<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 8-K/A
(Amendment No. 1)
Current Report
Pursuant to Section 13or 15(d) of the
Securities Exchange Act of 1934
-----------------------
Date of Report (Date of Earliest Event Reported):
June 4, 1999
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
---------------------------------------------
(Exact Name of Registrant as Specified in Charter)
New York
--------
(State or other jurisdiction of incorporation)
0-18533
-------
(Commission File Number)
16-1168175
----------
(I.R.S. Employer Identification Number)
50 North Main Street
Castile, New York 14427
-----------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number Including Area Code:
(716) 493-2576
--------------
<PAGE>
Letchworth Independent Bancshares Corporation ("Letchworth" or "Registrant")
hereby amends the following item of its Current Report on Form 8-K, dated June
4, 1999, and filed with the Securities and Exchange Commission on June 17, 1999,
as set forth below. The purpose of that Report was to disclose, pursuant to Item
2, Letchworth's acquisition of a controlling interest in The Mahopac National
Bank ("Mahopac"). As permitted by Sections (a)(4) and (b)(2) of the Instructions
to Item 7, the Report omitted the PRO FORMA financial information required by
Item 7(b). The purpose of this Amendment No.1 is to file such PRO FORMA
information.
Item 7. Financial Statements, PRO FORMA Financial Statements and Exhibits
(a) The audited financial statements of Mahopac as of and for the years
ended December 31, 1998, 1997 and 1996 are hereby incorporated by reference,
together with the reports of KPMG LLP, independent auditors, on such financial
statements.
(b) An unaudited PRO FORMA Condensed Combined Balance Sheet of Letchworth
as of March 31, 1999 and an unaudited PRO FORMA Condensed Combined Statement of
Income of Letchworth for the year ended December 31, 1998 and the quarter ended
March 31, 1999 are filed herewith as Exhibit 7(b). The unaudited PRO FORMA
Condensed Combined Balance Sheet assumes that Letchworth's acquisition of a
controlling interest in Mahopac was consummated on March 31, 1999. Certain
amounts in Mahopac's historical balance sheet as shown have been reclassified to
conform to Letchworth's presentation. The unaudited PRO FORMA Condensed
Combined Statements of Income assumes that the transaction was consummated on
January 1, 1998 and reflects the consolidation of the results of operations of
Letchworth and Mahopac for the year ended December 31, 1998 and three months
ended March 31, 1999. The cash consideration for the transaction is assumed to
have been funded by Letchworth by means of the liquidation of investment
securities available for sale. As a result of Letchworth's acquisition of a
controlling interest in Mahopac, Letchworth expects to achieve substantial
benefits, primarily in the area of future growth opportunities. The unaudited
PRO FORMA Condensed Combined Statements of Income do not reflect any direct
costs which are expected to result from the transaction, and are not indicative
of the results of future operations.
The unaudited PRO FORMA condensed financial information is not necessarily
indicative of the future financial position or future results of operations of
Letchworth or of the financial position or the results of operations of
Letchworth that would actually have occurred had the transaction been in effect
as of the dates or for the periods presented.
(c) The following Exhibits are filed herewith or incorporated by
reference herein as a part of this current report:
EXHIBIT NO.
23) Consent of KPMG LLP, independent auditors to Mahopac. Filed
herewith.
7(a) Mahopac audited Financial Statements, together with the Reports of
the Independent Auditors thereon: As of and for the years ended December
31, 1998 and 1997; and as of and for the years ended December 31, 1997 and
1996.
7(b) Letchworth PRO FORMA Condensed Combined Balance Sheet as of March 31,
1999 (unaudited) and Letchworth PRO FORMA Condensed Combined Statement of Income
for the year ended December 31, 1998 (unaudited) and the quarter ended March 31,
1999 (unaudited). Filed herewith.
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LETCHWORTH INDEPENDENT BANCSHARES CORPORATION
Date: August 12, 1999 By: /s/ Thomas J. Sykes
----------------------------------------
Thomas J. Sykes
Vice President & Chief Financial Officer
3
<PAGE>
EXHIBIT 7(a)
THE MAHOPAC NATIONAL BANK
Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
<PAGE>
Independent Auditors' Report
The Board of Directors
The Mahopac National Bank:
We have audited the accompanying statements of condition of The Mahopac National
Bank as of December 31, 1998 and 1997, and the related statements of operations,
changes in stockholders' equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Mahopac National Bank as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
January 29, 1999
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Condition
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets 1998 1997
-------------------- --------------------
<S> <C> <C>
Cash and due from banks (note 11) $ 3,826 4,128
Federal funds sold 5,350 3,650
-------------------- --------------------
Total cash and cash equivalents 9,176 7,778
-------------------- --------------------
Securities (note 3):
Available-for-sale, at fair value (amortized cost of $42,785
in 1998 and $36,625 in 1997) 43,080 36,817
Held-to-maturity, at amortized cost (fair value of $2,236
in 1998 and $1,469 in 1997) 2,231 1,469
-------------------- --------------------
Total securities 45,311 38,286
-------------------- --------------------
Loans, net (note 4):
Residential mortgage 48,072 48,233
Commercial mortgage 22,279 19,746
Commercial business 8,368 7,069
Consumer 3,472 3,633
Construction 4,239 7,629
-------------------- --------------------
Gross loans 86,430 86,310
Allowance for loan losses (1,479) (1,447)
-------------------- --------------------
Total loans, net 84,951 84,863
-------------------- --------------------
Bank premises and equipment, net (note 5) 5,210 5,193
Accrued interest receivable 693 859
Federal Home Loan Bank stock 705 622
Deferred income taxes (note 8) 684 639
Other assets (note 4) 1,658 1,316
-------------------- --------------------
Total assets $ 148,388 139,556
==================== ====================
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest bearing demand $ 36,641 30,208
Interest bearing (note 6) 96,302 95,475
-------------------- --------------------
Total deposits 132,943 125,683
Other liabilities 598 606
-------------------- --------------------
Total liabilities 133,541 126,289
-------------------- --------------------
Commitments and contingencies (note 9)
Stockholders' equity (notes 2 and 11):
Common stock ($100 par value; 2,125 shares
authorized, issued and outstanding) 213 213
Additional paid-in capital 597 597
Retained earnings 13,858 12,342
Accumulated other comprehensive income (net unrealized
gain on securities available-for-sale, net of taxes of $116 in
1998 and $77 in 1997) 179 115
-------------------- --------------------
Total stockholders' equity 14,847 13,267
-------------------- --------------------
Total liabilities and stockholders' equity $ 148,388 139,556
==================== ====================
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Operations
Years ended December 31, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
<S> <C> <C>
Interest income:
Loans $ 7,420 6,841
Securities 2,083 2,261
Federal funds and other 772 582
-------------------- --------------------
Total interest income 10,275 9,684
Interest expense on deposits 3,366 3,358
-------------------- --------------------
Net interest income 6,909 6,326
Provision for loan losses (note 4) 82 60
-------------------- --------------------
Net interest income after provision for loan losses 6,827 6,266
-------------------- --------------------
Non-interest income:
Deposit service fees 688 608
Net gain on sales of loans (note 4) 167 84
Other (note 4) 343 313
-------------------- --------------------
Total non-interest income 1,198 1,005
-------------------- --------------------
Non-interest expense:
Compensation and benefits (note 7) 2,742 2,590
Occupancy and equipment 743 856
Professional and outside service fees 617 387
Advertising and marketing 125 126
Other 780 768
-------------------- --------------------
Total non-interest expense 5,007 4,727
-------------------- --------------------
Income before income tax expense 3,018 2,544
Income tax expense (note 8) 1,184 994
-------------------- --------------------
Net income $ 1,834 1,550
===================- ====================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Changes in Stockholders' Equity
Years ended December 31, 1998 and 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Additional other Total
Common paid-in Retained comprehensive stockholders'
stock capital earnings income equity
---------- ---------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 213 597 11,015 (49) 11,776
Net income -- -- 1,550 -- 1,550
Change in net unrealized gain on
securities available-for-
sale, net of taxes of $110 -- -- -- 164 164
---------------
Total comprehensive income 1,714
Cash dividends declared ($105
per common share) -- -- (223) -- (223)
---------- ---------- ---------- --------------- ---------------
Balance at December 31, 1997 213 597 12,342 115 13,267
Net income -- -- 1,834 -- 1,834
Change in net unrealized gain on
securities available-for-
sale, net of taxes of $39 -- -- -- 64 64
---------------
Total comprehensive income 1,898
Cash dividends declared ($150
per common share) -- -- (318) -- (318)
---------- ---------- ---------- --------------- ---------------
Balance at December 31, 1998 $ 213 597 13,858 179 14,847
========== ========== ========== =============== ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
THE MAHOPAC NATIONAL BANK
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 $ 1,834 1,550
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 82 60
Amortization of discounts on securities, net (192) (25)
Net gain on sales of loans (167) (84)
Depreciation and amortization 327 313
Other adjustments, net 114 (532)
-------------------- --------------------
Net cash provided by operating activities 1,998 1,282
-------------------- --------------------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (61,097) (10,945)
Held-to-maturity (2,356) (1,582)
Repayments and maturities of securities:
Available-for-sale 55,132 12,328
Held-to-maturity 1,591 3,302
Disbursements for loan originations, net of repayments (12,566) (17,387)
Proceeds from sales of loans 12,321 5,128
Purchases of Federal Home Loan Bank stock (83) (622)
Other, net (484) (737)
-------------------- --------------------
Net cash used in investing activities (7,542) (10,515)
-------------------- --------------------
Cash flows from financing activities:
Net increase in deposits 7,260 9,559
Cash dividends paid (318) (223)
-------------------- --------------------
Net cash provided by financing activities 6,942 9,336
-------------------- --------------------
Net increase in cash and cash equivalents 1,398 103
Cash and cash equivalents at beginning of year 7,778 7,675
-------------------- --------------------
Cash and cash equivalents at end of year $ 9,176 7,778
==================== ====================
Supplemental information:
Interest paid on deposits $ 3,361 3,339
Income taxes paid 1,268 1,677
==================== ====================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
The Mahopac National Bank (the "Bank") provides community banking
services in its primary market area of Putnam County, New York. The Bank
is engaged principally in the business of attracting retail deposits from
the general public and business community, and investing those funds in
residential and commercial mortgage loans, commercial loans, consumer
loans and securities. The Bank is subject to regulation and supervision
by the Office of the Comptroller of the Currency (the "OCC"). Deposits
are insured up to applicable limits by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation.
The following is a summary of the significant accounting policies
followed by the Bank in the preparation of its financial statements.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. A
material estimate that is particularly susceptible to significant
near-term change is the allowance for loan losses, which is discussed
below.
For purposes of reporting cash flows, cash equivalents are defined as
Federal funds and other highly-liquid instruments with an original term
to maturity of three months or less.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
Securities
Securities are classified as held-to-maturity, trading, or
available-for-sale in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Securities classified as held-to-maturity are debt
securities for which the Bank has the positive intent and ability to hold
to maturity. Trading securities are debt and equity securities that are
bought principally for the purpose of selling them in the near term. All
other debt and equity securities are classified as available-for-sale.
Held-to-maturity securities are carried at amortized cost.
Available-for-sale securities are carried at fair value with unrealized
gains and losses excluded from earnings and reported on a net-of-tax
basis in stockholders' equity as "accumulated other comprehensive
income". The Bank has no trading securities.
Premiums and discounts are amortized to interest income on a level-yield
basis over the term of the security. Realized gains and losses on sales
of securities are determined based on the amortized cost of the specific
securities sold.
(Continued)
6
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
Federal Home Loan Bank ("FHLB") stock is a non-marketable equity security
held in accordance with certain regulatory requirements and, accordingly,
is carried at cost.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions for losses
charged to operations. Loan losses and recoveries of loans previously
written-off are charged or credited to the allowance as incurred or
realized, respectively. Management estimates the allowance for loan
losses based on an evaluation of the Bank's past loan loss experience,
known and inherent risks in the portfolio, the fair value of underlying
collateral, and current economic conditions. In management's judgment,
the allowance for loan losses is adequate to absorb probable losses in
the existing portfolio.
Establishing the allowance for loan losses involves significant
management judgment utilizing the best available information at the time
of review. Those judgments are subject to review by various sources,
including the Bank's regulators. Future adjustments to the allowance may
be necessary based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans,
the identification of additional problem loans, and other factors.
Impaired loans are accounted for in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118. A loan is considered to be impaired when, based on current
information and events, it is probable that the Bank will be unable to
collect all principal and interest contractually due. SFAS No. 114
permits the measurement of impaired loans based on (i) the present value
of expected future cash flows discounted at the loan's effective interest
rate, (ii) the loan's observable market price or (iii) the fair value of
the collateral if the loan is collateral dependent. Substantially all of
the Bank's impaired loans are collateral-dependent loans measured based
on the fair value of the collateral. When the measure of an impaired loan
is less than its recorded investment, an impairment loss is recognized as
part of the allowance for loan losses.
Interest and Fees on Loans
Generally, a loan (including an impaired loan under SFAS No. 114) is
placed on non-accrual status when principal or interest payments become
ninety days past due, or earlier if the ability of the borrower to meet
contractual payment terms is in doubt. When loans are placed on
non-accrual status, unpaid interest is reversed against interest income
of the current period. Interest payments received on non-accrual loans
are either applied to reduce unpaid principal balances or reported as
interest income, depending on management's judgment as to the likelihood
of further collections. Loans are returned to accrual status when
collectibility is no longer considered doubtful.
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is amortized to interest income over
the contractual term of the loans using the interest method. Unamortized
fees and costs applicable to loans prepaid or sold are recognized in
income at the time of prepayment or sale.
(Continued)
7
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
Bank Premises and Equipment
Land is carried at cost. All other categories of bank premises and
equipment are carried at cost, less accumulated depreciation computed
using the straight-line method over the estimated useful lives of the
respective assets.
Other Real Estate Owned
Other real estate owned represents properties acquired through
foreclosure. A property is recorded initially at fair value less
estimated costs to sell, and any resulting writedown of the recorded
investment in the loan is charged to the allowance for loan losses.
