXPENSE
Income tax expense increased $146,000, or 40.5% to $506,000 for the year ended
December 31, 1996 from $360,000 for the prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, borrowed funds, amortization
and prepayment of loans and maturities of investment securities and other short-
term investments, and earnings and funds provided from operations. While
scheduled principal repayments on loans are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions, and
16
<PAGE>
competition. The Bank manages the pricing of deposits to maintain a desired
deposit balance. In addition, the Bank invests excess funds in short-term
interest-bearing and other assets, which provide liquidity to meet lending
requirements. For additional information about cash flows from the Bank's
operating, financing, and investing activities, see Statements of Cash Flows
included in the Financial Statements. The Bank adjusts its liquidity levels in
order to meet funding needs of deposit outflows, payment of real estate taxes on
mortgage loans and loan commitments. The Bank also adjusts liquidity as
appropriate to meet its asset and liability management objectives. The Bank's
liquidity has been enhanced by its membership in the Federal Home Loan Bank of
New York, whose competitive advance programs and lines of credit will provide
the Bank with a safe, reliable and convenient source of funds.
A major portion of the Bank's liquidity consists of cash and cash equivalents,
which are a product of operating, investing, and financing activities. The
primary sources of cash were net income, principal repayments on loans and
increases in deposit accounts and borrowed funds. The Bank has experienced a
decrease in savings account deposits during the past two years. Savings account
balances decreased $7.1 million, or 10.0%, from $71.0 million at December 31,
1995 to $63.9 million at December 31, 1997. The decrease in savings account
deposits has caused the Bank to rely, at times, on overnight borrowings for
liquidity purposes. A significant decrease in deposits in the future could
result in the Bank having to seek other sources of funds for liquidity purposes.
Such sources could include, but are not limited to, additional borrowings,
brokered deposits, negotiated time deposits, the sale of "available-for-sale"
investment securities, the sale of securitized loans, or the sale of whole
loans. Such actions could result in higher interest expense costs and/or losses
on the sale of securities or loans.
At December 31, 1997, the Bank had outstanding loan commitments of $14.0
million. This amount includes the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less that one year at December
31, 1997 totaled $38.9 million. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Bank.
NEW ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income"
effective 1998. This statement will require the Bank to report comprehensive
income. For the Bank, comprehensive income is determined by adding unrealized
investment holding gains or losses during the period to net income.
Disclosures about Segments of an Enterprise and Related Information. In June
1997, the FASB issued SFAS No. 131, "Disclosures about Segments of and
Enterprise and Related Information". This statement requires companies to
disclose financial and descriptive information about its reportable business
segments. Management believes the Bank only operates one segment, which is the
banking segment. Therefore, disclosures required under this pronouncement will
not affect the financial statements of the Bank.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements of the Bank and notes thereto, presented elsewhere
herein, have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Bank are monetary. As a result, interest rates
have a greater impact of the Bank's performance that do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
COMMON STOCK AND RELATED MATTERS
The common stock of Pathfinder Bancorp, Inc. trades and is listed on The Nasdaq
SmallCap Stock Market under the symbol "PBHC" and the short name PathBcp. The
stock was issued on November 15, 1995 at $5.00 per share (adjusted for the three
for two stock split on February 5, 1998. As of March 20, 1998, there were 449
shareholders of record and 2,874,999 outstanding shares of common stock.
17
<PAGE>
The following table sets forth the high and low closing bid prices and dividends
paid per share of common stock for the periods indicated, adjusted retroactively
for the three for two stock split paid on February 5, 1998.
<TABLE>
<CAPTION>
Dividends
Quarter ended High Low Paid
------------------- ------- ------- ---------
<S> <C> <C> <C>
December 31, 1997 $20.000 $14.000 $.0467
September 30, 1997 14.750 8.583 $.0467
June 30, 1997 9.333 7.250 $.0467
March 31, 1997 8.667 6.250 $.0333
December 30, 1996 7.083 5.833 $.0333
September 30, 1996 6.000 5.333 $.0333
June 30, 1996 6.000 5.500 $.0333
March 31, 1996 6.833 5.833 $.0333
December 31, 1995 7.167 5.583 $.0333
</TABLE>
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, Oswego City Savings Bank's results of operations and financial
condition, tax considerations, and general economic conditions. No assurance
can be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
18
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 4,334,072 $ 6,802,959
Federal funds sold ---- 1,550,000
- -------------------------------------------------------------------------------------------------
Total cash and cash equivalents 4,334,072 8,352,959
Investment securities
(approximate fair value $56,847,000 and $59,597,000) 56,821,317 59,502,156
Mortgage loans held-for-sale 1,547,354 ----
Loans:
Real estate 110,416,494 99,842,835
Consumer and other 10,763,277 10,174,563
- -------------------------------------------------------------------------------------------------
Total loans 121,179,771 110,017,398
Less: Allowance for loan losses 827,521 906,567
Unearned discounts and origination fees 314,322 368,885
- -------------------------------------------------------------------------------------------------
Loans receivable, net 120,037,928 108,741,946
Premises and equipment, net 3,720,270 3,384,480
Accrued interest receivable 1,443,175 1,466,003
Other real estate 766,619 699,921
Intangible assets 3,604,876 3,920,632
Other assets 4,494,775 3,869,108
-------------------------------------------------------------------------------------------------
$196,770,386 $189,937,205
-------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Interest bearing $144,754,879 $151,656,742
Non-interest bearing 7,644,262 7,341,096
------------ ------------
Total deposits 152,399,141 158,997,838
Borrowed Funds 18,242,000 7,610,000
Note payable - ESOP 430,126 485,926
Other liabilities 2,116,384 1,453,357
- -------------------------------------------------------------------------------------------------
Total liabilities 173,187,651 168,547,121
Shareholders' equity:
Common stock, par value $.10 per share; authorized
9,900,000 shares; 2,874,999 shares issued and outstanding 287,500 1,916,666
Additional paid-in-capital 7,643,084 3,750,726
Retained earnings 17,156,415 15,787,666
Unearned stock based compensation (1,836,250) ----
Unearned ESOP shares (411,050) (477,908)
Unrealized appreciation on securities
available-for-sale 743,036 412,934
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 23,582,735 21,390,084
-------------------------------------------------------------------------------------------------
$196,770,386 $189,937,205
-------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
19
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $10,063,659 $ 9,256,360 $ 8,325,213
