<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
(Mark One) FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-25217
PEOPLES BANKCORP, INC.
- --------------------------------------------------------------
(Name of small business issuer as specified in its charter)
NEW YORK 16-1560886
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
825 STATE STREET, OGDENSBURG, NEW YORK 13669
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (315) 393-4340
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NOT APPLICABLE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE, $.01 PER SHARE
---------------------------------------
Check whether the issuer: (1) filed all reports required by
Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Check if there is no disclosure of delinquent filers in response
to Item 405 of Regulation S-B contained in this form, and no
disclosure will 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-KSB or any
amendment to this Form 10-KSB. [ X ]
Registrant's revenues for the fiscal year ended December 31,
1998: $1,804,000
As of March 1, 1999, the aggregate market value of the 134,390
shares of Common Stock of the registrant issued and outstanding
held by non-affiliates on such date was approximately $911,981
based on the closing sales price of $11.0625 per share of the
registrant's Common Stock on March 1, 1999 as reported on the
OTC Electronic Bulletin Board. For purposes of this
calculation, it is assumed that directors the Company's Employee
Stock Ownership Plan, executive officers and beneficial owners
of more than 10% of the registrant's outstanding voting stock
are affiliates.
Number of shares of Common Stock outstanding as of March 1,
1999: 134,390
Transitional Small Business Disclosure Format Yes ___ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Proxy Statement for the 1999 Annual
Meeting of Stockholders. (Part III)<PAGE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
- --------------------------------
GENERAL
THE COMPANY. Peoples Bankcorp, Inc. (the "Company"), a
New York corporation, was organized at the direction of the
Board of Directors of Ogdensburg Federal Savings and Loan
Association ("Ogdensburg Federal" or the "Association") in
September 1998 to acquire all of the capital stock to be issued
by the Association in its conversion from mutual to stock form
(the "Conversion"). The Conversion was completed on December
28, 1998, with the Company issuing 134,390 shares of its common
stock, par value $0.01 per share (the "Common Stock") to the
public, and the Association issuing all of its issued and
outstanding common stock to the Company. Prior to the
Conversion, the Company did not engage in any material
operations. The Company does not have any significant assets
other than the outstanding capital stock of the Association,
cash and investment securities and a note receivable from the
ESOP. Because substantially all of the Company's operations
consist of the operations of the Association, this Form 10-KSB
is largely a discussion of the Association's operations. At
December 31, 1998, the Company had total assets of $25.1
million, deposits of $22.2 million, net loans receivable of
$20.0 million and stockholders' equity of $2.6 million.
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION. The
Association is a federal mutual savings and loan association
operating through one office in Ogdensburg, New York.
Ogdensburg Federal was founded in 1888 as a federally chartered
institution and a member of the Federal Home Loan Bank ("FHLB")
System. The Association's principal business consists of
attracting deposits from the public and originating residential
mortgage loans. The Association also offers various types of
consumer loans and a limited number of commercial real estate
and commercial business loans. The Association's deposits are
insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC") under the SAIF.
Both the Company's and Ogdensburg Federal's executive
offices are located at 825 State Street, Ogdensburg, New York
13669 and its main telephone number is (315) 393-4340.
MARKET AREA
The Association considers its primary market area to be
the City of Ogdensburg, and the surrounding townships of Lisbon,
Oswegatchie, Madrid, Morristown, Heuvelton, Hammond, Depeyster,
Macomb and Waddington and the village of Rennsselaer Falls, all
of which are located in St. Lawrence County, New York. St.
Lawrence County is the largest county east of the Mississippi in
terms of total acreage. Ogdensburg is the eastern-most United
States port on the Great Lakes and the northern most port in New
York and is adjacent to the Montreal-Ottawa-Toronto corridor.
Although Ogdensburg is fairly rural with only approximately
13,000 residents, it is within a two-hour drive of more than 15
million people.
The largest employers in Ogdensburg and the surrounding
communities include the Ogdensburg Bridge and Port Authority,
local government offices, U.S. Customs Office, Acco and Wadhams
Hall Seminary College, Ogdensburg School District, Mitel
Corporation, CompAS, and several local hospitals. By industry,
the largest sectors of the Ogdensburg economy are retail,
services and manufacturing. The average household income of
$28,000 in 1998 for Ogdensburg was significantly below that of
New York as a whole of $57,000 and the average for the United
States of $50,000. The overall population of Ogdensburg has
declined by approximately 5% from 1990 to 1998 as compared to
marginal growth of 1% for New York State and a 7.5% growth rate
for the United States.
2<PAGE>
<PAGE>
LENDING ACTIVITIES
Most of the Association's loans are mortgage loans which are
secured by one- to four-family residences. The Association also
makes consumer, residential construction and commercial real
estate and commercial business loans. The Association believes
there is sufficient demand in its market area to continue its
policy of emphasizing lending in the one- to four- family real
estate loan area and continue originating various types of
consumer loans.
At December 31, 1998, the Association's gross loans
totaled $20.0 million of which $12.5 million were mortgage loans
secured by one-to four-family residences. The Association
originates both fixed rate mortgage and ARM loans. Generally,
all of the consumer loans the Association originates have fixed
rates, with the exception of home equity lines of credit.
The following table sets forth information concerning the
types of loans held by the Association at the dates indicated.
Other than as disclosed below, there were no concentrations of
loans which exceeded 10% of total loans at December 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------
1998 1997
------------- -------------
AMOUNT % AMOUNT %
------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential. . . . . . . . $12,541 62.74% $11,893 70.56%
Commercial. . . . . . . . . . . . . . . . . . 755 3.78 706 4.19
Construction. . . . . . . . . . . . . . . . . 52 0.26 67 0.40
Other loans:
Automobile. . . . . . . . . . . . . . . . . . 4,006 20.04 2,121 12.58
Home equity . . . . . . . . . . . . . . . . . 1,073 5.37 1,226 7.27
Passbook . . . . . . . . . . . . . . . . . . . 203 1.02 217 1.29
Commercial. . . . . . . . . . . . . . . . . . 337 1.69 100 0.59
Other consumer. . . . . . . . . . . . . . . . 1,021 5.10 526 3.12
------- ------ ------- ------
19,988 100.00% 16,856 100.00%
====== ======
Less:
Deferred fees . . . . . . . . . . . . . . . . 4 24
Allowance for loan losses . . . . . . . . . . 169 164
------- -------
Total. . . . . . . . . . . . . . . . . . . $19,815 $16,668
======= =======
</TABLE>
3<PAGE>
<PAGE>
The following table sets forth certain information regarding
the dollar amount of loans maturing in the Association's loan
portfolio based on their contractual terms to maturity and/or
repricing period. Included within the "Due Within One Year"
column are approximately $7.8 million in one year adjustable
rate mortgages.
<TABLE>
<CAPTION>
DUE AFTER
DUE WITHIN 1 THROUGH DUE AFTER
ONE YEAR AFTER 5 YEARS AFTER 5 YEARS AFTER
DECEMBER 31, 1998 DECEMBER 31, 1998 DECEMBER 31, 1998 TOTAL
----------------- ----------------- ----------------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family. . . .$ 8,678 $ 382 $3,481 $12,541
Commercial . . . . . . . . 610 90 55 755
Construction . . . . . . . -- -- 52 52
Automobile and other . . . . 62 4,559 406 5,027
Home equity. . . . . . . . . 1,073 -- -- 1,073
Passbook . . . . . . . . . . 130 32 41 203
Commercial . . . . . . . . . 337 -- -- 337
------- ------ ------ -------
Total . . . . . . . . .$10,890 $5,063 $4,034 $19,988
======= ====== ====== =======
</TABLE>
The next table shows at December 31, 1998, the dollar
amount of all the Association's loans due after one year from
December 31, 1998 which have fixed interest rates and have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
PREDETERMINED FLOATING OR
RATES ADJUSTABLE RATES
------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Real Estate:
One- to four-family residential. . . . . . . $ 3,587 $ 276
Commercial . . . . . . . . . . . . . . . . . 145 --
Construction . . . . . . . . . . . . . . . . 52 --
Automobile and other . . . . . . . . . . . . . 4,965 --
Home equity. . . . . . . . . . . . . . . . . . -- --
Passbook . . . . . . . . . . . . . . . . . . . 73 --
Commercial . . . . . . . . . . . . . . . . . . -- --
------- -------
Total . . . . . . . . . . . . . . . . . . $ 8,822 $ 276
======= =======
</TABLE>
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. The Association's
primary lending activity consists of the origination of one- to
four-family residential mortgage loans secured by property
located in its primary market area. The Association generally
originates one- to four-family residential mortgage loans in
amounts up to 80% of the lesser of the appraised value or
purchase price with a maximum loan amount of $200,000 and a
maximum term of 30 years. The Association also offers a first-
time home buyer program pursuant to which loans may be made in
amounts up to 90% of the lesser of the appraised value or
purchase price with the same maximum loan amount and terms as
its other mortgage loans.
The Association also offers ARM loans. The interest rate
on ARM loans is based on an index plus a stated margin. ARM
loans provide for periodic interest rate adjustments upward or
downward of up to 2% per year. The
4<PAGE>
<PAGE>
interest rate may not increase above a "ceiling rate"
established at the time the loan is originated and may not
decrease below the original interest rate. Generally, ARM loans
typically reprice every year and provide for terms of up to 30
years with most loans having terms of between 10 and 20 years.
ARM loans decrease the risk associated with changes in
interest rates by periodically repricing, but involve other
risks because as interest rates increase, the underlying
payments by the borrower increase, thus increasing the potential
for default by the borrower. At the same time, higher interest
rates may adversely affect the marketability of the underlying
collateral. Upward adjustment of the contractual interest rate
is also limited by the maximum periodic and lifetime interest
rate adjustment permitted by the loan documents, and, therefore
is potentially limited in effectiveness during periods of
rapidly rising interest rates. At December 31, 1998,
approximately 64.0% of the one- to four-family residential loans
the Association held had adjustable rates of interest.
Mortgage loans originated and held by the Association
generally include due-on-sale clauses. This gives the
Association the right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the
property securing the mortgage loan without the Association's
consent.
RESIDENTIAL CONSTRUCTION LOANS. The Association makes a
limited number of residential construction loans on one- to
four-family residential properties to the individuals who will
be the owners and occupants upon completion of construction.
Borrowers are required to pay interest during the construction
period which may not last beyond 12 months. Upon completion of
the construction, the loan converts to a fully amortizing
mortgage loan. Loan proceeds are disbursed according to a draw
schedule and the Association inspects the progress of the
construction before additional funds are disbursed.
Construction loans are offered on either a fixed or adjustable
basis.
Construction lending is generally considered to involve a
higher degree of credit risk than long term financing of
residential properties. The Association's risk of loss on a
construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of
construction and the estimated cost of construction. If the
estimate of construction cost and the marketability of the
property upon completion of the project prove to be inaccurate,
the Association may be compelled to advance additional funds to
complete the construction. Furthermore, if the final value of
the completed property is less than the estimated amount, the
value of the property might not be sufficient to assure the
repayment of the loan.
COMMERCIAL REAL ESTATE LOANS. The Association offers
limited commercial real estate loans secured by small apartment
buildings, office buildings, and other commercial properties.
Loan amounts do not exceed 75% of the appraised value of the
property. At December 31, 1998, the Association had a
participation interest in a commercial real estate loan
originated by the Thrift Associations Service Corporation
("TASCO"), a service corporation owned by various thrift
institutions operating in New York State. The Association's
interest in this loan amounted to $269,000 and was secured by an
office building. This loan was performing in accordance with
its terms at December 31, 1998.
Commercial real estate lending entails significant
additional risks compared to residential property lending.
These loans typically involve large loan balances to single
borrowers or groups of related borrowers. The repayment of
these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can
be significantly affected by supply and demand conditions in the
market for office and retail space and may also be subject to
adverse conditions in the economy. To minimize these risks, the
Association generally limits this type of lending to its market
area and to borrowers who are otherwise well known to the
Association.
COMMERCIAL BUSINESS LOANS. The Association engages in a
limited amount of commercial business lending to benefit from
the higher fees and interest rates and the shorter term to
maturity. The Association's commercial business loans consist
of equipment, lines of credit and other business purpose loans,
which generally are secured by either the underlying properties
or by the personal guarantees of the borrower. The
Association's largest commercial business loan at December 31,
1998 had a balance of $337,000 and was made to a local auto
dealer.
5<PAGE>
<PAGE>
Unlike residential mortgage loans, which generally are made
on the basis of the borrower's ability to make repayment from
his or her employment and other income and which are secured by
real property whose value tends to be more easily ascertainable,
commercial business loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the
borrower's business. As a result, the availability of funds for
the repayment of commercial business loans may be substantially
dependent on the success of the business itself and the general
economic environment.
CONSUMER LOANS. The Association offers various types of
consumer loans in order to provide a wider range of financial
services to its customers. Consumer loans totaled $6.6 million,
or 33.22%, of its total loans at December 31, 1998. The
Association's consumer loans consist of automobile, home equity
lines of credit, passbook, personal unsecured loans, boat loans,
home improvement loans and equipment loans. Home equity lines
of credit have a maximum draw period of ten years with a maximum
term of 20 years. Passbook and certificate of deposit secured
loans are offered up to the maximum of the deposit balance and
are due on demand.
The Association offers loans for both new and used
automobiles with maximum terms of sixty-six months and maximum
loan amounts of $30,000.
Consumer loans may entail greater risk than residential
mortgage loans, particularly in the case of consumer loans that
are unsecured or secured by assets that depreciate rapidly.
Repossessed collateral for a defaulted consumer loan may not be
sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Association's
President may approve all consumer loans up to $30,000.
All other loans require the approval of its board of
directors.
Upon receipt of a completed loan application from a
prospective borrower, a credit report is ordered. Income and
certain other information is verified. If necessary, additional
financial information may be requested. An appraisal or other
estimate of value of the real estate intended to be used as
security for the proposed loan is obtained. Appraisals are
prepared by outside fee appraisers who are approved by the board
of directors.
Either title insurance or a title opinion is generally
required on all real estate loans. Borrowers also must obtain
fire and casualty insurance. Flood insurance is also required
on loans secured by property which is located in a flood zone.
LOAN COMMITMENTS. Written commitments are given to
prospective borrowers on all approved real estate loans.
Generally, the commitment requires acceptance within 30 days of
the date of issuance. At December 31, 1998, commitments to
cover originations of mortgage loans were $374,000. The
Association's believes that virtually all of its commitments
will be funded.
LOANS TO ONE BORROWER. The maximum amount of loans which
the Association may make to any one borrower may not exceed the
greater of $500,000, or 15%, of its unimpaired capital and
unimpaired surplus. The Association may lend an additional 10%
of its unimpaired capital and unimpaired surplus if the loan is
fully secured by readily marketable collateral. The
Association's maximum loan-to-one borrower limit was $500,000 at
December 31, 1998. At December 31, 1998, the Association's
largest loan concentration outstanding had a balance of
$337,000.
NONPERFORMING AND PROBLEM ASSETS
LOAN DELINQUENCIES. Generally when a mortgage loan becomes
15 days past due, a notice of nonpayment is sent to the
borrower. If after 30 days payment is still delinquent, the
borrower will receive a formal delinquency notice. The borrower
will be contacted by telephone or visited personally if the loan
remains delinquent after 45 days. If the loan continues in a
delinquent status for 120 days past due and no repayment plan is
in effect, the loan will be referred to an attorney for
collection, with foreclosure commenced no later than 180 days.
The customer will be notified when
6<PAGE>
<PAGE>
foreclosure is commenced. At December 31, 1998, the
Association's loans past due between 30 and 89 days totaled
$440,000.
Loans are reviewed on a monthly basis and are generally
placed on a non-accrual status when the loan becomes more than
90 days delinquent or when, in the Association's opinion, the
collection of additional interest is doubtful. Interest accrued
and unpaid at the time a loan is placed on nonaccrual status is
charged against interest income. Subsequent interest payments,
if any, are either applied to the outstanding principal balance
or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan.
NONPERFORMING ASSETS. The following table sets forth
information regarding nonaccrual loans and real estate owned.
As of the dates indicated, the Association had no loans
categorized as troubled debt restructurings within the meaning
of SFAS 114 and no loans which were 90 days or more past due and
still accruing interest.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Real estate:
One- to four-family residence. . . . . . $ -- $ 22
Commercial . . . . . . . . . . . . . . -- 271
Construction . . . . . . . . . . . . . -- --
Automobile. . . . . . . . . . . . . . . . 24 --
Home equity . . . . . . . . . . . . . . . -- --
Passbook. . . . . . . . . . . . . . . . . -- --
Commercial. . . . . . . . . . . . . . . . -- --
Other . . . . . . . . . . . . . . . . . . -- --
---- -----
Total. . . . . . . . . . . . . . . . . $ 24 $ 293
==== =====
Accruing loans which are contractually
past due 90 days or more:
Real estate:
One- to four-family residence. . . . . $ -- $ --
Commercial . . . . . . . . . . . . . . -- --
Construction . . . . . . . . . . . . . -- --
Automobile. . . . . . . . . . . . . . . . -- --
Home equity . . . . . . . . . . . . . . . -- --
Passbook. . . . . . . . . . . . . . . . . -- --
Commercial. . . . . . . . . . . . . . . . -- --
Other . . . . . . . . . . . . . . . . . . -- --
---- -----
Total. . . . . . . . . . . . . . . . . $ -- $ --
==== =====
Total nonperforming loans. . . . . . . $ 24 $ 293
==== =====
Percentage of total loans. . . . . . . . . . .12% 1.74%
==== =====
Other non-performing assets (2). . . . . . . $ -- $ 40
==== =====
Loans modified in troubled debt
restructurings . . . . . . . . . . . . . . $ -- $ --
==== =====
<FN>
___________
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is
unlikely. Payments received on a nonaccrual loan are either
applied to the outstanding principal balance or recorded as
interest income, depending on management's assessment of the
collectibility of the loan.
