<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 For the Fiscal Year Ended December 31, 1999
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 16-1540137
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
</TABLE>
214 West First Street, Oswego, NY 13126
- ---------------------------------------- ------------
(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
---------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of February 28, 2000, there were 2,884,720 shares issued and 2,614,245
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, 2000
($7.75) was $6,112,456.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1999 (Parts II and IV).
2. Proxy Statement for the 2000 Annual Meeting of Stockholders (Parts I and
III).
<PAGE>
PART I
------
ITEM 1. Business
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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 Pathfinder 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, 2000 the Mutual Holding Company held
1,552,500 shares of Common Stock and the public held 1,061,745 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.
Pathfinder 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. On
November 19, 1999, the Bank changed its name to Pathfinder 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, 1999, the Bank had total assets of
$216.3 million, total deposits of $152.4 million, and shareholders' equity of
$20.1 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, 1999, $119.9 million, or 92% of the
Bank's total loan portfolio consisted of loans secured by real estate, of which
$87.8 million, or 73%, were loans secured by one- to four-family residences,
$20.1 million, or 17%, were secured by commercial real estate, $1.7 million, or
1%, were secured by multi-family properties and $9.5 million, or 8%, of total
real estate loans, were secured by second liens on residential properties. The
Bank also originates consumer and other loans which totaled $12.1 million, or
9%, of the Bank's total loan portfolio. The Bank invests a portion of its
assets in securities issued by the United States Government, state and municipal
obligations, corporate debt securities, mutual funds, and equity securities.
The Bank also invests in mortgage-backed securities primarily issued or
guaranteed by the United States Government or agencies thereof. The Bank's
principal sources of funds are deposits, principal and interest payments on
loans and borrowings from correspondent financial institutions. The principal
source of income is interest on loans and investment securities. The Bank's
principal expenses are interest paid on deposits, and employee compensation and
benefits.
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.
In April 1999 the Bank established Pathfinder REIT, Inc. as the Bank's
wholly-owned real estate investment trust subsidiary. At December 31, 1999
Pathfinder REIT, Inc. held $29.7 million in mortgage and mortgage related
assets. All disclosures in the Form 10-K relating to the Bank's loans and
investments includes loan and investments that are held by Pathfinder REIT, Inc.
<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 1999 the Bank originated and
securitized approximately $3.9 million of 30 year fixed rate mortgages, and sold
approximately $6.0 million into the secondary market. The loan sales resulted
in approximately $52,000 in capitalized servicing rights. At December 31, 1999,
$697,000 million, or 0.8% of the Bank's total one- to four-family real estate
portfolio consisted of loans held for sale. In recent years, the Bank has not
purchased loans originated by other lenders.
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,
--------------------------------------------------------------
1999 1998 1997
------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
-------- ------ -------- ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
First mortgage loans/(1)//(3)/ $110,374 84.4% $109,372 85.3% $102,403 84.2%
Second mortgage loans/(2)/.. 9,492 7.3 9,631 7.5 9,561 7.9
-------- ----- -------- ----- -------- -----
Total real estate loans...... 119,866 91.7 119,003 92.8 111,964 92.1
-------- ----- -------- ----- -------- -----
Consumer loans and other
loans:
Consumer.................... 3,482 2.7 4,073 3.2 4,278 3.5
Student..................... 12 -- 12 -- 13 --
Lease financing............. 278 0.2 350 0.3 564 0.5
Commercial business loans... 8,357 6.4 5,900 4.6 5,908 4.9
-------- ----- -------- ----- -------- -----
Total consumer and other
loans..................... 12,129 9.3 10,335 8.1 10,763 8.9
-------- ----- -------- ----- -------- -----
Total loans receivable..... 131,995 101.0 128,200 100.9 122,727 101.0
Less:
Unearned discount and
origination fees........... (84) (0.1) (199) (0.2) (314) (0.3)
Allowance for loan losses... (1,150) (0.9) (939) (0.7) (828) (0.7)
-------- ----- -------- ----- -------- -----
Total loans receivable, net $130,761 100.0% $129,338 100.0% $121,585 100.0%
======== ===== ======== ===== ======== =====
<CAPTION>
Years Ended December 31,
--------------------------------------------
1996 1995
------------------ ---------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
First mortgage loans/(1)//(3)/ $ 90,761 83.5% $ 83,325 83.2%
Second mortgage loans/(2)/.. 9,082 8.3 8,303 8.3
-------- ------ -------- ----
Total real estate loans...... 99,843 91.8 91,628 91.5
-------- ------ -------- ----
Consumer loans and other
loans:
Consumer.................... 3,481 3.2 3,286 3.2
Student..................... 58 0.1 63 0.1
Lease financing............. 1,153 1.1 2,013 2.0
Commercial business loans... 5,482 5.0 3,860 3.9
-------- ------ -------- ----
Total consumer and other
loans..................... 10,174 9.4 9,222 9.2
-------- ------ -------- ----
Total loans receivable..... 110,017 101.2 100,850 100.7
Less:
Unearned discount and
origination fees........... (368) (0.4) (355) (0.4)
Allowance for loan losses... (907) (0.8) (346) (0.3)
-------- ------ -------- -----
Total loans receivable, net $108,742 100.00% $100,149 100.0%
======== ====== ======== =====
</TABLE>
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/(1)/ Includes $87.1 million, $20.9 million and $1.7 million of one- to four-
family residential loans, commercial real estate and multi-family loans,
respectively, at December 31, 1999.
/(2)/ Includes $3.5 million and $6.0 million of home equity line of credit loans
and home equity fixed rate, fixed term loans, respectively, at December
31, 1999.
/(3)/ Includes $697,000 of mortgage loans held for sale at December 31, 1999.
3
<PAGE>
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...... $31,219 $17,217 $23,695 $ 9,162 $25,290 $3,791 $110,374
Second mortgage loans..... 3,570 395 1,149 3,990 388 -- 9,492
Consumer and other loans... 6,805 2,228 1,764 729 603 -- 12,129
------- ------- ------- ------- ------- ------ --------
Total loans.............. $41,594 $19,840 $26,608 $13,881 $26,281 $3,791 $131,995
======= ======= ======= ======= ======= ====== ========
</TABLE>
The following table sets forth at December 31, 1999, the dollar amount of
all fixed rate and adjustable rate loans due or repricing after December 31,
2000.
<TABLE>
<CAPTION>
Fixed Adjustable Total
------- ---------- -------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
First mortgage loans...... $39,039 $40,116 $79,155
Second mortgage loans..... -- 5,922 5,922
Consumer and other loans... 5,324 -- 5,324
------- ------- -------
Total loans.............. $44,363 $46,038 $90,401
======= ======= =======
</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, 1999,
approximately 91.2% 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, 1999 and 1998, 43.9% and 36.1%,
respectively, of the Bank's one- to four-family mortgage loan originations
consisted of fixed-rate loans.
The Bank also originates ARM loans which serve to reduce interest rate
risk. The Bank currently originates one-year ARM loans which adjust each year
at 275 basis points (100 basis points equal 1%) above the adjusted six month
moving average of the six-month Treasury bill auction discount rate. The Bank
also offers a loan product whereby the interest is fixed for the first five
years and adjusts annually thereafter. This loan product typically is
originated with terms
4
<PAGE>
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 $9.0, $11.6 million and $13.2 million, during the years
1999, 1998, and 1997, respectively. The Bank requires that borrowers qualify for
ARM loans based upon the loan's fully indexed rate.
At December 31, 1999, $53.5 million, or 61.0%, 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, 1999,
the Bank held $1.4 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 $20.9 million, or 17%, of the Bank's total loan
portfolio at December 31, 1999. At December 31, 1999, substantially all of the
Bank's commercial real estate loans were secured by properties located within
the Bank's market area. At December 31, 1999, the Bank's commercial real estate
loans had an average principal balance of $133.8. At that date, the largest
commercial real estate loan had a principal balance of $1.1 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.
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 $1.7
million, or 1.3%, of the Bank's total loan portfolio at December 31, 1999. At
December 31, 1999, 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, 1999, substantially all of the Bank's multi-family real estate
5
<PAGE>
loans were secured by properties located within the Bank's market area. At
December 31, 1999, the Bank's multi-family real estate loans had an average
principal balance of approximately $139,800 and the largest multi-family real
estate loan had a principal balance of $358,400, 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.
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, 1999, the disbursed
portion of home equity lines of credit totaled $3.5 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, 1999, consumer loans totaled $3.5
million, or 2.7%, 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, 1999, the Bank had commercial business loans outstanding with an
aggregate balance of $8.6 million, of which $4.9 million consisted of commercial
lines of credit and $278,000 were lease financing arrangements. The average
commercial business loan balance was approximately $52,000. 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
6
<PAGE>
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 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, 1999, the Bank had commitments to originate $9.0 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
Title insurance, title search, or an opinion of counsel as to the validity of
title are required on all loans secured by real property. In recent years, the
Bank has not purchased loans originated by other lenders.
7
<PAGE>
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,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loan receivable, beginning of period........ $129,338 $122,727 $110,017 $100,850 $ 90,412
Originations:
Real estate:
First mortgage/(1)//(3)/.................. 26,987 34,908 26,281 $ 23,496 18,219
Second mortgage/(2)/...................... 1,408 1,516 2,178 1,912 643
Consumer and other loans:
Consumer loans............................ 1,299 2,412 2,306 3,442 2,747
Student................................... -- -- -- -- 438
Lease financing........................... -- -- 300 -- 1,177
Commercial................................ 5,210 6,849 3,525 1,850 2,756
-------- -------- -------- -------- --------
Total originations...................... 34,904 45,685 34,590 30,700 25,980
Transfer of mortgage loans to foreclosed
real estate.............................. 93 563 374 445 645
Repayments................................. 26,201 29,969 21,506 21,088 13,774
Loan sales................................. 5,993 8,542 -- -- 1,123
-------- -------- -------- -------- --------
Net loan activity........................... 2,617 6,611 12,710 9,167 10,438
-------- -------- -------- -------- --------
Total loans receivable at end of period... $131,995 $129,338 $122,727 $110,017 $100,850
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------
</TABLE>
/(1)/ Includes $23.1 million, and $3.9 million in one- to four-family
residential loans and commercial real estate loans, respectively, for the
year ended December 31, 1999.
/(2)/ Includes $1.7 million in home equity loans and a net change of $278,000 in
home equity lines of credit for the year ended December 31, 1999.
/(3)/ Includes $3.8 million of mortgage loans held for sale originated during
the year ended December 31, 1999.
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,
1999, the Bank had $84,000 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 $993,000, $775,000 and $856,000, for the
fiscal years ended December 31, 1999, 1998, and 1997, respectively.
Loans-to-One Borrower. With certain limited exceptions, a New York
chartered savings bank may not make unsecured loans or extend unsecured credit
for commercial, corporate or business purposes (including lease financing) to a
single borrower, which in the aggregate exceed 15% of the Bank's net worth. At
December 31, 1999, the Bank's largest lending relationship totaled $2.6 million
and consisted of loans secured by retail businesses and properties. The Bank's
second largest lending relationship totaled $2.0 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 $1.9 million and was secured by a retail office plaza,
retail business property and residence. The Bank's fifth largest lending
relationship totaled $1.4 million and consisted of loans secured by multi-family
residential housing and residence. At December 31, 1999 all of the
aforementioned loans were performing in accordance with their terms.
8
<PAGE>
Delinquencies and Classified Assets
Delinquencies. The Bank's collection procedures provide that when a loan
is 15 days past due, a computer-generated late notice is sent to the borrower
requesting payment. If the delinquency continues, at 30 days a delinquent
notice is sent and personal contact efforts are attempted, either in person or
by telephone, to strengthen the collection process and obtain reasons for the
delinquency. Also, plans to arrange a repayment plan are made. If a loan
becomes 60 days past due, and no progress has been made in resolving the
delinquency, the Bank will send a 10-day demand letter and personal contact is
attempted, and the loan becomes subject to possible legal action if suitable
arrangements to repay have not been made. When a loan continues in a delinquent
status for 90 days or more, and a repayment schedule has not been made or kept
by the borrower, generally a notice of intent to foreclose is sent to the
borrower for mortgage loans, and a final demand letter is presented to the
borrower of non-real estate loans, giving 30 days to repay all outstanding
interest and principal. If not cured, foreclosure proceedings or other
appropriate legal actions are initiated to minimize any potential loss.
Non-Performing Assets. Loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Loans are placed on non-accrual
status when either principal or interest is 90 days or more past due or less
than 90 days, in the event the loan has been referred to the Bank's legal
counsel for foreclosure. Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income. At December
31, 1999, the Bank had non-performing assets of $3.2 million, and a ratio of
non-performing loans and real estate owned ("REO") of 1.5% total assets. Non-
performing assets increased $621,000, or 24%, from $2.8 million in 1998. 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 $641,000,
$742,000 and $767,000 at December 31, 1999, 1998,and 1997, respectively.
The largest component of REO consists of a real estate development project
which had a net book value of $510,000 at December 31, 1999. 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. 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. At December 31,
1999, the Bank had 16 lots remaining to be sold. 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.
9
<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,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Real estate loans........................................ $ 2,284 $ 1,298 $ 1,207 $ 1,953 $ 849
Consumer loans........................................... 270 534 283 45 70
-------- -------- -------- -------- --------
Total delinquent loans.................................. 2,554 1,832 1,490 1,998 919
Total REO................................................ 641 742 767 700 586
-------- -------- -------- -------- --------
Total nonperforming assets/(1)/....................... $ 3,195 $ 2,574 $ 2,257 $ 2,698 $ 1,505
======== ======== ======== -------- ========
Total loans delinquent 90 days or more
to total loans receivable/(2)/........................... 2.0% 1.4% 1.2% 1.8% 0.9%
Total loans delinquent 90 days or more to total assets... 1.2% 0.9% 0.8% 1.1% 0.5%
Total nonperforming assets to total assets............... 1.5% 1.3% 1.2% 1.4% 0.8%
Net loans receivable/(3)/................................ 130,761 128,200 121,585 108,742 100,149
-------- -------- -------- -------- --------
Total assets............................................. $216,324 $203,252 $196,770 $189,937 $180,752
======== ======== ======== ======== ========
</TABLE>
- -----------------------------
/(1)/ Net of specific valuation allowances.