Interest and dividends on investments:
U.S. Treasury and agencies 407,628 509,275 718,924
State and political subdivisions 372,376 320,192 274,681
Corporate 1,477,630 1,610,326 2,008,538
Marketable equity securities 82,819 27,857 107,337
Mortgage-backed 1,590,701 1,094,837 230,721
Federal funds sold and interest-bearing deposits 172,839 393,871 539,109
- ------------------------------------------------------------------------------------------------------------------
Total interest income 14,167,652 13,212,718 12,204,523
INTEREST EXPENSE:
Interest on deposits 6,287,117 6,295,592 6,255,020
Interest on borrowed funds 604,844 118,132 3,846
---------- ---------- ----------
Total interest expense 6,891,961 6,413,724 6,258,866
- ------------------------------------------------------------------------------------------------------------------
Net interest income 7,275,691 6,798,994 5,945,657
Provision for loan losses 261,112 636,410 102,500
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,014,579 6,162,584 5,843,157
- ------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 622,222 570,464 436,574
Mortgage servicing fees 49,811 37,364 35,645
Net securities gains (losses) 335,262 106,638 44,397
Deposit insurance refund ---- ---- 54,318
Other charges, commissions and fees 371,964 264,871 244,842
- ------------------------------------------------------------------------------------------------------------------
Total other income 1,379,259 979,337 815,776
- ------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 2,917,470 2,344,218 2,280,656
Building occupancy 666,082 691,101 659,774
Data processing expenses 387,741 375,557 409,400
Professional and other services 529,724 522,800 297,040
Deposit insurance premiums 33,139 235,843 325,735
Amortization 315,756 315,755 315,755
Provision for loss contingency ---- ---- 240,000
Other expenses 927,478 879,049 780,684
- ------------------------------------------------------------------------------------------------------------------
Total other expenses 5,777,390 5,364,323 5,309,044
Income before income taxes 2,616,448 1,777,598 1,349,889
Provision for income taxes 762,087 505,838 360,000
- ------------------------------------------------------------------------------------------------------------------
Net income $ 1,854,361 $ 1,271,760 $ 989,889
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Earnings per share-basic and diluted $0.66 $0.45 $0.07
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
20
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED APPRECIATION
ADDITIONAL UNEARNED (DEPRECIATION)
COMMON STOCK PAID IN RETAINED STOCK BASED ON INVESTMENT
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $14,099,486 $(109,363)
Net income 989,889
Net proceeds from
issuance of
common stock 1,916,666 $ 1,916,666 $3,748,248
Acquisition of unearned
ESOP shares
ESOP shares earned 31
Capital contribution to
Pathfinder Bancorp,
M.H.C. (200,000)
Change in unrealized
net appreciation
(depreciation) on
investment securities 731,721
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,916,666 1,916,666 3,748,279 14,889,375 622,358
Net Income 1,271,760
Acquisition of unearned
ESOP shares
ESOP shares earned 2,447
Change in unrealized
net appreciation
(depreciation) on
investment securities (209,424)
Dividends declared
($0.13 per share) (373,469)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,916,666 1,916,666 3,750,726 15,787,666 412,934
Net Income 1,854,361
ESOP shares earned 59,692
Unearned stock-based
compensation awarded 2,203,500 (2,203,500)
Stock based compensation earned 367,250
Change in unrealized
net appreciation
(depreciation) on
investment securities 330,102
Dividends declared
($0.17 per share) (485,612)
Three-for-two stock split and reduction
in par value of common stock 958,333 (1,629,166) 1,629,166
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,874,999 $ 287,500 $7,643,084 $17,156,415 ($1,836,250) $ 743,036
===================================================================================================================================
<CAPTION>
Unearned
ESOP
Shares Total
- -----------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1994 $ 13,990,123
Net income 989,889
Net proceeds from
issuance of
common stock 5,664,914
Acquisition of unearned
ESOP shares ($436,250) (436,250)
ESOP shares earned 10,950 10,981
Capital contribution to
Pathfinder Bancorp,
M.H.C. (200,000)
Change in unrealized
net appreciation
(depreciation) on
investment securities 731,721
- -----------------------------------------------------------------------------
Balance, December 31, 1995 (425,300) 20,751,378
Net Income 1,271,760
Acquisition of unearned
ESOP shares (110,047) (110,047)
ESOP shares earned 57,439 59,886
Change in unrealized
net appreciation
(depreciation) on
investment securities (209,424)
Dividends declared
($0.13 per share) (373,469)
- -----------------------------------------------------------------------------
Balance, December 31, 1996 (477,908) 21,390,084
Net Income 1,854,361
ESOP shares earned 66,858 126,550
Unearned stock-based
compensation awarded
Stock based compensation earned 367,250
Change in unrealized
net appreciation
(depreciation) on
investment securities 330,102
Dividends declared
($0.17 per share) 485,612
Three-for-two stock split and reduction
in par value of common stock
- -----------------------------------------------------------------------------
Balance, December 31, 1997 ($411,050) $23,582,735
=============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
21
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,854,361 $ 1,271,760 $ 989,889
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan, investment and other real estate losses 261,112 675,152 136,754
Provision for Nationar Loss ---- ---- 240,000
Deferred compensation 169,773 164,926 160,075
ESOP and other stock-based compensation earned 493,800 59,886 10,981
Deferred income tax provision 256,249 (62,775) (58,434)
Realized and unrealized losses (gains)
on investment securities (335,262) (106,638) (44,397)
Net loss on sale of other real estate ---- 3,602 29,783
Depreciation 235,282 248,105 327,827
Amortization of intangibles 315,756 315,755 315,755
Net amortization of premiums and discounts on
investment securities 65,923 114,115 348,485
Decrease (increase) in interest receivable 22,827 3,659 (69,291)
(Increase) decrease in other assets (437,353) (234,633) 307,135
(Decrease) Increase in other liabilities (137,440) (106,771) 308,012
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,765,028 2,346,143 3,002,574
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities available for sale (8,482,036) (28,604,061) (23,346,873)
Proceeds from maturities and principal reductions of
investment securities held to maturity 4,790,000 250,000 1,104,302
Proceeds from maturities and principal reductions of
investment securities available for sale 6,420,245 10,995,832 11,692,557
Proceeds from sale of investment securities available for sale 792,352 10,393,686 7,684,119
Net increase in loans (13,478,076) (9,674,236) (11,228,831)
Purchase of premises and equipment (571,072) (813,086) (1,135,676)
Proceeds from sale of other real estate owned 586,109 289,153 628,486
Increase in surrender value of life insurance (188,315) (138,210) (142,970)
Other investment activity (279,179) ---- ----
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,409,972) (17,300,922) (14,744,886)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in demand deposits,
NOW accounts, savings accounts,
money market deposit accounts and escrow deposits (1,191,170) (4,454,805) (7,404,864)
Net (decrease)increase in time deposits (5,407,527) 5,128,707 9,635,211
