<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, 1998
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
- ----------------------------- ---------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
214 West First Street, Oswego, NY 13126
----------------------------------------- ----------
(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 [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of February 28, 1999, there were 2,877,470 shares issued and 2,745,470
shares outstanding 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, 1999
($11.25) was $11,575,834.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1998 (Parts II and IV).
2. Proxy Statement for the 1999 Annual Meeting of Stockholders (Parts I and
III).
<PAGE>
PART I
------
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, 1999 the Mutual
Holding Company held 1,192,970 shares of Common Stock and the public held
1,552,500 shares 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, 1998, the Bank had total
assets of $203.4 million, total deposits of $160.2 million, and shareholders'
equity of $22.3 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, 1998, $118.8 million, or 91.2% of the
Bank's total loan portfolio consisted of loans secured by real estate, of which
$87.1 million, or 73.3%, were loans secured by one- to four-family residences,
$20.1 million, or 16.9%, were secured by commercial real estate, $2.0 million,
or 1.7%, were secured by multi-family properties and $9.6 million, or 8.1%, of
total real estate loans, were secured by second liens on residential properties.
The Bank also originates consumer and other loans which totaled $10.5 million,
or 8.2%, 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.
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.
<PAGE>
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.
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 1998 the Bank originated and
securitized approximately $8.8 million of 15 and 30 year fixed rate mortgages,
of which approximately $7.7 million were sold into the secondary market. The
loan sales resulted in approximately $55,000 in capitalized servicing rights.
At December 31, 1998, $2.8 million, or 2.6% 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.
2
<PAGE>
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,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ---------------- --------------- ---------------- -----------------
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)/............ $109,183 85.2% $102,403 84.2% $ 90,761 81.5% $ 83,325 83.2% $76,275 85.1%
Second mortgage loans/(2)/ 9,631 7.5 9,561 7.9 9,082 8.3 8,303 8.3 7,931 8.8
-------- ----- -------- ----- -------- ------ -------- ----- ------- -----
Total real estate loans.... 118,814 92.7 111,964 92.1 99,843 91.8 91,628 91.5 84,206 93.9
-------- ----- -------- ----- -------- ------ -------- ----- ------- -----
Consumer loans and other
loans:
Consumer.................. 4,073 3.2 4,278 3.5 3,481 3.2 3,286 3.1 3,258 3.6
Student................... 13 -- 13 -- 58 0.1 63 0.1 1,085 1.3
Lease financing........... 350 .3 564 0.5 1,153 1.1 2,013 2.0 835 0.9
Commercial business loans. 6,100 4.7 5,908 4.9 5,482 5.0 3,860 3.9 1,028 1.2
-------- ----- -------- ----- -------- ------ -------- ----- ------- -----
Total consumer and other
loans................... 10,536 8.2 10,763 8.9 10,174 9.4 9,222 9.2 6,206 7.0
-------- ----- -------- ----- -------- ------ -------- ----- ------- -----
Total loans receivable... 129,350 100.9 122,727 101.0 110,017 101.2 100,850 100.7 90,412 100.9
Less:
Unearned discount and
origination fees......... (199) (.2) (314) (0.3) (368) (0.4) (355) (0.4) (429) (0.5)
Allowance for loan losses. (939) (.7) (828) (0.7) (907) (0.8) (346) (0.3) (315) (0.4)
-------- ----- -------- ----- -------- ------ -------- ----- ------- -----
Total loans receivable,
net..................... $128,211 100.0% $121,585 100.0% $108,742 100.00% $100,149 100.0% $89,668 100.0%
======== ===== ======== ===== ======== ====== ======== ===== ======= =====
</TABLE>
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/(1)/ Includes $84.2 million, $20.1 million and $2.0 million of one- to four-
family residential loans, commercial real estate and multi-family loans,
respectively, at December 31, 1998.
/(2)/ Includes $5.8 million and $3.8 million of home equity line of credit loans
and home equity fixed rate, fixed term loans, respectively, at December
31, 1998.
/(3)/ Includes $2.8 million of mortgage loans held for sale at December 31,
1998.
3
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Loan Maturity Schedule. The following table sets forth certain information
as of December 31, 1999, 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...... $33,638 $10,779 $29,334 $ 6,903 $24,983 $3,546 $109,183
Second mortgage loans..... 3,856 319 1,099 4,143 214 -- 9,631
Consumer and other loans.. 5,437 1,952 2,115 578 454 -- 10,536
------- ------- ------- ------- ------- ------ --------
Total loans.............. $42,931 $13,050 $32,548 $11,624 $25,651 $3,546 $129,350
======= ======= ======= ======= ======= ====== ========
</TABLE>
The following table sets forth at December 31, 1998, the dollar amount of
all fixed rate and adjustable rate loans due or repricing after December 31,
1999.
<TABLE>
<CAPTION>
Fixed Adjustable Total
------- ---------- -------
<S> <C> <C> <C>
(In Thousands)
Real estate loans:
First mortgage loans................. $38,682 $36,863 $75,545
Second mortgage loans................ 5,775 -- 5,775
Consumer and other loans............. 5,099 -- 5,099
------- ------- -------
Total loans......................... $49,556 $36,863 $86,419
======= ======= =======
</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, 1998,
approximately 92.0% 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 originated with terms of up to 30 years (although fixed rate loans held
in portfolio are generally limited to terms of 20 years or less), 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 lower interest
rates. During years ended December 31, 1998 and 1997, 36.1% and 38.2%,
respectively, of the Bank's one- to four-family mortgage loan originations
consisted of fixed-rate loans.
4
<PAGE>
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 $11.6, $13.2
million and $8.7 million, during the years 1998, 1997, and 1996, respectively.
The Bank requires that borrowers qualify for ARM loans based upon the loan's
fully indexed rate.
At December 31, 1998, $53.8 million, or 63.9%, 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, 1998,
the Bank held $1.0 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 $22.1 million, or 17.1%, of the Bank's total loan
portfolio at December 31, 1998. At December 31, 1998, substantially all of the
Bank's commercial real estate loans were secured by properties located within
the Bank's market area. At December 31, 1998, the Bank's commercial real estate
loans had an average principal balance of $191,000. At that date, the largest
commercial real estate loan had a principal balance of $1.2 million, and was
secured by a facility for a private, non-profit human services agency located in
Oswego, New York. 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.
5
<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 $2.0
million, or 1.5%, of the Bank's total loan portfolio at December 31, 1998. At
December 31, 1998, the Bank had a total of 13 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, 1998, 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, 1998, the Bank's multi-family real estate loans had an average
principal balance of approximately $154,000 and the largest multi-family real
estate loan had a principal balance of $362,000, 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.
6
<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, 1998, the disbursed
portion of home equity lines of credit totaled $5.8 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 50 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, 1998, consumer loans totaled $4.1
million, or 3.2%, 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, 1998, the Bank had commercial business loans outstanding with an
aggregate balance of $6.5 million, of which $2.5 million consisted of commercial
lines of credit and $350,000 were lease financing arrangements. The average
commercial business loan balance was approximately $40,000. 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 leases to finance the acquisition of business
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
7
<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 $200,000 may be approved by any
designated loan officer; mortgage loans in excess of $200,000 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, 1998, the Bank had commitments to originate $7.9
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,
-----------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Loan receivable, beginning of period....... $122,727 $110,017 $100,850 $ 90,412 $79,600
Originations:
Real estate:
First mortgage/(1)(3)/................... 34,920 26,281 $ 23,496 18,219 19,739
Second mortgage/(2)/..................... 1,516 2,178 1,912 643 2,014
Consumer and other loans:
Consumer loans........................... 2,412 2,306 3,442 2,747 3,510
Student.................................. -- -- -- 438 954
Lease financing.......................... -- 300 -- 1,177 459
Commercial............................... 6,849 3,525 1,850 2,756 716
-------- -------- -------- -------- -------
Total originations..................... 45,697 34,590 30,700 25,980 27,392
Transfer of mortgage loans to foreclosed
real estate............................. 563 374 445 645 120
Repayments................................ 29,969 21,506 21,088 13,774 15,791
Loan sales................................ 8,542 -- -- 1,123 669
-------- -------- -------- -------- -------
Net loan activity.......................... 6,623 2,710 9,167 10,438 10,812
Total loans receivable at end of period.. $129,350 $122,727 $110,017 $100,850 $90,412
======== ======== ======== ======== =======
</TABLE>
- -------------------
/(1)/ Includes $28.1 million, and $6.8 million in one- to four-family
residential loans and commercial real estate loans, respectively, for the
year ended December 31, 1998.
/(2)/ Includes $1.9 million in home equity loans and a net change of $400,000 in
home equity lines of credit for the year ended December 31, 1998.
/(3)/ Includes $10.2 million of mortgage loans held for sale originated during
the year ended December 31, 1998.
8
<PAGE>
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 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,
1998, the Bank had $199,000 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 $775,000, $856,000 and $734,000, for the
fiscal years ended December 31, 1998, 1997, and 1996, respectively.
In 1998, the Bank began the securitization and sale of newly originated,
fixed rate mortgage loans. These transactions have resulted in the sale of the
principal balance to the investor, while the Bank retains the servicing rights
associated with the loans. To date, this program has resulted in approximately
$55,000 in capitalized service fee income.
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, 1998, the Bank's largest lending relationship totaled $2.8 million
and consisted of loans secured by retail businesses and properties. The Bank's
second largest lending relationship totaled $2.2 million and consisted of loans
secured by commercial retail businesses and properties. The Bank's third
largest lending relationship totaled $2.0 million and consisted of loans secured
by retail businesses and properties. The Bank's fourth largest lending
relationship totaled $1.5 million and was secured by a retail office plaza,
retail business property and residence. The Bank's fifth largest lending
relationship totaled $1.2 million and consisted of loans secured by multi-family
residential housing and residence. At December 31, 1998 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.
9
<PAGE>
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, 1998, the Bank had non-performing assets of $2.8 million, and a ratio of
non-performing loans and real estate owned ("REO") of 1.4% total assets. Non-
performing assets increased $469,000, or 20.3%, to $2.8 million in 1998 from
$2.3 million in 1997. While the changes in non-performing assets tend to be
cyclical, the increase can be attributed to longer workout or liquidation time
lines, due primarily to a larger volume of real estate foreclosures as well as a
generally soft local economy.
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 $732,000,
$767,000 and $700,000 at December 31, 1998, 1997,and 1996, respectively.
The largest component of REO consists of a real estate development project
which had a net book value of $638,000 at December 31, 1998. 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. In 1998, the Bank established a wholly-owned
subsidiary, whose sole business is the ownership and final development of the
Whispering Oaks real estate subdivision in Baldwinsville, New York. This
subsidiary was initially capitalized with $50,000 in cash, along with the
remainder of the subdivision project, which presently has a carrying value of
approximately $638,000. It is anticipated that this capitalization, together
with interim financing to be provided by the Bank, will be sufficient to
complete and liquidate this asset. During 1998, the Bank invested an additional
$511,000 to further the land for development. The Bank has developed and sold
19 lots through December 31, 1998. 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.
10
<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,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Real estate loans....................................... $ 1,498 $ 1,255 $ 1,953 $ 849 $ 1,045
Consumer loans.......................................... 534 283 45 70 693
-------- -------- -------- -------- --------
Total delinquent loans................................. 2,032 1,538 1,998 919 1,114
Total REO............................................... 742 767 700 586 610
-------- -------- -------- -------- --------
Total nonperforming assets/(1)/...................... $ 2,774 $ 2,305 $ 2,698 $ 1,505 $ 1,724
======== ======== ======== ======== ========
Total loans delinquent 90 days or more
to total loans receivable/(2)/.......................... 1.6% 1.0% 1.8% 0.9% 1.2%
Total loans delinquent 90 days or more to total assets.. 1.0% 0.8% 1.1% 0.5% 0.7%
Total nonperforming assets to total assets.............. 1.4% 1.2% 1.4% 0.8% 1.0%
Net loans receivable/(3)/............................... 128,211 121,585 108,742 100,149 89,668
-------- -------- -------- -------- --------
Total assets............................................ $203,374 $196,770 $189,937 $180,952 $170,715
======== ======== ======== ======== ========
</TABLE>
- ------------------------
/(1)/ Net of specific valuation allowances.
/(2)/ Net of unearned discount, and the allowance for loan losses.
/(3)/ Includes $2.8 million of mortgage loans held for sale at December 31,
1998.
During the year ended December 31, 1998, and year ended December 31, 1997,
respectively, additional gross interest income of $113,000 and $117,000 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,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 30-89 days:
Real estate loans......................................... $2,010 $2,232 $1,867 $2,465 $1,503
Consumer and other loans.................................. 126 296 249 133 137
------ ------ ------ ------ ------
Total past due 30-89 days................................ $2,136 $2,528 $2,116 $2,598 $1,640
====== ====== ====== ====== ======
</TABLE>
11
<PAGE>
The following table sets forth information regarding the Bank's delinquent
loans 60 days and greater and REO at December 31, 1998.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------
Balance Number
-------- ------
(Dollars In Thousands)
<S> <C> <C>
Residential real estate:
Loans 60 to 89 days delinquent..................................... $ 843 26
Loans more than 90 days delinquent................................. 1,498 42
Consumer and commercial business loans 60 days or more delinquent.. 566 58
Real estate owned.................................................. 742 4
------ ---
Total............................................................. $3,649 130
====== ===
</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.
The following table sets forth the aggregate amount of the Bank's
internally classified assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(In Thousands)
Substandard assets/(1)/............... $2,482 $1,719 $1,980 $1,163 $1,534
Doubtful assets....................... 103 55 59 34 11
Loss assets........................... 90 16 6 5 2
------ ------ ------ ------ ------
Total classified assets.............. $2,675 $1,790 $2,045 $1,547 $1,547
====== ====== ====== ====== ======
</TABLE>
- ---------------------
/(1)/Includes $638,000, $483,000, $250,000 and $292,000 for a real estate
development project classified as REO at December 31, 1998, 1997, 1996 and
1995, respectively.
12
<PAGE>
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.
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,
----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Total loans receivable, net................................ $128,211 $121,585 $108,742 $100,149 $89,668
Average loans outstanding.................................. 113,651 104,354 95,979 84,596
Allowance balance (at beginning of period)................. 827 906 346 315 280
Provision for losses:
Real estate................................................ 83 121 90 53 30
Consumer and other loans................................... 299 140 546 50 35
Charge-offs:
Real estate................................................ 141 -- -- 17 14
Consumer and other loans................................... 140 358 93 64 80
Recoveries:
Real estate................................................ -- -- -- -- 6
Consumer and other loans................................... 11 18 17 9 58
-------- -------- -------- -------- -------
Allowance balance (at end of period)....................... $ 939 $ 827 $ 906 $ 346 $ 315
======== ======== ======== ======== =======
Allowance for loan losses as a percent of net loans
receivable at end of period................................ 0.7% 0.7% 0.8% 0.3% 0.4%
Loans charged off as a percent of average loans
outstanding................................................ 0.1% 0.3% 0.1% 0.1% 0.1%
Ratio of allowance for loan losses to total nonperforming
loans at end of period/(1)/................................ 46.2% 53.8% 45.3% 37.6% 28.3%
Ratio of allowance for loan losses to total nonperforming
assets at end of period/(1)/.............................. 33.9% 35.9% 33.6% 23.0% 18.3%
</TABLE>
- ------------------------------
/(1)/ Net of specific reserves.