/(2)/ Net of unearned discount, and the allowance for loan losses.
/(3)/ Includes $697,000 of mortgage loans held for sale at December 31, 1999.
During the year ended December 31, 1999, and year ended December 31, 1998,
respectively, additional gross interest income of $84,000 and $24,000 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,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans past due 30-89 days:
Real estate loans............ $1,619 $2,010 $2,232 $1,867 $2,465
Consumer and other loans..... 161 126 296 249 133
------ ------ ------ ------ ------
Total past due 30-89 days... $1,780 $2,136 $2,528 $2,116 $2,598
====== ====== ====== ====== ======
</TABLE>
10
<PAGE>
The following table sets forth information regarding the Bank's delinquent
loans 60 days and greater and REO at December 31, 1999.
<TABLE>
<CAPTION>
At December 31, 1999
------------------------------
Balance Number
------------- -----------
(Dollars In Thousands)
<S> <C> <C>
Residential real estate:
Loans 60 to 89 days delinquent................................... $ 429 10
Loans more than 90 days delinquent............................... 2,284 59
Consumer and commercial business loans 60 days or more delinquent... 299 25
Real estate owned................................................... 641 5
------ --
Total......................................................... $3,653 99
====== ==
</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,
------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Substandard assets/(1)/.... $2,668 $2,482 $1,719 $1,980 $1,163
Doubtful assets............ 110 103 55 59 34
Loss assets................ 7 90 16 6 5
------ ------ ------ ------ ------
Total classified assets... 2,785 $2,675 $1,790 $2,045 $1,202
====== ====== ====== ====== ======
</TABLE>
- ---------------
/(1)/ Includes $510,000, $638,000, $483,000, $250,000 and 292,000 for a real
estate development project classified as REO at December 31, 1999, 1998,
1997, 1996 and 1995, respectively.
Allowance for Loan Losses. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred. The Bank reviews on a quarterly basis
the loans in its portfolio which have demonstrated delinquencies, including
problem loans, to
11
<PAGE>
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,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Total loans receivable, net................................. $130,761 $128,200 $121,585 $108,742 $100,149
Average loans outstanding................................... 130,728 126,931 113,651 104,354 95,979
Allowance balance (at beginning of period).................. 939 828 907 346 315
Provision for losses:
Real estate................................................. 135 83 121 90 53
Consumer and other loans.................................... 238 298 140 547 50
Charge-offs:
Real estate................................................. -- 141 -- -- 17
Consumer and other loans.................................... 190 140 358 93 64
Recoveries:
Real estate................................................. -- -- -- -- --
Consumer and other loans.................................... 28 11 18 17 9
-------- -------- -------- -------- --------
Allowance balance (at end of period)........................ $ 1,150 $ 939 $ 828 $ 907 $ 346
======== ======== ======== ======== ========
Allowance for loan losses as a percent of net loans
receivable at end of period................................. 0.9% 0.7% 0.7% 0.8% 0.3%
Loans charged off as a percent of average loans
outstanding................................................. 0.2% 0.1% 0.3% 0.1% 0.1%
Ratio of allowance for loan losses to total nonperforming
loans at end of period/(1)/................................. 45.0% 51.3% 55.6% 45.3% 37.6%
Ratio of allowance for loan losses to total nonperforming
assets at end of period/(1)/............................... 36.0% 36.5% 36.7% 33.6% 23.0%
</TABLE>
- -------------------------------------------
/(1)/ Net of specific reserves.
12
<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,
---------------------------------------------------------------------
1999 1998 1997
---------------------- -------------------- -------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
-------- ----------- ------- ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period
applicable to:
Real estate loans........... $ 440 90.81% $380 92.01% $ 462 91.23%
Consumer and other loans.... 710 9.19 559 7.99 366 8.77
------ ------ ---- ------ ----- ------
Total allowance for loan
losses /(1)/.............. $1,150 100.00% $939 100.00% $ 828 100.00%
====== ====== ==== ====== ===== ======
<CAPTION>
At December 31,
------------------------------------------
1996 1995
-------------------- --------------------
% of Loans % of Loans
In Each In Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at end of period
applicable to:
Real estate loans........... $ 340 90.75% $ 250 90.86%
Consumer and other loans.... 567 9.25 96 9.14
----- ------ ----- ------
Total allowance for loan
losses /(1)/............. $ 907 100.00% $ 346 100.00%
===== ====== ===== ======
</TABLE>
- ------------------------
/(1)/ Percentages include unearned discount and origination fees.
13
<PAGE>
Investment Activities
The investment policy of the Bank established by the Board of Directors
attempts to provide and maintain liquidity, maintain a high quality diversified
investment portfolio in order to obtain a favorable return on investment without
incurring undue interest rate and credit risk, provide collateral for pledging
requirements, and to complement the Bank's lending activities. At December 31,
1999, the Bank had investment securities with an aggregate amortized cost of
$67.8 million and a market value of $66.4 million. At December 31, 1999, the
Bank's amortized cost value of investment securities consisted of $21.2 million
of corporate debt issues and $17.9 million of securities issued or guaranteed by
the United States Government or agencies thereof and state and municipal
obligations. The corporate debt issues primarily consist of financial
corporation debt and industrial debentures (the largest single issue was $1.0
million). These issues generally have maturities 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, 1999,
the Bank held $2.0 million in common stock and $2.7 million in an equity mutual
fund. At December 31, 1999, the Bank had invested $23.3 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, 1999, the Bank's available-
for-sale and held-to-maturity portfolios had amortized cost of $67.8 million and
$113,000, respectively, and market values of $66.4 million and $113,000,
respectively.
The Bank generally has maintained a portfolio of liquid assets that exceeds
regulatory requirements. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of the yield that will be available in
the future, as well as management's projections as to the short term demand for
funds to be used in the Bank's loan origination and other activities. For
further information regarding the Bank's investments see Note 2 to the Notes to
Financial Statements.
At December 31, 1999, the Company holds the following investments which
exceed 10% of total capital.
<TABLE>
<CAPTION>
Issuer Book Value Fair Market Value
--------------- ---------- -----------------
<S> <C> <C>
Lehman Brothers $2,999,000 $2,705,000
CNA Financial $3,503,000 $3,339,000
</TABLE>
14
<PAGE>
Investment Portfolio. The following table sets forth the carrying value of
the Bank's investment portfolio at the dates indicated. At December 31, 1999,
the market value of the Bank's investments was approximately $66.4 million. The
market value of investments includes interest-earning deposits, and mortgage-
backed securities.
<TABLE>
<CAPTION>
At December 31,
----------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
(In Thousands)
Investment securities:
U.S. Government and agency obligations.................. $11,167 $ 1,471 $ 4,856
State and municipal obligations......................... 6,695 5,906 6,636
Corporate debt issues................................... 21,302 20,347 18,121
Equity securities....................................... 2,015 1,230 1,139
Mutual funds............................................ 2,656 2,298 1,785
------- ------- -------
43,835 31,252 32,537
Unrealized gain (loss) on available for sale portfolio... (786) 1,413 1,126
------- ------- -------
Total investment securities............................ 43,049 32,665 33,663
------- ------- -------
Interest-earning deposits in other institutions.......... -- -- --
Federal funds sold....................................... 1,800 --
------- -------
Total investments..................................... $43,048 $34,465 $33,663
======= ======= =======
Mortgage-backed securities, net:
Adjustable rate......................................... 1,602 2,505 3,823
Fixed rate.............................................. 22,453 17,976 19,200
------- ------- -------
24,055 20,481 23,023
Unrealized gain (loss) on available for sale portfolio... (707) 297 135
------- ------- -------
Total mortgage-backed securities, net................. $23,348 $20,778 $23,158
======= ======= =======
</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, 1999.
<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.......................... $ 2,012 $ 1,993 1.50 5.55%
U.S. Government agency............................ 9,155 8,892 5.95 6.54
State and municipal obligations................... 6,695 6,751 6.96 5.55
Corporate debt issues............................. 21,302 20,195 9.93 6.60
Marketable equity securities...................... 4,671 5,218 -- --
------- ------- ---- ----
Total............................................ $43,835 $43,049
------- =======
Unrealized loss on available for sale portfolio... (786)
-------
Carrying value of investment securities............ $43,049
=======
Investment securities held to maturity: /(1)/
Corporate debt obligations........................ $ 113 113 -- 9.52
======= ======= ==== ====
</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, 1999. Yield is calculated on the
amortized cost to maturity.
<TABLE>
<CAPTION>
At December 31, 1999
--------------------------------------------------------------------------
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
---------- ----------- ---------- ----------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt investment securities:
U.S. Agency securities................ $ -- --% $ 3,250 6.317% $ 5,881 6.659%
U.S. Government securities............ -- -- 1,993 5.500 19 10.927
State and municipal obligations....... 276 6.372 3,641 5.664 1,399 5.604
Corporate debt issues................. -- -- 2,804 6.618 11,602 6.617
------ ----- ------- ----- ------- ------
Total............................... $ 276 6.372% $11,688 6.141% $18,901 6.546%
====== ===== ======= ===== ======= ======
Equity and mortgage-backed
securities:
Mutual funds.......................... $2,656 0.600% $ -- --% $ -- --%
Mortgage-backed securities............ 134 6.476 747 6,705 5,723 6.684
Common stock.......................... 2,015 5.374 -- -- -- --
------ ----- ------- ----- ------- ------
Total............................... $4,805 2.774% $ 747 6.705% $ 5,723 6.684%
====== ===== ======= ===== ======= ======
Total investment
securities......................... $5,081 2.970% $12,435 6.169% $24,624 6.581%
====== ===== ======= ===== ======= ======
Unrealized gain on available for
sale portfolio.......................
Total carrying value...............
Investment securities held
to maturity:/(1)/
Corporate debt obligations............ $ -- --% $ -- --% $ -- --%
------ ----- ------- ----- ------- ------
Total securities..................... $ -- --% $ -- --% $ -- --%
====== ===== ======= ===== ======= ======
<CAPTION>
At December 31, 1999
---------------------------------------------------
More than Ten Years Total Investment Securities
--------------------- -----------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Market Average
Value Yield Value Value Yield
--------- -------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Debt investment securities:
U.S. Agency securities................ $ 24 10.126% $ 9,155 $ 8,892 6.546%
U.S. Government securities............ -- -- 2,012 1,993 5.552
State and municipal obligations....... 1,379 4.990 6,695 6,751 5.553
Corporate debt issues................. 6,783 6.561 21,189 20,082 6.601
------- ------ ------- ------- ------
Total............................... $ 8,186 6.325% $39,051 $37,718 6.354%
======= ====== ======= ======= ======
Equity and mortgage-backed
securities:
Mutual funds.......................... $ -- --% $ 2,656 $ 3,203 0.600%
Mortgage-backed securities............ 17,451 6.702 24,055 23,348 6.698
Common stock.......................... -- -- 2,015 2,015 5.374
------- ------ ------- ------- ------
Total............................... $17,451 6.702% $28,566 $28,566 6.041%
======= ====== ======= ======= ======
Total investment
securities......................... $25,637 6.582% $67,777 $66,397 6.222%
======= ====== ======= ======= ======
Unrealized gain on available for
sale portfolio........................ (1,493)
------
Total carrying value................ $66,284 $66,397 6.362%
======= ======= ======
Investment securities held
to maturity:/(1)/
Corporate debt obligations............ $ 113 7.161% $ 113 $ 113 7.161%
------- ------ ------- ------- ------
Total securities..................... $ 113 7.161% $66,397 $65,851 6.351%
======= ====== ======= ======= ======
</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, 1999:
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
- ------------- -------------- ----------------------------- ---------- --------- ---------
(In Thousands)
<C> <S> <C> <C> <C> <C>
0.000% None Non-interest demand account $ 50 $ 9,746 6.43%
2.000 None NOW accounts 500 13,996 9.24
2.150 None Savings Accounts - Fixed Rate 100 45,541 30.05
2.970 None Savings Account- Tiered Rate 100 13,889 9.17
3.546 None Money market accounts 2,500 418 .028
Certificates of Deposit
--------------------------
4.900 6 months Fixed term, fixed rate 2,500 6,135 4.05
5.692 9 months Fixed term, fixed rate 1,000 110 0.07
5.179 12 months Fixed term, fixed rate 1,000 23,641 15.60
5.144 15 months Fixed term, fixed rate 1,000 6,091 4.02
5.442 18 months Fixed term, variable rate 1,000 1,398 0.92
5.272 18 months Fixed term, fixed rate 1,000 4,579 3.02
5.380 24 months Fixed term, fixed rate 1,000 4,668 3.08
5.691 30 months Fixed term, fixed rate 1,000 3,253 2.15
5.853 36 months Fixed term, fixed rate/(1)/ 1,000 6,169 4.07
5.781 48 months Fixed term, fixed rate/(1)/ 1,000 3,855 2.54
5.909 60 months Fixed term, fixed rate 1,000 1,840 1.21
6.076 84 months Fixed term, fixed rate 1,000 6,160 4.07
2.858 60 through 120 months Fixed term, fixed rate 1,000 47 0.03
------- ------
TOTAL $151,536 /(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 $901,000 of December 31, 1999.