Thereafter, an allowance for losses on real estate owned is established
for any further declines in fair value less estimated costs to sell. Fair
value estimates are based on recent appraisals and other available
information.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Accordingly, deferred taxes are recognized for the estimated future tax
effects attributable to "temporary differences" between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. A deferred tax liability is recognized for all
temporary differences that will result in future taxable income. A
deferred tax asset is recognized for all temporary differences that will
result in future tax deductions, and for all tax credit carryforwards,
subject to reduction of the asset by a valuation allowance in certain
circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more
likely than not that some portion or all of the deferred tax asset will
not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of an enacted change in tax laws or
rates is recognized in income in the period that includes the enactment
date.
Comprehensive Income
The Bank has adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and display of comprehensive income
and its components in financial statements. Comprehensive income
represents the sum of net income and "other comprehensive income" which,
for the Bank, is limited to the change during the period in the net
unrealized gain or loss on securities available for sale. In accordance
with SFAS No. 130, the Bank has reported its comprehensive income for
1998 and 1997 in the statements of changes in stockholders' equity.
(Continued)
8
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
(2) Pending Acquisition of a Majority Ownership in the Bank
In January 1999, the Bank announced the signing of a definitive agreement
that allows Letchworth Independent Bankshares Corporation ("LIBC"), a
bank holding company, to acquire a majority ownership interest in the
Bank. LIBC expects to purchase between 58% and 70% of the Bank's
outstanding common shares. The purchase is subject to approval by the
Bank's shareholders and the appropriate regulatory authorities, and is
expected to be completed in the second quarter of 1999.
(3) Securities
The following is a summary of securities at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------------- --------------- --------------- --------------
(In thousands)
<S> <C> <C> <C> <C>
December 31, 1998
-----------------
Available-for-sale securities:
U.S. Treasury $ 2,005 15 -- 2,020
U.S. Government-
sponsored agencies 8,971 2 (1) 8,972
Mortgage-backed 15,384 195 (7) 15,572
State, county and municipal 9,421 98 (3) 9,516
Other 7,004 -- (4) 7,000
--------------- --------------- --------------- --------------A
$ 42,785 310 (15) 43,080
=============== =============== =============== ==============
Held-to-maturity securities:
State, county and municipal $ 2,231 5 -- 2,236
=============== =============== =============== ==============
December 31, 1997
-----------------
Available-for-sale securities:
U.S. Treasury $ 2,013 15 -- 2,028
U.S. Government-
sponsored agencies 11,942 -- (3) 11,939
Mortgage-backed 18,811 186 (70) 18,927
State, county and municipal 1,837 68 -- 1,905
Other 2,022 -- (4) 2,018
--------------- --------------- --------------- --------------
$ 36,625 269 (77) 36,817
=============== =============== =============== ==============
Held-to-maturity securities:
State, county and municipal $ 1,469 -- -- 1,469
=============== =============== =============== ==============
</TABLE>
(Continued)
9
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
On the basis of amortized cost at December 31, 1998, the Bank's
securities portfolio consisted of fixed-rate securities of $33.3 million
and adjustable-rate securities of $11.7 million with weighted average
yields of 5.2% and 5.1%, respectively. At December 31, 1997, fixed-rate
securities and adjustable-rate securities amounted to $31.7 million and
$6.4 million, respectively, with weighted average yields of 6.0% and
6.4%, respectively. The Bank's mortgage-backed securities primarily
represent pass-through securities guaranteed by Ginnie Mae, Fannie Mae
and Freddie Mac.
The net unrealized gain on available-for-sale securities was $295,000
($179,000 after taxes) at December 31, 1998, compared to a net unrealized
gain of $192,000 ($115,000 after taxes) at December 31, 1997. These gains
and losses will continue to fluctuate based on changes in the portfolio
and market conditions. All unrealized losses on securities at December
31, 1998 and 1997 were temporary declines in fair value attributable to
changes in market interest rates. There were no sales of
available-for-sale securities or held-to-maturity securities in 1998 or
1997.
The following is a summary of the amortized cost and fair value of debt
securities (other than mortgage-backed securities) at December 31, 1998,
by remaining term to contractual maturity. Actual maturities may differ
from contractual maturities because certain issuers have the right to
call or redeem their obligations prior to maturity.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
-------------------------------- ------------------------------
Amortized Amortized
cost Fair value cost Fair value
<S> <C> <C> <C> <C>
One year or less $ 18,258 18,271 1,815 1,815
Over one to five years 7,612 7,642 416 421
Over five to ten years 1,508 1,573 -- --
Total 27,378 27,486 2,231 2,236
---------------------------------------------------------------------------------------------------
</TABLE>
Securities with an amortized cost and fair value of $6.4 million and $6.5
million, respectively, were pledged to secure public deposits at December
31, 1998.
Interest income on tax-exempt securities was $216,000 in 1998 and
$200,000 in 1997.
(4) Loans
The Bank's gross loan portfolio at December 31, 1998 consisted of
fixed-rate loans of $30.2 million and adjustable-rate loans of $56.2
million with weighted average yields of 8.1% and 8.6%, respectively. At
December 31, 1997, fixed-rate loans and adjustable-rate loans amounted to
$28.3 million and $58.0 million, respectively, with weighted average
yields of 8.3% and 9.0%, respectively.
(Continued)
10
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
The Bank primarily originates mortgage loans secured by existing
single-family residential and commercial real estate properties. The Bank
also originates multi-family residential, commercial business, consumer
and construction loans. A substantial portion of the Bank's loans are
secured by real estate properties located in Putnam County, New York. The
ability of the Bank's borrowers to make principal and interest payments
is dependent upon, among other things, the level of overall economic
activity and the real estate market conditions prevailing within the
Bank's concentrated lending area.
The principal balances of loans on non-accrual status at December 31 were
as follows:
1998 1997
---------- --------
(In thousands)
Residential mortgage $ 602 768
Commercial mortgage -- 338
Commercial business 12 19
Consumer 47 151
Construction 89 89
--------- ---------
Total non-accrual loans $ 750 1,365
========= =========
If interest payments on non-accrual loans had been made in accordance
with their contractual terms, interest income would have been increased
by $163,000 in 1998 and $198,000 in 1997.
SFAS No. 114 applies to loans that are individually evaluated for
collectibility in accordance with the Bank's normal loan review
procedures (principally loans in the commercial mortgage and commercial
business categories). At December 31, 1998 and 1997, the Bank's total
recorded investment in impaired loans was $12,000 and $357,000,
respectively, representing its non-accrual loans in the foregoing
categories. An allowance for loan impairment under SFAS No. 114 was not
required at either date, primarily due to the adequacy of collateral
values. The Bank's average recorded investment in impaired loans was
$197,000 for 1998 and $393,000 for 1997. Interest income recognized on
impaired loans (while such loans were considered impaired) was immaterial
for 1998 and 1997.
The following is a summary of activity in the allowance for loan losses
for the years ended December 31:
1998 1997
--------- ---------
(In thousands)
Balance at beginning of year $ 1,447 1,411
Provision for loan losses 82 60
Charge-offs (78) (47)
Recoveries 28 23
---------- ----------
Balance at end of year $ 1,479 1,447
========== ==========
(Continued)
11
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
Other real estate owned properties with net carrying values of $60,000
and $66,000 are included in other assets at December 31, 1998 and 1997,
respectively.
Certain residential mortgage loans originated by the Bank are sold in the
secondary market, on a non-recourse basis with servicing retained.
Proceeds from sales of mortgage loans in 1998 and 1997 were $12.3 million
and $5.1 million, respectively, and the realized gains on sale were
$167,000 and $84,000, respectively. The realized gains in 1998 and 1997
include $135,000 and $55,000, respectively, for the capitalization of
mortgage servicing rights. Other assets at December 31, 1998 and 1997
include the unamortized cost of capitalized servicing rights of $168,000
and $73,000, respectively, which approximated fair value. The unpaid
principal balances of serviced loans, which are not included in the
Statements of Condition, were approximately $22.1 million at December 31,
1998 and $11.2 million at December 31, 1997. Mortgage loans held for sale
were $2.3 million and $1.3 million at December 31, 1998 and 1997,
respectively.
In 1996 the Bank implemented a program involving purchases, from its
commercial customers, of certain accounts receivable arising from the
customer's business. The receivables are purchased by the Bank at a
discount, with full recourse to the Bank's customer for any uncollectible
accounts. Full recourse is generally required from the Bank's customer
within ninety days of the purchased receivable's due date if all or a
portion remains unpaid. The Bank earns a fee for collecting payments and
performing other servicing functions with respect to the purchased
accounts. Purchased receivables of $1,226,000 and $958,000 are included
in other assets at December 31, 1998 and 1997, respectively. Other
non-interest income includes fees related to this program of $140,000 in
1998 and $120,000 in 1997.
(5) Bank Premises and Equipment
The following is a summary of bank premises and equipment at December 31:
1998 1997
------------ ---------
(In thousands)
Land $ 771 771
Land improvements 210 210
Bank premises 4,960 4,703
Furniture and equipment 1,476 1,389
--------- ----------
7,417 7,073
Less accumulated depreciation (2,207) (1,880)
------------ -----------
Bank premises and equipment, net $ 5,210 5,193
============ ===========
(Continued)
12
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
(6) Interest Bearing Deposits
Interest bearing deposits are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
-------------------------------- ----------------------------------
Weighted Weighted
average average
rates Amount rates Amount
-------------- -------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Savings accounts 2.6% $ 65,150 3.4% $ 65,421
NOW accounts 1.0 4,970 1.5 6,753
Money market accounts 2.0 3,777 2.5 3,298
-------------- ----------------
2.5 73,897 3.2 75,472
-------------- ----------------
Time deposits, by remaining period to
contractual maturity:
Six months or less 4.7 14,755 4.8 13,383
Over six months to one year 4.8 4,915 5.1 3,717
Over one to two years 4.8 1,788 5.2 1,948
Over two to three years 5.1 679 5.5 553
Over three years 5.4 268 5.5 402
-------------- ----------------
4.8 22,405 4.9 20,003
-------------- ================
Total interest bearing deposits 3.0% $ 96,302 3.6% $ 95,475
============== ================
</TABLE>
Time deposits issued in amounts of $100,000 or more totaled $5.8 million
at December 31, 1998 and $4.9 million at December 31, 1997. Interest
expense on time deposits over $100,000 amounted to $343,000 in 1998 and
$228,000 in 1997.
(7) Employee Benefit Plan
The Bank maintains a defined contribution plan for eligible employees
under Section 401(k) of the Internal Revenue Code. All employees who have
a minimum of one year of service may elect to participate in the plan, by
making contributions ranging from 1% to 10% of their compensation. The
Bank makes matching contributions equal to 100% of the participant's
contributions that are not in excess of 4% of compensation. The Bank, at
its discretion, may make additional contributions on a profit-sharing
basis. Plan expense for Bank contributions amounted to $105,000 in 1998
and $100,000 in 1997.
(Continued)
13
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
(8) Income Taxes
The components of income tax expense are summarized as follows for the
years ended December 31:
1998 1997
------------ ----------
(In thousands)
Current tax expense:
Federal $ 935 803
State 333 285
----------- ----------
1,268 1,088
----------- ----------
Deferred tax (benefit) expense:
Federal (63) (73)
State (21) (21)
------------ ----------
(84) (94)
------------ ----------
Total income tax expense $ 1,184 994
============ ==========
The following is a reconciliation of the expected income tax expense,
computed at the applicable Federal statutory tax rate of 34%, to the
actual income tax expense for the years ended December 31:
1998 1997
--------- ---------
(In thousands)
Expected income tax expense $ 1,026 865
State income taxes, net of Federal
income tax benefit 206 174
Tax-exempt interest (73) (68)
Other, net 25 23
--------- -------
Actual income tax expense $ 1,184 994
========= =======
(Continued)
14
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
The tax effects of temporary differences that give rise to the Bank's
deferred tax assets and liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
------------ ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses in excess of
tax bad debt reserve $ 511 473
Interest on non-accrual loans 316 261
Other deductible temporary differences 53 24
---------- ---------
Total deferred tax assets 880 758
---------- ---------
Deferred tax liabilities:
Net unrealized gain on available-for-sale securities (116) (77)
Other taxable temporary differences (80) (42)
---------- ----------
Total deferred tax liabilities (196) (119)
---------- ----------
Net deferred tax asset $ 684 639
========== =======
</TABLE>
Based on the Bank's historical and anticipated future pre-tax earnings,
management believes that it is more likely than not that the Bank's
deferred tax assets will be realized.
(9) Commitments and Contingencies
Legal Proceedings
From time to time, the Bank is involved in legal proceedings relating to
the conduct of its business. In the opinion of management, after
consultation with legal counsel, the financial position of the Bank will
not be affected materially by the outcome of any pending legal
proceedings.
(Continued)
15
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to credit-related financial instruments that involve,
to varying degrees, elements of credit and interest rate risk in addition
to the amounts recognized in the Statements of Condition. The Bank's
exposure to credit loss is represented by the instruments' contractual
amounts which were as follows at December 31:
<TABLE>
<CAPTION>
1998
------------------------------------------------
Fixed Adjustable 1997
rate rate Total Total
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Loan origination commitments $ 5,111 4,301 9,412 2,156
Unadvanced lines of credit 796 13,894 14,690 10,280
Performance standby letters of credit 955 -- 955 460
------------- -------------- ------------- -------------
Total $ 6,862 18,195 25,057 12,896
============= ============== ============= =============
</TABLE>
Loan origination commitments are contractual agreements to lend to
customers within specified time periods at interest rates and on other
terms based on existing market conditions. Commitments generally have
fixed expiration dates or other termination clauses and may require the
payment of a fee by the customer. Loan origination commitments at
December 31, 1998 include $3.9 million for fixed-rate mortgage loans
which, if funded, will be classified as loans held for sale in the
secondary market.