13
<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,
----------------------------------------------------------------------
1998 1997 1996
---------------------- -------------------- -----------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category
Amount Total Loans Amount Total Loans Amount Total Loans
------- ----------- ------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Balance at end of period applicable to:
Real estate loans....................... $ 380 91.67% $461 91.23% $340 90.66%
Consumer and other loans................ 559 8.33 366 8.77 566 9.34
----- ------ ---- ------ ---- ------
Total allowance for loan losses /(1)/.. $ 939 100.00% $827 100.00% $906 100.00%
===== ====== ==== ====== ==== ======
</TABLE>
- ----------------------------------------------
/(1)/ Percentages include unearned discount and origination fees.
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,
1998, the Bank had investment securities with an aggregate amortized cost of
$51.7 million and a market value of $53.4 million. At December 31, 1998, the
Bank's amortized cost value of investment securities consisted of $20.3 million
of corporate debt issues and $7.4 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 ranging up to 20 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, 1998,
the Bank held $1.2 million in common stock and $2.3 million in an equity mutual
fund. At December 31, 1998, the Bank had invested $23.0 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, 1998, the Bank's available-
for-sale and held-to-maturity portfolios had amortized cost of $51.7 million and
$80,000, respectively, and market values of $53.4 million and $80,000,
respectively.
14
<PAGE>
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.
Investment Portfolio. The following table sets forth the carrying value of
the Bank's investment portfolio at the dates indicated. At December 31, 1998,
the market value of the Bank's investments was approximately $53.4 million. The
market value of investments includes interest-earning deposits, and mortgage-
backed securities.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------
1998 1997 1996 1995
------- ------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agency obligations................. $ 1,471 $ 4,856 $ 5,879 $ 8,171
State and municipal obligations........................ 5,906 6,636 6,172 5,297
Corporate debt issues.................................. 20,267 18,121 22,060 28,533
Equity securities...................................... 1,230 1,139 557 69
Mutual funds........................................... 2,298 1,785 1,178 1,865
------- ------- ------- -------
31,172 32,537 35,846 43,935
Unrealized gain (loss) on available for sale portfolio.. 1,412 1,126 827 996
------- ------- ------- -------
Total investment securities........................... 32,665 33,663 36,673 $44,931
------- ------- ------- -------
Interest-earning deposits in other institutions......... -- -- -- --
Federal funds sold...................................... 1,800 -- 1,550 8,200
------- ------- ------- -------
Total investments.................................... $34,465 $33,663 $38,223 $53,131
======= ======= ======= =======
Mortgage-backed securities, net:
Adjustable rate........................................ 2,505 3,823 4,787 2,812
Fixed rate............................................. 17,976 19,200 18,179 5,100
------- ------- ------- -------
20,481 23,023 22,966 7,912
Unrealized gain (loss) on available for sale portfolio.. 298 135 (137) 41
------- ------- ------- -------
Total mortgage-backed securities, net................ 20,779 $23,158 $22,829 $ 8,310
======= ======= ======= =======
</TABLE>
Investment Portfolio Maturities. The following table sets forth the
amortized cost, market value, average life in years, and annualized weighted
average yield of the Bank's investment portfolio at December 31, 1998.
<TABLE>
<CAPTION>
Annualized
Average Weighted
Amortized Market Life Average
Cost Value Years Yield
---------- -------- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government treasury........................... $ 219 $ 220 1.293 7.75%
U.S. Government agency............................. 1,252 1,292 6.456 7.00
State and municipal obligations.................... 5,906 6,326 6.367 5.66
Corporate debt issues.............................. 20,347 20,677 9.189 6.63
Marketable equity securities....................... 3,529 4,149 -- --
------- ------- ----- -----
Total............................................. $31,253 $32,664 6.44
------- =======
Unrealized gain on available for sale portfolio.... 1,412
-------
Carrying value of investment securities............. $32,665
=======
Investment securities held to maturity: /(1)/
Corporate debt obligations......................... $ 80 80 -- 8.310
======= ======= ===== =====
</TABLE>
- -------------------------
/(1)/ The information is included above as a component of corporate debt issues.
15
<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, 1998. Yield is calculated on the
amortized cost to maturity.
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
------------------------ --------------------- -------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- ------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Debt investment securities:
U.S. Agency securities.... $ 27 6.042% $ 250 6.685% $ 929 6.959%
U.S. Government securities 200 7.440 -- -- -- --
State and municipal
obligations.............. 100 4.737 2,358 5.957 2,555 5.530
Corporate debt issues..... 1,935 6.548 5,531 6.650 6,874 6.558
------ ----- ------ ----- ------- -----
Total................... $2,262 6.541% $8,139 6.450% $10,357 6.340%
====== ===== ====== ===== ======= =====
Equity and mortgage-backed
securities:
Mutual funds.............. $2,298 1.100% $ -- --% $ -- --%
Mortgage-backed securities 3 7.883 1,367 6.704 2,899 7.009
Common stock.............. 1,230 7.634 -- -- -- --
------ ----- ------ ----- ------- -----
Total................... $3,531 3.378% $1,367 6.704% $ 2,899 7.009%
====== ===== ====== ===== ======= =====
Total investment
securities............. $5,793 4.613% $9,506 6.487% $13,256 6.486%
====== ===== ====== ===== ======= =====
Unrealized gain on available
for sale portfolio
Total carrying value....
Investment securities held
to maturity:/(1)/
Corporate debt obligations $ -- --% $ -- --% $ -- --%
------ ----- ------ ----- ------- -----
Total securities......... $ -- --% $ -- --% $ -- --%
====== ===== ====== ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998
-----------------------------------------------------
More than Ten Years Total Investment Securities
-------------------- ------------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Market Average
Value Yield Value Value Yield
----- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Debt investment securities:
U.S. Agency securities.... $ 46 10.126% $ 1,252 $ 1,292 7.003%
U.S. Government securities 19 10.952 219 220 7.748
State and municipal
obligations.............. 893 5.326 5,906 6,326 5.656
Corporate debt issues..... 6,008 6.742 20,348 20,678 6.633
------- ------ ------- ------- -----
Total................... $ 6,996 6.594% $27,725 $28,516 6.673%
======= ====== ======= ======= =====
Equity and mortgage-backed
securities:
Mutual funds.............. $ -- --% $ 2,298 $ 2,298 1.716%
Mortgage-backed securities 16,212 6.738 20,481 20,778 6.774
Common stock.............. -- -- 1,230 1,851 4.768
------- ------ ------- ------- -----
Total................... $16,212 6.738% $24,009 $24,927 6.187%
======= ====== ======= ======= =====
Total investment
securities............. $23,178 6.695% $51,734 $53,443 6.448%
======= ====== ======= ======= =====
Unrealized gain on available 1,709
for sale portfolio -----
Total carrying value.... $53,443
=======
Investment securities held
to maturity:/(1)/
Corporate debt obligations $ 80 8.310% $ 80 $ 80 8.310%
------- ------ ------- ------- -----
Total securities......... $ 80 8.310% $ 80 $ 80 8.310%
======= ====== ======= ======= =====
</TABLE>
- ------------------------------
/(1)/ The Information is included as a component of debt investment securities.
16
<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, 1998:
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
- ---------------- ------------------------- ----------------------------- ---------- --------- ---------
<C> <S> <C> <C> <C> <C>
(In Thousands)
0.000 None Non-interest demand account $ 50 $ 9,628 6.03%
2.000 None NOW accounts 500 16,327 10.23
2.150 None Savings Accounts - Fixed Rate 100 49,368 30.92
3.925 None Savings Account- Tiered Rate 100 14,861 9.31
2.411 None Money market accounts 2,500 75 .05
Certificates of Deposit
-------------------------
4.519 6 months Fixed term, fixed rate 2,500 4,927 3.04
4.602 9 months Fixed term, fixed rate 1,000 100 0.06
5.456 12 months Fixed term, fixed rate 1,000 20,334 12.53
5.914 15 months Fixed term, fixed rate 1,000 11,863 7.31
4.341 18 months Fixed term, variable rate 1,000 1,454 0.90
5.564 18 months Fixed term, fixed rate 1,000 2,920 1.80
5.558 24 months Fixed term, fixed rate 1,000 3,591 2.21
5.827 30 months Fixed term, fixed rate 1,000 4,283 2.64
5.926 36 months Fixed term, fixed rate /(1)/ 1,000 5,633 3.47
6.036 48 months Fixed term, fixed rate/ (1)/ 1,000 3,906 2.41
6.030 60 months Fixed term, fixed rate 1,000 1,892 1.17
6.729 84 months Fixed term, fixed rate 1,000 8,219 5.06
6.055 60 through 120 months Fixed term, fixed rate 1,000 284 0.18
------- -----
TOTAL $162,289/(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)/ Tables excludes escrow accounts totalling $556,000 of December 31, 1998.
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.
17
<PAGE>
<TABLE>
<CAPTION>
Balance Percent Balance Percent
at of Incr. at of Incr.
12/31/98 Deposits (Decr) 12/31/97 Deposits (Decr)
--------- -------- -------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Club accounts.............. $ 907 0.57% $ 115 $ 792 0.52% $ 131
Noninterest accounts....... 9,628 6.03 1,984 7,644 5.03 303
NOW accounts............... 16,327 10.23 3,021 13,306 8.75 224
Passbooks.................. 63,322 39.66 177 63,145 41.53 (1,828)
Money market deposit
accounts.................. 75 0.05 (38) 113 0.07 (61)
Time deposits which mature:
Within 12 months.......... 51,729 32.40 12,869 38,860 25.56 (14,075)
Within 12-36 months....... 11,946 7.47 (10,665) 22,611 14.87 7,679
Beyond 36 months.......... 5,729 3.59 141 5,588 3.67 990
--------- ------ -------- --------- ------ --------
Total.................... $ 159,663 100.00% $ 7,604 $ 152,059 100.00% $ (6,637)
========= ====== ======== ========= ====== ========
</TABLE>
<TABLE>
<CAPTION>
Balance Percent Balance Percent Balance
at of Incr. at of Incr. at
12/31/96 Deposits (Decr) 12/31/95 Deposits (Decr) 12/31/94
-------- -------- ------- --------- -------- ------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Club accounts.............. $ 661 0.42% $ 110 $ 551 0.3% $ (67) $ 618
Noninterest accounts....... 7,341 4.63 129 7,212 4.6 1,124 6,088
NOW accounts............... 13,082 8.24 917 12,165 7.7 (912) 13,077
Passbooks.................. 64,973 40.94 (5,495) 70,468 44.6 (7,027) 77,495
Money market deposit
accounts.................. 174 0.11 (78) 252 0.2 (532) 784
Time deposits which mature:
Within 12 months.......... 52,935 33.36 15,011 37,924 24.0 10,762 27,162
Within 12-36 months....... 14,933 9.41 (5,968) 20,901 13.2 (1,977) 22,878
Beyond 36 months.......... 4,598 2.90 (3,914) 8,512 5.4 850 7,662
--------- ----- ------- --------- ----- ------- ---------
Total.................... $ 158,697 100.0% $ 712 $ 157,985 100.0% $ 2,221 $ 155,764
========= ===== ======= ========= ===== ======= =========
</TABLE>
_______________________________
/(1)/ Excludes escrow accounts totalling $556,000 of December 31, 1998.
18
<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,
---------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C>
Rate
- ----
3.00% or less............. $ 8 $ 139 $ 180 $ 274
3.01 - 4.99%.............. 10,824 7,253 10,665 3,601
5.00 - 6.99%.............. 53,920 55,228 57,128 58,313
7.00 - 8.99%.............. 4,652 4,552 4,667 5,347
9.00 - 10.99%............. -- -- -- 53
------- ------- ------- -------
$69,404 $67,172 $72,640 $67,588
======= ======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1998.
<TABLE>
<CAPTION>
Amount Due
----------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
------- ----- ----- ----- ----- ------- ----
Rate (In Thousands)
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
3.00% or less.... $ 8 $ -- $ -- $ -- $ -- $ -- $ 8
3.01 - 3.99%..... 11 5 -- -- -- -- 16
4.00 - 4.99%..... 6,413 3,573 573 62 187 -- 10,808
5.00 - 5.99%..... 39,699 2,351 3,291 1,353 874 1,629 49,197
6.00 - 6.99%..... 1,162 2,350 255 722 177 57 4,723
7.00 - 7.99%..... 3,775 -- -- 758 -- -- 3,775
8.00% and above.. 119 -- -- -- -- -- 119
------- ------ ------ ------ ------ ------ -------
$51,187 $8,279 $4,119 $2,895 $1,238 $1,686 $69,404
======= ====== ====== ====== ====== ====== =======
</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,
1998.
<TABLE>
<CAPTION>
Certificates
of Deposit
of $100,000
Remaining Maturity or More
------------------ -----------
(In Thousands)
<S> <C>
Three months or less.............................................. $ 1,458
Three through six months.......................................... 2,510
Six through twelve months......................................... 2,719
Over twelve months................................................ 2,004
--------
Total.......................................................... $ 8,691
========
</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,
----------------------------------------------------
1998 1997 1996 1995
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period.............................................. $152,060 $158,697 $157,985 $155,764
Net deposits (withdrawals).................................................. 1,520 (12,920) (5,611) (4,034)
Interest credited........................................................... 6,083 6,283 6,323 6,255
-------- -------- -------- --------
Ending balance.............................................................. 159,663 152,060 158,697 157,985
-------- -------- -------- --------
Net increase (decrease) in deposits......................................... $ 7,604 $ (6,637) $ 712 $ 2,251
======== ======== ======== ========
</TABLE>
19
<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,
1998, the Bank had $5.4 million in funds obtained from repurchase agreements
outstanding and $13.3 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,
-----------------------------------
1998 1997 1996
---- ---- -----
(In thousands)
<S> <C> <C> <C>
Overnight Line of Credit..................... $ -- $ 5,750 $ --
Term borrowings (original
term)
90 days or less............................. 1,587 7,942 7,610
1 year...................................... 8,404 3,550 --
2 year...................................... 8,700 1,000 --
------- ------- ------
Balance at end of period................... $18,691 $18,242 $7,610
======= ======= ======
Daily average during the
year........................................ 15,077 10,212 1,472
Maximum month-end balance.................... 18,691 18,892 7,610
Weighted average rate
during the year............................. 5.64% 5.92% 5.90%
Year-end average rate........................ 5.32% 5.84% 5.47%
</TABLE>
Personnel
As of December 31, 1998, the Bank had 67 full-time and 12 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. 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
20
<PAGE>
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 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.
