<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from ______________ to _____________
Commission File Number: 0-23975
-------
NIAGARA BANCORP, INC.
-----------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1545669
------------------------------- --------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
6950 SOUTH TRANSIT ROAD, P.O. BOX 514, LOCKPORT, NY 14095-0514
--------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(716) 625-7500
--------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
----
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
----------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES ____ NO X
---
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 May 11, 1998, there were issued and outstanding 29,756,250 shares of
the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
<PAGE>
PART I
ITEM 1. BUSINESS
- ------------------
GENERAL
NIAGARA BANCORP, INC.
Niagara Bancorp, Inc. (the "Company") is a Delaware corporation that was
organized in December 1997 at the direction of the Board of Trustees of Lockport
Savings Bank (the "Bank") for the purpose of acquiring all of the capital stock
of the Bank upon completion of the Bank's reorganization into the mutual holding
company structure. The initial public offering of common stock by the Company in
connection with the reorganization was consummated on April 20, 1998, and
accordingly, had not been consummated by December 31, 1997, the end of the 12-
month period for which this Annual Report on Form 10-K is filed. Prior to the
consummation of the reorganization and the initial stock offering, the Company
had not issued any stock, had no assets and no liabilities, and had not
conducted operations other than of an organizational nature. Following
consummation of the reorganization and initial stock offering, the Company's
only significant assets are 100% of the shares of the Bank's outstanding common
stock, the Company's loan to the Bank's employee stock ownership plan and up to
50% of the net proceeds of the Company's initial public stock offering.
The Company does not intend to employ any persons other than certain
officers who are currently officers of the Bank, but will utilize the support
staff of the Bank from time to time. Additional employees will be hired as
appropriate to the extent the Company expands its business in the future. The
directors and executive officers of the Company are set forth below.
The Company's offices are located at the executive offices of the Bank at
6950 South Transit Road P.O. Box 514, Lockport, New York, 14095-0514. Its
telephone number is (716) 625-7500.
Filed herewith as Exhibits 99.1 and 99.2 for informational purposes only
are the consolidated financial statements of the Bank and its subsidiaries, and
management's discussion and analysis of such consolidated financial statements,
as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996
and 1995.
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following individuals serve as directors and executive officers of the
Company:
(a) Directors of the Company
<TABLE>
<CAPTION>
DIRECTOR AGE* OCCUPATION TERM EXPIRES
- -------- ---- ---------- ------------
<S> <C> <C> <C>
Gordon P. Assad 49 President and Chief Executive Officer, 2001
Erie & Niagara Insurance Association
Christa R. Caldwell 63 Director (Retired), 2000
Lockport Public Library
James W. Currie 56 President, 1999
Ag Pak, Inc.
Gary B. Fitch 62 Owner-Manager, 2000
Ontario Orchards, Inc.
David W. Heinrich 61 President, 1999
Heinrich Chevrolet Corp.
Daniel W. Judge 55 President and Chief Executive Officer, 2000
I.D. ONE, Inc.
B. Thomas Mancuso 41 President, 1999
Joseph L. Mancuso & Sons, Inc.
James Miklinski 55 General Manager, 2000
Niagara Milk Cooperative
Barton G. Smith 68 Paul Garrick, Inc. (Retired) 2001
William E. Swan 50 President and Chief Executive Officer, 2001
Lockport Savings Bank
Robert G. Weber 60 Managing Partner (Retired), 1999
KPMG Peat Marwick LLP
</TABLE>
______________
*As of December 31, 1997
(b) Executive Officers of the Company
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
William E. Swan 50 President and Chief Executive Officer
Paul J. Kolkmeyer 44 Executive Vice President and Chief
Financial Officer
G. Gary Berner 49 Senior Vice President
Kathleen P. Monti 49 Senior Vice President
Diane Allegro 42 Senior Vice President
</TABLE>
The executive officers of the Company are elected annually and hold office
until their successors are elected and qualified, or until death, resignation,
retirement or removal by the board of directors.
2
<PAGE>
BIOGRAPHICAL INFORMATION
Directors of the Company
Gordon P. Assad has served as a trustee of the Bank since 1995. Mr. Assad
is the President and Chief Executive Officer of Erie & Niagara Insurance
Association and has served in that position since 1972.
Christa R. Caldwell has served as a trustee of the Bank since 1986. Ms.
Caldwell is retired and was the director of the Lockport Public Library from
1967 to 1996.
James W. Currie has served as a trustee of the Bank since 1987. Mr. Currie
is the President of Ag Pak, Inc., a manufacturer of produce packaging machines,
and has served in that position since 1974.
Gary B. Fitch has served as a trustee of the Bank since 1981. Mr. Fitch is
the Owner-Manager of Ontario Orchards, Inc., and has served in that position
since 1976. Mr. Fitch also serves as the Executive Secretary of Agricultural
Affiliates, Inc. and has served in that position since 1991.
David W. Heinrich served as a trustee of the Bank from 1969 to 1991. He was
re-elected to the board in June of 1993. Mr. Heinrich is the President of
Heinrich Chevrolet Corp.
Daniel W. Judge has served as a trustee of the Bank since 1992. Mr. Judge
is the President and Chief Executive Officer of I.D. ONE, Inc., a purchasing and
marketing cooperative of independent industrial distributors, and has served in
that position since 1996. Mr. Judge served as the Executive Director of I.D.
ONE, Inc. from 1993 to 1996. Mr. Judge has also served as President and Manager
of Dansam, Inc., a business management services company, since 1990.
B. Thomas Mancuso has served as a trustee of the Bank since 1990. Mr.
Mancuso is the President of Joseph L. Mancuso & Sons, Inc., a real estate
development company.
James Miklinski has served as a trustee of the Bank since 1996. Mr.
Miklinski is the General Manager of Niagara Milk Cooperative, and has served in
that position since 1990.
Barton G. Smith has served as a trustee of the Bank since 1986. Mr. Smith
is retired from Paul Garrick, Inc., an insurance agency.
William E. Swan has served as a trustee of the Bank since 1996. Mr. Swan is
the President and Chief Executive Officer of the Bank, and has served in that
position since 1989. Prior to joining the Bank in 1988, he served as an
Administrative Vice President of Manufacturers and Traders Trust Company.
Robert G. Weber has served as a trustee of the Bank since 1996. Mr. Weber
is a retired Buffalo Office Managing Partner of KPMG Peat Marwick LLP where he
served from 1959 to 1995.
Executive Officers of the Company Who Are Not Directors
Paul J. Kolkmeyer has served as Executive Vice President and Chief
Financial Officer of the Bank since 1995. Mr. Kolkmeyer served as Senior Vice
President and Chief Financial Officer of the Bank. Prior to joining the Bank in
1990, he served as a Vice President at Morgan Guaranty Trust Company.
Kathleen P. Monti has served as Senior Vice President of Human Resources
and Administration of the Bank since 1995. From 1993 to 1995 Ms. Monti served as
Vice President of Human Resources of the Bank. Prior to 1993, she served as an
Administrative Vice President-Regional Human Resource Manager at Marine Midland
Bank.
3
<PAGE>
G. Gary Berner has served as Senior Vice President and Chief Lending
Officer of the Bank since 1992. Prior to joining the Bank, he was a Vice
President in the Asset Management Group at Key Bank of New York, N.A.
Diane Allegro has been Senior Vice President of Retail Banking since
October 1997. From 1994 to October 1997, she was Vice President-Retail Sales &
Delivery Systems at Rochester Community Savings Bank. Prior to 1994, she was
employed by First Federal Savings and Loan Association of Rochester.
ITEM 2. PROPERTIES
- --------------------
The Company conducts its business through its office at 6950 South Transit
Road, Lockport, New York.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
The Company is not party to any legal proceedings, claims or lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted during the fourth quarter of the year ended
December 31, 1997 to a vote of security holders.
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
- ----------------------------------------------------------
(a) The common stock of the Company is quoted on the Nasdaq National
Market under the symbol "NBCP". As of December 31, 1997, the date for which this
report is filed, the Company had not issued shares and there had been no trading
in the common stock of the Company.
(b) The effective date of the Securities Act registration statement for
which use of proceeds information is being disclosed herein was February 17,
1998; the commission file number assigned to the registration statement was 333-
42977.
The offering commenced on or about February 24, 1998 and continued
through March 24, 1998. The offering was managed on a best efforts basis by CIBC
Oppenheimer Corp. and Trident Securities, Inc., as marketing agent. The
securities registered were the common stock, par value $.01 per share, of the
Company. In the registration statement, 13,501,554 shares of such common stock
were registered at an aggregate price of $135,015,540. In the Reorganization,
29,756,250 shares of common stock were issued, of which 13,501,554 shares were
sold to the public, which includes shares purchased by the Bank's Employee Stock
Ownership Plan. In addition, 15,849,650 shares were issued to Niagara Bancorp,
MHC, the mutual holding company formed in the reorganization and 405,046 shares
were issued to the Charitable Foundation established by the Company. In that the
effective date of the registration statement was subsequent to December 31,
1997, the ending date of the reporting period for this report, the amount of
expenses incurred and the amount of net offering proceeds will be reported in
the Company's next periodic report filed pursuant to section 13(a) and 15(b) of
the Securities Exchange Act of 1934. However, the total expenses of the
reorganization and offering are not expected to exceed $2.2 million.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
- --------------------------------------------------------
None. As of December 31, 1997, the Company had not issued any stock, had no
assets and no liabilities, and had not conducted operations other than of an
organizational nature.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- -----------------------------------------------------------
None. As of December 31, 1997, the Company had not issued any stock, had no
assets and no liabilities, and had not conducted operations other than of an
organizational nature. See Exhibit 99.2.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
Not applicable. See Exhibit 99.2
ITEM 8. FINANCIAL STATEMENTS
- ------------------------------
None. As of December 31, 1997, the Company had not issued any stock, had no
assets and no liabilities, and had not conducted operations other than of an
organizational nature. See Exhibit 99.1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ----------------------------------------------------------
Not applicable.
5
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
- ----------------------------------------------------
See Item 1. "Directors and Executive Officers of the Registrant" for
information concerning the Company's directors and executive officers.
ITEM 11. EXECUTIVE COMPENSATION
- ----------------------------------
No compensation has been paid by the Company to the executive officers or
directors of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
- -----------------------------------------------------------
Not applicable.
ITEM 13. CERTAIN TRANSACTIONS
- --------------------------------
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
- -------------------------------------------------------
The exhibits and financial statement schedules filed as a part of
this Form 10-K are as follows:
(a)(3) Exhibits
--------
99.1 Consolidated Financial Statements of Lockport Savings Bank and
subsidiaries as of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995, with Report of
Independent Auditors.
99.2 Management's discussion and analysis of the Consolidated
Financial Statements, and certain statistical data.
(b) Reports on Form 8-K:
-------------------
The Registrant filed no Current Report on Form 8-K during the fourth
quarter of 1997.
6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NIAGARA BANCORP, INC.
Date: May 11, 1998 By: /s/ William E. Swan
--------------------------------------------
William E. Swan
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ William E. Swan President, Chief Executive May 11, 1998
- ------------------------- Officer (Principal Executive
William E. Swan Officer)and Director
/s/ Paul J. Kolkmeyer Executive Vice President and May 11, 1998
- ------------------------- Chief Financial Officer (Principal
Paul J. Kolkmeyer Accounting Officer)
/s/ Gordon P. Assad Director May 11, 1998
- -------------------------
Gordon P. Assad
/s/ Christa P. Caldwell Director May 11, 1998
- -------------------------
Christa P. Caldwell
/s/ James W. Currie Director May 11, 1998
- -------------------------
James W. Currie
/s Gary B. Fitch Director May 11, 1998
- -------------------------
Gary B. Fitch
/s/ David W. Heinrich Director May 11, 1998
- -------------------------
David W. Heinrich
/s/ Daniel W. Judge Director May 11, 1998
- -------------------------
Daniel W. Judge
7
<PAGE>
/s/ B. Thomas Mancuso Director May 11, 1998
- -------------------------
B. Thomas Mancuso
/s/ James Miklinski Director May 11, 1998
- -------------------------
James Miklinski
/s/ Barton G. Smith Director May 11, 1998
- -------------------------
Barton G. Smith
/s/ Robert G. Weber Director May 11, 1998
- -------------------------
Robert G. Weber
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 0
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 0
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 0
<INTEREST-LOAN> 0
<INTEREST-INVEST> 0
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 0
<INTEREST-DEPOSIT> 0
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 0
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 0
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
[LOGO OF PEAT MARWICK LLP APPEARS HERE]
Exhibit 99.1
12 Fountain Plaza, Suite 601
Buffalo, NY 14202
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Lockport Savings Bank:
We have audited the accompanying consolidated statements of condition of
Lockport Savings Bank and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income and cash flows for each of the years
in the three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lockport Savings
Bank and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Buffalo, New York
February 20, 1998
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Consolidated Statements of Condition
December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 13,913 11,219
Federal funds sold 7,700 5,000
Securities purchased under resale agreements 15,000 -
----------- -----------
Total cash and cash equivalents 36,613 16,219
Securities available for sale 449,281 409,735
Securities held to maturity 17,000 38,000
Loans, net 635,396 598,486
Accrued interest receivable 7,085 6,348
Premises and equipment, net 22,308 13,240
Federal Home Loan Bank stock, at cost 6,392 5,394
Other assets 4,951 5,936
----------- -----------
$ 1,179,026 1,093,358
=========== ===========
Liabilities and Net Worth
-------------------------
Liabilities:
Deposits $ 986,875 920,072
Mortgagors' payments held in escrow 8,746 8,773
Short-term borrowings 18,783 27,008
Long-term debt 14,934 5,000
Other liabilities 19,217 16,841
----------- -----------
1,048,555 977,694
----------- -----------
Commitments and contingencies
Net worth:
Surplus and undivided profits 127,941 116,690
Net unrealized gain (loss) on securities
available for sale, net of deferred income
taxes 2,530 (1,026)
----------- -----------
130,471 115,664
----------- -----------
$ 1,179,026 1,093,358
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest Income:
Real estate loans $ 44,540 40,440 36,948
Other loans 7,029 6,845 6,400
Securities available for sale 27,838 24,422 21,743
Securities held to maturity 1,429 1,698 2,780
Federal funds sold and securities
purchased under resale argreements 1,079 1,293 1,647
Other 448 364 338
--------- ---------- ----------
82,363 75,062 69,856
Interest expense:
Deposits 43,385 39,814 39,034
Borrowed funds 1,593 841 -
--------- ---------- ----------
Net interest income 37,385 34,407 30,822
Provision for loan losses 1,493 2,187 1,016
--------- ---------- ----------
Net interest income after provision for loan losse 35,892 32,220 29,806
--------- ---------- ----------
Noninterest income:
Banking service charges and fees 3,085 2,468 1,837
Loan fees 1,147 1,027 855
Net gain on sale of securities available for sale 910 576 1,477
Other 1,654 1,681 1,237
--------- ---------- ----------
Total noninterest income 6,796 5,752 5,406
--------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 13,119 11,477 9,706
Occupancy and equipment 3,749 3,178 2,635
Network interchange fees 1,197 984 877
Deposit insurance 121 2 983
Marketing and advertising 1,398 1,355 978
Other 5,594 3,930 4,964
--------- ---------- ----------
Total noninterest expense 25,178 20,926 20,143
--------- ---------- ----------
Income before income taxes 17,510 17,046 15,069
Income taxes 6,259 6,278 5,144
--------- ---------- ----------
Net income $ 11,251 10,768 9,925
========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $11,251 10,768 9,925
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of premises and equipment 2,256 1,911 1,607
Amortization (accretion) of fees and discounts, net (279) (717) 554
Provision for loan losses 1,493 2,187 1,016
Other provisions for losses 339 23 834
Net gain on sale of securities available for sale (910) (576) (1,477)
Deferred income taxes (324) (387) (253)
(Increase) decrease in:
Accrued interest receivable (737) (726) (198)
Other assets (2,497) 3,356 (10,390)
Increase in other liabilities 2,378 2,661 8,607
--------- -------- ---------
Net cash provided by operating activities 12,970 18,500 10,225
--------- -------- ---------
Cash flows from investing activities:
Purchase of securities available for sale (99,005) (91,304) (11,770)
Proceeds from sales of securities available for sale 27,366 16,803 11,892
Proceeds from maturities of securities available for sale 11,175 27,215 -
Purchase of mortgage-backed securities available for sale (67,340) (85,506) (46,375)
Proceeds from sales of mortgage-backed securities
available for sale 47,792 24,924 50,755
Principal payments on mortgage-backed securities
available for sale 47,379 35,522 29,780
Purchase of securities held to maturity (199,100) (249,700) (239,100)
Proceeds from maturities of securities held to maturity 220,100 258,400 227,368
Net increase in loans (36,394) (65,123) (62,288)
Other (13,034) (2,534) (3,647)
---------- ---------- ----------
Net cash used by investing activities (61,061) (131,303) (43,385)
---------- ---------- ----------
</TABLE>
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 66,803 59,007 41,375
Net increase (decrease) in mortgagors' payments held in
escrow (27) (1,416) 589
Proceeds from (repayment of) short-term borrowings (8,225) 27,008 -
Proceeds from long-term debt 10,000 5,000 -
Repayments of long-term debt (66) - -
-------- ------- -------
Net cash provided by financing activities 68,485 89,599 41,964
-------- ------- -------
Net increase (decrease) in cash and cash equivalents 20,394 (23,204) 8,804
Cash and cash equivalents at beginning of year 16,219 39,423 30,619
-------- ------- -------
Cash and cash equivalents at end of year $ 36,613 16,219 39,423
======== ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes $ 3,870 6,597 4,110
Interest expense 44,693 40,485 38,972
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996 and 1995
(1) Summary of Significant Accounting Policies
- -----------------------------------------------
The accounting and reporting policies of Lockport Savings Bank, a New York
State chartered FDIC insured mutual savings bank, and its subsidiaries
conform to general practices within the banking industry and to generally
accepted accounting principles. The following is a description of the more
significant accounting policies.