Proceeds from borrowings 10,632,000 7,720,047 436,250
Repayments of borrowings (55,800) (48,799) (11,572)
Cash dividends (351,446) (277,636) ----
Common stock acquired by ESOP ---- (110,047) (436,250)
Proceeds from the sale of common stock ---- ---- 5,664,914
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,626,057 7,957,467 7,883,689
- -----------------------------------------------------------------------------------------------------------------------------
Reclass of Nationar deposits from
cash equivalents to other assets (see Note 12) ---- 2,783,000 (2,960,000)
- -----------------------------------------------------------------------------------------------------------------------------
(Decrease) in cash and cash equivalent (4,018,887) (4,214,312) (6,818,623)
Cash and cash equivalents at beginning of year 8,352,959 12,567,271 19,385,894
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,334,072 $ 8,352,959 $ 12,567,271
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE PERIOD FOR:
Interest $ 6,835,301 $ 6,285,566 $ 6,255,153
Income Taxes Paid 795,705 529,477 215,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate 373,628 445,035 644,936
Gross change in unrealized appreciation (depreciation)
on securities available for sale 564,402 (349,040) 1,219,540
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid 130,922 93,138 ----
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
22
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The accompanying consolidated financial statements include the accounts of
Pathfinder Bancorp, Inc. (the "Company") and its wholly owned subsidiary, Oswego
City Savings Bank (the "Bank"). All inter-company accounts and activity have
been eliminated in consolidation. The Bank has five full service offices
located in its market area consisting of Oswego County. The Bank is primarily
engaged in the business of attracting deposits from the general public in the
Bank's market area, and investing such deposits, together with other sources of
funds, in loans secured by one-to-four family residential real estate and
investment securities.
Pathfinder Bancorp, M.H.C., (the "Holding Company") a mutual holding company
whose activity is not included in the accompanying financial statements, owns
approximately 54% of the outstanding common stock of the Company. Salaries,
employee benefits and rent approximating $48,000 were allocated from the Bank to
Pathfinder Bancorp, M.H.C. during 1997.
Effective December 1997, the Bank and Pathfinder Bancorp, M.H.C., reorganized
through the formation of Pathfinder Bancorp, Inc., a state-chartered, stock
holding company. The reorganization was effected by the exchange of outstanding
shares of the Bank for shares of Pathfinder Bancorp, Inc.
In September 1997, the Bank entered into a definitive agreement to merge with
Oswego County Savings Bank, a mutual, state-chartered savings bank with assets
of approximately $112 million. The merger requires approval of applicable
regulators, the shareholders of Pathfinder Bancorp, Inc., and the depositors of
Oswego County Savings Bank and is expected to be consummated in the second half
of 1998.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits (with original maturity of three months or less) and
federal funds sold. Generally, federal funds are purchased and sold for one-day
periods. Short-term cash investments include certificates of deposit and money
market funds. The estimated fair value of cash and cash equivalents approximates
carrying value.
INVESTMENT SECURITIES
The Company classifies investment securities as held-to-maturity or available-
for-sale. Held-to-maturity securities are those that the Company has the
positive intent and ability to hold to maturity, and are reported at cost,
adjusted for amortization of premiums and accretion of discounts. Investment
securities not classified as held-to-maturity are classified as available-for-
sale and are reported at fair value, with net unrealized gains and losses
reflected as a separate component of shareholders' equity, net of the applicable
income tax effect. None of the Company's investment securities have been
classified as trading securities.
Gains or losses on investment security transactions are based on the amortized
cost of the specific securities sold. Fair values for investment securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. Premiums and discounts on securities are amortized and accreted
into income using the interest method over the period to maturity.
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans held-for-sale are carried at the lower of cost or fair value.
Fair value is determined in the aggregate.
LOANS
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan origination fees and costs. Interest income is
generally recognized when income is earned using the interest method.
Nonrefundable loan fees received and related direct origination costs incurred
are deferred and amortized over the life of the loan using the interest method,
resulting in a constant effective yield over the loan term. Deferred fees are
recognized into income immediately upon prepayment of the related loan.
23
<PAGE>
For variable rate loans that reprice frequently and with no significant credit
risk, fair values are based on carrying values. Fair values for fixed rate loans
are estimated using discounted cash flow analysis, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. The carrying amount of accrued interest approximates its fair
value.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for loan losses is maintained at a level considered adequate to
provide for potential loan losses. The allowance is increased by provisions
charged to expense and reduced by net charge-offs. The level of the allowance is
based upon management's evaluation of potential losses related to outstanding
loans, as well as prevailing economic conditions.
INCOME RECOGNITION ON IMPAIRED AND NON-ACCRUAL LOANS
Loans, including impaired loans, are generally classified as non-accrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days. When a loan is classified as non-accrual and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
When future collectibility of the recorded loan balance is expected, interest
income may be recognized on a cash basis. In the case where a nonaccrual loan
had been partially charged off, recognition of interest on a cash basis is
limited to that which would have been recognized on the recorded loan balance at
the contractual interest rate. Cash interest receipts in excess of that amount
are recorded as recoveries to the allowance for possible credit losses until
prior charge-offs have been fully recovered.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed generally on a straight-line basis over the estimated
useful lives of the related assets. Maintenance and repairs are charged to
operating expenses as incurred.
OTHER REAL ESTATE
Properties acquired through foreclosure, or by deed in lieu of foreclosure, are
carried at the lower of cost (fair value at the date of foreclosure) or fair
value less estimated disposal costs.
INTANGIBLE ASSETS
Intangible assets represent goodwill arising from branch acquisitions and are
being amortized on a straight-line basis over a 15-year period. The Company
periodically reviews the carrying value of intangible assets using fair value
methodologies. Accumulated amortization totaled approximately $1,131,458 and
$816,000 at December 31, 1997 and 1996, respectively.
DEPOSITS
Interest on deposits is accrued and paid to the depositors or credited to the
depositors accounts monthly, quarterly or annually.