21
<PAGE>
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 Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal banking regulators.
22
<PAGE>
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, 1998 the Bank held $26.1 million in deposits which are insured by
the Savings Association Insurance Fund. The Bank paid $35,000 in federal
deposit insurance premiums for the fiscal year ended December 31, 1998, as
compared to $33,000 in 1997.
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, 1998, 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 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
23
<PAGE>
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 system, and
make such assessment available to the public. The NYCRA also requires
24
<PAGE>
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, 1998, 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, 1998, 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.
25
<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
26
<PAGE>
operating losses can offset no more than 90% of AMTI. Certain payments of
alternative minimum tax may be used as credits against regular tax liabilities
in future years. The Bank has not been subject to the alternative minimum tax
and has no such amounts available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At December 31, 1998, 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, 1998. The aggregate net book
value of the Bank's premises and equipment was $4.5 million at December 31,
1998. 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
Fulton Branch 1994 Owned --
- -------------
114 Oneida Street
</TABLE>
Fulton, New York 13068
____________________________________
(1) The property is owned; the underlying land is leased.
27
<PAGE>
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, 1998 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.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
28
<PAGE>
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 68 Chairman of the Board,
President and Chief Executive Officer
Anita J. Austin 49 Internal Auditor
Melissa A. Dashnau 41 Vice President, Secretary
James A. Dowd, CPA 31 Vice President--Controller
Edgar J. Manwaring 53 Vice President--Lending
Gregory L. Mills 38 Vice President, Director of Marketing, Branch
Administrator
W. David Schermerhorn 38 Executive Vice President-Lending
Thomas W. Schneider 37 Executive Vice President and Chief Financial Officer
Barry S. Thompson 44 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.
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.
29
<PAGE>
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, 1998 and 1997.
(C) Consolidated Statements of Income - years ended December 31, 1998,
1997 and 1996;
(D) Consolidated Statements of Stockholders' Equity -years ended
December 31, 1998, 1997 and 1996
(F) Consolidated Statements of Cash Flows - years ended December 31,
1998, 1997 and 1996; 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, 1998.
(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)
4 Form of Stock Certificate of Pathfinder Bancorp, Inc. (Incorporated
herein by reference to the Company's S-4)
10.1 Form of Oswego City Savings Bank 1998 Stock Option Plan Incorporated
by reference to the Company's S-4
30
<PAGE>
10.2 Form of Oswego City Savings Bank 1998 Recognition and Retention Plan
Incorporated by reference to the Company's S-4
10.3 and Chief Executive Officer Incorporated by reference to the Company's
Employment Agreement between the Bank and Chris C. Gagas, President S-
4
10.4 Vice President and Chief Financial Officer Incorporated by reference
to Employment Agreement between the Bank and Thomas W. Schneider, the
Company's S-4
10.5 Vice President - Loan Administration Incorporated by reference to the
Employment Agreement between the Bank and W. David Schermerhorn,
Company's S-4
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
31
<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 26, 1999 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,
Chief Executive Executive Vice
Officer and Chairman of the Board President and Chief Financial
Officer
(Principal Executive Officer) (Principal Financial Officer)
Date: March 26, 1999 Date: March 26, 1999
By: /s/ James A. Dowd By: /s/ Chris R. Burritt
----------------- --------------------
James A. Dowd, Vice President Chris R. Burritt, Director
and Controller (Principal
Accounting Officer)
Date: March 26, 1999 Date: March 26, 1999
By: /s/ Bruce E. Manwaring By: /s/ Raymond W. Jung
---------------------- -------------------
Bruce E. Manwaring., Director Raymond W. Jung, Director
Date: March 26, 1999 Date: March 26, 1999
By: /s/ L. William Nelson, Jr. By: /s/Victor S. Oakes
-------------------------- ------------------
L. William Nelson, Jr., Director Victor S. Oakes, Director
Date: March 26, 1999 Date: March 26, 1999
By: /s/ Lawrence W. O'Brien By: /s/ Corte J. Spencer
----------------------- --------------------
Lawrence W. O'Brien, Director Corte J. Spencer, Director
Date: March 26, 1999 Date: March 26, 1999
By: /s/ Janette Resnick
-------------------
Janette Resnick, Director
Date: March 26, 1999
32
<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.
(Incorporated herein by reference to the Company's S-4)
10.1 Form of Oswego City Savings Bank 1998 Stock Option Plan
Incorporated by reference to the Company's S-4
10.2 Form of Oswego City Savings Bank 1998 Recognition and
Retention Plan Incorporated by reference to the Company's S-4
10.3 Employement 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
33
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
It is with great pleasure that we once again present the Annual Report of
Pathfinder Bancorp, IncBOBBI DAVISFinancial Printing GroupIt is with great
pleasure that we once again present the Annual Report of Pathfinder Bancorp,
Inc., the holding company for Oswego City Savings Bank, to our shareholders.
A major disappointment for your Bank was the refusal of the FDIC to approve the
merger of Oswego County Savings Bank into your Bank. It is very difficult to
understand the reason for their rejection of the merger which, by statute, is
perfectly legal, especially when it is clearly obvious that the regulators will
let larger players (i.e. Citicorp-Travelers) do what they want even when clearly
violating existing laws. While we feel the business reasons for this merger are
as valid today as when the agreement was reached, the longer than anticipated
time line has forced us to turn our attention toward more immediate operational
and growth strategies.
As we celebrate our 140th year, we continue to offer financial services to our
community in an efficient and friendly manner. A very successful effort in the
secondary mortgage market was made with the origination of approximately $11
million of additional mortgages. In an effort to increase this business, we
have recently increased the number of mortgage originators, expanding into the
Onondaga County market. The ability to securitize our conforming residential
loan portfolio allows the bank to expand mortgage originations through
competitive pricing, while minimizing interest rate and credit risk, and
enhancing liquidity. The bank services all mortgage loans which we originate,
and the resultant mortgage servicing rights are a source of service fee income
and reduce our reliance on net interest income. Our BUSINESS MANAGER program,
a cash flow management system, continues to be well received by the business
community. We crossed the 2,000 accounts threshold for Young Investors
accounts. This is an account opened by anyone from birth to 16 years of age as
a beginning step toward lifetime savings. Our electronic banking facilities have
increased with the installation of ATM's in the Sunrise Convenience Stores in
Fulton, Oswego and New Haven. We are pleased to report that Senior Vice
President and Compliance Officer, Barry Thompson, was successful in obtaining
the CRCM (Certified Regulatory Compliance Manager) designation, emphasizing our
commitment to full and complete compliance with the many regulations which
govern our business.
Your Bank has made significant investments in upgrading our computer facilities
in 1998. We continually invest in technology to maintain a leading edge in the
services available to our customers, and to provide those services in an
efficient and cost effective manner. We also have entered a program to verify
our full compliance with the Year 2000 event (Y2K) and have successfully passed
examinations by our regulators in the certification process.
We are eager to report to you our earnings for the year 1998 which reflect
operating results and our financial condition for the fiscal year ended December
31, 1998. Total assets increased by $6.6 million to $203.4 million, total
loans increased by $6.6 million, and deposits increased by $7.8 million.
Reported net income for 1998 was $1.2 million, while the actual contribution to
tangible shareholders' equity from cash
<PAGE>
earnings was $1.8 million. We believe it is important for investors and analysts
to focus on cash earnings and related ratios since tangible equity generation,
or cash earnings, measure our financial capacity for growth, share repurchases,
and dividend payments. In that regard, we present cash earnings information on
page 9 of this report.
While the banking industry is facing more and greater competition, and mergers
and acquisitions are ever more prevalent, it is important to reiterate our
commitment to remain an independent local Bank. We look forward to continuing
our long record of offering successful financial service with alliances where
appropriate, to be able to continue our position of leadership.
Our goals in 1999 include continued growth in assets; further enhancement of our
services to our customers; increased shareholder value; and our continuing
commitment to our employees and the communities we serve.
We remain confident of the future and our readiness to meet the demands made on
us.
Sincerely,
Chris C. Gagas
Chairman, President & CEO
<PAGE>
On January 14, 1997, the Board of Directors adopted an Agreement and Plan of
Reorganization to reorganize the Bank 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. On December 30, 1997, the Reorganization was implemented
pursuant to the Agreement and Plan of Reorganization approved by the Bank's
stockholders and deregulatory authorities. As a result of the Reorganization,
Pathfinder Bancorp, MHC, the Bank's existing mutual holding company, owns a
majority of the common stock of the new stock holding company (Pathfinder
Bancorp, Inc.), which owns 100% of the common stock of the Bank. Pursuant to the
Reorganization, each share of Bank common stock held by existing stockholders of
the Bank was exchanged for a share of common stock of Pathfinder Bancorp, Inc.
The Reorganization of the Bank was structured as a tax-free reorganization and
accounted for in a manner similar to a pooling of interests.
As of December 31, 1998, the company's total assets and shareholders' equity
were $203.4 million and $22.3 million, respectively.
Pathfinder Bancorp, Inc.'s common stock currently trades on the NASDAQ Small Cap
Market under the symbol "PBHC".
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR (In Thousands)
Interest Income $ 14,056 $ 14,168 $ 13,213 $ 12,205 $ 10,443
Interest Expense 6,969 6,892 6,414 6,259 4,697
Net Interest Income 7,086 7,276 6,799 5,946 5,746
Net Income 1,209 1,854 1,272 990 1,146
PER COMMON SHARE (a) (b)
Net Income:
Primary 0.44 0.66 0.68 0.10 NA
Fully diluted 0.42 0.66 0.68 0.10 NA
Book Value 8.25 8.20 7.22 7.00 NA
Cash dividends declared 0.20 0.17 0.13 0.00 NA
Stock Price:
IOP 5.00 5.00 5.00 5.00 N/A
High 26.125 20.00 7.083 7.167 NA
Low 9.125 6.25 5.333 5.583 NA
Close 9.125 20.0 6.25 7.00 NA
YEAR END (In Thousands)
Total assets $203,374 $196,800 $189,937 $180,752 $170,715
Interest-earning deposits at
other financial institutions 1,800 -- 1,550 8,200 13,627
Investment securities 32,665 33,663 36,673 44,932 48,135
Mortgage-backed securities 20,778 23,158 22,829 7,953 992
Loans Receivable, net:
Real estate 115,392 109,543 99,047 91,023 83,563
Consumer and other 9,978 10,495 9,695 9,126 6,105
Total loans receivable, net 125,370 120,038 108,742 100,149 89,668
Intangible assets 3,289 3,605 3,921 4,236 4,552
Deposits 160,219 152,399 158,998 158,324 155,764
Borrowed funds 18,691 18,242 7,610 -- --
Notes Payable ESOP -- 430 486 425 --
Equity 22,287 23,583 21,390 20,751 13,990
SELECTED PERFORMANCE RATIOS
Return on average assets 0.62% 0.97% 0.69% 0.56% 0.74%
Return on average equity 5.12 8.35 6.09 6.31 8.20
Return on tangible equity 6.36 9.28 7.28 5.99 12.14
Average equity to average assets 12.05 11.59 11.32 8.74 9.00
Equity to total assets 10.96 11.98 11.26 11.47 8.19
Net interest rate spread 3.72 3.83 3.88 3.72 4.01
Noninterest expense to total assets 3.24 2.93 2.82 2.94 2.83
Nonperforming loans to
net loans receivable 1.62 1.25 2.05 0.92 1.24
Nonperforming assets to
total assets 1.36 1.17 1.54 0.83 1.01
Allowance for loan losses
to net loans receivable 0.75 0.69 0.83 0.35 0.35
Number of full service offices 5 5 5 5 5
</TABLE>
(a) Net income per share data for 1995 is 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 5, 1998 to shareholders of record
January 26, 1998.
<PAGE>
Cash Earnings and Related Returns
Cash earnings, which represent the amount by which tangible equity changes each
period due to operating results, includes reported earnings and excludes non-
cash charges for amortization relating to the allocation of ESOP stock, the
earned portion of Option plan and MRP stock, and the amortization of the premium
for deposits acquired ("goodwill"). Cash earnings increased tangible
shareholders' equity in 1998 by $1.8 million, or 52.9% more than reported
earnings would indicate.
<TABLE>
<CAPTION>
Cash Earnings Analysis
For the Years Ended December 31,
(in thousands, except per share data) 1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $1,208 $1,854 $1,272
Add back non-cash expenses related to:
Stock-related benefit plans 598 494 -
Amortization of intangible asset 316 316 316
Associated tax benefits (274) (243) (92)
- -------------------------------------------------------------------
Cash earnings $1,848 $2,421 $1,496
===================================================================
Cash earnings per share-basic $ .67 $ .87 $ .53
Cash earnings per share-diluted $ .64 $ .86 $ .53
- -------------------------------------------------------------------
</TABLE>
Cash Earnings Performance Ratios
<TABLE>
<CAPTION>
For the Years Ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets .94% 1.26% .81%
Return on average tangible shareholders' equity 9.44% 13.12% 7.16%
Non interest expense to average assets 2.89% 2.59% 2.74%
Efficiency ratio 65.42% 57.37% 64.14%
- ----------------------------------------------------------------------------
</TABLE>
Cash Earnings Performance Ratios Exclusive of Merger Costs
- ------------------------------------------------------------------------------
For the year ended December 31, 1998
- ------------------------------------------------------------------------------
Return on average assets 1.08%
Return on average tangible shareholders' equity 10.84%
Non interest expense to average assets 2.70%
Efficiency ratio 61.05%
- -------------------------------------------------------------------------------
<PAGE>
General
Throughout the Management's Discussion and Analysis the term, "the Company",
refers to the consolidated entity of Pathfinder Bancorp, Inc., Oswego City
Savings Bank, and Whispering Oakes Development Corp. At December 31, 1998,
Pathfinder Bancorp, Inc.'s only business was the 100% ownership of Oswego City
Savings Bank. At December 31, 1998, 1,552,500 shares, or 57.5%, of the
Company's common stock was held by Pathfinder Bancorp, MHC, the Company's mutual
holding company parent and 1,149,345 shares, or 42.5%, was held by the public.
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 Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market areas and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company'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 Company 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 Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its investments in
mortgage and other loans, investment securities and other assets, and its cost
of funds consisting of interest paid on deposits and other borrowings. The
Company'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, service
charges and servicing rights, net gains and losses on sales of securities and
loans, 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 Company 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 Company. In particular, the general level
of market rates tends to be highly cyclical.