Under a standby letter of credit, the Bank is obligated to disburse funds
to a designated third-party beneficiary in the event that the customer
fails to perform under an agreement with the beneficiary.
The Bank's outstanding credit-related financial instruments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully
drawn upon. The credit risk associated with these instruments is
essentially the same as for outstanding loans reported in the Statements
of Condition.
Lines of Credit
The Bank may borrow funds from the FHLB of New York subject to certain
limitations. At December 31, 1998, the Bank also had a line of credit of
$10.0 million available from a commercial bank. These borrowing
facilities were not utilized during 1998 and 1997.
(Continued)
16
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
(10) Related Party Transactions
Certain of the Bank's directors and executive officers, including their
immediate families and companies in which they are principal owners, were
loan customers of the Bank during 1998 and 1997. These loans were made in
the ordinary course of business at normal credit terms, including
interest rates and collateral requirements, and do not represent more
than a normal risk of collection. The unpaid principal balances of these
loans, none of which were on non-accrual status, totaled approximately
$1.6 million at both December 31, 1998 and 1997. Repayments of such loans
were $90,000 in 1998 and $92,000 in 1997. Originations of loans to
directors and executive officers were $113,000 in 1998 and $26,000 in
1997.
In addition, certain of the Bank's directors and stockholders provide
legal and other services to the Bank in the normal course of business.
Management believes that the amounts paid by the Bank for these services
are reasonable in relation to the value of the services provided.
(11) Regulatory Matters
Capital Requirements
National banks are required to maintain minimum levels of regulatory
capital in accordance with OCC regulations. These regulations require a
minimum leverage ratio of Tier 1 capital to total adjusted assets of
4.0%, and minimum ratios of Tier 1 and total capital to risk-weighted
assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the OCC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized bank. Such actions could
have a direct material effect on a bank's financial statements. The
regulations establish a framework for the classification of banks into
five categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, a bank is considered well capitalized if it
has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1
risk-based capital ratio of at least 6.0%; and a total risk-based capital
ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the
regulators about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1998 and 1997, the Bank met
all capital adequacy requirements to which it was subject. Further, the
most recent OCC notification categorized the Bank as a well-capitalized
bank under the prompt corrective action regulations. There have been no
conditions or events since that notification that management believes
have changed the Bank's capital classification.
(Continued)
17
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 1998 and 1997, compared to the required ratios
for minimum capital adequacy and for classification as well-capitalized:
<TABLE>
<CAPTION>
Minimum Classification as
Actual capital adequacy well capitalized
-------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------- --------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
-----------------
Leverage (Tier I) capital $ 14,651 9.9% $ 5,936 4.0% $ 7,419 5.0%
Risk-based capital:
Tier I 14,651 16.5 3,562 4.0 5,343 6.0
Total 15,769 17.7 7,124 8.0 8,906 10.0
December 31, 1997
-----------------
Leverage (Tier I) capital $ 13,145 9.4% $ 5,582 4.0% $ 6,978 5.0%
Risk-based capital:
Tier I 13,145 16.1 3,267 4.0 4,901 6.0
Total 14,171 17.4 6,534 8.0 8,168 10.0
</TABLE>
Dividend Restrictions
The Bank may not, without prior approval of the OCC, declare dividends in
excess of the sum of the current year's earnings (as defined) plus the
net profits and losses (as defined) from the prior two years, less any
dividends previously declared within the same period. The Bank's net
earnings retained in 1998 and 1997 (after dividends) totaled $2,843,000.
Reserve Requirements
The Bank is required to maintain reserves (primarily in the form of cash
on hand and Federal Reserve Bank balances) with respect to certain types
of deposit liabilities. Reserves maintained at December 31, 1998 and 1997
were $937,000 and $867,000, respectively.
(Continued)
18
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
(12) Fair Values of Financial Instruments
SFAS No. 107 requires disclosures about the fair values of financial
instruments for which it is practicable to estimate fair value. The
definition of a financial instrument includes many of the assets and
liabilities recognized in the Bank's Statements of Condition, as well as
certain off-balance sheet items. Fair value is defined in SFAS No. 107 as
the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale.
Quoted market prices are used to estimate fair values when those prices
are available. However, active markets do not exist for many types of
financial instruments. Consequently, fair values for these instruments
must be estimated by management using techniques such as discounted cash
flow analysis and comparison to similar instruments. Estimates developed
using these methods are highly subjective and require judgments regarding
significant matters, such as the amount and timing of future cash flows
and the selection of discount rates that appropriately reflect market and
credit risks. Changes in these judgments often have a material effect on
the fair value estimates. In addition, since these estimates are made as
of a specific point in time, they are susceptible to material near-term
changes. Fair values disclosed in accordance with SFAS No. 107 do not
reflect any premium or discount that could result from the sale of a
large volume of a particular financial instrument, nor do they reflect
possible tax ramifications or estimated transaction costs.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business or the value of non-financial assets and
liabilities such as premises and equipment. In addition, there are
significant intangible assets that are not included in these fair value
estimates, such as the value of "core deposits" which comprise a
significant portion of the Bank's deposit base. Accordingly, the fair
values disclosed below do not represent management's estimate of the
underlying value of the Bank.
The following is a summary of the carrying amounts and fair values of the
Bank's financial assets and liabilities (none of which were held for
trading purposes) at December 31:
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------
Carrying Fair Carrying Fair
amount value amount value
----------- -------- ----------- -------
(In millions)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 9.2 9.2 7.8 7.8
Securities 45.3 45.3 38.3 38.3
Loans 85.0 87.3 84.9 87.1
Accrued interest receivable 0.7 0.7 0.9 0.9
Federal Home Loan Bank stock 0.7 0.7 0.6 0.6
Financial liabilities:
Time deposits 22.4 22.5 20.0 20.0
Other deposits 110.5 110.5 105.7 105.7
========== ========== ========== =========
</TABLE>
(Continued)
19
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1998 and 1997
The following is a description of the principal valuation methods used by
the Bank to estimate the fair values of its financial instruments:
Securities
The fair values of securities were generally based on market prices or
dealer quotes. The fair values of certain municipal securities, for which
market prices are not readily available, were based on a comparison to
quoted prices for similar securities.
Loans
For valuation purposes, each significant loan portfolio category was
analyzed, where appropriate, into components based on significant
financial characteristics such as type of interest rate (fixed or
adjustable). Generally, management estimated fair values by discounting
the anticipated cash flows at current market rates for loans with similar
terms to borrowers of similar credit quality.
Deposit Liabilities
The fair value of time deposits represents contractual cash flows
discounted using interest rates currently offered on accounts with
similar characteristics and maturities. In accordance with SFAS No. 107,
the fair values of deposit liabilities with no stated maturity (demand,
savings, NOW and money market accounts) are equal to the carrying amounts
payable on demand.
Other Financial Instruments
The other financial assets listed in the preceding table have fair values
that approximate the respective carrying amounts. The fair values of the
loan origination and sale commitments, unadvanced lines of credit and
letters of credit described in note 9 were estimated based on an analysis
of the interest rates and fees currently charged to enter into similar
transactions, considering the remaining terms of the instruments and the
creditworthiness of the counterparties. At December 31, 1998 and 1997,
the fair values of these financial instruments approximated the related
carrying amounts which were not significant.
(13) Recent Accounting Standard
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
requires that an entity recognize the fair value of all derivatives as
either assets or liabilities in the statement of condition. If certain
conditions are met, a derivative may be specifically designated as a fair
value hedge, a cash flow hedge, or a foreign currency hedge. A specific
accounting treatment applies to each type of hedge. SFAS No. 133 is
effective for fiscal years beginning after June 15, 1999, although early
adoption is permitted. The Bank does not presently engage in derivatives
and hedging activities covered by the new standard and, accordingly, SFAS
No. 133 is not expected to have a material impact on the Bank's financial
statements.
20
<PAGE>
KPMG
The Global Leader
THE MAHOPAC NATIONAL BANK
Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
KPMG Peat Marwick LLP
Stamford Square
3001 Summer Street
Stamford, CT 06905
Independent Auditors' Report
----------------------------
The Board of Directors
The Mahopac National Bank:
We have audited the accompanying statements of condition of The Mahopac
National Bank as of December 31, 1997 and 1996, and the related statements of
operations, changes in stockholders' equity, and cash flows for the years 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 an our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Mahopac National Bank as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 29, 1998
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Condition
December 31, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks (note 10) $ 4,128 $ 3,375
Federal funds sold 3,650 4,300
--------- ---------
Total cash and cash equivalents 7,778 7,675
--------- ---------
Securities (note 2):
Available-for-sale. at fair value (Amortized cost of $36,625
in 1997 and $38.008 in 1996) 36,817 37,926
Held-to-maturity, at amortized cost (fair value of $1,469
in 1997 and $3.192 in 1996) 1,469 3,189
--------- ---------
Total securities 38,286 41,115
--------- ---------
Loans, net (note 3):
Residential mortgage 48,233 37,634
Commercial mortgage 19,746 18,582
Commercial business 7,069 8,617
Consumer 3,633 3,654
Construction 7,629 5,540
--------- ---------
Gross loans, 86,310 74,027
Allowance for loan losses (1,447) (1,411)
--------- ---------
Total loans. net 84,863 72,616
--------- ---------
Bank premises and equipment, net (note 4) 5,193 4,992
Accrued interest receivable 859 854
Federal Home Loan Bank stock 622 -
Deferred income taxes (note 7) 639 655
Other real estate owned 66 200
Other assets (note 3) 1,250 940
--------- ---------
Total assets $ 139,556 $ 129,047
--------- ---------
Liabilities and Stockholder Equity
Liabilities:
Deposits:
Non-interest bearing demand $ 30,208 $ 25,795
Interest bearing (note 5) 95,475 90,329
--------- ---------
Total deposits 125,683 116,124
Other liabilities 606 1,147
--------- ---------
Total liabilities 126,289 117,271
--------- ---------
Commitments and contingencies (note 8)
Stockholders' equity (note 10):
Common stock ($ 100 par ) value; 2,125 shares
authorized, issued and outstanding) 213 213
Additional paid-in capital 597 597
Retained earnings 12,342 11,015
Net unrealizd gain (loss) on securities available-for-sale,
net of taxes (note 2) 115 (49)
--------- ---------
Total stockholders' equity 13,267 11,776
--------- ---------
Total liabilities and stockholders' equity $ 139,556 $ 129,047
========= =========
</TABLE>
See accompanying notes to financial statements,
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Operations
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans $ 6,841 $ 5,568
Securities (note 2) 2,261 2,657
Federal funds and other 582 561
--------- -------
Total interest income 9,684 8,786
1nterest expense on deposits 3,358 3,296
--------- -------
Net interest income 6,326 5,490
Provision for loan losses (note 3) 60 60
--------- -------
Net interest income after provision for loan losses 6,266 5,430
--------- -------
Non-interest income:
Deposit service fees 608 451
Net gain on sales of loans and securities (notes 2 and 3) 84 88
Other (note 3) 313 230
--------- -------
Total non-interest income 1,005 769
--------- -------
Non-interest expense:
Compensation and benefits (note 6) 2,590 2,476
Occupancy and equipment 856 730
Professional and outside service fees 397 262
Advertising and marketing 126 103
Other 768 591
--------- -------
Total non-interest expense 4,727 4,162
--------- -------
Income before income tax expense 2,544 2,037
Income tax expense (note 7) 994 779
--------- -------
Net income $ 1,550 $ 1,258
========= =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Changes in Stockholders' Equity
Years ended December 31, 1997 and 1996
(In thousands, except per share data)
<TABLE>
<CAPTION>
Net
Additional unrealized
Common paid-in Retained gain (loss) on
stock Capital earnings securities Total
----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $213 $ 597 $ 9,937 $ 187 $ 10,934
Net income - - 1,258 - 1,258
Cash dividends declared ($85
per common share) - - (180) - (180)
Change in net unrealized gain
(loss) on securities available
for-sale, net of taxes - - - (236) (236)
------- -------- --------- ---------- --------
Balance at December 31, 1996 213 597 11,015 (49) 11,776
Net income - - 1,550 - 1,550
Cash dividends declared ($105
per common share) - - (223) - (223)
Change in net unrealized gain
(loss) on securities available
for-sale, net of taxes - - - 164 164
------- -------- --------- ---------- --------
Balance at December 31, 1997 $ 213 $ 597 $ 12,342 $ 115 $ 13,267
======= ======== ======== ========== ========
</TABLE>
See accompanying notes to financial statements,
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Cash Flows
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities,
Net income $ 1,550 $ 1,258
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 60 60
Amortization of (discounts) premiums on securities, net (25) 17
Depreciation and amortization 313 262
Other adjustments, net (671) 707
-------- -------
Net cash provided by operating activities 1,227 2,304
-------- -------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (10,945) (15,540)
Held-to-maturity (1,582) (2,970)
Repayments and maturities of securities:
Available-for-sale 12,328 12,075
Held-to-maturity 3,302 6,470
Sales of securities available-for-sale - 4,801
Disbursements for loan originations, net of repayments (17,387) (18,721)
Proceeds from sales of loans 5,183 3,478
Purchase of Federal Home Loan Bank stock (622) -
Other, net (737) (922)
-------- -------
Net cash used in investing activities (10,460) (11,329)
-------- -------
Cash flows from financing activities:
Net increase in deposits 9,559 5,255
Cash dividends paid (223) (180)
-------- -------
Net cash provided by financing activities 9,336 5,075
-------- -------
Net increase (decrease) in cash and cash equivalents 103 (3,950)
Cash and cash equivalents at beginning of year 7,675 11,625
-------- -------
Cash and cash equivalents at end of year $ 7,778 $ 7,675
======== =======
Supplemental information:
Interest paid on deposits $ 3,339 $ 3,287
Income taxes paid 1,677 220
======== =======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1997 and 1996
(1) Summary of Significant Accounting Policies
The Mahopac; National Bank (the "Bank") provides community banking
services in its primary market area of Putnam County, New York. The Bank
is engaged principally in the business of attracting retail deposits from
the general public and business community, and investing those funds in
residential and commercial mortgage loans, commercial loans, consumer
loans and securities. The Bank is subject to regulation and supervision
by the Office of the Comptroller of the Currency (the "OCC"). Deposits
are insured up to applicable limits by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation.