17
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
S<TABLE>
<CAPTION>
Balance Percent Balance Percent Balance Percent
at of Incr. at of Incr. at of
12/31/99 Deposits (Decr) 12/31/98 Deposits (Decr) 12/31/97 Deposits
--------- -------- ------- --------- -------- ------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Club accounts................ $ 1,002 .66% $ 94 $ 908 0.57% $ 115 $ 792 0.52%
Noninterest accounts......... 9,746 6.43 273 9,473 5.94 1,829 7,644 5.03
NOW accounts................. 13,996 9.24 (2,331) 16,327 10.23 3,021 13,306 8.75
Passbooks.................... 58,429 38.56 (4,893) 63,322 39.70 177 63,145 41.53
Money market deposit accounts 418 .28 343 75 0.05 (38) 113 0.07
Time deposits which mature:
Within 12 months............ 45,670 30.14 (6,059) 51,729 32.43 12,869 38,860 25.56
Within 12-36 months......... 16,190 10.68 2,799 13,391 8.40 (9,220) 22,611 14.87
Beyond 36 months............ 6,085 4.02 1,801 4,284 2.68 1,303 5,588 3.67
--------- ------ ------- --------- ------ ------- --------- ------
Total...................... $ 151,536 100.00% $(7,973) $ 159,509 100.00% $ 7,450 $ 152,059 100.00%
========= ====== ======= ========= ====== ======= ========= ======
<CAPTION>
Balance Percent Balance
Incr. at of Incr. at
(Decr) 12/31/96 Deposits (Decr) 12/31/95
-------- --------- -------- ------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Club accounts................ $ 131 $ 661 0.42% $ 110 $ 551
Noninterest accounts......... 303 7,341 4.63 129 7,212
NOW accounts................. 224 13,082 8.24 917 12,165
Passbooks.................... (1,828) 64,973 40.94 (5,495) 70,468
Money market deposit accounts (61) 174 0.11 (78) 252
Time deposits which mature:
Within 12 months............ (14,075) 52,935 33.36 15,011 37,924
Within 12-36 months......... 7,679 14,933 9.41 (5,968) 20,901
Beyond 36 months............ 990 4,598 2.90 (3,914) 8,512
-------- --------- ----- ------- ---------
Total...................... $ (6,637) $ 158,697 100.0% $ 712 $ 157,985
======== ========= ===== ======= =========
</TABLE>
- -----------------------------
/(1)/ Excludes escrow accounts totalling $901,000 of December 31, 1999.
18
<PAGE>
The following table sets forth the certificates of deposit in the Bank
classified by rates as of the dates indicated:
s<TABLE>
<CAPTION>
At December 31,
-----------------------------------
1999 1998 1997
------- --------------- -------
(In Thousands)
<S> <C> <C> <C>
Rate
- ----
3.00% or less................... $ 10 $ 8 $ 139
3.01 - 4.99%.................... 20,466 10,824 7,253
5.00 - 6.99%.................... 46,702 53,920 55,115
7.00 - 8.99%.................... 767 4,652 4,552
9.00 - 10.99%................... -- -- --
------- ------- -------
$67,945 $69,404 $67,079
======= ======= =======
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1999.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
--------- ------- ----- ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate
- ----
3.00% or less..... $ 10 $ -- $ -- $ -- $ -- $ -- $ 10
3.01 - 3.99%...... 469 6 -- -- -- -- 57
4.00 - 4.99%...... 19,096 1,022 161 130 -- -- 20,409
5.00 - 5.99%...... 24,152 7,855 5,438 1,167 1,595 2,351 43,058
6.00 - 6.99%...... 2,361 240 701 176 60 106 3,644
7.00 - 7.99%...... -- -- 767 -- -- -- 767
8.00% and above... -- -- -- -- -- -- --
------- ------ ------ ------ ------ ------ -------
$46,088 $9,123 $7,067 $1,973 $1,655 $2,457 $67,945
======= ====== ====== ====== ====== ====== =======
</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,
1999.
<TABLE>
<CAPTION>
Certificates
of Deposit
of $100,000
Remaining Maturity or More
- ------------------ ---------------
(In Thousands)
<S> <C>
Three months or less....................................... $ 1,673
Three through six months................................... 2,431
Six through twelve months.................................. 2,239
Over twelve months......................................... 2,386
--------
Total..................................................... $ 8,729
========
</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,
------------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of period................................... $159,509 $152,059 $158,696
Net deposits (withdrawals)....................................... (13,322) 1,367 (12,920)
Interest credited................................................ 5,349 6,083 6,283
-------- -------- --------
Ending balance................................................... 151,536 159,509 132,059
-------- -------- --------
Net increase (decrease) in deposits.............................. $ (7,973) $ 7,450 $ (6,637)
======== ======== ========
</TABLE>
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,
1999, the Bank had $10.2 million in funds obtained from repurchase agreements
outstanding and $28.4 million in term advances. The Bank is a member of the
Federal Home Loan Bank System.
19
<PAGE>
The following table summarizes the outstanding balance of short-term
borrowing of the Bank for the years indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Overnight Line of Credit................. $ 4,350 $ -- $ 5,750
Term borrowings (original
term)
90 days or less......................... 9,612 1,587 7,942
1 year.................................. 10,995 8,404 3,550
2 year.................................. 2,700 1,000 1,000
------- ------- -------
Balance at end of period... $27,657 $10,991 $18,242
======= ======= =======
Daily average during the year 18,148 15,077 10,212
Maximum month-end balance................ 27,657 18,691 18,892
Weighted average rate during
the year................................ 5.42% 5.64% 5.92%
Year-end average rate.................... 5.06% 5.32% 5.84%
</TABLE>
Personnel
As of December 31, 1999, the Bank had 68 full-time and 21 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 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
20
<PAGE>
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.
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.
21
<PAGE>
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.
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, 1999 the Bank held $25.6 million in deposits which are insured by
the Savings Association Insurance Fund. The Bank paid $31,000 in federal
deposit insurance premiums for the fiscal year ended December 31, 1999, as
compared to $35,000 in 1998.
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, 1999, the
Bank's capital exceeded the capital requirements imposed by the FDIC.
22
<PAGE>
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
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 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,
23
<PAGE>
and provides that such assessment may serve as a basis for the denial of any
such application. At December 31, 1999, 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, 1999, 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.
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
24
<PAGE>
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.
Gramm-Leach-Bliley Financial Services Modernization Act of 1999
In November 1999, President Clinton signed into law the Gramm-Leach-Bliley
Financial Services Modernization Act of 1999, federal legislation intended to
modernize the financial services industry by establishing a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers. To the extent the
legislation permits banks, securities firms and insurance companies to
affiliate, the financial services industry may experience further consolidation.
This could result in a growing number of larger financial institutions that
offer a wider variety of financial services than the Bank currently offers and
that can aggressively compete in the markets the Bank currently serves.
FEDERAL AND STATE TAXATION
Federal Taxation. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Company or the
Bank.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use
the specific charge off method in computing its bad debt deduction beginning
with its 1996 Federal tax return. In addition, the federal legislation requires
the recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may 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, 1999, 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.
25
<PAGE>
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, 1999. The aggregate net book
value of the Bank's premises and equipment was $4.9 million at December 31,
1999. 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.
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.
26
<PAGE>
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, 1999 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.
27
<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 at December 31, 1999.
<TABLE>
<CAPTION>
Name Age Positions Held With the Company
- --------------------------- --- --------------------------------------------------------------
<S> <C> <C>
Chris C. Gagas 69 Chairman of the Board, President and Chief Executive Officer
Anita J. Austin 50 Internal Auditor
Melissa A. Miller 42 Vice President, Secretary
James A. Dowd, CPA 32 Vice President--Controller
Edgar J. Manwaring 54 Vice President--Lending
Gregory L. Mills 39 Vice President, Director of Marketing, Branch Administrator
W. David Schermerhorn 39 Executive Vice President-Lending
Thomas W. Schneider/(1)/ 38 Executive Vice President and Chief Financial Officer
Barry S. Thompson 45 Senior Vice President, Compliance Officer and Security Officer
- -------------------
</TABLE>
/(1)/ Effective January 15, 2000, Mr. Schneider was named President and Chief
Executive Officer of the Company.
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.
28
<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, 1999 and
1998.
(C) Consolidated Statements of Income - years ended December 31,
1999, 1998 and 1997;
(D) Consolidated Statements of Stockholders' Equity - years ended
December 31, 1999, 1998 and 1997
(F) Consolidated Statements of Cash Flows - years ended December
31, 1999, 1998 and 1997; 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, 1999.
(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.
10.1 Form of Oswego City Savings Bank 1999 Stock Option Plan
Incorporated by reference to the Company's S-4
10.2 Form of Oswego City Savings Bank 1999 Recognition and
Retention Plan Incorporated by reference to the Company's
S-4
29
<PAGE>
10.3 Employment Agreement between the Bank and Chris C. Gagas,
President and Chief Executive Officer Incorporated by
reference to the Company's S-4
10.4 Employment Agreement between the Bank and Thomas W.
Schneider, Vice President and Chief Financial Officer
Incorporated by reference to the Company's S-4
10.5 Employment Agreement between the Bank and W. David
Schermerhorn, Vice President - Loan Administration
Incorporated by reference to the Company's S-4
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
30
<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 21, 2000 By: /S/ Thomas W. Schneider
---------------------------------
Thomas W. Schneider
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.
<TABLE>
<CAPTION>
<S> <C>
By: /S/ Chris C. Gagas
-------------------------------------
Chris C. Gagas, Chairman of the Board
Date: March 21, 2000
By: /S/ Thomas W. Schneider By: /S/ Chris R. Burritt
---------------------------------------- ---------------------------------
Thomas W. Schneider, President and Chief Chris R. Burritt, Director
Executive Officer
Date: March 21, 2000 Date: March 21, 2000
By: /S/ James A. Dowd By: /S/ Raymond W. Jung
---------------------------------------- --------------------------------
James A. Dowd, Vice President and Controller Raymond W. Jung, Director
(Principal Accounting Officer)
Date: March 21, 2000 Date: March 21, 2000
By: /S/ Bruce E. Manwaring By: /S/ Victor S. Oakes
---------------------------------------- ---------------------------------
Bruce E. Manwaring., Director Victor S. Oakes, Director
Date: March 21, 2000 Date: March 21, 2000
By: /S/ L. William Nelson, Jr. By: /S/ Corte J. Spencer
---------------------------------------- --------------------------------
L. William Nelson, Jr., Director Corte J. Spencer, Director
Date: March 21, 2000 Date: March 21, 2000
By: /S/ Lawrence W. O'Brien
----------------------------------------
Lawrence W. O'Brien, Director
Date: March 21, 2000
By: /S/ Janette Resnick
----------------------------------------
Janette Resnick, Director
Date: March 21, 2000
</TABLE>
<PAGE>
Exhibit Index
-------------
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc.
Incorporated herein by reference to the Company's registration
statement on S-4, file no. 333-36051 (the "S-4")
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference
to the Company's S-4
4 Form of Stock Certificate of Pathfinder Bancorp, Inc.
10.1 Form of Oswego City Savings Bank 1999 Stock Option Plan Incorporated
by reference to the Company's S-4
10.2 Form of Oswego City Savings Bank 1999 Recognition and Retention Plan
Incorporated by reference to the Company's S-4
10.3 Employment Agreement between the Bank and Chris C. Gagas, President
and Chief Executive Officer Incorporated by reference to the
Company's S-4
10.4 Employment Agreement between the Bank and Thomas W. Schneider, Vice
President and Chief Financial Officer Incorporated by reference to
the Company's S-4
10.5 Employment Agreement between the Bank and W. David Schermerhorn,
Vice President - Loan Administration Incorporated by reference to
the Company's S-4
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
<PAGE>
FOREIGN CORPORATION
CERTIFICATE
(See Note Below)
--------------------------------
THE UNDERSIGNED, a corporation duly organized and existing under the laws of
the State of , in accordance with the provisions of
-----------------------
section 371 of Title 8 of the Delaware Code, does hereby certify:
FIRST: That
----------------------------------------------------------
(See Note Below)
is a corporation duly organized and existing under the laws of the State of and
is filing herewith a certificate evidencing its corporate existence.
SECOND: That the name and address of its registered agent in said State of
Delaware upon whom service of process may be had is The Corporation Trust
Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware
19801.
THIRD: That the assets of said corporation are $ and that the
----------------
liabilities thereof are $ . The assets and liabilities
-----------------
indicated are as of a date within six months prior to the filing date of this
Certificate.
FOURTH: That the business which it proposes to do in the State of Delaware
is as follows:
FIFTH: That the business which it proposes to do in the State of Delaware
is a business it is authorized to do in the jurisdiction of its Incorporation.
IN WITNESS WHEREOF, said corporation has caused this certificate to be
signed on its behalf this day of .
------------------ ---------------------
(See Note below)*
------------------------------
(Title)
* Any authorized officer or the Chairman or Vice-Chairman of the Board of
Directors may execute this certificate.
Note: If the corporation is qualifying under an assumed name because its true
- ----
name is unavailable for use in Delaware, the certificate should set forth
(whether in the heading, the body or the execution thereof) the true name of the
corporation followed by "also known as (assumed name)" or "doing business as
(assumed name)" wherever the name is required.
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
Pathfinder Bancorp, Inc. is the parent company of Pathfinder Bank. Pathfinder
Bank has two operating subsidiaries - Pathfinder REIT Inc., and Whispering Oaks
Development Corporation.
Pathfinder Bancorp, Inc.'s common stock currently trades on the NASDAQ Small Cap
Market under the symbol "PBHC".