Termination of Merger Agreement
- -------------------------------
On January 28, 1999, the Company announced that in conference and concurrence
with the Board of Trustees of Oswego County Savings Bank, the merger agreement
between the two banks, which was originally signed on September 5, 1997 was
terminated. The Company cited the failure to gain regulatory approval for a
transaction that was deemed unique as the reason for the cancellation of the
merger plans. For the year ended December 31, 1998, the company recognized
costs of $379,000 in connection with the merger. These costs were for
professional services rendered in legal, tax, and accounting work, as well as
for filing fees.
Whispering Oaks Development Corporation
- ---------------------------------------
On October 31, 1998, the Company incorporated Whispering Oaks Development Corp.
("WODC") as a wholly owned subsidiary of Oswego City Savings Bank. The assets
of WODC were formerly held by the Company as a component of other real estate
owned. The Company is in the process of liquidating the development property.
The subsidiary was formed to comply with regulatory requirements regarding the
development of the property. The net book value of the assets transferred is
$638,000. Management does not anticipate any loss associated with the
liquidation of the assets held in the subsidiary.
<PAGE>
Stock Split
- -----------
On January 13, 1998, the Board of Directors of the Company declared a three for
two stock split in the form of a dividend on the holding company's outstanding
common stock. The stock split was paid on February 5, 1998 to shareholders of
record as of January 26, 1998. The stock split was applied retroactively to all
per share data reported in the financial statements and presented in this
report.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company'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 Company 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 Company'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 Company completed
its assessment phase and identified five systems critical to its continued
operations. These systems include the loan, deposit, investment, general
ledger, and electronic funds transfer systems. The committee has determined
that the required changes are manageable, and that such changes will resolve the
Company's Year 2000 computer systems issues. The committee has segregated the
issues between those that affect information technology ("IT") and those that do
not ("non-IT"). At March 15, 1999, the implementation of modifications for
Year 2000 readiness of mission critical systems is complete. Testing for non-IT
systems is 95% complete at March 15, 1999. Testing of solutions for IT
commenced in September 1998 with a goal to be fully tested by June 30, 1999. At
March 15, 1999, IT testing was approximately 75% complete.
The Company has utilized both internal and external resources to program,
replace, and test the software for Year 2000 modifications. The Company is also
communicating with its third party data processing vendors, as well as its
significant suppliers and commercial customers, to determine the Company's
exposure should any of these parties fail to resolve their own significant Year
2000 issues. The committee is evaluating the risk from these third parties and,
where appropriate, will establish action plans to reduce or eliminate the risk.
In some cases, the Company 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 Company could result.
The costs of the remedial actions and the date on which the Company 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. Costs related to the Year 2000
issue will be expensed as they are incurred, except for the cost, if any for new
hardware or software that is purchased which will be capitalized and expensed in
conformity with generally accepted accounting principles. The Company's efforts
to prepare its data processing systems for the impact of the Year 2000 were
approximately $45,000 in non-capitalized costs for 1998 with the majority of
expenditures for software and hardware upgrades being capitalized upon
implementation in February 1999. The total amount capitalized was approximately
$613,000 and is being depreciated over an average of approximately 6 years. The
depreciation will result in additional annual expenses of approximately $100,000
over this period. Exclusive of these expenses, management does not anticipate
costs exceeding $75,000 in additional expenses associated with Year 2000
readiness issues.
<PAGE>
As of March 15, 1999, the Company believes that the progress it has made to
date, along with the expected completion of mission critical testing in 1999,
will result in the Company's being well prepared to meet the Year 2000. There
can be no assurance that the Company's third party data service providers will
be able to satisfactorily address the Year 2000 issue, or that the costs
associated with Year 2000 readiness and compliance issues will not exceed
management's estimate. The Company has established contingency plans for all
mission critical systems and will evaluate the implementation of such plans
during 1999.
Business Strategy
The Company's business strategy is to operate as a well-capitalized, profitable
and independent community bank dedicated to providing quality customer service.
Generally, the Company 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 Company'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 Company's business strategy are as follows:
Community-Oriented Institution
The Company is committed to meeting the financial needs of its customers in
Oswego County, New York, the county in which it operates. The Company 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 Company can be
more effective in servicing its customers than many of its non-locally
headquartered competitors because of the Company's ability to quickly and
effectively provide senior management responses to customer needs and inquiries.
The Company's ability to provide these services is enhanced by the stability of
the Company's senior management, which has an average tenure with the Company of
over 16 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 public offering and
subsequent reorganization into the two-tier holding company structure to further
enhance growth and independence, and the expansion of the Company's small
business lending services. The Company is committed to exploring additional
lines of business and the formation of strategic alliances to maintain its
independence and enhance its profitability in a competitive, consolidating
industry.
Capital and Asset Growth
The Company's net worth has increased from $14.0 million at December 31, 1994 to
$22.3 million at December 31, 1998. The Company's ratio of shareholders' equity
to total assets was 10.96% at December 31, 1998. Total assets have increased by
$32.7 million, or 19.1%, since December 31, 1994. The Company's capital exceeds
all regulatory capital requirements (see footnote # 15 of the consolidated
financial statements for Pathfinder Bancorp, Inc.).
Emphasis on Residential Mortgage Lending and Investment Securities
Since its inception, the Company 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
Company has not been an active purchaser of loans or loan participations. To
supplement local mortgage loan originations, the Company invests in investment
securities consisting
<PAGE>
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 Company 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, 1998, 91.8% of the Company's total loan portfolio consisted of
loans secured by real estate. In addition, at December 31, 1998, 26.3% of the
Company's total assets consisted of investment securities. Generally, the yield
on mortgage loans originated by the Company is greater than that of investment
securities and mortgage-backed securities purchased by the Company.
Strong Retail Deposit Base
The Company has a relatively strong retail base drawn from the five full-service
offices in its market area. At December 31, 1998, 58.0% of the Company's
deposit base of $160.2 million consisted of core deposits, which included non-
interest-bearing demand accounts, NOW accounts, passbook and club savings
accounts and money market deposit accounts. Core deposits are considered to be a
more stable and lower cost source of funds than certificates of deposit or
outside borrowings. The Company will continue to emphasize retail deposits by
maintaining its network of full service offices, and providing depositors with a
full range of accounts.
Management of Market Risk - Interest Rate Risk
The Company's most significant form of market risk is interest rate risk, as the
majority of the Company's assets and liabilities are sensitive to changes in
interest rates. The Company's mortgage loan portfolio, consisting primarily of
loans on residential real property located in Oswego County, is subject to risks
associated with the local economy. The Company's interest rate risk management
program focuses primarily on evaluating and managing the composition of the
Company's assets and liabilities in the context of various interest rate
scenarios. Factors beyond management's control, such as market interest rates
and competition, also have an impact on interest income and interest expense.
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.
The Company does not generally 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 Company 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 Company'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 Company 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 Company's savings accounts.
<PAGE>
Savings accounts have traditionally provided a source of relatively low cost
funding that have demonstrated historically a low sensitivity to interest rate
changes. The Company generally matches a percentage of these, which are deemed
core, against longer term loans and investments. In addition, the Company has
sought to extend the terms of its time deposits. In this regard, the Company 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
Company 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 up to ten years ) portfolio with staggered maturities.
The Company 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
Company has an Asset-Liability Management Committee which is responsible for
reviewing the Company'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 Company'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 Company 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.
At December 31, 1998, the total interest bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $26.7 million, representing a cumulative one-
year gap ratio of a negative 16.96%. Simulation and net present value analysis
demonstrate percentage changes to net interest income and net portfolio value of
a negative 7.57% and a negative 21.79%, respectively, in an upward 200 basis
point parallel shift in the yield curve.
Gap Table
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
expected to reprice or mature based upon certain assumptions in each of the
future time periods shown. The Company has assumed that its passbook savings,
NOW, and money market accounts which totaled $85.0 million at December 31, 1998
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 $17,699 $ 18,830 $ 11,088 $ 5,017 $ 1,256 -- $ 53,810
Fixed rate 355 1,995 9,959 7,851 8,282 1,989 30,431
Commercial and multi-family:
ARM's 1,182 2,277 2,659 530 -- -- 6,648
Fixed 138 788 4,073 3,502 4,530 2,422 25,453
Home equity fixed rate loans 120 344 1,040 1,247 3,070 -- 5,811
Home equity line of credit 3,819 -- -- -- -- -- 3,819
Consumer loans 1,243 767 1,349 727 -- -- 4,086
Commercial business loans 224 710 2,175 1,698 963 679 6,449
Mortgage-backed securities 2,271 4,172 3,637 4,041 4,897 1,759 20,777
Investment securities 5,532 8,104 4,589 2,990 9,429 1,893 32,537
Interest earning deposits at other
financial institutions 1,800 -- -- -- -- -- 1,800
Total interest-earning assets $38,822 $ 32,283 $ 40,161 $ 31,710 $30,455 $ 8,318 $181,749
- ---------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook accounts $ 4,867 $ 14.430 $ 19,256 $ 25,675 -- -- $ 64,228
NOW accounts 5,628 5,628 5,628 -- -- -- 16,884
Money market accounts 75 -- -- -- -- -- 75
Certificate accounts 19,694 31,493 12,398 4,133 1,686 -- 69,404
Repurchase agreements 1,909 14,096 2,685 -- -- -- 18,690
Total interest-bearing liabilities $32,173 $ 65,647 $ 39,967 $ 29,808 $ 1,686 $ 0 $169,281
- --------------------------------------------------------------------------------------------------------------------
Interest-earning assets less interest-
bearing liabilities ("interest rate
sensitivity gap") 6,694 (33,364) 194 1,902 28,769 8,318
Cumulative excess (deficiency) of
interest-sensitive assets over
interest-sensitive liabilities 6,694 (26,715) (26,521) (24,619) 4,150 11,438
Interest sensitivity gap
to total assets 3.38% -16.96% .10% .97% 14.62% 4.23%
Cumulative interest sensitivity gap
to total assets 3.38% -13.58% -13.48% -12.51% 2.11% 5.81%
Ratio of interest-earning assets to
interest-bearing liabilities 120.67% 49.18% 100.49% 106.38% -- --
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 120.67% 72.69% 80.75% 85.31% 102.45% 106.72%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOW, passbook and money market accounts are anticipated to 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 Company. Moreover, certain shortcomings are inherent in the
analysis presented by the foregoing tables. 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 tables.
Changes in Net Interest Income and Net Portfolio Value
The following table measures the Company'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"
<PAGE>
measures changes in the current net mark-to-market value of assets and
liabilities due to parallel shifts in the yield curve. The base case assumes
December 31, 1998 interest rates. The Company 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 Company's
Interest Rate Risk policy. The Company's current interest rate risk exposure is
within those guidelines set forth.
Change in Interest Rates
Increase(Decrease)
Basis Points Net Interest Income Net Portfolio Value
(Rate Shock) Percentage Change Percentage Change
------------ ----------------- ------------------
300 -12.00% -33.25%
200 -7.57 -21.79
100 -3.59 -9.99
Base Case - -
(100) 2.32 5.40
(200) 3.47 9.12
(300) -.40 10.87
Changes in Financial Condition
Comparison at December 31, 1998 and December 31, 1997.
Total assets increased $6.6 million, or 3.3%, to $203.4 million at December 31,
1998 from $196.8 million at December 31, 1997. The increase in assets is
primarily the result of increases in the balance of net loans receivable to
$125.4 million from $120.0 million, an increase of $5.3 million, or 4.4%. This
increase was principally attributable to the deployment of maturing short term
investments to fund the demand for the Company's loan products, principally one
to four family mortgage loans and commercial real estate loans. Additionally,
the Company originated mortgage loans held-for-sale of $9.9 million of which
$7.7 million was sold into the secondary market. These originations consist of
15 year and 30 year fixed rate mortgages. The Company services these mortgages
and recognizes fee income from the amortization of capitalized mortgage
servicing rights. At December 31, 1998, the Company's mortgage loans held-for-
sale portfolio was $2.8 million, compared to $1.5 million at December 31, 1997.
Increases also occurred in the following areas: interest-bearing deposits at
other financial institutions increased by $1.8 million, cash and due from banks
increased by $382,000, premises and equipment increased $770,000, and other
assets increased $920,000. The increase in premises and equipment consists
primarily of upgrades to the Company's data processing systems. The increase in
other assets was primarily attributable to a $554,000 increase in the cash value
of life insurance, an $84,000 increase in prepaid pension expense, $55,000 in
capitalized mortgage servicing rights, a $100,000 receivable from another
financial institution, and $76,000 in other prepaid expenses. These increases
were partially offset by decreases in investment securities of $3.4 million, or
5.9%, to $53.4 million from $56.8 million, and intangible assets of $316,000 to
$3.3 million from $3.6 million.
Non-performing loans (past due 90 days or more) increased $494,000, or 32.1%, to
$2.0 million at December 31, 1998, from $1.5 million at the end of the prior
year. The non-performing loans to total loans ratio at December 31, 1998 was
1.6% compared to 1.3% at December 31, 1997. The Company's allowance for loan
losses to total loans and non-performing loans was .73% and 46.2%, respectively,
at December 31, 1998. The increase in non-performing loans occurred primarily in
the Company's one-to-four family real estate loan portfolio. While this trend
is indicative of the slow economic growth in the Company's market area, the
underwriting of these loans allows for relatively low loan-to-value ratios. The
average loan-to-value ratio of the Company's non-performing one-to-four family
mortgage loans was approximately 63% at December 31, 1998.
Total liabilities increased $7.9 million, or 4.5%, to $181.1 million at December
31, 1998 from $173.2 million at the end of the prior fiscal year. The increase
was primarily attributable to a $7.8 million
<PAGE>
increase in deposits to $160.2 million at December 31, 1998, from $152.4 at
December 31, 1997. The increase in deposits was comprised of a $5.8 million
increase in interest bearing deposits and a $2.0 million increase in non-
interest bearing deposits. Savings accounts increased $292,000, or .5%, to $64.2
million while time deposits increased $2.3 million, or 3.5%. The Company's
borrowings increased $449,000, or 2.5% to $18.7 million at December 31, 1998
from $18.2 million at the end of the prior year. The borrowings, consisting of
term advances and repurchase agreements, were utilized to fund the Company's
growth in its loan portfolio. Other liabilities increased $31,000, or .1%, to
$2.2 million at December 31, 1998 from $2.1 million at the prior fiscal year
end. The Bank's ESOP refinanced its note payable by borrowing funds from the
Company and repaying its third party lender. The note payable is eliminated in
the Company's consolidated financial statements.
Shareholders' equity decreased $1.3 million, or 5.5%, to $22.3 million at
December 31, 1998 from $23.6 million at December 31, 1997. The decrease is
attributable to the repurchase of 175,625 shares of the Company's common stock
totaling $2.7 million and dividends declared of $545,000, partially offset by
net income of $1.2 million, an increase in the unrealized appreciation on
investment securities available for sale of $269,000, and a net decrease in
unearned ESOP and stock compensation plans of $472,000.