The following is a summary of the significant accounting policies
followed by the Bank in the preparation of its financial statements.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. A
material estimate that is particularly susceptible to significant
near-term change is the allowance for loan losses, which is discussed
below.
For purposes of reporting cash flows, cash equivalents are defined as
Federal funds and other highly-liquid instruments with an original term
to maturity of three months or less.
Certain reclassifications have been made to prior year amounts to conform
to the current year presentation.
Securities
Securities are classified as held-to-maturity, trading, or available
for sale in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
and Equity Securities". Securities classified as held-to maturity are
debt securities for which the Bank has the positive intent and ability to
hold to maturity. Trading securities are debt and equity securities that
are bought principally for the purpose of selling them in the near term.
All other debt and equity securities are classified as
available-for-sale.
Held-to-maturity securities are carried at amortized cost.
Available-for-sale securities are carried at fair value with unrealized
gains and losses excluded from earnings and reported on a net-of-tax
basis as a separate component of stockholders' equity. The Bank has no
trading securities.
Premiums and discounts are amortized to interest income on a level-yield
basis over the term of the security. Realized gains and losses on sales
of securities are determined based on the amortized cost of the specific
securities sold.
<PAGE>
2
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Federal Home Loan Bank ("FHLB") stock is a non-marketable equity security
held in accordance with certain regulatory requirements and, accordingly,
is carried at cost.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions for losses
charged to operations. Loan losses and recoveries of loans previously
written-off are charged or credited to the allowance as incurred or
realized, respectively. Management estimates the allowance for loan
losses based on an evaluation of the Bank's past loan loss experience,
known and inherent risks in the portfolio, the fair value of underlying
collateral, and current economic conditions. In management's judgment,
the allowance for loan losses is adequate to absorb probable losses in
the existing portfolio.
Establishing the allowance for loan losses involves significant
management judgment utilizing the best available information at the time
of review. Those judgments are subject to review by various sources,
including the Bank's regulators. Future adjustments to the allowance may
be necessary based on changes in economic and real estate market
conditions, further information obtained regarding known problem loans,
the identification of additional problem loans, and other factors.
Impaired loans are accounted for in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS
No. 118. A loan is considered to be impaired when, based on current
information and events, it is probable that the Bank will be unable to
collect all principal and interest contractually due. SFAS No. 114
permits the measurement of impaired loans based on (i) the present value
of expected future cash flows discounted at the loan's effective interest
rate, (ii) the loan's observable market price or (iii) the fair value of
the collateral if the loan is collateral dependent. Substantially all of
the Bank's impaired loans are collateral-dependent loans measured based
on the fair value of the collateral. When the measure of an impaired loan
is less than its recorded investment, an impairment loss is recognized as
part of the allowance for loan losses.
Interest and Fees on Loans
Generally, a loan (including an impaired loan under SFAS No. 114) is
placed on non-accrual status when principal or interest payments become
ninety days past due, or earlier if the ability of the borrower to meet
contractual payment terms is in doubt. When loans are placed on
non-accrual status, unpaid interest is reversed against interest income
of the current period. Interest payments received on non-accrual loans
are either applied to reduce unpaid principal balances or reported as
interest income, depending on management's judgment as to the likelihood
of further collections. Loans are returned to accrual status when
collectibility is no longer considered doubtful.
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is amortized to interest income over
the contractual term of the loans using the interest method. Unamortized
fees and costs applicable to loans prepaid or sold are recognized in
income at the time of prepayment or sale.
<PAGE>
3
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Bank Premises and Equipment
Land is carried at cost. All other categories of bank premises and equipment are
carried at cost, less accumulated depreciation computed using the straight-line
method over the estimated useful lives of the respective assets.
Other Real Estate Owned
Other real estate owned represents properties acquired through foreclosure. A
property is recorded initially at fair value less estimated costs to sell, and
any resulting writedown of the recorded investment in the loan is charged to the
allowance for loan losses. Thereafter, an allowance for losses on real estate
owned is established for any further declines in fair value less estimated costs
to sell. Fair value estimates are based on recent appraisals and other available
information.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Accordingly, deferred taxes are recognized for the estimated future tax effects
attributable to "temporary differences" between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. A
deferreded tax liability is recognized for all temporary differences that will
result in future taxable income. A deferred tax asset is recognized for all
temporary differences that will result in future tax deductions, and for all tax
credit carryforwards, subject to reduction of the asset by a valuation allowance
in certain circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more likely
than not that some portion or all of the deferred tax asset will not be
realized.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of an enacted change in tax laws or rates is recognized
in income in the period that includes the enactment date.
<PAGE>
4
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
(2) Securities
----------
The following is a summary of securities at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
Cost gains Losses Value
---- ----- ------ -----
(Jn thousands)
<S> <C> <C> <C> <C>
December 31, 1997
------------------
Available-for-sale securities:
U.S. Treasury $ 2,013 $ 15 $ - $ 2,028
U.S. Government-sponsored agencies 11,942 - (3) 11,939
Mortgage-backed 18,811 186 (70) 18,927
State, county and municipal 1,837 68 - 1,905
Other 2,022 - (4) 2,018
--------- --------- --------- ----------
36,625 269 (77) 36,817
Held-to-maturity securities:
State, county and municipal 1,469 - - 1,469
--------- --------- --------- ----------
Total securities $ 38,094 $ 269 $ (77) $ 38,286
========= ========= ========= ==========
December 31, 1996
-----------------
Avaiable-for-sale securities:
U.S. Treasury $ 3,019 $ 9 $ (1) $ 3,027
U.S. Government-sponsored agencies 8,998 4 (24) 8,978
Mortgage-backed 22,127 117 (236) 22,008
State, county and municipal 1,842 49 - 1,891
Other 2,022 - - 2,022
--------- --------- --------- ----------
38,008 179 (261) 37,926
Held-to-maturity securities:
State, county and municipal 3,189 3 _ 3,192
--------- --------- --------- ----------
Total securities $ 41,197 $ 182 $ (261) $ 41,118
========= ========= ========= ==========
</TABLE>
On the basis of amortized cost at December 31, 1997, the Bank's,
securities portfolio consisted of fixed-rate securities of $31.7 million
and adjustable-rate securities of $6.4 million with weighted average
yields of 6.0% and 6.4%, respectively. At December 31, 1996, fixed-rate
securities and adjustable-rate securities amounted to $34.1 million and
$7.1 million, respectively, with weighted average yields of 6.2% and
6.4%, respectively. The Bank's mortgage-backed securities primarily
represent pass-through securities guaranteed by Ginnie Mae, Fannie Mae
and Freddie Mac.
<PAGE>
5
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
The net unrealized gain on available-for-sale securities was $192.000
($115,000 after taxes) at December 31, 1997, compared to a net unrealized
loss of $82,000 ($49,000 after taxes) at December 31 1996. Changes in
unrealized holding gains and losses resulted in a pre-tax increase
(decrease) in stockholders' equity of $274,000 in 1997 and ($395,000) in
1996. These gains and losses will continue to fluctuate based on changes
in the portfolio and market conditions. All unrealized losses on
securities at December 31, 1997 and 1996 were temporary declines in fair
value attributable to changes in market interest rates.
Sales of available-for-sale securities in 1996 resulted in a net realized
gain of $25,000 (gross realized gains of $46,000 less gross realized
losses of $21,000). There were no sales of available-for-sale
securities in 1997 or held-to-maturity securities in 1997 or 1996.
The following is a summary of the amortized cost and fair value of debt
securities (other than mortgage-backed securities) at December 31, 1997,
by remaining term to contractual maturity. Actual maturities may differ
from contractual maturities because certain issuers have the right to
call or redeem their obligations prior to maturity.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
-------------------------------- ----------------------------
Amortized Amortized
cost Fair value cost Fair value
---- ---------- ---- ----------
(In thousands)
<S> <C> <C> <C> <C>
One year or less $ 10,295 $ 10,307 $ 1,382 $ 1,382
Over one to five years 6,262 6,277 87 87
Over five to ten years 1,234 1,282 - -
--------- --------- ------- -------
Total $ 17,791 $ 17,866 $ 1,469 $ 1,469
========= ========= ======= =======
</TABLE>
Securities with an amortized cost and fair value of $9.7 million were
pledged to secure public deposits at December 31, 1997.
Interest income on tax-exempt securities was $200,000 in 1997 and
$242,000 in 1996.
(3) Loans
The Bank's gross loan portfolio at December 31, 1997 consisted of
fixed-rate loans of $28.3 million and adjustable-rate loans of $58.0
million with weighted average yields of 8.3% and 9.0%, respectively. At
December 31, 1996, fixed-rate loans and adjustable-rate loans amounted
to $36.0 million and $38.0 million, respectively, with weighted average
yields of 9.0% and 8.8%, respectively.
<PAGE>
6
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
The Bank primarily originates mortgage loans secured by existing
single-family residential and commercial real estate properties. The Bank
also originates multi-family residential, commercial business, consumer
and construction loans. A substantial portion of the Bank's loans are
secured by real estate properties located in Putnam County, New York. The
ability of the Bank's borrowers to make principal and interest payments is
dependent upon, among other things, the level of overall economic activity
and the real estate market conditions prevailing within the Bank's
concentrated lending area.
The principal balances of loans on non-accrual status at December 31 were
as follows:
1997 1996
---- ----
(In thousands)
Residential mortgage $ 768 $ 532
Commerical mortgage 338 371
Commercial business 19 140
Consumer 151 159
Construction 89 89
------- -------
Total non-accrual loans $ 1,365 $ 1,291
======= =======
If interest payments on non-accrual loans at December 31, 1997 and 1996
had been made during the respective years in accordance with their
contractual terms, interest income would have been increased by $198,000
in 1997 and $194,000 in 1996.
SFAS No. 114 applies to loans that are individually evaluated for
collectibility in accordance with the Bank's normal loan review
procedures (principally loans in the commercial mortgage and commercial
business categories). At December 31, 1997 and 1996, the Bank's total
recorded investment in impaired loans was $357,000 and $511,000,
respectively, representing its non-accrual loans in the foregoing
categories. An allowance for loan impairment under SFAS No. 114 was not
required at either date, primarily due to the adequacy of collateral
values. The Bank's average recorded investment in impaired loans was
$393,000 for 1997 and $630,000 for 1996. Interest income recognized on
impaired loans was immaterial for 1997 and 1996.
The following is a summary of activity in the allowance for loan losses
for the years ended December 31:
1997 1996
---- ----
(In thousands)
Balance at beginning of year $ 1,411 $ 1,439
Provision for loan losses 60 60
Charge-offs (47) (134)
Recoveries 23 46
------- --------
Balance at end of year $ 1,447 $ 1,411
======= ========
<PAGE>
7
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Certain residential mortgage loans originated by the Bank are sold in the
secondary market, on a non-recourse basis with servicing retained.
Proceeds from sales of mortgage loans in 1997 and 1996 were $5.2 million
and $3.5 million, respectively, and the realized gains on sale were
$84,000 and $63,000, respectively. The realized gains in 1997 and 1996
include $55,000 and $38,000, respectively, for the capitalization of
mortgage servicing rights. Other assets at December 31, 1997 and 1996
include the unamortized cost of capitalized servicing rights of $73,000
and $33,000, respectively, which approximated fair value. The unpaid
principal balances of serviced loans, which are not included in the
Statements of Condition, were approximately $11.2 million at December 31,
1997 and $7.0 million at December 31, 1996. Mortgage loans held for sale
were $1.3 million and $250,000 at December 31, 1997 and 1996,
respectively.
In 1996 the Bank implemented a program involving purchases, from its
commercial customers, of certain accounts receivable arising from the
customer's business. The receivables are purchased by the Bank at a
discount, with full recourse to the Bank's customer for any uncollectible
accounts. Full recourse is generally required from the Bank's customer
within ninety days of the purchased receivable's due date if all or a
portion remains unpaid. The Bank earns its fee for collecting payments
and performing other servicing functions with respect to the purchased
accounts. Purchased receivables of $958,000 and $741,000 are included in
other assets at December 31, 1997 and 1996, respectively. Other
non-interest income includes fees related to this program of $120,000 in
1997 and $52,000 in 1996.
(4) Bank Premises and Equipment
The following is a summary of bank premises and equipment at December 31:
1997 1996
---- ----
(In thousands)
Land $ 771 $ 771
Land improvements 210 210
Bank premises 4,703 4,642
Furniture and equipment 1,389 936
------- --------
7,073 6,559
Less accumulated depreciation (1,880) (1,567)
------- --------
Bank premises and equipment, net $ 5,193 $ 4,992
======= ========
<PAGE>
8
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
(5) Interest Bearing Deposits
Interest bearing deposits are summarized as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ------------------------------
Weighted Weighted
average average
rates Amount rates Amount
----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Savings accounts 3.4% $ 65,421 3.4% $ 63,543
NOW accounts 1.5 6,753 1.5 2,676
Money market accounts 2.5 3,298 2.5 3,597
-------- ----------
3.2 75,472 3.3 69,816
Time deposits, by remaining period
to contractual maturity:
Six months or less 4.8 13,383 4.5 14,280
Over six months to one year 5.1 3,717 4.8 3,494
Over one to two years 5.2 1,948 5.0 1,801
Over two to three years 5.5 553 5.3 528
Over three years 5.5 402 5.7 410
-------- ----------
4.9 20,003 4.6 20,513
-------- ----------
Total interest bearing deposits 3.6% $ 95,475 3.6% $ 90,329
==== ======== ==== ==========
</TABLE>
Time deposits issued in amounts of $100,000 or more totaled $4.9 million
at December 31, 1997 and $5.2 million at December 31, 1996. Interest
expense on time deposits over $100,000 amounted to $228,000 in 1997 and
$257,000 in 1996.