Fair values disclosed for demand, savings, variable rate money market accounts
and time accounts approximate their carrying values at the reporting date. Fair
values for fixed rate time accounts are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on similar
certificates to a schedule of aggregated expected monthly maturities on time
deposits. The carrying value of accrued interest approximates fair value.
INCOME TAXES
Provisions for income taxes are based on taxes currently payable or refundable
and deferred income taxes on temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are reported in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding throughout each year (2,798,610,
2,801,503, and 2,816,279 for 1997, 1996, and November 15, 1995 through December
31, 1995, respectively as adjusted to reflect the 3 for 2 stock split). Diluted
earnings per share gives effect to weighted average shares which would be
outstanding assuming the exercise of issued stock options using the treasury
stock method (2,804,365 for 1997).
24
<PAGE>
In conjunction with the formation of Pathfinder Bancorp, Inc. in December 1997,
the Company changed the par value of its common stock from $1.00 to $.10. On
January 13, 1998, the Board of Directors declared a three-for-two stock split of
the Company's common stock to be effected in the form of a stock dividend
distributed February 5, 1998 to shareholders of record on January 26, 1998. The
effect of the stock split has been retroactively reflected as of December 31,
1997 in the consolidated statement of condition and statement of shareholders'
equity. All references to number of shares, per share amounts and stock option
data in the consolidated financial statements have been restated.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" in 1997, which had no affect on quarterly or annual
earnings as previously reported.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure of fair value information
of financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair values estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The carrying amounts and
estimated fair values of financial instruments at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
Amounts Fair Values Amounts Fair Values
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,334,072 $ 4,334,000 $ 8,352,959 $ 8,353,000
Investment Securities 56,821,317 56,847,000 59,502,156 59,597,000
Mortgage loans held-for-sale 1,547,354 1,554,550 -- --
Loans 120,037,928 123,969,000 108,741,946 113,047,000
Accrued interest receivable & other assets 1,443,175 1,443,000 1,466,003 1,446,000
Deposits 152,399,141 148,044,000 158,997,838 154,888,000
Borrowed funds 18,242,000 18,242,000 7,610,000 7,610,000
Note payable - ESOP 430,126 430,000 485,926 486,000
</TABLE>
The fair value of options and commitments to extend credit is not significant.
RECLASSIFICATION
Certain amounts from 1996 and 1995 have been reclassified to conform to the
current years presentation. These reclassifications had no affect on net income
as previously reported.
NOTE 2: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Corporate debt $ 5,115,232 $ 32,260 $ 6,131 $ 5,141,360
- -----------------------------------------------------------------------------------------------------
Available-for-sale:
Bond investments:
U.S. Treasury and agencies 4,856,250 36,312 8,224 4,884,338
State and political subdivision 6,635,657 424,830 545 7,059,942
Corporate 13,006,129 204,018 6,412 13,203,735
Mortgage-backed 23,023,302 189,011 54,374 23,157,939
- -----------------------------------------------------------------------------------------------------
Total 47,521,338 854,171 69,555 48,305,954
Stock investments:
Federal Home Loan Bank and Other 2,923,670 476,461 -- 3,400,131
- -----------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total available-for-sale $50,445,008 $1,330,632 $ 69,555 $51,706,085
- -----------------------------------------------------------------------------------------------------
Net unrealized gain on available-for-sale 1,261,077
Grand total carrying value $56,821,317
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held-to-maturity:
Corporate debt $ 9,629,303 $ 110,966 $ 16,009 $ 9,724,260
- -----------------------------------------------------------------------------------------------------
Available-for-sale:
Bond investments:
U.S. Treasury and agencies 5,879,451 40,018 25,733 5,893,736
State and political subdivision 6,172,638 333,556 12,761 6,493,433
Corporate 12,430,395 192,478 40,292 12,582,581
Mortgage-backed 22,965,752 69,397 206,082 22,829,067
- -----------------------------------------------------------------------------------------------------
Total 47,448,236 635,449 284,868 47,798,817
Stock investments:
Federal Home Loan Bank and Other 1,734,623 339,413 -- 2,074,036
Total available-for-sale $49,182,859 $ 974,862 $284,868 $49,872,853
- -----------------------------------------------------------------------------------------------------
Net unrealized gain on available-for-sale 689,994
Grand total carrying value $59,502,156
- --------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of debt investments at December 31,
1997 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalties.
<TABLE>
<CAPTION>
Available for Sale Held-to Maturity
December 31, 1997 December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $4,635,248 $4,678,344 $4,270,688 $4,293,934
Due after one year through five years 6,116,119 6,239,412 -- --
Due after five years through ten years 10,543,456 10,894,299 774,109 776,991
Due after ten years 3,203,213 3,335,960 70,435 70,435
Mortgage-backed securities 23,023,302 23,157,939 -- --
Totals $47,521,338 $48,305,954 $5,115,232 $5,141,360
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the sales of debt securities for 1997, 1996, and 1995 were
$792,352, $10,393,686, and $7,624,121, respectively. Gross gains of $4,102,
$3,643, and $31,040 and gross losses of $15,698, $49,996 and $58,563 were
realized on these sales for 1997, 1996, and 1995, respectively. The sale of
marketable equity securities resulted in realized losses of $38,078 for 1995.
26
<PAGE>
NOTE 3: LOANS
Major classifications of loans at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------
<S> <C> <C>
Real estate mortgages:
Conventional $ 79,346,064 $ 72,357,149
Second mortgage loans 9,561,252 9,082,632
Construction 1,579,261 2,496,673
FHA insured 94,677 115,576
VA guaranteed 93,448 122,298
Commercial 19,741,792 15,668,507
--------------------------------------------------------------
110,416,494 99,842,835
--------------------------------------------------------------
Other loans:
Consumer 4,106,503 3,275,268
Lease financing 564,333 1,152,521
Passbook loans 170,854 206,133
Student 13,286 58,168
Commercial 5,908,301 5,482,472
10,763,277 10,174,563
$121,179,771 $110,017,398
--------------------------------------------------------------
</TABLE>
The Company grants mortgage and consumer loans to customers throughout Oswego
and parts of Onondaga counties. Although the Company has a diversified loan
portfolio, a substantial portion of its debtors ability to honor their contracts
is dependent upon the counties employment and economic conditions.
At December 31, 1997, loans to officers and directors were not significant.