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 Company's
loan products, principally one to four family mortgage loans and commercial real
estate loans. Additionally, the Company 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 Company's market area and expand mortgage
underwriting into new geographic regions without incurring the credit risk of
holding such loans in the Company's portfolio. The Company intends to service
these mortgages and will recognize fee income from the amortization of mortgage
servicing rights. At December 31, 1997, the Company'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 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 Company'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 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 Company's investment unit, an agency relationship with a
third party vendor, participated in a portion of this shift. Investments by
Company depositors in the Company's investment unit totaled approximately $1.5
million during 1997. The Company recognizes fee income on these transactions.
The decrease in deposits, especially passbook savings accounts, has caused the
Company to rely, at times, on overnight borrowings for liquidity purposes. A
significant decrease in deposits in the future could result in the Company
having to seek other sources
<PAGE>
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.
Results of Operations
General
The Company had net income of $1.2 million, $1.9 million, and $1.3 million for
the fiscal years ended December 31, 1998, 1997 and 1996, respectively. The
decrease in net income for the year ended December 31, 1998, compared to 1997
resulted primarily from a decrease in net interest income of $190,000, or 2.6%,
to $7.0 million, an increase in the provision for loan losses of $120,000, or
46.1%, and an increase in non-interest expense of $816,000, or 14.1%. The
decreased income was partially offset by an increase in non-interest income of
$213,000, or 15.5%, and a decrease in the provision for income taxes of
$267,000. The increase in non-interest expense was partially attributable to
the $379,000 in charges recognized as a result of the cancellation of the
merger. The Company's return on average assets and return on average
shareholders' equity for the years ended December 31, 1998, 1997 and 1996 were
.62%, .97%, and .69% and 5.12%, 8.35%, and 6.09%, respectively. The return on
average assets and return on average shareholders' equity for 1998, exclusive of
the merger costs were .76% and 6.28%. These performance ratios tend to be below
the Company'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
annualized return on average assets for the periods ended September 30, 1998 and
December 31, 1997 and 1996 were .95%, .99%, and .86%, respectively. The peer
groups annualized return on average equity for the periods ended September 30,
1998 and December 31, 1997 and 1996 were 8.04%, 8.77%, and 6.09%, 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 Company's peers group. Management believes
that a well structured execution of its business plan over the next 18 months
will generate additional lines of revenue, strategic leveraging of its capital,
and reduced costs as a percentage of average assets.
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997
Interest Income
Interest income totaled $14.1 million for the year ended December 31, 1998, as
compared to $14.2 million for the year ended December 31, 1997, a decrease of
$146,000, or 1.0%. The decrease in interest income was principally attributable
to a decrease in the average yield on interest-earning assets to 8.03% from
8.16%, partially offset by an increase of $1.1 million, or .6%, in the average
balance of interest earning-assets to $177.1 million from $175.9 million. The
yield reduction is principally the result of a lower interest rate environment,
which in turn has resulted in new mortgage loan originations at rates in excess
of 100 basis points below the weighted average coupon of the existing loan
portfolio which lowered the total portfolio yield, and the reinvestment of
investment security principal maturity's and prepayments at rates over 75 basis
points less than the existing portfolio yield. The decline in yield on
mortgages and investments was caused by a general decline in market interest
rates. To illustrate,
<PAGE>
the yield on 1 year and 30 year treasury bonds declined by 94 basis points and
82 basis points, respectively from December 31, 1997 to December 31, 1998. The
increase in average interest-earning assets was primarily attributable to loan
origination activity. Loan originations totaled $45.7 million for the 1998
fiscal year, of which $28.1 were one-to-four family residential mortgages. Loan
sales during this period were $7.7 million. The originations, less loan
repayments and sales, increased the average balance of real estate loans by
$12.8 million, or 12.4%, to $116.4 million at December 31, 1998 from $103.6
million at the prior fiscal year end. The average balance on consumer and other
loans increased by $433,000, or 4.3%. Funding for the loan originations came
principally from a reduction of the investment security portfolio through
maturities, calls, and redemptions, as well as through borrowed funds. The
average balance on mortgage-backed securities and investment securities
decreased by $2.9 million and $8.3 million, respectively. The average balance on
interest-earning deposits at other financial institutions decreased by $597,000.
Interest income on real estate loans totaled $9.7 million and $9.0 million for
the years ended December 31, 1998 and 1997, respectively. The $727,000, or
8.1%, increase resulted primarily from an increase in the average balance of
real estate loans of $12.8 million, or 12.4%, to $116.4 million for 1998 from
$103.6 million for 1997. The increase in the average balance on real estate
loan was partially offset by a reduction in the average yield on such loans to
8.33% from 8.66%. The increase in the average balance on real estate loans was
principally due to the origination of 15 and 30 year term one-to-four family
residential mortgages loans held-for-sale and one-to-four family adjustable rate
mortgage loans retained in the Company's portfolio. The Company began
originating mortgage loans held-for-sale during the fourth quarter of 1997. The
origination of adjustable rate mortgages mortgage loans is primarily comprised
of "5/1 ARMS" which have interest rates that are fixed for the first five years
and are adjustable annually thereafter, and amortize over 30 years. To a lesser
degree, the Company also increased its origination of commercial real estate
loans. The decrease in the yield on average real estate loans was attributable
to the lower rates charged on mortgage loans held-for-sale, the initial rates
charged on 5/1 ARMS, and the downward repricing of the one year adjustable rate
mortgage portfolio caused by the relatively lower interest rate environment.
Interest income on consumer and other loans increased $80,000, or 7.3%, to $1.2
million for the year ended December 31, 1998 from $1.1 million for the year
ended December 31, 1997. The increase was due to an increase in the average
yield on consumer and other loans to 11.19% from 10.87%, as well as an increase
in the average balance on consumer and other loans of $433,000, or 4.3%, to
$10.5 million from $10.1 million. The increase in the average yield on consumer
and other loans reflects the Company's continuing efforts to provide lending to
qualified local businesses, which tend to carry higher interest rates. The
increase in the average balance on consumer and other loans demonstrates
continued penetration into this particular segment of the market.
Interest income on mortgage-backed securities decreased by $227,000, or 14.3%,
to $1.4 million from $1.6 million for the years ended December 31, 1998 and
1997, respectively. The decrease in interest income on mortgage-backed
securities resulted generally from a decrease in the average balance on
mortgage-backed securities of $2.9 million, or 12.3%, to $20.4 million at
December 31, 1998 from $23.2 million at the end of the prior year, as well as a
decrease in the average yield on mortgage-backed securities to 6.69% from 6.84%.
The decrease in the average balance of mortgage-backed securities resulted from
the scheduled amortization and prepayments of principal on the underlying
mortgage loans. Prepayments accelerated throughout the second half of 1998 as
the decline in interest rates on new mortgages fostered significant refinancing
activity. The cash flow from the mortgage-backed securities portfolio was
utilized to fund the origination of loans. The decrease in the average yield on
mortgage-backed securities was the result of prepayments being more predominant
on the higher coupon collateral than on those mortgage loans with lower fixed
rates.
Interest income on investment securities, on a tax equivalent basis, decreased
$698,000, or 27.6%, for the year ended December 31, 1998 to $1.8 million from
$2.5 million for the same period in 1997. The decrease resulted primarily from
a decrease in the average balance of investment securities of $8.7 million, or
24.4%, to $26.9 million at the end of the 1998 fiscal year from $35.6 million at
December 31, 1997. Additionally, the average yield on investment securities, on
a tax equivalent basis, decreased to
<PAGE>
6.80% from 7.10% for the years ended December 31, 1998 and 1997, respectively.
The decrease in the average balance of investment securities resulted primarily
from the reinvestment of funds from maturing and called securities into loan
originations. The average yield on investment securities declined as higher
coupon securities purchased three to five years ago were either called due to
the lower interest rate environment or matured.
Interest income on interest-earning deposits decreased $28,000, or 16.2%, to
$145,000 for the year ended December 31, 1998 from $173,000 for the prior year.
The decrease was due to a $597,000, or 17.4%, decrease in the average balance on
interest-earning deposits, partially offset by an increase in the average yield
on such deposits to 5.13% from 5.05%.
Interest Expense
Interest expense increased $43,000, or .6%, to $7.0 million for the year ended
December 31 1998, from $6.9 million for the prior year. The increase was
primarily attributable to an increase in the use of borrowed funds which
resulted in a higher average balance of interest-bearing liabilities. The
average balance of interest-bearing liabilities increased $2.0 million, or 1.3%,
to $162.0 million at December 31, 1998 as compared to $160.0 million at the end
of the prior year. The average cost of interest-bearing liabilities decreased to
4.30% during the year ended December 31, 1998 from 4.33% for the year ended
December 31, 1997. The decrease in the average cost is primarily attributable
to reductions in the interest rates paid on NOW accounts and savings deposits.
Interest expense on savings and club accounts decreased $106,000, or 5.4%, while
the interest expense on time deposits decreased $80,000, or 2.0%. The average
balance on savings and club accounts decreased $966,000, or 1.5%, to $64.4
million for the year ended December 31, 1998 from $65.4 for the prior year,
while the average cost of such deposits decreased to 2.90% from 3.01%. The
stated rate of interest paid on fixed rate savings accounts was reduced to 2.15%
from 3.00% during the fourth quarter of 1998. During 1998, the Company
introduced a tiered-rate savings account, which allows for higher rates of
interest at higher balances ranging from 2.15% to 3.25%. At December 31, 1998,
$49.4 million, or 76.8%, of the total savings deposits were held in fixed rate
accounts while $14.9 million were held in the tiered-rate product. The average
balance on time deposits decreased $2.2 million, or 3.1%, to $68.4 million for
the year ended December 31, 1998 from $70.6 million at December 31, 1997, while
the average cost of time deposits increased to 5.69% from 5.63%. The decrease
in the average balance on the Company's core deposits is reflective of increased
competition form non-bank investment products and a lack of growth in the
Company's market area. These conditions are anticipated to continue in the near
future. The Company's borrowings consist of term and overnight advances from
the Federal Home Loan Bank of New York and funds obtained through repurchase
agreements ("repos"). A loan held at a third party bank for the Bank's Employee
Stock Ownership Plan ("ESOP") was refinanced by the mid-tier holding company
during the fourth quarter of 1998. The average balance on the term and
overnight advances for the year ended December 31, 1998 was $8.2 million at an
average cost of 5.85%, compared to $1.1 million, at an average cost of 6.93%
for 1997. The average balance on the repos for the year ended December 31, 1998
was $6.4 million at an average cost of 5.61%, compared to $8.4 million, at an
average cost of 5.68% in 1997.
<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, 1998, 1997,
and 1996 using a marginal federal income tax rate 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,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
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 $116,447 $ 9,698 8.33% $103,600 $ 8,971 8.66% $ 94,126 $ 8,250 8.76%
Consumer & Other Loans 10,484 1,173 11.19% 10,051 1,093 10.87% 10,228 1,006 9.84%
Mortgage-backed Securities 20,385 1,364 6.69% 23,244 1,591 6.84% 16,312 1,095 6.71%
Taxable investment
securities 20,877 1,330 6.37% 29,160 1,974 6.77% 32,643 2,148 6.58%
Non-taxable investment
securities 6,034 500 8.29% 6,432 554 8.61% 5,471 485 8.86%
Interest-earning deposits 2,829 145 5.13% 3,426 173 5.05% 7,206 394 5.47%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $177,056 $14,210 8.03% $175,913 $ 14,356 8.16% $165,986 $13,378 8.06%
Non Interest Earning
Assets:
Other assets 18,352 16,017 18,671
Allowance for loan losses (851) (936) (492)
Net unrealized gains
(losses)
on available for sale
portfolio 1,443 648 366
Total Assets $196,000 $191,642 $184,531
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
Liabilities:
Now accounts $ 14,281 $ 331 2.32% $ 13,346 $ 341 2.56% $ 12,709 $ 322 2.53%
Savings and club accounts 64,417 1,865 2.90% 65,383 1,971 3.01% 69,354 2,088 3.01%
Time deposits 68,417 3,895 5.69% 70,591 3,975 5.63% 69,470 3,886 5.59%
Borrowings 14,927 878 5.88% 10,677 639 5.98% 1,894 118 6.23%
Total Interest bearing
liabilities $162,042 $ 6,969 4.30% $159,997 $ 6,926 4.33% $153,427 $ 6,414 4.18%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-Interest-Bearing
Liabilities:
Demand deposits 8,436 7,633 7,869
Other liabilities 1,913 1,798 2,345
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 172,391 169,428 163,641
Shareholder's equity 23,609 22,214 20,890
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities &
shareholder's equity $196,000 $191,642 $184,531
Net interest income $ 7,241 $ 7,430 $ 6,964
Net interest rate spread 3.72% 3.83% 3.88%
Net interest margin 4.09% 4.22% 4.20%
- -----------------------------------------------------------------------------------------------------------------------------------
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities 109.27% 109.95% 108.19%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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
the changing 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 Company's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to: (i) changes
attributable to changes in volume (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,
- ---------------------------------------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Due to Increase (Decrease) Due to
- ---------------------------------------------------------------------------------------------------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Interest Income:
Real estate loans $1,079 ($352) $ 727 $ 817 ($96) $ 721
Consumer and other loans 48 32 80 (17) 104 87
Mortgage-backed securities (193) (34) (227) 474 22 496
Taxable investment securities (533) (111) (644) (235) 61 (174)
Non-taxable investment securities (33) (21) (54) 83 (14) 69
Interest-earning deposits (31) 3 (28) (193) (28) (221)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 337 (483) (146) 929 49 978
Interest Expense:
Now and escrow accounts 23 (33) (10) 15 4 19
Savings and club accounts (30) (76) (106) (117) 0 (117)
Time deposits (122) 42 (80) 62 27 89
Borrowings 250 (11) 239 493 (6) 487
Total Interest expense 121 (78) 43 453 25 478
- ---------------------------------------------------------------------------------------------------------------------------
Net change in interest
income $ 216 ($405) ($189) $ 476 $ 24 $ 500
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Interest Income
Net interest income decreased $189,000, on a tax equivalent basis, for the year
ended December 31, 1998 as compared to December 31, 1997. The decrease occurred
due to a decrease in the ratio of average interest-earning assets to average
interest bearing liabilities to 109.27% from 109.95%, as well as a compression
of the Company's net interest rate spread to 3.72% from 3.83%. These ratios are
the result of a $2.0 million, or 1.3%, increase in average interest-bearing
liabilities, and a decrease in the average yield of interest-earning assets to
8.03% from 8.16%. These decreases were offset in part by an increase in the
average balance of interest earning assets of $1.1 million, or .6%, and a
decrease in the average cost on interest bearing liabilities to 4.30% from
4.33%.