(6) Employee Benefit Plan
---------------------
The Bank maintains a defined contribution plan for eligible employees
under Section 401(k) of the Internal Revenue Code. All employees who have
a minimum or one year of service may elect to participate in the plan, by
making contributions ranging from 1% to 10% of their compensation. The
Bank makes matching contributions equal to 100% of the participant's
contributions that are not in excess of 4% of compensation. The Bank, at
its discretion, may make additional contributions on a profit-sharing
basis. Plan expense for Bank contributions amounted to $100,000 in 1997
and $102,000 in 1996.
<PAGE>
9
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
(7) Income-Taxes
The components of income tax expense are summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Current tax expense:
Federal $ 803 $ 489
State 285 230
------ ------
1,088 719
Deferred tax (benefit) expense: ------ ------
Federal (73) 79
State (21) (19)
------ ------
(94) 60
------ ------
Total income tax expense $ 994 $ 779
====== ======
</TABLE>
The following is a reconciliation of the expected income tax expense,
computed at the applicable Federal statutory tax rate of 34%, to the
actual income tax expense for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Expected income tax expense $ 865 $ 693
State income taxes, net of Federal
income tax benefit 174 139
Tax-exempt interest (68) (82)
Other, net 23 22
------ ------
Actual income tax expense $ 994 $ 779
</TABLE>
<PAGE>
10
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
The tax effects of temporary differences that give rise to the Bank's
deferred tax assets and liabilities are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses in excess of
tax bad debt reserve $ 473 $ 424
Interest on non-accrual loans 261 210
Other deductible temporary differences 24 20
------ ------
Total gross deferred tax assets 758 654
Deferred tax liabilities for taxable
temporary differences (42) (32)
Net deferred tax asset 716 622
------ ------
Deferred tax (liability) asset for net unrealized
(gain) loss on available-for-sale securities (77) 33
Total net deferred tax asset $ 639 $ 655
====== ======
</TABLE>
Based on the Bank's historical and anticipated future pre-tax earnings,
management believes that it is more likely than not that the Bank's
deferred tax assets will be realized.
(8) Commitments and Contingencies
Legal Proceedings
From time to time, the Bank is involved in legal proceedings relating to
the conduct of its business. In the opinion of management, after
consultation with legal counsel, the financial position of the Bank will
not be affected materially by the outcome of any pending legal
proceedings.
<PAGE>
11
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to credit-related financial instruments that involve,
to varying degrees. elements of credit and interest rate risk in addition
to the amounts recognized in the Statements of Condition. The Bank's
exposure to credit loss is represented by the instruments' contractual
amounts which were as follows at December 31:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
Fixed Adjustable 1996
rate rate Total Total
---- ---- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Loan origination commitments $ 476 $ 1,680 $ 2,156 $ 4,884
Unadvanced lines of credit 1,153 9,127 10,280 9,033
Performance standby letters of credit 460 - 460 316
------ ------- ------- -------
Total $ 2,089 $ 10,807 $ 12,896 $ 14,233
====== ======= ======= =======
</TABLE>
Loan origination commitments are contractual agreements to lend to
customers within specified time periods at interest rates and on other
terms based on existing market conditions. Commitments generally have
fixed expiration dates or other termination clauses and may require the
payment of a fee by the customer. Under a standby letter of credit, the
Bank is obligated to disburse funds to a designated third-party
beneficiary in the event that the customer fails to perform under an
agreement with the beneficiary.
Loan origination commitments at December 31, 1997 include $476,000 for
fixed-rate mortgage loans which, if funded, will be delivered in the
secondary market under existing sales commitments. Portfolio loans held
for sale at December 31, 1997 are also covered by sales commitments.
The Bank's outstanding credit-related financial instruments do not
necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully
drawn upon. The credit risk associated with these instruments is
essentially the same as for outstanding loans reported in the Statements
of Condition.
Lines of Credit
The Bank may borrow funds from the FHLB of New York subject to certain
limitations. At December 31, 1997, the Bank also had a line of credit of
$10.0 million available from a commercial bank. These borrowing
facilities were not utilized during 1997 and 1996.
<PAGE>
12
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
(9) Related Party Transactions
--------------------------
Certain of the Bank's directors and executive officers, including their
immediate families and companies in which they are principal owners, were
loan customers of the Bank during 1997 and 1996. These loans were made in
the ordinary course of business at normal credit terms, including
interest rates and collateral requirements, and do not represent more than
a normal risk of collection. The unpaid principal balances of these loans,
none of which were on non-accrual status, totaled approximately $1.6
million at both December 31, 1997 and 1996. Repayments of such loans were
$92.000 in 1997 and $230,000 in 1996. Originations of loans to directors
and executive officers were $26,000 in 1997 and $32,000 in 1996.
In addition, certain of the Bank's directors and stockholders provide
legal and other services to the Bank in the normal course of business.
Management believes that the amounts paid by the Bank for these services
are reasonable in relation to the value of the services provided,
(10) Regulation Matters
------------------
Capital Requirements
National banks are required to maintain minimum levels of regulatory
capital in accordance with OCC regulations, These regulations require a
minimum leverage ratio of Tier 1 capital to total adjusted assets of 4.0%,
and minimum ratios of Tier 1 and total capital to risk-weighted assets of
4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the OCC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized bank. Such actions could have
a direct material effect on a bank's financial statements. The regulations
establish a framework for the classification of banks into five
categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized.
Generally, a bank is considered well capitalized if it has a leverage
(Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio
of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the
regulators about capital components, risk weightings and other factors.
Management believes that, as of December 31, 1997 and 1996, the Bank met
all capital adequacy requirements to which it was subject. Further, the
most recent OCC notification categorized the Bank as a well-capitalized
bank under the prompt corrective action regulations. There have been no
conditions or events since that notification that management believes have
changed the Bank's capital classification.
<PAGE>
13
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 1997 and 1996, compared to the required ratios
for minimum capital adequacy and for classification as well-capitalized:
<TABLE>
<CAPTION>
Minimum Classification as
Actual capital adequacy well capitalized
------------------- ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
December 31, 1997
-----------------
<S> <C> <C> <C> <C> <C> <C>
Leverage (Tier 1) capital $ 13,145 9.4% $ 5,582 4.0% $ 6,978 5.0%
Risk-based capital:
Tier I 13,145 16.1 3,267 4.0 4,901 6.0
Total 14,171 17.4 6,534 8.0 8,168 10.0
December 31, 1996
-----------------
Leverage (Tier 1) capital $ 11,825 9.2% 5,162 4.0% $ 6,452 5.0%
Risk-based capital:
Tier 1 11,825 16.4 2,892 4.0 4.338 6.0
Total 12,735 17.6 5,784 8.0 7,231 10.0
</TABLE>
Dividend Restrictions
The Bank may not, without prior approval of the OCC, declare dividends
in excess of the sum of the current year's earnings (as defined) plus
the net profits and losses (as defined) from the prior two years, less
any dividends previously declared within the same period. At December
31, 1997, the dividends that the Bank could declare, without the
approval of the OCC, amounted to $2,925,000.
Reserve Requirements
The Bank is required to maintain reserves (primarily in the, form of
cash on hand and Federal Reserve Bank balances) with respect to certain
types of deposit liabilities. Reserves maintained at December 31, 1997
and 1996 were $867,000 and $655,000, respectively,
(11) Fair Values of Financial Instruments
------------------------------------
SFAS No. 107 requires disclosures about the fair values of financial
instruments for which it is practicable to estimate fair value. The
definition of a financial instrument includes many of the assets and
liabilities recognized in the Bank's Statements of Condition, as well as
certain off-balance sheet items. Fair value is defined in SFAS No. 107
as the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale.
<PAGE>
14
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Quoted market prices are used to estimate fair values when those prices
are available, However, active markets do not exist for many types of
financial instruments. Consequently, fair values for these instruments
must be estimated by management using techniques such as discounted cash
flow analysis and comparison to similar instruments. Estimates developed
using these methods are highly subjective and require judgments
regarding significant matters, such as the amount and timing of future
cash flows and the selection of discount rates that appropriately
reflect market and credit risks. Changes in these judgments often have a
material effect on the fair value estimates. In addition, since these
estimates are made as of a specific point in time, they are susceptible
to material near-term changes. Fair values disclosed in accordance with
SFAS No. 107 do not reflect any premium or discount that could result
from the sale of a large volume of a particular financial instrument,
nor do they reflect possible tax ramifications or estimated transaction
costs.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business or the value of non-financial assets and
liabilities such as premises and equipment. In addition, there are
significant intangible assets that arc not included in these fair value
estimates, such as the value of "core deposits" which comprise a
significant portion of the Bank's deposit base. Accordingly, the fair
values disclosed below do not represent management's estimate of the
underlying value of the Bank.
The following is a summary of the carrying amounts and fair values of
the Bank's financial assets and liabilities (none of which were held for
trading purposes) at December 31:
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
(In millions)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 7.8 $ 7.8 $ 7.7 $ 7.7
Securities 38.3 38.3 41.1 41.1
Loans 84.9 87.1 72.6 74.7
Accrued interest receivable 0.9 0.9 0.9 0.9
Federal Home Loan Bank stock 0.6 0.6 - -
Financial liabilities:
Time deposits 20.0 20.0 20.5 20.5
Other deposits 105.7 105.7 95.6 95.6
===== ===== ==== ====
</TABLE>
The following is a description of the principal valuation methods used
by the Bank to estimate the fair values of its financial instruments:
Securities
The fair values of securities were generally based on market prices or
dealer quotes. The fair values of certain municipal securities, for
which market prices are not readily available, were based on a
comparison to quoted prices for similar securities.
<PAGE>
15
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Loans
For valuation purposes, each significant loan portfolio category was
analyzed, where appropriate, into components based on significant financial
characteristics such as type of interest rate (fixed or adjustable).
Generally, management estimated fair values by discounting the anticipated
cash flows at current market rates for loans with similar terms to
borrowers of similar credit quality.
Deposit Liabilities
The fair value of time deposits represents contractual cash flows
discounted using interest rates currently offered on accounts with similar
characteristics and maturities. In accordance with SFAS No. 107, the fair
values of deposit liabilities with no stated maturity (demand, savings, NOW
and money market accounts) are equal to the carrying amounts payable on
demand.
Other Financial Instruments
The other financial assets listed in the preceding table have fair values
that approximate the respective carrying amounts. The fair values of the
loan orgination and sale commitments, unadvanced lines of credit and
letters of credit described in note 8 were estimated based on an analysis
of the interest rates and fees currently charged to enter into similar
transactions, considering the remaining terms of the instruments and the
creditworthiness of the counterparties. At December 31, 1997 and 1996, the
fair values of these financial instruments approximated the related
carrying amounts which were not significant.
(12) Recent Accounting Standard
--------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income (and its components) in
financial statements. The standard does not, however, specify when to
recognize or how to measure items that make up comprehensive income.
Comprehensive income represents net income and certain amounts reported
directly in stockholders' equity, such as the net unrealized gain or loss
on available-for-sale securities. While SFAS No. 130 does not require a
specific reporting format, it does require that an enterprise display an
amount representing total comprehensive income for the period. SFAS No. 130
is effective for the fiscal years beginning after December 15, 1997.