During 1997, the Company began originating loans which conform to Federal
National Mortgage Association ("FNMA") underwriting standards with the intent to
securitize and sell such loans into the secondary market. The terms of the
loans originated for sale are limited to one-to-four family 15-year and 30-year
fixed rate mortgages.
In conjunction with the origination and pending sale of such mortgages, the
Company has engaged in certain transactions to mitigate or eliminate the impact
of changes in interest rates on the market value of the loans pending sale. At
December 31, 1997, the company had $3.0 million in notional amount outstanding
put options to hedge loans committed or loans closed and pending sale. The put
options are accounted for as hedging instruments. The put options provide the
bank the option to sell FNMA 30-year mortgage-backed securities at a specified
strike price prior to the maturity date. The unamortized carrying value of the
option premiums at December 31, 1997 was $26,000. The maturity dates on the
outstanding options are January 14 and February 5, 1998.
NOTE 4: ALLOWANCES FOR LOAN LOSSES
Changes in the allowance for loan losses are presented in the following summary:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 906,567 $345,660 $315,050
Recoveries credited 18,113 17,498 8,631
Provision for loan losses 261,112 636,410 102,500
Loans charged off (358,271) (93,001) (80,521)
Balance at end of period $ 827,521 $906,567 $345,660
--------------------------------------------------------------
</TABLE>
At December 31, 1997, the Company had no loans for which specific valuation
allowances were recorded.
During 1996, the Company had approximately $1.1 million of collateralized loans
outstanding with a lease financing company and its affiliates that were
determined to be impaired under SFAS No. 114. The Company established a
$420,000 reserve to reflect the estimated impairment. During 1996 and 1997, the
Company received payments reducing its outstanding balance in the loans
receivable to approximately $319,000. Loans charged off during 1997 of $358,271
included approximately $319,000 relating to these loans receivable.
27
<PAGE>
For the year ended December 31, 1996, the average recorded investment in
impaired loans was approximately $1,036,000, with $29,000 of interest income
recognized on these loans on a cash basis.
NOTE 5: PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------
<S> <C> <C>
Land $ 631,773 $ 416,993
Buildings 2,953,032 2,532,626
Furniture, fixture and equipment 1,839,156 1,781,615
Construction in progress 484,763 635,611
-----------------------------------------------------------
5,908,724 5,366,845
Less: Accumulated depreciation 2,188,454 1,982,365
$3,720,270 $3,384,480
-----------------------------------------------------------
</TABLE>
NOTE 6: DEPOSITS
A summary of amounts due to depositors is shown as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Savings accounts $ 63,937,467 $ 65,634,242
Money market accounts 112,842 173,758
Time accounts 67,058,897 72,466,425
Demand deposits interest bearing 13,306,129 13,081,669
Demand deposits non-interest bearing 7,644,262 7,341,096
Mortgages escrow funds 339,544 300,648
$152,399,141 $158,997,838
--------------------------------------------------------------------
</TABLE>
Time deposits with balances in excess of $100,000 amounted to approximately
$8,455,000 and $11,216,000 at December 31, 1997 and 1996, respectively. The
approximate maturity of time deposits is as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------
Year of Maturity Amount Percent Amount Percent
<S> <C> <C> <C> <C>
1 $38,860,000 57.9% $52,929,000 73.0%
2 17,960,000 26.8% 7,886,000 10.9%
3 to 5 8,621,000 12.9% 9,035,000 12.5%
5 and over 1,618,000 2.4% 2,616,000 3.6%
- -----------------------------------------------------------------------------------
$67,059,000 100.0% $72,466,000 100.0%
- -----------------------------------------------------------------------------------
</TABLE>
NOTE 7: BORROWED FUNDS
The Company has available a $550,870 line of credit in connection with the
Employee Stock Ownership Plan, of which $430,126 was outstanding at December 31,
1997. Principal and interest are payable quarterly at prime minus one over 10
years.
The Company maintains an unsecured overnight line of credit with the Federal
Home Loan Bank for liquidity purposes. At December 31, 1997, $9,500,000 was
available under this line of which $5,750,000 was outstanding. Interest on this
line is determined at the time of borrowing. The average rate paid on the
overnight line during 1997 approximated 5.8%. The outstanding balance is
Collateralized by Certain Mortgage loans under a pledge agreement with the
Federal Home Loan Bank.
The Company has term borrowings in the form of repurchase agreements and
advances. At December 31, 1997, repurchase agreements totalled $7.9 million and
advances totalled $4.6 million. The repurchase agreements mature within 90 days
and carry interest rates varying from 5.65% and 5.84%. The repurchase agreements
are collateralized by mortgage-backed securities which had a carrying value of
$8.3 million at December 31, 1997.
The principal balance, interest rates, and maturities on the term advances are
as follows:
Principal Rate Term Maturity Date
--------- ---- ---- -------------
$ 850,000 6.12% 1 yr. 12/29/98
$ 1,000,000 5.98% 1 yr. 8/13/98
$ 1,000,000 6.24% 2 yrs. 8/13/99
$ 1,700,000 6.96% 1 yr. 10/29/98
NOTE 8: EMPLOYEE BENEFITS
The Company has a noncontributory defined benefit pension plan covering
substantially all employees. Under the plan, retirement benefits are primarily a
function of both the years of service and level of compensation. It is the
Company's policy to fund the plan in amounts sufficient to pay liabilities.
Plan assets consist primarily of temporary cash investments and listed stocks
and bonds. The following table represents a reconciliation of the funded status
of the plan at October 1 (date of the most recent actuarial study):
28
<PAGE>
<TABLE>
Plan assets at fair value $3,231,500 $2,627,000
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefits 2,034,500 1,755,900
Nonvested benefits 54,500 87,500
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligations 2,089,000 1,843,400
Effect of future salary increases 370,200 366,800
Projected benefit obligation 2,459,200 2,210,200
- ----------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 772,400 416,800
Unrecognized net loss (173,100) 147,400
Unrecognized past service liability 5,500 6,600
Unrecognized transition obligation -- (34,200)
Prepaid pension asset included in other assets $ 604,800 $ 536,600
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost for the years ended December 31 is as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned during the year $ 76,262 $ 94,076 $ 99,664
Interest cost on projected benefit obligations 169,405 162,256 148,160
Return on plan assets (582,197) (314,657) (377,065)
Net amortization and deferral 340,840 99,445 203,924
Net periodic pension expense $ 4,310 $ 41,120 $ 74,683
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The actuarial present value of the projected benefit obligation shown in the
above table is based on a discount rate of 7.25% and 7.75% for 1997 and 1996,
respectively and an assumed rate of increase in future compensation levels of
5.0%. The expected long-term rate of return on assets was 8% for 1997 and 1996.