The following table sets forth certain financial highlights of the consolidated
entity for the periods and at the dates indicated:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR (In Thousands)
Interest Income $ 14,689 $ 14,056 $ 14,168 $ 13,213 $ 12,205
Interest Expense 7,035 6,969 6,892 6,414 6,259
Net Interest Income 7,654 7,086 7,276 6,799 5,946
Net Income 930 1,209 1,854 1,272 990
PER COMMON SHARE (a) (b)
Net Income:
Primary 0.35 0.44 0.66 0.45 0.07
Fully diluted 0.35 0.42 0.66 0.45 0.07
Book Value 7.61 8.12 8.20 7.44 7.22
Cash dividends declared 0.24 0.20 0.17 0.13 0.00
Stock Price:
IOP 5.00 5.00 5.00 5.00 5.00
High 12.00 26.125 20.00 7.083 7.167
Low 7.50 9.125 6.25 5.333 5.583
Close 8.875 9.125 20.0 6.25 7.00
YEAR END (In Thousands)
Total assets $216,324 $203,252 $196,770 $189,937 $180,752
Interest-earning deposits at
other financial institutions -- 1,800 -- 1,550 8,200
Investment securities 43,049 32,665 33,663 36,673 44,932
Mortgage-backed securities 23,348 20,778 23,158 22,829 7,953
Loans Receivable, net:
Real estate 118,643 115,380 109,543 99,047 91,023
Consumer and other 11,420 9,978 10,495 9,695 9,126
Total loans receivable, net 130,063 125,358 120,038 108,742 100,149
Intangible assets 2,973 3,289 3,605 3,921 4,236
Deposits 152,436 160,219 152,399 158,998 158,324
Borrowed funds 42,880 18,691 18,242 7,610 --
Notes Payable ESOP -- -- 430 486 425
Equity 20,075 22,287 23,583 21,390 20,751
SELECTED PERFORMANCE RATIOS
Return on average assets 0.44% 0.62% 0.97% 0.69% 0.56%
Return on average equity 4.33 5.12 8.35 6.09 6.31
Return on tangible equity 5.44 6.36 9.28 7.28 5.99
Average equity to average assets 10.24 12.05 11.59 11.32 8.84
Equity to total assets 9.28 10.97 11.98 11.26 11.47
Dividend payout ratio 67.65 45.07 26.19 29.37 0.0
Net interest rate spread 3.73 3.73 3.85 3.88 3.72
Noninterest expense to total assets 3.30 3.24 2.93 2.82 2.94
Nonperforming loans to
net loans receivable 1.96 1.46 1.24 2.05 0.92
Nonperforming assets to
total assets 1.48 1.27 1.15 1.54 0.83
Allowance for loan losses
to net loans receivable 0.88 0.75 0.69 0.83 0.35
Number of full service offices 5 5 5 5 5
</TABLE>
(a) Earnings per share for 1995 are based on the period from November 15,1995
to December 31, 1995.
(b) Per common share data has been retroactively restated to reflect the three-
for-two stock split paid on February 5, 1998 to shareholders of record
January 26, 1998.
2
<PAGE>
Cash Earnings and Related Returns
The Company's net income is significantly impacted by the non-cash amortization
of certain expenses associated with the Company's stock based compensation
plans, as well as, the amortization of goodwill. The recognition of these
expense items are considered non-cash because they do not adversely impact the
Company's generation of tangible shareholders' equity since the full realization
of such items have previously been deducted from tangible shareholders' equity.
Management believes that a presentation of the Company's cash earnings (which
measure tangible equity generation), alongside reported earnings, is important
in determining the Company's financial capacity for growth, share repurchases,
and payments of dividends.
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 1999 by $1.5 million, or 64.7% more than reported
earnings would indicate.
<TABLE>
<CAPTION>
Cash Earnings Analysis
<S> <C> <C> <C>
For the Years Ended December 31,
- --------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
Net Income 930 $1,209 $1,854
Add back non-cash expenses related to:
Stock-related benefit plans 544 599 494
Amortization of intangible asset 316 316 316
Associated tax benefits (258) (274) (243)
- --------------------------------------------------------------------------------------------------
Cash earnings $1,532 $1,850 $2,421
- --------------------------------------------------------------------------------------------------
Cash earnings per share-basic $ .58 $ .67 $ .87
Cash earnings per share-diluted $ .57 $ .65 $ .86
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Cash Earnings Performance Ratios
For the Years Ended December 31,
- --------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets .73% .94% 1.26%
Return on average tangible shareholders' equity 8.36% 9.44% 13.12%
Non interest expense to average assets 2.99% 2.89% 2.59%
Efficiency ratio 70.84% 65.42% 57.37%
- --------------------------------------------------------------------------------------------------
</TABLE>
General
Throughout the Management's Discussion and Analysis the term, "the Company",
refers to the consolidated entity of Pathfinder Bancorp, Inc. Pathfinder Bank
is a wholly owned subsidiary of Pathfinder Bancorp, Inc. Pathfinder REIT, Inc.
and Whispering Oaks Development Corp. represent wholly owned subsidiaries of
Pathfinder Bank. At December 31, 1999, Pathfinder Bancorp, Inc.'s only business
was the 100% ownership of Pathfinder Bank. At December 31, 1999, 1,552,500
shares, or 58.8%, of the Company's common stock was held by Pathfinder Bancorp,
MHC, the Company's mutual holding company parent and 1,086,745 shares, or 41.2%,
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
3
<PAGE>
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 results 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.
Management Succession
On January 14, 2000, Chris C. Gagas retired as President and Chief Executive
Officer of the Pathfinder Bancorp, MHC, Pathfinder Bancorp, Inc. and Pathfinder
Bank. Mr. Gagas continues as Chairman of the Board of the Company and its mutual
holding company parent. Thomas W. Schneider succeeded him. Mr. Schneider has
been employed by the Company since 1988 and most recently served as Executive
Vice President and Chief Financial Officer.
Bank Name Change
On November 16, 1999, Oswego City Savings Bank changed its name to Pathfinder
Bank.
Trust Department
During the fourth quarter of 1999, the Company began providing trust and
custodial services. The Company incurred approximately $17,000 in expense
during 1999 associated with trust operations establishment.
Real Estate Investment Trust
On May 13, 1999, the Company established and funded Pathfinder REIT, Inc., a
Real Estate Investment Trust ("the REIT"), as a subsidiary of Pathfinder Bank.
The REIT holds a portion of the residential and commercial loans originated by
the Company. The establishment of the REIT will enable the Company to secure a
method of achieving liquidity enhancement and contingency funding in the future.
The Company incurred expenses of approximately $90,000 during 1999 associated
with the establishment of the REIT. At December 31, 1999, Pathfinder REIT, Inc.
had total assets of $31.4 million.
Impact of the Year 2000
Prior to year-end 1999, the Company had completed the assessment of its Year
2000 risk, had implemented all necessary system enhancements, and had tested all
systems and equipment to ensure customer service, and minimize its business
risks associated with the century date rollover. A business resumption
contingency plan along with a liquidity contingency plan were in place to
provide for problems should they have occurred. As a result of strong customer
communications and marketing efforts by both the Company and the banking
industry, consumer confidence in the banking industry increased. The Company
experienced no significant year 2000 related deposit declines or cash
withdrawals in December of
4
<PAGE>
1999. The month of January 2000 reflected a successful transition to the year
2000 of all the Company's systems and equipment. All year end processing was
completed as scheduled and daily processing since year-end has been performed
without any year 2000 related incidents. During the month of January, the
Company had successfully reinvested its contingency cash balances. The Company
estimates that interest expense was negatively impacted in December of 1999 by
$14,000 as a result of the cash being reserved for customer contingencies. Costs
of the Company's efforts to prepare its data processing systems for the impact
of the Year 2000 were approximately $180,000 in non-capitalized costs with the
majority of expenditures for software and hardware upgrades being capitalized
upon implementation in February 1999, and maintenance costs of operating
parallel systems. The total amount capitalized was $575,000 and is being
depreciated over an average of approximately four and one-third years. The
depreciation will result in additional annual expenses of approximately $133,000
over this period.
To date, there has been no indication that the quality of the Company's
commercial loan portfolio has had any negative year 2000 related impact. The
Company believes that its year 2000 related business risks have been
significantly reduced with the successful operation of its systems during the
early part of the year 2000. By the end of the first quarter of 2000, the
Company expects that a sufficient level of business activity with all its third
party vendors will indicate if any risk remains. Until such time, the Company
will continue to maintain its year 2000 business resumption contingency plan to
manage such risk.
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 13 years.
Management believes that the following actions over the past five 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 public offering and subsequent
reorganization into the two-tier holding company structure to further enhance
growth and independence, the expansion of the Company's small business lending
services, and the creation of a Trust division to further serve the community
needs and provide additional revenue sources. 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 Levels
The Company's shareholders' equity has decreased from $20.8 million at December
31, 1995 to $20.1 million at December 31, 1999. Exclusive of treasury share
repurchases, the Company's equity has increased $2.4 million or 11.6% during the
same time period. The Company's ratio of shareholders' equity to total assets
was 9.28% at December 31, 1999. Total assets have increased by $35.6 million,
or 19.7%,
5
<PAGE>
since December 31, 1995. 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
The Company emphasizes 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
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, 1999, 90.8% of the
Company's total loan portfolio consisted of loans secured by real estate. In
addition, at December 31, 1999, 30.7% of the Company's total assets consisted of
investment securities.
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, 1999, 55.4% of the Company's
deposit base of $152.4 million consisted of core deposits, which included non-
interest-bearing demand accounts, NOW accounts, passbook and club savings
accounts and money market deposit accounts. 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.
Changes in Financial Condition
Comparison at December 31, 1999 and December 31, 1998.
Total assets increased $13.0 million, or 6.4%, to $216.3 million at December 31,
1999 from $203.3 million at December 31, 1998. The increase in assets is
primarily the result of increases of $13.0 million, or 24.3%, in investment
securities to $66.4 million from $53.4 million, and an increase of $4.7 million
in net loans receivable. The increase in total assets was primarily the result
of the continued implementation of a wholesale growth strategy in which the
Company uses borrowings to fund the purchase of investments, and the origination
of loans, as well as offsetting reductions in core deposits. Additionally, the
Company had originations of mortgage loans held-for-sale of $3.8 million and
loan sale proceeds of $5.9 million from sales into the secondary market. These
originations consist of 15 year and 30 year fixed rate mortgages. The Company
services these mortgages and recognizes income from the capitalization of
mortgage servicing rights. At December 31, 1999, the Company's mortgage loans
held-for-sale portfolio was $697,000, compared to $2.8 million at December 31,
1998. These asset increases were also offset by a $2.2 million dollar decrease
in cash and cash equivalents.
Non-performing loans (past due 90 days or more) increased $722,000, or 39.4%, to
$2.6 million at December 31, 1999, from $1.8 million at the end of the prior
year. The non-performing loans to total loans ratio at December 31, 1999 was
2.0% compared to 1.5% at December 31, 1998. The Company's allowance for loan
losses to total loans and non-performing loans was .88% and 45.0%, respectively,
at December 31, 1999. 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, 1999. The relatively low
loan-to-value ratio serves as a mitigating factor in estimating the company's
potential losses from credit default.
Total liabilities increased $16.2 million, or 9.0%, to $196.3 million at
December 31, 1999 from $180.1 million at the end of the prior fiscal year. The
increase was primarily attributable to a $24.2 million increase in borrowed
funds to $42.9 million at December 31, 1999, from $18.7 at December 31, 1998.
The increase in borrowings represent term advances and reverse repurchase
agreements utilized to fund the Company's growth in its investment and loan
portfolios, as well as an extension of the Company's line of credit. The
increase in borrowed funds was partially offset by a $7.8 million decrease in
deposits, and a $1.1 million
6
<PAGE>
decrease in other liabilities. The decrease in deposits was comprised of a $4.8
million, or a 7.5% decrease in savings accounts, a $2.3 million, or 14.3%,
decrease in interest-bearing demand deposits, and a $1.5 million decrease in
time accounts. The decrease in deposits reflects both the lack of significant
growth in the Company's market area and increased competitive forces for
alternative investment products and returns. The decrease in other liabilities
was the result of a $1.3 million increase in deferred taxes, partially offset by
a $196,000 increase in deferred compensation and a $143,000 increase in interest
payable.
Shareholders' equity decreased $2.2 million, or 9.9%, to $20.1 million at
December 31, 1999 from $22.3 million at December 31, 1998. The decrease is
attributable to the repurchase of 113,475 shares of the Company's common stock
totaling $1.2 million, a decrease in accumulated other comprehensive income of
$1.9 million and dividends declared of $ 629,000. The decreases were offset by
net income of $930,000 and stock based compensation earned of $544,000.
Comparison at December 31, 1998 and December 31, 1997.
Total assets increased $6.5 million, or 3.3%, to $203.3 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 $5.4 million, or 4.5%. 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. 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
$810,000. 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
6.0%, 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 $342,000, or 22.9%, to
$1.8 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
1.5% compared to 1.2% at December 31, 1997. The Company's allowance for loan
losses to total loans and non-performing loans was .75% and 51.3%, respectively,
at December 31, 1998.
Total liabilities increased $6.9 million, or 4.0%, to $180.1 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 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.
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 132,000 shares of the Company's common stock
totaling $1.9 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, a net decrease in unearned
ESOP and stock compensation plans of $599,000.
Results of Operations
General
The Company had net income of $930,000, $1.2 million, and $1.9 million for the
fiscal years ended December 31, 1999, 1998 and 1997, respectively. The decrease
in net income for the year ended December 31, 1999, compared to 1998 resulted
primarily from an increase in other expenses of $548,000, or 8.3%, to $7.1
million, and a decrease in other income of $382,000, or 24.1%. This was
partially offset by an increase in net interest income of $567,000, or 8.1%.