<PAGE>
KPMG
The Global Leader
THE MAHOPAC NATIONAL BANK
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
KPMG Peat Marwick LLP
Stamford Square
3001 Summer Street
Stamford, CT 06905
Independent Auditors' Report
----------------------------
The Board of Directors
The Mahopac National Bank:
We have audited the accompanying statements of condition of The Mahopac
National Bank as of December 31, 1996 and 1995, and the related statements of
operations, changes in stockholders' equity, and cash flows for the years
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. we believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Mahopac National Bank
as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
January 31, 1997
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Condition
December 31, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
1996 1995
---- ----
Assets
------
<S> <C> <C>
Cash and due from banks (note 10) $ 3,375 $ 4,625
Federal funds sold 4,300 7,000
---------- ----------
Total cash and cash equivalents 7,675 11,625
---------- ----------
Securities (note 2);
Available-for-sale, at fair value (amortized cost of $38,008
in 1996 and $39,336 in 1995) 37,926 39,649
Held-to-maturity, at amortized cost (fair value of $3,192
in 1996 and $6,706 in 1995) 3,189 6,689
---------- ----------
Total securities 41,115 46,338
---------- ----------
Loans, net (note 3):
Residential mortgage 37,634 27,761
Commercial mortgage 18,582 17,119
Commercial business 8,617 8.399
Consumer 3,654 3,490
Construction 5,540 1,988
---------- ----------
Gross loans 74,027 58,757
Allowance for loan losses (1,411) (1,439)
---------- ----------
Total loans, net 72,616 57,318
---------- ----------
Bank premises and equipment, net (note 4) 4,992 5,073
Accrued interest receivable 854 985
Deferred income taxes, net (note 7) 655 556
Other real estate owned 200 222
Other assets (note 3) 940 149
---------- ----------
Total assets $ 129,047 $ 122,266
========== ==========
<CAPTION>
Liabilities and Stockholder's Equity
- ------------------------------------
<S> <C> <C>
Liabilities:
Deposits:
Non-interest bearing demand $ 25,795 $ 25,900
Interest bearing (note 5) 90,329 84,969
---------- ----------
Total deposits 116,124 110,869
Other Liabilities 1,147 463
---------- ----------
Total liabilities 117,271 111,332
---------- ----------
Commitments and contingencies (note 8)
Stockholders' equity (note 10):
Common stock ($100 par value; 2,125 shares
authorized, issued and outstanding) 213 213
Additional paid-in capital 597 597
Retained earnings 11,015 9,937
Net unrealized gain (loss) on securities available-for-sale,
net of taxes (note 2) (49) 187
---------- ----------
Total stockholders' equity 11,776 10,934
---------- ----------
Total liabilities and stockholders' equity $ 129,047 $ 122,266
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Operations
Years ended December 31, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans $ 5,568 $ 4,645
Securities (note 2) 2,657 2,178
Federal funds and other 561 792
------ ------
Total interest income 8,786 7,615
Interest expense on deposits 3,296 3,285
------ ------
Net interest income 5,490 4,330
Provision for loan losses (note 3) 60 60
------ ------
Net interest income after provision for loan losses 5,430 4,270
Non-interest income:
Deposit service fees 451 420
Net gain on sales of loans and securities (notes 2 and 3) 88 22
Other (note 3) 230 128
------ ------
Total non-interest income 769 570
------ ------
Non-interest expense:
Compensation and benefits (note 6) 2,476 2,306
Occupancy and equipment 730 721
Professional and outside service fees 262 210
FDIC deposit insurance premiums 2 134
Other 692 704
------ ------
Total non-interest expense 4,162 4,075
------ ------
Income before income tax expense 2,037 765
Income tax expense (note 7) 779 96
------ ------
Net income $ 1,258 $ 669
====== ======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Changes in Stockholders' Equity
Years ended December 31, 1996 and 1995
(In thousands, except per share data)
<TABLE>
<CAPTION>
Net
Additional unrealized
Common paid-in Retained gain (loss) on
stock capital earnings securities Total
----- ------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 213 $ 597 $ 9,417 $ (312) $ 9,915
Net income - - 669 - 669
Cash dividends declared ($70 per
common share) - - (149) - (149)
Change in net unrealized gain
(loss) on securities available-
for-sale, net of taxes - - - 499 499
------- ------ ------- ------- --------
Balance at December 31, 1995 213 597 9,937 187 10,934
Net income - - 1,258 - 1,258
Cash dividends declared ($85 per
common share) - - (180) - (180)
Change in net unrealized gain
(loss) on securities available-
for-sale, net of taxes - - - (236) (236)
------- ------ ------- ------- --------
Balance at December 31, 1996 $ 213 $ 597 $ 11,015 $ (49) $ 11,776
======= ====== ======= ======= ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
THE MAHOPAC NATIONAL BANK
Statements of Cash Flows
Years ended December 31, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,258 $ 669
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 60 60
Amortization of premiums on securities, net 17 121
Depreciation and amortization 262 250
Other adjustments, net 707 392
------- -------
Net cash provided by operating activities 2,304 1,492
------- -------
Cash flows from investing activities:
Purchases of securities:
Available-for-sale (15,540) (17,764)
Held-to-maturity (2,970) (8,143)
Repayments and maturities of securities:
Available-for-sale 12,075 8,762
Held-to-maturity 6,470 7,870
Sales of securities available-for-sale 4,801 -
Disbursements for loan originations, net of repayments (18,721) (13,699)
Proceeds from sales of loans 3,478 3,963
Other, net (922) (188)
------- -------
Net cash used in investing activities (11,329) (19,199)
------- -------
Cash flows from financing activities:
Net increase in deposits 5,255 22,230
Cash dividends paid (180) (149)
------- -------
Net cash provided by financing activities 5,075 22,081
------- -------
Net (decrease) increase in cash and cash equivalents (3,950) 4,374
Cash and cash equivalents at beginning of year 11,625 7,251
------- -------
Cash and cash equivalents at end of year $ 7,675 $ 11,625
========= ========
Supplemental information:
Interest paid on deposits $ 3,287 $ 3,253
Securities transferred from held-to-maturity
to available-for-sale $ - $ 9,970
========= ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
December 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
The Mahopac National Bank (the "Bank") provides community banking
services in its primary market area of Putnam County, New York. The
Bank is engaged principally in the business of attracting retail
deposits from the general public and business community, and
investing those funds in residential and commercial mortgage loans,
commerical loans, consumer loans and securities. The Bank is subject to
regulation and supervision by the Office of the Comptroller of the
Currency (the "OCC"). Deposits are insured up to applicable limits by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation.
The following is a summary of the significant accounting policies
followed by the Bank in the preparation of its financial statements.
Basis of Presentation
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. A
material estimate that is particularly susceptible to significant
near-term change is the allowance for loan losses, which is discussed
below.
For purposes of reporting cash flows, cash equivalents are defined as
Federal funds and other highly-liquid instruments with an original term
to maturity of three months or less.
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
Securities
Securities are classified as held-to-maturity, trading, or available-
for-sale in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Securities classified as held-to-maturity are debt
securities for which the Bank has the positive intent and ability to
hold to maturity. Trading securities are debt and equity securities that
are bought principally for the purpose of selling them in the near term.
All other debt and equity securities are classfied as available-for-
sale.
Held-to-maturity securities are carried at amortized cost. Available-
for-sale securities are carried at fair value with unrealized gains and
losses excluded from earnings and reported on a net-of-tax basis as a
separate component of stockholders' equity. The Bank has no trading
securities.
Premiums and discounts are amortized to interest income on a level-yield
basis over the term of the security. Realized gains and losses on sales
of securities are determined based on the amortized cost of the specific
securities sold.
<PAGE>
2
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Allowance for Loan Losses
The allowance for loan losses is increased by provisions for losses
charged to operations. Loan losses and recoveries of loans previously
written-off are charged or credited to the allowance as incurred or
realized, respectively. Management estimates the allowance for loan
losses based on an evaluation of the Bank's past loan loss experience,
known and inherent risks in the portfolio, the fair value of
underlying collateral, and current economic conditions. In
management's judgment, the allowance for loan losses is adequate to
absorb probable losses in the existing portfolio.
Establishing the allowance for loan losses involves significant
management judgment utilizing the best available information at the
time of review. Those judgments are subject to review by various
sources, including the Bank's regulators. Future adjustments to the
allowance may be necessary based on changes in economic and real
estate market conditions, further information obtained regarding known
problem loans, the identification of additional problem loans, and
other factors.
Impaired loans are accounted for in accordance with SFAS No. 114.
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS
No.118. A loan is considered to be impaired when, based on current
information and events, it is probable that the Bank will be unable to
collect all principal and interest contractually due. SFAS No. 114
permits the measurement of impaired loans based on (i) the present
value of expected future cash flows discounted at the loan's effective
interest rate, (ii) the loan's observable market price or (iii) the
fair value of the collateral if the loan is collateral dependent.
Substantially all of the Bank's impaired loans are
colleteral-dependent loans measured based on the fair value of the
collateral. When the measure of an impaired loan is less than its
recorded investment, an impairment loss is recognized as part of the
allowance for loan losses.
Interest and Fees on Loans
Generally, a loan (including an impaired loan under SFAS No. 114) is
placed on non-accrual status when principal or interest payments
become ninety days past due, or earlier if the ability of the borrower
to meet contractual payment terms is in doubt. When loans are placed
on non-accrual status, unpaid interest is reversed against interest
income of the current period. Interest payments received on
non-accrual loans are either applied to reduce unpaid principal
balances or reported as interest income, depending on management's
judgment as to the likelihood of further collections. Loans are
returned to accrual status when collectibility is no longer considered
doubtful.
Loan origination fees and certain direct loan origination costs are
deferred, and the net fee or cost is amortized to interest income over
the contractual term of the loans using the interest method.
Unamortized fees and costs applicable to loans prepaid or sold are
recognized in income at the time of prepayment or sale.
<PAGE>
3
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Bank Premises and Equipment
Land is carried at cost. All other categories of bank premises and equipment
are carried at cost, less accumulated depreciation computed using the
straight-line method over the estimated useful lives of the respective assets.
Other Real Estate Owned
Other real estate owned represents properties acquired through foreclosure. A
property is recorded initially at fair value less estimated costs to sell, and
any resulting writedown of the recorded investment in the loan is charged to the
allowance for loan losses. Thereafter, an allowance for losses on real estate
owned is established for any further declines in fair value less estimated costs
to sell. Fair value estimates are based on recent appraisals and other available
information.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Accordingly, deferred taxes are recognized for the estimated future tax effects
attributable to "temporary differences" between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases. A
deferred tax liability is recognized for all temporary differences that will
result in future taxable income. A deferred tax asset is recognized for all
temporary differences that will result in future tax deductions, and for all tax
credit carryforwards, subject to reduction of the asset by a valuation allowance
in certain circumstances. This valuation allowance is recognized if, based on an
analysis of available evidence, management determines that it is more likely
than not that some portion or all of the deferred tax asset will not be
realized. The valuation allowance is subject to ongoing adjustment based on
changes in circumstances that affect management's judgment about the
realizability of the deferred tax asset. Adjustments to increase or decrease the
valuation allowance are charged or credited, respectively, to income tax
expense.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of an enacted change in tax laws or rates is recognized
in income in the period that includes the enactment date.
<PAGE>
4
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
(2) Securities
----------
The following is a summary of securities at December 31, 1996
and 1995;
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
(In thousands)
December 31, 1996
-----------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury $ 3,019 $ 9 $ (1) $ 3,027
U.S. Government-sponsored agencies 8,998 4 (24) 8,978
Mortgage-backed 22,127 117 (236) 22,008
State, county and municipal 1,842 49 - 1,891
Other 2,022 - - 2,022
-------- ------- ------- --------
38,008 179 (261) 37,926
Held-to-maturity securities:
State, county and municipal 3,189 3 - 3,192
-------- ------- ------- --------
Total securities $ 41,197 $ 182 $ (261) $ 41,118
======== ======= ======= ========
December 31, 1995
Available-for-sale securities:
U.S. Treasury $ 8,031 $ 33 $ (7) $ 8,057
U.S. Government-sponsored agencies 10,000 70 (20) 10,050
Mortgage-backed 16,225 171 (3) 16,393
State, county and municipal 3,059 85 (1) 3,143
Other 2,021 - (15) 2,006
-------- ------- ------- --------
39,336 359 (46) 39,649
-------- ------- ------- --------
Held-to-maturity securities:
U.S. Government-sponsored agencies 3,998 6 - 4,004
State, county and municipal 2,691 11 - 2,702
-------- ------- ------- --------
6,689 17 - 6,706
-------- ------- ------- --------
Total securities $ 46,025 $ 376 $ (46) $ 46,355
======== ======= ======= ========
</TABLE>
On the basis of amortized cost at December 31, 1996, the Bank's
securities portfolio consisted of fixed-rate securities of $34.1
million and adjustable-rate securities of $7.1 million with weighted
average yields of 6.2% and 6.4%, respectively. At December 31, 1995,
fixed-rate securities and adjustable-rate securities amounted to $33.5
million and $12.5 million, respectively, with weighted average yields
of 6.3% and 6.1%, respectively. The Bank's mortgage-backed
securities primarily represent pass-through securities guaranteed by
Ginnie Mac, Fannie Mae and Freddie Mac.
<PAGE>
5
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
The net unrealized loss on available-for-sale securities was $82,000
($49.000 after taxes) at December 31, 1996, compared to a net
unrealized gain of $313.000 ($187,000 after taxes) at December 31
1995. Changes in unrealized holding gains and losses resulted in a
pre-tax increase (decrease) in stockholders' equity of ($395.000) in
1996 and $833.000 in 1995. These gains and losses will continue to
fluctuate based on changes in the portfolio and market conditions.
All unrealized losses on securities at December 31, 1996 and 1995
were temporary declines in fair value attributable to changes in
market interest rates.
The proceeds from sales of available-for-sale securities totaled $4.8
million in 1996 (none in 1995). These sales resulted in a net
realized gain of $25,000 (gross realized gains of $46,000 less gross
realized losses of $21,000). which is included in other non-interest
income in the Statement of Operations. There were no sales of held
-to-maturity securities in 1996 or 1995.
In December 1995, held-to-maturity securities with an amortized cost
of $10.0 million and a pre-tax net unrealized gain of $41,000 were
transferred to the available-for-sale category. This transfer was
made in accordance with a Special Report, issued by the Financial
Accounting Standards Board ("FASB"), which provided a one-time
opportunity to reclassify securities in the 45-day period ended
December 31, 1995 without calling into question the intent to hold
other held-to-maturity securities to maturity.
The following is a summary of the amortized cost and fair value of
debt securities (other than mortgage-backed securities) at December
31, 1996, by remaining term to contractual maturity. Actual
maturities may differ from contractual maturities because certain
issuers have the right to call or redeem their obligations prior to
maturity.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
--------------------------- ---------------------------
Amortized Amortized
cost Fair value cost Fair value
---- ---------- ---- ----------
(In thousands)
<S> <C> <C> <C> <C>
One year or less $ 1,998 $ 1,998 $ 3,073 $ 3,076
Over one to five years 12,626 12,650 116 116
Over five to ten years 1,234 1,247 - -
-------- --------- ------- --------
Total $ 15,858 $ 15,895 $ 3, 189 $ 3,192
</TABLE>
Securities with an amortized cost and fair value of $8.9 million were
pledged to secure public deposits at December 31, 1996.
Interest income on tax-exempt securities was $242,000 in 1996 and
$351,000 in 1995.
<PAGE>
6
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
(3) Loans
-----
The Bank's gross loan portfolio at December 31, 1996 consisted of fixed-
rate loans of $36.0 million and adjustable-rate loans of $38.0 million
with weighted average yields of 9.0% and 8.8%, respectively. At December
31, 1995, fixed-rate loans and adjustable-rate loans amounted to $32.9
million and $25.9 million, respectively, with weighted average yields of
8.5% and 8.9%, respectively.
The Bank primarily originates mortgage loans secured by existing single-
family residential and commercial real estate properties. The Bank also
originates multi-family residential, commercial business, consumer and
construction loans. A substantial portion of the Bank's loans are
secured by real estate properties located in Mahopac, New York and the
surrounding area. The ability of the Bank's borrowers to make principal
and interest payments is dependent upon, among other things, the level
of overall economic activity and the real estate market conditions
prevailing within the Bank's concentrated lending area.
The principal balances of loans on non-accrual status at December 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Residential mortgage $ 532 $ 371
Commercial mortgage 371 842
Commercial business 140 426
Consumer 159 153
Construction 89 94
-------- --------
Total non-accrual loans $ 1,291 $ 1,986
======== ========
</TABLE>
If interest payments on non-accrual loans at December 31, 1996 and 1995
had been made during the respective years in accordance with their
contractual terms, interest income would have been increased by $194,000
in 1996 and $162,000 in 1995.