(2) Other nonperforming assets represents property acquired by
the Association through foreclosure or repossession. This
property is carried at its fair value less costs to sell.
</FN>
</TABLE>
7<PAGE>
<PAGE>
At December 31, 1998, the Association's largest nonaccrual
loan consisted of a $24,000 auto loan. The borrower on such
loan was six months past due. The loan remains on nonaccrual
status.
During the year ended December 31, 1998, the Association
would have recorded additional interest income of approximately
$1,000 on nonaccrual loans if such loans had been current
throughout the period. At December 31, 1998, the Association
did not have any loans which were not classified as nonaccrual,
90 days past due or restructured, but where known information
causes the Association to have serious concerns as to the
ability of these borrowers to comply with its current loan
terms.
CLASSIFIED ASSETS. OTS regulations provide for a
classification system for problem assets of savings associations
which covers all problem assets. Under this classification
system, problem assets of savings associations such as the
Association's are classified as "substandard," "doubtful," or
"loss." An asset is considered substandard if it is inadequately
protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility"
that the savings association will sustain "some loss" if the
deficiencies are not corrected. Assets classified as doubtful
have all of the weaknesses inherent in those classified
substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full, on the basis of
currently existing facts, conditions, and, values, "highly
questionable and improbable." Assets classified as loss are
those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be
designated "special mention" because of potential weakness that
do not currently warrant classification in one of the
aforementioned categories.
When a savings association classifies problem assets as
either substandard or doubtful, it may establish general
allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When a
savings association classifies problem assets as loss, it is
required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to
charge off such amount. A savings association's determination
as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS, which may
order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to
cover possible losses related to assets classified as
substandard or doubtful may be included in determining a savings
association's regulatory capital. Specific valuation allowances
for loan losses generally do not qualify as regulatory capital.
At December 31, 1998, none of the Association's assets
were classified as a loss but it had $16,000 in loans classified
as substandard, $8,000 in loans classified as special mention
and $8,000 in loans classified as doubtful.
FORECLOSED REAL ESTATE. Real estate acquired in
settlement of loans is carried at the lower of the unpaid loan
balance or fair value less estimated costs to sell. Write-downs
from the unpaid loan balance to fair value at the time of
foreclosure are charged to the allowance for loan losses.
Subsequent write-downs to fair value, net of disposal costs, are
charged to other expenses. At December 31, 1998, the
Association had no properties acquired through foreclosure.
ALLOWANCE FOR LOAN LOSSES. The Association's policy is to
provide for losses on unidentified loans in its loan portfolio.
A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be
incurred in its loan portfolio. The evaluation, including a
review of all loans on which full collectibility of interest and
principal may not be reasonably assured, considers: (i) the
Association's past loan loss experience, (ii) known and inherent
risks in its portfolio, (iii) adverse situations that may affect
the borrower's ability to repay, (iv) the estimated value of any
underlying collateral, and (v) current economic conditions.
The Association monitors its allowance for loan losses and
make additions to the allowance as economic conditions dictate.
Although the Association maintains its allowance for loan losses
at a level that it considers adequate for the inherent risk of
loss in its loan portfolio, actual losses could exceed the
balance of the allowance for loan losses and additional
provisions for loan losses could be required. In addition, the
Association's determination as to the
8<PAGE>
<PAGE>
amount of its allowance for loan losses is subject to review by
the OTS, as part of its examination process. After a review of
the information available, the OTS might require the
establishment of an additional allowance.
The following table sets forth an analysis of the
Association's allowance for loan losses for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period . . . . . . . $ 164 $ 116
Loans charged off:
Real estate mortgage:
One- to four-family residential. . . . -- --
Commercial . . . . . . . . . . . . . . -- 3
Construction . . . . . . . . . . . . . -- --
Automobile. . . . . . . . . . . . . . . . 5 3
Home equity . . . . . . . . . . . . . . . -- --
Passbook. . . . . . . . . . . . . . . . . -- --
Commercial. . . . . . . . . . . . . . . . -- --
Other . . . . . . . . . . . . . . . . . . -- 3
----- -----
Total charge-offs. . . . . . . . . . . . . . 5 9
----- -----
Recoveries:
Real estate mortgage:
One- to four-family residential. . . . -- --
Commercial . . . . . . . . . . . . . . -- --
Construction. . . . . . . . . . . . . -- --
Automobile. . . . . . . . . . . . . . . . -- --
Home equity . . . . . . . . . . . . . . . -- --
Passbook. . . . . . . . . . . . . . . . . -- --
Commercial. . . . . . . . . . . . . . . . -- --
Other . . . . . . . . . . . . . . . . . . 1 --
----- -----
Total recoveries . . . . . . . . . . . . . . 1 --
----- -----
Net loans charged off. . . . . . . . . . . . 4 9
----- -----
Provision for loan losses. . . . . . . . . . 4 57
----- -----
Balance at end of period . . . . . . . . . . $ 169 $ 164
===== =====
Ratio of net charge-offs to average
loans outstanding during the period . . . 0.03% 0.06%
===== =====
</TABLE>
9<PAGE>
<PAGE>
The following table illustrates the allocation of the
allowance for loan losses for each category of loan. The
allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does
not restrict the Association's use of the allowance to absorb
losses in other loan categories.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1998 1997
-------------------- -----------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential. . . . . $ 24 62.74% $ 32 70.56%
Commercial. . . . . . . . . . . . . . . . 13 3.78 47 4.19
Construction. . . . . . . . . . . . . . . 1 .26 1 0.40
Automobile . . . . . . . . . . . . . . . . . 86 20.04 53 12.58
Home equity. . . . . . . . . . . . . . . . . 10 5.37 18 7.27
Passbook . . . . . . . . . . . . . . . . . . -- 1.02 -- 1.29
Commercial . . . . . . . . . . . . . . . . . 12 1.69 -- 0.59
Other. . . . . . . . . . . . . . . . . . . . 23 5.10 13 3.12
----- ------ ------- ------
Total allowance for loan losses . . . . $ 169 100.00% $ 164 100.00%
===== ====== ======= ======
</TABLE>
INVESTMENT ACTIVITIES
SECURITIES. The Association is required under federal
regulations to maintain a minimum amount of liquid assets which
may be invested in specified short-term securities and certain
other investments. See "Regulation -- Regulation of the
Association -- Federal Home Loan Bank System." The level of
liquid assets varies depending upon several factors, including:
(i) the yields on investment alternatives, (ii) the
Association's judgment as to the attractiveness of the yields
then available in relation to other opportunities, (iii)
expectation of future yield levels, and (iv) the Association's
projections as to the short-term demand for funds to be used in
loan origination and other activities. At December 31, 1998,
the Association's investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury
obligations, (ii) U.S. federal agency or federally sponsored
agency obligations, (iii) local municipal obligations, (iv)
mortgage-backed securities, (v) bankers' acceptances, (vi) time
certificates, (vii) federal funds, including FHLB overnight and
term deposits (up to six months), and (viii) investment grade
corporate bonds, commercial paper and mortgage derivative
products. See " -- Mortgage-Backed Securities." The board of
directors may authorize additional investments.
The Association's securities at December 31, 1998 did not
contain securities of any issuer with an aggregate book value in
excess of 10% of its equity, excluding those issued by the
United States Government or its agencies.
MORTGAGE-BACKED SECURITIES. To supplement lending
activities, the Association has invested in residential
mortgage-backed securities. Mortgage-backed securities can
serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a
participation interest in a pool of one- to four-family or other
type of mortgages. Principal and interest payments are passed
from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors
such as the Association. The Association's mortgage-backed
securities portfolio consists of participations or pass-through
certificates issued by the Government National Mortgage
Association ("GNMA"). GNMA certificates are guaranteed as to
principal and interest by the full faith and credit of the
United States. The Association's mortgage-backed securities
portfolio was classified as "held to maturity" at December 31,
1998.
10<PAGE>
<PAGE>
Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may
have the right to call or prepay obligations with or without
prepayment penalties.
Mortgage-backed securities typically are issued with
stated principal amounts. The securities are backed by pools of
mortgages that have loans with interest rates that are within a
set range and have varying maturities. The underlying pool of
mortgages can be composed of either fixed-rate or adjustable
mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-
through certificates. The interest rate risk characteristics of
the underlying pool of mortgages (i.e., fixed-rate or
adjustable-rate) and the prepayment risk, are passed on to the
certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
The following table sets forth the carrying value of the
Association's investment securities and mortgage-backed
portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Securities available-for-sale:
Mortgage-backed securities - GNMA . . . . . $ -- $ 737
Securities held to maturity :
U.S. Government securities. . . . . . . . . 2,000 3,962
Mortgage-backed securities - GNMA . . . . . 57 69
------ ------
Total investments. . . . . . . . . . . . $2,057 $4,768
====== ======
</TABLE>
11<PAGE>
<PAGE>
The following table sets forth the scheduled maturities,
carrying values, market values and average
yields for the Association's investment portfolio at December
31, 1998.
<TABLE>
<CAPTION>
ONE YEAR ONE TO FIVE TO MORE THAN TOTAL
OR LESS FIVE YEARS TEN YEARS TEN YEARS INVESTMENT PORTFOLIO
--------------- --------------- -------------- -------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE BOOK MARKET AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE VALUE YIELD
----- ------- ----- -------- ----- -------- ----- -------- ----- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held-to-maturity:
U.S. Government and
agency securities $2,000 5.86% $ -- -- % $ -- -- % $ -- % $2,000 $2,007 5.86%
Mortgage-backed
securities - GNMA. . . . . -- -- -- -- -- -- 57 11.00 57 62 11.00
------ ----- ----- ----- ------ ------
Total. . . . . . . . . . .$2,000 $ -- $ -- $ 57 $2,057 $2,069
====== ===== ===== ===== ====== ======
</TABLE>
12<PAGE>
<PAGE>
SOURCES OF FUNDS
Deposits are the Association's major external source of
funds for lending and other investment purposes. Funds are also
derived from the receipt of payments on loans and prepayment of
loans and, to a much lesser extent, maturities of investment
securities and mortgage-backed securities, borrowings and
operations. Scheduled loan principal repayments are a
relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are significantly influenced by
general interest rates and market conditions.
DEPOSITS. Consumer and commercial deposits are attracted
principally from within the Association's primary market area
through the offering of a selection of deposit instruments
including regular savings accounts, money market accounts, and
term certificate accounts. Deposit account terms vary according
to the minimum balance required, the time period the funds must
remain on deposit, and the interest rate. The interest rates
paid by the Association on deposits are set weekly at the
direction of the Association's senior management. Interest
rates are determined based on the Association's liquidity
requirements, interest rates paid by its competitors, and its
growth goals and applicable regulatory restrictions and
requirements.
At December 31, 1998, time certificates in amounts of
$100,000 or more constituted $2.2 million, or 10%, of the
deposit portfolio. The majority of these certificates represent
deposits from long-standing customers.
At December 31, 1998, the Association's deposits were
represented by the various types of savings programs described
below.
<TABLE>
<CAPTION>
INTEREST MINIMUM MINIMUM BALANCES IN PERCENTAGE OF
RATE(1) TERM CATEGORY AMOUNT THOUSANDS TOTAL DEPOSITS
- ------- ------- -------- ------- ----------- --------------
<S> <C> <C> <C> <C> <C>
-- % -- Demand accounts $ 100 $ 642 2.89%
3 - 4 -- Savings and club accounts 100 2,806 12.64
1 - 2.5 -- NOW and money market accounts 100 to
2,500 2,293 10.33
TIME CERTIFICATES
-----------------
4.00 - 4.99 6 months Fixed-term, fixed-rate 1,000 1,949 8.79
5.00 - 5.99 12 months Fixed-term, fixed-rate 1,000 14,564 65.35
------- ------
$22,194 100.00%
======= ======
</TABLE>
The following table sets forth the Association's time
certificates classified by interest rate at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1998 1997
---- ----
(In thousands)
<S> <C> <C>
4.00 - 4.99% . . . . . . . . . . . . . $ 1,949 $ 111
5.00 - 5.99% . . . . . . . . . . . . . 14,504 10,928
6.00 - 6.99% . . . . . . . . . . . . . -- 5,267
------- -------
$16,453 $16,306
======= =======
</TABLE>
13<PAGE>
<PAGE>
The following table sets forth the amount and maturities
of the Association's time certificates at December 31, 1998.
Approximately 88.0% of such time certificates has interest rates
from 5.00% to 5.99%.
<TABLE>
<CAPTION>
AMOUNT DUE
----------------------------------------------------
LESS THAN AFTER
ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL
--------- --------- --------- ------- ------
(In thousands)
<S> <C> <C> <C> <C>
$11,621 $4,255 $ 565 $ 12 $16,453
======= ====== ====== ====== =======
</TABLE>
The following table indicates the amount of the
Association's time certificates of $100,000 or more by original
maturity as of December 31, 1998.
<TABLE>
<CAPTION>
CERTIFICATES
ORIGINAL MATURITY OF DEPOSIT
----------------- ------------
(IN THOUSANDS)
<S> <C>
Three months or less . . . . . . . . . . . . . $ 272
Over three through six months. . . . . . . . . 537
Over six through 12 months . . . . . . . . . . 799
Over 12 months . . . . . . . . . . . . . . . . 473
--------
Total. . . . . . . . . . . . . . . . . . . $ 2,081
========
</TABLE>
BORROWINGS. Advances (borrowings) may be obtained from
the FHLB of New York to supplement the Association's supply of
lendable funds. Advances from the FHLB of New York are
typically secured by a pledge of the Association's stock in the
FHLB of New York, a portion of its first mortgage loans and
other assets. Each FHLB credit program has its own interest
rate, which may be fixed or adjustable, and range of maturities.
At December 31, 1998, the Association did not have any
borrowings outstanding.
COMPETITION
The Association competes for deposits with other insured
financial institutions such as commercial banks, thrift
institutions, credit unions, finance companies, and multi-state
regional banks in its market area. The Association also
competes for funds with insurance products sold by local agents
and investment products such as mutual funds and other
securities sold by local and regional brokers. Loan competition
varies depending upon market conditions. The Association's
competition comes from commercial banks, thrift institutions,
credit unions and mortgage bankers, many of whom have greater
resources than it has.
PERSONNEL
At December 31, 1998, the Association had 7 full-time and
no part-time employees. None of the Association's employees are
represented by a collective bargaining group. The Association
believes that its relationship with its employees is good.
REGULATION OF THE COMPANY
GENERAL. The Company is a savings and loan holding
company within the meaning of the Home Owners' Loan Act, as
amended ("HOLA"). As such the Company is registered with the
OTS and is subject to OTS regulations,
14<PAGE>
<PAGE>
examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the
Association is subject to certain restrictions in its dealings
with the Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. The Board of Directors of the
Company presently operates the Company as a unitary savings and
loan holding company. There are generally no restrictions on
the activities of a unitary savings and loan holding company.
However, if the Director of OTS determines that there is
reasonable cause to believe that the continuation by a savings
and loan holding company of an activity constitutes a serious
risk to the financial safety, soundness, or stability of its
subsidiary savings association, the Director of OTS may impose
such restrictions as deemed necessary to address such risk
including limiting: (i) payment of dividends by the savings
institution, (ii) transactions between the savings institution
and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be
imposed on the savings institution. Notwithstanding the above
rules as to permissible business activities of unitary savings
and loan holding companies, if the savings institution
subsidiary of such a holding company fails to meet the Qualified
Thrift Lender ("QTL") Test, then such unitary holding company
shall also presently become subject to the activities
restrictions applicable to multiple holding companies and unless
the savings association requalifies as a QTL within one year
thereafter, register as, and become subject to, the restrictions
applicable to a bank holding company. See "Regulation of the
Company -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings
association, other than through merger or other business
combination with the Association, the Company would thereupon
become a multiple savings and loan holding company. Except
where such acquisition is pursuant to the authority to approve
emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL Test, the activities of the Company
and any of its subsidiaries (other than the Association or other
subsidiary savings institutions) would thereafter be subject to
further restrictions. Among other things, no multiple savings
and loan holding company or subsidiary thereof which is not a
savings institution may commence or continue for a limited
period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity,
upon prior notice to, and no objection by the OTS, other than
(i) furnishing or performing management services for a
subsidiary savings institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidat-
ing assets owned by or acquired from a subsidiary savings insti-
tution, (iv) holding or managing properties used or occupied by
a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly
authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized
by the Federal Reserve Board as permissible for bank holding
companies, unless the Director of OTS by regulation prohibits or
limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved
by the Director of OTS prior to being engaged in by a multiple
holding company.
TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections
23A and 23B of the Federal Reserve Act. An affiliate of a
savings institution is any company or entity which controls, is
controlled by or is under common control with the savings
institution. In a holding company context, the parent holding
company of a savings institution (such as the Company) and any
companies which are controlled by such parent holding company
are affiliates of the savings institution. Generally, Sections
23A and 23B (i) limit the extent to which the savings
institution or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10%
of such institution's capital stock and surplus, and contain an
aggregate limit on all such transactions with all affiliates to
an amount equal to 20% of such capital stock and surplus, and
(ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the
institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other
types of transactions. In addition to the restrictions imposed
by Sections 23A and 23B, no savings institution may (i) loan or
otherwise extend credit to an affiliate, except for any
affiliate which engages only in activities which are permissible
for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the
savings institution. Savings associations are also subject to
the anti-tying provisions of Section 106(b) of the Bank Holding
Company Act of 1956 ("BHCA") which prohibits a depository
institution from extending credit to or offering any other
15<PAGE>
<PAGE>
services, or fixing or varying the consideration for such
extension of credit or service, on the condition that the
customer obtain some additional service from the institution or
certain of its affiliates or not obtain services of a competitor
of the institution, subject to certain exceptions.
Savings institutions are also subject to the restrictions
contained in Section 22(h) of the Federal Reserve Act on loans
to executive officers, directors and principal stockholders.
Under Section 22(h), loans to an executive officer and to a
greater than 10% stockholder of a savings institution, and
certain affiliated entities of either, may not exceed, together
with all other outstanding loans to such person and affiliated
entities the institution's loan to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus
and an additional 10% of such capital and surplus for loans
fully secured by certain readily marketable collateral) and all
loans to such persons may not exceed the institution's
unimpaired capital and unimpaired surplus unless the institution
has less than $100 million in deposits in which case the
aggregate limit may be increased to no more than two times
unimpaired capital and surplus. Section 22(h) also prohibits
loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater
than 10% stockholders of a savings institution, and their
respective affiliates, unless such loan is approved in advance
by a majority of the board of directors of the institution with
any "interested" director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which
includes all other outstanding loans to such person), as to
which such prior board of director approval is required, as
being the greater of $25,000 or 5% of capital and surplus (up to
$500,000). Further, the Federal Reserve Board pursuant to
Section 22(h) requires that loans to directors, executive
officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to
other persons unless the loan is made pursuant to a benefit or
compensation plan that is widely available to other employees
and does not give preference to insiders. Section 22(h) also
generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
Savings institutions are also subject to the requirements
and restrictions of Section 22(g) of the Federal Reserve Act and
Regulation on loans to executive officers and the restrictions
of 12 U.S.C. Section 1972 on certain tying arrangements and
extensions
of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of
depository institutions not be made on terms more favorable than
those afforded to other borrowers, requires approval for such
extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and
additional restrictions on the type, amount and terms of credits
to such officers. Section 1972 prohibits (i) a depository
institution from extending credit to or offering any other
services, or fixing or varying the consideration for such
extension of credit or service, on the condition that the
customer obtain some additional service from the institution or
certain of its affiliates or not obtain services of a competitor
of the institution, subject to certain exceptions, and (ii)
extensions of credit to executive officers, directors, and
greater than 10% stockholders of a depository institution by any
other institution which has a correspondent banking relationship
with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other
unfavorable features.
RESTRICTIONS ON ACQUISITIONS. The HOLA generally
prohibits savings and loan holding companies from acquiring,
without prior approval of the Director of OTS, (i) control of
any other savings institution or savings and loan holding
company or substantially all the assets thereof, or (ii) more
than 5% of the voting shares of a savings institution or holding
company thereof which is not a subsidiary. Under certain
circumstances, a registered savings and loan holding company is
permitted to acquire, with the approval of the Director of OTS,
up to 15% of the voting shares of an under-capitalized savings
institution pursuant to a "qualified stock issuance" without
that savings institution being deemed controlled by the holding
company. In order for the shares acquired to constitute a
"qualified stock issuance," the shares must consist of
previously unissued stock or treasury shares, the shares must be
acquired for cash, the savings and loan holding company's other
subsidiaries must have tangible capital of at least 6-1/2% of
total assets, there must not be more than one common director or
officer between the savings and loan holding company and the
issuing savings institution and transactions between the savings
institution and the savings and loan holding company and any of
its affiliates must conform to Sections 23A and 23B of the
Federal Reserve Act. Except with the prior approval of the
Director of OTS, no director or officer of a savings and loan
holding company or person owning or controlling by proxy
16<PAGE>
<PAGE>
or otherwise more than 25% of such company's stock, may also
acquire control of any savings institution, other than a
subsidiary savings institution, or of any other savings and loan
holding company.
The Director of OTS may only approve acquisitions
resulting in the formation of a multiple savings and loan
holding company which controls savings institutions in more than
one state if: (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as
of March 5, 1987; (ii) the acquiror is authorized to acquire
control of the savings institution pursuant to the emergency
acquisition provisions of the Federal Deposit Insurance Act; or
(iii) the statutes of the state in which the institution to be
acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan
holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such
state-chartered savings institutions).
The OTS regulations permit federal associations to branch
in any state or states of the United States and its territories.
Except in supervisory cases or when interstate branching is
otherwise permitted by state law or other statutory provision, a
federal association may not establish an out-of-state branch
unless (i) the federal association qualifies as a "domestic
building and loan association" under Section 7701(a)(19) of the
Code and the total assets attributable to all branches of the
association in the state would qualify such branches taken as a
whole for treatment as a domestic building and loan association
and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company
or (b) a violation of certain statutory restrictions on
branching by savings association subsidiaries of banking holding
companies. Federal associations generally may not establish new
branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the
association's record of compliance with the Community
Reinvestment Act of 1977 in connection with any branch
application.
Under the BHCA, bank holding companies are specifically
authorized to acquire control of any savings association.
Pursuant to rules promulgated by the Federal Reserve Board,
owning, controlling or operating a savings institution is a
permissible activity for bank holding companies, if the savings
institution engages only in deposit-taking activities and
lending and other activities that are permissible for bank
holding companies. A bank holding company that controls a
savings institution may merge or consolidate the assets and
liabilities of the savings institution with, or transfer assets
and liabilities to, any subsidiary bank which is a member of the
Association with the approval of the appropriate federal banking
agency and the Federal Reserve Board. The resulting bank will
be required to continue to pay assessments to the SAIF at the
rates prescribed for SAIF members on the deposits attributable
to the merged savings institution plus an annual growth
increment. In addition, the transaction must comply with the
restrictions on interstate acquisitions of commercial banks
under the BHCA.
REGULATION OF THE ASSOCIATION
GENERAL. As a federally chartered savings institution,
Ogdensburg Federal is subject to extensive regulation by the
OTS. The lending activities and other investments of Ogdensburg
Federal must comply with various state and federal regulatory
requirements. The OTS periodically examines the Association for
compliance with various regulatory requirements. The FDIC also
has the authority to conduct special examinations of the
Association because its deposits are insured by SAIF. The
Association must file reports with these agencies describing its
activities and financial condition. The Association is also
subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. Certain of
these regulatory requirements are referred to below or appear
elsewhere herein.
REGULATORY CAPITAL REQUIREMENTS. Under OTS capital
standards, savings associations must maintain "tangible" capital
equal to 1.5% of adjusted total assets, "core" capital equal to
3.0% of adjusted total assets and a combination of core and
"supplementary" capital equal to 8.0% of "risk-weighted" assets.
In addition, the OTS has recently adopted regulations which
impose certain restrictions on savings associations that have a
total risk-based capital ratio that is less than 8.0%, a ratio
of Tier 1 capital to risk-weighted assets of less than 4.0% or a
ratio of Tier 1 capital to adjusted total assets of less than
4.0% (or 3.0% if the institution is rated Composite 1 under the
OTS examination rating system). See
17<PAGE>
<PAGE>
" -- Prompt Corrective Regulatory Action." For purposes of this
regulation, Tier 1 capital has the same definition as core
capital which is defined as common shareholders' equity
(including retained earnings), noncumulative perpetual preferred
stock and related surplus, minority interests in the equity
accounts of fully consolidated subsidiaries, certain
nonwithdrawable accounts and pledged deposits and "qualifying
supervisory goodwill." Core capital is generally reduced by the
amount of the savings association's intangible assets for which
no market exists. Limited exceptions to the deduction of
intangible assets are provided for purchased mortgage servicing
rights and qualifying supervisory goodwill. Tangible capital is
given the same definition as core capital but does not include
an exception for qualifying supervisory goodwill and is reduced
by the amount of all the savings association's intangible assets
with only a limited exception for purchased mortgage servicing
rights and purchased credit card relationships. Both core and
tangible capital are further reduced by an amount equal to the
savings association's debt and equity investments in
subsidiaries engaged in activities not permissible to national
banks other than subsidiaries engaged in activities undertaken
solely as an agent for customers or in mortgage banking
activities and subsidiary depository institutions or their
holding companies. At December 31, 1998, Ogdensburg Federal had
no such investments.
Adjusted total assets are a savings association's total
assets as determined under generally accepted accounting
principles, adjusted for certain goodwill amounts and increased
by a pro rated portion of the assets of subsidiaries in which
the savings association holds a minority interest and which are
not engaged in activities for which the capital rules require
deduction of its debt and equity investments. Adjusted total
assets are reduced by the amount of assets that have been
deducted from capital, the portion of the savings association's
investments in subsidiaries that must be netted against capital
under the capital rules and, for purposes of the core capital
requirement, qualifying supervisory goodwill.
In determining compliance with the risk-based capital
requirement, a savings association is allowed to use both core
capital and supplementary capital provided the amount of
supplementary capital used does not exceed the savings
association's core capital. Supplementary capital is defined to
include certain preferred stock issues, nonwithdrawable accounts
and pledged deposits that do not qualify as core capital,
certain approved subordinated debt, certain other capital
instruments, a portion of the savings association's general loss
allowances and up to 45% of unrealized gains on equity
securities. Total core and supplementary capital are reduced by
the amount of capital instruments held by other depository
institutions pursuant to reciprocal arrangements and by the
savings association's high loan-to-value ratio land loans and
non-residential construction loans and equity investments other
than those deducted from core and tangible capital. At December
31, 1998, the Association had no high ratio land or
nonresidential construction loans and had no equity investments
for which OTS regulations require deduction from total capital.
The risk-based capital requirement is measured against
risk-weighted assets which equal the sum of each asset and the
credit-equivalent amount of each off-balance sheet item after
being multiplied by an assigned risk weight. Under the OTS
risk-weighting system, one- to four-family first mortgages not
more than 90 days past due with loan-to-value ratios under 80.0%
are assigned a risk weight of 50.0%. Consumer and residential
construction loans are assigned a risk weight of 100%.
Mortgage-backed securities issued, or fully guaranteed as to
principal and interest, by FNMA and the FHLMC are assigned a
20.0% risk weight. Cash and U.S. Government securities backed
by the full faith and credit of the U.S. Government are given a
0.0% risk weight. As of December 31, 1998, the Association's
risk-weighted assets were approximately $15.0 million.
18<PAGE>
<PAGE>
The table below presents the Association's capital
position relative to its various regulatory capital requirements
at December 31, 1998.
<TABLE>
<CAPTION>
Percent of
Amount Assets (1)
------ ----------
(Dollars in Thousands)
<S> <C> <C>
Tangible capital . . . . . . . . . . $2,218 9.0%
Tangible capital requirement . . . . 370 1.5
------ ----
Excess . . . . . . . . . . . . . . $1,848 7.5%
====== ====
Core capital . . . . . . . . . . . . $2,218 9.0%
Core capital requirement . . . . . . 740 3.0
------ ----
Excess . . . . . . . . . . . . . . $1,478 6.0%
====== ====
Total capital (i.e., core and
supplementary capital) . . . . . . $2,387 16.1%
Risk-based capital requirement . . . 1,190 8.0
------ ----
Excess . . . . . . . . . . . . . . $1,197 8.1%
====== ====
<FN>
__________
(1) Based upon adjusted total assets for purposes of the
tangible, core and Tier 1 capital requirements, and
risk-weighted assets for purposes of the risk-based capital
requirements.
</FN>
</TABLE>
OTS regulations require savings institutions with more
than a "normal" level of interest rate risk to maintain
additional total capital. A savings institution's interest rate
risk is measured in terms of the sensitivity of its "net
portfolio value" to changes in interest rates. Net portfolio
value is defined, generally, as the present value of expected
cash inflows from existing assets and off-balance sheet
contracts less the present value of expected cash outflows from
existing liabilities. A savings institution will be considered
to have a "normal" level of interest rate risk exposure if the
decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever
results in the greater decline) is less than two percent of the
current estimated economic value of its assets. A savings
institution with a greater than normal interest rate risk is
required to deduct from total capital, for purposes of
calculating its risk-based capital requirement, an amount (the
"interest rate risk component") equal to one-half the difference
between the institution's measured interest rate risk and the
normal level of interest rate risk, multiplied by the economic
value of its total assets.
The OTS calculates the sensitivity of a savings
institution's net portfolio value based on data submitted by the
institution in a schedule to its quarterly Thrift Financial
Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk
component, if any, to be deducted from a savings institution's
total capital is based on the institution's Thrift Financial
Report filed two quarters earlier. Savings institutions with
less than $300 million in assets and a risk-based capital ratio
above 12% are generally exempt from filing the interest rate
risk schedule with their Thrift Financial Reports. However, the
OTS will require any exempt savings institution that it
determines may have a high level of interest rate risk exposure
to file such schedule on a quarterly basis. The OTS has not yet
implemented these requirements. The Association has determined
that, on the basis of current financial data, it will not be
deemed to have more than normal level of interest rate risk
under the new rule and does not expect that it will be required
to increase its total capital as a result of the rule upon its
implementation.
In addition to requiring generally applicable capital
standards for savings institutions, the OTS is authorized to
establish the minimum level of capital for a savings institution
at such amount or at such ratio of capital-to-assets as the OTS
determines to be necessary or appropriate for such institution
in light of the particular circumstances of the institution.
The OTS may treat the failure of any savings institution to
maintain capital at or above such level as an unsafe or unsound
practice and may issue a directive requiring any savings
institution which fails to maintain capital
19<PAGE>
<PAGE>
at or above the minimum level required by the OTS to submit and
adhere to a plan for increasing capital. Such an order may be
enforced in the same manner as an order issued by the FDIC.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators are required to take
prompt corrective action if an insured depository institution
fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted
from making any capital distribution or paying any management
fees if the institution would thereafter fail to satisfy the
minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may
be: (i) subject to increased monitoring by the appropriate
federal banking regulator; (ii) required to submit an acceptable
capital restoration plan within 45 days; (iii) subject to asset
growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of
businesses. The capital restoration plan must include a
guarantee by the institution's holding company that the
institution will comply with the plan until it has been
adequately capitalized on average for four consecutive quarters,
under which the holding company would be liable up to the lesser
of 5% of the institution's total assets or the amount necessary
to bring the institution into capital compliance as of the date
it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any
undercapitalized institution that did not submit an acceptable
capital restoration plan, may be subject to regulatory demands
for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible
replacement of directors and officers, and restrictions on
capital distributions by any bank holding company controlling
the institution. Any company controlling the institution could
also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive
officers of a significantly undercapitalized institution may not
receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments
of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the
foregoing sanctions on an undercapitalized institution if the
regulators determine that such actions are necessary to carry
out the purposes of the prompt corrective action provisions. If
an institution's ratio of tangible capital to total assets falls
below a "critical capital level," the institution will be
subject to conservatorship or receivership within 90 days unless
periodic determinations are made that forbearance from such
action would better protect the deposit insurance fund. Unless
appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically
undercapitalized institution must be placed in receivership if
it remains critically undercapitalized on average during the
calendar quarter beginning 270 days after the date it became
critically undercapitalized. If a savings institution is in
compliance with an approved capital plan on the date of
enactment of FDICIA, however, it will not be required to submit
a capital restoration plan if it is undercapitalized or become
subject to the statutory prompt corrective action provisions
applicable to significantly and critically undercapitalized
institutions prior to July 1, 1994.
The federal banking regulators, including the OTS,
generally measure a depository institution's capital adequacy on
the basis of the institution's total risk-based capital ratio
(the ratio of its total capital to risk-weighted assets), Tier 1
risk-based capital ratio (the ratio of its core capital to risk-
weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, a
savings institution that is not subject to an order or written
directive to meet or maintain a specific capital level will be
deemed "well capitalized" if it also has: (i) a total risk-based
capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of
5.0% or greater. An "adequately capitalized" savings
institution is a savings institution that does not meet the
definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-
based ratio of 4.0% or greater; and (iii) a leverage ratio of
4.0% or greater (or 3.0% or greater if the savings institution
has a composite 1 CAMELS rating). An "undercapitalized
institution" is a savings institution that has (i) a total risk-
based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of
less than 4.0% (or 3.0% if the institution has a composite 1
CAMELS rating). A "significantly undercapitalized" institution
is defined as a savings institution that has: (i) a total risk-
based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-
based capital ratio of less than 3.0%; or (iii) a leverage ratio
of less than 3.0%. A "critically undercapitalized" savings
institution is defined as a savings institution that has a
ratio of "tangible equity" to total assets of less than 2.0%.
Tangible equity is defined as core capital plus cumulative
perpetual preferred stock (and related surplus) less all
20<PAGE>
<PAGE>
intangibles other than qualifying supervisory goodwill and
certain purchased mortgage servicing rights. The OTS may
reclassify a well capitalized savings institution as adequately
capitalized and may require an adequately capitalized or
undercapitalized institution to comply with the supervisory
actions applicable to institutions in the next lower capital
category (but may not reclassify a significantly
undercapitalized institution as critically under-capitalized) if
the OTS determines, after notice and an opportunity for a
hearing, that the savings institution is in an unsafe or unsound
condition or that the institution has received and not corrected
a less-than-satisfactory rating for any CAMELS rating category.