The Company's return on average assets and
7
<PAGE>
return on shareholders' equity for the years ended December 31, 1999, 1998 and
1997 were .44%, .62%, and .97% and 4.33%, 5.12%, and 8.35%, respectively. 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, 1999 and December 31, 1998 and 1997 were .89%, .92%,
and .99%, respectively. The peer groups annualized return on average equity for
the periods ended September 30, 1999 and December 31, 1998 and 1997 were 7.53%,
7.78%, and 8.77%, respectively. The primary reason for declining earnings trends
and lower than peer returns is the growth rate in operating expenses exceeding
the rate of growth of revenue. During the three year period ended December 31,
1999, operating expenses increased at an average annualized rate of 11.0%, while
revenue, exclusive of securities gains/losses, increased at an average
annualized rate of 4.8%. The growth in operating expenses is representative of
the Company's actions to position the bank as a more diverse provider of
financial services. Management and the Board are committed to harnessing the
Company's enhanced capacity and capabilities to consistently grow revenue at a
rate in excess of the growth of expenses.
Comparison of Operating Results for the Years Ended December 31, 1999 and 1998
Interest Income
Interest income totaled $14.7 million for the year ended December 31, 1999, as
compared to $14.1 million for the year ended December 31, 1998, an increase of
$633,000 or 4.5%. The increase in interest income was principally attributable
to an increase of $14.8 million in the average balance of interest-earning
assets to $191.9 million from $177.1 million, partially offset by a decrease in
the average yield on interest earning-assets to 7.72% from 8.03%. The increase
in average interest-earning assets occurred as a result of growth in both the
securities and loan portfolio. Average investment securities increased $11.0
million, or 22.0%, and average loans increased $3.8 million, or 3.0%. The
yield reduction is principally the result of a lower interest rate environment
during the first 3 quarters of 1999, which in turn has resulted in new mortgage
loan originations at rates in excess of 90 basis points below the weighted
average rate of the existing loan portfolio which lowered the total portfolio to
8.27% from 8.56%, combined with the reinvestment of investment security
principal maturity's and prepayments taking place during the year at rates over
75 basis points less than the existing portfolio yield. The increase in average
interest-earning assets was primarily attributable to the Company's continued
implementation of a wholesale growth strategy in which borrowings are utilized
to purchase investments and fund loan portfolio growth.
Interest income on real estate loans totaled $9.6 million and $9.7 million for
the years ended December 31, 1999 and 1998, respectively. The $142,000, or
1.5%, decrease resulted primarily from a decrease in the average yield on real
estate loans of .36%, to 7.97% for 1999 from 8.33% for 1998. The decrease in
the average yield on real estate loans was partially offset by an increase of
$3.4 million, or 3.0%, in the average balance of such loans to $119.9 million
from $116.5 million. The increase in the average balance on real estate loans
was principally due to the origination of 15 year term one-to-four family
residential mortgages loans, and one-to-four family adjustable rate mortgage
loans retained in the Company's portfolio. The origination of adjustable rate
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 the 15
year conforming mortgage loans originated during the year, and the initial rates
charged on 5/1 ARMS.
Interest income on consumer and other loans increased $79,000, or 6.7%, to $1.3
million for the year ended December 31, 1999 from $1.2 million for the year
ended December 31, 1998. The increase was due to an increase in the average
yield on consumer and other loans to 11.56% from 11.19%, as well as an increase
in the average balance on consumer and other loans of $351,000, or 3.4%, to
$10.8 million from $10.5 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.
8
<PAGE>
Interest income on mortgage-backed securities increased by $88,000, or 6.5%, to
$1.5 million from $1.4 million for the years ended December 31, 1999 and 1998,
respectively. The increase in interest income on mortgage-backed securities
resulted generally from a increase in the average yield on mortgage-backed
securities to 6.75% from 6.69%, as well as an increase in the average balance of
mortgage-backed securities of $1,134, or 5.6%. The increase in the average
balance reflects the continued utilization of mortgage-backed securities in
repurchase agreement transactions by the Company. The increase in the average
yield on mortgage-backed securities was a result of the funds from the scheduled
amortization and prepayments being reinvested at higher market rates.
Interest income on investment securities, on a tax equivalent basis, increased
$672,000, or 36.7%, for the year ended December 31, 1999 to $2.5 million from
$1.8 million for the same period in 1998. The increase resulted primarily from
an increase in the average balance of investment securities of $11.7 million, or
43.6%, to $38.6 million at the end of the 1999 fiscal year from $26.9 million at
December 31, 1998. The increase in average balance was partially offset by a
decrease in the average yield on investment securities, on a tax equivalent
basis, to 6.48% from 6.80% for the years ended December 31, 1999 and 1998,
respectively. The increase in the average balance of investment securities
resulted primarily from the continuation of the Company's wholesale strategy
whereby borrowings are utilized to fund investment portfolio growth.
Interest income on interest-earning deposits decreased $85,000, or 58.6%, to
$60,000 for the year ended December 31, 1999 from $145,000 for the prior year.
The decrease was due to a $1.8 million, or 64.6%, decrease in the average
balance on interest-earning deposits, partially offset by an increase in the
average yield on such deposits to 5.99% from 5.13%.
Interest Expense
Interest expense increased $66,000, or .1%, to $7.0 million for the year ended
December 31 1999. The increase was primarily attributable to an increased
utilization of borrowed funds in connection with the Company's continued
wholesale growth strategy and the use of borrowed funds to supplement deposit
declines. The average balance of interest-bearing liabilities increased $14.5
million, or 8.9%, to $176.5 million at December 31, 1999 as compared to $162.0
million at the end of the prior year. The average cost of interest-bearing
liabilities decreased to 3.99% during the year ended December 31, 1999 from
4.30% for the year ended December 31, 1998. 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
$405,000, or 21.7%. The average balance on savings and club accounts decreased
$2.0 million, or 3.1%, to $62.4 million for the year ended December 31, 1999
from $64.4 for the prior year, while the average cost of such deposits decreased
to 2.34% from 2.90%. The average balance on time deposits remained relatively
constant when comparing the years ended December 31, 1999 and 1998, while the
average cost of time deposits decreased to 5.28% from 5.69%. 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"). Interest expense on borrowed funds increased $808,000, or
92.0%, to $1.7 million for the year ended December 31,1999 from $878,000 at the
prior year end. This increase was primarily the result of a increase in the
average balance of the borrowings of $15.6 million, to $30.5 million, from
$14.9 million for 1999 and 1998 respectively, partially offset be a decrease in
the average cost of borrowed fund of .35% to 5.53% from 5.88%. The reduction in
the average cost of borrowed funds is primarily a result of approximately $10
million of borrowings being entered into during the fourth quarter of 1998 and
the first quarter of 1999 when the prevailing rates were at their lowest.
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, 1999, 1998,
and 1997 using marginal federal income tax rates of 34%. Averages are computed
on the daily average balance for each month in the period divided by the number
of days in the period. Yields and amounts earned include loan fees. Non-accrual
loans have been included in interest-earning assets for purposes of these
calculations.
9
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
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 $119,893 $ 9,556 7.97% $116,447 $ 9,698 8.33% $103,600 $ 8,971 8.66%
Consumer & Other Loans 10,835 1,252 11.56% 10,484 1,173 11.19% 10,051 1,093 10.87%
Mortgage-backed Securities 21,519 1,452 6.75% 20,385 1,364 6.69% 23,244 1,591 6.84%
Taxable investment
securities 32,935 2,014 6.12% 20,877 1,330 6.37% 29,160 1.968 6.75%
Non-taxable investment
securities 5,695 488 8.57% 6,034 500 8.29% 6,432 554 8.61%
Interest-earning deposits 1,002 60 5.99% 2,829 145 5.13% 3,426 173 5.05%
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $191,879 $14,822 7.72% $177,056 $ 14,210 8.03% $175,913 $14,350 8.16%
Non Interest Earning Assets:
Other assets 18,525 18,352 16,017
Allowance for loan losses (1,000) (851) (936)
Net unrealized gains
on available for sale
portfolio 406 1,443 648
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $209,810 $196,000 $191,642
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing Liabilities:
Now accounts $ 15,119 $ 273 1.81% $ 14,281 $ 331 2.32% $ 13,346 $ 341 2.56%
Savings and club accounts 62,403 1,460 2.34% 64,417 1,865 2.90% 65,383 1,971 3.01%
Time deposits 68,482 3,616 5.28% 68,417 3,895 5.69% 70,591 3,975 5.63%
Borrowings 30,511 1,686 5.53% 14,927 878 5.88% 10,677 605 5.67%
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest bearing
liabilities $176,515 $ 7,035 3.99% $162,042 $ 6,969 4.30% $159,997 $ 6,892 4.31%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Interest-Bearing
Liabilities:
Demand deposits 9,736 8,436 7,633
Other liabilities 2,083 1,913 1,798
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 188,334 172,391 169,428
- ------------------------------------------------------------------------------------------------------------------------------------
Shareholder's equity 21,476 23,609 22,214
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities &
shareholder's equity $209,810 $196,000 $191,642
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $ 7,787 $ 7,241 $ 7,458
Net interest rate spread 3.73% 3.73% 3.85%
Net interest margin 4.06% 4.09% 4.24%
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities 108.70% 109.27% 109.95%
</TABLE>
Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest earning assets and interest-bearing liabilities have
affected the 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) changes attributable to both rate and volume have been
allocated equally.
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Due to Increase (Decrease) Due to
- ------------------------------------------------------------------------------------------------------------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Real estate loans $ 282 $ (424) ($142) $1,091 $(364) $ 727
Consumer and other loans 39 40 79 47 33 80
Mortgage-backed securities 76 12 88 (195) (32) (227)
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Taxable investment securities 752 (68) 684 (543) (95) (638)
Non-taxable investment securities (28) 16 (12) (34) (20) (54)
Interest-earning deposits (101) 16 (85) (30) 2 (28)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 1,020 (408) 612 336 (476) (140)
Interest Expense:
Now and escrow accounts 18 (76) (58) 23 (33) (10)
Savings and club accounts (51) (354) (405) (31) (75) (106)
Time deposits 3 (282) (279) (122) 42 (80)
Borrowings 888 (80) 808 246 27 273
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest expense: 858 (792) 66 116 (39) 77
- ------------------------------------------------------------------------------------------------------------------------------------
Net change in interest
income $ 162 $ 384 $ 546 $ 220 $(437) $(217)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Interest Income
Net interest income increased $546,000, on a tax equivalent basis, for the year
ended December 31, 1999 as compared to December 31, 1998. The increase occurred
due to an increase in the average balance of interest earning assets of $14.8
------------------------------------------------------
million, or 8.4%, and a decrease in the average cost of interest-bearing
- --------------------------------------------------------------------------------
liabilities to 3.99% from 4.30%, partially offset by an increase in the average
- --------------------------------------------------------------------------------
balance of interest-bearing liabilities of $14.5 million, or 8.9%, and a
- --------------------------------------------------------------------------------
decrease in the average yield of interest-earning assets to 7.72% from 8.03%.
- ----------------------------------------------------------------------------
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, 1999 of $373,000 as compared to a
provision of $382,000 for the year ended December 31, 1998. The decrease in the
provision for loan losses is attributable a lower level of net charge offs
during 1999 when compared to 1998. The Company's allowance for loan losses as a
percentage of total loans receivable was .88%, while the allowance for loan
losses to non-performing loans was 45.01% at December 31, 1999.
Non interest Income
The Company's non interest income is principally comprised of fees on deposit
accounts and transactions, loan servicing, commissions, and net gain on
securities and loans. Non interest income exclusive of net gains on securities
and loans increased $151,000 or 15.6%, to 1.1 million for the year ended
December 31, 1999, when compared to the same period in the prior year. The
increase in non interest income, exclusive of net gain on securities and loans,
is a result of an ongoing effort by the Company to diversify its revenue sources
and lessen its dependence on net interest income. As a component of this
objective, the Company has expanded its facilities and resources to provide
trust services and enhance its investment management services. Net gain on
securities and loans decreased $532,000, or 86.1%, for the year ended December
31, 1999 when compared to the 1998 period. The decrease in net gain on
securities and loans is a result of a reduction in the mark-to-market gain in
the Company's equity mutual fund holdings.
Non interest Expense
Non interest expense increased $548,000, or 8.3%, to $7.1 million for the year
ended December 31, 1999 from $6.6 million for the prior year. The increase in
non-interest expense was comprised of a $351,000, or 78.5% increase in data
processing charges, a $247,000, or 45.9% increase in professional and other
services, a $124,000 increase in building occupancy, and a $183,000 increase in
salaries and employee benefits. These increases were offset by a $379,000 charge
recorded in the prior year as a result of the termination of the Company's
merger transaction. The increase in data processing costs are primarily the
result of increases in depreciation and maintenance on upgraded hardware and
software placed into service during the first quarter on 1999. These upgrades
to hardware and software represent efforts by the company to undertake remedial
actions for Year 2000 contingency and enhance its ability to compete over
11
<PAGE>
the near term. The increase in professional and other services is primarily
comprised of increased fees for information systems consulting, advertising
associated with the company name change, investment and risk management, and
attorney fees. The increase in building occupancy expense is principally due to
depreciation and maintenance increases associated with expansion of the
Company's main office. The increase in salaries and employee benefits is
primarily due to commissions paid to mortgage originators, accelerated
amortization of certain stock-based compensation plans, and annual salary
increases.
The Company's overhead (non-interest expense to average assets) and efficiency
ratios for the year ended December 31, 1999 were 3.40% and 80.5%, 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 (see page xxx). If these non-cash expenses were deducted
from the Company's overhead and efficiency ratios, those adjusted ratios for the
year ended December 31, 1999 would be 2.99% and 70.8%, respectively.
Income Tax Expense
Income tax expense decreased $75,000, or 15.1% to $421,000 for the year ended
December 31, 1999 from $495,000 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, 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
$112,000, 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 $1.2 million, or .6%, in the average
balance of interest earning-assets to $177.1 million from $175.9 million. The
decline in yield on mortgages and investments was caused by a general decline in
market interest rates. 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 $116.5 million at December 31,
1998 from $103.6 million for the prior fiscal year. The average balance on
consumer and other loans increased by $433,000, or 4.3%. The average balance on
mortgage-backed securities and investment securities decreased by $2.9 million
and $8.7 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 $116.5 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.