(a) Principles of Consolidation
--------------------------------
The consolidated financial statements include the accounts of Lockport
Savings Bank (LSB) and its subsidiaries (the Bank), LSB Associates,
Inc., an agent for third party mutual fund and annuity sales; LSB
Realty, Inc., a real estate development company; LSB Funding, Inc.,
a real estate investment trust; and LSB Securities, Inc., a
securities investment company. All significant intercompany balances
and transactions have been eliminated in consolidation.
(b) Cash and Cash Equivalents
------------------------------
For purposes of reporting cash flows, cash and cash equivalents
include, cash on hand, amounts due from banks, federal funds
generally sold for one to three day periods, and securities
purchased under resale agreements generally sold within 90 days.
(c) Investment Securities
--------------------------
Debt securities and marketable equity securities are classified as
either available for sale or held to maturity. Held to maturity
securities are those that the Bank has the positive intent and
ability to hold to maturity. All other securities are classified as
available for sale.
Securities available for sale are carried at fair value with
unrealized gains and losses, net of the related deferred tax effect,
excluded from earnings and reported as a separate component of net
worth. Realized gains and losses are determined using the specific
identification method.
Securities held to maturity are recorded at cost with discounts
accreted and premiums amortized to maturity using a method that
approximates level-yield. If permanent impairment of a security
exists, that security is written down to fair value with a charge to
earnings.
1
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
- ----------------------------------------------------------
(d) Loans
----------
Loans are stated at the principal amount outstanding, adjusted for net
unamortized deferred fees and costs which are accrued to income
on the interest method. Accrual of interest income on loans is
discontinued after payments become more than ninety days
delinquent, unless the status of a particular loan clearly
indicates earlier discontinuance is more appropriate. All
uncollected interest income previously recognized on non-accrual
loans is reversed and subsequently recognized only to the extent
payments are received. In those instances where there is doubt as
to the collectibility of principal, interest payments are applied
to principal. Loans are generally returned to accrual status when
principal and interest payments are current, full collectibility
of principal and interest is reasonably assured and a consistent
record of performance, generally six months, has been
demonstrated.
Purchased loans are recorded at cost with related premiums or
discounts amortized to expense or accreted to income using the
interest method over the estimated life of the loans. Mortgage
loans originated and intended for sale in the secondary market
are carried at the lower of cost or market. Net unrealized losses
are recognized through a valuation allowance by charges to
earnings.
(e) Real Estate Owned
----------------------
Real estate owned consists of property acquired in settlement of loans
which are initially valued at the lower of cost or fair value
based on appraisals at foreclosure and are periodically adjusted
to the lower of adjusted cost or net realizable value throughout
the remaining period.
(f) Allowance for Loan Losses
------------------------------
The allowance for loan losses is established through charges to
earnings. Management's determination of the balance of the
allowance is based on many factors including credit evaluation of
the loan portfolio, current and expected economic conditions and
past loss experience. While management uses available information
to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for
loan losses and may require the Bank to recognize additions to
the allowance based on their judgment of information available to
them at the time of their examination.
2
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
- ----------------------------------------------------------
(f) Allowance for Loan Losses, Continued
-----------------------------------------
A loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect
all amounts of principal and interest under the original terms of
the agreement. Such loans are measured based on the present value
of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, the loan's observable
market price or the fair value of the underlying collateral if
the loan is collateral dependent. The Bank excludes smaller-
balance homogeneous loans that are collectively evaluated for
impairment, including one-to four-family residential mortgage
loans, student loans and consumer loans, other than those
modified in a troubled debt restructuring.
(g) Mortgage Servicing Rights
------------------------------
In 1996, the Bank adopted Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights", an
amendment to SFAS No. 65. Accordingly, the rights to service
mortgage loans for others are carried as separate assets at fair
value, whether acquired through purchase transactions or through
loan originations. The adoption of this standard did not have a
material impact on the Bank's consolidated financial statements.
(h) Premises and Equipment
---------------------------
Premises and equipment are carried at cost, net of accumulated
depreciation and amortization. Depreciation is computed on the
straight-line method over the estimated useful lives of the
assets. Lease hold improvements are amortized on the straight-
line method over the lesser of the life of the improvements or
the lease term.
(i) Employee Benefits
----------------------
The Bank maintains a non-contributory, qualified, defined benefit
pension plan that covers substantially all full time employees.
The actuarially determined pension benefits in the form of a life
annuity are based on the employee's combined years of service,
age and compensation. The Bank's policy is to fund the minimum
amount required by government regulations.
The Bank also provides certain post-retirement benefits, principally
health care and group life insurance, to employees and their
beneficiaries and dependents. The Bank accrues for the expected
cost of providing these post-retirement benefits during an
employee's active years of service.
3
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
- ----------------------------------------------------------
(j) Income Taxes
-----------------
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred
tax assets and liabilities are adjusted through the provision for
income taxes.
(k) Transfers and Servicing of Financial Assets and Extinguishments of
-----------------------------------------------------------------------
Liabilities
-----------
In 1997, the Bank adopted SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities", as amended by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of Financial Accounting
Standards Board (FASB) Statement No. 125". SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that
focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings.
SFAS No. 127 deferred the adoption of certain provisions of SFAS
No. 125 until January 1, 1998. The adoption of SFAS No. 125, as
amended by SFAS No. 127, did not have a material impact on the
Bank's financial position, results of operations, or liquidity.
(l) New Accounting Standards
-----------------------------
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure". SFAS No. 129 summarizes
previously issued disclosure guidance contained within APB
Opinion Nos. 10 and 15 as well as SFAS No. 47. There will be no
changes to the Bank's disclosures pursuant to the adoption of
SFAS No. 129. This statement is effective for financial
statements for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. The comprehensive income and
related cumulative equity impact of comprehensive income items
will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains
or losses on securities available for sale is expected to be
disclosed as an additional component of the Bank's income under
the requirements of SFAS No. 130. This statement is effective for
fiscal years beginning after December 15, 1997.
4
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies, Continued
- ----------------------------------------------------------
(l) New Accounting Standards (Continued)
-----------------------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which changes
the way companies report information about segments of their
business on their annual financial statements and requires them
to report selected segment information in their quarterly reports
issued to shareholders. It also requires entity wide disclosures
about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its
major customers. This statement is effective for fiscal years
beginning after December 15, 1997.
(m) Use of Estimates
---------------------
Management of the Bank has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and
disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(n) Reclassifications
----------------------
Certain reclassifications were made to the 1996 and 1995 financial
statements to conform them to the 1997 presentation.
(2) Securities Purchased under Resale Agreements
- -------------------------------------------------
The Bank enters into agreements with large securities dealers to purchase
residential and commercial mortgage loans, mortgage-backed securities
and U.S. Treasury Notes and to resell substantially identical
securities, generally within 90 days. Such agreements at December 31,
1997, consist of mortgage loans and U.S. Treasury Notes, have a
weighted average rate of 6.07% and mature within 90 days. No material
amount of agreements was outstanding with any individual dealer.
The securities underlying the agreements are book-entry securities and were
delivered into the Bank's account maintained at the Federal Home Loan
Bank of New York, or into a third-party custodian's account designated
by the Bank under a written custodial agreement that explicitly
recognizes the Bank's interest in the securities. Mortgage loans
underlying the agreements are held in safekeeping by the seller on
behalf of the Bank. Securities purchased under resale agreements
averaged approximately $11.1 million since the Bank began entering
into these agreements during November 1997, and the maximum amount
outstanding at any month-end during 1997 was $15.0 million.
5
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Securities Available for Sale
- ----------------------------------
The amortized cost and approximate fair value of securities available for
sale at December 31, 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
cost gains losses value
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury $ 84,877 921 (47) 85,751
States and political subdivisions 1,760 110 - 1,870
Corporate 6,933 121 - 7,054
-------- ----- ------ -------
93,570 1,152 (47) 94,675
-------- ----- ------ -------
Mortgage-backed securities:
Collateralized mortgage obligations 100,037 673 (746) 99,964
Government National Mortgage Association 31,515 1,091 (7) 32,599
Federal National Mortgage Association 24,282 223 (22) 24,483
Freddie Mac 114,922 1,108 (121) 115,909
-------- ----- ------ -------
270,756 3,095 (896) 272,955
-------- ----- ------ -------
Asset-backed securities:
Home equity 61,983 36 (78) 61,941
Student Loans 9,475 - (24) 9,451
Auto 3,515 15 - 3,530
-------- ----- ------ -------
74,973 51 (102) 74,922
-------- ----- ------ -------
Equity securities - Common stock 5,693 1,170 (134) 6,729
-------- ----- ------ -------
$444,992 5,468 (1,179) 449,281
======== ===== ====== =======
</TABLE>
6
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Securities Available for Sale, Continued
- ---------------------------------------------
Scheduled contractual maturities of securities, other than equity
securities, at December 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Fair
cost value
--------- -------
<S> <C> <C>
Within one year $ 17,079 17,103
After one year through five years 121,643 122,663
After five years through ten years 76,169 76,705
After ten years 224,408 226,081
-------- -------
$439,299 442,552
======== =======
</TABLE>
The amortized cost and approximate fair value of securities available for
sale at December 31, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
cost gains losses value
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury $ 84,716 723 (219) 85,220
U.S. government agencies 5,012 - (8) 5,004
States and political subdivisions 1,942 99 - 2,041
Corporate 999 1 - 1,000
-------- ----- ------ -------
92,669 823 (227) 93,265
-------- ----- ------ -------
Mortgage-backed securities:
Collateralized mortgage obligations 104,244 133 (2,385) 101,992
Government National Mortgage Association 44,966 931 (117) 45,780
Federal National Mortgage Association 28,487 20 (251) 28,256
Freddie Mac 109,903 475 (1,546) 108,832
-------- ----- ------ -------
287,600 1,559 (4,299) 284,860
-------- ----- ------ -------
Asset-backed securities - Home equity 28,090 36 (128) 27,998
-------- ----- ------ -------
Equity securities - Common stock 3,115 594 (97) 3,612
-------- ----- ------ -------
$411,474 3,012 (4,751) 409,735
======== ===== ====== =======
</TABLE>
7
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Note to Consolidated Financial Statements, Continued
(3) Securities Available for Sale, Continued
- ---------------------------------------------
Gross realized gains (losses) on sales of securities available for sale are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ---- ------
<S> <C> <C> <C>
Realized gains $1,195 896 2,442
Realized losses (285) (320) (965)
====== ==== =+====
</TABLE>
At December 31, 1997, approximately $5.0 million of U.S. Treasury Notes
were pledged under a collateral agreement with the Federal Reserve
Treasury, Tax and Loan Program and $19.0 million of U.S. Treasury
Notes were pledged as collateral under reverse repurchase agreements.
(4) Securities Held To Maturity
- --------------------------------
The Bank's held to maturity securities consist of money market preferred
stock which matures approximately every 49 days. Cost approximates
fair value at December 31, 1997 and 1996. Each maturity and subsequent
reinvestment in the stock during the year is included in the
accompanying consolidated statements of cash flows as maturities and
purchases, respectively. Aside from the rollover of that investment,
there were no maturities of held to maturity debt securities in 1997
and 1996. There were no sales of, or transfers to or from, securities
classified as held to maturity in either year.
8
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Note to Consolidated Financial Statements, Continued
(5) Loans
- ----------
Loans receivable at December 31, 1997 and 1996 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---------- --------
Real estate:
<S> <C> <C>
Residential conventional $392,846 360,573
Residential home equity 13,587 11,337
Commercial 151,266 139,998
Construction 10,791 12,493
-------- -------
568,490 524,401
-------- -------
Consumer installment:
Mobile home 22,747 21,406
Vehicle 7,306 18,747
Guaranteed student 10,975 10,702
Other 24,640 22,412
-------- -------
65,668 73,267
-------- -------
Commercial 4,893 4,895
-------- -------
Total loans 639,051 602,563
Net deferred costs and discounts 3,266 2,462
Allowance for loan losses (6,921) (6,539)
-------- -------
Loans, net $635,396 598,486
======== =======
</TABLE>
Non-accrual loans amounted to $3,047,000, $4,718,000 and $3,955,000 at
December 31, 1997, 1996, and 1995, respectively, representing .47%,
.78% and .74% of total loans. Interest income that would have been
recorded if the loans had been performing in accordance with their
original terms amounted to $245,000, $325,000 and $367,000 in 1997,
1996 and 1995, respectively.
9
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Note to Consolidated Financial Statements, Continued
(5) Loans, Continued
- ---------------------
Mortgage loans sold amounted to $33.8 million, $26.1 million, and $30.1
million for the years ending December 31, 1997, 1996, and 1995,
respectively. Servicing fee income included in loan fees in the
consolidated statements of income amounted to $424,000, $363,000, and
$274,000 in 1997, 1996, and 1995, respectively.
Mortgages serviced for others by the Bank amounted to $152.5 million and
$129.0 million at December 31, 1997 and 1996, respectively. At
December 31, 1997, the Bank maintained $3 million in fidelity blanket
bond coverage and under its mortgage impairment insurance policy,
maintained errors and omissions coverage of $2 million per commercial
and residential mortgage occurrence.
At December 31, 1997, the Bank had outstanding commitments to originate
loans of approximately $44.2 million with $14.6 million at fixed rates
and $29.6 million at variable rates.
Changes in the allowance for loan losses in 1997, 1996 and 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------ ------
<S> <C> <C> <C>
Balance, beginning of year $ 6,539 4,707 4,192
Provision for loan losses 1,493 2,187 1,016
Charge-offs (1,362) (436) (556)
Recoveries on loans previously
charged-off 251 81 55
------- ----- -----
Balance, end of year $ 6,921 6,539 4,707
======= ===== =====
</TABLE>
Approximately 96.5% of the Bank's mortgage and consumer loans are in New
York State. Accordingly, the ultimate collectibility of a substantial
portion of the Bank's loan portfolio is susceptible to changes in
market conditions in this primary market area.