The Association is classified as "well capitalized" under these
regulations.
QUALIFIED THRIFT LENDER TEST. A savings institution that
does not meet the Qualified Thrift Lender test ("QTL Test") must
either convert to a bank charter or comply with the following
restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly
or indirectly, unless such activity or investment is permissible
for a national bank; (ii) the branching powers of the
institution shall be restricted to those of a national bank;
(iii) the institution shall not be eligible to obtain any
advances from its FHLB; and (iv) payment of dividends by the
institution shall be subject to the rules regarding payment of
dividends by a national bank. Upon the expiration of three
years from the date the institution ceases to be a QTL, it must
cease any activity, and not retain any investment not
permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness
considerations).
To qualify as a QTL, a savings institution must maintain
at least 65% of its "portfolio" assets in Qualified Thrift
Investments. Portfolio assets are defined as total assets less
intangibles, property used by a savings institution in its
business and liquidity investments in an amount not exceeding
20% of assets. Qualified Thrift Investments consist of: (i)
loans, equity positions, or securities related to domestic,
residential real estate or manufactured housing, and
educational, small business and credit card loans; (ii) shares
of stock issued by an FHLB. Subject to a 20% of portfolio
assets limit, however, savings institutions are able to treat
the following as Qualified Thrift Investments: (i) 50% of the
dollar amount of residential mortgage loans subject to sale
under certain conditions but do not include any intangible
assets; (ii) investments, both debt and equity, in the capital
stock or obligations of and any other security issued by a
service corporation or operating subsidiary, provided that such
subsidiary derives at least 80% of its annual gross revenues
from activities directly related to purchasing, refinancing,
constructing, improving or repairing domestic residential
housing or manufactured housing; (iii) 200% of their
investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and
community service facilities or for financing small businesses
in "credit-needy" areas; (iv) loans for the purchase,
construction, development or improvement of community service
facilities, (v) loans for personal, family, household or
educational purposes, provided that the dollar amount treated as
Qualified Thrift Investments may not exceed 10% of the savings
association's portfolio assets; and (vi) shares of stock issued
by FNMA or FHLMC.
A savings institution must maintain its status as a QTL on
a monthly basis in nine out of every 12 months. A savings
institution that fails to maintain Qualified Thrift Lender
status will be permitted to requalify once, and if it fails the
QTL Test a second time, it will become immediately subject to
all penalties as if all time limits on such penalties had
expired. Failure to qualify as a QTL results in a number of
sanctions, including the imposition of certain operating
restrictions imposed on national banks and a restriction on
obtaining additional advances from the FHLB System. Upon
failure to qualify as a QTL for two years, a savings association
must convert to a commercial bank. At December 31, 1998,
approximately 89.0% of the Association's assets were invested in
Qualified Thrift Investments.
DIVIDEND LIMITATIONS. Under OTS regulations, the
Association is not permitted to pay dividends on its capital
stock if its regulatory capital would thereby be reduced below
the amount then required for the liquidation account established
for the benefit of certain depositors of the Association at the
time of its conversion to stock form. In addition, savings
institution subsidiaries of savings and loan holding companies
are required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the holding company.
Federal regulations impose limitations on the payment of
dividends and other capital distributions (including stock
repurchases and cash mergers) by the Association. Under these
regulations, a savings institution that, immediately
21<PAGE>
<PAGE>
prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by
OTS regulation) that is equal to or greater than the amount of
its fully phased-in capital requirements (a "Tier 1
Association") is generally permitted without OTS approval, after
notice, to make capital distributions during a calendar year in
the amount equal to the greater of (i) 75% of net income for the
previous four quarters or (ii) up to 100% of its net income to
date during the calendar year plus an amount that would reduce
by one-half the amount by which its capital-to-assets ratio
exceeded its fully phased-in capital requirement to assets ratio
at the beginning of the calendar year. A savings institution
with total capital in excess of current minimum capital
requirements but not in excess of the fully phased-in
requirements (a "Tier 2 Association") is permitted, after
notice, to make capital distributions without OTS approval of up
to 75% of its net income for the previous four quarters, less
dividends already paid for such period. A savings institution
that fails to meet current minimum capital requirements (a "Tier
3 Association") is prohibited from making any capital
distributions without the prior approval of the OTS. Tier 1
Associations that have been notified by the OTS that they are in
need of more than normal supervision will be treated as either a
Tier 2 or Tier 3 Association. Unless the OTS determines that
the Association is an institution requiring more than normal
supervision, the Association is authorized to pay dividends in
accordance with the provisions of the OTS regulations discussed
above as a Tier 1 Association.
Under the OTS' prompt corrective action regulations, the
Association is also prohibited from making any capital
distributions if after making the distribution, the Association
would have: (i) a total risk-based capital ratio of less than
8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%;
or (iii) a leverage ratio of less than 4.0%. The OTS, after
consultation with the FDIC, however, may permit an otherwise
prohibited stock repurchase if made in connection with the
issuance of additional shares in an equivalent amount and the
repurchase will reduce the institution's financial obligations
or otherwise improve the institution's financial condition.
SAFETY AND SOUNDNESS STANDARDS. Under FDICIA, as amended
by the Riegle Community Development and Regulatory Improvement
Act of 1994 (the "CDRI Act"), each Federal banking agency is
required to establish safety and soundness standards for
institutions under its authority. The final rule and the
guidelines went into effect on August 9, 1995. The guidelines
require savings institutions to maintain internal controls and
information systems and internal audit systems that are
appropriate for the size, nature and scope of the institution's
business. The guidelines also establish certain basic standards
for loan documentation, credit underwriting, interest rate risk
exposure, and asset growth. The guidelines further provide that
savings institutions should maintain safeguards to prevent the
payment of compensation, fees and benefits that are excessive or
that could lead to material financial loss, and should take into
account factors such as comparable compensation practices at
comparable institutions. If the OTS determines that a savings
institution is not in compliance with the safety and soundness
guidelines, it may require the institution to submit an
acceptable plan to achieve compliance with the guidelines. A
savings institution must submit an acceptable compliance plan to
the OTS within 30 days of receipt of a request for such a plan.
Failure to submit or implement a compliance plan may subject the
institution to regulatory sanctions. Management believes that
the Association already meets substantially all the standards
adopted in the interagency guidelines, and therefore does not
believe that implementation of these regulatory standards will
materially affect the Association's operations.
Additionally, under FDICIA, as amended by the CDRI Act,
the Federal banking agencies are required to establish standards
relating to the asset quality and earnings that the agencies
determine to be appropriate. On July 10, 1995, the federal
banking agencies, including the OTS, issued proposed guidelines
relating to asset quality and earnings. Under the proposed
guidelines, a savings institution should maintain systems,
commensurate with its size and the nature and scope of its
operations, to identify problem assets and prevent deterioration
in those assets as well as to evaluate and monitor earnings and
ensure that earnings are sufficient to maintain adequate capital
and reserves. Management believes that the asset quality and
earnings standards, in the form proposed by the banking
agencies, would not have a material effect on the Association's
operations.
DEPOSIT INSURANCE. The Association is required to pay
assessments based on a percentage of its insured deposits to the
FDIC for insurance of its deposits by the FDIC through the SAIF.
Under the Federal Deposit Insurance Act, the FDIC is required to
set semi-annual assessments for SAIF-insured institutions at a
level necessary to maintain
22<PAGE>
<PAGE>
the designated reserve ratio of the SAIF at 1.25% of estimated
insured deposits or at a higher percentage of estimated insured
deposits that the FDIC determines to be justified for that year
by circumstances indicating a significant risk of substantial
future losses to the SAIF.
Under the FDIC's risk-based deposit insurance assessment
system, the assessment rate for an insured depository
institution depends on the assessment risk classification
assigned to the institution by the FDIC, which is determined by
the institution's capital level and supervisory evaluations.
Based on the data reported to regulators for the date closest to
the last day of the seventh month preceding the semi-annual
assessment period, institutions are assigned to one of three
capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under
the prompt corrective action regulations. See " -- Prompt
Corrective Regulatory Action." Within each capital group,
institutions are assigned to one of three subgroups on the basis
of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC
determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance fund.
The FDIC has adopted a new assessment schedule for SAIF
deposit insurance pursuant to which the assessment rate for
well-capitalized institutions with the highest supervisory
ratings has been reduced to zero and institutions in the lowest
risk assessment classification will be assessed at the rate of
0.27% of insured deposits. Until December 31, 1999, however,
SAIF-insured institutions, will be required to pay assessments
to the FDIC at the rate of 6.5 basis points to help fund
interest payments on certain bonds issued by the Financing
Corporation ("FICO"), an agency of the federal government
established to finance takeovers of insolvent thrifts. During
this period, both BIF and SAIF members will be assessed at the
same rate for FICO payments.
The FDIC has adopted a regulation which provides that any
insured depository institution with a ratio of Tier 1 capital to
total assets of less than 2% will be deemed to be operating in
an unsafe or unsound condition, which would constitute grounds
for the initiation of termination of deposit insurance
proceedings. The FDIC, however, will not initiate termination
of insurance proceedings if the depository institution has
entered into and is in compliance with a written agreement with
its primary regulator, and the FDIC is a party to the agreement,
to increase its Tier 1 capital to such level as the FDIC deems
appropriate. Tier 1 capital is defined as the sum of common
stockholders' equity, noncumulative perpetual preferred stock
(including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets other
than certain purchased servicing rights and purchased credit
card receivables and qualifying supervisory goodwill eligible
for inclusion in core capital under OTS regulations and minus
identified losses and investments in certain securities
subsidiaries. Insured depository institutions with Tier 1
capital equal to or greater than 2% of total assets may also be
deemed to be operating in an unsafe or unsound condition
notwithstanding such capital level. The regulation further
provides that in considering applications that must be submitted
to it by savings institutions, the FDIC will take into account
whether the savings association is meeting the Tier 1 capital
requirement for state non-member banks of 4% of total assets.
LIQUIDITY REQUIREMENTS. The Association is required to
maintain average daily balances of liquid assets (cash, certain
time deposits, bankers' acceptances, highly rated corporate debt
and commercial paper, securities of certain mutual funds, and
specified United States government, state or federal agency
obligations) equal to the monthly average of not less than a
specified percentage (currently 4%) of its net withdrawable
savings deposits plus short-term borrowings. The Association is
also required to maintain average daily balances of short-term
liquid assets at a specified percentage (currently 1%) of the
total of its net withdrawable savings accounts and borrowings
payable in one year or less. Monetary penalties may be imposed
for failure to meet liquidity requirements. The average daily
and short-term liquidity ratios of the Association for the month
of December 1998, were 17.37% and 12.72%, respectively.
FEDERAL HOME LOAN BANK SYSTEM. The Association is a
member of the FHLB, which consists of 12 Federal Home Loan Banks
subject to supervision and regulation by the Federal Housing
Finance Board ("FHFB"). The Federal Home Loan Banks provide a
central credit facility primarily for member institutions. As a
member of the FHLB of New York, the Association is required to
acquire and hold shares of capital stock in the FHLB of New York
in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts,
and similar
23<PAGE>
<PAGE>
obligations at the beginning of each year, or 1/20 of its
advances from the FHLB of New York, whichever is greater.
The Association was in compliance with this requirement with
investment in FHLB of New York stock at December 31, 1998, of
$139,000. The FHLB of New York is funded primarily from
proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes advances to members in accordance
with policies and procedures established by the FHFB and the
Board of Directors of the FHLB of New York. As of December 31,
1998, the Association did not have any advances outstanding from
the FHLB of New York. See "Sources of Funds -- Borrowings."
FEDERAL RESERVE SYSTEM. Pursuant to regulations of the
Federal Reserve Board, a thrift institution must maintain
average daily reserves equal to 3% on the first $46.5 million of
transaction accounts, plus 10% on the remainder. This
percentage is subject to adjustment by the Federal Reserve
Board. Because required reserves must be maintained in the form
of vault cash or in a non-interest bearing account at a Federal
Reserve Bank, the effect of the reserve requirement is to reduce
the amount of the institution's interest-earning assets. As of
December 31, 1998, the Association met its reserve requirements.
TAXATION
The Association is subject to the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), in the
same general manner as other corporations. However, prior to
August 1996, savings institutions such as the Association, which
met certain definitional tests and certain other conditions
prescribed by the Code could benefit from certain favorable
provisions regarding their deductions from taxable income for
annual additions to their bad debt reserve. The amount of the
bad debt deduction that a qualifying savings institution could
claim for tax purposes with respect to additions to its reserve
for bad debts for "qualifying real property loans" could be
based upon the Association's actual loss experience (the
"experience method") or as a percentage of the Association's
taxable income (the "percentage of taxable income method").
Historically, the Association used the method that would allow
the Association to take the largest deduction.
In August 1996, the Code was revised to equalize the
taxation of savings institutions and banks. Savings
institutions, such as the Association, no longer have a choice
between the percentage of taxable income method and the
experience method in determining additions to bad debt reserves.
Thrifts with $500 million of assets or less may still use the
experience method, which is generally available to small banks
currently. Larger thrifts may only take a tax deduction when a
loan is actually charged off. Any reserve amounts added after
1987 will be taxed over a six year period beginning in 1996;
however, bad debt reserves set aside through 1987 are generally
not taxed. A savings institution may delay recapturing into
income its post-1987 bad debt reserves for an additional two
years if it meets a residential-lending test. This law is not
expected to have a material impact on the Association.
Earnings appropriated to the Association's bad debt
reserve and claimed as a tax deduction including the
Association's supplemental reserves for losses will not be
available for the payment of cash dividends or for distribution
(including distributions made on dissolution or liquidation),
unless the Association includes the amount in income, along with
the amount deemed necessary to pay the resulting federal income
tax. If such amount is used for any purpose other than bad debt
losses, including a dividend distribution or a distribution in
liquidation, it will be subject to federal income tax at the
then current rate. Retained earnings at December 31, 1998
included approximately $426,000 for which no deferred Federal
income tax liability has been recognized. This amount
represents such allocation of income to tax bad debt deduction
for income tax purposes.
The Code imposes a tax ("AMT") on alternative minimum
taxable income ("AMTI") at a rate of 20%. AMTI is increased by
certain preference items, including the excess of the tax bad
debt reserve deduction using the percentage of taxable income
method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net
operating loss carryovers of which the Association currently has
none. AMTI is also adjusted by determining the tax treatment of
certain items in a manner that negates the deferral of income
resulting from the regular tax treatment of those items. Thus,
the Association's AMTI is increased by an amount equal to 75% of
the
24<PAGE>
<PAGE>
amount by which the Association's adjusted current earnings
exceeds the Association's AMTI (determined without regard to
this adjustment and prior to reduction for net operating
losses). In addition, for taxable years beginning after
December 31, 1986 and before January 1, 1996, an environmental
tax of 0.12% of the excess of AMTI (with certain modifications)
over $2 million is imposed on corporations, including the
Association, whether or not an AMT is paid. Under pending
legislation, the AMT rate would be reduced to zero for taxable
years beginning after December 31, 1994, but this rate reduction
would be suspended for taxable years beginning in 1995 and 1996
and the suspended amounts would be refunded as tax credits in
subsequent years.
The Company may exclude from its income 100% of
dividends received from the Association as a member of the same
affiliated group of corporations. A 70% dividends received
deduction generally applies with respect to dividends received
from corporations that are not members of such affiliated group,
except that an 80% dividends received deduction applies if the
Company owns more than 20% of the stock of a corporation paying
a dividend. The above exclusion amounts, with the exception of
the affiliated group figure, were reduced in years in which the
Association availed itself of the percentage of taxable income
bad debt deduction method.
The Association's federal income tax returns have not been
audited by the IRS.
STATE TAXATION
The Company reports income on a combined basis to New York
State. The Company is subject to the New York State franchise
tax on banking corporations. The New York State tax on banking
corporations is imposed in an annual amount of the greater (i)
9% of the Company's "Entire Net Income" allocable to New York
State during the taxable year, or (ii) the applicable
alternative minimum tax. The applicable alternative minimum tax
is generally the greater of (i) a percentage (0.01%, 0.004% or
0.002%, depending upon the nature and mix of the Company's
assets and on the ratio of its net worth to the value of its
assets) of the value of the Company's assets allocable to New
York State with certain modifications, (ii) 31/2% of the
Company's "Alternative Entire Net Income" allocable to New York
State or (iii) $325.00.
For purposes of the New York State tax on banking
corporations, "Entire Net Income" is similar to federal taxable
income, subject to certain modifications (including the fact
that net operating losses cannot be carried back or carried
forward), and "Alternative Entire Net Income" is similar to
"Entire Net Income," subject to certain further modifications.
EXECUTIVE OFFICERS
At December 31, 1998, the executive officers of the
Company were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert E. Wilson 61 President and Chief Executive Officer
Todd R. Mashaw 35 Vice President, Secretary/ Treasurer
</TABLE>
ROBERT E. WILSON has served as President and Chief Executive
Officer of the Association since 1963 and as President and Chief
Executive Officer of the Company since its formation. He is a
former member of the Ogdensburg City School Board having served
15 years with two terms as President and two terms as Vice
President. He was a member of Kiwanis International for 15 years
and served on their Board of Directors. For 25 years he
participated in the Kiwanis youth activity programs.