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.
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-
12
<PAGE>
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.
Interest income on investment securities, on a tax equivalent basis, decreased
$692,000, or 27.4%, 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 6.80% from 7.09% 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.
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 $77,000, or 1.1%, 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 on 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 4.31% 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,
$49.49 million, or 76.9%, 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 average
balance of borrowed funds increased $4.2 million, or 39.8%, to $14.9 million at
December 31, 1998 as compared to $10.7 million at the end of the prior year.
The average cost of borrowed funds increased to 5.67% during the year ended
December 31, 1998 from 5.67 for the same period in the prior year. The increase
in the average balance of borrowed funds reflects the Company's continued
emphasis on wholesale growth.
Net Interest Income
Net interest income decreased $217,000, 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 3.73% from 3.85%. 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
4.31%.
Provision for Loan Losses
13
<PAGE>
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 Company's
allowance for loan losses as a percentage of total loans receivable was .75%,
while the allowance for loan losses to non-performing loans was 51.20% at
December 31, 1998.
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 $26,000, or 5.3%, to $515,000 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 $107,000, or 29.1%, to $260,000 from $367,000.
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 $211,000, or 22.1%, 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, 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 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 (see page 14). 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 52.33%, respectively.
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.
Quantitative and Qualitative Disclosure about Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates or prices such as interest rates, foreign currency
exchange rates, commodity prices, and equity prices. 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 consists primarily of loans on residential
real property located in Oswego County, and is therefore 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
14
<PAGE>
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. Other types of market risks do not arise in the normal
course of the Company's business activities.
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. 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 three to five 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, net portfolio value and net portfolio value ratio 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 net
portfolio value 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 in the GAP table.
Gap Table
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, 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 $75.0 million at December 31, 1999
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.
15
<PAGE>
<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 $16,073 $ 17,248 $ 11,868 $ 5,723 $ 2,572 $ 0 $ 53,484
Fixed rate 405 1,876 8,469 7,590 11,035 4,247 33,622
Commercial and multi-family
ARM's 5,040 5,403 5,063 463 0 0 15,969
Fixed 108 471 1,911 1,688 2,423 0 6,601
Home equity fixed rate loans 147 1,396 462 1,670 2,275 0 5,950
Home equity line of credit 3,541 0 0 0 0 0 3,541
Consumer loans 241 664 2,540 49 0 0 3,494
Commercial business loans 1,569 435 4,047 1,284 1,264 36 8,635
Mortgage-backed securities 1,284 3,188 5,189 4,069 6,401 3,924 24,055
Investment securities 8,453 276 8,231 3,458 17,856 5,561 43,835
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 36,861 30,957 47,780 25,994 43,826 13,768 199,186
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook accounts 463 6,618 13,312 9,865 14,857 15,212 60,327
NOW accounts 2,309 6,928 4,759 0 0 0 13,996
Certificate accounts 12,600 33,488 16,188 3,629 2,457 0 68,362
Repurchase agreements 17,540 10,117 6,913 1,000 7,310 0 42,880
Total interest-bearing liabilities 32,912 57,151 41,172 14,494 24,624 15,212 185,565
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets less interest-
bearing liabilities ("interest rate
sensitivity gap") 3,949 (26,194) 6,608 11,500 19,202 (1,444)
Cumulative excess (deficiency) of
interest-sensitive assets over
interest-sensitive liabilities 3,949 (22,245) (15,637) (4,137) 15,065 13,621
Interest sensitivity gap
to total assets 1.83 (12.11) 3.05 5.32 8.88 (.67)
Cumulative interest sensitivity gap
to total assets 1.83 (10.28) (7.23) (1.91) 6.97 6.3
Ratio of interest-earning assets to
interest-bearing liabilities 112.00 54.17 116.05 179.34 177.98 90.51
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 112.00 75.30 88.08 97.16 108.84 107.34
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, the total interest bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $22.2 million, representing a cumulative one-
year gap ratio of a negative 12.11%. Simulation and net present value analysis
demonstrate percentage changes to net interest income and net portfolio value of
a negative 14.16% and a negative 11.94%, respectively, in an upward 200 basis
point parallel shift in the yield curve.
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)
16
<PAGE>
represent the fair value of net assets (determined as the market value of assets
minus the market value of liabilities). The table quantifies the changes in net
interest income and net portfolio value to parallel shifts in the yield curve.
The column "Net Interest Income Percent Change" measures the change to the next
twelve month's projected net interest income, due to parallel shifts in the
yield curve. The column "Net Portfolio Value Percent Change" measures changes in
the current net mark-to-market value of assets and liabilities due to parallel
shifts in the yield curve. The base case assumes December 31, 1999 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.
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------
Change Percentage Percentage Change Percentage Percentage
In NPV Change in Change in In NPV Change in Change in
Interest Capital Net Income Net Market Interest Capital Net Income Net Market
Rates Ratio Interest Value Rates Ratio Interest Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
-300 15.58% 4.59% 2.52% -300 14.02% -0.40% 10.87%
-200 16.40% 7.42% 6.55% -200 13.97% 3.47% 9.12%
-100 16.55% 4.65% 5.92% -100 13.67% 2.32% 5.40%
0 16.00% 0.00% 0.00% 0 13.17% 0.00% 0.00%
100 15.24% -5.90% -7.11% 100 12.11% -3.59% -9.99%
200 14.44% -11.94% -14.16% 200 10.78% -7.57% -21.79%
300 13.57% -18.27% -21.34% 300 9.43% -12.00% -33.25%
</TABLE>
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 $6.2 million, or 9.5%, from $65.6 million at
December 31, 1996 to $59.4 million at December 31, 1999. 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, 1999, the Company had outstanding loan commitments of $3.0
million. This amount includes the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less that
17
<PAGE>
one year at December 31, 1999 totaled $46.1 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 15, 2000. 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 operation or
shareholders' equity of the Company.
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 February 25, 2000, there were 410 shareholders of
record and 2,614,245 outstanding shares of common stock.
Share Repurchases
On January 22, 1999, the Company announced its second share repurchase program
for the purchase of up to 135,000 shares. At December 31, 1999 the program has
resulted in the repurchase of 113,475 shares at an average price of $10.54.
The following table sets forth the high and low closing bid prices and dividends
paid per share of common stock for the periods indicated.
<TABLE>
<CAPTION>
Dividends
Quarter ended High Low Paid
--------------------- ------- ------- ----------
<S> <C> <C> <C>
December 31, 1999 $10.000 $ 7.500 $.0600
September 30, 1999 10.000 7.938 $.0600
June 30, 1999 11.000 8.750 $.0600
March 31, 1999 12.000 9.250 $.0600
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
</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, Pathfinder Bank and its subsidiaries results of operations and
financial condition, tax considerations, and general economic conditions. No
assurance can be given that dividends will be declared or, if declared, what the
amount of dividends will be, or whether such dividends, once declared, will
continue.
18
<PAGE>
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, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards
generally accepted in the United States 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 11, 2000
19
<PAGE>
<TABLE>
<CAPTION>
Statements of Condition
December 31,
--------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 4,280,255 $ 4,716,238
Federal funds sold ---- 1,800,000
- ------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 4,280,255 6,516,238
Investment securities
(approximate fair value $66,397,000 and $53,443,000) 66,397,491 53,443,039
Mortgage loans - held-for-sale 697,405 2,841,931
Loans:
Real estate 119,167,708 116,161,445
Consumer and other 12,129,363 10,334,531
- ------------------------------------------------------------------------------------------------------------
Total loans 131,297,071 126,495,976
Less: Allowance for loan losses 1,149,677 939,161
Unearned discounts and origination fees 84,453 199,156
- ------------------------------------------------------------------------------------------------------------
Loans receivable, net 130,062,941 125,357,659
Premises and equipment, net 4,869,553 4,489,928
Accrued interest receivable 1,431,251 1,237,069
Other real estate 641,384 742,163
Intangible assets, net 2,973,365 3,289,121
Other assets 4,969,908 5,334,919
- ------------------------------------------------------------------------------------------------------------
Total assets $216,323,553 $203,252,067
============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Interest bearing $142,690,583 $150,745,802
Non-interest bearing 9,745,513 9,473,352
- ------------------------------------------------------------------------------------------------------------
Total deposits 152,436,096 160,219,154
Borrowed funds 42,879,500 18,691,000
Other liabilities 933,345 2,055,228
- ------------------------------------------------------------------------------------------------------------
Total liabilities 196,248,941 180,965,382
Shareholders' equity:
Common stock, par value $.10 per share; authorized
9,000,000 shares; 2,884,720 and 2,877,470 shares issued and
2,639,245 and 2,745,470 outstanding, respectively. 288,472 287,747
Additional paid-in-capital 6,912,580 6,828,836
Retained earnings 18,121,372 17,820,409
Unearned stock based compensation (981,125) (1,428,746)
Accumulated other comprehensive (loss) income (895,894) 1,012,462
Unearned ESOP shares (287,609) (346,917)
Treasury stock, at cost; 245,475 and 132,000 shares respectively (3,083,184) (1,887,106)
- ------------------------------------------------------------------------------------------------------------
Total shareholders' equity 20,074,612 22,286,685
- ------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $216,323,553 $203,252,067
============================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
20
<PAGE>
<TABLE>
<CAPTION>
Statements of Income
December 31,
-----------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $10,807,715 $10,871,385 $10,063,659
Interest and dividends on investments:
U.S. Treasury and agencies 391,496 198,401 407,628
State and political subdivisions 355,767 345,303 372,376
Corporate obligations 1,509,688 1,032,369 1,477,630
Marketable equity securities 112,610 98,951 82,819
Mortgage-backed securities 1,451,756 1,364,002 1,590,701
Federal funds sold and interest-bearing deposits 59,551 145,132 172,839
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 14,688,583 14,055,543 14,167,652
INTEREST EXPENSE:
Interest on deposits 5,348,868 6,091,009 6,287,117
Interest on borrowed funds 1,686,202 878,364 604,844
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 7,035,070 6,969,373 6,891,961
Net interest income 7,653,513 7,086,170 7,275,691
Provision for loan losses 372,910 381,561 261,112
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,280,603 6,704,609 7,014,579
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 525,363 460,954 488,799
Mortgage servicing fees 218,644 53,797 ----
Cash surrender value 125,028 192,368 188,315
Net gain on securities and loans 86,130 618,448 328,565
Other charges, commissions and fees 249,099 260,170 366,883
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income 1,204,264 1,585,737 1,372,562
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 3,300,004 3,116,577 2,917,470
Building occupancy 750,618 626,231 666,082
Data processing expenses 798,027 447,024 387,741
Professional and other services 783,872 537,339 529,724
Amortization of intangible assets 315,756 315,756 315,756
Merger expense ---- 378,896 ----
Other expenses 1,185,721 1,164,689 953,920
- ------------------------------------------------------------------------------------------------------------------------------------
Total other expenses 7,133,998 6,586,512 5,770,693
Income before income taxes 1,350,869 1,703,834 2,616,448
Provision for income taxes 420,474 495,033 762,087
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 930,395 $ 1,208,801 $ 1,854,361
Other comprehensive (loss) income, net of taxes:
Unrealized net (losses) gains on securities:
Unrealized holding (losses) gains arising during period $(3,217,269) $ 437,441 $ 538,574
Reclassification adjustment for gains included
in net income 14,685 11,602 11,596
- ------------------------------------------------------------------------------------------------------------------------------------
(3,202,584) 449,043 550,170
Income tax benefit (provision) 1,294,228 (179,617) (220,068)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, net of tax (1,908,356) 269,426 330,102
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive (loss) income $ (977,961) $ 1,478,227 $ 2,184,463
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share - basic $.35 $.44 $.66
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $.35 $.42 $.66
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
21
<PAGE>
Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional Unearned
---------------------------------- Paid in Retained Stock Based
Shares Amount Capital Earnings Compensation
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,916,666 $ 1,916,666 $ 3,750,726 $ 15,787,666 $ --
Net Income 1,854,361
ESOP shares earned 59,692
Unearned stock-based
compensation awarded 2,203,500 (2,203,500)
Stock based compensation earned 367,250
Change in unrealized
net appreciation
on investment securities
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)
Net Income 1,208,801
ESOP shares earned 127,533
Stock options exercised 2,471 247 16,207
Treasury stock purchased
Common stock issued under stock
based compensation plan (957,988)
Stock based compensation earned 407,504
Change in unrealized
net appreciation
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)
Net Income 930,395
ESOP shares earned 36,742
Stock options exercised 7,250 725 47,002
Treasury stock purchased
Stock based compensation earned 447,621
Change in unrealized
net depreciation on
investment securities
Dividends declared
($0.24 per share) (629,432)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 2,884,720 $ 288,472 $ 6,912,580 $ 18,121,372 $ (981,125)
==================================================================================================================================
<CAPTION>
Accumulated
Other Unearned
Comprehensive ESOP Treasury
Income (loss) Shares Stock Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 $ 412,934 $ (477,908) $ -- $21,390,084
Net Income 1,854,361
ESOP shares earned 66,858 126,550
Unearned stock-based
compensation awarded --
Stock based compensation earned 367,250
Change in unrealized
net appreciation
on investment securities 330,102 330,102
Dividends declared
($0.17 per share) (485,612)
Three-for-two stock split and reduction
in par value of common stock --
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 743,036 (411,050) -- 23,582,735
Net Income 1,208,801
ESOP shares earned 64,133 191,666
Stock options exercised 16,454
Treasury stock purchased (2,845,094) (2,845,094)
Common stock issued under stock
based compensation plan 957,988 --
Stock based compensation earned 407,504
Change in unrealized
net appreciation 269,426 269,426
on investment securities
Dividends declared
($0.20 per share) (544,807)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,012,462 (346,917) (1,887,106) 22,286,685
Net Income 930,395
ESOP shares earned 59,308 96,050
Stock options exercised 47,727
Treasury stock purchased (1,196,078) (1,196,078)
Stock based compensation earned 447,621
Change in unrealized
net depreciation on
investment securities (1,908,356) (1,908,356)
Dividends declared
($0.24 per share) (629,432)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ (895,894) $(287,609) $(3,083,184) $20,074,612
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
22
<PAGE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Years Ended December 31
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 930,395 $ 1,208,801 $ 1,854,361
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 372,910 381,561 261,112
ESOP and other stock-based compensation earned 543,671 599,170 493,800
Deferred income tax benefit (101,638) (117,667) (76,942)
Proceeds from sale of loans 5,919,922 7,726,767 ----
Originations of loans held-for-sale (3,848,919) (8,961,646) ----
Realized and unrealized loss/(gain) on:
Sale of real estate acquired through foreclosure 48,332 68,741 ----
Loans 73,523 (59,410) 6,697
Available-for-sale investment securities (159,653) (559,038) (335,262)
Depreciation 425,135 231,617 235,282
Amortization of intangibles 315,756 315,756 315,756
Net amortization of premiums and discounts on
investment securities 292,701 (39,951) 65,923
(Increase) decrease in interest receivable (194,182) 206,106 22,827
Net change in other assets and liabilities 542,706 (480,270) (71,829)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,160,659 520,537 2,771,725
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities available-for-sale (27,418,591) (15,633,561) (8,482,036)
Purchase of investment securities held-to-maturity (32,724) ---- ----
Proceeds from maturities and principal reductions of
investment securities held-to-maturity ---- 4,270,000 4,790,000
Proceeds from maturities and principal reductions of
investment securities available-for-sale 9,435,170 14,863,726 6,420,245
Proceeds from sale of:
Real estate acquired through foreclosure 171,188 753,334 586,109
Available-for-sale investment securities 1,726,061 926,143 792,352
Net increase in loans (5,170,784) (6,276,483) (13,484,773)
Purchase of premises and equipment (804,760) (1,001,275) (571,072)
Decrease (increase) in surrender value of life insurance 75,315 (474,230) (188,315)
Other investing activities (26,149) (234,573) (279,179)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,045,274) (2,806,919) (10,416,669)
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (decrease) increase in demand deposits,
NOW accounts, savings accounts,
money market deposit accounts and escrow deposits (6,324,318) 5,475,054 (1,191,170)
Net (decrease) increase in time deposits (1,458,740) 2,344,959 (5,407,527)
Proceeds from borrowings, net 24,188,500 449,000 10,632,000
Repayments of note payable-ESOP ---- (430,126) (55,800)
Proceeds from exercise of stock options 47,727 16,454 ----
Cash dividends (608,459) (541,699) (351,446)
Treasury stock purchased (1,196,078) (2,845,094) ----
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,648,632 4,468,548 3,626,057
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalent (2,235,983) 2,182,166 (4,018,887)
Cash and cash equivalents at beginning of year 6,516,238 4,334,072 8,352,959
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,280,255 $ 6,516,238 $ 4,334,072
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE PERIOD FOR:
Interest $ 6,891,736 $ 7,014,726 $ 6,835,301
Income taxes paid 605,000 868,950 795,705
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate 92,592 563,046 373,628
Decrease (increase) in unrealized gains and losses on
available for sale investment securities 3,202,584 (449,043) (550,170)
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid 155,438 134,465 134,166
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
23
<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,
Pathfinder Bank (the "Bank"), Whispering Oaks Development Inc. and Pathfinder
REIT, Inc. All inter-company accounts and activity have been eliminated in
consolidation. The Company has five full service offices located in 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 58.8% of the outstanding common stock of the Company. Salaries,
employee benefits and rent approximating $151,700, $71,000 and $48,000 were
allocated from the Company to Pathfinder Bancorp, M.H.C. during 1999, 1998 and
1997, respectively.