The Company provides certain health and life insurance benefits for eligible
retired employees. Employees with less than 14 years of service as of January 1,
1995 are not eligible for these benefits. The costs of post-retirement health
and life insurance benefits are accrued for during the service lives of
employees. The Company elected the prospective transition approach, and is
amortizing the transition obligation over a 20 year period. The effect of this
accounting change in 1995 was to decrease net income by approximately $34,000.
Net periodic post-retirement benefit cost at December 31, includes the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 3,014 $ 3,748 $ 3,344
Amortization of transition obligation 18,450 18,978 18,978
Interest on APBO less interest on expected benefit payments 24,898 24,976 26,238
Net periodic post-retirement benefit costs $46,362 $47,702 $48,560
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
A 10% percent annual rate of increase in the per capita costs of covered health
care benefits was assumed for 1997, gradually decreasing to 5.5 percent by the
year 2005. Increasing the assumed health care cost trend rates by one percentage
point would increase the accumulated post-retirement benefit obligation as of
December 31, 1997 by $17,766, and increase the aggregate of the service cost and
interest cost components of net periodic post-retirement benefit cost for 1997
by $1,205. A discount rate of 7.00% was used to determine the accumulated post-
retirement obligation.
The funded status of the plan as of December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated Post-retirement Benefit Obligation (APBO):
Retirees $299,681 $ 277,142
Other active plan participants 78,048 92,110
- --------------------------------------------------------------------------------------------------------------------------------
Total APBO 377,729 369,252
Plan Assets -- --
- --------------------------------------------------------------------------------------------------------------------------------
APBO in excess of plan assets (377,729) (369,252)
Unrecognized portion of net obligation at transition 273,909 292,887
Unrecognized net loss 11,594 12,779
- --------------------------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(92,226) $ (63,586)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The Company has a Salary Deferral Program which covers employees who have
completed one year of service (1,000 hours per year) and are 21 years of age.
The plan includes a Section 401(k) provision as defined under the Internal
Revenue Code. The 401(k) provision permits employees to contribute the lessor of
$9,500, or 15% of their total compensation on a pretax basis for the plan year
ended December 31, 1997. The Company's contributions are at the discretion of
the board of directors. Company contributions associated with the Plan amounted
to $41,400, $35,400, and $0 for the years ended December 31, 1997, 1996, and
1995, respectively.
NOTE 9: DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT PLANS
The Company maintains optional deferred compensation plans for its directors
whereby fees normally received are deferred and paid by the Company based upon a
payment schedule commencing at age 65 and continue monthly for 10 years.
Directors must serve on the board for a minimum of 5 years to be eligible for
the Plan. At December 31, 1997 and 1996, other liabilities include approximately
$565,000 and $539,000, respectively, relating to deferred compensation. Deferred
compensation expense for the years ended December 31, 1997, 1996 and 1995
amounted to approximately $60,000, $49,000, and $39,000, respectively.
The Company has a supplemental executive retirement plan and a director emeritus
plan for the benefit of directors and certain executive officers. Benefits under
the Supplemental executive retirement plan are intended to provide a 15 year
income stream which approximates 70-75% of final compensation including defined
benefit and defined contribution plans and social security payments. Benefits
under the director emeritus plans are provided to directors after retirement
from the Board as a defined benefit retirement plan. The plans have been funded
with single premium life insurance policies on the participating directors and
officers, with the Company as owner and beneficiary of the policies. Cash
surrender value related to these policies approximates $3,378,000 at December
31, 1997 and $3,190,171 at December 31, 1996 and is included in other assets. At
December 31, 1997 and 1996, other liabilities include approximately $425,000 and
$281,000 accrued under these plans. Compensation expense includes approximately
$136,000, $131,000, and $121,000 relating to the supplemental executive
retirement plan and director emeritus plan for 1997, 1996 and 1995,
respectively.
NOTE 10: STOCK BASED COMPENSATION PLANS
During 1997, shareholders approved the 1997 Stock Option Plan and Management
Recognition and Retention Plan for directors, officers and key employees. Under
the Stock Option Plan, up to 88,166 options have been authorized for grant of
incentive stock options and non-qualified stock options. All options have a 10-
year term and vest and become exercisable ratably over a 6-year period.
Activity in the Stock Option Plan for 1997 is as follows:
<TABLE>
<CAPTION>
Options Option Price Shares
Outstanding Per Share Exercisable
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 0 - -
Granted 132,000 $ 6.58 0
Exercised - - -
Forfeited - - -
Outstanding at December 31, 1997 132,000 $ 6.58 0
- --------------------------------------------------------------------------------
</TABLE>
In February 1997, the Board approved option grants with an exercise price equal
to the market value of the Company's shares at the date of grant, subject to
shareholder approval. Upon shareholder approval of the plans in December 1997,
the excess of market value over exercise price for approved options approximated
$1,330,000. This amount has been recorded as unearned stock-based compensation
within the stockholders' equity section of the statement of condition and will
be recognized as compensation expense ratably over the 6-year vesting period of
the options.
During 1997, the Company awarded 52,350 shares (52,950 authorized) of restricted
stock under the Management Recognition and Retention Plan. The market value of
shares awarded at the date of grant approximated $873,000 and has been
recognized in the accompanying statement of condition as unearned stock-based
compensation, net of compensation expense of approximately $145,000 for 1997.
The market value of shares awarded will be recognized as compensation expense
ratably over the 6-year restriction period.
The Company has elected to account for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25. Pro forma amounts
of net income and earnings per share under Statement of Financial Accounting
Standards No. 123 are as follows:
<TABLE>
<CAPTION>
1997
- --------------------------------------------------------------------------------
<S> <C>
Net Income:
As reported $1,854,361
Pro forma 1,804,108
</TABLE>
30
<PAGE>
Earnings per share (basic and diluted):
As reported $ .66
Pro forma .65
The fair value of these options was estimated at the date of grant using a
Black-Scholes options pricing model with the following assumptions: risk free
interest rate 5.77%; dividend yield 2.0%; market price volatility 36.95%;
weighted average option life - 6 years. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' vesting period. Therefore, the foregoing pro forma results are not
likely to be representative of the effects of reported net income of future
periods due to additional years of vesting. The weighted-average fair value per
share of discounted options granted during 1997 is $13.32.