TODD R. MASHAW has served as Vice President of the
Association since 1989 and Vice President, Secretary/Treasurer
of the Company since its formation. He has been a member of
the Board of Assessment and Review
25<PAGE>
<PAGE>
for the City of Ogdensburg since 1995 and has been a member of
S.U.N.Y. Canton College
Business Administration Advisory Committee since 1991. He has
also coached Kiwanis Baseball and is active in bringing a
community-built playground to the City of Ogdensburg.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
The following table sets forth certain information regarding
the Association's main office which is its only location.
<TABLE>
<CAPTION>
BOOK VALUE AT DEPOSITS AT
YEAR OWNED OR DECEMBER 31, APPROXIMATE DECEMBER 31,
OPENED LEASED 1998 (1) SQUARE FOOTAGE 1998
------ -------- ------------- -------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Main Office: 1987 Owned $434 2,800 $22,194
825 State Street
Ogdensburg, NY 13669
<FN>
_____________
(1) Cost less accumulated depreciation and amortization.
</FN>
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
The Association is, from time to time, a party to legal
proceedings arising in the ordinary course of its business,
including legal proceedings to enforce the rights against
borrowers. The Association is not currently a party to any
legal proceedings which are expected to have a material adverse
effect on its financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
There were no matters submitted to a vote of the security
holders during the fourth quarter of fiscal year 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
- --------------------------------------------------------------
(a) The Common Stock is listed in the over-the-counter
through the OTC "Electronic Bulletin Board" under the symbol
"PBKO" There are currently 134,390 shares of the Common Stock
outstanding. The number of registered holders of Common Stock
on December 31, 1998 was 149. Trading in the Common Stock
commenced on December 28, 1998. The high and low sale prices
for the Common Stock for the period from issuance through
December 31, 1998 were $10.00 and $10.00, respectively. No
dividends have been declared or paid on the Common Stock.
The income of the Company consists of interest on
investment and related securities and dividends which may
periodically be declared and paid by the Board of Directors of
the Association on the common shares of the Association held by
the Company.
In addition to certain federal income tax considerations,
OTS regulations impose limitations on the payment of dividends
and other capital distributions by savings associations. Under
OTS regulations applicable to converted savings associations,
the Association is not permitted to pay a cash dividend on its
common shares if the Association's regulatory capital would, as
a result of the payment of such dividend, be reduced below the
amount required for the
26<PAGE>
<PAGE>
liquidation account established in connection with the
Conversion or applicable regulatory capital requirements
prescribed by the OTS.
OTS regulations applicable to all savings associations
provide that a savings association which immediately prior to,
and on a pro forma basis after giving effect to, a proposed
capital distribution (including a dividend) has total capital
(as defined by OTS regulations) that is equal to or greater than
the amount of its capital requirements is generally permitted
without OTS approval (but subsequent to 30 days' prior notice to
the OTS) to make capital distributions, including dividends,
during a calendar year in an amount not to exceed the greater of
(1) 100% of its net earnings to date during the calendar year,
plus an amount equal to one-half the amount by which its total
capital to assets ratio exceeded its required capital to assets
ratio at the beginning of the calendar year, or (2) 75% of its
net earnings for the most recent four-quarter period. Savings
associations with total capital in excess of the capital
requirements that have been notified by the OTS that they are in
need of more than normal supervision will be subject to
restrictions on dividends. A savings association that fails to
meet current minimum capital requirements is prohibited from
making any capital distributions without the prior approval of
the OTS.
The Association currently meets all of its regulatory
requirements and, unless the OTS determines that the Association
is an institution requiring more than normal supervision, the
Association may pay dividends in accordance with the foregoing
provisions of the OTS regulations.
(b) On December 28, 1998, the Company issued 134,390
shares of its common stock, par value $.01 per share (the
"Common Stock"), pursuant to the terms of the Plan of Conversion
adopted by the Association on July 23, 1998. The shares were
issued in connection with Ogdensburg Federal's conversion from
mutual to stock form as a wholly owned subsidiary of the
Company. As part of the conversion, the Company sold 134,390
shares of Common Stock to the public.
The following information is provided with respect to the
Company's sale of shares of Common Stock pursuant to its
Registration Statement on Form SB-2, Commission File No.
333-63625, declared effective by the Securities and Exchange
Commission on November 12, 1998. The offering commenced on
November 21, 1998 and terminated on December 14, 1998. The
Company retained Trident Securities, Inc. ("Trident
Securities"), a broker-dealer registered with the SEC and a
member of the National Association of Securities Dealers, Inc.,
to provide financial and sales assistance in connection with the
offering. Trident Securities agreed to use its best efforts to
assist the Company with the sale of the Common Stock in the
offering. Trident Securities was not obligated to take or
purchase any shares of Common Stock in the offering. In the
offering, the Company registered 198,375 shares of Common Stock
with an aggregate offering price of $1,983,750, all for the
account of the Company. On December 28, 1998, the Company sold
a total of 134,390 shares of Common Stock for aggregate
consideration of $1,343,900.
The following table sets forth expenses incurred or
estimated to have been incurred by the Company in connection
with the offering. All of such amounts were paid to persons or
entities who were not officers, directors or 10% stockholders of
the Company or their affiliates or an affiliate of the Company.
<PAGE>
<TABLE>
<CAPTION>
Expenses Amount
-------- ------
<S> <C>
Underwriting discounts and commissions. . .$ 92,191
Finders' fees . . . . . . . . . . . . . . . --
Expenses paid to or for underwriters. . . . --
Other expenses. . . . . . . . . . . . . . . 250,365
--------
Total expenses. . . . . . . . . . . . . . .$342,556
========
</TABLE>
27<PAGE>
<PAGE>
After deducting expenses, the net offering proceeds are
$1,001,344.
The following table sets forth the purposes for which the
net offering proceeds were used and the amount of the net
offering proceeds used for each purpose. With the exception of
the Company's investment in its subsidiary, such amounts were
paid to persons or entities who were not officers, directors or
10% stockholders of the Company of their affiliates or an
affiliate of the Company.
<TABLE>
<CAPTION>
Expenses Amount (1)
-------- ----------
<S> <C>
Construction of plant, building and facilities. . $ --
Purchase and installation of machinery and
equipment . . . . . . . . . . . . . . . . . . . --
Purchases of real estate. . . . . . . . . . . . . --
Acquisition of other business . . . . . . . . . . --
Repayment of indebtedness . . . . . . . . . . . . --
Working capital . . . . . . . . . . . . . . . . . 393,160
Investment in subsidiary. . . . . . . . . . . . . 500,672
Loan to Employee Stock Ownership Plan . . . . . . 107,512
----------
$1,001,344
==========
<FN>
_____________
(1) Such amount was contributed to Ogdensburg Federal, which
will use the indicated portion of the net offering
proceeds for the indicated purpose.
</FN>
</TABLE>
The uses of proceeds described above do not represent a
material change in the use of proceeds described in the
Company's Prospectus dated November 12, 1998.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
- --------------------------------------------------------
The Company has recently been formed and accordingly, has no
results of operations. The following discussion relates only to
its financial condition and results of operations
The Company's results of operations depend primarily on net
interest income, which is determined by (i) the difference
between rates of interest it earns on its interest-earning
assets and the rates it pays on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. The
Company's results of operations are also affected by non-
interest expense, including primarily compensation and employee
benefits, federal deposit insurance premiums and office
occupancy costs. The Company's results of operations also are
affected significantly by general and economic and competitive
conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all
of which are beyond its control.
The Company believes there is sufficient demand in its
market area to continue its policy of emphasizing lending in the
one- to four-family real estate loan area. In addition, the
Company hopes to experience continued growth in its consumer
loan portfolio; however, there is no assurance that it will be
able to do so. See "Item 1. Description of Business -- Lending
Activities."
YEAR 2000 READINESS DISCLOSURE
A great deal of information has been disseminated about the
global computer problem that may occur in the year 2000 which
would affect the speed and accuracy of the data processing that
is essential to its operations. The Company is conducting a
thorough review of its internal systems as well as the efforts
of its outside data processing service provider. The progress
of the plan is monitored by its board of directors. The Company
does not expect to incur significant costs to replace existing
hardware or software. The greatest potential for problems,
however, concerns the data processing provided by its third
party service bureau. The service bureau with which the Company
operates is providing it with periodic updates of its compliance
progress. The Company has participated in the first and second
phases of testing with the provider satisfactorily prior to
December 31, 1998. The service bureau has indicated that it
will be compliant by such date. With respect to the Company's
teller/platform computer system, it is converting to a
28<PAGE>
<PAGE>
new system that is year 2000 compliant which will be completed
by April 30, 1999. The Company is in the process of developing
a contingency plan to deal with the potential that its service
bureau is unable to bring its systems into compliance. The
Company believes that it would use manual systems as a
contingency plan if its current provider is unable to resolve
this problem in time. There can be no assurance in this regard,
however, and it is possible that as a result the Company could
experience data processing delays, errors or failures, all of
which could have a material adverse impact on its financial
condition and results of operations. The Company estimates that
its expenses related to year 2000 compliance will be
approximately $5,000.
The Company has also evaluated its non-information
technology systems (for example, its alarm system, its heating
and air conditioning system) to determine if such systems may
have embedded technology that could also be affected by the year
2000 problem. The Company has determined that the only system
of this type that could be affected is its alarm system. The
Company has been informed, however, by the vendor that the
system is year 2000 compliant and has been fully tested.
The Company is in the process of installing a new
teller/platform computer system. The costs of the new system
will be approximately $60,000. The installation of the new
system is not a result of Year 2000 compliance. As a result,
such costs will be capitalized.
Computer problems experienced by the Company's commercial
borrowers could have an adverse effect on their business
operations and their ability to repay their loans when due. The
Company has recently begun evaluating Year 2000 readiness of its
commercial loan applicants as part of the loan underwriting
process and is calling upon major existing borrowers to assess
their readiness and identify potential problems.
MARKET/INTEREST RATE RISK DISCLOSURE
QUALITATIVE DISCLOSURE. The Company's assets and
liabilities may be analyzed by examining the extent to which its
assets and liabilities are interest-rate sensitive and by
monitoring the expected effects of interest rate changes on its
net portfolio value.
An asset or liability is interest rate sensitive within a
specific time period if it will mature or reprice within that
time period. If the Company's assets mature or reprice more
quickly or to a greater extent than its liabilities, its net
portfolio value and net interest income would tend to increase
during periods of rising interest rates but decrease during
periods of falling interest rates. Conversely, if the Company's
assets mature or reprice more slowly or to a lesser extent than
its liabilities, its net portfolio value and net interest income
would tend to decrease during periods of rising interest rates
but increase during periods of falling interest rates. The
Company's policy has been to mitigate the interest rate risk
inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by
pursuing certain strategies designed to decrease the
vulnerability of its earnings to material and prolonged changes
in interest rates.
The Company's primary method of managing interest rate is to
emphasize the origination of ARM loans. The Company's ARM loans
provide that the interest rate will adjust every year. The
terms of these loans generally limit the amount of any rate
change to a maximum of 2% and also provide that the rate may not
increase above a "ceiling" rate established at the time the loan
is made, nor below a floor rate which is the initial rate on the
loan. At December 31, 1998, approximately 65.0% of its mortgage
loan portfolio had adjustable rates. The Company also purchases
investment securities with relatively short maturities, normally
three years or less. At December 31, 1998, approximately 97.0%
of its investment portfolio had a maturity of five years or
less. The Company also seeks to cushion itself against interest
rate fluctuations by preserving a loyal depositor base whose
accounts are less likely to switch to
institutions that may be offering higher rates. The Company
monitors its deposit rates on a weekly basis to ensure that it
remains competitive.
29<PAGE>
<PAGE>
QUANTITATIVE DISCLOSURE. In recent years, the Company has
measured its interest rate sensitivity by computing the "gap"
between the assets and liabilities which were expected to mature
or reprice within certain time periods, based on assumptions
regarding loan prepayment and the rates at which deposits will
be withdrawn by depositors over time formerly provided by the
OTS. However, the OTS now measures an institution's interest
rate risk by computing the amount by which the net present value
of cash flow from assets, liabilities and off balance sheet
items (the institution's net portfolio value or "NPV") would
change in the event of a range of assumed changes in market
interest rates. These computations estimate the effect on an
institution's NPV from instantaneous and permanent 1% to 4% (100
to 400 basis points) increases and decreases in market interest
rates. The following table presents the interest rate
sensitivity of the Company's NPV at December 31, 1998, as
calculated by the OTS, which is based upon quarterly information
that it voluntarily provided to the OTS.
<TABLE>
<CAPTION>
NPV AS % OF
CHANGE NET PORTFOLIO VALUE PORTFOLIO VALUE OF ASSETS
CHANGE ----------------------------- --------------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BASIS POINT CHANGE
-------- -------- -------- -------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+ 400 bp $1,828 $ (376) (17)% 7.63% (126) bp
+ 300 bp 1,973 (231) (10) 8.14 (74) bp
+ 200 bp 2,080 (124) (6) 8.51 (38) bp
+ 100 bp 2,150 (54) (2) 8.73 (16) bp
0 bp 2,204 8.88
- 100 bp 2,306 102 5 9.21 32 bp
- 200 bp 2,423 219 10 9.58 70 bp
- 300 bp 2,575 370 17 10.06 118 bp
- 400 bp 2,704 500 23 10.46 158 bp
</TABLE>
The board of directors has established a policy setting
forth maximum NPV variances as a result of such instantaneous
and permanent changes in interest rates. At December 31, 1998,
the Company's interest rate sensitivity was within the policy
established by the board.
While the Company cannot predict future interest rates or
their effects on its NPV or net interest income, it does not
expect current interest rates to have a material adverse effect
on its NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest
rate changes are based on numerous assumptions, including
relative levels of market interest rates, prepayments and
deposit runoff and should not be relied upon as indicative of
actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have
similar maturity or periods of repricing, they may react at
different times and in different degrees to changes in the
market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and
liabilities may lag behind changes in market interest rates.
Certain assets, such as ARM loans, generally have features which
restrict changes in interest rates on a short-term basis and
over the life of the loan. In the event of a change in interest
rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set
forth above. Additionally, an increased credit risk may result
as the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase.
The board of directors reviews the Company's asset and
liability policies. The board of directors meets regularly to
review interest rate risk and trends, as well as liquidity and
capital ratios and requirements. Management administers the
policies and determinations of the board of directors with
respect to its asset and liability goals and strategies. The
Company expects that its asset and liability policies and
strategies will continue as described so long
as competitive and regulatory conditions in the financial
institution industry and market interest rates continue as they
have in recent years.
30<PAGE>
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth certain information relating
to the Company's average balance sheet and reflects the average
yield on assets and average cost of liabilities for the periods
indicated and the average yields earned and rates paid at the
date and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average daily
balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1998 1997
---------------------------- --------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) . . . . . . . . . . . . . . . $18,994 $1,537 8.09% $15,824 $1,330 8.40%
Securities (2). . . . . . . . . . . . . 3,309 206 6.23 4,887 277 5.67
Other short-term investments. . . . . . 953 61 6.40 835 55 6.59
------- ------ ------- ------
Total interest-earning assets. . . . 23,256 1,804 7.76 21,546 1,662 7.71
Non-interest-earning assets. . . . . . . . 600 1,234
------- -------
Total assets . . . . . . . . . . . . $23,754 $22,780
======= =======
Interest-bearing liabilities:
Savings and club accounts . . . . . . . $ 2,969 82 2.76 $ 2,747 79 2.88
Time certificates . . . . . . . . . . . 16,550 942 5.69 15,824 883 5.58
NOW accounts and money market
accounts. . . . . . . . . . . . . . . 2,090 34 1.63 2,024 36 1.78
Borrowings . . . . . . . . . . . . . . . . -- -- -- -- -- --
------- ------ ------- ------
Total interest-bearing liabilities. . 21,609 1,058 4.90 20,595 998 4.85
Non-interest-bearing liabilities . . . . . 58 672
------- -------
Total liabilities . . . . . . . . . . 21,667 21,267
Total equity . . . . . . . . . . . . . . . 1,888 1,502
------- -------
Total liabilities and equity. . . . . $23,555 $22,769
======= =======
Net interest income. . . . . . . . . . . . $ 746 $ 664
====== ======
Net interest rate spread . . . . . . . . . 2.86% 2.86%
==== ====
Net yield on interest-earning assets . . . . . . 3.21% 3.08%
==== ====
Average interest-earning assets
to average interest-bearing liabilities 1.08x 1.05x
==== ====
<FN>
__________
(1) Non-accrual loans are included in average balances, less allowance for loan losses and
deferred fees.
(2) Securities are included at amortized cost, with net unrealized gains or losses on
securities available-for-sale included as a component of non-earning assets.