On November 29,1999, Oswego City Savings Bank formally changed its name to
Pathfinder Bank, in conformity with its parent company.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 straight-line 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.
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.
24
<PAGE>
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 loan losses until prior charge-
offs have been fully recovered.
The amount of loans on which the Company has ceased accruing interest aggregated
approximately $2,554,000 and $1,832,000 at December 31, 1999 and 1998,
respectively. The amount of interest not accrued related to these loans was
approximately $84,000, $24,000 and $13,000 for 1999, 1998 and 1997,
respectively.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the related assets, ranging up to 31.5 years for premises and 10 years
for equipment. 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. Write downs of, and expenses related to
other real estate holdings included in noninterest expense were $53,000, $60,000
and $63,000 in 1999, 1998 and 1997.
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 approximated $1,763,000 and $1,447,000
at December 31, 1999 and 1998, respectively.
Mortgage Servicing Rights
Included in other assets is approximately $78,000 and $55,000 of mortgage
servicing rights at December 31, 1999 and 1998, respectively. 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.
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.
25
<PAGE>
Treasury Stock
Treasury stock purchases are recorded at cost. During 1999, the Company
purchased 113,475 shares at an average cost of $10.54 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.
Trust Division
The Company has applied for and received regulatory approval to form a Trust
Department as a division of Pathfinder Bank. The Company incurred approximately
$17,000 in expense during 1999 associated with trust operations start-up.
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:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amounts Fair Values Amounts Fair Values
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,280,255 $ 4,280,000 $ 6,516,238 $ 6,516,000
Investment securities 66,397,491 66,397,000 53,443,039 53,443,000
Mortgage loans held-for-sale 697,405 697,000 2,841,931 2,888,000
Loans 130,062,941 131,109,000 125,357,659 127,369,000
Accrued interest receivable 1,431,251 1,431,000 1,237,069 1,237,000
Deposits 152,436,096 138,327,000 160,219,154 157,979,000
Borrowed funds 42,879,500 42,016,000 18,691,000 18,693,000
</TABLE>
Reclassification
Certain amounts from 1998 and 1997 have been reclassified to conform to the
current year presentation. These reclassications had no affect on net income as
previously reported.
26
<PAGE>
Note 2: Investment Securities
The amortized cost and estimated fair value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
- ---------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
Corporate debt $ 112,942 $ -- $ -- $ 112,942
- ---------------------------------------------------------------------------------------------------------------
Available-for-sale:
Bond investments:
U.S. Treasury and agencies 11,167,203 3,395 286,033 10,884,565
State and political subdivision 6,694,828 156,633 100,309 6,751,152
Corporate 21,189,143 37,279 1,143,994 20,082,428
Mortgage-backed 24,055,195 13,184 719,689 23,348,690
- ---------------------------------------------------------------------------------------------------------------
Total 63,106,369 210,491 2,250,025 61,066,835
Stock investments:
Federal Home Loan Bank and other 4,671,340 546,374 -- 5,217,714
- ---------------------------------------------------------------------------------------------------------------
Total available-for-sale $67,777,709 $ 756,865 $2,250,025 $66,284,549
========== ========== ===========
Net unrealized loss on available-for-sale (1,493,160)
- -------------------------------------------- -----------
Grand total carrying value $66,397,491
============================================ ===========
December 31, 1999
- ---------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
- ---------------------------------------------------------------------------------------------------------------
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>
27
<PAGE>
The amortized cost and estimated fair value of debt investments at December 31,
1999 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
- ------------------------------------------------------------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 276,046 $ 280,379 $ -- $ --
Due after one year through five years 11,688,319 11,682,707 -- --
Due after five years through ten years 18,900,701 17,970,186 -- --
Due after ten years 8,186,108 7,784,873 112,942 112,942
Mortgage-backed securities 24,055,195 23,348,690 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Totals $63,106,369 $ 61,066,835 $ 112,942 $ 112,942
====================================================================================================================================
Note 3: Loans
Major classifications of loans at December 31, are as follows:
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
Real estate mortgages:
Conventional $ 85,635,997 $ 83,047,925
Second mortgage loans 9,491,545 9,630,621
Construction 1,380,211 1,037,445
FHA insured 43,147 66,852
VA guaranteed 46,733 75,809
Commercial 22,570,075 22,302,793
- -------------------------------------------------------------------------------------------------------------------
119,167,708 116,161,445
- -------------------------------------------------------------------------------------------------------------------
Other loans:
Consumer 3,378,452 3,902,896
Lease financing 278,088 350,088
Passbook loans 103,572 170,060
Student 12,361 12,630
Commercial 8,356,890 5,898,857
- -------------------------------------------------------------------------------------------------------------------
12,129,363 10,334,531
- -------------------------------------------------------------------------------------------------------------------
Total loans 131,297,071 126,495,976
- -------------------------------------------------------------------------------------------------------------------
Less:
Allowance for loan losses 1,149,677 939,161
Unearned discount and origination fees 84,453 199,156
- -------------------------------------------------------------------------------------------------------------------
Loans receivable, net $130,062,941 $125,357,659
- -------------------------------------------------------------------------------------------------------------------
</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, 1999 and 1998, loans to officers and directors were not
significant.
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 $16,292,000 and $8,669,000 at
December 31, 1999 and 1998, 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>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 939,161 $ 827,521 $ 906,567
Recoveries credited 27,926 11,014 18,113
Provision for loan losses 372,910 381,561 261,112
Loans charged off (190,320) (280,935) (358,271)
- -------------------------------------------------------------------------------------------------------------------------
Balance at end of year $1,149,677 $ 939,161 $ 827,521
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
At December 31, 1999 and 1998, the Company had no loans for which specific
valuation allowances were recorded.
Note 5: Premises and Equipment
A summary of premises and equipment at December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
Land $ 631,773 $ 631,773
Buildings 3,735,579 3,228,123
Furniture, fixture and equipment 3,207,417 2,319,478
Construction in progress 139,990 730,625
- --------------------------------------------------------------------
7,714,759 6,909,999
Less: Accumulated depreciation 2,845,206 2,420,071
- --------------------------------------------------------------------
$4,869,553 $4,489,928
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
Note 6: Deposits
A summary of amounts due to depositors at December 31, is shown as follows:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------
<S> <C> <C>
Savings accounts $ 59,430,007 $ 64,229,261
Money market accounts 418,126 75,395
Time accounts 67,945,116 69,403,856
Demand deposits interest bearing 13,996,417 16,326,717
Demand deposits non-interest bearing 9,745,513 9,473,352
Mortgage escrow funds 900,917 710,573
- -----------------------------------------------------------------------------
$152,436,096 $160,219,154
- -----------------------------------------------------------------------------
</TABLE>
Time deposits with balances in excess of $100,000 amounted to approximately
$8,729,000 and $8,691,000 at December 31, 1999 and 1998, respectively. The
approximate maturity of time deposits at December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Year of Maturity Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 $45,670,000 67.2% $51,729,000 74.5%
2 9,123,000 13.4% 8,314,000 12.0%
3 7,067,000 10.4% 5,077,000 7.3%
4 1,973,000 2.9% 1,413,000 2.1%
5 1,655,000 2.5% 1,190,000 1.7%
Thereafter 2,457,000 3.6% 1,681,000 2.4%
- ------------------------------------------------------------------------------------------------------------------------------------
$67,945,000 100.0% $69,404,000 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 7: Borrowed Funds
The composition of borrowings at December 31 as as follows:
<TABLE>
<CAPTION>
1999 1998
Short-term:
Repurchase agreements $ 9,242,000 $ 5,411,000
Advances 14,065,000 5,580,000
Overnight line of credit 4,350,000 -
- -------------------------------------------------------------------------------------------------------------------
Total short term 27,657,000 10,991,000
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
Long-term:
Repurchase agreements 912,500 -
Advances 14,310,000 7,700,000
- -------------------------------------------------------------------------------------------------------------------
Total long- term $15,222,500 $ 7,700,000
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The principal balance, interest rate and maturity of the above borrowings at
December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Term Principal Rates
<S> <C> <C>
Short-term:
Repurchase agreements with Morgan Stanley
due within 3 months $ 4,886,000 5.85%-6.00%
due within 3-6 months 909,000 5.91%
due within 6 months to 1 year 910,000 5.91%
Repurchase agreements with FHLB
due within 3 months 2,537,000 5.68%-6.01%
- ------------------------------------------------------------------------------------------------------------------------------------
Total repurchase agreements 9,242,000
Advances with FHLB
due within 3 months 4,835,000 5.41%-5.99%
due within 3-6 months 6,530,000 5.60%-6.18%
due within 6 months to 1 year 2,700,000 4.80%-5.11%
Total advances 14,065,000
Overnight line of credit with FHLB 4,350,000 3.60%
- ------------------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings $27,657,000
- ------------------------------------------------------------------------------------------------------------------------------------
Long-term:
Repurchase agreement with Morgan Stanley
due within 3 years $ 912,500 5.35%
- ------------------------------------------------------------------------------------------------------------------------------------
Advances with FHLB
due within 2 years 4,000,000 5.60%-5.31%
due within 4 years 1,000,000 5.61%
due within 5 years 1,000,000 5.43%
due after 5 years 7,310,000 5.56%-5.98%
Total advances with FHLB 14,310,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term borrowings $15,222,500
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other information related to borrowed funds is as follows:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Maximum outstanding at any month end $43,349,000 $20,480,000
Average amount outstanding during the year 30,511,000 14,927,000
Average interest rate during the year 5.53% 5.88%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The repurchase agreements are collateralized by mortgage-backed and government
agency securities which had a carrying value of $13,242,000 at December 31,
1999. The overnight line of credit agreement with the Federal Home Loan Bank
(FHLB) is used for liquidity purposes. Interest on this line is determined at
the time of borrowing. The average rate paid on the overnight line during 1999
approximated 5.30%. At December 31, 1999, $10,102,100 was available under the
line of credit. In addition to the overnight line of credit program, the
Company also has access to the FHLB's Term Advance Program under which it can
borrow at various terms and interest rates. Residential mortgage loans in the
amount of $77.8 million have been pledged by the Company under a blanket
collateral agreement to secure the Company's lsine of credit and term
borrowings.