The Company sponsors an externally leveraged Employee Stock Ownership Plan
(ESOP) for employees who have attained age 21 and who have completed a 12 month
period of employment with the Company during which they worked at least 1,000
hours. Unearned ESOP shares are pledged as collateral on the borrowings. As the
debt is repaid, earned shares are released from collateral and become eligible
for allocation. Cash dividends received on unearned shares are allocated among
participants and are reported as compensation expense. Shares are allocated
among participants on the basis of compensation subject to limitations.
The debt of the ESOP is recorded as a liability of, and guaranteed by, the
Company and the shares pledged as collateral are reported as unearned ESOP
shares in the Company's statement of financial condition. As shares are earned,
the Company reports compensation expense equal to the current market price of
the shares, and the shares become outstanding for earnings per share
computations. ESOP compensation expense approximated $167,000 and $70,000 for
the fiscal years ended December 31, 1997 and 1996, respectively. Of the 92,574
shares acquired on behalf of the ESOP, 23,052 and 11,722 shares were released as
of December 31, 1997 and 1996, respectively. The estimated fair value of the
remaining 69,522 shares at December 31, 1997 is $1,390,000.
NOTE 11: INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
Current $839,029 $568,613 $418,434
Deferred (76,942) (62,775) (58,434
$762,087 $505,838 $360,000
- --------------------------------------------------------------------------------
</TABLE>
The components of deferred income taxes, included in other assets
(liabilities), consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Loan origination fees $125,540 $147,333
Deferred compensation 395,218 327,411
Allowance for loan losses 144,233 102,547
Stock based compensation 146,680 --
ESOP 7,619 7,824
Postretirement benefits 34,592 21,700
Other 6,091 6,091
- -------------------------------------------------------------------------------------------------------
859,973 612,906
Liabilities
Pension benefits 198,631 165,081
Depreciation 10,845 21,784
Investments 719,167 377,675
928,643 564,540
Net deferred tax asset (liability) $(68,670) $ 48,366
- -------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The Company has determined that no valuation allowance is necessary as it is
more likely than not deferred tax assets will be realized through carryback to
taxable income in prior years, future reversals of existing temporary
differences and through future taxable income.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate at December 31, is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C> <C>
State tax, net of federal benefit 4.3 2.7 3.8
Tax-exempt interest income (6.7) (8.0) (9.7)
Dividends received deduction (0.1) (0.3) (1.7)
Other (2.4) 0.1 0.1
- --------------------------------------------------------------------------------
Effective income tax rate 29.1% 28.5% 26.5%
------------------------------------------------------------------------------
</TABLE>
NOTE 12: COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist primarily of commitments to extend credit,
which involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the statement of condition. The contract amount of those
commitments to extend credit reflects the extent of involvement the Commitment
has in this particular class of financial instrument. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual
amount of the instrument. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
<TABLE>
<CAPTION>
Contract Amount
- -----------------------------------------------------------------------------------------------
<S> <C>
Financial instruments whose contract amounts represent
credit risk at December 31:
1997 $14,009,007
1996 6,399,157
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitment amounts are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter party. Collateral held varies but
may include residential real estate and income-producing commercial properties.
The Company leases land for a branch under an operating lease expiring in 2013.
Rent expense totaled approximately $15,000 in 1997, $14,000 in 1996, and $13,000
in 1995. The lease provides for renewal options for two 10 year periods at
specified amounts ranging from $18,000 to $24,000 per year. Rental payments are
subject to increases based upon the preceding years Revised Consumer Price
Index, but limited to 5% in any one year. Approximate minimum rental commitments
for the non-cancelable operating lease is as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 15,200
1999 15,200
2000 15,200
2001 16,200
2002 16,200
Thereafter 199,600
- --------------------------------------------------------------------------------
Total minimum lease payments $277,600
-------------------------------------------------------------------------------
</TABLE>
During 1995, the New York Superintendent of Banks ("Superintendent") was
appointed conservator of Nationar, a New York chartered commercial Company owned
by savings banks throughout the state. The Superintendent froze all assets of
Nationar at the time he was appointed conservator. The Company had
approximately $3.0 million on deposit with Nationar against which a provision
for possible losses of $240,000 was recorded for the year ended December 31,
1995. During 1996, distributions were made from the Nationar estate to settle
all accepted claims. In connection with this settlement, the Company charged
$177,000 against the $240,000 reserve established during 1995, and recognized
income of $63,000 associated with the remaining reserve recovery during 1996.
NOTE 13: DIVIDENDS AND RESTRICTIONS
The board of trustees of Pathfinder Bancorp, M.H.C., determines whether the
Holding Company will waive or receive dividends declared by the Company each
time the Company declares a dividend, which is expected to be on a quarterly
basis. The Holding Company may elect to receive dividends and utilize such funds
to pay expenses or for other allowable purposes. The Federal Reserve Bank (the
"FRB") has indicated that (i) the Holding Company shall provide the FRB annually
with written notice of its intent to waive its dividends prior to the proposed
date of the dividend, and the FRB shall have the authority to approve or deny
any dividend waiver request; (ii) if a waiver is granted, dividends waived by
the Holding Company will not be available for payment to the minority
shareholders and such amounts will be excluded from the
32
<PAGE>
Company's capital accounts for purposes of calculating dividend payments to
minority shareholders; (iii) the Company shall establish a restricted capital
account in the amount of any dividends waived by the Holding Company, and such
restricted capital account would be added to any liquidation account in the
Company established in connection with a conversion of the Holding Company to
stock form and would be maintained in accordance with OTS requirements. During
1997, the Company paid cash dividends totaling $248,400 to the Holding Company.
The restricted capital account has a $0 balance as of December 31, 1997.
Retained earnings of the Bank are subject to certain restrictions under New York
State Banking regulations. The amount of retained earnings restricted under
these regulations approximated $3,389,000 as of December 31, 1997.
NOTE 14: REGULATORY MATTERS
The Bank 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
Bank's financial statements. Under capital adequacy guideline and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1997, that the Bank meets all
capital adequacy requirements to which it is subject and is "well capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well Capitalized" the Bank must maintain minimum total risk-based, Tier 1
risk based, and Tier 1 leverage ratios as set forth in the following table.