10
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Note to Consolidated Financial Statements, Continued
(6) Premises and Equipment
- ---------------------------
A summary of premises and equipment at December 31, 1997 and 1996 follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ------
<S> <C> <C>
Land $ 1,049 1,049
Buildings and improvements 17,230 10,996
Furniture and equipment 14,820 9,785
------- ------
33,099 21,830
Less accumulated depreciation and amortization 10,791 8,590
------- ------
$22,308 13,240
======= ======
</TABLE>
Minimum rental commitments for premises and equipment under noncancellable
operating leases at December 31, 1997 follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $ 612
1999 658
2000 671
2001 674
2002 681
Later years 6,603
------
Total minimum lease payments $9,899
======
</TABLE>
Real estate taxes, insurance and maintenance expenses related to these
leases are obligations of the Bank. Rent expense was $534,000,
$414,000, and $271,000 in 1997, 1996 and 1995, respectively, and is
included in occupancy expense.
During 1997, the Bank completed construction of a new Administrative
Center. Included in premises and equipment at December 31, 1997 and
1996 are $11.7 million and $1.8 million, respectively, of costs,
net of accumulated depreciation, relating to this new facility.
11
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Note to Consolidated Financial Statements, Continued
(7) Deposits
- -------------
Deposits consist of the following at December 31, 1997 and 1996 (in
thousands):
<TABLE>
<CAPTION>
Weighted
average 1997
rate Balance
-------- -------
<S> <C> <C>
Savings accounts 3.34% $297,020
--------
Certificates maturing:
Within one year 5.52 355,534
After one year, through two years 6.63 118,162
After two years, through three years 6.41 16,375
After three years, through four years 6.46 9,151
After four years, through five years 5.73 740
After five years 6.06 2,464
--------
5.83 502,426
--------
Checking accounts:
Non-interest bearing - 27,689
Interest-bearing:
NOW accounts 2.00 65,756
Money market accounts 4.24 93,984
--------
187,429
--------
4.51% $986,875
==== ========
</TABLE>
12
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Note to Consolidated Financial Statements, Continued
(7) Deposits, Continued
- ------------------------
<TABLE>
<CAPTION>
Weighted
average 1996
rate Balance
-------- -------
<S> <C> <C>
Savings accounts 3.34% $300,747
--------
Certificates maturing:
Within one year 5.33 356,401
After one year, through two years 6.01 69,923
After two years, through three years 8.16 42,054
After three years, through four years 6.96 8,992
After four years, through five years 6.89 5,905
After five years 6.17 1,446
--------
5.72 484,721
--------
Checking accounts:
Non-interest bearing - 25,382
Interest-bearing:
NOW accounts 2.00 55,901
Money market accounts 3.54 53,321
--------
134,604
--------
4.43% $920,072
==== ========
</TABLE>
13
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) Deposits, Continued
- ------------------------
Generally, interest rates on certificates of deposit range from 3.68% to
9.50% at December 31, 1997.
Interest expense in 1997, 1996 and 1995 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Savings accounts $10,124 10,353 11,636
Certificates 29,426 26,432 24,159
NOW accounts 1,120 955 901
Money market accounts 2,561 1,916 2,164
Mortgagors' payments held in escrow 154 158 174
------- ------ ------
$43,385 39,814 39,034
======= ====== ======
</TABLE>
Included in 1995 interest expense is a special interest payment of
$1,250,000 which was approved by the Board of Trustees of the Bank and
paid on a pro rata basis on all interest-bearing accounts in recognition
of the Bank's 125th anniversary.
Certificates issued in amounts over $100,000 amounted to $88.6 million,
$83.9 million, and $75.2 million at December 31, 1997, 1996 and 1995,
respectively. Interest expense thereon approximated $5.2 million, $4.6
million, and $4.2 million in 1997, 1996 and 1995, respectively.
14
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(8) Other Borrowed Funds
- -------------------------
The Bank has a $127.8 million line of credit with the Federal Home Loan
Bank (FHLB), secured by FHLB stock and the residential mortgage
portfolio, which provides a secondary funding source for lending,
liquidity, and asset/liability management.
The Bank also pledged, to broker-dealers, U.S. Treasury Notes as collateral
under agreements to repurchase. Under these agreements, the broker-
dealers are required to transfer securities to the Bank upon maturity of
the agreements, generally within 90 to 180 days after the transaction
date.
Information relating to outstanding borrowings at December 31, 1997 and
1996 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Short-term borrowings:
Advances from Federal Home Loan Bank $ - 7,000
Reverse repurchase agreements 18,783 20,008
------- ------
$18,783 27,008
======= ======
Long-term advances from FHLB, bearing fixed interest rates:
5.72%, maturing on January 29, 2001 $ 5,000 5,000
6.59%, amortizing through July 31, 2012 4,934 -
6.37%, amortizing through December 22, 2012 5,000 -
------- ------
$14,934 5,000
======= ======
Information relating to the reverse repurchase agreements at December 31, 1997 and 1996
is summarized as follows:
1997 1996
---- ----
<S> <C> <C>
Weighted average interest rate of reverse
repurchase agreements 5.65% 5.42
Maximum outstanding at any month end $28,961 24,675
Average amount outstanding during the year 20,807 11,091
======= ======
</TABLE>
The average amounts outstanding are computed using weighted monthly averages.
Related interest expense for 1997 and 1996 was $1,158,000 and $576,000,
respectively. The Bank had no such borrowings in 1995.
The aggregate maturities of long-term advances from FHLB for each of the five
years subsequent to December 31, 1997, are as follows: 1998, $395,000;
1999, $439,000; 2000, $468,000; 2001, $5,499,000; and 2002, $533,000.
15
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Net Worth
- --------------
The changes in net worth for 1997, 1996 and 1995 follow (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
Net worth, beginning of year $115,664 107,653 81,322
Net income 11,251 10,768 9,925
Net change in unrealized gain (loss) on
securities available for sale, net of taxes 3,556 (2,757) 16,406
-------- ------- -------
Net worth, end of year $130,471 115,664 107,653
======== ======= =======
</TABLE>
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 guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific 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 minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets. As of December 31, 1997, the Bank meets
all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the following table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
16
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) Net Worth, Continued
- -------------------------
The Bank's actual capital amounts and ratios are presented in the following
table (in thousands):
<TABLE>
<CAPTION>
To Be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
---------------- --------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total capital to
risk-weighted assets $134,920 21.81% $49,490 8.00% $61,863 10.00%
Tier 1 capital to
risk-weighted assets 127,999 20.69 24,745 4.00 37,118 6.00
Tier 1 capital to
average assets 127,999 10.96 35,050 3.00 58,416 5.00
As of December 31, 1996:
Total capital to risk-
weighted assets 123,229 22.84 43,160 8.00 53,950 10.00
Tier 1 capital to
risk-weighted assets 116,690 21.63 21,580 4.00 32,370 6.00
Tier 1 capital to
average assets 116,690 10.77 32,492 3.00 54,154 5.00
</TABLE>
17
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Income Taxes
- -----------------
Total income taxes in 1997, 1996 and 1995 were allocated as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Income from operations $6,259 6,278 5,144
Net worth, for unrealized gain/loss
on securities available for sale 2,472 (1,917) 10,028
====== ====== ======
</TABLE>
The components of income taxes attributable to income from operations in
1997, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $5,858 5,640 4,353
State 725 1,025 1,044
------ ----- -----
6,583 6,665 5,397
------ ----- -----
Deferred:
Federal (312) (387) (253)
State (12) - -
------ ----- -----
(324) (387) (253)
------ ----- -----
$6,259 6,278 5,144
====== ===== =====
</TABLE>
Income tax expense attributable to income from operations in 1997, 1996 and
1995 differs from the expected tax expense (computed by applying the
Federal corporate tax rate of 35% to income before income taxes) as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------ ------
<S> <C> <C> <C>
Expected tax expense $6,129 5,966 5,274
Increase (decrease) attributable to:
State income taxes, net of Federal benefit 471 666 679
Dividends received deduction (375) (434) (436)
Non-taxable interest income (34) (68) (386)
Increase in valuation allowance for deferred
tax assets 84 264 44
Other (16) (116) (31)
------ ----- -----
$6,259 6,278 5,144
====== ===== =====
</TABLE>
18
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Income Taxes, Continued
- ----------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Financial reporting allowance for loan losses $ 2,838 2,681
Deferred compensation 759 576
Post-retirement benefit obligation 678 638
Losses on investments in affiliates 535 490
Net unrealized loss on securities available for sale - 713
Other 659 659
------- ------
Total gross deferred tax assets 5,469 5,757
Valuation allowance (1,386) (1,302)
------- ------
Net deferred tax assets 4,083 4,455
------- ------
Deferred tax liabilities:
Tax allowance for loan losses, in excess of base
year amount (1,905) (1,790)
Net unrealized gain on securities available for sale (1,759) -
Prepaid pension costs (282) (301)
Other (81) (160)
------- ------
Total gross deferred tax liabilities (4,027) (2,251)
------- ------
Net deferred tax asset $ 56 2,204
======= ======
</TABLE>
19
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10) Income Taxes, Continued
- ----------------------------
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, availability
of operating loss carrybacks, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income, the opportunity for net operating loss
carrybacks, and projections for future taxable income over the periods
which deferred tax assets are deductible, management believes it is more
likely than not the Bank will realize the benefits of these deductible
differences, net of the existing valuation allowance, at December 31, 1997.
At December 31, 1997, net worth includes approximately $11.1 million
representing bad debt deductions taken under the provisions of the Internal
Revenue Code. Federal legislation repealed this provision of the Tax Code
thereby requiring the Bank to recapture $4.2 million in additions to the
tax bad debt reserve for periods after the 1987 base year. At December 31,
1997, the deferred tax liability related to the tax allowance for loan
losses in excess of the base year amount includes $1.5 million of Federal
income taxes which the Bank will repay over tax years 1998 through 2003.
20
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Benefit Plans
- ------------------
Pension Plan
------------
The funded status of the Bank's pension plan and the amounts recognized in
the financial statements as of December 31, 1997 and 1996 follow (in
thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 5,172 4,174
Non-vested 251 467
------- ------
Total accumulated benefit obligation $ 5,423 4,641
======= ======
Projected benefit obligation for service rendered to date 6,936 6,084
Plan assets at fair value 9,195 7,602
------- ------
Plan assets in excess of projected benefit obligation 2,259 1,518
Unrecognized net asset being recognized over 10 years (60) (122)
Unrecognized net gain (1,653) (799)
Prior service cost not yet recognized in net periodic
pension costs 10 14
------- ------
Prepaid pension costs, included in other assets $ 556 611
======= ======
</TABLE>
Net pension cost in 1997, 1996, and 1995 is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Service cost, benefits earned during the year $ 383 340 277
Interest cost on projected benefit obligation 452 422 385
Actual return on plan assets (1,698) (949) (1,133)
Net amortization and deferral 1,023 366 640
------- ----- ------
Net periodic pension cost $ 160 179 169
======= ===== ======
</TABLE>
21
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Benefit Plans, Continued
- -----------------------------
The principal actuarial assumptions used in 1997, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.25% 7.75% 7.50%
Expected long-term rate of return on assets 8.00 8.00 8.00
Assumed rate of future compensation increase 5.00 5.50 5.50
==== ==== ====
</TABLE>
The plan assets are in mutual funds consisting primarily of listed stocks and
bonds, government securities and cash equivalents.
401(k) Plan
-----------
All employees are also eligible to participate in a Bank sponsored 401(k)
plan. Participants may make contributions to the Plan in the form of
salary reductions of up to 15% of their eligible compensation subject to
the Internal Revenue Code limit. The Bank contributes an amount to the
Plan equal to 50% of employee contributions, up to a maximum of 6% of the
employee's eligible compensation. The Bank's contribution was $196,000,
$169,000 and $143,000 in 1997, 1996 and 1995, respectively.
Other Post-retirement Benefits
------------------------------
In addition to providing pension benefits, the Bank provides post-retirement
health care and life insurance benefits for substantially all full-time
employees and their beneficiaries (and dependents) if they reach normal
retirement age while working for the Bank.
The components of net periodic post-retirement benefit cost for the years
ended December 31, 1997, 1996, and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 64 64 49
Interest cost 99 105 101
Net amortization and deferral (11) - -
----- ---- ----
Total cost $ 152 169 150
===== ==== ====
</TABLE>
22
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11) Benefit Plans, Continued
- -----------------------------
The accumulated post-retirement benefit obligation recognized as of December
31, 1997 and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Fully eligible active participants $ 86 45
Active participants not yet eligible 559 427
Retirees 963 798
Unrecognized net gain 46 285
------ -----
Total accumulated post- retirement benefit
obligation,included in other liabilities $1,654 1,555
====== =====
</TABLE>
The post-retirement benefit obligation was determined using a discount rate
of 7.25% for 1997 and 8.0% for 1996. The assumed health care cost trend
rate used in measuring the accumulated post-retirement benefit obligation
initially ranged from 6.0% to 15.0% in 1998, depending on the specific
plan, and was decreased to 5.0% in the year 2003 and thereafter, over the
projected payout of benefits. The health care cost trend rate assumption
can have a significant effect on the amounts reported. If the health care
cost trend rate were increased one percent, the accumulated post-retirement
benefit obligation as of December 31, 1997 would have increased by 4.1%,
and the aggregate of service and interest cost would increase by 1.4%.
However, the plan limits the increase in the Bank's annual contributions to
the plan for most participants to the increase in base compensation for
active employees.
Other Plans
-----------
The Bank also sponsors two non-qualified compensation plans, one for officers
and one for employees. Awards are payable if certain earnings and
performance objectives are met. Awards under these plans were $1,153,000,
$1,202,000 and $1,173,000 in 1997, 1996 and 1995, respectively.
The Bank also maintains a supplemental benefit plan for certain executive
officers that is funded by the Bank through life insurance contracts.
23
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Fair Value of Financial Instruments
- -----------------------------------------
The carrying value and estimated fair value of the Bank's financial
instruments, all of which are non-trading, are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
--------------------------
Carrying Estimated fair
value value
----- -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 36,613 36,613
Securities available for sale 449,281 449,281
Securities held to maturity 17,000 17,000
Loans 635,396 646,988
Accrued interest receivable 7,085 7,085
Federal Home Loan Bank stock 6,392 6,392
Financial liabilities:
Deposits $ 986,975 989,550
Mortgagors' payments held in escrow 8,746 8,746
Borrowed funds 33,717 33,917
Accrued interest payable 615 615
Unrecognized financial instruments:
Commitments to extend credit $ 44,152 44,152
December 31, 1996
--------------------------
Carrying Estimated fair
value value
----- -----
Financial assets:
Cash and cash equivalents $ 16,219 16,219
Securities available for sale 409,735 409,735
Securities held to maturity 38,000 38,000
Loans 598,486 604,000
Accrued interest receivable 6,348 6,348
Federal Home Loan Bank stock 5,394 5,394
Financial liabilities:
Deposits $ 920,072 923,796
Mortgagors' payments held in escrow 8,773 8,773
Borrowed funds 32,008 31,863
Accrued interest payable 330 330
Unrecognized financial instruments:
Commitments to extend credit $ 34,193 34,193
</TABLE>
24
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Fair Value of Financial Instruments, Continued
- ----------------------------------------------------
Fair value estimates are based on existing on and off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in these
estimates. Fair value estimates, methods, and assumptions are set forth
below for each type of financial instrument.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument,
including judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Cash and Cash Equivalents
-------------------------
The carrying value approximates the fair value because the instruments mature
in 90 days or less.
Securities
----------
The fair values are estimated based on quoted market prices supplied by the
Bank's custody agent and investment broker.
Loans
-----
Residential revolving home equity and personal and commercial open ended
lines of credit reprice as the prime rate changes. Therefore, the carrying
values of such loans, totalling $16.1 million and $14.0 million at December
31, 1997 and 1996, respectively, approximate their fair value.