SFAS No. 114 applies to loans that are individually evaluated for
collectibility in accordance with the Bank's normal loan review
procedures (principally loans in the commercial mortgage and commercial
business categories). At December 3, 1996 and 1995, the Bank's total
recorded investment in impaired loans was $511,000 and $1.3 million,
respectively, representing its non-accrual loans in the foregoing
categories. These totals include loan of $511,000 in 1996 and $1.1
million in 1995 for which an allowance for loan impairment was not
required under SFAS No. 114, primarily due to the adequacy of collateral
values. The remaining impaired loans of $218,000 in 1995 had an
allowance for loan impairment of $62,000 which was included in the
overall allowance for loan losses. The Bank's average recorded
investment in impaired loans was $630,000 for 1996 and $1.3 million for
1995. Interest income recognized on impaired loans was immaterial for
1996 and 1995.
<PAGE>
7
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
The following is a summary of activity in the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Balance at beginning of year $ 1,439 $ 1,278
Provision for loan losses 60 60
Charge-offs (134) (82)
Recoveries 46 183
-------- --------
Balance at end of year $ 1,411 $ 1,439
======== ========
</TABLE>
Certain residential mortgage loans originated by the Bank are sold without
recourse in the secondary market. Proceeds from sales of mortgage loans in 1996
and 1995 were $3.5 million and $4.0 million, respectively, and realized gains on
sale were $63,000 and $22,000, respectively. The realized gain on 1996 sales
includes $38,000 for the capitalization of mortgage servicing assets as a result
of the Bank's prospective adoption, effective January 1, 1996, of SFAS No. 122,
"Accounting for Mortgage Servicing Rights." Among other things, this standard
requires (i) recognition of servicing rights as assets when mortgage loans are
sold with servicing retained and (ii) subsequent amortization of the assets over
the period of estimated net servicing income. At December 31, 1996, other assets
includes the unamortized cost of mortgage servicing assets of $33,000 which
approximated the fair value of the underlying servicing rights. The unpaid
principal balances of serviced loans, which are not included in the Statements
of Condition, were approximately $7.0 million at December 31, 1996 and $3.9
million at December 31, 1995. Mortgage loans held for sale were $250,000 and
$907,000 at December 31, 1996 and 1995, respectively.
In 1996 the Bank implemented a program involving purchases, from its commercial
customers, of certain accounts receivable arising from the customer's business.
The receivables are purchased by the Bank at a discount, with full recourse to
the Bank's customer for any uncollectible accounts. Full recourse is generally
required from the Bank's customer within ninety days of the purchased
receivable's due date if all or a portion remains unpaid. The Bank earns its fee
for collecting payments and performing other servicing functions with respect to
the purchased accounts. Purchased receivables of $741,000 are included in other
assets at December 31, 1996. Other non-interest income for 1996 includes fees of
$52,000 related to this program.
<PAGE>
8
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
(4) Bank Premises and Equipment
---------------------------
The following is a summary of bank premises and equipment at
December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Land $ 771 $ 771
Land improvements 210 210
Bank premises 4,642 4,623
furniture and equipment 936 794
------- -------
6,559 6,398
Less accumulated depreciation (1,567) (1,325)
------- -------
Bank premises and equipment, net $ 4,992 $ 5,073
======= =======
</TABLE>
(5) Interest Bearing Desposits
---------------------------
Interest bearing deposits are summarized as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------------------- -----------------------
Weighted Weighted
average average
rates Amount rates Amount
----- ------ ----- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Savings accounts 3.4 % $ 63,543 3.8% $ 59,919
NOW accounts 1.5 2,676 1.5 3,652
Money market accounts 2.5 3.597 2.5 4,502
-------- --------
3.3 69,816 3.6 68,073
-------- --------
Time deposit accounts, by
remaining period to contractual
maturity:
Six months or less 4.5% $ 14,280 5.1% 10,994
Over six months to one year 4.8 3,494 4.8 2,636
Over one to two years 5.0 1,801 5.3 2.216
Over two to three years 5.3 528 5.6 562
Over three years 5.7 410 5.6 488
-------- --------
4.6 20,513 5.1 16,896
-------- --------
Total interest bearing deposits 3.6% $ 90,329 3.9% $ 84,969
===== ======== ==== ========
</TABLE>
<PAGE>
9
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Time deposits issued in amounts of $ 100,000 or more totaled $5.2 million
at December 31, 1996 and $2.1 million at December 31, 1995. Interest
expense on time deposits over $100,000 amounted to $257,000 in 1996 and
$106,000 in 1995.
(6) Employee Benefit Plan
----------------------
The Bank maintains a defined contribution plan for eligible employees under
Section 401 (k) of the Internal Revenue Code. All employees who have a
minimum of one year of service may elect to participate in the plan, by
making contributions ranging from 1% to 10% of their compensation. The
Bank makes matching contributions equal to 100% of the participant's
contributions that are not in excess of 4% of compensation. The Bank, at
its discretion, may make additional contributions on a profit-sharing basis.
Plan expense for Bank contributions amounted to $102,000 in 1996 and $80,000
in 1995.
(7) Income Taxes
------------
The components of income tax expense are summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
Current tax expense:
<S> <C> <C>
Federal $ 489 $ 83
State 230 46
----- -----
719 129
----- -----
Deferred tax expense (benefit):
Federal 79 61
State (19) 21
Elimination of valuation allowance
for deferred tax assets - (115)
----- -----
60 (33)
----- -----
Total income tax expense $ 779 $ 96
===== =====
</TABLE>
<PAGE>
10
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
The following is a reconciliation of the expected income tax expense,
computed at the applicable Federal statutory tax rate of 34%, to the
actual income tax expense for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousand)
<S> <C> <C>
Expected income tax expense $ 693 $ 260
State income taxes, net of Federal
income tax benefit 139 44
Tax-exempt interest (82) (119)
Elimination of valuation allowance for
deferred tax assets - (115)
Other net 29 26
------- ------
Actual income tax expense $ 779 $ 96
======= ======
</TABLE>
The tax effects of temporary differences and tax credit carryforwards
that give rise to the Bank's deferred tax assets and liabilities are
as follows at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses in excess of
tax bad debt reserve $ 424 $ 427
Interest on non-accrual loans 210 51
Other deductible temporary differences 20 99
Alternative minimum tax credit carryforwards - 112
------ ------
Total gross deferred tax assets 654 689
Deferred tax liabilities for taxable
temporary differences (32) (7)
------ ------
Net deferred tax asset 622 682
Deferred tax assets (liability) for net unrealized
gains and losses on available-for-sale securities 33 (126)
------ ------
Total net deferred tax asset $ 655 $ 556
====== ======
</TABLE>
The valuation allowance far deferred tax assets was eliminated in
1995 based on management's reevaluation of the Bank's prospects for
future earnings considering factors such as the improved level of
pre-tax earnings and asset growth achieved during the year. Based on
the Bank's historical and anticipated future pre-tax earnings,
management believes that it is more likely than not that the Bank's
deferred tax assets will be realized.
<PAGE>
11
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
(8) Commitments and Contingencies
-----------------------------
Legal Proceedings
From time to time, the Bank is involved in legal proceedings relating to the
conduct of its business. In the opinion of management, after consultation
with legal counsel, the financial position of the Bank will not be affected
materially by the outcome of any pending legal proceedings.
Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to credit-related financial instruments that involve, to
varying degrees, elements of credit and interest rate risk in addition to
the amounts recognized in the Statements of Condition. The Bank's exposure
to credit loss is represented by the instruments' contractual amounts which
were as follows at December 31:
<TABLE>
<CAPTION>
1996
Fixed Adjustable 1995
rate rate Total Total
--- ---- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Loan origination commitments $ 596 $ 4,288 $ 4,884 $ 5,939
Unadvanced lines of credit 2,551 6,482 9,033 3,549
Performance standby letters of credit 316 - 316 254
------ ------- ------ ------
Total $ 3,463 $ 10,770 $ 14,233 $ 9,742
====== ======= ====== ======
</TABLE>
Loan origination commitments are contractual agreements to lend to
customers within specified time periods at interest rates and on other
terms based on existing market conditions. Commitments generally have
fixed expiration dates or other termination clauses and may require the
payment of a fee by the customer. Under a standby letter of credit, the
Bank is obligated to disburse funds to a designated third-party
beneficiary in the event that the customer fails to perform under an
agreement with the beneficiary.
Loan origination commitments at December 31, 1996 and 1995 include
$596,000 and $1.2 million, respectively, for fixed-rate mortgage loans
which, if funded, will be delivered in the secondary market under
existing sales commitments. Portfolio held for sale at
December 31, 1996 and 1995 are also covered by sales commitments.
The Bank's outstanding credit-related financial instruments do not
necessarily represent future cash requirements, since certain of these
instruments may expire without being funded and others may not be fully
drawn upon. The credit risk associated with these instruments is
essentially the same as for outstanding loans reported in the Statements
of Condition.
Line of Credit
At December 31, 1996, the Bank had a line of credit of $ 10.0 million
available from another financial institution. This borrowing facility was
not utilized during 1996 and 1995.
<PAGE>
12
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
(9) Related Party Transactions
---------------------------
Certain of the Bank's directors and executive officers, including their
immediate families and companies in which they are principal owners,
were loan customers of the Bank during 1996 and 1995. These loans were
made in the ordinary course of business at normal credit terms,
including interest rates and collateral requirements, and do not
represent more than a normal risk of collection. The unpaid principal
balances of these loans, none of which were on non-accrual status,
totaled $1.6 million and $1.8 million at December 31, 1996 and 1995,
respectively. Repayments of such loans were $230,000 in 1996 and
$839,000 in 1995. Originations of loans to directors and executive
officers were $32,000 in 1996 and $804,000 in 1995.
In addition, certain of the Bank's directors and stockholders provide
legal and other services to the Bank in the normal course of business.
Management believes that the amounts paid by the Bank for these
services are reasonable in relation to the value of the services
provided.
(10) Regulatory Matters
------------------
Capital Requirements
National banks are required to maintain minimum levels of regulatory
capital in accordance with regulations of the Office of the Comptroller
of the Currency ("OCC"). These regulations require a minimum leverage
ratio of Tier 1 capital to total adjusted assets of 4.0%, and minimum
ratios of Tier 1 and total capital to risk-weighted assets of 4.0% and
8.0%, respectively.
Under its prompt corrective action regulations, the OCC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized bank. Such actions could
have a direct material effect on a bank's financial statements. The
regulations establish a framework for the classification of banks into
five categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, a bank is considered well capitalized if
it has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1
risk-based capital ratio of at least 6.0%;, and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the
regulators about capital components, risk weightings and other
factors.
Management believes that, as of December 31, 1996 and 1995, the Bank
met all capital adequacy requirements to which it was subject. Further,
the most recent OCC notification categorized the Bank as a well-
capitalized bank under the prompt corrective action regulations. There
have been no conditions or events since that notification that
management believes have changed the Bank's capital classification.
<PAGE>
13
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
The following is a summary of the Bank's actual capital amounts and
ratios as of December 31, 1996 and 1995, compared to the required
ratios for minimum capital adequacy and for classification as
well-capitalized:
<TABLE>
<CAPTION>
Minimum For classification as
Bank actual Capital adcquacy well capitaziaed
------------------------- ----------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
December 31 , 1996
------------------
Leverage (Tier 1) capital $ 11,825 9.2% $ 5,162 4.0% $ 6,452 5.0%
Risk-based capital;
Tier 1 11,825 16.4 2,892 4.0 4,338 6.0
Total 12,735 17.6 5,784 8.0 7,231 10.0
December 31, 1995
------------------
Leverage (Tier 1) Capital $ 10,270 8.4% $ 4,890 4.0% $ 6,113 5.0%
Risk-based Capital;
Tier 1 10,270 17.0 2,417 4.0 3,625 6.0
Total 10,995 18.2 4,832 8.0 6,041 10.0
</TABLE>
Dividend Restrictions
The Bank may not, without prior approval of the OCC, declare dividends
in excess of the sum of the current year's earnings (as defined) plus
the net profits and losses (as defined) from the prior two years, less
any dividends previously declared within the same period. At December
31, 1996, the dividends that the Bank could declare, without the
approval of the OCC, amounted to $1,675,000.
Reserve Requirements
The Bank is required to maintain reserves (primarily in the form of
cash on hand and Federal Reserve Bank balances) with respect to
certain types of deposit liabilities. Reserves maintained at December
31. 1996 and 1995 were $655,000 and $631,000, respectively.
(11) Fair Values of Financial Instruments
-------------------------------------
SFAS No. 107 requires disclosures about the fair values of finanical
instruments for which it is practicable to estimate fair value. The
definition of a financial instrument includes many of the assets and
liabilities recognized in the Bank's Statements of Financial
Condition, as well as certain off-balance sheet items. Fair value is
defined in SFAS No. 107 as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale.
Quoted market prices are used to estimate fair values when those
prices are available. However, active markets do not exist for many
types of financial instruments. Consequently, fair values for these
instruments must be estimated by management using techniques such as
discounted cash flow analysis and comparison to similar instruments.
Estimates developed using these methods are highly subjective and
require judgments
<PAGE>
14
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
regarding significant matters, such as the amount and timing of
future cash flows and the selection of discount rates that
appropriately reflect market and credit risks. Changes in these
judgments often have a material effect on the fair value estimates.
In addition, since these estimates are made as of a specific point in
time, they are susceptible to material near-term changes. Fair values
disclosed in accordance with SFAS No. 107 do not reflect any premium
or discount that could result from the sale of a large volume of a
particular financial instrument, nor do they reflect possible tax
ramifications or estimated transaction costs.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business or the value of non-financial assets and
liabilities such as premises and equipment. In addition, there are
significant intangible assets that are not included in these fair
value estimates, such as the value of "core deposits" which comprise
a significant portion of the Bank's deposit base. Accordingly, the
fair values disclosed below do not represent management's estimate of
the underlying value of the Bank.