Provision for Loan Losses
The Company maintains an allowance for loan losses based upon a monthly
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 Company's actual loss experience, as well as standards
applied by the FDIC. The Company established a provision for possible loan
losses for the year ended December 31, 1998 of $382,000 as compared to a
provision of $261,000 for the year ended December 31, 1997. The increase in the
provision for loan losses is attributable to the desire of Company management to
increase the Company's' coverage ratios for non-performing loans in response to
recent trends and to reflect the increased risks associated with commercial
lending. The Company's allowance for loan losses as a percentage of total loans
receivable was .74%, while the allowance for loan losses to non-performing loans
was 46.20% at December 31, 1998.
<PAGE>
Non interest Income
Non interest income consists of servicing income and fee income, gains (losses)
on the sale of investment securities and loans and other operating income.
Non interest income increased $213,000, or 15.5%, to $1.6 million for the year
ended December 31, 1998, as compared to $1.4 million for the year ended December
31, 1997. The increase in non interest income was primarily attributable to an
increase in fees and service charges of $35,000, or 7.3%, to $524,000 from
$489,000, and additional gains on the sale of investment securities and loans of
$290,000, partially offset by a decrease in other charges, commissions, and fees
of $116,000, or 32.0%, to $251,000 from $367,000. The increase in fees and
service charges is primarily attributable to fees from checking accounts and ATM
transactions, and increased mortgage servicing activity. The gains on the sale
of investment securities and loans is the result of the recognition of the
unrealized increased market value on the Company's investment in a mutual fund
which amounted to $571,000 versus $347,000 for the prior year, and gains on loan
sales of $60,000 for 1998. The decrease in other charges and commissions is
primarily the result of a $53,000 reduction in fees from investment services and
a prior period recovery of $95,000 in 1997 for Nationar and Bennett Funding
Group investments, partially offset by increases in building rents and profits
on the liquidation of other real estate owned.
Non interest Expense
Non interest expense increased $816,000, or 14.1%, to $6.6 million for the year
ended December 31, 1998 from $5.8 million for the prior year. The increase in
non interest expense was primarily attributable to increases in employee
compensation and benefits of $199,000, or 6.8%, data processing costs of
$59,000, or 15.3%, professional service expense increases of $8,000, other
expense increases of $208,000, or 22.6%, and a charge of $379,000 in connection
with the cancellation of the merger. The merger expenses were attributable to
professional services rendered for legal, tax, and accounting work, as well as
for certain filing fees. The increases in the employee compensation and
benefits is primarily the result of increased salaries of approximately of
$105,000, stock compensation expense of $40,000, and directors fees of $62,000.
The salary increases resulted from the hiring of additional personnel to
originate and service loans held-for-sale. The stock compensation increase was
attributable to accelerated vesting for two board directors approaching
mandatory retirement. The additional directors fees was due to the increased
number of meetings related to consideration of the plans of merger and merger
related issues. The increased data processing costs were mainly caused by the
configuration and installation of a local and wide area network and an expansion
of the ATM network. The increase in other expenses was primarily attributable
to the following: $81,000 in connection with the liquidation of certain OREO
properties, $52,000 in non-recurring data communications costs for networks,
$49,000 for costs related to the operation of the mid-tier holding company
(principally franchise tax), and $16,000 in additional liability insurance
expense. The expense increase were partially offset by a decrease in occupancy
costs of $40,000, or 6.0%.
The Company's overhead (non-interest expense to average assets) and efficiency
ratios for the year ended December 31, 1998 were 3.36% and 70.57%, respectively.
Exclusive of the merger costs the same ratios were 3.17% and 65.22%,
respectively. The stock based compensation plan expenses and the Company's
amortization of goodwill represent non-cash expenses in that they do not
decrease the generation of tangible capital (9). If these non-cash expenses
were deducted from the Company's overhead and efficiency ratios, exclusive of
the merger costs, those adjusted ratios for the year ended December 31, 1998
would be 2.70% and 61.05%, respectively. The Company's efforts to prepare its
data processing systems for the impact of the Year 2000 were not a significant
component of expense in 1998 since the majority of expenditures were software
and hardware upgrades which were capitalized upon implementation in January
1999. The total amount capitalized was approximately $613,000 and is being
depreciated over an average of approximately 6 years. The depreciation will
result in additional annual expenses of approximately $100,000 over this period.
Exclusive of these expenses, management does not anticipate incurring additional
significant expenses associated with Year 2000 readiness issues.
<PAGE>
Income Tax Expense
Income tax expense decreased $267,000, or 35.0% to $495,000 for the year ended
December 31, 1998 from $762,000 for the prior year. The decrease in income tax
expense reflected lower pre-tax income during the year.
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 Company'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
Company'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 Company'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.
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
<PAGE>
securities as part of a strategy, during the first half of 1997, to leverage the
Company'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 Company's
earnings to future increases in interest rates. As part of engaging in such a
strategy, the Company 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 Company's large base of savings account deposits tends to
mitigate the otherwise potential negative ramifications of rising market
interest rates. Company 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 Company'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 Company'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
Company'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.
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
<PAGE>
average interest-earning assets to average interest bearing liabilities to
110.27% from 108.19%, partially offset by a decrease in the Company'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 Company 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 Company's actual loss experience, as well as standards
applied by the FDIC. The Company 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 Company's investments in lease
finance packages acquired from the Bennett Funding Group. The Company's loan
loss provision for 1997 increased $45,000 over the prior year, after adjusting
for the specific provision in 1996. The Company's allowance for loan losses as a
percentage of net loans receivable at December 31, 1997 was .68%.
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 $393,000, or 40.2%, 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 $82,000, or 14.3%, to $489,000 from
$570,000, additional gains on the sale of investment securities of $222,000, and
an increase in other charges, commissions, and fees to $367,000 from $164,000.
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 Company'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 Company's investment in the IIMF
mutual fund.
Non interest Expense
Non interest expense increased $406,000, or 7.6%, 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 $42,000, or 4.7%. 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 Company'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 Company'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 Company's amortization of goodwill represent
non-cash expenses. If these non-cash expenses were deducted from the Company's
overhead and efficiency ratios, those adjusted ratios for the year ended
December 31, 1997, would be 2.59% and 57.37%, respectively. The Company's
efforts to prepare its data processing systems for the impact of the Year 2000
were not a significant component of expense in 1997.
<PAGE>
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.
Liquidity and Capital Resources
The Company'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 competition. The Company
manages the pricing of deposits to maintain a desired deposit balance. In
addition, the Company 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 Company's operating, financing,
and investing activities, see Statements of Cash Flows included in the Financial
Statements. The Company 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 Company also adjusts liquidity as appropriate to meet its
asset and liability management objectives. The Company'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 Company with a
safe, reliable and convenient source of funds.
A major portion of the Company'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 Company has
experienced a decrease in savings account deposits during the past three years.
Savings account balances decreased $6.8 million, or 9.6%, from $71.0 million at
December 31, 1995 to $64.2 million at December 31, 1998. The decrease in
savings account deposits has caused the Company to rely, at times, on overnight
borrowings for liquidity purposes. A significant decrease in deposits in the
future could result in the Company 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, 1998, the Company had outstanding loan commitments of $7.9
million. This amount includes the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less than one year at December
31, 1998 totaled $51.7 million. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Company.
New Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities. In June of 1998,
the Financial Accounting Standards Board ("FASB") issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" effective for all
fiscal quarters for fiscal years beginning after June 30, 1999. This statement
requires an entity to recognize all derivative financial instruments as either
assets or liabilities in the consolidated statement of condition and measure
those instruments at fair value. Management does not believe that this
statement will have a significant impact on the results of operations or
shareholders' equity of the Company
Impact of Inflation and Changing Prices
The financial statements of the Company 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 Company's operations. Unlike most industrial companies, nearly all
the assets
<PAGE>
and liabilities of the Company are monetary. As a result, interest rates have a
greater impact of the Company's performance than 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 trades and is listed on The Nasdaq SmallCap Stock Market under
the symbol "PBHC" and the short name PathBcp. The common 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 15, 1998, there were 436 shareholders of
record and 2,701,845 outstanding shares of common stock.
Share Repurchases
During 1998, the Company repurchased 43,625 shares of its common stock for its
Management Recognition and Retention Program. Additionally, in the fourth
quarter of 1998 the Company commenced and completed a share repurchase program
for 5% of outstanding shares. This program resulted in 132,000 shares being
repurchased at an average price of $14.296 for a total cost of $1.9 million. On
January 22, 1999, the Company announced a second share repurchase program for
the purchase of up to 135,000 shares to be completed by June 30, 1999.
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, 1998 $10.375 $ 9.125 $.0500
September 30, 1998 23.000 12.000 $.0500
June 30, 1998 26.125 21.000 $.0500
March 31, 1998 24.625 17.172 $.0500
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
</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, the Company'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.
<PAGE>
Independent Auditors' Report
Board of Directors and Shareholders
Pathfinder Bancorp, Inc.
Oswego, New York
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income and comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of Pathfinder Bancorp, Inc. at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Syracuse, New York
February 5, 1999
<PAGE>
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 4,716,238 $ 4,334,072
Federal funds sold 1,800,000 ----
- --------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents $ 6,516,238 4,334,072
Investment securities
(approximate fair value $53,443,000 and $56,847,000) 53,443,039 56,821,317
Mortgage loans held-for-sale 2,841,931 1,547,354
Loans:
Real estate 115,971,684 110,416,494
Consumer and other 10,536,151 10,763,277
- --------------------------------------------------------------------------------------------------------------
Total loans 126,507,835 121,179,771
Less: Allowance for loan losses 939,161 827,521
Unearned discounts and origination fees 199,156 314,322
- --------------------------------------------------------------------------------------------------------------
Loans receivable, net 125,369,518 120,037,928
Premises and equipment, net 4,489,928 3,720,270
Accrued interest receivable 1,237,069 1,443,175
Other real estate 742,163 766,619
Intangible assets, net 3,289,121 3,604,876
Other assets 5,444,979 4,524,781
- --------------------------------------------------------------------------------------------------------------
Total assets $203,373,986 $196,800,392
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits :
Interest bearing $150,591,029 $144,754,879
Non-interest bearing 9,628,125 7,644,262
- --------------------------------------------------------------------------------------------------------------
Total deposits 160,219,154 152,399,141
Borrowed Funds 18,691,000 18,242,000
Note payable - ESOP ---- 430,126
Other liabilities 2,177,147 2,146,390
- --------------------------------------------------------------------------------------------------------------
Total liabilities 181,087,301 173,217,657
Shareholders' equity:
Common stock, par value $.10 per share; authorized
9,000,000 shares; 2,877,470 and 2,874,999 shares issued and
2,745,470 and 2,874,999 outstanding for 1998 and 1997, respectively. 287,747 287,500
Additional paid-in-capital 6,828,836 7,643,084
Retained earnings 17,820,409 17,156,415
Unearned stock based compensation (1,428,746) (1,836,250)
Accumulated other comprehensive income 1,012,462 743,036
Unearned ESOP shares (346,917) (411,050)
Treasury stock, at cost; 132,000 shares (1,887,106) ----
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 22,286,685 23,582,735
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $203,373,986 $196,800,392
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $10,871,385 $10,063,659 $ 9,256,360
Interest and dividends on investments:
U.S. Treasury and agencies 198,401 407,628 509,275
State and political subdivisions 345,303 372,376 320,192
Corporate obligations 1,032,369 1,477,630 1,610,326
Marketable equity securities 98,951 82,819 27,857
Mortgage-backed securities 1,364,002 1,590,701 1,094,837
Federal funds sold and interest-bearing deposits 145,132 172,839 393,871
- -------------------------------------------------------------------------------------------------------------------
Total interest income 14,055,543 14,167,652 13,212,718
INTEREST EXPENSE:
Interest on deposits 6,091,009 6,287,117 6,295,592
Interest on borrowed funds 878,364 604,844 118,132
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 6,969,373 6,891,961 6,413,724
Net interest income 7,086,170 7,275,691 6,798,994
Provision for loan losses 381,561 261,112 636,410
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 6,704,609 7,014,579 6,162,584
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 524,238 488,799 570,464
Cash surrender value 192,368 188,315 138,265
Net gain on securities and loan sales 618,448 328,565 106,638
Other charges, commissions and fees 250,683 366,883 163,970
- -------------------------------------------------------------------------------------------------------------------
Total other income 1,585,737 1,372,562 979,337
- -------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 3,116,577 2,917,470 2,344,218
Building occupancy 626,231 666,082 691,101
Data processing expenses 447,024 387,741 375,557
Professional and other services 537,339 529,724 522,800
Deposit insurance premiums 35,466 33,139 235,843
Amortization of intangible assets 315,756 315,756 315,755
Merger expense 378,896 ---- ----
Other expenses 1,129,223 920,781 879,049
- -------------------------------------------------------------------------------------------------------------------
Total other expenses 6,586,512 5,770,693 5,364,323
Income before income taxes 1,703,834 2,616,448 1,777,598
Provision for income taxes 495,033 762,087 505,838
- -------------------------------------------------------------------------------------------------------------------
Net income $ 1,208,801 1,854,361 $ 1,271,760
Other comprehensive income, net of taxes:
Unrealized net gains on securities:
Unrealized holding gains (losses) arising during period $ 437,441 $ 538,574 $ (416,718)
Reclassification adjustment for gains included
in net income 11,602 11,596 67,678
- -------------------------------------------------------------------------------------------------------------------
449,043 550,170 (349,040)
Income tax (provision) benefit (179,617) (220,068) 139,616
- -------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax 269,426 330,102 (209,424)
- -------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 1,478,227 $ 2,184,463 $ 1,062,336
- -------------------------------------------------------------------------------------------------------------------
Net income per share basic $.44 $.66 $.45
- -------------------------------------------------------------------------------------------------------------------
Net income per share diluted $.42 $.66 $.45
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Other Unearned
Common Stock Paid in Retained Stock Based Comprehensive ESOP
Shares Amount Capital Earnings Compensation Income Shares
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 1,916,666 $ 1,916,666 $3,748,279 $14,889,375 $ $ 622,358 $(425,300)
Net Income 1,271,760
Acquisition of unearned
ESOP shares (110,047)
ESOP shares earned 2,447 57,439
Change in unrealized net
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 (477,908)
Net Income 1,854,361
ESOP shares earned 59,692 66,858
Unearned stock-based
compensation awarded 2,203,500 (2,203,500)
Stock based compensation
earned 367,250
Change in unrealized
net appreciation
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 ($411,050)
Net Income 1,208,801
ESOP shares earned 127,533 64,133
Stock options exercised 2,471 247 16,207
Treasury stock purchased
Common stock issued
under stock
based compensation
plan (957,988) 957,988
Stock based compensation
earned 407,504
Change in unrealized
net appreciation 269,426
on investment
securities
Dividends declared
($0.20 per share) (544,807)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 2,877,470 $ 287,747 $6,828,836 $17,820,409 $ (1,428,746) $1,012,462 $(346,917)
==================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,208,801 $ 1,854,361 $ 1,271,760
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan, investment and other real estate losses 381,561 261,112 675,152
Deferred compensation 188,721 169,773 164,926
ESOP and other stock-based compensation earned 599,170 493,800 59,886
Deferred income tax (benefit) provision (117,668) (76,942) (62,775)
Realized and unrealized loss/(gain) on:
Sale of real estate acquired through foreclosure 68,741 ---- 3,602
Sale of loans (59,410) 6,697 ----
Available-for-sale investment securities (559,038) (335,262) (106,638)
Depreciation 231,617 235,282 248,105
Amortization of intangibles 315,756 315,756 315,755
Net amortization of premiums and discounts on
investment securities (39,951) 65,923 114,115
Decrease in interest receivable 206,106 22,827 3,659
Increase in other assets (445,968) (437,353) (234,633)
(Decrease) increase in other liabilities (223,022) 195,751 (106,771)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,755,416 2,771,725 2,346,143
- -----------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (15,633,561) (8,482,036) (28,604,061)
Proceeds from maturities and principal reductions of
investment securities held-to-maturity 4,270,000 4,790,000 250,000
Proceeds from maturities and principal reductions of
investment securities available-for-sale 14,863,726 6,420,245 10,995,832
Proceeds from sale of:
Real estate acquired through foreclosure 753,334 586,109 289,153
Loans 7,726,767 ---- ----
Available-for-sale investment 926,143 792,352 10,393,686
Net increase in loans (15,238,129) (13,484,773) (9,674,236)
Purchase of premises and equipment (1,001,275) (571,072) (813,086)
Increase in surrender value of life insurance (474,230) (188,315) (138,210)
Other investing activities (234,573) (279,179) ----
- -----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,041,798) (10,416,669) (17,300,922)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts, savings accounts,
money market deposit accounts and escrow deposits 5,475,054 (1,191,170) (4,454,805)
Net increase (decrease) in time deposits 2,344,959 (5,407,527) 5,128,707
Proceeds from borrowings, net 449,000 10,632,000 7,720,047
Repayments of note payable-ESOP (430,126) (55,800) (48,799)
Proceeds from exercise of stock options 16,454 ---- ----
Common stock acquired by ESOP ---- ---- (110,047)
Cash dividends (541,699) (351,446) (277,636)
Treasury stock purchased (2,845,094) ---- ----
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,468,548 3,626,057 7,957,467
- -----------------------------------------------------------------------------------------------------------------------
Reclass of Nationar deposits from
cash equivalents to other assets ---- 2,783,000
- -----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalent 2,182,166 (4,018,887) (4,214,312)
Cash and cash equivalents at beginning of year 4,334,072 8,352,959 12,567,271
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,516,238 $ 4,334,072 $ 8,352,959
- -----------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE PERIOD FOR:
Interest 7,014,726 $ 6,835,301 $ 6,285,566
Income taxes paid 868,950 795,705 529,477
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate 563,046 373,628 445,035
Change in unrealized (appreciation)/depreciation
on securities available-for-sale (449,043) (550,170) 349,040
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid 137,274 134,166 93,138
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<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 subsidiaries,
Oswego City Savings Bank (the "Bank") and Whispering Oaks Development Inc. All
inter-company accounts and activity have been eliminated in consolidation. The
Company has five full service offices located in its market area consisting of
Oswego County. The Company is primarily engaged in the business of attracting
deposits from the general public in the Company'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 57% of the outstanding common stock of the Company. Salaries,
employee benefits and rent approximating $71,000 and $48,000 were allocated from
the Company to Pathfinder Bancorp, M.H.C. during 1998 and 1997, respectively.