The fair value of fixed-rate performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using the Bank's
current origination rates. The estimate of maturity is based on the Bank's
contractual cash flows adjusted for prepayment estimates based on current
economic and lending conditions. Fair value for significant nonperforming
loans is based on carrying value which does not exceed recent external
appraisals of any underlying collateral.
25
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) Fair Value of Financial Instruments, Continued
- ---------------------------------------------------
Deposits
--------
The fair value of deposits with no stated maturity, such as savings, money
market, checking, as well as mortgagors' payments held in escrow, is equal
to the amount payable on demand as of December 31, 1997 and 1996. The fair
value of certificates of deposit is based on the discounted value of
contractual cash flows, using rates currently offered for deposits of
similar remaining maturities.
Borrowed Funds
--------------
The fair value of the Bank's borrowed funds is calculated by discounting
scheduled cash flows through the estimated maturity using current market
rates.
Other Assets and Liabilities
----------------------------
The fair value of the Bank's accrued interest receivable on loans and
investments and accrued interest payable to depositors approximates the
carrying value because all interest is receivable or payable in 90 to 120
days.
Commitments to Extend Credit
----------------------------
The fair value of the Bank's commitments to extend credit approximates the
notional amount of the agreements because of the short-term (90 to 120
days) commitment period or because they reprice as market rates change.
26
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) Plan of Reorganization and Stock Issuance
- ----------------------------------------------
On September 15, 1997, the Board of Trustees of LSB unanimously adopted a
Plan of Reorganization (the Plan) whereby LSB will be reorganized into a
New York chartered two-tiered mutual holding company.
The Reorganization will be accomplished in the following manner: (i) LSB
will organize an interim stock savings bank as a wholly-owned subsidiary
(Interim One); (ii) Interim One will organize an interim stock savings bank
as a wholly-owned subsidiary (Interim Two); (iii) Interim One will organize
Niagara Bancorp, Inc., (the Company) as a wholly-owned subsidiary; (iv) LSB
will exchange its charter for a New York stock savings bank charter to
become the Stock Bank and Interim One will exchange its charter for a New
York mutual holding company charter to become the Mutual Holding Company
("MHC"); (v) simultaneously with step (iv), Interim Two will merge with and
into the Stock Bank with the Stock Bank as the resulting institution; (vi)
all of the initially issued stock of the Stock Bank will be transferred to
the MHC in exchange for membership interests in the MHC; and (vii) the MHC
will contribute the capital stock of the Stock Bank to the Company, and the
Stock Bank will become a wholly-owned subsidiary of the Company.
Contemporaneously with the Reorganization, the Company will offer for sale
in the stock offering shares of common stock representing the pro forma
market value of the Company and the Bank. Each savings account of LSB at
the time of Reorganization will become a savings account in the newly-
formed bank in the same amount and upon the same terms and conditions,
except the holder of each such deposit account will have liquidation rights
with respect to the MHC rather than the Bank.
LSB has applied to the Federal Reserve Board, the New York State Banking
Department, the FDIC and the SEC for approval of transactions contemplated
by the Plan. The Plan authorizes the Company to offer stock in one or more
stock offerings up to a maximum of 49% of the issued and outstanding shares
of its common stock. The common stock will be offered on a priority basis
to depositors, employee benefit plans of LSB, certain other eligible
subscribers, the community and a charitable foundation to be established
pursuant to the Plan.
The Company proposes to fund the foundation by contributing a number of
authorized but unissued shares of common stock or grants of cash,
securities or other assets to the foundation, immediately following the
conversion. Such contribution, once made, will not be recoverable by the
Company or the Bank. The Company will recognize expense equal to the fair
value of the stock, cash, securities or other assets in the quarter in
which the contribution occurs, which is expected to be the first or second
quarter of 1998. Such expense will reduce earnings and have a material
impact on the Company's earnings for such quarter and for 1998.
The costs of the Reorganization and offering will be deferred and reduce the
proceeds from the shares sold in the offering. If the Reorganization and
offering are not completed, all costs will be charged to expense.
27
<PAGE>
Exhibit 99.2
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
- ----------------------------------
Total assets......................... $1,179,026 $1,093,358 $994,291 $916,185 $914,910
Loans, net........................... 635,396 598,486 535,971 474,191 421,061
Securities available for sale (1):
Mortgage related securities......... 272,955 284,860 261,543 273,280 300,582
Other securities.................... 176,326 124,875 79,941 65,733 67,903
Securities held to maturity.......... 17,000 38,000 46,700 43,838 51,927
Deposits............................. 988,875 920,072 861,065 819,690 812,939
Other borrowed funds................. 33,717 32,008 -- -- --
Net worth............................ 130,471 115,664 107,653 81,322 87,195
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
- -------------------------
Interest income...................... $ 82,363 $ 75,062 $ 69,856 $ 63,144 $ 61,681
Interest expense..................... 44,978 40,655 39,034(2) 31,754 32,597
---------- ---------- --------- -------- --------
Net interest income................ 37,385 34,407 30,822 31,390 29,084
Provision for loan losses............ 1,493 2,187 1,016 948 1,522
---------- ---------- --------- -------- --------
Net interest income after
provision for loan losses.......... 35,892 32,220 29,806 30,442 27,562
---------- ---------- --------- -------- --------
Fees and service charges............. 4,232 3,495 2,692 2,283 2,293
Net gain (loss) on sale of
securities available for sale...... 910 576 1,477 (849) 3,601
Other operating income............... 1,654 1,681 1,237 952 1,149
---------- ---------- --------- -------- --------
Total operating income............... 6,796 5,752 5,406 2,386 7,043
---------- ---------- --------- -------- --------
Operating and other expenses......... 25,178 20,926 20,143 18,399 16,666
---------- ---------- --------- -------- --------
Income before taxes and cumulative
effect of change in accounting
principle.......................... 17,510 17,046 15,069 14,429 17,939
Income taxes......................... 6,259 6,278 5,144 4,704 6,595
Cumulative effect of change in
accounting principle............... -- -- -- (924)(3) 129(4)
---------- ---------- --------- -------- --------
Net income........................... $ 11,251 $ 10,768 $ 9,925 $ 8,801 $ 11,473
========== ========== ========= ======== ========
</TABLE>
___________________________
(1) The Bank adopted the provisions set forth in SFAS No. 115 on January 1,
1994, which requires securities available for sale to be carried at fair
value. At December 31, 1993 securities held for sale were carried at
amortized cost.
(2) Includes $1.25 million paid as a special interest payment in 1995, which was
paid on a prorata basis on all interest-bearing savings, NOW, money market
and certificate of deposit accounts in recognition of the Bank's 125th
anniversary.
(3) Cumulative effect of change in accounting for postretirement health care
and life insurance benefits.
(4) Cumulative effect of change in accounting for income taxes.
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA (1):
- ---------------------------------------------
PERFORMANCE RATIOS:
Return on assets (ratio of net
income to average total assets).......... 0.98% 1.03% 1.04% 0.95% 1.31%
Return on net worth (ratio
of net income to average net worth)...... 9.20 9.84 10.25 10.41 14.01
Interest rate spread information:
Average during period..................... 2.83 2.82 2.88 3.07 3.10
End of period............................. 2.87 3.03 2.83 3.18 3.04
Net interest margin (2)................... 3.37 3.38 3.44 3.50 3.49
Operating income to
average total assets (3).................. 0.51 0.50 0.41 0.35 0.40
Operating expenses to
average total assets...................... 2.20 2.01 2.10 1.99 1.92
Average interest-earning assets
to average interest-bearing liabilities.. 113.42 113.93 113.92 112.30 109.95
ASSET QUALITY RATIOS:
Non-performing loans to total loans........ 0.47% 0.78% 0.74% 0.89% 1.10%
Non-performing assets to total assets...... 0.28 0.48 0.97 0.56 0.69
Allowance for loan losses to non-
performing loans.......................... 227.14 138.60 119.01 99.29 88.61
Allowance for loan losses to total loans... 1.08 1.09 0.88 0.88 0.96
Net charge-offs during the period
to average loans outstanding during the
period.................................... 0.18% 0.06% 0.10% 0.17% 0.05%
CAPITAL RATIOS:
Net worth to total assets.................. 11.07% 10.58% 10.92% 8.88% 9.53%
Average net worth to average assets........ 10.70 10.49 10.11 9.17 9.37
OTHER DATA:
Number of full-service offices............. 15 13 11 10 10
Number of deposit accounts................. 144,415 129,087 122,464 114,464 107,242
Loans serviced for others.................. $ 152.5 $ 129.0 $ 110.4 $ 85.1 $ 69.5
(in millions)
Residential loan originations.............. $ 108.2 $ 110.9 $ 107.6 $ 84.1 $ 134.5
(in millions)
Full time equivalent employees............. 356.5 325.0 276.5 243.5 238.5
</TABLE>
___________________________
(1) Averages presented are monthly averages.
(2) Net interest income divided by average interest earning assets.
(3) Operating income excludes net gain(loss) on sale of securities available
for sale.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
consolidated financial statements and related notes. The Bank's results of
operations are dependent primarily on net interest income, which is the
difference between the income earned on our loan and securities portfolios and
our cost of funds, consisting of the interest paid on deposits and borrowings.
Results of operations are also affected by the provision for loan losses,
securities and loan sale activities, loan servicing activities and service
charges and fees collected on our deposit accounts. Our non-interest expense
primarily consists of salaries and employee benefits, occupancy and equipment
expense, federal deposit insurance premiums, marketing expenses and other
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets increased by $85.7 million, or 7.8%, from $1.093 billion at
December 31, 1996 to $1.179 billion at December 31, 1997. The growth in assets
is primarily attributable to a $30.5 million increase in investment securities
in the available for sale and held to maturity portfolios, a $44.1 million
increase in real estate loans, and a $15.0 million increase in securities
purchased under resale agreements. Asset growth was funded through deposit
inflows resulting from the continued expansion of the Bank's branch network. The
asset growth was partially offset by an $11.9 million decrease in mortgage
related securities available for sale and a $7.6 million decrease in consumer
loans resulting from a $12.5 million early repayment of the automobile lease
portfolio. Debt, equity and asset-backed investment securities in the available
for sale portfolio increased $51.5 million from December 31, 1996 to December
31, 1997. Substantially all of the increase in these securities was attributable
to purchases of one- to three-year weighted average life, fixed-rate corporate
bonds and asset-backed securities, as well as common stock of corporate issuers.
While the rates earned on these securities is lower than rates earned on longer-
term securities, the Bank's strategy was to shorten its interest rate risk
exposure and obtain more consistent cash flows in this low rate, flat yield
curve environment. Partially offsetting these increases in investment securities
were $21.0 million of maturities in money market preferred stock in the held to
maturity portfolio with the Bank reinvesting these liquid assets into securities
purchased under resale agreements that earned slightly higher yields. Real
estate loans increased from $524.4 million at December 31, 1996 to $568.5
million at December 31, 1997, primarily due to increased one- to four-family,
bi-weekly residential mortgage loans, an enhanced home equity loan product, and
increased originations in commercial real estate loans as the Bank continued to
emphasize the expansion of real estate lending. Premises and equipment increased
by $9.1 million, or 68.5%, primarily due to the construction of a new building
which was occupied in August 1997 and provides office space for administrative
functions and lending departments.
At December 31, 1997, the Bank's allowance for loan losses as a
percentage of total non-performing loans improved to 227.1%, compared to 138.6%
at December 31, 1996, due to a slight increase in the allowance as well as a
decrease in non-performing loans from $4.7 million at December 31, 1996 to
$3.0 million at December 31, 1997. This decrease was attributable to repayments,
writedowns to net realizable values and a settlement with a bankruptcy trustee.
At December 31, 1997, the Bank's allowance for loan losses as a percentage of
total loans was 1.08% compared to 1.09% at December 31, 1996. While management
uses available information to recognize losses on loans, future loan loss
provisions may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses and may require the
Bank to recognize additional provisions based on their judgement of information
available to them at the time of their examination.
Total deposits at December 31, 1997 were $986.9 million, an increase of
$66.8 million, or 7.3%, compared to $920.1 million at December 31, 1996. The
increase was primarily due to the introduction of a new money market deposit
account, which from a rate perspective competes against mutual fund money market
accounts, and grew to $47.6 million by December 31, 1997. The Bank's
certificates of deposit grew from $484.7 million at December 31, 1996 to
$502.4 million at December 31, 1997. The increase in certificates of deposit was
primarily attributable to the Bank's strategy of offering introductory rates on
certain certificates of deposit whenever a new branch is opened, as was the case
in both
<PAGE>
March and May of 1997. The Bank's borrowed funds increased $1.7 million, or
5.3%, from $32.0 million at December 31, 1996 to $33.7 million at December 31,
1997. In 1997, the Bank obtained two $5.0 million, fifteen year, amortizing FHLB
borrowings, one in July 1997 at a rate of 6.59% and one in December 1997 at a
rate of 6.37%. The increase in borrowed funds was offset by the repayment of a
short-term FHLB advance of $7.0 million, which matured in early January. Other
borrowings, primarily in the form of reverse repurchase agreements (repos),
declined $1.2 million. These borrowings are used to fund the Bank's
borrowing/reinvestment program which takes advantage of low rate short-term
borrowings, typically three- to six- month repos, and invests in one-to two-year
securities, primarily U.S. Treasury securities, to earn additional net interest
income. The relatively flat yield curve in 1997 made it less attractive to enter
into more borrowing/reinvestment transactions due to the very low interest rate
spreads the Bank could earn.
Net worth increased to $130.5 million at December 31, 1997 from
$115.7 million at December 31, 1996. This increase was the result of net income
of $11.3 million and a $3.5 million net unrealized gain on available for sale
securities due to the lower market interest rates at December 31, 1997 which
positively affected the market value of the Bank's available for sale securities
portfolio.
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Bank
for the years ended December 31, 1997, 1996 and 1995. For the periods indicated,
the total dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average interest-
bearing liabilities, is expressed both in dollars and rates. No tax equivalent
adjustments were made. The average balance for federal funds sold and securities
purchased under resale agreements is an average daily balance, while all other
average balances are monthly averages. Non-accruing loans have been excluded
from the yield calculations in this table.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
- -------------------------------------- ----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and securities
purchased under resale agreements... $ 19,123 $ 1,079 5.64% $ 24,057 $ 1,293 5.37% $ 27,434 $ 1,647 6.00%
Investment securities(1)............. 180,759 10,295 5.70 141,865 7,573 5.34 115,303 6,584 5.71
Mortgage related securities(1)....... 283,873 18,972 6.68 281,843 18,547 6.58 275,448 17,939 6.51
Loans (2)............................ 617,356 51,569 8.35 564,049 47,285 8.38 506,600 43,348 8.56
Other interest-earning assets (3).... 7,086 448 6.32 5,981 364 6.09 7,720 338 4.38
---------- ------- ---------- ------- -------- -------
Total interest-earning assets..... 1,108,197 $82,363 7.43% 1,017,795 $75,062 7.37% 932,505 $69,856 7.49%
---------- ------- ---------- ------- -------- -------
Allowance for loan losses............. (6,495) (5,701) (4,436)
Other noninterest-earning assets (4).. 45,336 34,894 32,548
---------- ---------- --------
Total assets....................... $1,147,038 $1,046,988 $960,617
========== ========== ========
Interest-bearing liabilities:
Savings accounts (5)................. $ 301,932 $10,124 3.35% $ 307,530 $10,353 3.37% $326,125 $11,154 3.42%
Interest-bearing checking (5)........ 129,303 3,681 2.85 105,717 2,871 2.72 96,551 2,909 3.01
Certificates of deposit (5).......... 508,964 29,426 5.78 455,230 26,432 5.81 386,648 23,546 6.09
Mortgagor's payments held in escrow.. 7,959 154 1.93 8,174 158 1.93 9,222 174 1.89
Other borrowed funds................. 28,878 1,593 5.52 16,674 841 5.04 - - -
---------- ------- ---------- ------- -------- -------
Total interest-bearing liabilities. 977,036 $44,978 4.60% 893,325 $40,655 4.55% 818,546 $37,783 4.61%
---------- ------- ---------- ------- -------- -------
Noninterest-bearing demand deposits... 27,497 26,248 26,658
Other noninterest-bearing liabilities. 19,660 17,873 15,332
---------- ---------- --------
Total liabilities.................. 1,024,193 937,446 862,536
Net worth............................. 122,845 109,542 98,081
---------- ---------- --------
Total liabilities and net worth.... $1,147,038 $1,046,988 $960,617
========== ========== ========
Net interest income................... $37,385 $34,407 $32,073
======= ======= =======
Net interest rate spread.............. 2.83% 2.82% 2.88%
====== ====== ======
Net earning assets.................... $ 131,161 $ 124,470 $113,959
========== ========== ========
Net interest income as a percentage
of average interest-earning assets... 3.37% 3.38% 3.44%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities.......................... 113.42% 113.93% 113.92%
====== ====== ======
</TABLE>
___________________________
(1) Amounts shown are amortized cost.