The following is a summary of the carrying amounts and fair values
of the Bank's financial assets and liabilities (none of which were
held for trading purposes) at December 31:
<TABLE>
<CAPTION>
1996 1995
--------------------------- -----------------------
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
(In millions)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 7.7 $ 7.7 $ 11.6 $ 11.6
Securities 41.1 41.1 46.3 46.3
Loans 72.6 74.7 57.3 60.5
Accrued interest receivable 0.9 0.9 1.0 1.0
Financial liabilities:
Time deposit accounts 20.5 20.5 16.9 17.0
Other deposit accounts 95.6 95.6 94.0 94.0
======== ======= ======== =======
</TABLE>
The following is a description of the principal valuation methods
used by the Bank to estimate the fair values of its Financial
instruments:
Securities
The fair values of securities were based on market prices or dealer
quotes.
Loans
For valuation purposes, each significant loan portfolio category was
analyzed, where appropriate, into components based on significant
financial characteristics such as type of interest rate (fixed or
adjustable). Generally, management estimated fair values by
discounting the anticipated cash flows at current market rates for
loans with similar terms to borrowers of similar credit quality.
<PAGE>
15
THE MAHOPAC NATIONAL BANK
Notes to Financial Statements
Deposit Liabilities
The fair value of time deposit accounts represents contractual cash
flows discounted using interest rates currently offered on accounts
with similar characteristics and maturities. In accordance with SFAS
No. 107, the fair values of deposit liabilities with no stated
maturity (demand, savings, NOW and money market accounts) are equal to
the carrying amounts payable on demand.
Other Financial Instruments
Cash and cash equivalents and accrued interest receivable have fair
values that approximate the respective carrying amounts because the
instruments are payable on demand or have short-term maturities and
present relatively low credit risk and interest rate risk.
The fair values of the loan origination and sale commitments,
unadvanced lines of credit and letters of credit described in note 8
were estimated based on an analysis of the interest rates and fees
currently charged to enter into similar transactions, considering the
remaining terms of the instruments and the creditworthiness of the
counterparties. At December 31, 1996 and 1995, the fair values of
these financial instruments approximated the related carrying amounts
which were not significant.
(12) Recent Accounting Standard
--------------------------
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities."
Transactions within the scope of SFAS No. 125 include loan
securitizations, sales of partial interests in financial assets,
repurchase agreements, securities lending, pledges of collateral, loan
syndications and participations, sales of receivables with recourse,
servicing of mortgage and other loans, and in-substance defeasances of
debt.
SFAS No. 125 applies a financial-components approach that focuses on
the entity's control over a financial asset to determine the proper
accounting for financial asset transfers. Under that approach, after
financial assets are transferred, an entity recognizes in the balance
sheet all assets it controls and all liabilities it has incurred. The
entity would remove from the balance sheet those assets it no longer
controls and liabilities it has satisfied. If the entity has
surrendered control over the transferred assets, based on criteria
set forth in SFAS No. 125, the transaction is accounted for as a
sale. If any of these criteria are not met, the transfer is accounted
for as a secured borrowing. SFAS No. 125 also requires recognition of
servicing assets when loans are sold or securitized with servicing
retained.
SFAS No. 125 has limited applicability to the Bank's current
activities. However, as required, the Bank will apply SFAS No. 125 to
affected transactions entered into on or after January 1, 1997.
Management anticipates that the implementation of SFAS No. 125 will
not have a material impact on the Bank's financial condition or
results, of operations.
<PAGE>
EXHIBIT 7(b)
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(Amounts in Thousands)
(unaudited)
The following pro forma condensed combined balance sheet gives effect to the
Letchworth Independent Bancshares Corporation ("Letchworth") acquisition of
70.165% of the outstanding common stock of The Mahopac National Bank ("Mahopac")
using the purchase method of accounting assuming the acquisition was consummated
on March 31, 1999. Letchworth acquired 70.165% of the outstanding common stock
of Mahopac for cash on June 4, 1999.
<TABLE>
<CAPTION>
March 31, 1999
Pro Forma
Letchworth Mahopac Adjustments Pro Forma
------------------------------- --------------------- ---------------
<S> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 9,353 $ 2,768 $ - $ 12,121
Federal funds sold 12,700 10,300 - 23,000
Investment securities 64,894 43,848 (14,519) 1 94,226
3 2
LOANS 185,763 88,541 (14) 3 274,290
Allowance for loan losses (2,451) (1,493) (3,944)
--------------- -------------- --------------- ---------------
Loans, net 183,312 87,048 (14) 270,346
--------------- -------------- --------------- ---------------
Premises and equipment, net 6,291 5,258 (1,166) 4 10,383
Goodwill and core deposit premium 617 - 6,065 5 6,682
Accrued interest and other assets 3,389 2,004 (116) 1 4,555
(722) 8
=============== ============== =============== ===============
Total Assets $ 280,556 $ 151,226 $ (10,469) $ 421,313
=============== ============== =============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing deposits $ 206,344 $ 100,547 $ 28 6 $ 306,919
Securities sold under agreement to
repurchase 1,204 - 1,204
Advances from Federal Home Loan Bank 3,826 - 3,826
--------------- -------------- --------------- ---------------
Interest bearing liabilities 211,374 100,547 28 311,949
--------------- -------------- --------------- ---------------
Noninterest bearing deposits 33,206 34,667 67,873
Accrued interest and other liabilities 2,059 769 135 7 3,107
144 8
--------------- -------------- --------------- ---------------
Total liabilities 246,639 135,983 307 382,929
Minority interest in Mahopac - - 4,524 9 4,524
Stockholders' equity 33,917 15,243 (15,300) 10 33,860
--------------- -------------- --------------- ---------------
=============== ============== =============== ===============
Total liabilities and stockholders' equity $ 280,556 $ 151,226 $ (10,469) $ 421,313
=============== ============== =============== ===============
</TABLE>
See notes to pro forma condensed combined financial information (unaudited).
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (Dollar Amounts in Thousands,
except per share data) (unaudited)
The following pro forma condensed combined statement of income for the year
ended December 31, 1998 gives effect to the Letchworth Independent Bancshares
Corporation ("Letchworth") acquisition of 70.165& of the outstanding common
stock of The Mahopac National Bank ("Mahopac") using the purchase method of
accounting assuming the acquisition was consummated on January 1, 1998.
Letchworth acquired 70.165% of the outstanding common stock of Mahopac for cash
on June 4, 1999.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
Pro Forma
Letchworth Mahopac Adjustments Pro Forma
------------------------------ -------------------- --------------
<S> <C> <C> <C> <C>
Interest income:
Loans including fees $ 16,350 $ 7,612 $ 4 11 $ 23,966
Federal funds 437 772 1,209
Investment securities 4,151 2,083 (824) 12 5,408
(2) 13
-------------- -------------- --------------- --------------
Total interest income 20,938 10,467 (822) 30,583
Interest expense
Deposits and advances 8,811 3,366 (11) 14 12,166
-------------- -------------- --------------- --------------
Net interest income 12,127 7,101 (811) 18,417
Provision for loan losses 533 82 615
-------------- -------------- --------------- --------------
Net interest income after provision for
loan losses 11,594 7,019 (811) 17,802
Other operating income:
Service charges on deposit accounts 1,081 688 1,769
Net gain on sales of loans and
investment securities 72 167 239
Other operating income 433 151 584
-------------- -------------- --------------- --------------
Total other operating income 1,586 1,006 - 2,592
Other operating expenses:
Salaries and employee benefits 4,645 2,742 7,387
Occupancy and equipment 1,399 743 (67) 15 2,075
Amortization of goodwill and core
deposit premium 140 - 772 16 912
Other costs of operations 2,317 1,522 3,839
-------------- -------------- --------------- --------------
Total other operating expenses 8,501 5,007 705 14,213
Income before income taxes 4,679 3,018 (1,516) 6,181
Income taxes 1,366 1,184 (555) 17 1,995
-------------- -------------- --------------- --------------
Income before minority interest expense 3,313 1,834 (961) 4,186
Minority interest expense - - (547) 18 (547)
-------------- -------------- --------------- --------------
Net income $ 3,313 $ 1,834 $ (1,508) $ 3,639
============== ============== =============== ==============
Net income per common share
Basic $ 1.01 $ 1.11
Diluted $ 0.99 $ 1.09
Average common shares
Basic 3,266,509 3,266,509
Diluted 3,353,526 3,353,526
</TABLE>
See notes to pro forma condensed combined financial information (unaudited).
2
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (Dollar Amounts in Thousands,
except per share data) (unaudited)
The following pro forma condensed combined statement of income for the quarter
ended March 31, 1999 gives effect to the Letchworth Independent Bancshares
Corporation ("Letchworth") acquisition of 70.165% of the outstanding common
stock of The Mahopac National Bank ("Mahopac") using the purchase method of
accounting assuming the acquisition was consummated on January 1, 1998.
Letchworth acquired 70.165% of the outstanding common stock of Mahopac for cash
on June 4, 1999.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31, 1999
Pro Forma
Letchworth Mahopac Adjustments Pro Forma
------------------------------ -------------------- --------------
<S> <C> <C> <C> <C>
Interest income:
Loans including fees $ 4,200 $ 2,118 $ 1 11 $ 6,319
Federal funds 160 177 337
Investment securities 878 494 (206) 12 1,165
(1) 13
-------------- -------------- --------------- --------------
Total interest income 5,238 2,789 (206) 7,821
Interest expense
Deposits and advances 1,974 725 (3) 14 2,696
-------------- -------------- --------------- --------------
Net interest income 3,264 2,064 (203) 5,125
Provision for loan losses 116 23 139
-------------- -------------- --------------- --------------
Net interest income after provision for
loan losses 3,148 2,041 (203) 4,986
Other operating income:
Service charges on deposit accounts 252 177 429
Net gain on sales of loans and
investment securities 1 80 81
Other operating income 138 39 177
-------------- -------------- --------------- --------------
Total other operating income 391 296 - 687
Other operating expenses:
Salaries and employee benefits 1,217 759 1,976
Occupancy and equipment 362 176 (17) 15 521
Amortization of goodwill and core
deposit premium 35 - 177 16 212
Other costs of operations 594 345 939
-------------- -------------- --------------- --------------
Total other operating expenses 2,208 1,280 160 3,648
Income before income taxes 1,331 1,057 (363) 2,025
Income taxes 365 415 (132) 17 648
-------------- -------------- --------------- --------------
Income before minority interest expense 966 642 (231) 1,377
Minority interest expense - - (192) 18 (192)
-------------- -------------- --------------- --------------
Net income $ 966 $ 642 $ (422) $ 1,186
============== ============== =============== ==============
Net income per common share
Basic $ 0.30 $ 0.37
Diluted $ 0.29 $ 0.36
Average common shares
Basic 3,238,052 3,238,052
Diluted 3,292,872 3,292,872
</TABLE>
See notes to pro forma condensed combined financial information (unaudited).
3
<PAGE>
Notes to Proforma Condensed Combined Financial Information (Unaudited)
(Dollars in Thousands)
1) The unaudited proforma condensed combined financial information assumes
the cash purchase price of $14,635 less $116 in prepaid direct acquisition
costs, is provided by the liquidation of investment securities available
for sale.
2) Adjustment to record acquired investment securities at estimated fair
value (stepped up 70.165%).
3) Adjustment to record acquired loans at estimated fair value (stepped up
70.165%).
4) Adjustment to record premises and equipment at estimated fair value
(stepped up 70.165%).
5) Represents core deposit intangible of $3,534 and goodwill of $2,531
resulting from the transaction.
6) Adjustment to record acquired interest-bearing deposits at estimated fair
value (stepped up 70.165%).
7) Adjustment to record Mahopac management bonuses payable as of closing
date.
8) Adjustment to record deferred income tax liability of $866 relating to the
fair value adjustments and the establishment of the core deposit
intangible, and also to net Mahopac's net deferred tax asset of $722
against the Letchworth net deferred tax liability.
9) Adjustment to recognize the 29.835% minority interest in Mahopac.
10) Elimination of Mahopac's March 31, 1999 equity.
11) Accretion of discount related to loans using accelerated methods based on
estimated weighted-average maturities of the loans.
12) Reduction in the interest income from investment securities available for
sale assumed to be liquidated to fund the cash purchase price assuming an
interest rate of 5.63% or the portfolio's average return for 1998.
13) Amortization of premium related to investment securities using an
accelerated method over the estimated weighted-average remaining term of
the securities.
14) Amortization of fair value adjustment to deposits using an effective yield
method over the remaining terms to maturity of the deposits.
15) Amortization of fair value adjustment to premises and equipment on a
straight-line basis over the estimated useful lives of the assets.
16) Amortization on an accelerated basis for the core deposit premium and on a
straight-line basis for goodwill:
12/31/98 3/31/99
Estimated life Amount Amount
-------------- ------ ------
(in years) (in 000s)
Core deposit premium 10 $643 $145
Goodwill 20 129 32
------- -------
Total $772 $177
17) Income tax benefit on pro forma adjustments is reflected using an expected
tax rate of 40% applied to net pre-tax effect of pro forma adjustments
other than nondeductible amortization of goodwill.
18) To recognize the minority interest expense equal to 29.835% of the
historical net earnings of Mahopac.
4
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
-------------------------------
The Board of Directors
The Mahopac National Bank:
We consent to the incorporation by reference in the registration statement
(No.333-01263) on Form S-8 of Letchworth Independent Bancshares Corporation
("Letchworth") of (1) our report dated January 29, 1999 with respect to the
statements of condition of The Mahopac National Bank as of December 31, 1998 and
1997, and related statements of operations, changes in Stockholders' equity, and
cash flows for the years then ended, (2) our report dated January 29, 1998 with
respect to the statements of condition of The Mahopac National Bank as of
December 31, 1997 and 1996, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years then ended, and (3) our
report dated January 31, 1997 with respect to the statements of condition of The
Mahopac National Bank as of December 31, 1996 and 1995, and related statements
of operations, changes in stockholders' equity, and cash flows for the years
then ended, which reports appear in the Form 8-KA of Letchworth dated August 12,
1999.
/s/ KPMG LLP
Stamford, Connecticut
August 12, 1999