</FN>
</TABLE>
31<PAGE>
<PAGE>
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding
changes in interest income and interest expense for the periods
indicated. For each category of interest-earning asset and
interest-bearing liability, information is provided on changes
attributable to: (i) changes in volume (changes in volume
multiplied by old rate); and (ii) changes in rate (change in
rate multiplied by old volume), and the net change in net
interest income. The net change attributable to the combined
impact of volume and rate has been allocated proportionately to
the absolute dollar amounts of change in each.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1998 VS. 1997 1997 VS. 1996
------------------------ -----------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------------ -----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------------------------ -----------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans. . . . . . . . . . . . $256 $(49) $207 $ 70 $(6) $ 64
Securities . . . . . . . . . (98) 27 (71) 17 -- 17
Other short-term
investments. . . . . . . 8 (2) 6 (12) 1 (11)
---- ---- ---- ---- --- ----
Total interest-earning
assets . . . . . . . 185 (33) 152 75 (5) 70
---- ---- ---- ---- --- ----
Interest expense:
Savings and club accounts. . 6 (3) 3 (5) (2) (7)
Time certificates. . . . . . 42 17 59 54 (3) 51
NOW and money market
accounts . . . . . . . . . 1 (3) (2) -- -- --
Borrowings. . . . . . . . -- -- -- (1) -- (1)
---- ---- ---- ---- --- ----
Total interest-bearing
liabilities. . . . . 48 11 59 48 (5) 43
---- ---- ---- ---- --- ----
Change in net interest
income . . . . . . . . . . .$137 $(35) $102 $ 27 $-- $ 27
==== ==== ==== ==== === ====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND
DECEMBER 31, 1997
Total assets increased by $2.0 million, or 7.3%, from
$23.4 million at December 31, 1997 to $25.1 million at December
31, 1998. The increase in assets for the period was
attributable to the growth in the Company's loan portfolio (net
of allowance for loan losses) of $3.1 million, or 18.7%, which
was the result of its capitalizing on strong loan demand in its
market area, partially offset by declines in the level of its
securities designated as available for sale and securities
designated as held to maturity. Loan growth was partially
funded by the proceeds of the sale of securities designated as
available for sale during the period which amounted to $719,000,
principal repayments on held to maturity investments and the net
proceeds from the stock offering. Total liabilities increased
by $0.6 million, or 3.2%, from $21.8 million at December 31,
1997 to $22.5 million at December 31, 1998. At December 31,
1998, its total deposits amounted to $22.2 million, an increase
of $4.3, or 1.8%, from December 31, 1997's level of $21.8
million. The deposit growth consisted primarily of time
certificates and NOW and money market accounts.
32<PAGE>
<PAGE>
Total equity increased by $1.0 million, or 62.5%, due
mainly to the net proceeds from the stock offering and retained
earnings from the period. At December 31, 1998, the Company was
in compliance with all applicable regulatory capital
requirements with total core and tangible capital of $2.2
million (9.0% of adjusted total assets) and total risk-based
capital of $2.2 million (16.1% of risk-weighted assets)
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER
31, 1998 AND 1997
NET INCOME. Net income increased $53,000, or 60.23% from
$88,000 for the fiscal year ended December 31, 1997 to $141,000
for the fiscal year ended December 31, 1998. The primary reason
for the increase was due to an increase in net interest income,
partially offset by an increase in noninterest expense.
NET INTEREST INCOME. Net interest income before provision
for loan losses increased from $664,000 for fiscal year 1997 to
$746,000 for fiscal year 1998. The $82,000 increase was
primarily due to an increase in the average balance of the loan
portfolio, which was partially offset by a reduction in the
securities portfolio. During the year ended December 31, 1998,
the average balance of the loan portfolio increased by $3.2
million, or 20.0%, and the average balance of the securities
portfolio decreased by $1.6 million, or 32.3%, as compared to
the year ended December 31, 1997. Total interest expense also
increased during the fiscal year by $60,000 due to an increase
in the volume of deposits, primarily time certificates, which
are the most costly component.
PROVISION FOR LOAN LOSSES. During fiscal year 1998, the
Company recorded a $9,000 provision for loan losses as compared
to $57,000 provision during the previous fiscal year. The
higher provision for loan losses for fiscal 1997 was due to
increases in the automobile loan portfolio which are believed to
have greater risk than one- to four-family mortgage lending.
Future additions to the loan loss allowance will be based on the
analysis of the loan portfolio as described above, and,
accordingly, are not predictable. During fiscal year 1998, off a
total of $5,000 in loans were charged off as compared to a total
of $9,000 in charge-offs during fiscal year 1997.
NONINTEREST INCOME. Noninterest income was $44,000 for
fiscal years 1997 and 1998.
NONINTEREST EXPENSE. For fiscal year 1998, total
noninterest expenses were $590,000 as compared to $525,000 for
fiscal year 1997. The increase in this expense level was due
mainly to increases in salaries and employee benefits of $28,000
and other expenses of $36,000.
INCOME TAX EXPENSE. Income tax expense for fiscal year
1998 amounted to $50,000 as compared to $38,000 for fiscal year
1997. The $12,000 increase was directly attributable to the
increased level of pre-tax income in 1998 as compared to 1997.
The Company's effective tax rates for fiscal years 1998 and 1997
were 26.2% and 30.1%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company is required to maintain minimum levels of
liquid assets as defined by OTS regulations. This requirement,
which varies from time to time (currently 4%) depending upon
economic conditions and deposit flows, is based upon a
percentage of its deposits and short-term borrowings. The
required ratio at December 31, 1998 was 4% and its actual
liquidity ratio at December 31, 1998 was 18.43%. It is the
Company's belief that upon completion of the conversion its
liquidity ratio will increase due to the additional funds it
will receive.
The Company's primary sources of funds are deposits,
repayment of loans and mortgage-backed securities, maturities of
investments and interest-bearing deposits and funds provided
from operations. The Company is also able to obtain advances
from the FHLB of New York, although historically it has done
this rarely. While scheduled repayments of loans and mortgage-
backed securities and maturities of investment securities are
predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by the general level of interest rates,
economic conditions and competition. The Company uses its
liquidity resources principally to fund existing and future loan
33<PAGE>
<PAGE>
commitments, to fund maturing time certificates and demand
deposit withdrawals, to invest in other interest-earning assets,
to maintain liquidity, and to meet operating expenses.
Liquidity may be adversely affected by unexpected deposit
outflows, higher interest rates paid by competitors, adverse
publicity relating to the savings and loan industry, and similar
matters. Management monitors projected liquidity needs and
determines the level desirable, based in part on the Company's
commitments to make loans and management's assessment of its
ability to generate funds.
A major portion of the Company's liquidity consists of
cash and cash equivalents, which include cash and interest-
bearing deposits in other banks. The level of these assets is
dependent upon its operating, investing, lending and financing
activities during any given period. At December 31, 1998, cash
and cash equivalents totaled $2.1 million.
The Company's primary investing activities include
origination of loans and purchases of investment and mortgage-
backed securities. During the years ended December 31, 1998 and
1997, purchases of investment and mortgage-backed securities
totaled $3.0 million and $ 8.8 million, respectively, while loan
originations totaled $7.2 million and $4.3 million,
respectively. These investments were funded in part by loan and
securities and mortgage-backed securities repayments and
maturities and an increase in time certificates received for the
years ended December 31, 1998 and 1997.
At December 31, 1998, the Company had $298,000 in
outstanding commitments to originate fixed-rate loans with rates
that ranged from 7% to 8.99%. The Company anticipates that it
will have sufficient funds available to meet its current loan
origination commitments. Time certificates which are scheduled
to mature in one year or less totaled $9.6 million at December
31, 1998. Based on historical experience management believes
that a significant portion of such deposits will remain with the
Company.
The Company is subject to federal regulations that impose
certain minimum capital requirements. For a discussion on such
capital levels, see " Item 1. Description of Business --
Regulation -- Regulation of the Association -- Regulatory
Capital Requirements."
IMPACT OF INFLATION AND CHANGING PRICES
The Company's financial statements and the accompanying
notes presented elsewhere in this document, have been prepared
in accordance with generally accepted accounting principles,
which require the measurement of financial position and
operating results in terms of historical dollars without
considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is
reflected in the increased cost of its operations. As a result,
interest rates have a greater impact on its performance than do
the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent
as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Association adopted the
remaining provisions of Statement of Financial Accounting
Standards ("SFAS") No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, which relate to the accounting for securities
lending, repurchase agreements, and other secured financing
activities. These provisions, which were delayed for
implementation by SFAS No. 127, are not expected to have a
material impact on the Association.
34<PAGE>
<PAGE>
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") 128 "Earnings Per Share." SFAS 128 requires the
disclosure of basic and diluted earnings per share. It
establishes rules for calculating diluted earnings per share
based upon the effect of agreements by publicly traded companies
to issue additional stock. SFAS 128 is now effective and will
require the Company, after the conversion, to report in addition
to basic earnings per share, diluted earnings per share which
would show, for example, the effect on earnings per share of the
exercise of outstanding stock options, if any.
In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income," which requires that comprehensive income
and its effect on equity must be disclosed prominently in the
notes to the financial statements. Comprehensive income
includes net income as adjusted for items that are recorded as
direct entries to equity. Only the impact of unrealized gains
or losses on securities available-for-sale is disclosed as an
additional component of its income under the requirements of
SFAS 130. SFAS 130 imposes disclosure requirements only and
does not affect the Company's financial condition or results of
operations. Comprehensive income (loss) for the year ended
December 31, 1998 was $140,000 and was $100,000 for 1997.
In June 1997, the FASB issued SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information," which
changes the way public 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 stockholders. The Company
anticipates that, in the near future, the Company's business
will comprise only one segment and hence SFAS 131 will not have
a material effect on its financial disclosures. However, if the
Company engages in material non-banking business in the future,
separate segment disclosure may be required.
In February 1998, the FASB issued SFAS 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits,"
which amends existing disclosure rules regarding pension and
other post-retirement benefits to standardize the disclosure
formats effective for fiscal years beginning after December 15,
1997. Disclosures regarding pensions and other non-pension
post-retirement benefits have been combined. SFAS 132 addresses
disclosure issues only and does not require any substantive
change in accounting treatment for the benefits covered by it.
Hence, the implementation of SFAS 132 will have no effect on the
Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," which
establishes comprehensive accounting and reporting requirements
for derivative instruments and hedging activities. The
statement requires companies to recognize all derivatives as
either assets or liabilities, with the instruments measured at
fair value. The accounting for gains and losses resulting from
changes in fair value depends on the intended use of the
derivative and the type of risk being hedged. SFAS 133 is
effective for the Company and the Association for all fiscal
quarters beginning January 1, 2000. Earlier adoption is
permitted although the Company does not expect to do so. SFAS
No. 133 also permits certain reclassifications of securities
among the trading, available for sale and held to maturity
classifications. The Company has no current intention to
reclassify any securities pursuant to SFAS 133. The Company
does not presently use derivatives and the adoption of SFAS 133
is not expected to have a material impact on the Company's
consolidated financial statements.
35<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
MORROW & POULSEN, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
145 Clinton Street
Watertown, NY 13601
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Stockholders
Peoples Bankcorp, Inc.
We have audited the accompanying consolidated statement of
financial condition of Peoples Bankcorp, Inc. and subsidiary
(the Company) as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity, and
cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The
financial statements of Peoples Bankcorp, Inc. as of December
31, 1997 were audited by other auditors whose report dated July
24, 1998, expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our
opinion.
In our opinion, the December 31, 1998 consolidated
financial statements referred to above present fairly, in all
material respects the consolidated financial position of Peoples
Bankcorp, Inc. and subsidiary as of December 31, 1998, and the
results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting
principles.
MORROW & POULSEN, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
/s/ Morrow & Poulsen, P.C.
-----------------------------
MARCH 3, 1999
WATERTOWN, NEW YORK
36<PAGE>
<PAGE>
KPMG LLP
113 South Salina Street
Syracuse, New York 13202
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ogdensburg Federal Savings and Loan Association:
We have audited the accompanying statement of financial
condition of Ogdensburg Federal Savings and Loan Association as
of December 31, 1997, and the related statements of income,
equity and cash flows for the year then ended. These financial
statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Ogdensburg Federal Savings and Loan Association as of
December 31, 1997, and the results of operations and its cash
flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ KPMG LLP
July 24, 1998
37
<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
=====================================
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
______________________________________________________________________________
1998 1997
-------- --------
ASSETS
<S> <C> <C>
Cash and Cash Equivalents:
Cash and due from banks $ 1,194 $ 674
Interest-bearing deposits with other banks 1,281 553
------- -------
Total Cash and Cash Equivalents 2,475 1,227
Securities available-for-sale, at fair value 0 737
Securities held-to-maturity (fair value of $2,069 at
December 31, 1998 and $4,038 at December 31, 1997) 2,057 4,031
Loans, net of deferred fees 19,984 16,832
Less - allowance for loan losses 169 64
------- -------
Net Loans 19,815 16,668
Premises and equipment, net 434 434
Federal Home Loan Bank Stock, at cost -
required by law 139 137
Accrued interest receivable 151 125
Real estate owned 0 40
Other assets 3 3
------- -------
TOTAL ASSETS $25,074 $23,402
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand accounts - non-interest bearing $ 642 $ 638
Savings and club accounts - interest bearing 2,806 2,733
Time certificates - interest bearing 16,453 16,306
NOW and money market accounts -
interest bearing 2,293 2,088
------- -------
Total Deposits 22,194 21,765
Advance payments by borrowers for property
taxes and insurance 3 3
Other liabilities 266 57
------- -------
Total Liabilities 22,463 21,825
------- -------
Commitments and contingencies (Note 10)
Stockholders' Equity:
Preferred stock $.01 par value per share,
500,000 shares authorized, no shares
issued or outstanding 0 0
Common stock of $.01 par value, 3,000,000
shares authorized, 134,390 shares issued
and outstanding at December 31, 1998 (none
at December 31, 1997) 1 0
Additional paid-in capital 1,000 0
Retained earnings - substantially restricted 1,717 1,576
Accumulated other comprehensive income 0 1
Loan to employee stock ownership plan (107)
------- -------
Total Stockholders' Equity 2,611 1,577
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,074 $23,402
======= =======
See accompanying notes to consolidated financial statements.
_____________________________________________________________________________
</TABLE>
38<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
=====================================
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
__________________________________________________________________________
1998 1997
-------- --------
<S> <C> <C>
Interest Income:
Loans $1,537 $1,330
Securities 206 277
Other short-term investments 61 55
------ ------
Total Interest Income 1,804 1,662
------ ------
Interest Expense:
Deposits 1,058 998
Borrowings 0 0
------ ------
Total Interest Expense 1,058 998
------ ------
Net Interest Income 746 664
Provision for Loan Losses 9 57
------ ------
Net Interest Income After
Provision For Loan Losses 737 607
------ ------
Non-Interest Income:
Service charges 30 30
Net gain on sale of securities 1
Other 13 14
------ ------
Total Non-Interest Income 44 44
------ ------
Non-Interest Expenses:
Salaries and employee benefits 286 258
Directors' fees 43 39
Building, occupancy and equipment 63 73
Data processing 34 28
Postage and supplies 31 25
Deposit insurance premium 13 11
Insurance 10 17
Other 110 74
------ ------
Total Non-Interest Expenses 590 525
------ ------
Income before Income Tax Expense 191 126
Income Tax Expense 50 38
------ ------
Net Income $ 141 $ 88
====== ======
Earnings Per Share - Basic and Diluted N/A N/A
(See Note 1)
See accompanying notes to consolidated financial statements.
________________________________________________________________________
</TABLE>
39<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
======================================
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
______________________________________________________________________________________
Loan to Retained Accumulated
Additional Employee Earnings Other
Common Paid-in Stock Substantially Comprehensive
Stock Capital Ownership Plan Restricted Income Total
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 $ $ $ $1,488 $(11) $1,477
Comprehensive Income:
Change in net unrealized
gain (loss) on securities,
net of tax and reclassifi-
cation adjustment 12 12
Net Income 88 88
------ ---- ------
Comprehensive Income 88 12 100
------ ---- ------
Balance at
December 31, 1997 1,576 1 1,577
Comprehensive Income:
Change in net unrealized
gain (loss) on securities,
net of tax and reclassifi-
cation adjustment (1) (1)
Net Income 141 141
------ ---- ------
Comprehensive Income 141 (1) 140
Sale of Common Stock 1 1,000 1,001
Loan to Employee Stock
Ownership Plan (107) (107)
----- ------ ----- ------ ---- -------
Balance at
December 31, 1998 $ 1 $1,000 $(107) $1,717 $ 0 $ 2,611
===== ====== ===== ====== ==== =======
See accompanying notes to consolidated financial statements.
_____________________________________________________________________________________________________________
</TABLE>
40
<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
=====================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
________________________________________________________________________________
1998 1997
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 141 $ 88
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 15 21
(Increase) decrease in accrued interest
receivable (26) (33)
Provision for loan losses 9 57
Loss on sale of real estate owned 10
Net gains on sales of securities (1)
Net amortization (accretion) of
premiums/discounts (82) (196)
Increase in other liabilities 209 39
Deferred income taxes (14)
(Increase) decrease in other assets 17
------- ------
Net Cash Provided (Used) by Operating Activities 275 (21)
------- ------
Cash Flows from Investing Activities:
Net increase in loans (3,156) (1,406)
Proceeds from sales of securities available-
for-sale 719
Proceeds from maturities and principal
reductions of securities available-for-sale 19 83
Purchases of securities held-to-maturity (2,957) (8,796)
Proceeds from maturities and principal
reductions of securities held-to-maturity 5,012 8,523
Purchase of FHLB stock - required by law (2) (1)
Purchase of premises and equipment (15)
Proceeds from sale of real estate owned 30
------- ------
Net Cash Used by Investing Activities (350) (1,597)
------- ------
Cash Flows from Financing Activities:
Increase in deposits 429 1,276
Decrease in advance payments by borrowers
for property taxes and insurance (2)
Sale of stock 1,344
Cash paid for cost of stock conversion (343)
Increase in loan to employee stock
ownership plan (107)
------- ------
Net Cash Provided by Financing Activities 1,323 1,274
------- ------
Net Increase (Decrease) in Cash and Cash Equivalents 1,248 (344)
Cash and Cash Equivalents at Beginning of Year 1,227 1,571
------- ------
Cash and Cash Equivalents at End of Year $ 2,475 $1,227
======= ======
</TABLE>
41
<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
=====================================
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONT.)