(2) Net of deferred loan fees and expenses, loan discounts, loans in process
and non-accruing loans.
(3) Includes Federal Home Loan Bank stock and interest-bearing demand accounts.
(4) Includes unrealized gains/(losses) on securities available for sale.
(5) Excludes $1.25 million paid for a special interest payment in 1995 which
was approved by the Bank's board of trustees and paid on a pro rata basis
on all interest-bearing savings, NOW, money market, and certificates of
deposit accounts in recognition of the Bank's 125th anniversary.
<PAGE>
Rate/Volume Analysis
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and interest expense during
the periods indicated. Information is provided in each category with respect to
: (i) changes attributable to changes in volume (changes in volume multiplied by
prior rate); (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume); and (iii) the net change. The changes attributable
to the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995 1995 VS. 1994
------------------------------ ------------------------------ ------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE) INCREASE/(DECREASE)
DUE TO TOTAL DUE TO TOTAL DUE TO TOTAL
------------------ INCREASE ------------------ INCREASE ------------------ INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
-------- ------ ---------- -------- ------- ---------- -------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
securities purchased under
resale agreements............. $ (277) $ 63 $ (214) $ (190) $ (164) $ (354) $ 332 $ 467 $ 799
Investment securities.......... 2,187 535 2,722 1,441 (452) 989 (472) 738 266
Mortgage related securities.... 134 291 425 419 189 608 (1,698) 1,363 (335)
Loans.......................... 4,454 (170) 4,284 4,830 (893) 3,937 4,925 719 5,644
Other interest-earning
assets........................ 69 15 84 (88) 114 26 338 0 338
------ ----- ------ ------ ------- ------ ------- ------ -------
Total interest-earning
assets..................... 6,567 734 7,301 6,412 (1,206) 5,206 3,425 3,287 6,712
====== ===== ====== ====== ======= ====== ======= ====== =======
Interest-bearing liabilities:
Savings accounts............... (188) (41) (229) (628) (173) (801) (2,973) 1,258 (1,715)
Interest-bearing checking...... 666 144 810 263 (301) (38) 296 330 626
Certificates of deposit........ 3,107 (113) 2,994 4,022 (1,136) 2,886 5,969 1,134 7,103
Mortgagors' payments held
in escrow..................... (4) 0 (4) (20) 4 (16) 14 1 15
Other borrowed funds........... 667 85 752 841 - 841 - - 0
------ ----- ------ ------ ------- ------ ------- ------ -------
Total interest-bearing
liabilities................ $4,248 $ 75 $4,323 $4,478 $(1,606) $2,872 $ 3,306 $2,723 $ 6,029
====== ===== ====== ====== ======= ====== ======= ====== =======
Net interest income.............. $2,978 $2,334 $ 683
====== ====== =======
</TABLE>
Calculations for the above table exclude $1.25 million paid as a special
interest payment in 1995, which was paid on a pro rata basis on all interest-
bearing savings, NOW, money market and certificates of deposit accounts in
recognition of the Bank's 125th anniversary.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996.
General. The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on interest-
earning assets, consisting primarily of residential and commercial real estate
loans, consumer loans, securities available for sale and securities held to
maturity, and the interest paid on interest-bearing liabilities, consisting
primarily of deposits and other borrowed funds. Net interest income is a
function of the Bank's interest rate spread, which is the difference between the
average yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. The Bank's
earnings also are affected by its level of service charges and gains on sale of
loans and securities, as well as its level of operating and other expenses,
including salaries and employee benefits, occupancy and equipment costs, and
marketing and advertising costs.
Net income for the year ended December 31, 1997 increased by $483,000,
or 4.5%, from $10.8 million for the year ended December 31, 1996 to $11.3
million in 1997. The increase was due primarily to an increase in interest
income which resulted from an increase in the average balance of interest-
earning assets, as well as an increase in other operating income related to fees
and service charges on deposits, increased gains on the sale of securities
available for sale, and lower provisions for loan losses. The increases were
partially offset by increased interest expense which resulted primarily from an
increase in average interest-bearing liabilities and an increase in operating
and other expenses reflecting the expansion of the Bank's branch network.
<PAGE>
Interest Income. Interest income increased by $7.3 million, or 9.7%, to
$82.4 million for the year ended December 31, 1997 from $75.1 million for the
year ended December 31, 1996. The increase was primarily due to a $4.3 million
increase in income from loans, a $2.7 million increase in income from investment
securities, and a $425,000 increase in income from mortgage related securities.
These increases were partially offset by a $214,000 decrease in income from
federal funds sold and securities purchased under resale agreements. The
increase in income from loans was attributable to a $53.4 million increase in
the average balance of loans to $617.4 million from $564.0 million, partially
offset by a 3 basis point decrease in the average yield on loans from 8.38% to
8.35%. The continued origination and portfolio growth of the Bank's one- to
four-family real estate loans was primarily responsible for the loan growth.
The increase in income from investment securities was attributable to a $38.9
million increase in the average balance of investment securities to $180.8
million from $141.9 million, and a 36 basis point increase in the average yield
on investment securities to 5.70% from 5.34%. The Bank invested in U.S.
Treasury securities and asset-backed securities during 1997 to take advantage of
their short-term structure and higher yields which increased the Bank's overall
yield on its investment securities. The increase in income from mortgage
related securities was attributable to a $2.1 million increase in the average
balance of mortgage related securities. During the year as interest rates
fluctuated the Bank took the opportunity to invest in CMO's, 5-year and 7-year
balloons, and 30-year mortgage related securities to obtain yields between 6.47%
and 7.40% and increased the Bank's overall yield on its mortgage related
securities. The decrease in income from federal funds sold and securities
purchased under resale agreements was partially due to a $4.9 million decrease
in the average balance of these short-term investments resulting from the Bank's
redeployment of excess funds into loans and investment securities. In 1997, the
Bank began entering into higher yielding securities purchased under resale
agreements with various large securities dealers which grew to $15.0 million by
year end. The average yield on federal funds sold and securities purchased
under resale agreements increased 27 basis points from 5.37% in 1996 to 5.64%
in 1997.
Interest Expense. Interest expense increased by $4.3 million, or 10.6%,
to $45.0 million for the year ended December 31, 1997 from $40.7 million for the
year ended December 31, 1996. This increase was the result of an $83.7 million
increase in the average balance of interest-bearing liabilities in the 1997
period compared to the 1996 period, and a 5 basis point increase in the average
rate paid on such liabilities over the same period. In particular, the increase
resulted primarily from a $3.0 million increase in interest expense on
certificates of deposit, a $752,000 increase in interest expense on other
borrowings, and a $810,000 increase in interest expense on interest-bearing
checking accounts. These increases were partially offset by a $229,000 decrease
in interest expense on savings accounts. The increase in interest expense
attributable to certificates of deposit resulted from a $53.8 million increase
in the average balance of certificates of deposit to $509.0 million in 1997 from
$455.2 million in 1996, which was partially offset by a 3 basis point decrease
in the average cost of certificates of deposit from 5.81% to 5.78%. The rate
decline reflects the slightly lower interest rate environment during 1997, as
well as the results of the Bank closely monitoring maturing certificates of
deposit with high rates and promoting alternative certificates of deposit to
lower the overall rate paid on these accounts. Two new branch openings in early
1997 and one new branch opening in late 1996 contributed to the large increase
in average certificates of deposit balances. The increase in interest expense
attributable to other borrowings resulted from a $12.2 million increase in the
average balance of other borrowings to $28.9 million in 1997 from $16.7 million
in 1996. The Bank continues to implement a borrowing/reinvestment program which
utilizes reverse repurchase agreements to fund investments in securities as long
as such agreements are a cost effective source of funds. Also contributing to
the increase in interest expense on borrowings was a 48 basis point increase in
the average borrowing cost to 5.52% from 5.04% which resulted from borrowing
costs associated with FHLB advances that were obtained by the Bank in 1997.
However, as short-term interest rates increased and the yield curve flattened in
1997, the rates being paid on these borrowings increased and the spread earned
on the related investments began to narrow, thus reducing the attractiveness of
these transactions. The increase in interest expense attributable to interest-
bearing checking accounts resulted from a $23.6 million increase in the average
balance of interest-bearing checking accounts to $129.3 million in 1997 from
$105.7 million in 1996, and a 13 basis point increase in the average cost of
interest-bearing checking accounts to 2.85% from 2.72%. Contributing most
significantly to these increases was the introduction in June 1997 of a new
money market deposit account product that contributed $16.4 million of the total
increase in the average balance of interest-bearing checking accounts. The
decrease in interest expense attributable to savings accounts resulted from a
$5.6 million decrease in the average balance of total savings accounts to
$301.9 million from $307.5 million, and a 2 basis point decrease in the average
cost of savings accounts to 3.35% from 3.37%.
<PAGE>
Provision for Loan Losses. The Bank establishes provisions for loan
losses, which are charged to operations, in order to maintain the allowance for
loan losses at a level sufficient to absorb future charge-offs of loans deemed
uncollectible. In determining the appropriate level of the allowance for loan
losses, management considers past and anticipated loss experience, evaluations
of real estate collateral, current and anticipated economic conditions, volume
and type of lending and the levels of non-performing and other classified loans.
The amount of the allowance is based on estimates and the ultimate losses may
vary from such estimates. Management of the Bank assesses the allowance for
loan losses on a quarterly basis.
The Bank provided $1.5 million and $2.2 million in loan loss provisions
during the years ended December 31, 1997 and December 31, 1996, respectively.
During 1996, management provided $800,000 for potential losses on approximately
$1.8 million of loans to a borrower that had filed for bankruptcy protection.
The Bank charged-off $496,000 of this loan during 1997 after a settlement was
reached with the bankruptcy trustee. This amount contributed to the increase in
the net charge-offs to average loans outstanding to .18% from .06% during 1997
and 1996, respectively.
Operating Income. Operating income includes fee income and service
charges and gains from the sale of loans and securities. Total operating income
was $6.8 million for the year ended December 31, 1997, a $1.0 million, or 18.2%
increase from $5.8 million for the year ended December 31, 1996. The primary
reasons for the improvement were net gains of $910,000 on the sale of securities
available for sale during 1997 compared to $576,000 in 1996, reflecting the
Bank's desire to realize some of the gains, primarily on marketable equity
securities, which occurred in 1997 as a result of the strong performance of the
stock market. Bank service charges and fees on deposit accounts increased
$617,000 for the year ended December 31, 1997 to $3.1 million from $2.5 million
for the year ended December 31, 1996. This increase was primarily the result of
increased fee income of $212,000 on the Bank's debit card which was introduced
in 1995 and continues to see significant growth in customer acceptance and
usage. In addition, service charges and charges for insufficient funds on
checking accounts increased $363,000 from December 31, 1996 to December 31, 1997
as a result of the Bank's continued promotion of its low fee checking account
products. Loan origination and servicing fees increased $120,000 for the year
ended December 31, 1997 to $1.1 million from $1.0 million for 1996.
Operating and Other Expenses. Operating and other expenses increased by
$4.3 million, or 20.3%, to $25.2 million for the year ended December 31, 1997
from $20.9 million for the year ended December 31, 1996. The increase was due to
a $1.7 million increase in other expenses, a $1.6 million increase in salaries
and employee benefits, a $571,000 increase in occupancy and equipment, a
$213,000 increase in network interchange fees, a $119,000 increase in deposit
insurance and a $43,000 increase in marketing and advertising.
Other expenses increased to $5.6 million for the year ended December 31,
1997 from $3.9 million for the year ended December 31, 1996. The December 31,
1996 total reflects the benefit recognized for the reversal of a $600,000
provision for possible loss on demand deposit balances held at Nationar, Inc.
("Nationar"), which had originally been made in 1995. (See the comparison of
operating results for fiscal years 1996 and 1995). Without this reversal, the
net increase in other expenses would have been $1.1 million, which includes
professional fees associated with the implementation of various tax planning
strategies, additional charitable contributions, additional costs incurred as a
result of the growth in the number of checking accounts, and expenses associated
with the anticipated settlement of a real estate tax escrow lawsuit. Salaries
and employee benefits increased to $13.1 million for the year ended December 31,
1997 from $11.5 million for 1996, as a result of an additional 31.5 full time
equivalent employees hired at the four new branch locations opened by the Bank
since August of 1996 as well as normal merit and promotional salary increases.
The depreciation and building expenses associated with these new branches as
well as with the Bank's new administrative center contributed to the increase in
occupancy and equipment to $3.7 million for the year ended December 31, 1997
from $3.2 million for 1996. Included in occupancy and equipment is $573,000 of
depreciation on the furniture and equipment and leasehold improvements for the
new facilities and $327,000 of building-related operating expenses. Occupancy
and equipment also reflects approximately $95,000 of technology equipment
writedowns related to the Bank's continued upgrading of its technology,
communications and information systems, primarily personal computers and related
software. Network interchange fees increased to $1.2 million for the year ended
December 31, 1997 from $984,000 for 1996 reflecting the costs associated with
the continued growth in the number of customer transactions performed utilizing
the Bank's debit card product. Deposit insurance increased to $121,000 for the
year ended December 31, 1997 from $2,000 in 1996, resulting from the FDIC's
decision to raise the assessment for deposit insurance in 1997 to $0.013/per one
hundred dollars of deposits from the minimal assessment in 1996.
<PAGE>
Income Taxes. Income tax expense was $6.3 million for the years ended
December 31, 1997 and December 31, 1996. The effective tax rate decreased from
36.8% for 1996 to 35.8% for 1997 reflective of the implementation of various tax
planning strategies during the second half of 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
General. Net income for the year ended December 31, 1996 of
$10.8 million increased by $843,000, or 8.5%, from $9.9 million for the year
ended December 31, 1995. The increase was due primarily to an increase in
interest income which primarily resulted from an increase in the average balance
of interest-earning assets and an increase in other operating income related to
fees and service charges on deposits. The increases were partially offset by
increased interest expense which resulted primarily from an increase in average
interest-bearing liabilities, decreased gains on the sale of securities
available for sale, higher provisions for loan losses, increases in operating
and other expenses, and increased income taxes.
Interest Income. Interest income increased by $5.2 million, or 7.5%, to
$75.1 million in 1996 from $69.9 million in 1995, due to a $3.9 million increase
in income from loans, a $989,000 increase in income from investment securities,
and a $608,000 increase in income from mortgage related securities. These
increases were partially offset by a $354,000 decrease in income from federal
funds sold. The increase in income from loans was attributable to a $57.4
million increase in the average balance of loans to $564.0 million from $506.6
million, partially offset by an 18 basis point decrease in the average yield
from 8.56% to 8.38%. The origination and portfolio growth of the Bank's one- to
four-family real estate loans was responsible for over 64% of the total loan
growth. However, since interest rates decreased throughout 1995, refinancings
increased during the last quarter of 1995 and into early 1996 which lowered the
total portfolio yield in 1996. The increase in income from investment
securities was attributable to a $26.6 million increase in the average balance
of investment securities to $141.9 million from $115.3 million, partially offset
by a 37 basis point decrease in the average yield on investment securities to
5.34% from 5.71%. This decrease in yield resulted from high coupon municipal
bonds being called during the second half of 1995 as well as a decrease in the
yield on the Bank's asset-backed securities from 6.28% to 5.78% resulting from
the declining rate environment. The $989,000 increase in 1996 interest income
was the result of the development of a five year laddered portfolio of U.S.