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 January 1999, the Company, in conference and concurrence with the Board of
Trustees of Oswego County Savings Bank, jointly rescinded the merger agreement
between the two banks, which was originally signed September 5, 1997.
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. 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.
<PAGE>
For variable rate loans that reprice frequently and with no significant credit
risk, fair values approximate 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 adequacy of the allowance for possible loan losses is periodically evaluated
by the Company in order to maintain the allowance at a level that is sufficient
to absorb probable credit losses. Management's evaluation of the adequacy of
the allowance is based on a review of the Company's historical loss experience,
known and inherent risks in the loan portfolio and an analysis of the levels and
trends of delinquencies and charge-offs.
A loan is considered impaired, based on current information and events, if it is
probable the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based upon the
present value of future cash flows discounted at the historical effective rate,
except that all collateral-dependent loans are measured for impairment based on
fair values of collateral.
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 non-accrual 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-off 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. The asset cost and accumulated depreciation are
removed from the accounts for assets sold or retired and any resulting gain or
loss is included in the determination of income.
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 $1,447,213 and $1,131,458 at
December 31, 1998 and 1997, respectively.
Mortgage Servicing Rights
Included in other assets at December 31, 1998 is approximately $55,000 of
mortgage servicing rights. Originated mortgage servicing rights are recorded at
their fair value at the time of transfer and are amortized in proportion to and
over the period of estimated net servicing income or loss. The Company uses a
valuation model that calculates the present value of future cash flows to
determine the fair value of servicing rights. In using this valuation method,
the Company incorporated assumptions that market participants would use in
estimating future net servicing income, which included estimates of the cost of
servicing per loan, the discount rate, and prepayment speeds. The carrying
value of the originated mortgage servicing rights is periodically evaluated for
impairment using these same market assumptions.
Deposits
Interest on deposits is accrued and paid to the depositors or credited to the
depositors accounts monthly.
<PAGE>
Fair values disclosed for demand, savings, and variable rate money market
accounts and certificates of deposit approximate their carrying values at the
reporting date. Fair values for fixed rate time deposits 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.
Treasury Stock
Treasury stock purchases are recorded at cost. During 1998, the Company
purchased 132,000 shares at an average cost of $14.29 per share. The Company
considers the common stock to be an attractive investment, in view of the
current price at which the common stock is trading relative to the Company's
earnings per share, book value per share, and general market and economic
factors. Treasury stock has also been acquired in order to have shares
available for issuance under the Management Recognition and Retention Plan.
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. 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.
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 was 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 were restated.
New Accounting Pronouncements
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement
required the Company to report the effects of unrealized investment holding
gains or losses during the year as comprehensive income.
During 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement standardizes the
disclosure requirements for pensions and other postretirement benefits, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate additional analysis and eliminates certain
disclosures previously required.
In June of 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activity." This statement
requires an entity to recognize all derivatives as either assets or liabilities
in the consolidated statement of condition and measure those instruments at fair
value. This statement is effective for all fiscal quarters of fiscal years
beginning after June 30, 1999. Management does not believe this statement will
have a significant impact on the results of operations or equity of the Company.
Fair Values of Financial Instruments
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires
disclosure of fair value information of financial instruments, whether or not
recognized in the consolidated statement of condition, 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. The carrying amounts and estimated
fair values of financial instruments at December 31, are as follows:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Values Amounts Fair Values
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 6,516,238 $ 6,516,000 $ 4,334,072 $ 4,334,000
Investment securities 53,443,039 53,443,000 56,821,317 56,847,000
Mortgage loans held-for-sale 2,841,931 2,888,000 1,547,354 1,555,000
Loans 125,369,518 127,381,000 120,037,928 123,969,000
Accrued interest receivable 1,237,069 1,237,000 1,443,175 1,443,000
Deposits 160,219,154 157,979,000 152,399,141 148,044,000
Borrowed funds 18,691,000 18,693,000 18,242,000 18,242,000
Note payable - ESOP ---- ---- 430,126 430,000
Put options ---- ---- 3,000,000 2,973,750
</TABLE>
Reclassification
Certain amounts from 1997 and 1996 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, 1998
- -----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
Corporate debt $ 80,218 -- -- $ 80,218
Available-for-sale:
Bond investments:
U.S. Treasury and agencies $ 1,470,989 $ 42,470 $ 1,246 1,512,213
State and political subdivision 5,906,335 420,035 -- 6,326,370
Corporate 20,266,946 346,720 16,408 20,597,258
Mortgage-backed 20,480,552 338,071 40,332 20,778,291
- -----------------------------------------------------------------------------------------------
Total 48,124,822 1,147,296 57,986 49,214,132
Stock investments:
Federal Home Loan Bank and other 3,528,576 620,113 -- 4,148,689
- -----------------------------------------------------------------------------------------------
Total available-for-sale $51,653,398 $1,767,409 $57,986 $53,362,821
========== ======= ===========
Net unrealized gain on available-for-sale 1,709,423
- --------------------------------------------- -----------
Grand total carrying value $53,443,039
============================================= ===========
</TABLE>
<PAGE>
<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 4,856,944 35,618 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 47,522,032 853,477 69,555 48,305,954
Stock investments:
Federal Home Loan Bank and other 2,923,670 476,461 -- 3,400,131
Total available-for-sale $50,445,702 $1,329,938 $69,555 $51,706,085
========== ======= ===========
Net unrealized gain on available-for-sale 1,260,383
- --------------------------------------------- -----------
Grand total carrying value $56,821,317
============================================= ===========
</TABLE>
The amortized cost and estimated fair value of debt investments at December 31,
1998 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, 1998 December 31, 1998
- ---------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,261,838 $ 2,277,652 $ -- $ --
Due after one year through five years 8,138,784 8,465,059 -- --
Due after five years through ten years 10,277,006 10,659,521 -- --
Due after ten years 6,966,642 7,033,609 80,218 80,218
Mortgage-backed securities 20,480,552 20,778,291 -- --
- ---------------------------------------------------------------------------------------------------------
Totals $48,124,822 $49,214,132 $80,218 $80,218
=========================================================================================================
</TABLE>
Note 3: Loans
<TABLE>
<CAPTION>
Major classifications of loans at December 31, are as follows: 1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate mortgages:
Conventional $ 83,059,784 $ 79,346,064
Second mortgage loans 9,630,621 9,561,252
Construction 1,037,445 1,579,261
FHA insured 66,852 94,677
VA guaranteed 75,809 93,448
Commercial 22,101,173 19,741,792
- ------------------------------------------------------------------------------------------------
115,971,684 110,416,494
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Other loans:
<S> <C> <C>
Consumer 3,902,896 4,106,503
Lease financing 350,088 564,333
Passbook loans 170,060 170,854
Student 12,630 13,286
Commercial 6,100,477 5,908,301
- --------------------------------------------------------------------------------
10,536,151 10,763,277
- --------------------------------------------------------------------------------
Total loans 126,507,835 121,179,771
- --------------------------------------------------------------------------------
Less:
Allowance for loan losses 939,161 827,521
Unearned discount and origination fees 199,156 314,322
- --------------------------------------------------------------------------------
Loans receivable, net $125,369,518 $120,037,928
- --------------------------------------------------------------------------------
</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, 1998 and 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 put options to hedge loans
committed to or closed and pending sale. The put options are accounted for as
hedging instruments. Detail on the face amount and loss on market value are
listed below:
<TABLE>
<CAPTION>
Settlement
Option Face Value Loss Date
- -----------------------------------------------------------
<S> <C> <C> <C>
FNMA, 30 year 7.00% $1,000,000 ($10,156) 01/14/98
FNMA, 30 year 7.50% 1,000,000 (6,875) 01/14/98
FNMA, 30 year 7.00% 1,000,000 (9,219) 02/05/98
</TABLE>
As of December 31, 1998, the Company had no hedging instruments.
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of condition. The unpaid principle balances of mortgage
loans serviced for others was approximately $8,669,000 and $0 at December 31,
1998 and 1997, respectively.
Note 4: Allowances for Loan Losses
Changes in the allowance for loan losses for the year ended December 31, are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 827,521 $ 906,567 $345,660
Recoveries credited 11,014 18,113 17,498
Provision for loan losses 381,561 261,112 636,410
Loans charged off (280,935) (358,271) (93,001)
- ------------------------------------------------------------------
Balance at end of year $ 939,161 $ 827,521 $906,567
==================================================================
</TABLE>
At December 31, 1998 and 1997, the Company had no loans for which specific
valuation allowances were recorded.
<PAGE>
Note 5: Premises and Equipment
A summary of premises and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Land $ 631,773 $ 631,773
Buildings 3,228,123 2,953,032
Furniture, fixture and equipment 2,319,478 1,839,156
Construction in progress 730,625 484,763
- ------------------------------------------------------------
6,909,999 5,908,724
Less: Accumulated depreciation 2,420,071 2,188,454
- ------------------------------------------------------------
$4,489,928 $3,720,270
============================================================
</TABLE>
Note 6: Deposits
A summary of amounts due to depositors at December 31, is shown as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Savings accounts $ 64,229,261 $ 63,937,467
Money market accounts 75,395 112,842
Time accounts 69,403,856 67,058,897
Demand deposits interest bearing 16,326,717 13,306,129
Demand deposits non-interest bearing 9,628,125 7,644,262
Mortgages escrow funds 555,800 339,544
- --------------------------------------------------------------------
$160,219,154 $152,399,141
- --------------------------------------------------------------------
</TABLE>
Time deposits with balances in excess of $100,000 amounted to approximately
$8,691,000 and $8,455,000 at December 31, 1998 and 1997, respectively. The
approximate maturity of time deposits is as follows:
<TABLE>
<CAPTION>
1998 1997
Year of Maturity Amount Percent Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 $51,729,000 74.5% $38,860,000 57.9%
2 8,314,000 12.0% 17,960,000 26.8%
3 to 5 7,680,000 11.1% 8,621,000 12.9%
5 and over 1,681,000 2.4% 1,618,000 2.4%
- ------------------------------------------------------------------------------
$69,404,000 100.0% $67,059,000 100.0%
==============================================================================
</TABLE>
Note 7: Borrowed Funds
The Company maintains a secured line of credit with the Federal Home Loan Bank
for liquidity purposes. Interest on this line is determined at the time of
borrowing. The average rate paid on the overnight line during 1998 approximated
5.41%. The outstanding balance is collateralized by certain mortgage loans
under a pledge agreement with the Federal Home Loan Bank. As of December 31,
1998, $9,800,000 was available under the line of credit of which $0 was
outstanding.
The Company has term borrowings in the form of repurchase agreements and Federal
Home Loan Bank advances. At December 31, 1998, repurchase agreements totaled
$5,411,000 and advances totaled $13,280,000. The repurchase agreements mature
within 90 days to one year and carry interest rates varying from 4.71% and
5.63%. The repurchase agreements are collateralized by mortgage-backed
securities which had a carrying value of $8,275,566 at December 31, 1998.