YEARS ENDED DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
_______________________________________________________________________________
1998 1997
<S> <C> <C>
Supplemental Disclosure of Cash Flow
Information:
Non-cash investing activities:
Loans transferred to real estate owned
through foreclosure $ 0 $ 40
Cash Paid During the Year for:
Interest 1,058 998
Income taxes 87 0
See accompanying notes to consolidated financial statements.
________________________________________________________________________________
</TABLE>
42
<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
=====================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
________________________________________________________________
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Peoples Bankcorp, Inc. ("the Company" or "the Parent") was
incorporated on September 17, 1998 in connection with its
wholly-owned subsidiary's, Ogdensburg Federal Savings and Loan
Association ("the Bank"), conversion from a Federally-chartered
mutual saving and loan to a Federally-chartered stock savings
and loan, as approved by the Office of Thrift Supervision
("OTS"). The accounting principles used and methods of applying
them conform with generally accepted accounting principles and
practices within the savings and loan industry. The following
are descriptions of the more significant of the accounting and
reporting policies.
(A) BASIS OF FINANCIAL STATEMENT PRESENTATION
In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the
statements of financial condition and revenues and expenses for
the period. Material estimates that are particularly
susceptible to significant change in the near-term relate to the
determination of the allowance for loan losses. Actual results
could differ significantly from those estimates.
Management believes that the allowance for losses on loans is
adequate. While management uses available information to
recognize losses on loans and real estate owned, future
additions to the allowance may be necessary based on changes in
economic conditions. In addition, regulatory agencies," as an
integral part of their examination process, periodically review
the Bank's allowance for losses on loans. Such agencies may
require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the
time of their examination.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of the Company and the Bank. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include vault cash and amounts duefrom
banks which represents short-term highly liquid
investments.
(D) SECURITIES
The Bank classifies its debt securities as either available-for-
sale or held-to-maturity as the Bank does not hold any
securities considered to be trading. Held-to-maturity
securities are those debt securities the Bank has the ability
and intent to hold until maturity. All other debt securities
are classified as available-for-sale.
43<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
(D) SECURITIES (CONT.)
Available-for-sale securities are recorded at fair value. Held-
to-maturity securities are recorded at amortized cost.
Unrealized holding gains and losses, net of the related tax
effect, on available-for-sale securities are excluded from
earnings and reported as a separate component of equity until
realized. Transfers of securities between categories are
recorded at fair value at the date of transfer.
A decline in the fair value of an available-for-sale or held-to
maturity security that is deemed to be other than temporary
results in a charge to earnings resulting in the establishment
of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using the
interest method. Dividend and interest income are recognized
when earned. Realized gains and losses on securities are
included in earnings and are calculated using the specific
identification method for determining the cost of the securities
sold.
(E) LOANS
Loans are reported at the principal amount outstanding, net of
deferred fees. Fees and certain direct origination costs
related to lending activities are recognized using the interest
method over the contractual lives of the loans. Management has
the ability and intent to hold its loans to maturity.
Interest on loans is accrued and included in income at
contractual rates applied to the principal outstanding. The
accrual of interest on loans (including impaired loans) is
generally discontinued and previously accrued interest is
reversed or an allowance is established when loan payments are
90 days or more past due or when, by the judgment of management,
collectibility becomes uncertain. The allowance is established
by a charge to interest income equal to all interest previously
accrued. Subsequent recognition of income occurs only to the
extent that payment is received. Loans are returned to an
accrual status when both principal and interest are current and
the loan is determined to be performing in accordance with the
applicable loan terms.
(F) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses consists of the provision charged
to operations based upon past loan loss experience, management's
evaluation of the loan portfolio under current economic
conditions and such other factors that require current
recognition in estimating loan losses. Loan losses and
recoveries of loans previously written-off are charged or
credited to the allowance as incurred or realized, respectively.
44<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
(F) ALLOWANCE FOR LOAN LOSSES (CONT.)
The Bank estimates losses on impaired loans based on the present
value of expected future cash flows (discounted at the loan's
effective interest rate) or the fair value of the underlying
collateral if the loan is collateral dependent. An impairment
loss exists if the recorded investment in a loan exceeds the
value of the loan as measured by the aforementioned methods. A
loan is considered impaired when it is probable that the Bank
will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Generally, all
commercial mortgage loans and commercial loans in a delinquent
payment status (90 days or more delinquent) are considered
impaired. Residential mortgage loans, consumer loans and home
equity lines of credit are evaluated collectively since they are
homogenous and generally carry smaller individual balances.
Impairment losses are included as a component of the allowance
for loan losses. The Bank recognizes interest income on
impaired loans using the cash basis of income recognition. Cash
receipts on impaired loans are generally applied according to
the terms of the loan agreement, or as a reduction of principal,
based upon management judgement and the related factors
discussed above.
(G) REAL ESTATE OWNED
Real estate acquired in settlement of loans is carried at the
lower of the unpaid loan balance or fair value less estimated
costs to sell. Write-downs from the unpaid loan balance to fair
value at the time of foreclosure are charged to the allowance
for loan losses. Subsequent write-downs to fair value, net of
disposal costs, are charged to other expenses.
(H) PREMISES AND EQUIPMENT
Land is carried at cost and buildings and improvements and
furniture and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation is computed on the
straight-line method over the estimated useful lives of the
assets (10-36 years for building and improvements and 5-7 years
for furniture and equipment).
(I) EMPLOYEE BENEFIT PLANS
The Bank has a non-contributory multiemployer pension plan which
participates in the Financial Institutions Retirement Fund. All
full-time employees are covered by the plan.
The Bank has a defined contribution 401(k) Plan (the Plan) for
all eligible salaried employees. Employees are permitted to
contribute up to 15% of base pay to the Plan, subject to certain
limitations. The Bank matches each employee's contribution up
to 5%.
45<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
(J) INCOME TAXES
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in the period that includes the enactment date.
(K) COMPREHENSIVE INCOME
On January 1, 1998, the Bank adopted the provisions of Statement
of Financial Accounting Standards No. 130, Reporting
Comprehensive Income. This statement establishes standards for
reporting and displaying of comprehensive income and its
components. Comprehensive income includes the reported net
income of a bank adjusted for items that are currently accounted
for as direct entries to equity, such as the mark to market
adjustment on securities available for sale, foreign currency
items and minimum pension liability adjustments. At the
Company, comprehensive income represents net income plus other
comprehensive income, which consists of the net change in
unrealized gains or losses on securities available for sale for
the period. Accumulated other comprehensive income represents
the net unrealized gains or losses on securities available for
sale as of the balance sheet dates.
The following summarizes the components of other comprehensive
income (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997
<S> <C> <C>
Other comprehensive income, before tax:
Net unrealized holding gain (loss) on
securities $0 $17
Reclassification adjustment for (gains)
losses included in net income (1) 0
--- ---
Other comprehensive income, before tax ($1) $17
Income tax expense related to items of
other comprehensive income 0 5
--- ---
Other comprehensive income, net of tax ($1) $12
=== ===
</TABLE>
46<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.)
(L) EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings Per Share," on a
retroactive basis, which requires entities report both basic and
diluted earnings per share for 1998 and all prior years.
Because of the conversion from a Federally-chartered mutual
savings and loan to a Federally chartered stock savings and loan
on December 28, 1998, there were no outstanding shares of common
stock and no earnings per share data for December 31, 1997.
Since the shares were issued on December 28, 1998, the
computation of weighted average shares outstanding for 1998
would be distorted and, therefore, earnings per share for 1998
were not computed.
(M) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank does not engage in the use of derivative financial
instruments. The Bank's off-balance sheet financial instruments
are limited to commitments to extend credit.
(N) NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Bank adopted the remaining
provisions of Statement of Financial Accounting Standards
("SFAS") No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, which
relate to the accounting for securities lending, repurchase
agreements, and other secured financing activities. These
provisions, which were delayed for implementation by SFAS No.
127, are not expected to have a material impact on the Bank.
47
<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(2) SECURITIES
Securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
. . . . . . DECEMBER 31, 1998. . . . . . .
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Held-to-Maturity:
U.S. Government and federal agency
securities $2,000 $ 7 $ 0 $2,007
Mortgage-backed securities - GNMA 57 5 0 62
------ ------ ------- ------
$2,057 $ 12 $ 0 $2,069
====== ====== ======= ======
. .. . . . . . . DECEMBER 31, 1997. . . . .
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Available-for Sale:
Mortgage-back securities - GNMA $ 736 $ 1 $ 0 $ 737
------ ----- ----- ------
$ 736 $ 1 $ 0 $ 737
====== ===== ===== ======
Held-to-Maturity:
U. S. Government and federal agency
securities $3,962 $ 3 $ 3 $3,962
Mortgage-backed securities - GNMA 69 7 0 76
------ ----- ----- ------
$4,031 $ 10 $ 3 $4,038
====== ===== ===== ======
</TABLE>
48<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(2) SECURITIES (CONT.)
The following table presents the carrying value and fair value
of securities based on the earlier of call or maturity date at
December 31, 1998:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
(IN THOUSANDS)
<S> <C> <C>
Held-to-maturity:
Due within one year $2,000 $2,007
Due after one year through five years 0 0
Due after ten years 57 62
------ ------
$2,057 $2,069
====== ======
</TABLE>
The following table presents the carrying value and fair value
of securities based on the earlier of call or maturity date at
December 31, 1997:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
(IN THOUSANDS)
<S> <C> <C>
Available-for sale:
Due after ten years $ 736 $ 737
------ ------
$ 736 $ 737
====== ======
Held-to-maturity:
Due within one year $2,962 $2,959
Due after one year through five years 1,000 1,003
Due after ten years 69 76
------ ------
$4,031 $4,038
====== ======
</TABLE>
The amortized cost and fair value of mortgage-backed securities
are presented by contractual maturity in the preceding table.
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations without call or prepayment penalties.
Gross gains of $1,000 were realized on sales of available-for-
sale securities during the year ended December 31, 1998. There
were no sales of securities during the year ended December 31,
1997.
49<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(3) LOANS RECEIVABLE
Loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Mortgages:
One to four family residential $12,541 $11,893
Commercial 755 706
Construction 52 67
------- -------
13,348 12,666
Other Loans:
Automobile 4,006 2,121
Home equity 1,073 1,226
Passbook 203 217
Commercial 337 100
Other 1,021 526
------- -------
6,640 4,190
------- -------
Total Loans 19,988 16,856
Less - Net Deferred Fees 4 24
------- -------
$19,984 $16,832
======= =======
</TABLE>
Changes in the allowance for loan losses are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997
<S> <C> <C>
Balance at beginning of period $ 164 $ 116
Provision charged to operations 9 57
Recoveries 1 0
Loans charged off (5) (9)
------ -----
Balance at end of period $ 169 $ 164
====== =====
</TABLE>
50<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(3) LOANS RECEIVABLE (CONT.)
At December 31, 1998 and December 31, 1997, impaired loans
totaled $64,000 and $271,000, respectively, with no related
allowance for loan losses as a result of cash flow analysis.
The average recorded investment in impaired loans was $180,000
and $23,000 during the years ended December 31, 1998 and 1997,
respectively. Interest income recognized on impaired loans was
$20,000 and $-0- during the years ended December 31, 1998 and
1997, respectively.
The principal balances of loans not accruing interest amounted
to approximately $24,000 and $293,000 at December 31, 1998 and
1997, respectively. The interest income foregone for non-
accruing loans was approximately $1,000 and $8,000 during the
years ended December 31, 1998 and 1997, respectively.
In the ordinary course of business, the Bank has and expects to
continue to have transactions, including borrowings, with its
officers and directors. In the opinion of management, such
transactions were on substantially the same terms, including
interest rates and collateral, as those prevailing at the time
of comparable transactions with other persons and did not
involve more than a normal risk of collectibility or present any
other unfavorable features to the Bank. The following table
presents a summary of the activity with respect to loans to
directors and executive officers at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Balance outstanding - beginning of year $ 209,552 $ 308,989
New loans 584,500 14,500
Principal repayments (163,908) (113,937)
--------- ---------
Balance outstanding - end of year $ 630,144 $ 209,552
========= =========
</TABLE>
(4) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Land $125 $125
Buildings and improvements 429 429
Furniture and equipment 16 63
---- ----
570 617
Less - accumulated depreciation and amortization 136 183
---- ----
$434 $434
==== ====
</TABLE>
Depreciation and amortization expense amounted to $15,000 and
$21,000 during the years ended December 31, 1998 and 1997,
respectively.
51<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(5) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Loans $104 $ 91
Securities 47 34
---- ----
$151 $125
==== ====
</TABLE>
(6) DEPOSITS
At December 31, 1998 and 1997, the aggregate amounts of time
deposits in denominations of $100,000 or more were approximately
$2,214,000 and $1,677,000, respectively. Deposit balances in
excess of $100,000 are not insured by the FDIC.
Contractual maturities of time certificates are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Within one year $11,621 $14,427
One through two years 4,255 1,339
Two through three years 565 381
Three through four years 4 155
Four through five years 8 4
------- -------
Total Time Certificates $16,453 $16,306
======= =======
</TABLE>
Interest expense on deposits is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997
<S> <C> <C>
Savings, club and escrow accounts $ 82 $ 79
Time certificates 942 883
NOW accounts and money market accounts 34 36
------ ----
$1,058 $998
====== ====
</TABLE>
52<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(7) BORROWINGS
The Bank is a member of the Federal Home Loan Bank of New York
(FHLB). As a member, the Bank is required to own capital stock
in the FHLB and is authorized to apply for advances from the
FHLB. At December 31, 1998 and 1997, the Bank may borrow up to
30 percent of total assets.
During 1998 and 1997 the Bank did not hold borrowings with the
FHLB.
(8) INCOME TAXES
Income taxes were allocated as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997
<S> <C> <C>
Income before income tax expense $ 50 $ 38
Changes in equity, for changes in
unrealized gains on securities 0 5
---- ----
$ 50 $ 43
==== ====
</TABLE>
The components of income tax expense attributable to income from
operations are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Current:
Federal $ 48 $ 46
State 8 6
---- ----
$ 56 $ 52
---- ----
Deferred:
Federal $ (4) $(12)
State (2) (2)
---- ----
$ (6) $(14)
---- ----
$ 50 $ 38
==== ====
</TABLE>
53<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(8) INCOME TAXES (CONT.)
Actual tax expense attributable to income before income taxes
differed from "expected" tax expense, computed by applying the
U. S. Federal statutory tax rate of 34% to income before income
tax as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
1998 1997
<S> <C> <C>
Computed "expected" tax expense $ 65 $ 43
Increase (decrease) in income taxes resulting from:
States taxes, net of:
Federal tax benefits 1 3
Benefit of Federal tax rates
below statutory rates (7) (7)
Other items, net (9) (1)
---- ----
$ 50 $ 38
---- ----
Effective tax rate 26.2% 30.1%
==== ====
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 61 $ 60
Net deferred loan fees 7 8
Accrued expenses 6 2
Other 0 4
---- ----
Total Gross Deferred Tax Assets $ 74 $ 74
Deferred tax liabilities:
Accumulated depreciation on
premises and equipment $ 7 $ 7
Accrued interest receivable 54 55
Bad debt reserves in excess of
base year reserve 10 15
---- ----
Total Gross Deferred Tax Liabilities $ 71 $ 77
---- ----
Net Deferred Tax Assets (Liabilities) $ 3 $ (3)
==== ====
</TABLE>
54<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(8) INCOME TAXES (CONT.)
Realization of deferred tax assets is dependent upon the
generation of future taxable income or the existence of
sufficient taxable income within the carryback period. A
valuation allowance is provided when it is more likely than not
that some portion of the deferred tax assets will not be
realized. In assessing the need for a valuation allowance,
management considers the scheduled reversal of the deferred tax
liabilities, the level of historical taxable income and
projected future taxable income over the periods in which the
temporary differences comprising the deferred tax assets will be
deductible. Management believes that no valuation allowance is
necessary.
Included in retained earnings at December 31, 1998 and 1997 is
approximately $426,000 representing aggregate provisions for
loan losses taken under the Internal Revenue Code. Use of these
reserves to pay dividends in excess of earnings and profits or
to redeem stock, or if the institution fails to qualify as a
bank for Federal income tax purposes, would result in taxable
income to the Bank.
(9) PENSION PLAN
The Bank has a non-contributory multiemployer pension plan.
The Bank participates in the Financial Institutions Retirement
Fund. The Fund is a tax-qualified pension trust covering 298
participating employers. Separate actuarial valuations are not
made with respect to each employer. All full-time employees of
the Bank are covered by the plan. Statement of Financial
Accounting Standards (SFAS) No. 87, Employers' Accounting for
Pensions requires that in multiemployer plans, pension expense
is equal to contributions required each accounting period.
During the years ended December 31, 1998 and 1997 the Bank was
not required to make contributions to the plan and the expense
was $-0-.
The plan uses the projected unit credit cost method as its
funding method. The maximum number of years in which the
initial past service liability would be required to be paid off
by any participating employer is 15. Actuarial gains and losses
are spread as a part of the valuation method.
The Bank adopted a 401(k) Plan effective January 1, 1994
covering all full-time employees. The Bank matches an
employee's contribution up to a maximum of 5%. The expense for
this Plan was $10,000 for the years ended December 31, 1998 and
1997.