<TABLE>
<CAPTION>
To be "Well
Capitalized"
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total Core Capital
(to Risk Weighted Assets) $20,062,344 17.1% $9,428,960 8.0% $11,786,200 10.0%
Tier 1 Capital
(to Risk Weighted assets) $19,234,823 16.4% $4,714,480 4.0% $ 7,071,720 6.0%
Tier 1 Capital
(to Average Assets) $19,234,823 10.1% $7,665,120 4.0% $ 9,581,400 5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996:
Total Core Capital
(to Risk Weighted Assets) $18,376,019 15.7% $9,383,121 8.0% $11,728,901 10.0%
Tier 1 Capital
(to Risk Weighted assets) $17,469,452 14.9% $4,691,560 4.0% $ 7,037,340 6.0%
Tier 1 Capital
(to Average Assets) $17,469,452 9.5% $7,319,520 4.0% $ 9,149,400 5.0%
</TABLE>
NOTE 15: FINANCIAL CONDITION - PARENT COMPANY
As discussed in Note 1, on December 30, 1997 the Company reorganized through the
formation of Pathfinder Bancorp, Inc., a state-chartered, stock holding company.
The following represents the condensed balance sheet of Pathfinder Bancorp, Inc.
at December 31, 1997.
STATEMENT OF CONDITION
----------------------
Assets
Receivable from subsidiary $ 3,000,000
Investment in Bank subsidiary 20,582,735
==========
$ 23,582,735
============
Shareholders' equity $ 23,582,735
============
33
<PAGE>
CITY SAVINGS BOARD
of Directors
Chris R. Burritt
Chris C. Gagas
Raymond W. Jung
Bruce E. Manwaring
L. William Nelson
Victor S. Oakes
Lawrence W. O'Brien
Janette Resnick
Corte J. Spencer
CITY SAVINGS OFFICERS:
Chris C. Gagas
Chairman, President
Chief Executive Officer
Barry S. Thompson
Senior Vice President
Thomas W. Schneider
Vice President
Chief Financial Officer
W. David Schermerhorn
Vice President, Loan Administration
Edgar J. Manwaring
Vice President, Loan Origination
Melissa A. Dashnau
Vice President, Corporate Secretary
Gregory L. Mills
Vice President, Marketing,
Branch Administration
James A. Dowd
Controller
Laurie Lockwood
Assistant Controller
Anita A. Austin
Auditor
Pamela S. Knox
Assistant Vice President, Lending
Michele Torbitt
Assistant Vice President
CITY SAVINGS BRANCH MANAGERS
Charlene M. Himple
Assistant Vice President,
Plaza Office
Cynthia L. Claflin, Mexico Office
Joyce E. Daniels, Eastside Office
Jeannine M. Crahan, Fulton Office
35
<PAGE>
CITY SAVINGS SERVICES
Savings Accounts
Young Investors Club
Prestige Plus Accounts
Prestige Personal Accounts
Business Manager Program
Christmas Club Accounts
Certificates of Deposit
Money Management Accounts
Checking Accounts
NOW Accounts
Business Checking
Check Protection
Checking Line-of-Credit
Home Mortgage Loans
Home Improvement Loans
Home Equity Loans/Lines of Credit
Passbook Loans
Automatic Loan Payments
Commercial Loans
Commercial Lines-of-Credit
Consumer Loans
Education Loans
Safety Deposit Boxes
Money Orders
Travelers Checks
Savings Bank Life Insurance
Investment Services
IRAs
Direct Deposit
Bank-by-Mail
Credit Cards
Free Notary Service
CORPORATE HEADQUARTERS
214 West First Street
Oswego, NY 13126
(315) 343-0057
36
<PAGE>
ANNUAL MEETING
Wednesday, April 30, 1997
10:00 AM
Oswego City Savings Bank
Board Room
214 West First St.
Oswego, NY 13126
STOCK LISTING
Electronic Bulletin Board
Symbol: PBHC
COUNSEL
Doren P. Norfleet
Oswego City Savings Bank
214 West First Street, Third Floor
Oswego, NY 13126
SPECIAL COUNSEL
Luse Lehman Gorman Pomerenk
& Schick
5335 Wisconsin Avenue N.W.
Suite 400
Washington, DC 20015
INDEPENDENT AUDITORS
Coopers & Lybrand L.L.P.
One Lincoln Center
Syracuse, NY 13202
TRANSFER AGENT
Chemical Mellon Shareholder
Services L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660
37
<PAGE>
INVESTOR RELATIONS
Chris C. Gagas
Chairman, President,
Chief Executive Officer
Thomas W. Schneider
Vice President,
Chief Financial Officer
214 West First Street
Oswego, NY 13126
(315) 343-0057
GENERAL INQUIRIES AND REPORTS
A copy of the Bank's 1996 Annual Report to the Federal Deposit Insurance
Corporation, Form F-2,
may be obtained without charge by
written request of shareholders to:
Melissa A. Dashnau
Vice President, Corporate Secretary
Oswego City Savings Bank
214 West First Street
Oswego, NY 13126
FDIC DISCLAIMER
This Annual Report has not been
reviewed, or confimed for accuracy
or relevance, by the FDIC.
38
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned
- ----------------------- -------------
Oswego City Savings Bank 100%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,334
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51,706
<INVESTMENTS-CARRYING> 5,115
<INVESTMENTS-MARKET> 5,141
<LOANS> 121,180
<ALLOWANCE> 828
<TOTAL-ASSETS> 196,770
<DEPOSITS> 152,399
<SHORT-TERM> 18,242
<LIABILITIES-OTHER> 2,116
<LONG-TERM> 430
0
0
<COMMON> 288
<OTHER-SE> 23,582
<TOTAL-LIABILITIES-AND-EQUITY> 196,770
<INTEREST-LOAN> 10,064
<INTEREST-INVEST> 3,931
<INTEREST-OTHER> 173
<INTEREST-TOTAL> 14,168
<INTEREST-DEPOSIT> 6,287
<INTEREST-EXPENSE> 605
<INTEREST-INCOME-NET> 7,276
<LOAN-LOSSES> 261
<SECURITIES-GAINS> 335
<EXPENSE-OTHER> 5,777
<INCOME-PRETAX> 2,616
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,854
<EPS-PRIMARY> .66
<EPS-DILUTED> .66
<YIELD-ACTUAL> 8.16
<LOANS-NON> 1,538
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 907
<CHARGE-OFFS> 358
<RECOVERIES> 18
<ALLOWANCE-CLOSE> 827
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 827
</TABLE>