Treasury securities and the start-up of the Bank's borrowing/reinvestment
program which was initiated in 1996 and mainly invested in two year U.S.
Treasury securities. The increase in income from mortgage related securities
was attributable to a $6.4 million increase in the average balance of mortgage
related securities to $281.8 million from $275.4 million, and a 7 basis point
increase in the average yield on mortgage related securities to 6.58% from
6.51%. The $608,000 increase in 1996 interest income is attributable to the
repositioning of the Bank's mortgage related securities in early 1996 to achieve
a higher yielding portfolio. The decrease in income from federal funds sold was
due to a $3.3 million decrease in the average balance of federal funds sold to
$24.1 million from $27.4 million, and a 63 basis point decrease in the yield on
the Bank's federal funds sold to 5.37% from 6.00%. This decrease was the result
of our continuing deployment of excess funds, mainly in investment securities.
Interest Expense. Interest expense increased by $1.7 million, or 4.2%,
to $40.7 million for the year ended December 31, 1996 from $39.0 million for the
year ended December 31, 1995. Interest expense for the year ended December 31,
1995 includes a special interest payment of $1.25 million paid in connection
with our 125th anniversary. Excluding this special interest payment, interest
expense increased by $2.9 million, or 7.6%, to $40.7 million from $37.8 million
for the prior year. Overall, the average balance of interest-bearing liabilities
increased by $74.8 million in 1996, while the average rate paid on these
liabilities decreased 6 basis points since year end 1995. In particular, this
increase resulted primarily from a $2.9 million increase in interest expense on
certificates of deposit, and an $841,000 increase in interest expense on other
borrowings. These were partially offset by an $801,000 decrease in interest
expense on savings accounts and a decrease of $38,000 in interest expense on
interest-bearing checking accounts. The increase in interest expense
attributable to certificates of deposit resulted from a $68.6 million increase
in the average balance of certificates of deposit to $455.2 million in 1996 from
$386.6 million in 1995 which was partially offset by a 28 basis point decrease
in the average cost of certificates of deposit to 5.81% from 6.09%. The Bank's
customers continued to move deposits from core savings accounts into
certificates of deposit as a result of the higher rates being paid on
certificates of deposit. The Bank benefitted from $19.0 million of matured 9% to
10% interest-bearing certificates of deposit which occurred in early 1996 and
helped to reduce the Bank's overall cost of funds. The increase in interest
expense on other borrowings was due to the Bank's average borrowings of
$16.7 million during 1996, as compared to no borrowings during 1995. The Bank's
first FHLB advance, a 5-year advance, was recorded in January 1996 when
<PAGE>
interest rates declined to their lowest point since late 1993. In addition, the
Bank initiated a short-term borrowing/reinvestment program during 1996 which
included borrowings with reverse repurchase agreements and corresponding
investments mainly in short-term U.S. Treasury securities. By year end 1996, the
Bank had averaged over $11.1 million in reverse repurchase agreements. The
decrease in interest expense attributable to savings accounts was due to an
$18.6 million decrease in the average balance of total savings accounts to
$307.5 million in 1996 from $326.1 million in 1995, and a 5 basis point decrease
in the average cost of savings accounts to 3.37% from 3.42%.
Provision for Loan Losses. The Bank's provision for loan losses
increased by $1.2 million, from $1.0 million for the year ended December 31,
1995 to $2.2 million for the year ended December 31, 1996. The increase in the
provision was due primarily to management's assessment of the potential losses
that ultimately would be recognized on the $1.8 million of loans to a borrower
that had filed for bankruptcy protection. The increase is also reflective of
management's objective to increase the allowance for loan losses as a percentage
of total loans due to the growth in the loan portfolios.
Operating Income. Total operating income was $5.8 million for the year
ended December 31, 1996, a $346,000, or 6.4%, increase from $5.4 million for the
year ended December 31, 1995. Banking service charges and fees on deposit
accounts increased $631,000 for the year ended December 31, 1996, from
$1.8 million for 1995 to $2.5 million for 1996. The increase was primarily
attributable to a $222,000 increase in fees charged for insufficient funds on
the Bank's checking accounts resulting from modifications to the Bank's
insufficient funds policy, $220,000 in additional revenue generated because of
the increased usage of the Bank's new debit card product, and $138,000 of
additional service charges received due to the growth in the Bank's interest-
bearing checking accounts. Loan origination and servicing fees increased
$172,000 for the year ended December 31, 1996, to $1.0 million from $855,000 for
1995, reflective of the Bank's increased loan origination activity.
Additionally, all other operating income increased $444,000, from $1.2 million
for 1995 to $1.7 million for 1996. This increase was primarily due to an
additional $218,000 of commissions received on increased sales of annuity
products during 1996. The 1995 amount also includes a $200,000 write-off charged
to operations in connection with the Bank's investments in real estate
development projects. These increases were partially offset by a $901,000
decline in net gains on the sale of securities available for sale from
$1.5 million during 1995 to $576,000 during 1996 due to the market driven
reduced sales opportunities in 1996.
Operating and Other Expenses. Operating and other expenses increased by
$783,000, or 3.9%, to $20.9 million for the year ended December 31, 1996 from
$20.1 million for the year ended December 31, 1995. The increase was due to a
$1.8 million increase in salaries and employee benefits, a $543,000 increase in
occupancy and equipment, a $377,000 increase in marketing and advertising and a
$107,000 increase in network interchange fees. These increases were partially
offset by a $981,000 decrease in deposit insurance and a $1.0 million decrease
in other expenses.
Salaries and employee benefits increased to $11.5 million for 1996 from
$9.7 million for 1995. Occupancy and equipment expenses increased to
$3.2 million in 1996 from $2.6 million for 1995. Both expense categories were
impacted by the opening of two new branch locations during 1996. Besides the
costs related to expansion, salaries and employee benefits and occupancy and
equipment reflects the first full year of operating costs related to the 1995
start up and implementation of the Bank's new item processing center and
telephone service center. The item processing center, designed to be the first
area bank to utilize imaging technology, was established to perform check
clearing and statement rendering functions previously outsourced to a third
party. The telephone service center was established to enhance the Bank's retail
delivery system by minimizing the number of telephone calls into the branches
thereby enabling branch personnel to focus on more personalized service and
cross selling opportunities to branch walk-in customers.
The increase in marketing and advertising, to $1.4 million for 1996 from
$978,000 for 1995, was attributable to the Bank's efforts to expand its
marketing coverage area to include localities where the Bank had opened new
branches, primarily in Erie County. The significant decrease in deposit
insurance, from $983,000 for 1995 to $2,000 for 1996, reflects the FDIC's
decision to lower the insurance premiums paid by BIF-insured institutions to the
legal minimum effective January 1, 1996. The Bank's "well capitalized" risk
classification allowed the Bank to pay the minimum annual assessment during
1996.
Other operating expenses decreased from $5.0 million for 1995 to
$3.9 million for 1996. The significant decrease was related to circumstances
involving the Bank's relationship with Nationar. On February 6, 1995, the
Superintendent of Banks for the State of New York seized Nationar, a checking-
clearing and trust company, placing it
<PAGE>
in receivership, and freezing all of its assets. The Bank and its Savings Bank
Life Insurance affiliate had $5.8 million of demand deposits at Nationar frozen
by this action. Since there were numerous uncertainties regarding the total
amount of claims filed against Nationar, the priorities thereof, the proceeds
remaining after disposition of assets and the ultimate cost of the liquidation,
management believed there to be reasonable likelihood that the Bank would not
recover all amounts due it from Nationar. Because of these uncertainties, a
$600,000 loss provision was reflected in other operating expenses for 1995.
However, during 1996 the Bank received all funds due from Nationar and therefore
reversed the allowance with the benefit reflected as a reduction in other
operating expenses.
Income Taxes. Income tax expense was $6.3 million for the year ended
December 31, 1996 compared to $5.1 million for the year ended December 31, 1995.
The effective tax rate increased from 34.1% for 1995 to 36.8% for 1996,
primarily related to a decrease in tax-exempt income and an increase in the
valuation allowance on its deferred tax assets.
<PAGE>
SUPPLEMENTARY TABLES
Regulatory Capital. The table below sets forth the Bank's capital
position relative to its regulatory capital requirements at December 31, 1997.
The definitions of the terms used in the table are those provided in the capital
regulations issued by the FDIC.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------
PERCENT OF
AMOUNT ASSETS (1)
-------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Leverage Capital:
Capital level........................... $127,999 10.96%
Requirement (2)......................... 35,050 3.00
-------- -----
Excess................................. $ 92,949 7.96%
======== =====
Risk-based capital:
Tier 1 capital level.................... $127,999 20.69%
Requirement............................. 24,745 4.00
-------- -----
Excess................................. $103,254 16.69%
======== =====
Total capital level..................... $134,920 21.81%
Requirement............................. 49,490 8.00
-------- -----
Excess................................. $ 85,430 13.81%
======== =====
</TABLE>
__________________________
(1) Leverage capital levels are shown as a percentage of tangible assets.
Risk-based capital levels are calculated on the basis of a percentage of
risk-weighted assets.
(2) The current leverage capital requirement is 3% of total adjusted assets for
banks that receive the highest supervisory rating for safety and soundness
and that are not experiencing or anticipating significant growth. The
current leverage capital ratio applicable to all other banks is 4% to 5%.
See "Regulation - Regulatory Capital Requirements."
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the allowance for loan losses by category at December 31,
1997.
<TABLE>
<CAPTION>
AMOUNT PERCENT OF
OF ALLOWANCE LOANS IN EACH
FOR LOAN CATEGORY TO
LOSSES TOTAL LOANS
------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate Loans:
One- to four-family................. $ 443 61.96%
Home equity......................... 33 2.12
Commercial and multi-family......... 390 24.46
Consumer and other................... 359 10.70
Commercial business.................. 218 0.76
Unallocated.......................... 5,478 --
------ ------
Total allowance for loan losses.... $6,921 100.00%
====== ======
</TABLE>
<PAGE>
Loan Portfolio Composition. Set forth below is selected information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ---------------------------
One- to four-family...... $392,846 61.47% $360,573 59.85% $319,340 59.31% $277,010 58.12% $248,324 58.66%
Home equity.............. 13,587 2.13 11,337 1.88 10,234 1.90 10,729 2.25 10,832 2.56
Multi-family............. 74,049 11.59 71,397 11.85 71,489 13.28 66,972 14.05 59,943 14.16
Commercial real estate... 77,217 12.08 68,601 11.38 62,005 11.52 55,946 11.74 42,326 10.00
Construction (1)......... 10,791 1.69 12,493 2.07 7,891 1.47 3,454 0.72 6,910 1.63
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans. 568,490 88.96 524,401 87.03 470,959 87.48 414,111 86.88 368,335 87.01
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer and Other Loans:
- ---------------------------
Consumer Loans:
Mobile home............. 22,747 3.56 21,406 3.55 20,630 3.83 20,662 4.33 19,785 4.68
Vehicle................. 7,306 1.14 18,747 3.11 12,591 2.34 9,391 1.97 7,275 1.72
Personal................ 15,157 2.37 13,596 2.26 11,485 2.13 10,213 2.14 8,402 1.98
Home improvement........ 7,609 1.19 6,879 1.14 7,046 1.31 6,517 1.37 6,028 1.42
Other consumer.......... 1,874 0.29 1,937 0.32 1,698 0.32 1,841 0.39 2,059 0.49
Guaranteed student...... 10,975 1.72 10,702 1.78 9,874 1.83 9,951 2.09 8,123 1.92
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans... 65,668 10.27 73,267 12.16 63,324 11.76 58,575 12.29 51,672 12.21
Commercial business loans.. 4,893 0.77 4,895 0.81 4,085 0.76 3,948 0.83 3,321 0.78
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans 639,051 100.00% 602,563 100.00% 538,368 100.00% 476,634 100.00% 423,328 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
Net deferred costs.... 3,380 2,809 2,349 1,749 1,763
Unearned discounts.... (114) (347) (39) -- --
Allowance for losses.. (6,921) (6,539) (4,707) (4,192) (4,030)
-------- -------- -------- -------- --------
Loans, net............ $635,396 $598,486 $535,971 $474,191 $421,061
======== ======== ======== ======== ========
</TABLE>
_____________________
(1) Includes loans for the construction of one-to-four family residential,
multi-family and commercial real estate properties. At December 31, 1997,
construction loans included $4,194,000 of one- to four-family loans and
$6,597,000 of commercial real estate and multi-family loans.
<PAGE>
Loan Maturity and Repricing Schedule. The following table sets forth
certain information as of December 31, 1997, regarding the amount of loans
maturing or repricing in the Bank's portfolio. Demand loans having no stated
schedule of repayment and no stated maturity, and overdrafts are reported as due
in one year or less. Adjustable- and floating-rate loans are included in the
period in which interest rates are next scheduled to adjust rather than the
period in which they contractually mature, and fixed-rate loans are included in
the period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
WITHIN THROUGH THROUGH THROUGH THROUGH BEYOND
ONE THREE FIVE TEN TWENTY TWENTY
YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
-------- ------- ------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family...... $ 86,886 $10,681 $ 6,591 $27,965 $188,600 $72,123 $392,846
Home equity............... 9,101 155 701 2,028 1,602 -- 13,587
Multi-family.............. 31,542 20,924 20,810 217 556 -- 74,049
Commercial................ 20,646 25,786 17,210 11,021 2,554 -- 77,217
Construction.............. 6,374 422 277 1,974 572 1,172 10,791
-------- ------- ------- ------- -------- ------- --------
Total real estate loans.. 154,549 57,968 45,589 43,205 193,884 73,295 568,490
-------- ------- ------- ------- -------- ------- --------
Consumer and other loans 17,353 8,742 10,271 11,527 17,627 148 65,668
Commercial business loans 3,443 293 291 662 -- 204 4,893
-------- ------- ------- ------- -------- ------- --------
Total loans $175,345 $67,003 $56,151 $55,394 $211,511 $73,647 $639,051
======== ======= ======= ======= ======== ======= ========
</TABLE>
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth
at December 31, 1997 the dollar amount of all fixed-rate and adjustable-rate
loans due after December 31, 1998. Adjustable- and floating-rate loans are
included based on the period in which interest rates are next scheduled to
adjust rather than the period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1998
--------------------------------
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Real Estate Loans:
One- to four-family.................. $293,940 $12,020 $305,960
Home equity.......................... 4,486 -- 4,486
Multi-family......................... 9,507 33,000 42,507
Commercial........................... 11,846 44,725 56,571
Construction......................... 2,034 2,383 4,417
-------- ------- --------
Total real estate loans.......... 321,813 92,128 413,941
-------- ------- --------
Consumer and other loans............... 48,315 -- 48,315
Commercial business loans.............. 1,450 -- 1,450
-------- ------- --------
Total loans....................... $371,578 $92,128 $463,706
======== ======= ========
</TABLE>
<PAGE>
Loan Activities. The following table sets forth the loan origination,
purchase and repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Originations by Type:
- ---------------------
Real estate:
One- to four-family...................................... $108,222 $110,894 $107,618
Home equity.............................................. 3,155 1,357 852
Commercial and multi-family.............................. 28,176 27,168 24,880
Consumer and other......................................... 26,172 31,688 25,053
Commercial business........................................ 6,000 5,972 2,767
-------- -------- --------
Total loans originated.................................. 171,725 177,079 161,170
-------- -------- --------
Purchases:
- ----------
Real estate:
Commercial and multi family.............................. 5,127 - -
Sales:
- ------
Real estate:
One- to four- family..................................... 33,764 26,148 30,141
Consumer and other......................................... 5,457 4,749 4,948
-------- -------- --------
Total loans sold........................................ 39,221 30,897 35,089
-------- -------- --------
Repayments:
- -----------
Real estate:
One- to four-family...................................... 43,518 42,323 32,959
Home equity.............................................. 905 254 1,347
Commercial and multi-family.............................. 21,983 17,066 11,716
Consumer and other......................................... 29,387(1) 16,247 15,141
Commercial business........................................ 5,444 5,169 2,630
-------- -------- --------
Total repayments........................................ 101,237 81,059 63,793
-------- -------- --------
Total reductions........................................ 140,458 111,956 98,882
Increase (decrease) in other items, net (2)................. 898 (776) 7
-------- -------- --------
Net increase............................................ $ 37,292 $ 64,347 $ 62,295
======== ======== ========
</TABLE>
______________________________
(1) Includes the early repayment of loans secured by pledges and assignments of
automobile leases.