(10) COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
consist of commitments to extend credit and involve, to varying
degrees, elements of credits, market and interest rate risk in
excess of the amounts recognized in the balance sheet. Credit
risk represents the accounting loss that would be recognized at
the reporting date if obligated counterparties failed completely
to perform as contracted. Market risk represents risk that
future changes in market prices make financial instruments less
valuable.
55<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(10) COMMITMENTS AND CONTINGENCIES (CONT.)
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since some of the commitments are expected to
expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's
evaluation of the customer's financial position. Collateral
held varies, but may include real estate, accounts receivable,
inventory, property, plant and equipment and income-producing
commercial properties. Substantially all commitments to extend
credit, if exercised, will represent loans secured by real
estate.
Commitments to originate fixed and adjustable rate loans are as
follows (in thousands):
DECEMBER 31,
1998
Fixed rate:
7.00-7.99% $244
8.00-8.99% 55
----
Total Fixed Rate $299
Adjustable rate 75
----
Total Commitments to Originate Loans $374
====
Unused lines of credit, which includes home equity, consumer and
commercial, amounted to $404,000 and $345,000 at December 31,
1998 and 1997, respectively.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instruments
for loan commitments is represented by the contractual or
notional amount of these instruments. The Bank uses the same
credit policies in making commitments as it does for on-balance
sheet instruments. The Bank controls its credit risk through
credit approvals, limits, and monitoring procedures.
In the normal course of business, there are various outstanding
legal proceedings. In the opinion of management, the aggregate
amount involved in such proceedings is not material to the
financial condition or results of operations of the Bank.
56<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(11) CONCENTRATIONS OF CREDIT
A substantial portion of the Bank's loans are mortgages in
Northern 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
area. A majority of the Bank's loan portfolio is secured by
real estate.
The Bank's concentrations of credit risk are disclosed in the
schedule of loan classifications. Other than general economic
risks, management is not aware of any material concentrations of
credit risk to any industry or individual borrower.
(12) REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements
administered by its primary Federal regulator, the Office of
Thrift Supervision (OTS). Failure to meet the minimum
regulatory capital requirements can initiate certain mandatory,
and possible additional discretionary actions by regulators,
that if undertaken, could have a direct material affect on the
Bank and the financial statements. Under the regulatory capital
adequacy guidelines and the regulatory framework for prompt
correction action, the Bank must meet specific capital
guidelines involving 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 classification under the prompt corrective action
guidelines are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios of: total risk-based capital and Tier I capital to
risk-weighted assets (as defined in the regulations), Tier I
capital to adjusted tangible assets (as defined), and tangible
capital to tangible assets (as defined). As discussed in
greater detail below, as of December 31, 1998, the Bank met all
of the capital adequacy requirements to which it is subject.
As of November 2, 1998, the most recent notification from the
OTS, the Bank was categorized as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank has to maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as disclosed in the table below. There are no conditions
or events since the most recent notification that management
believes have changed the Bank's prompt corrective action
category.
57
<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(12) REGULATORY MATTERS (CONT.)
The following is a reconciliation of the Bank's GAAP and
Regulatory capital at December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
GAAP TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL % CAPITAL % CAPITAL %
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998 $2,218 $2,218 $2,218 $2,218
Regulatory capital adjustments:
General allowance
for loan losses (up to 1.25%
of risk-weighted assets)
169
------ ------ ------
Total regulatory capital $2,218 9.0% $2,218 9.0% $2,387 16.1%
Regulatory capital requirement 370 1.5% 740 3.0% 1,190 8.0%
------ ------ ------
Regulatory capital excess $1,848 $1,478 $1,197
====== ====== ======
<CAPTION>
GAAP TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL % CAPITAL % CAPITAL %
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997 $1,577 $1,577 $1,577 $1,577
Regulatory capital adjustments:
General allowance
for loan losses (up to 1.25%
of risk-weighted assets)
150
Net unrealized gain on securities
available-for-sale (1) (1) (1)
------ ------ ------
Total regulatory capital $1,576 6.7% $1,576 6.7% $1,726 14.4%
Regulatory capital requirement 351 1.5% 702 3.0% 958 8.0%
------ ------ ------
Regulatory capital excess $1,225 $ 874 $ 768
====== ====== ======
</TABLE>
58
<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(12) REGULATORY MATTERS (CONT.)
The following is a summary of the Bank's actual capital amounts
and ratios compared to the OTS minimum capital adequacy
requirements and the OTS requirements for classification as a
well capitalized institution under prompt corrective action
provisions (in thousands):
<TABLE>
<CAPTION>
TO BE CLASSIFIED
AS WELL-
MINIMUM CAPITALIZED UNDER
CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Total capital (to risk weighted assets) $2,387 16.1% $1,190 8.0% $1,487 10.0%
Tier I Capital (to risk weighted assets) 2,218 14.9 595 4.0 892 6.0
Tier I Capital (to adjusted tangible
assets) 2,218 9.0 740 3.0 1,234 5.0
Tangible Capital (to tangible assets) 2,218 9.0 370 1.5 - N/A
As of December 31, 1997
Total capital (to risk weighted assets) $1,726 4.4% $ 958 8.0% $1,198 10.0%
Tier I Capital (to risk weighted assets) 1,576 13.2 479 4.0 719 6.0
Tier I Capital (to adjusted tangible
assets) 1,576 6.7 702 3.0 1,170 5.0
Tangible Capital (to tangible assets) 1,576 6.7 351 1.5 - N/A
</TABLE>
59<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in
estimating fair values of financial instruments:
CASH AND CASH EQUIVALENTS: The fair values are considered
to approximate the carrying values, as reported in the balance
sheet.
SECURITIES: Fair values of securities are based on
exchange quoted market prices, where available. If quoted
market prices are not available, fair values are based on quoted
market prices of similar instruments.
LOANS: For variable rate loans that reprice frequently
and loans due on demand with no significant change in credit
risk, fair values are considered to approximate carrying values.
The fair values for certain mortgage loans (e.g., one-to-four
family residential) and other consumer loans are based on quoted
market prices of similar loans sold on the secondary market,
adjusted for differences in loan characteristics. The fair
values for other loans (e.g., commercial real estate and rental
property mortgage loans) are estimated using discounted cash
flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit rating.
The carrying amount of accrued interest approximates its fair
value.
FHLB STOCK: The carrying value of this instrument, which
is redeemable at par, approximates fair value.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Bank's
off-balance-sheet instruments (lines of credit and commitments
to fund loans) are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standing. The
fair value of these financial instruments is immaterial and has
therefore been excluded from the table below.
DEPOSITS: The fair values of demand, savings, club, NOW
and money market accounts are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their
carrying amounts). Fair values for fixed-rate time certificates
are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on these products
to a schedule of aggregated expected monthly maturities on time
deposits.
60<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated carrying values and fair values of the Bank's
financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,475 $ 2,475 $ 1,227 $ 1,227
Securities 2,057 2,069 4,768 4,775
Loans, net 19,815 20,062 16,668 16,306
FHLB stock 139 139 137 137
Accrued interest receivable 151 151 125 125
Financial liabilities:
Deposits:
Demand accounts 642 642 638 638
Savings and club
accounts 2,806 2,806 2,733 2,733
Time certificates 16,453 16,536 16,306 16,329
NOW and money market
accounts 2,293 2,293 2,088 2,088
</TABLE>
Fair value estimates are made at a specific point in time based
on relevant market information and information about the
financial instrument. 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.
(14) YEAR 2000 COMPUTER COMPLIANCE
The Year 2000 (Y2K) issue is the result of computer programs
using two-digits, as opposed to four digits, to indicate the
year. Such computer systems will be unable to interpret dates
beyond the year 1999, which could cause a system failure or
other computer errors, leading to disruptions in operations. In
1998, the Bank developed a three phase program for Y2K
information System's compliance.
Phase I is to identify those systems with which the Bank
has exposure to Y2K issues.
Phase II is the development and implementation of action
plans to be Y2K compliant in all areas.
Phase III, to be completed early in 1999, is the final
testing of each major area of exposure to ensure compliance.
The Bank does not anticipate significant cost to replace
existing hardware or software. The teller/platform computer
system is in the process of being replaced with a new system.
The cost of the new system will be approximately $60,000 and it
will be Y2K compliant.
61<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(14) YEAR 2000 COMPUTER COMPLIANCE (CONT.)
The greatest potential for problems, however, is the data
processing provided by its third party service bureau. The
service bureau with which the Bank operates is providing it with
periodic updates to its compliance progress. The first two
phases of testing were completed as of December 31, 1998 and the
service bureau has indicated that it will be compliant by that
date. The Bank is in the process of developing a contingency
plan to deal with the potential that its service bureau is
unable to bring its systems into compliance. If the service
bureau is not Y2K compliant, the Bank would use manual systems.
The use of manual systems, however, could result in data
processing delays or errors.
The Bank has also evaluated its non-information technology
systems to determine if these systems could be impacted by the
year 2000 problem. The Bank has determined that the only system
of this type that could be affected is its alarm system. The
Bank has been informed, however, by the vendor that the System
is Year 2000 compliant and has been fully tested.
(15) CONVERSION FROM MUTUAL TO STOCK ORGANIZATION
On December 28, 1998 the Bank converted from a Federally
chartered mutual savings and loan to a Federally chartered stock
savings and loan. In connection with this conversion, the Bank
issued all of its stock to the Parent and the Company issued
134,390 shares of common stock and received gross proceeds of
$1,343,900. Costs associated with the conversion of $342,556
were accounted for as a reduction of gross proceeds.
At the time of conversion, the Bank established a liquidation
account, which is a memorandum account that does not appear on
the statement of financial condition, in an amount equal to its
retained earnings as reflected in the latest statement of
financial condition used in the final conversion prospectus.
The liquidation account is maintained for the benefit of
eligible account holders who continue to maintain their deposit
accounts in the Bank after conversion. In the event of a
complete liquidation of the Bank (and only in such an event),
eligible depositors who continue to maintain accounts shall be
entitled to receive a distribution from the liquidation account
before any liquidation may be made with respect to common stock.
(16) EMPLOYEE STOCK OWNERSHIP PLAN
On December 28, 1998, the board of directors adopted an Employee
Stock Ownership Plan ("ESOP") to provide stock awards to
eligible employees of the Company. The Company issued a
promissory note to the ESOP for $107,510 to purchase shares of
the Company's common stock. The ESOP will repay the note in
annual payments of principal and interest through December 31,
2008. The first payment will be due on December 31, 1999.
The amount of the Company's annual contribution to the ESOP is
at the discretion of the Company's board of directors. At
December 31, 1998 there were no contributions to the ESOP.
62<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(17) CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Peoples Bankcorp, Inc.
is as follows:
DECEMBER 31,
1998
(IN THOUSANDS)
BALANCE SHEET
Assets:
Cash - interest bearing deposits with other
banks $ 393
Investment in common stock of Ogdensburg
Federal Savings and Loan Association 2,218
------
Total Assets $2,611
======
Liabilities and Stockholders' Equity:
Stockholders' Equity $2,611
------
Total Liabilities and
Stockholders' Equity $2,611
======
YEAR ENDED
DECEMBER 31,
1998
(IN THOUSANDS)
STATEMENT OF INCOME
Interest on investments $ 0
-----
Income before equity in undistributed net
income of Ogdensburg Federal Savings and Loan
Association $ 0
Equity in undistributed net income of Ogdensburg
Federal Savings and Loan Association 140
-----
Net Income $ 140
=====
63<PAGE>
<PAGE>
PEOPLES BANKCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997 (CONT.)
________________________________________________________________
(17) CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (CONT.)
YEAR ENDED
DECEMBER 31,
1998
(IN THOUSANDS)
STATEMENT OF CASH FLOWS
Cash Flows from Operating Activities:
Net income $ 140
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
Ogdensburg Federal Savings and Loan
Association (140)
------
Net Cash Provided by Operating Activities $ 0
------
Cash Flows from Investing Activities:
Investment in common stock of Ogdensburg
Federal Savings and Loan Association $ (501)
------
Net Cash Used by Investing Activities $ (501)
------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock $1,344
Cost associated with conversion (343)
Increase in loan to employee stock ownership plan (107)
------
Net Cash Provided by Financing Activities $ 894
------
Net Increase in Cash and Cash Equivalents $ 393
Cash and Cash Equivalents at Beginning of Year 0
------
Cash and Cash Equivalents at End of Year $ 393
======
64
<PAGE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------
The disclosure required by this item is incorporated by
reference to the Company's Current Report on Form 8-K dated
January 1, 1999.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
- --------------------------------------------------------------
The information required by this item is incorporated by
reference to "Proposal I -- Election of Directors" in the Proxy
Statement.
For certain information regarding the non-director
executive officers of the Company, see "Item 1. Description of
Business -- Executive Officers."
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated by
reference to "Executive Compensation" in the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- ------------------------------------------------------------
The information required by this item is incorporated by
reference to "Voting Securities and Principal Holders Thereof"
and "Proposal I -- Election of Directors" in the Proxy
Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated
herein by reference to the section captioned "Transactions with
Management" in the Proxy Statement.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
- -------------------------------------------------
(a) List of Documents Filed as Part of this Report
(1) Financial Statements. The following financial
statements are incorporated by reference from Item 7:
Independent Auditors' Report of Morrow & Poulsen, P.C.
Independent Auditors' Report of KPMG LLP
Consolidated Statements of Financial Condition as of
December 31, 1998 and 1997
Consolidated Statements of Income for the Years
Ended December 31, 1998 and 1997
Consolidated Statements of Stockholder's Equity for
the Years Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements
65<PAGE>
<PAGE>
(2) Exhibits. The following is a list of exhibits filed
as part of this Annual Report on Form 10-KSB and is also the
Exhibit Index.
Page in
Sequentially
No. Description Numbered Copy
- --- ----------- -------------
3.1 Certificate of Incorporation of Peoples
Bankcorp, Inc. *
3.2 Bylaws of Peoples Bankcorp, Inc. *
4 Form of Common Stock Certificate of
Peoples Bankcorp, Inc. *
10.1 Proposed Peoples Bankcorp, Inc. 1998 Stock
Option and Incentive Plan *
10.2 Proposed Peoples Bankcorp, Inc. Management
Recognition Plan and Trust Agreement *+
10.3 Employment Agreement between People's
Bankcorp, Inc. and Robert E. Wilson *+
10.4 Guaranty Agreement between People's Bankcorp,
Inc. and Robert E. Wilson *+
10.5 Employment Agreement between Ogdensburg
Federal Savings and Loan Association and
Todd R. Mashaw *+
21 Subsidiaries
27 Financial Data Schedule (EDGAR only)
________
(*) Incorporated herein by reference from Registration
Statement on Form SB-2 filed (File No. 333-63625).
(+) Management contract or compensatory plan or
arrangement.
(B) REPORTS ON FORM 8-K. There were no Current Reports
on Form 8-K filed by the Company during the fourth quarter of
fiscal year 1998.
66<PAGE>
<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.
PEOPLES BANKCORP, INC.
March 10, 1999 By: /s/ Robert E. Wilson
--------------------------
Robert E. Wilson
President and Chief Executive Officer
(Duly Authorized Representative)
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.
/s/ Robert E. Wilson March 10, 1999
- ---------------------------------
Robert E. Wilson
President and Chief Executive Officer
(Director and Principal Executive,
Accounting and Financial Officer)
/s/ Robert E. Hentschel March 10, 1999
- ---------------------------------
Robert E. Hentschel
Chairman of the Board
(Director)
/s/ Anthony P. LeBarge, Sr. March 10, 1999
- ---------------------------------
Anthony P. LeBarge, Sr.
/s/ Wesley L. Stitt March 10, 1999
- ---------------------------------
Wesley L. Stitt
(Director)
/s/ George E. Silver March 10, 1999
- ---------------------------------
George E. Silver
(Director)
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Parent
- ------
Peoples Bankcorp, Inc.
State or Other
Jurisdiction Percentage
Subsidiaries (1) of Incorporation Ownership
- --------------- ----------------- ----------
<S> <C> <C>
Ogdensburg Federal Savings and
Loan Association United States 100%
<FN>
___________
(1) The assets, liabilities and operations of the subsidiaries
are included in the consolidated financial statements
contained in the financial statements attached hereto as an
exhibit.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,194
<INT-BEARING-DEPOSITS> 1,281
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 2,057
<INVESTMENTS-MARKET> 2,069
<LOANS> 19,984
<ALLOWANCE> 169
<TOTAL-ASSETS> 25,074
<DEPOSITS> 22,194
<SHORT-TERM> 0
<LIABILITIES-OTHER> 269
<LONG-TERM> 0
<COMMON> 1,344
0
0
<OTHER-SE> 1,717
<TOTAL-LIABILITIES-AND-EQUITY> 25,074
<INTEREST-LOAN> 1,537
<INTEREST-INVEST> 206
<INTEREST-OTHER> 61
<INTEREST-TOTAL> 1,804
<INTEREST-DEPOSIT> 1,058
<INTEREST-EXPENSE> 1,058
<INTEREST-INCOME-NET> 746
<LOAN-LOSSES> 9
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 590
<INCOME-PRETAX> 191
<INCOME-PRE-EXTRAORDINARY> 141
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.21
<LOANS-NON> 48
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 33
<ALLOWANCE-OPEN> 164
<CHARGE-OFFS> 5
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 169
<ALLOWANCE-DOMESTIC> 169
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