30
<PAGE>
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,
1999 and 1998.
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $2,989,234 $2,477,313 $ 385,747 $ 377,729
Service cost 115,393 94,188 3,086 2,641
Interest cost 188,462 183,151 23,975 24,938
Actuarial (gain) loss (426,076) 350,752 -- 12,786
Benefits paid (107,499) (116,170) (33,807) (32,347)
- ------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $2,759,514 $2,989,234 $ 379,001 $ 385,747
- ------------------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year $3,129,180 $3,231,536 $ - $ -
Actual return on plan assets 540,592 (4,338)
Company contribution -- 18,152
Benefits paid (107,499) (116,170)
- ------------------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $3,562,273 $3,129,180 $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
Components of prepaid/accrued benefit cost
Funded (unfunded) status $ 802,759 $ 139,946 $(379,001) $(385,747)
Unrecognized prior service cost 3,377 4,457 -- --
Unrecognized transition obligation --- - 235,953 254,931
Unrecognized actuarial net (gain)loss (292,476) 435,814 24,999 25,273
- ------------------------------------------------------------------------------------------------------------------------------------
Prepaid/(accrued) benefit cost $ 513,660 $ 580,217 $(118,049) $(105,543)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The significant assumptions used in determining the benefit obligation as of
December 31, 1999 and 1998 is as follows:
<TABLE>
<S> <C> <C> <C> <C>
Weighted average discount rate 7.75% 6.50% 6.50% 6.50%
Expected long-term rate of return on plan assets 8.00% 8.00% - -
Rate of increase in future compensation levels 5.50% 4.50% - -
</TABLE>
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 1,321 (1,241)
Effect on postretirement benefit obligation 18,885 (17,738)
</TABLE>
Plan assets consist primarily of temporary cash investments and listed stocks
and bonds.
31
<PAGE>
The composition of the net periodic benefit plan for the years ended December
31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
- ------------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 115,393 $ 94,188 $ 76,262 $ 3,086 $ 2,641 $ 3,014
Interest cost 188,462 183,151 169,405 23,975 24,938 24,898
Amortization of transition obligation --- -- (34,165) 18,978 18,978 18,978
Amortization of unrecognized prior service cost 1,080 1,080 1,080 -- -- --
Amortization of gains and losses 7,656 -- -- 274 (893) (528)
Expected return on plan assets (246,034) (253,781) (208,272) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit plan cost $ 66,557 $ 24,638 $ 4,310 $46,313 $45,664 $46,362
=================================================================================================================================
</TABLE>
The Company also offers a 401(k) plan to its employees. Contributions to these
plans were $48,000, $45,000 and $41,400 for 1999, 1998, and 1997, 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, 1999 and 1998, other liabilities include approximately
$1,080,000 and $1,009,000, respectively, relating to deferred compensation.
Deferred compensation expense for the years ended December 31, 1999, 1998, and
1997 amounted to approximately $89,000, $136,000 and $150,000, respectively.
The Company has a supplemental executive retirement plan for the benefit of
certain executive officers. At December 31, 1999 and 1998, other liabilities
include approximately $314,000 and $189,000 accrued under these plans.
Compensation expense includes approximately $161,000, $53,000, and $46,000
relating to the supplemental executive retirement plan for 1999, 1998, and 1997,
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 is as follows:
<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
Granted --- --- ---
Exercised (7,250) --- 24,750
Forfeited --- --- ---
- -----------------------------------------------------------------------------------
Outstanding at December 31, 1999 122,250 $6.583 44,250
- -----------------------------------------------------------------------------------
</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
32
<PAGE>
$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, 1999, 1998
and 1997 approximated $272,000, $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, 1999, 1998,
and 1997 was $175,000, $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:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Net Income:
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As reported 930,395 $1,208,801 $1,854,361
Pro forma 864,312 1,117,602 1,738,214
</TABLE>
<TABLE>
<CAPTION>
Earnings per share: Basic Diluted Basic Diluted Basic Diluted
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As reported $ .35 $ .35 $ .44 $ .42 $ .66 $ .66
Pro forma $ .33 $ .32 $ .41 $ .40 $ .62 $ .62
</TABLE>
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 1999,
1998 and 1997, respectively: risk free interest rate - 4.63%; dividend yield -
2.19%; market price volatility - 93.6%. 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 during 1999 is $46.07.
The Bank sponsors an Employee Stock Ownership Plan (ESOP) for employees who have
attained the age of 21 and who have completed a 12 month period of employment
with the Bank during which they worked at least 1,000 hours. The Bank purchased
92,574 shares of common stock on behalf of the ESOP. The purchase of the shares
was funded by a loan from the Company and the unearned shares are pledged as
collateral for the borrowing. As the loan is repaid, earned shares are released
from collateral and are allocated to the particpants. As shares are earned, the
Bank records compensation expense at the average market price of the shares
during the period. Cash dividends received on unearned shares are allocated
among the participants and are reported as compensation expense. ESOP
compensation expense approximated $96,000, $192,000 and $127,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. Total earned shares at
December 31, 1999, 1998 and 1997 were 43,970, 33,920 and 23,052, respectively.
The estimated fair value of the remaining 48,604 unearned shares at December 31,
1999 is $431,000. Unearned ESOP shares are not considered outstanding for
purposes of computing earnings per share.
Note 11: Income Taxes
The provision (benefit) for income taxes for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------
<S> <C> <C> <C>
Current $ 522,112 $ 612,700 $839,029
Deferred (101,638) (117,667) (76,942)
- ----------------------------------------------------
$ 420,474 $ 495,033 $762,087
- ----------------------------------------------------
</TABLE>
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Federal Income Tax $384,853 $410,013 $642,237
New York State Franchise Tax 35,621 85,020 119,850
- -----------------------------------------------------------------
$420,474 $495,033 $762,087
- -----------------------------------------------------------------
</TABLE>
33
<PAGE>
The components of net deferred tax asset (liability), included in other
liabilities for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------
<S> <C> <C>
Assets:
Deferred and other compensation $ 777,581 $ 724,063
Allowance for loan losses 288,047 182,191
Investment securities 597,263 --
Loan origination fees 33,731 79,543
ESOP 12,500 10,977
Postretirement benefits 57,131 51,366
Other 6,092 6,092
- ---------------------------------------------------------------------
1,772,345 1,054,232
Liabilities
Prepaid pension (205,156) (232,180)
IIMF reserve (195,071) (241,745)
Depreciation (103,449) (25,593)
Accretion (48,603) (35,845)
Other (2,294) ---
Investments --- (686,820)
- ---------------------------------------------------------------------
(554,573) (1,222,183)
- ---------------------------------------------------------------------
Net deferred tax asset (liability) $1,217,772 $ (167,951)
- ---------------------------------------------------------------------
</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>
1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State tax, net of federal benefit 1.0 3.2 4.3
Tax-exempt interest income and other, net (3.9) (8.1) (9.2)
- ----------------------------------------------------------------------
Effective income tax rate 31.1% 29.1% 29.1%
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
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>
Earnings Shares EPS
<S> <C> <C> <C>
1999 Net Income $ 930,395
Basic EPS 930,395 2,631,812 $.35
- ----------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 0 62,961
Diluted EPS 930,395 2,694,773 $.35
============================================================================
1998 Net Income $1,208,801
Basic EPS 1,208,801 2,773,673 $.44
- ----------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 0 81,206
Diluted EPS $1,208,801 2,854,879 $.42
============================================================================
1997 Net Income $1,854,361
Basic EPS 1,854,361 2,798,610 $.66
- ----------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 0 3,603
</TABLE>
34
<PAGE>
<TABLE>
<S> <C> <C> <C>
Diluted EPS 1,854,361 2,802,213 $.66
==================================== ========== ========== ====
</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.
Financial instruments whose contract amounts
represent credit risk at December 31:
Contract Amount
1999 1998
- --------------------------------------------------------------------------------
Commitment to extend credit $8,973,000 $7,897,000
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, 1999 and 1998, is not
readily determinable.
The Company leases land for a branch under an operating lease expiring in 2013.
Rent expense totaled approximately $16,000 in 1999, $16,200 in 1998, and $15,000
in 1997. The lease provides for renewal options for two 10 year periods at
specified amounts ranging from $18,000 to $24,000 per year. Rental payments are
subject to increases based upon the preceding years Revised Consumer Price
Index, but limited to 5% in any one year. Approximate minimum rental commitments
for the non-cancelable operating lease is as follows:
<TABLE>
<CAPTION>
Years ending December 31:
- ------------------------------------------------------------------------
<S> <C>
2000 $ 16,000
2001 17,000
2002 17,000
2003 17,000
2004 18,000
Thereafter 170,000
- ------------------------------------------------------------------------
Total minimum lease payments $255,000
- ------------------------------------------------------------------------
</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 29, 1999 was $574,000.
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 1999, the Company paid
cash dividends totaling $357,075 to the Holding Company. The restricted capital
account has a $0 balance as of December 31, 1999.
35
<PAGE>
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 $2,333,706 as of December 31, 1999.
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, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 1999, 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.
<TABLE>
<CAPTION>
To be "Well
Capitalized"
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Provisions
- ---------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Core Capital
(to Risk Weighted Assets) $19,146,818 14.0% $10,900,160 8.0% $13,625,200 10.0%
Tier 1 Capital
(to Risk Weighted assets) $17,997,141 13.1% $ 5,450,080 4.0% $ 8,175,120 6.0%
Tier 1 Capital
(to Average Assets) $17,997,141 8.5% $ 8,255,800 4.0% $10,490,500 5.0%
- ---------------------------------------------------------------------------------------------------------------------
As of December 31, 1998:
Total Core Capital
(to Risk Weighted Assets) $18,924,263 15.1% $10,122,080 8.0% $12,652,600 10.0%
Tier 1 Capital
(to Risk Weighted assets) $17,985,102 14.3% $ 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%
</TABLE>
Note 16: Parent Company - Financial Information
- --------------------------------------------------------------------------------
The following represents the condensed financial information of Pathfinder
Bancorp, Inc. for years ended December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Statement of Condition
- ----------------------
Assets
Cash $ 121,239
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C>
Investments 150,000 --
Receivable from subsidiary 318,905 390,435
Investment in bank subsidiary 21,906,029
Other Assets 44,110 6,256
- ---------------------------------------------------------------------
Total Assets $22,423,959
=====================================================================
Liabilities
Accrued Liabilities 24,469 $ 137,274
- ---------------------------------------------------------------------
Total Liabilities 24,469 137,274
Shareholders' equity
Common stock, par value $.10 per
share; authorized 9,000,000 shares;
2,884,720 and 2,877,470 shares
issued and 2,639,245 and 2,745,470
outstanding for 1999 and 1998,
respectively. 288,472 287,747
Additional paid in capital 6,912,580 6,828,836
Retained earnings 18,121,372 17,820,409
Unearned stock based compensation (981,125) (1,428,746)
Accumulated other comprehensive income (895,894) 1,012,462
Unearned ESOP shares (287,609) (346,917)
Treasury stock, at cost; 245,475 and (3,083,184) (1,887,106)
132,000 shares, respectively
- ---------------------------------------------------------------------
Total liaibilities and shareholders'
equity $20,099,081 $22,423,959
=====================================================================
</TABLE>
Statement of Income
- -------------------
Year Ended
December 31, 1999
-----------------
Equity in undistributed income of
Subsidiary
Interest Income
Income from operations
Operating Expenses
Net Income
Statement of Cash Flow
- ----------------------
Year Ended
December 31, 1999
-----------------
Operating Activities
Net Income
Equity in undistributed earnings
Of subsidiary
ESOP and other stock based compensation earned
Other operating activities
Net cash provided by operating activities
- --------------------------------------------------------------------
Investing Activities
Loan distributed to subsidiary
Net cash used in investing activities
- --------------------------------------------------------------------
Financing Activities
Capital contribution from Oswego City Savings Bank
Proceeds from exercise of stock option plan
Cash dividends
Treasury stock purchased
Net cash used in financing activities
- --------------------------------------------------------------------
37
<PAGE>
Increase in cash and cash equivalents
Cash and cash equivalents beginning of year
-------------------------------------------
Cash and cash equivalents at end of year
===========================================
38
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,280
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 113
<INVESTMENTS-MARKET> 113
<LOANS> 131,297
<ALLOWANCE> 1,150
<TOTAL-ASSETS> 216,324
<DEPOSITS> 152,436
<SHORT-TERM> 27,657
<LIABILITIES-OTHER> 153,369
<LONG-TERM> 15,223
289
0
<COMMON> 0
<OTHER-SE> 11,786
<TOTAL-LIABILITIES-AND-EQUITY> 216,324
<INTEREST-LOAN> 10,808
<INTEREST-INVEST> 3,821
<INTEREST-OTHER> 60
<INTEREST-TOTAL> 14,689
<INTEREST-DEPOSIT> 5,349
<INTEREST-EXPENSE> 7,035
<INTEREST-INCOME-NET> 7,654
<LOAN-LOSSES> 373
<SECURITIES-GAINS> 86
<EXPENSE-OTHER> 7,134
<INCOME-PRETAX> 1,351
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 930
<EPS-BASIC> .35
<EPS-DILUTED> .35
<YIELD-ACTUAL> 7.72
<LOANS-NON> 2,553
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 939
<CHARGE-OFFS> 190
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 1,150
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,150
</TABLE>