(2) Other items include charge-offs, deferred fees and expenses, and discounts
and premiums.
<PAGE>
Loan Delinquencies. The following table sets forth delinquencies in the
Bank's loan portfolio as of the dates indicated. When a loan is delinquent 90
days or more, the Bank fully 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 114.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
------------------------------------------ -----------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
--------------------- ------------------- -------------------- -------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
---------- --------- -------- --------- -------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...................... 9 $385 20 $1,126 9 $373 17 $ 473
Home equity.............................. 2 35 - - 1 13 1 58
Commercial real estate and multi-family.. 1 63 8 1,364 -- -- 8 1,822
Consumer and other....................... 52 290 79 235 73 296 89 257
Commercial business...................... 1 5 13 322 -- -- 13 2,108
---------- --------- -------- --------- -------- ---------- -------- ---------
Total................................... 65 $778 120 $3,047 83 $682 128 $4,718
========== ========= ======== ========= ======== ========== ======== =========
Delinquent loans to total loans (1) (2).. 0.12% 0.47% 0.11% 0.78%
========= ========= ========== =========
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
------------------------------------------ ----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
--------------------- ------------------- -------------------- ------------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
---------- --------- -------- --------- -------- ---------- -------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...................... 6 $147 25 $1,100 16 $ 344 17 $ 715
Home equity.............................. 2 21 1 34 4 86 1 12
Commercial real estate and multi-family.. -- -- 10 2,436 2 613 9 3,133
Consumer and other....................... 70 212 60 166 29 108 39 117
Commercial business...................... -- -- 1 219 -- -- 1 245
---------- --------- -------- --------- -------- ---------- -------- --------------
Total................................... 78 $380 97 $3,955 51 $1,151 67 $4,222
========== ========= ======== ========= ======== ========== ======== ==============
Delinquent loans to total loans (1) (2).. 0.07% 0.74% 0.24% 0.89%
========= ========= ========== ==============
</TABLE>
__________________________________
(1) Total loans include principal balance net of the deferred loan fees and
expenses and unamortized premiums and discounts.
(2) Excludes loans that had matured and as to which the Bank had not formally
extended the maturity date. Regular principal and interest payments
continued in accordance with the original terms of the loan. The Bank
continued to accrue interest on these loans as long as regular payments
received were less than 90 days delinquent. These loans totaled $3.9
million, $3.1 million and $2.7 million at December 31, 1996, 1995 and 1994,
respectively. There were no such loans 90 days past the maturity date as of
December 31, 1997.
<PAGE>
Non-Accrual Loans and Non-Performing Assets. The following table sets
forth information regarding nonaccrual loans and other non-performing assets.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans (1):
One- to four-family.................................. $1,126 $ 473 $1,100 $ 715 $ 689
Home equity.......................................... -- 58 34 12 9
Commercial real estate and multi-family.............. 1,364 1,822 2,436 3,133 3,611
Consumer and other................................... 235 257 166 117 140
Commercial business.................................. 322 2,108 219 245 99
------ ------ ------ ------ ------
Total............................................... 3,047 4,718 3,955 4,222 4,548
------ ------ ------ ------ ------
Non-performing assets:
Other real estate owned (2):
One- to four-family.................................. 21 155 -- -- 15
Commercial real estate and multi-family.............. 202 162 257 259 922
Other non-performing assets:
Investments in affiliates............................ -- 157 264 629 789
Nationar receivable (3).............................. -- -- 5,053 -- --
------ ------ ------ ------ ------
Total............................................... 223 474 5,574 888 1,726
------ ------ ------ ------ ------
Total non-performing assets........................... $3,270 $5,192 $9,529 $5,110 $6,274
====== ====== ====== ====== ======
Total non-performing assets as a percentage of total
assets............................................... 0.28% 0.48% 0.97% 0.56% 0.69%
====== ====== ====== ====== ======
Total non-performing loans to total loans (4)......... 0.47% 0.78% 0.74% 0.89% 1.10%
====== ====== ====== ====== ======
</TABLE>
- -----------------------
(1) Loans are placed on non-accrual status when they become 90 days or more past
due or if they have been identified by the Bank as presenting uncertainty
with respect to the collectibility of interest or principal.
(2) Other real estate owned balances are shown net of related allowances.
(3) On February 6, 1995, the Superintendent seized Nationar, a check-clearing
and trust company, freezing all of Nationar's assets. As of December 31,
1995, the Bank had $5.7 million in demand deposits held in receivership by
the New York State Banking Department. As of December 31, 1996, the Bank
had received all funds due from Nationar.
(4) Excludes loans that had matured and the Bank had not formally extended the
maturity date. Regular principal and interest payments continued in
accordance with the original terms of the loan. The Bank continued to
accrue interest on these loans as long as regular payments received were
less than 90 days delinquent. These loans totaled $3.9 million, $3.1
million, $2.7 million, and $1.5 million at December 31, 1996, 1995, 1994,
and 1993, respectively. There were no such loans 90 days past the maturity
date as of December 31, 1997
For the years ended December 31, 1997 and 1996, gross
interest income which would have been recorded had the non-accruing loans been
current in accordance with their original terms amounted to $245,000 and
$325,000, respectively. No interest income on non-accrual loans was included in
income during such periods except for $30,000 and $39,000 of cash interest
payments received for the Bank's largest non-performing loan for the years ended
December 31, 1997 and 1996, respectively.
Classified Loans. On the basis of management's review of its assets, at
December 31, 1997, a total of $6.4 million of loans were classified as follows
(in thousands):
Special Mention.................... $3,931
Substandard........................ 2,487
Doubtful........................... --
Loss............................... --
------
Total classified................. $6,418
======
Allowance for loan losses.......... $6,921
======
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at the beginning of period.......... $6,539 $4,707 $4,192 $4,030 $2,689
Charge-offs:
One- to four-family........................ 46 28 17 -- --
Multi-family............................... 173 122 215 223 --
Commercial real estate..................... 198 35 108 460 --
Construction or development................ -- -- -- -- --
Consumer and other......................... 388 251 216 142 160
Commercial business (1).................... 557 -- -- -- 66
------ ------ ------ ------ ------
1,362 436 556 825 226
------ ------ ------ ------ ------
Recoveries:
One- to four-family........................ -- -- -- -- --
Multi-family............................... 149 -- -- -- --
Commercial real estate..................... 21 25 -- -- --
Construction or development................ -- -- -- -- --
Consumer and other......................... 81 56 55 30 42
Commercial business........................ -- -- -- 9 3
------ ------ ------ ------ ------
251 81 55 39 45
------ ------ ------ ------ ------
Net charge-offs............................. 1,111 355 501 786 181
Provision for loan losses................... 1,493 2,187 1,016 948 1,522
------ ------ ------ ------ ------
Balance at end of period.................... $6,921 $6,539 $4,707 $4,192 $4,030
====== ====== ====== ====== ======
Ratio of net charge-offs during the period
to average loans outstanding during
the period................................. 0.18% 0.06% 0.10% 0.17% 0.05%
====== ====== ====== ====== ======
Allowance for loan losses to total loans.... 1.08% 1.09% 0.88% 0.88% 0.96%
====== ====== ====== ====== ======
Allowance for loan losses to
non-performing loans....................... 227.14% 138.60% 119.01% 99.29% 88.61%
====== ====== ====== ====== ======
</TABLE>
____________________
(1) Included in 1997 is $496,000 related to a settlement that the Bank had
reached with the bankruptcy trustee relating to loans to a borrower that had
filed for bankruptcy protection.
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the allowance for loan losses by loan category for the periods
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------- ----------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
AMOUNT IN EACH AMOUNT IN EACH AMOUNT IN EACH
OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY
FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL
LOAN LOSSES LOANS LOAN LOSSES LOANS LOAN LOSSES LOANS
------------ ----------- ------------ ----------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family...................... $ 443 61.96% $ 412 60.77% $ 367 60.14%
Home equity.............................. 33 2.12 27 1.88 24 1.90
Commercial real estate and multi-family.. 390 24.46 374 24.38 630 25.44
Consumer and other....................... 359 10.70 385 12.16 302 11.76
Commercial business...................... 218 0.76 1,432 0.81 164 0.76
Unallocated.............................. 5,478 -- 3,909 -- 3,220 --
------------ ----------- ------------ ----------- ------------ --------
Total................................... $6,921 100.00% $6,539 100.00% $4,707 100.00%
============ =========== ============ =========== ============ ========
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------
1994 1993
------------------------- -------------------------
PERCENT PERCENT
OF LOANS OF LOANS
AMOUNT IN EACH AMOUNT IN EACH
OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY
FOR TO TOTAL FOR TO TOTAL
LOAN LOSSES LOANS LOAN LOSSES LOANS
------------ ----------- ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
One- to four-family..................................................... $ 350 58.59% $ 290 59.43%
Home equity............................................................. 26 2.25 26 2.56
Commercial real estate and multi-family................................. 736 26.04 1,367 25.02
Consumer and other...................................................... 298 12.29 286 12.21
Commercial business..................................................... 164 0.83 119 0.78
Unallocated............................................................. 2,618 - 1,942 -
------------ ----------- ------------ -----------
Total.................................................................. $4,192 100.00% $4,030 100.00%
============ =========== ============ ===========
</TABLE>
<PAGE>
Amortized Cost and Fair Value of Investment and Mortgage Related
Securities. The following table sets forth certain information regarding the
amortized cost and fair values of the Bank's debt, equity, asset-backed and
mortgage related securities as of the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995
------------------- ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- -------- --------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Securities held to maturity:
Money market preferred stock..................... $17,000 $17,000 $38,000 $38,000 $46,700 $46,700
States and political subdivisions................ -- -- -- -- -- --
--------- -------- -------- -------- -------- --------
Total securities held to maturity.............. 17,000 17,000 38,000 38,000 46,700 46,700
--------- -------- -------- -------- -------- --------
Debt securities available for sale:
U.S. Treasury.................................... 84,877 85,751 84,716 85,220 54,839 55,745
U.S. government agency........................... -- -- 5,012 5,004 -- --
States and political subdivisions................ 1,760 1,870 1,942 2,041 9,118 9,317
Corporate bonds.................................. 6,933 7,054 999 1,000 6,035 6,035
--------- -------- -------- -------- -------- --------
Total debt securities available for sale....... 93,570 94,675 92,669 93,265 69,992 71,097
--------- -------- -------- -------- -------- --------
Equity securities available for sale:
Common stock..................................... 5,693 6,729 3,115 3,612 3,382 3,566
--------- -------- -------- -------- -------- --------
Total equity securities available for sale..... 5,693 6,729 3,115 3,612 3,382 3,566
--------- -------- -------- -------- -------- --------
Asset-backed securities available for sale........ 74,973 74,922 28,090 27,998 5,350 5,278
--------- -------- -------- -------- -------- --------
Total investment securities.................... $191,238 $193,326 $161,874 $162,875 $125,424 $126,641
========= ======== ======== ======== ======== ========
Average remaining life of investment
securities (1)................................... 1.61 years 1.97 years 1.38 years
========== ========== ==========
Mortgage related securities:
Available for sale:
Freddie Mac.................................... $114,922 $115,909 $109,903 $108,832 $ 43,000 $ 43,392
GNMA........................................... 31,515 32,599 44,966 45,780 51,104 52,984
FNMA........................................... 24,282 24,483 28,487 28,256 33,170 33,575
CMOs........................................... 100,037 99,964 104,244 101,992 132,550 131,592
--------- -------- -------- -------- -------- --------
Total mortgage related securities
available for sale:............................. $270,756 $272,955 $287,600 $284,860 $259,824 $261,543
========= ======== ======== ======== ======== ========
Average remaining life of
mortgage related securities....................... 4.92 years 7.56 years 6.21 years
========== ========== ==========
Net unrealized gains (losses) on
available for sale securities.................... $ 4,289 $ -- $ (1,739) $ -- $ 2,936 $ --
Total securities.................................. $466,281 $466,281 $447,735 $447,735 $388,184 $388,184
========= ======== ======== ======== ======== ========
Average remaining life of securities (1).......... 3.55 years 5.60 years 4.64 years
========== ========== ==========
</TABLE>
____________________
(1) Average remaining life does not include common stock.
<PAGE>
Securities Portfolio. The following table sets forth certain information
regarding the carrying value, weighted average yields and contractual maturities
of the Bank's securities portfolio as of December 31, 1997. Adjustable-rate
mortgage related securities are included in the period in which interest rates
are next scheduled to adjust. No tax equivalent adjustments were made to the
weighted average yields. Amounts are shown at amortized cost for held to
maturity securities and at fair value for available for sale securities.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS AFTER TEN YEARS TOTAL
------------------- ------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage related
securities:
Freddie Mac............... $ 1,168 6.28% $25,301 6.28% $35,794 6.92% $ 53,646 7.09% $115,909 6.85%
GNMA...................... -- -- 50 6.77 496 7.94 32,053 8.09 32,599 8.09
FNMA...................... -- -- 3,333 6.94 21,150 6.70 -- -- 24,483 6.73
CMOs...................... -- -- 3,102 5.64 1,386 4.98 95,494 6.42 99,964 6.37
-------- -------- -------- -------- --------
Total mortgage related
securities.............. 1,168 6.28 31,786 6.28 58,808 6.80 181,193 6.91 272,955 6.81
-------- -------- -------- -------- --------
Debt securities:
U.S. treasury............. 14,997 5.64 70,754 6.34 -- -- -- -- 85,751 6.21
U.S. government agencies.. -- -- -- -- -- -- -- -- -- --
States and political
subdivisions............. 939 4.05 329 4.94 -- -- 602 8.30 1,870 5.58
Corporate bonds........... -- -- 7,054 6.84 -- -- -- -- 7,054 6.84
-------- -------- -------- -------- --------
Total debt securities.... 15,936 5.54 78,137 6.38 -- -- 602 8.30 94,675 6.25
-------- -------- -------- -------- --------
Equity securities:
Common stock.............. -- -- -- -- -- -- -- -- 6,729 2.24
-------- -------- -------- -------- --------
Total equity securities.. -- -- -- -- -- -- -- -- 6,729 2.24
-------- -------- -------- -------- --------
Asset-backed securities.... -- -- 12,739 6.41 17,897 6.06 44,286 6.47 74,922 6.36
Total securities
available for sale...... 17,104 5.59 122,662 6.36 76,705 6.63 226,081 6.83 449,281 6.55
-------- -------- -------- -------- --------
HELD TO MATURITY:
Money market preferred
stock.................... 17,000 4.43 -- -- -- -- -- -- 17,000 4.43
-------- -------- -------- -------- --------
Total securities........... $34,104 $122,662 $76,705 $226,081 $466,281
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Purchases, Sales, and Repayments of Mortgage Related Securities. Set
forth below is information relating to the Bank's purchases, sales and
repayments of principal of mortgage related securities for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Purchases:
- ----------
Adjustable-rate (1)............................ $ 7,918 $ -- $ -- $ 10,104
Fixed-rate (1)................................. 23,563 85,506 32,885 44,164
CMOs........................................... 35,859 -- 13,490 58,027
-------- -------- -------- --------
Total purchases.............................. 67,340 85,506 46,375 112,295
Sales:
- ------
Adjustable-rate (1)............................ (15,726) -- (16,110) --
Fixed-rate (1)................................. (8,409) (11,421) (17,964) (16,507)
CMOs........................................... (23,630) (13,125) (18,377) (24,951)
-------- -------- -------- --------
Total sales.................................. (47,765) (24,546) (52,451) (41,458)
Principal Repayments:
- ---------------------
Principal repayments........................... (36,301) (33,026) (28,056) (76,816)
Increase in other items, net (2)............... (118) (158) (130) (517)
Change in unrealized gains (losses)
on mortgage related securities............... 4,939 (4,459) 22,525 (20,806)
-------- -------- -------- --------
Net increase (decrease)..................... $(11,905) $ 23,317 $(11,737) $(27,302)
======== ======== ======== ========
</TABLE>
______________________
(1) Consists of pass-through securities.