<PAGE>
The principal balance, interest rates, and maturities on the term advances are
as follows:
<TABLE>
<CAPTION>
Principal Rate Term Maturity Date
- ---------------------------------------------------------------
<S> <C> <C> <C>
$ 730,000 5.310% 1 year 12/29/99
850,000 5.800% 1 year 03/02/99
1,000,000 6.237% 2 year 08/13/99
1,000,000 5.580% 10 year 12/18/08
1,000,000 5.330% 1 year 12/28/99
1,000,000 5.170% 6 month 06/28/99
1,000,000 5.170% 6 month 06/29/99
1,000,000 5.110% 2 year 12/18/00
1,700,000 4.800% 2 year 10/30/00
2,000,000 5.442% 3 year 11/19/01
2,000,000 5.780% 10 year 12/29/08
-----------
$13,280,000
===========
</TABLE>
Note 8: Employee Benefits
The Company has a noncontributory defined benefit pension plan covering
substantially all employees. In addition, the Company provides certain health
and life insurance benefits for eligible retired employees.
The following tables set forth the changes in the plan's benefit obligation,
fair value of plan assets and prepaid (accrued) benefit cost as of December 31,
1998 and 1997.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $2,477,313 $2,305,100 $ 377,729 $ 369,252
Service cost 94,188 76,262 2,641 3,014
Interest cost 183,151 169,405 24,938 24,898
Amendments 34,897 -- --
Actuarial loss (gain) 350,752 18,550 12,786 (1,713)
Benefits paid (116,170) (126,901) (32,347) (17,722)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $2,989,234 $2,477,313 $ 385,747 $ 377,729
- ------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $3,231,536 $2,626,962 $ - $ -
Actual return on plan assets (4,338) 582,197
Company contribution 18,152 149,278
Benefits paid (116,170) (126,901)
- -----------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $3,129,180 $3,231,536 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------------
Components of prepaid/accrued benefit cost
Funded (unfunded) status $ 139,946 $ 754,223 $(385,747) $(377,729)
Contributions - 18,152 -- --
Unrecognized prior service cost 4,457 5,537 -- --
Unrecognized transition obligation - - 254,931 273,909
Unrecognized actuarial net loss/(gain) 435,814 (173,057) 25,273 11,594
- -----------------------------------------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit cost $ 580,217 $ 604,855 $(105,543) $ (92,226)
- -----------------------------------------------------------------------------------------------------------------------------------
The significant assumptions used in determining the benefit obligation
as of December 31, 1998 and 1997 is as follows:
Weighted average discount rate 6.50% 7.25% 6.50% 7.0%
Expected long-term rate of return on plan assets 8.00% 8.00% - -
Rate of increase in future compensation levels 4.50% 5.00% - -
</TABLE>
<PAGE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage point change in the health
care cost trend rates (including those for the dental plan) would have the
following effects:
<TABLE>
<CAPTION>
1 Percentage 1 Percentage
Point Point
Increase Decrease
<S> <C> <C>
Effect on total of service and interest cost
components 1,175 (1,111)
Effect on postretirement benefit obligation 17,569 (16,505)
</TABLE>
Plan assets consist primarily of temporary cash investments and listed stocks
and bonds.
The composition of the net periodic pension cost for the years ended December
31, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 94,188 $ 76,262 $ 94,076 $ 2,641 $ 3,014 $ 3,748
Interest cost 183,151 169,405 162,256 24,938 24,898 24,976
Amortization of transition obligation -- (34,165) -- 18,978 18,978 18,978
Amortization of unrecognized prior service cost 1,080 1,080 -- -- -- --
Amortization of gains and losses -- -- -- (893) (528) --
Expected return on plan assets (253,781) (208,272) (215,212) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 24,638 $ 4,310 $ 41,120 $45,664 $ 46,362 $47,702
==============================================================================================================================
</TABLE>
The Company also offers a 401(k) plan to its employees. Contributions to these
plans were $45,000, $41,400 and $35,400 for 1998, 1997 and 1996, 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, 1998 and 1997, other liabilities include approximately
$588,000 and $565,000, respectively, relating to deferred compensation. Deferred
compensation expense for the years ended December 31, 1998, 1997 and 1996
amounted to approximately $79,000, $60,000 and $49,000 respectively.
The Company has a supplemental executive retirement plan and a director emeritus
plan for the benefit of directors and certain executive officers. 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 $3,933,000
at December 31, 1998 and $3,378,000 at December 31, 1997 and is included in
other assets. At December 31, 1998 and 1997, other liabilities include
approximately $610,000 and $425,000 accrued under these plans. Compensation
expense includes approximately $110,000, $136,000 and $131,000 relating to the
supplemental executive retirement plan and director emeritus plan for 1998, 1997
and 1996, 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 132,249 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 1998 and 1997 is as follows:
<PAGE>
<TABLE>
<CAPTION>
Options Option Price Shares
Outstanding Per Share Exercisable
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at December 31, 1996 --- --- ---
Granted 132,000 $6.583 0
Exercised --- --- ---
Forfeited --- --- ---
- ---------------------------------------------------------------------------------------
Outstanding at December 31, 1997 132,000 $6.583 0
Granted --- --- ---
Exercised (2,500) --- 19,500
Forfeited --- --- ---
- ---------------------------------------------------------------------------------------
Outstanding at December 31, 1998 129,500 $6.583 19,500
- ---------------------------------------------------------------------------------------
</TABLE>
In February 1997, the Board of Directors approved an option plan 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
consolidated statement of condition and will be recognized as compensation
expense ratably over the 6-year vesting period. Compensation expense for the
years ended December 31, 1998 and 1997 approximated $247,000 and $222,000,
respectively.
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. Compensation expense for the years ended December 31, 1998 and
1997 was $160,000 and $145,000, respectively. 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:
1998 1997
- ------------------------------------------------------------
Net Income:
As reported $1,208,801 $1,854,361
Pro forma 1,117,602 1,738,214
Earnings per share: Basic Diluted Basic Diluted
As reported $.44 $.42 $.66 $.66
Pro forma $.41 $.40 $.62 $.62
The fair value of these options was estimated at the date of grant using a
Black-Scholes options pricing model with the following assumptions for 1998 and
1997, respectively: risk free interest rate 4.63%; dividend yield 2.19%;
market price volatility 93.60%. An assumed weighted average option life of 6
years has been utilized for each year. 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 1998 is $15.38.
The Company sponsors a 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
<PAGE>
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 the Bank, and guaranteed by
the Mutual Holding 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 $192,000, $127,000
and $60,000 for the fiscal years ended December 31, 1998, 1997 and 1996,
respectively. Of the 92,574 shares acquired on behalf of the ESOP, 33,920,
23,052 and 11,722 shares were released as of December 31, 1998, 1997 and 1996,
respectively. The estimated fair value of the remaining 58,654 shares at
December 31, 1998 is $535,222.
Note 11: Income Taxes
The provision (benefit) for income taxes for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------
<S> <C> <C> <C>
Current $ 612,700 $839,029 $568,613
Deferred (117,667) (76,942) (62,775)
- ----------------------------------------------
$ 495,033 $762,087 $505,838
- ----------------------------------------------
</TABLE>
The components of net deferred tax liability, included in other liabilities for
the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------
<S> <C> <C>
Assets:
Loan origination fees $ 79,543 $ 125,540
Deferred compensation 478,397 395,218
Allowance for loan losses 182,191 144,233
Stock based compensation 245,667 146,680
ESOP 10,977 7,619
Postretirement benefits 51,366 34,592
Other 6,091 6,091
- --------------------------------------------------------
1,054,232 859,973
Liabilities
Pension benefits (232,180) (198,631)
Depreciation (25,593) (10,845)
Investments (964,410) (719,167)
- --------------------------------------------------------
(1,222,183) (928,643)
- --------------------------------------------------------
Net deferred tax liability $ (167,951) $ (68,670)
- --------------------------------------------------------
</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>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State tax, net of federal benefit 3.2 4.3 2.7
Tax-exempt interest income (10.0) (6.7) (8.0)
Dividends received deduction (0.1) (0.1) (0.3)
Other 2.0 (2.4) 0.1
Effective income tax rate 29.1% 29.1% 28.5%
- ---------------------------------------------------------
</TABLE>
<PAGE>
Note 12: Earnings per Share
Basic earnings per share is computed based on the weighted average shares
outstanding. Diluted earnings per share is computed based on the weighted
average shares outstanding adjusted for the dilutive effect of the assumed
exercise of stock options during the year. The following is a reconciliation of
basic to diluted earnings per share for the years ended December 31:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 Net Income $1,208,801
----------
Basic EPS 1,208,801 2,731,602 $.44
----
Effect of dilutive securities:
Stock awards 0 52,350
Stock options 0 81,206
Diluted EPS $1,208,801 $2,865,158 $.42
========== ========== ====
1997 Net Income $1,854,361
Basic EPS 1,854,361 2,798,610 $.66
----
Effect of dilutive securities:
Stock awards 0 2,152
Stock options 0 3,603
Diluted EPS 1,854,361 2,804,365 $.66
========== ========== ====
1996 Net Income $1,271,760
Basic EPS 1,271,760 2,801,503 $.45
Effect of dilutive securities
Stock awards 0 0
Stocl options 0 0
Diluted EPS $1,271,760 2,801,503 $.45
========== ========== ====
</TABLE>
Note 13: 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 consolidated 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.
Contract Amount
- ------------------------------------------------------------------------
Financial instruments whose contract amounts represent
credit risk at December 31:
1998 $ 7,897,000
1997 14,009,000
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 fair value of these commitments as of December 31, 1998 and 1997, is not
readily determinable.
The Company leases land for a branch under an operating lease expiring in 2013.
Rent expense totaled approximately $16,200 in 1998, $15,000 in 1997 and $14,000
in 1996. 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
<PAGE>
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>
Years ending December 31:
- ------------------------------------------------------------
<S> <C>
1999 $ 16,200
2000 16,200
2001 17,200
2002 17,200
2003 17,200
Thereafter 193,400
Total minimum lease payments $277,400
</TABLE>
The Company is required to maintain a reserve balance as established by the
Federal Reserve Bank of New York. The required average total reserve for the 14
day maintenance period ended December 31, 1998 was $487,000.
Note 14: 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 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 1998, the Company paid
cash dividends totaling $305,325 to the Holding Company. The restricted capital
account has a $0 balance as of December 31, 1998.
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 $3,790,000 as of December 31, 1998.
Note 15: 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, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997, the Bank's most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as "well-capitalized", under
the regulatory framework for prompt corrective action. To be categorized as
"well-capitalized", the Bank must maintain total risk based, Tier 1 risk-based
and Tier 1 leverage ratios as set for in the tables below. There are no
conditions or events since that notification that management believes have
changed the institution's category.
<PAGE>
<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, 1998:
Total Core Capital
(to Risk Weighted Assets) $18,924,263 15.0% $10,122,080 8.0% $12,652,600 10.0%
Tier 1 Capital
(to Risk Weighted assets) $17,985,102 14.2% $ 5,061,040 4.0% $ 7,591,560 6.0%
Tier 1 Capital
(to Average Assets) $17,985,102 9.2% $ 7,840,000 4.0% $ 9,800,000 5.0%
- --------------------------------------------------------------------------------------------------
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%
</TABLE>
Note 16: Parent Company Financial Information
- --------------------------------------------------------------------------------
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 financial information of Pathfinder
Bancorp, Inc. for years ended December 31:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Statement of Condition
- ----------------------
Assets
Cash $ 121,239 $ -
Receivable from subsidiary 390,435 3,000,000
Investment in bank subsidiary 21,906,029 20,716,901
- ------------------------------------------------------------------------------
Other Assets 6,256 --
Total Assets $22,423,959 $23,716,901
==============================================================================
Liabilities
Accrued Liabilities $ 137,274 $ 134,166
- ------------------------------------------------------------------------------
Total Liabilities 137,274 134,166
Shareholders' equity
Common stock, par value $.10 per
share; authorized
9,000,000 shares; 2,877,470 and
2,874,999 shares
issued and 2,745,470 and 2,874,999
outstanding for
1998 and 1997, respectively. 287,747 287,500
Additional paid in capital 6,828,836 7,643,084
Retained earnings 17,820,409 17,156,415
Unearned stock based compensation (1,428,746) (1,836,250)
Accumulated other comprehensive income 1,012,462 743,036
Unearned ESOP shares (346,917) (411,050)
Treasury stock, at cost; 132,000 shares (1,887,106) -
- ------------------------------------------------------------------------------
Total liaibilities and shareholders'
equity $22,423,959 $23,716,901
==============================================================================
</TABLE>
<PAGE>
Statement of Income
- -------------------
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-------------------
<S> <C>
Equity in undistributed income of
Subsidiary $ 1,189,128
Interest income 75,122
------------------
Income from operations 1,264,250
Operating Expenses (55,449)
------------------
Net Income $ 1,208,801
==================
Statement of Cash Flow
- ----------------------
Year Ended
December 31, 1998
------------------
Operating Activities
Net Income $ 1,208,801
Equity in undistributed earnings
Of subsidiary (1,189,128)
ESOP and other stock based compensation earned 599,170
Other operating activities 263,170
Net cash provided by operating activities 882,013
- ---------------------------------------------------------------------------
Investing Activities
Loan distributed to subsidiary (390,435)
Net cash used in investing activities (390,435)
Financing Activities
Capital contribution from Oswego City Savings Bank 3,000,000
Proceeds from exercise of stock option plan 16,454
Cash dividends (541,699)(544,807)
Treasury stock purchased (2,845,094)
Net cash used in financing activities (370,339)
- ---------------------------------------------------------------------------
Increase in cash and cash equivalents 121,239
Cash and cash equivalents beginning of year 0
Cash and cash equivalents at end of year $ 121,239
===========================================================================
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Precent Owned
- ------- -------------
Oswego City Savings Bank 100%
Whispering Oaks
Development Corp. 100%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,716
<INT-BEARING-DEPOSITS> 1,800
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 80
<INVESTMENTS-MARKET> 54,363
<LOANS> 126,508
<ALLOWANCE> 939
<TOTAL-ASSETS> 203,374
<DEPOSITS> 160,219
<SHORT-TERM> 18,691
<LIABILITIES-OTHER> 2,177
<LONG-TERM> 0
0
0
<COMMON> 288
<OTHER-SE> 21,999
<TOTAL-LIABILITIES-AND-EQUITY> 203,374
<INTEREST-LOAN> 10,871
<INTEREST-INVEST> 3,040
<INTEREST-OTHER> 145
<INTEREST-TOTAL> 14,056
<INTEREST-DEPOSIT> 6,091
<INTEREST-EXPENSE> 6,693
<INTEREST-INCOME-NET> 7,086
<LOAN-LOSSES> 382
<SECURITIES-GAINS> 618
<EXPENSE-OTHER> 6,587
<INCOME-PRETAX> 1,704
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,209
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.42
<YIELD-ACTUAL> 7.92
<LOANS-NON> 2,031
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 827
<CHARGE-OFFS> 281
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 939
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 939
</TABLE>