(2) Other items represent amortization and accretion of premiums and discounts.
Deposit Activity. The following table sets forth the deposit activities
of the Bank for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Opening balance................... $ 920,072 $ 861,065 $ 819,690 $ 812,939
Deposits.......................... 2,415,023 1,736,655 1,508,173 1,182,400
Withdrawals....................... (2,390,713) (1,716,709) (1,502,621) (1,207,280)
Interest credited................. 42,493 39,061 35,823 31,631
----------- ----------- ----------- -----------
Ending balance.................... 986,875 920,072 861,065 819,690
----------- ----------- ----------- -----------
Net increase...................... $ 66,803 $ 59,007 $ 41,375 $ 6,751
=========== =========== =========== ===========
Percent increase.................. 7.26% 6.85% 5.05% 0.83%
=========== =========== =========== ===========
</TABLE>
<PAGE>
Certificates of Deposit Maturities. The following table indicates the
amount of the Bank's certificates of deposit by time remaining until maturity as
of December 31, 1997.
<TABLE>
<CAPTION>
MATURITY
-------------------------------------------------------
3 MONTHS OVER 3 TO 6 OVER 6 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
-------- ----------- ------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000... $ 91,648 $111,677 $ 97,441 $113,040 $413,806
Certificates of deposit of $100,000 or more.. 15,314 17,824 21,630 33,852 88,620
-------- -------- -------- -------- --------
Total of certificates of deposit............. $106,962 $129,501 $119,071 $146,892 $502,426
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Average Balance of Deposits. The following tables set forth information,
by various rate categories, regarding the average balance of deposits by types
of deposit for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996
----------------------------- -----------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
Balance DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts................ $ 67,877 7.01% 3.77% $ 53,999 6.04% 3.55%
Savings accounts..................... 301,932 31.20 3.35 307,530 34.36 3.37
NOW accounts......................... 61,426 6.35 1.82 51,718 5.78 1.85
Non-interest-bearing accounts........ 27,728 2.86 -- 26,273 2.94 --
-------- ------ -------- ------
Total............................. 458,963 47.42 3.01 439,520 49.12 3.01
-------- ------ -------- ------
Certificates of deposit:
Less than six months................. 188,668 19.49 -- 176,787 19.76 --
Over six through 12 months........... 121,630 12.57 -- 106,793 11.94 --
Over 12 through 24 months............ 83,754 8.65 -- 53,409 5.97 --
Over 24 months....................... 26,924 2.78 -- 38,486 4.30 --
Certificates over $100,000........... 87,988 9.09 -- 79,755 8.91 --
-------- ------ -------- ------
Total certificates of deposit..... 508,964 52.58 5.78 455,230 50.88 5.81
-------- ------ -------- ------
Total average deposits......... $967,927 100.00% 4.47% $894,750 100.00% 4.43%
======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1995/(1)/ 1994
----------------------------- -----------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
Balance DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts................ $ 52,528 6.27% 3.96% $ 49,671 6.05% 3.09%
Savings accounts..................... 326,125 38.91 3.42 415,843 50.68 3.09
NOW accounts......................... 44,023 5.25 1.89 36,386 4.43 2.06
Non-interest-bearing accounts........ 28,720 3.43 -- 30,996 3.78 --
-------- ------ -------- ------
Total............................. 451,396 53.86 3.12 532,896 64.94 2.84
-------- ------ -------- ------
Certificates of deposit:
Less than six months................. 117,584 14.03 -- 64,323 7.85 --
Over six through 12 months........... 94,366 11.26 -- 56,520 6.89 --
Over 12 through 24 months............ 55,039 6.57 -- 46,226 5.63 --
Over 24 months....................... 50,891 6.07 -- 62,147 7.57 --
Certificates over $100,000........... 68,768 8.21 -- 58,445 7.12 --
-------- ------ -------- ------
Total certificates of deposit..... 386,648 46.14 6.09 287,661 35.06 5.72
-------- ------ -------- ------
Total average deposits......... $838,044 100.00% 4.49% $820,557 100.00% 3.85%
======== ====== ======== ======
</TABLE>
___________________________
(1) Calculations for this table exclude a $1.25 million special interest payment
in 1995 which was approved by the Bank's board of trustees and paid on a pro
rata basis on all interest-bearing savings, NOW, money market and
certificate of deposit accounts in recognition of the Bank's 125th
anniversary.
<PAGE>
Certificates of Deposit Rates and Maturities. The following table sets
forth the amount and maturities of certificates of deposit at December 31, 1997.
<TABLE>
<CAPTION>
LESS THREE FOUR
THAN ONE TO TWO TO TO TO FIVE AS OF
ONE TWO THREE FOUR FIVE YEARS OR DECEMBER 31,
YEAR YEARS YEARS YEARS YEARS MORE 1997
-------- ------- ------- ------ ----- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate:
0 to 4.00%..... $ 981 $ -- $ 2 $ -- $ 2 $ 1 $ 986
4.01 to 5.00%.. 34,327 360 21 0 7 85 34,800
5.01 to 6.00%.. 295,313 84,032 10,836 4,624 716 1,861 397,382
6.01 to 7.00%.. 12,145 3,091 1,058 195 15 409 16,913
7.01 to 8.00%.. 1,938 328 176 4,332 0 0 6,774
8.01 to 9.00%.. 10,815 3,719 4,282 0 0 0 18,816
Over 9.01%..... 15 26,632 -- -- -- 108 26,755
-------- -------- ------- ------ ---- ------ --------
Total $355,534 $118,162 $16,375 $9,151 $740 $2,464 $502,426
======== ======== ======= ====== ==== ====== ========
</TABLE>
<PAGE>
Borrowed Funds.
The following table sets forth the maximum month-end balance and average
monthly balance of FHLB advances and securities sold under agreements to
repurchase for the periods indicated. The Bank had no outstanding borrowings at
December 31, 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maximum Balance:
- ----------------
FHLB advances................................. $ 14,934 $ 12,000
Securities sold under agreements
to repurchase................................ 28,961 24,675
Average Balance:
- ----------------
FHLB advances................................. 8,071 5,583
Securities sold under agreements
to repurchase................................ 20,807 11,091
Weighted Average Interest Rate:
- -------------------------------
FHLB advances................................. 6.02% 5.78%
Securities sold under agreements
to repurchase................................ 5.60 5.38
</TABLE>
The following table sets forth certain information as to the Bank's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
FHLB advances..................................... $ 14,934 $ 12,000
Securities sold under agreements to repurchase.... 18,783 20,008
-------- --------
Total borrowings................................ $ 33,717 $ 32,008
======== ========
Weighted average interest rate of FHLB advances... 6.23% 6.03%
Weighted average interest rate of securities
sold under agreements to repurchase............. 5.65% 5.42%
</TABLE>
<PAGE>
MANAGEMENT OF INTEREST RATE RISK
The principal objective of our interest rate risk management is to evaluate
the interest rate risk inherent in certain assets and liabilities, determine the
appropriate level of risk given our business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the board's approved guidelines to reduce the vulnerability
of our operations to changes in interest rates. The asset/liability committee
is comprised of senior management under the direction of the Board, with senior
management responsible for reviewing with the Board its activities and
strategies, the effect of those strategies on our net interest margin, the fair
value of the portfolio and the effect that changes in interest rates will have
on the portfolio and our exposure limits.
In recent years, we have used the following strategies to manage interest
rate risk: (1) emphasizing the origination and retention of residential monthly
and bi-weekly fixed-rate mortgage loans having terms to maturity of not more
than twenty years, residential and commercial adjustable-rate mortgage loans,
and consumer loans consisting primarily of mobile home loans, home equity loans
and student loans; (2) selling substantially all newly originated 25-30 year
fixed-rate, residential mortgage loans into the secondary market without
recourse and on a servicing retained basis (except for such loans with interest
rates of 9% or greater, which the Bank retains in its portfolio); and (3)
investing in shorter term investments which generally bear lower yields as
compared to longer term investments, but which better position the Bank for
increases in market interest rates. Shortening the maturities of our interest-
earning assets by increasing shorter term investments better matches the
maturities of our deposit accounts, in particular our certificates of deposit
that mature in one year or less, which, at December 31, 1997 totaled $355.5
million, or 35.5% of total interest-bearing liabilities. These strategies may
adversely impact net interest income due to lower initial yields on these
investments in comparison to longer term, fixed rate loans and investments.
However, management believes that reducing the exposure to interest rate
fluctuations will enhance long-term profitability.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At December 31, 1997, the Bank's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was a negative 21.0%. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position is likely to experience a decline in net interest income
as the cost of its interest-bearing liabilities increase at a rate faster than
its yield on interest-earning assets. In comparison, an institution with a
positive gap is likely to realize an increase in its net interest income in a
rising interest rate environment. Given the Bank's existing liquidity position
and its ability to sell securities from its available for sale portfolio,
management believes that its negative gap position will not have a material
adverse effect on its operating results or liquidity position. If interest
rates decrease, there may be a positive effect on the Bank's interest rate
spread and corresponding operating results.
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature during
a particular period were determined in accordance with the earlier of the
repricing date or the contractual maturity of the asset or liability. The table
sets forth an approximation of the projected repricing of assets and liabilities
at December 31, 1997, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within the selected time intervals.
For adjustable and fixed-rate loans on residential properties, prepayment rates
were assumed to range from 4.14% to 10.20% annually. Mortgage related
securities were assumed to prepay at rates between 8.04% and 13.38% annually.
Savings accounts were assumed to decay at 10.00%, 10.00%, 19.99%, 12.47%, 9.88%,
16.63% and 21.03%; NOW checking accounts were assumed to decay at 22.26%,
22.26%, 44.52%, 2.28%, 1.81%, 3.03% and 3.84%; and money market savings accounts
were assumed to decay at 54.75%, 4.11%, 8.23%, 32.91%, 0%, 0%, and 0% for the
periods of three months or less, three to six months, six to twelve months, one
to three years, three to five years, five to ten years and more than ten years,
respectively. Prepayment and deposit decay rates can have a significant impact
on the Bank's estimated gap. While the Bank believes such assumptions to be
reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual future loan prepayment and deposit withdrawal
activity.
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING AT DECEMBER 31, 1997
-----------------------------------------------------------------------------------------
LESS THAN 3-6 6 MONTHS TO OVER 10
THREE MONTHS MONTHS 1 YEAR 1-3 YEARS 3-5 YEARS 5-10 YEARS YEARS TOTAL
------------ -------- ----------- --------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning assets:
Federal funds sold and
securities purchased under
resale agreements.................. $ 22,700 - - - - - - $ 22,700
Mortgage related securities (1)...... 12,639 12,716 25,946 120,797 85,294 13,364 - 270,756
Investment securities (1)............ 41,935 5,242 25,241 101,328 16,955 - 500 191,201
FHLB capital stock (1)............... - - - - - - 6,392 6,392
Other interest-earning assets........ 1,534 - - - - - - 1,534
Loans (2)............................ 75,357 37,024 109,960 153,064 106,221 125,376 32,194 639,196
------------ -------- ----------- --------- -------- ---------- -------- ----------
Total interest-earning assets....... 154,165 54,982 161,147 375,189 208,470 138,740 39,086 1,131,779
------------ -------- ----------- --------- -------- ---------- -------- ----------
Interest-Bearing liabilities:
Savings accounts..................... 30,481 30,138 60,275 36,617 29,004 48,798 61,707 297,020
Interest-bearing checking............ 66,093 18,503 37,005 32,428 1,187 1,998 2,526 159,740
Certificate accounts................. 106,962 129,501 119,071 134,537 9,891 2,464 - 502,426
Mortgagor's payments held in escrow.... 2,586 - 3,160 - - - 3,000 8,746
Other borrowed funds................... 8,968 5,053 209 907 10,980 3,247 4,353 33,717
------------ -------- ----------- --------- -------- ---------- -------- ----------
Total interest-bearing liabilities.. 215,090 183,195 219,720 204,489 51,062 56,507 71,586 1,001,649
------------ -------- ----------- --------- -------- ---------- -------- ----------
Interest sensitivity gap............... ($60,925)($128,213) ($58,573) $170,700 $157,408 $82,233 ($32,500) $130,130
============ ======== =========== ========= ======== ========== ======== ==========
Cumulative interest rate
sensitivity gap...................... ($60,925)($189,138) ($247,711) ($77,011) $80,397 $162,630 $130,130
============ ======== =========== ========= ======== ========== ========
Ratio of interest-earning assets to
interest-bearing liabilities......... 71.67% 30.01% 73.34% 183.48% 408.27% 245.52% 54.60% 112.99%
Ratio of cumulative gap to
total assets......................... (5.17)% (16.04)% (21.01)% (6.53)% 6.82% 13.79% 11.04%
</TABLE>
________________________________
(1) Amounts shown are amortized cost.
(2) Amounts shown include principal balance net of deferred loan fees and
expenses, unamortized premiums and discounts, and non-accruing loans.
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
the GAP Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates, both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.
As a result of these shortcomings, the Bank focuses more attention on
simulation modeling, such as the Net Income and Portfolio Value Analysis
discussed below, rather than Gap Analysis. Even though the Gap Analysis reflects
a ratio of cumulative gap to total assets within the Bank's targeted range of
acceptable limits, the net income and net portfolio value simulation modeling is
considered by management to be more informative in forecasting future income and
economic value trends.
Net Income and Net Portfolio Value Analysis. The Bank's interest rate
sensitivity is also monitored by management through the use of a net income
model and a net portfolio value model which generates estimates of the change in
the Bank's net income and net portfolio value ("NPV") over a range of interest
rate scenarios. NPV is the present value of expected cash flows from assets and
liabilities. The model assumes estimated loan prepayment rates, reinvestment
rates and deposit decay rates similar to the assumptions utilized for the
GAP Table. The following sets forth the Bank's net income and NPV as of
December 31, 1997.
<TABLE>
<CAPTION>
CHANGE IN
INTEREST RATES NET INCOME NET PORTFOLIO VALUE
IN BASIS POINTS ------------------------------- --------------------------------
(RATE SHOCK) $ AMOUNT $ CHANGE % CHANGE $ AMOUNT $ CHANGE % CHANGE
- --------------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
400................ 8,535 (2,539) (22.9)% 114,003 (40,398) (26.2)%
300................ 9,063 (2,011) (18.2)% 124,068 (30,333) (19.6)%
200................ 9,753 (1,321) (11.9)% 134,650 (19,751) (12.8)%
100................ 10,404 (670) (6.0)% 145,179 (9,222) (6.0)%
Static............... 11,074 -- -- 154,401 -- --
(100)............... 11,421 347 3.1% 159,591 5,190 3.4%
(200)............... 11,784 710 6.4% 163,248 8,847 5.7%
(300)............... 12,128 1,054 9.5% 175,001 20,600 13.3%
(400)............... 12,485 1,411 12.7% 193,639 39,238 25.4%
</TABLE>
As is the case with the GAP Table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in Net Income and NPV requires the making of certain assumptions which
may or may not reflect the manner in which actual yields and costs respond to
changes in market interest rates. In this regard, the Net Income and NPV Table
presented assumes that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities. Accordingly,
although the Net Income and NPV Table provides an indication of the Bank's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Bank's net interest income and will differ from
actual results.
